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Property Tax Resources

Feb
08

New Approach Produces Hotel Property Tax Reductions

"Generally, the fee simple income approach has not been explicitly applied to hotel properties."

By Jim Popp, Esq., as published by Hotel News Resource, January 9th, 2008

A two step process has become the most common method used to value a hotel for property tax purposes. The first step calls for applying the income approach, which values the total assets of a hotel's business. The next step requires an allocation of the total assets of the business to segregate the real property, personal property and business enterprise components. Although this approach is well accepted in the appraisal community and the appraisal literature, it often draws opposition from property tax authorities. To address this opposition, the following alternative valuation method has been employed successfully in negotiations with tax authorities. Its success results from the fact that the approach is similar to the methodology tax authorities frequently use on less complex properties. That makes it easy to explain and tax authorities are comfortable with its use.

The key issue in this alternative valuation method involves the use of fee simple principles applied to the income approach. A distinction exists in the application of the income approach generally used for property tax purposes (the fee simple approach) and the application used for acquisitions, due diligence or financing considerations (leased fee approach).

In using fee simple, income parameters are developed from the overall market rather than from the specific parameters of the property being assessed. Specifically, the fee simple approach determines market rent/income and occupancy and utilizes these factors in developing market values. Conversely, the leased fee approach uses the actual rent/income of the property and the actual occupancy. The differences in resulting value may be significant.

The concept of the fee simple income approach has been generally applied and accepted with regard to office buildings, apartments, retail centers and similar properties and is uniformly used by tax authorities. They are familiar with its application and derivation. Generally, the fee simple income approach has not been explicitly applied to hotel properties.

However, several hotel owners and appraisers have successfully applied the approach to hotel properties. They determined the fee simple characteristics of the hotel in comparison to its leased fee characteristics and then made an adjustment to deduct the business enterprise component from the income stream.

Of course, the first step requires the taxpayer to determine the hotel's competitive set. Then, a review of the income attributes of the competitive set is conducted to determine such components as REVPAR, room rates and occupancy. The market place rate for these components should be determined and then applied to the taxpayer's hotel. For example, if the REVPAR of the competitive set equals $100 and the REVPAR of the hotel property comes in at $120, the income stream of the hotel for purposes of the property tax income approach should be adjusted to the market REVPAR of $100.

The result of this adjustment process produces the fee simple income approach value attributable to the total assets of the hotel's business. The next step calls for subtracting the remaining business enterprise value portion. The hotel's brand name represents the most significant business value component. Some, but not all of this was subtracted in the REVPAR analysis. The remainder of the brand name is removed in this step. In addition, deductions should be made for such business intangibles as work force in place, working capital and profit centers.

This alternative approach has been used successfully in the property tax trial of a major brand full service hotel. In point of fact, a most practical use of the approach lies in negotiations with tax authorities. The breaking of the process into steps provides tax authorities with a more understandable and comfortable approach under which to evaluate possible tax reductions.

JimPopp140Jim Popp is a partner with the Austin, Texas law firm of Popp Hutcheson PLLC. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Popp can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
02

Equal and Uniform Arguments Reduce Hotel Taxes

"Many state constitutions include language calling for equal and uniform property tax valuation. Unfortunately, only a few states actually have a statutory remedy to implement this goal."

By Jim Popp, Esq., as published by Hotel News Resource, August 2nd, 2007

The strong hotel market has resulted in a significant number of hotel sales at levels much higher than in recent memory. These high sales prices dramatically affected property tax officials, encouraging them to raise hotel assessments to ever increasing levels. Of course, the sales price of these properties result from a combination of real estate, personal property and business intangibles values. Knowledgeable owners, appraisers and property tax lawyers and even some tax officials understand that these sales prices do not represent market value for property tax purposes. However, tax officials often give in to the pressure of high sales prices and arguments relating to real estate market value fall on deaf ears.

Sales Activity Inflates Property Tax Values

Several factors account for tax officials' willingness and need to allow sales prices to impact them (commonly known as sales chasing). The first is that all hotel properties are judged by the sales of a few properties. The sales approach has become a fundamental basis of property valuation; however, it must be used with caution when applied to a complicated hotel property that includes several property value components. The phenomenon of the many judged by the few results in hotel properties tending to be valued at greater than market. The second factor relates to tax officials tendency to single out sold properties, causing them to be saddled with assessments higher than their competitors.

Taxpayers often experience difficulty addressing either of these problems directly using solely a market approach to property valuation. Overall this means recent sales activity tends to inflate property tax values.

Remedying the Impact of Sales Prices

Several states with more taxpayer friendly systems addressed sales price chasing by passing remedial legislation that focuses on the equality of property tax valuation. Many state constitutions include language calling for equal and uniform property tax valuation. Unfortunately, only a few states actually have a statutory remedy to implement this goal.

Texas for example enacted such a remedy. The legislation enables Texas taxpayers to challenge a tax valuation based on the traditional tax value in excess of market value. More importantly, they may also challenge based on the contention that the property is unequally appraised. Specifically, the statute provides that a property shall be valued for property taxes based upon the median level of appraisal of a reasonable number of properties appropriately adjusted. The appropriate adjustments are made to account for physical differences between the properties. The application of this remedy may produce a dramatic effect on property taxes.

For example, a hotel property recently sold in the range of $60 million. The tax official, in recognition of business value, appraised the property for tax purposes at approximately $50 million. This may have been some indication of the real estate's market value. The difficulty for the taxpayer came about because a competitive set of hotel properties were valued on a per key basis or per square foot basis at less than half of his property. The application of an equality remedy generated a 50% reduction in tax value, down to $25 million, which was comparable to the competition.

Testing for Tax Equality

Several tests of equality exist, which may prove useful to hotel owners in presenting their case for property tax reduction:

  1. The most basic test compares the per key value of the hotel with comparable properties in its competitive set. Tax authorities generally understand this approach. It makes sense, for example, that adjacent limited service properties that have similar physical characteristics should be valued on the same per room basis.
  2. The next test compares the tax value of the property on a per square foot value allocated among the components of the property. The square footage attributable to rooms, banquet and restaurant facilities, health club and spa and parking facilities is determined. The purpose here is to measure and compare the economic impact of various profit centers. For example, if two properties have an equal room square footage but one has a significantly larger banquet facility, the property with the larger banquet facility will be more valuable. The tax authority inclination to focus on per room values ignores this reality.
  3. Another very useful test is the ratio of taxable value to room revenue. Since many tax officials value property on an income approach using uniform deductions for business value across flags, this allows comparison of the property to the competitive set based on income. It should be noted, however, that this comparison does little to address the effect of flag affiliation on revenue.

These tests have proven effective in states with a specific equality remedy and often are at least considered in states without such a remedy.

Conclusion

The comparison of tax values on an equality basis is a very effective remedy. It addresses the practice of sales chasing. It holds in check the propensity to use high sales prices to raise property taxes across the entire market. It offers an understandable alternative to a purely excess market value argument. If your state has such a remedy, use it. If it does not have such a remedy, a legislative effort to obtain one will prove beneficial.

JimPopp140Jim Popp is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Popp can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
15

Texas Efficient Property Tax System Could Serve as Model for Other States

The taxing units that impose and collect the tariff do not value property; an appraisal district is set up solely for this purpose.

"A recent review of the 30 states with the largest property tax indicates that Texans enjoy one of the most efficient systems. The Texas method clearly illustrates five significant characteristics that make for a taxpayer-friendly process."

By Jim Popp, Esq., as published by Real Estate Forum, January 2007

Some states tilt their tax systems toward fairness to the taxpayer and others tend to favor the taxing unit. Fairness of the system and to taxpayers depends on each state's legislature. Since property tax is levied primarily on real estate, many of the favorable taxpayer systems are a result of a commercial real estate community's involvement with the legislative process.

A recent review of the 30 states with the largest property tax indicates that Texans enjoy one of the most efficient systems. The Texas method clearly illustrates five significant characteristics that make for a taxpayer-friendly process.

The state separates the valuation method from the levy and collection process. The taxing units that impose and collect the tariff do not value property; rather, an appraisal district is set up solely for this purpose. This removes valuation from any appearance of political influence. It also promotes taxpayer understanding because a single value is established on a property for use by all taxing units. An effective check-and-balance system is provided by an appraisal district board of directors appointed by the taxing units and a state ratio study review of appraisal district performance. The ratio study compares the market value of commercial assets to the appraisal district tax value for a sample of properties. It is a means to encourage valuation at 100% of market value.

Second, a fundamental goal of any fair property tax system is to place a value on property that is equal in comparison to others and accurate compared to an understandable standard. The valuation of an asset based on 100% of market value each year accomplishes both of these goals. It is equal because the same standard applies to all and is understandable because property owners are familiar with market value. Systems with appraisal ratios (valuation at a percentage of market value for different properties) or appraisal limitation caps (an artificial limitation on yearly value increases) invariably create a sense of unfairness among taxpayers.

Providing meaningful information about and access to the process is also important. In Texas, a single notice is mailed for each property if the value increases above the prior year. A statewide uniform challenge deadline is applicable to all local appraisal entities. An owner can challenge the valuation of the asset by filing a simple form without any reason for or evidence in support of the challenge. Hearings at the administrative level are informal. Finally, taxpayers have the ability to vote to rollback tax increases over 8%.

The state also provides for equality of value among various types of commercial properties. Owners frequently comment that they just want to be treated fairly. For example, an investor purchases an office building for $100 per sf, resulting in $100-per-sf tax value, but competitive office properties remain at $80 a foot. An equal and uniform statute allows comparison between the tax value of the $100-per-sf property and the value of comparable assets. Thus, the tax for that property would be reduced to $80 per sf in order to conform to the equal and uniform statute.

Finally, it's essential to maintain a level playing field. All remedies encourage the tax authorities to negotiate in good faith but not be so one-sided as to affect overall fairness. Taxpayers are entitled to attorney's fees if they prevail in a lawsuit. This encourages the settlement process. The appeal process consists of an informal administrative first step in which many problems are resolved. Then a formal appeal to district court is filed. Lastly, taxing units possess limited opportunities to initiate challenges to taxpayers' valuations.

In reality the life of an industrial building may be much shorter and should result in a reduction of the assessor's value. In addition, costs for maintenance, which simply keep a building productive, should not be used by the assessor to reduce the age of the plant, thereby, increasing the assessed value.

Owners bear a burden of unfair taxation in states where the tax system doesn't include the five characteristics discussed above. Legislators welcome information from informed individuals like commercial real estate owners who often know a lot about property taxes. In states where the commercial real estate community took an active role in the education of legislators about property taxes, the property tax systems have proven to be the most taxpayer friendly.

The views expressed in this article are those of the author and not Real Estate Media or its publications.

JimPopp140Jim Popp is a partner with the law firm of Popp, Gray & Hutcheson, an Austin, TX-based member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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