The Valuation of Lodging Properties for Property Tax Purposes
By Jon M. Ripans, JD, MBA Finance
Property Tax Advocate: Attorney and Commercial Real Estate Appraiser
Introduction
Property
taxes are a large line-item expense for most lodging properties. To make
matters worse, double taxation and even triple taxation of some property
components can occur, particularly with leased furniture, fixtures, and
equipment (FF&E).
Hospitality properties can be overtaxed through the application of the wrong approach to value, the incorrect application of a correct approach to value, or through the owner’s failure to prevent certain mistakes.
Tangibles and Intangibles
The
tangible components of value are real estate (land and building) and personal/business
property such as FF&E. Intangible components of value include: 1) contracts
and assembled workforce; 2) intellectual property such as patents, trademarks,
and copyrights; 3) brand, goodwill, and reputation; 4) other assets; and 5) residual
income. Intangibles are not subject to ad valorem taxation / property taxes in
most U.S. jurisdictions.
The Cost Approach to
Value
The
Cost Approach is most applicable to newer buildings that have stabilized income
and expenses. It is applicable - with adjustments - to new buildings that have
yet to reach stabilization. The Cost Approach is less applicable to older
buildings, and is sometimes not applicable at all to buildings that are
experiencing market or other factors that have caused income production to
divert sharply from cost.
One normally does not think of lodging properties as experiencing long delays between being built and reaching "stabilized" occupancy. But, "lease up" should be taken into consideration in determining the market value of a newly constructed lodging property.
The Cost Approach is least applicable, and most damaging for property tax purposes, to lodging facilities that are underperforming. These include properties that face excessive competition, have substantial deterioration, are under franchisor restrictions, or have lost or experienced substantial downgrading in their flag or brand. These factors tend to manifest themselves in the income and expense figures for the property and are best addressed by the Income Approach.
The Sales Comparison
Approach
The
Sales Comparison Approach can be very difficult to apply to lodging and
hospitality properties. One variation of the Sales Comparison Approach is essentially
a modified version of the Income Approach. It uses a gross income or net income
multiplier. The other variation of the Sales Comparison Approach uses a unit of
comparison such as sales price per room, per square foot, or per bed. Both an
income multiplier or a unit of comparison is undesirable for property tax
purposes because they fail to separate real estate and personal property values
from intangibles. This can result in the property owner overpaying taxes if
only the Sales Comparison Approach is used to determine value for property
taxes. Worse yet, the unit of comparison method may not adequately reveal
modest to severe limitations confronting a property, such as those mentioned at
the end of the Cost Approach discussion above.
The Income Approach
The
Income Approach is the most useful way of separating a lodging facility’s real
estate value and personal property value from intangibles and business value. The
most detailed and useful income and expense information comes in the form of The Uniform System of Accounts for the Lodging
Industry (USALI). But, owners or operators who keep less detailed books
need not despair. Less detailed income and expense figures can also be examined
with the help of a professional to provide a more useful breakdown of realty
and non-realty components.
Conclusion
It
is difficult in a brief article to give a full overview of property tax
advocacy for even the simplest of properties. This article gave a short summary
of the pros and cons of the three approaches to value that are applicable to
most hotels, motels, and other lodging facilities. It did not discuss property
tax laws and procedures, which vary from state to state. Ultimately, the value
of each property is dependent upon its unique economic and physical
characteristics and requires individual analysis, whether for general valuation
purposes or property tax advocacy.
To get the most favorable treatment when it comes to property taxes, it is important that property owners work with qualified professionals and that they try to do it well before deadlines for property tax returns and property tax appeals.
Jon M. Ripans is a Certified General Real Property Appraiser and an attorney, who serves as a property tax advocate for hotels, motels, and other lodging facilities. As a commercial real estate appraiser, Jon has appraised over $1.5 billion worth of real estate. Jon has been an author, panelist, and speaker for various professional, industry, and government organizations. He is a member of the State Bar of Georgia, the Institute for Professionals in Taxation (Property Tax Affiliate), the Georgia Association of Assessing Officials, and a Practicing Affiliate with The Appraisal Institute. Jon can be reached at (404) 993-9467 and jripans@gmail.com.