By Martin S. Katz

As printed in Metro Chicago Real Estate, July/August 1997


Last November, a Symposium sponsored by American Property Tax Counsel, The National Affiliation of Property Tax Attorneys (APTC), was held in Arizona to bring together the leading attorneys in the property tax field in the United States and Canada as well as representatives from the major hotel companies to discuss the implications of the changing nature of the hospitality industry on the valuation of hotel properties for property tax purposes.

The conclusion reached at the two day “think tank,” which included the views of Landauer Real Estate Counselors, was that recognition must be given to a major shift from hotels being primarily “physical asset” based to a “business” which utilizes real estate as a component. The hotel industry has become one which is significantly more oriented toward customer demands and technology than in the past. As an example, the Cap Ex Study, published by the International Society of Hospitality Consultants, indicated that it is no longer appropriate in the income approach to deduct only 3% of revenues for reserves for replacement. The Cap Ex Study found that, due to the need for hotels to constantly update rooms, equipment, meeting facilities, etc., a more appropriate reserve for replacement expense is at least 6% and can range as high as 12% of revenues for some hotel types. Just this one change in the income approach reflects a significant differential in the value attributable to real estate.

Other issues such as the value of brand names like Marriott and Hilton, reservation systems provided by chain operators, and higher risk factors in those hotels where a more significant portion of revenues are related to food and beverage all contribute to an extremely complicated valuation process.

The conclusion of the American Property Tax Counsel Symposium was that an appropriate property tax valuation of a hotel should segregate real estate, “intangible” business value, FF&E and goodwill. The participants also concluded that a careful examination is necessary when a major acquisition is contemplated so that all of the purchase price is not recorded as real estate, thereby giving assessing authorities the erroneous notion that the entire price should be subject to taxation.

With the almost meteoric recovery of the hotel market, as well as the purchase prices being paid by real estate investment trusts, it is anticipated that this concept of necessary allocations of value will become extremely important over the next several years in the property tax valuation process.