By Martin S. Katz

As published in Hotel Magazine, May 1996


Establishing the real estate value of hotel properties for ad valorem tax purposes has always been an extremely complex issue. That process has become even more complicated during the 1990’s.

It is generally acknowledged that hotel properties do not encompass only real estate value. Because hotel operations are management intensive, “business” or “intangible” value constitutes a significant portion of their overall worth. The conflict between hotel taxpayers and governmental assessing authorities is not so much whether business value exists, but rather how to quantify it.

Due to the growing pressures on assessors to raise revenues for local government, especially in view of federal cutbacks which are anticipated to increase, assessors tend to minimize business value allocations. Attorneys who represent hotel taxpayers in assessment appeal cases must practice the highest form of advocacy and persistently utilize all levels of the assessment process, including the courts.

Assessors have had great difficulty in dealing with the “roller coaster ride” of the hotel market over the past decade because they fail to react quickly to extreme fluctuations in value. This is further complicated by the increase in REIT acquisitions of hotels with their inflated prices. An assessment appeal must persuasively quantify that portion of a REIT sale which represents “diversification” and “securitization.” The recorded sale prices paid by REIT’s, coupled with the typical failure to allocate any portion of acquisition prices to non-real estate related assets, has allowed assessors to develop artificially low capitalization rates which result in higher property assessments and taxes for even those hotels which have not recently changed ownership.

Further, although assessors typically make some allowance for “entrepreneurial profit,” either by imputing additional expenses or by additions to basic capitalization rates, they do not sufficiently take into account the intense management requirements of the asset which is the hotel property. Certainly, property assessments do not generally reflect current trends requiring more intense financial management, capital expenditure controls, labor problems, etc. They also fail to recognize the enormous effect of capital markets on the hotel industry in general, and various sectors thereof in particular.

Just as regional shopping malls have traditionally been overassessed because local government has failed to recognize and accept the entrepreneurial value of attracting the appropriate anchors who provide the customer base for the mall tenants, hotel properties are also overassessed because government refuses to acknowledge the extent of the required management of the hotel asset.

An example of the need for advocacy on behalf of hotel owners is an appeal successfully handled by our law firm several years ago. Our client had previously been represented by a non-lawyer tax consultant, who, after being unsuccessful in attempting to negotiate a reduced assessment with the local assessor based on actual operations of the property, recommended that no further action be taken. After we were retained to appeal the assessment to the highest administrative level in the State, an $8 million reduction was granted. The reduction was based upon our submission of formal evidence concerning the then imminent decline in the hotel market. A major factor in our successful appeal was identifying as an expert witness, a creative and competent appraiser who testified concerning the projected ramifications of the declining daily room rates and average daily occupancies as well as the “business” value inherent to producing net, after tax profit.

The issues now facing the recovering hotel industry concerning property assessments and taxes will be dealt with, in depth, at a Seminar later this year sponsored by American Property Tax Counsel, The National Affiliation of Property Tax Attorneys (APTC) at which many major hotel owners and management firms will be asked to join with the leading attorneys in the property tax field to share ideas and to attempt to identify analytical arguments supporting lower property values and taxes.