How To Avoid Overpaying Hotel Property Taxes

Assessors in many jurisdictions value hotels based upon comparable sales of similar properties on a per-room basis, resulting in overstated taxable value and unfair tax bills. 

 In valuing a hotel on a per-room basis, assessors turn a blind eye to the personal property within those rooms. Items like the bed, television, chairs and other personal items are reflected in sales prices, but are not part of the real estate.

 Not limited to guest rooms, personal property extends to dining room furniture, computers, lobby furniture and the like. In many jurisdictions, these items are separately assessed as personal property. When personal items are included in a per-room sales analysis, the assessor is effectively double taxing the personal property.

 Another non-taxable component of a hotel sales price is the in-place, trained workforce, which represents a portion of the hotel’s start-up cost. The investment in the trained workforce and other pre-opening costs, such as advertising and promotion, are non-realty items, and yet they are reflected in the assessor’s per-room-sales-based valuation.

 The room-sale valuation likewise ignores the inherent business value of management and the flag affiliation. These intangible values are not subject to taxation.

 A more accurate method of determining value is the income approach. Under this method, a portion of the income must be attributed to personal property to provide for a return of, as well as a return on, the capital investment.

 Coupled with an additional adjustment to net operating income as a reserve to replace short-lived items, the assessor can establish an appropriate net operating income. Then applying a proper capitalization rate yields a proper market value.

 This approach ensures that hotel real estate taxes are being paid on real estate, and not on personal property and intangibles that the assessor would like to include through a value-per-room approach.

 Jerome Wallach is a partner in St. Louis, Mo.-based The Wallach Law Firm, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at jwallach@wallachlawfirm.com.