Hotel property taxes – An opportunity to reduce a cost
According to the March 2022 edition of CBRE’s Hotel Horizons® National Forecast Report, the total revenue of a typical U.S. hotel is not expected to return to pre-COVID 2019 nominal dollars until 2023. As a result, hotel owners and operators hotels continue to look for ways to control spending.
A potential reduction opportunity is property taxes. Based on a sample of 3,400 hotels from CBRE’s Trends® in the Hospitality Industry Database, hotel property tax expenditures in the United States decreased by 13.0% from 2020 to 2021. This decline put 2021 property taxes 9.9% below 2019 levels. Unfortunately, this compares unfavorably to the 41.3% drop in revenue and 57.4% drop in profits during the same period. For this analysis, earnings are defined as earnings before interest, taxes, depreciation and amortization, or EBITDA.
Relationship with profits
Compared to other forms of real estate, the financial performance of hotels is relatively volatile. Due to the absence of long-term leases, hotel revenues and profits will react almost instantaneously to changes in the economy. This was evident in 2020 when we observed a sudden 64.3% drop in revenue as well as a 109.4% drop in EBITDA in reaction to the pandemic.
Property taxes are based on the assessed value of a property, which is generally the fair market value of the asset. Since profits strongly influence the value of a hotel, the volatility of the profitability of the hotel leads to frequent and instantaneous changes in value.
Unfortunately, changes in assessed values do not occur so quickly. Many municipalities will value a property based on the previous year’s market conditions or the performance of the property. Some jurisdictions rate less frequently, putting hotel properties with volatile performance at a disadvantage relative to their peers. So, while the profits of the hotels in our sample fell by more than 100% in 2020, the property taxes of these hotels increased by 3.6% during the year.
After going through the worst year of performance in the history of the U.S. lodging industry, many hotel owners have used these results as a reason to reduce the estimated value of their properties. Based on the 13.0% reduction in property tax payments in 2021, these homeowners are starting to see some relief.
Differences by property type and geography
Since tax policy and rates are determined locally, there can be greater variations in hotel property tax changes by geography versus property type.
Across the six hotel property category types tracked by CBRE, declines in property tax payments made in 2021 did not vary significantly from the overall average of 13.0%. It’s curious, because the property types haven’t worked the same way during the pandemic. Limited service hotels and resort hotels have performed better than average during the pandemic and other types such as central business district (CBD) and convention hotels have not performed as well.
In 2021, hotels in the North Central region of the United States enjoyed the largest drop in property taxes. The 23.1% drop in taxes for hotels in this region follows a 2.6% drop in 2020. In contrast, hotels in the Mountain and Pacific region suffered the largest property tax increases in 2019 and 2020, then saw the smallest decline of any region in 2021. This is likely due to values being closer to market value in the North-Central region before the pandemic and further adjustment was needed. The values in the Pacific region tend to be below market and therefore the values have probably not been adjusted to the same extent as those in the North Central region.
Orientation and appropriate repair
While the accommodation industry in the United States is in the midst of a substantial recovery, hotel owners are still suffering from the dramatic decline in profits in 2020. Hotel owners should consider the following actions to continue to reduce, or at least control, their property tax payments in the years to come:
- Have your tax notice reviewed each year.
- Have the review performed by a competent property tax firm, one with local property tax professionals AND hotel valuation professionals, not just property tax professionals. Without both disciplines, assessed values will not be reduced to their lowest permitted levels.
- Perform a second examination periodically.
- For owners with personal property tax filing requirements, have those filings reviewed as well.
All a professional will need is:
- A copy of your tax bill, or notice of assessment showing the parcels included in the assessment
- Your I&E statement for the previous and current year
- Your list of fixed assets
- Your personal property file (if applicable)
- Last personal property bill received (if applicable)
Remember that most tax appraisals are based on mass appraisal techniques. The first time your tax assessment is reviewed in detail is when you or your Designated Professional reviews it!
*This article originally appeared in the May 2022 edition of Lodging.
Director of Research Information Services