Can Any Hotel Sale Really be Used as a 'Comparable'?
By David Chitlik, Vice President, Atlus Hospitality Tax Group
A hotel is not the same as a house or a warehouse or an apartment or office building, and assessors often don't understand why. The hospitality sector is frequently the most challenging part of a jurisdiction's property tax base. The only way to derive a hotel's real property value from a purchase price is for an assessor to spend time and energy understanding the adjustments needed to accurately determine what part of that purchase price relates to real property and whether or not it can be used as a sales comparable for other hotels in that jurisdiction.
Too few assessors are willing to make this effort. They are more likely to look at sales of nearby hotels just like they would home sales. They are either unwilling to investigate, or indifferent to, underlying factors that determine overall sales prices. It's easy for the assessor to believe that if a full-service hotel sold for $300,000 a room, then every full-service hotel in the area should be valued at $300,000 per room.
Not necessarily. In fact, that is not likely true at all. A hotel sale typically includes several elements that make it unique in the market. Those elements should pose questions that assessors need to answer to help make adjustments before a sale can be deemed reliable for use in a comparability analysis. Some of those questions should include:
Was the hotel sold as part of a portfolio transaction?
That's been the case for most sales over the past decade or so. But if the portfolio included hotels in New York, Boston, Washington, Los Angeles, San Francisco and other higher-priced destinations, it's not likely it can be used to accurately determine room values in Chesapeake, Va., or Macon, Ga. Without talking to the seller and/or buyer, it's unlikely assessors will understand adjustments needed in using the portfolio hotel sale to set the value of other hospitality properties in the area.
Was the hotel sold to a Real Estate Investment Trust (REIT)?
REITS are established to take advantage of favorable tax treatment, and that advantage drives property transactions. REIT buyers frequently will pay a premium to churn sales that can earn tax-advantaged profits. Without adjusting the purchase price of the REIT sale being used as a comparable, it clearly is not going to yield reliable market data - unless the property being assessed is also being offered for sale to a REIT.
Who bought the hotel?
Foreign investors approach U.S. property differently than American buyers. International investors tend to be more patient and eye a longer return. They may be satisfied with a 2 percent annual rate over 30-50 years and frequently will pay more for stability of income. A U.S. investor tends to look for a 7-to-10 year holding period, demands a higher return and tries to negotiate a lower going-in price. Without divining business culture's impact on a sales price, the assessor is not going to understand its relevance for comparable sales purposes.
Did the hotel sale include a management contract with a recognized flag in place?
It may well be that a branded hotel such as a Marriott or Ritz-Carlton garners more value than another brand, but an assessment is supposed to reflect the land, bricks-and-mortar only. The premium one might pay for the manager's brand advertising, reservations system and rewards program is not part of the real property and adjustments should be made.
Was the sales price driven by the hotel's bar and restaurant business? This was not an issue when bar and restaurant sales were largely a function of room service. Often, a hotelier was happy to break even, or perhaps make a little positive revenue, on food and drink.
Now, with a focus on meetings and conventions, bar and restaurant sales can be major profit centers, adding significantly to hotel gross revenue. But, again, the assessor is dealing with bricks and mortar and land, so bar and restaurant influences on value may have to be adjusted out of a hotel's purchase price for tax purposes, and out of the sales price of a hotel being used as a comparable.
Was location a primary factor in determining purchase price? Premiums are often paid to get into markets with high barriers to entry, such as Las Vegas, San Francisco, and, until recently, New York City. If it is difficult to build from the ground up due to lack of open land or onerous permitting processes, owners are willing to pay more for an existing hotel.
While receiving an assessment based on poorly adjusted sales is not a good situation for the hotel property owner, there is potentially a worse scenario if an appeal is filed. A hotelier who challenges the assessment, and goes into an appeals board hearing armed with his or her facts about the subject property, can be ambushed. Remember, the board works under the belief that the assessment is already correct, so the appellant has to prove the assessor erred. After making the claim and presenting the evidence, the hotel owner can be confronted by someone from the assessor's office defending the assessment with a sheaf of papers reflecting unadjusted sales of "comparable" hotels. This happens more often than you might think.
What can be done to avoid this situation? The appellant either has to really know the comparable properties being used to support the subject assessment, or he or she needs to hire a consultant who does. It's imperative to have information such as location, brand, ancillary businesses and amenities, as well as any other data on the local hotels to counter an unadjusted sale offered as a comparable.
There are data services that can help with this data collection, but remember, assessors and appeals boards often have access to the same sources. It's best for the owner or consultant to get out and survey the market situation regarding other hotels.
In summary, assessing a hotel properly is difficult, but it can be done if assessors are willing to do their homework. But if an assessor isn't willing, the hotelier - or the consultant - has to be able to demonstrate the correct real property value to an appeals board. Eliminating excess tax expense depends on getting it right. Don't let the process go without education for the accessor and, if necessary, challenge to the assessment.
David J. Chitlik, CAE, has extensive experience in all facets of the property tax assessment and appeal industry. Prior to joining Altus Group, he spent 18 years as the Director, then Senior Director, of the Property Tax Department at Marriott International. Initially he oversaw a staff of more than 20 associates working on both sales and property tax compliance, appeals and audits. Mr. Chitlik has many years of property tax consulting experience as well, first with Tenenbaum Hill & Associates, Inc. and then Marvin F. Poer & Company. He was the Managing Director for the Mid-Atlantic Regional Office for both companies with a combined 11 years with both firms. Mr. Chitlik can be contacted at firstname.lastname@example.org Please visit http://www.altusgroup.com/ for more information. Extended Bio...
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