Hotel Values Decline – Have Your Property Taxes Gone Down?

The latest national forecasts by PKF Hospitality Research call for unit-level RevPAR declines in excess of 17 percent and a fall-off in profits of more than 30 percent.  In this depressed environment, cost control becomes even more crucial.  While savvy managers tend to keep a close check on their operating expenditures, one expense item that is not typically on management’s radar screen is property taxes.

For the most part, property owners have no control over the movement of the millage/tax rates set by the taxing jurisdiction. However, there are ways for hotel owners, lenders, and asset managers to take a proactive approach and closely review the assessed valuations of the hotels in their portfolios.  Since market values form the basis of property tax payments, it is important to understand hotel values in this period of volatility.

When determining the value of income product properties, it is essential to be aware of net operating income (NOI) expectations, as well as movements in capitalization and discount rates. According to PKF Hospitality Research's Hospitality Investment Survey 2009, the overall capitalization rate in 2009 is expected to be 10.65 percent, 122 basis points higher than that in 2008. The discount rate is estimated to be 15.17 percent in 2009, representing a 204-basis-point increase from the prior year. The spread between the overall capitalization and discount rates in 2009 was 452 basis points, significantly higher than the 370-basis-point spread in 2008. All these investment factors, combined with the anticipated declines in NOI, are suggesting lower hotel values in 2009 compared to 2008.

Based on information from our firm’s Trends® in the Hotel Industry database, we analyzed the change in property tax expense from 2007 to 2008. For a hotel with annual revenue of $10 million, the average loss in profits for the year was $80,000. Assuming a 10.65 percent cap rate, this equates to a $750,000 loss in value.

In a period of declining values, hotel owners should ask themselves, “Why are my tax liabilities rising?” Hotel owners and asset managers should continue to exercise vigilance in reviewing their property assessments. The need for professional involvement is essential to help establish fair and reasonable values.

Posted on behalf of Charlotte Kang, Vice President with PKF Consulting out of Atlanta.