|NEW YORK, NY, September 9, 1999 - Growth in the New York
hotel market may be slowing, but the tax bite will continue to increase.
Significant increases in real estate tax bills for the current tax year
may be followed by further increases in bills for the next tax year beginning
After decades in which hotel revenues were largely disregarded by tax
assessors valuing hotels, tax assessments for hotels in New York City now
closely correlate to net operating income. Because increases in what
are called “actual” or “target” assessments for any tax year are implemented
over a five year period, a sustained period of increasing hotel profitability
can continue to drive up tax bills for several years after profitability
stabilizes or even declines. In consequence of the record profits
of the last few years, many New York hotels have two or more years of further
increases already built into their tax bills. For some, the actual
future dollar impact from past profitability will be in the millions of
Tax assessments are based on financial reporting by hotels to the tax authorities. Financial reporting to various agencies in New York City is tightly regulated, both in terms of deadlines for reporting and the information required to be supplied. Real Property Income & Expense forms (colloquially known as “RPIEs”) must be filed with the Department of Finance by September 1. In past years, some late filing has been tolerated, but failure to file a RPIE can have serious consequences, including 10% - 30% tax penalties and denial of the right to have an administrative hearing in the next year with respect to the hotel’s new assessment.
In addition, care must be taken in the completion of the forms. An item properly marked as a cost of repair or ordinary maintenance usually translates into a perceived lower operating profit and a relatively lower assessment and tax bill. Presentation of the same item in another light may lead the assessor to classify the expense as a “capital improvement,” with serious adverse consequences. Among other things, increases in assessments due to capital improvements are not subject to the five-year phase in rule. The increase in valuation translates into an immediate tax bill increase.
There is a second opportunity to submit financial information to the City. This submission is optional but can have a major impact on the ability of hotel managers and operators to persuade another agency of the City of New York (namely, the New York City Tax Commission) to grant tax relief.
New assessments for the next tax year, 2000/2001, will be published on January 15, 2000. Review of those assessments, first before the Tax Commission and later still in the Courts (if relief is not obtained before the Tax Commission), requires the filing of applications by March 1, 2000, including the submission of financial data. Failure to file the required forms, on time and properly completed, will result in denial of administrative and judicial relief with respect to next year’s assessment. The decision of lenders and/or managers to have the tax bill directed to them may result in the assessment coming too late to the attention of the owner or being lost in the shuffle. The owner must take steps to get the assessment results and cannot rely on receiving the information by mail. There is an important need to plan in advance so that an appeal application can be filed on a timely basis with complete information. Lenders as well as owners have an interest in taking steps to minimize the tax hardship. A six-or-seven figure increase in a tax bill can become a serious problem for a loan’s debt service coverage ratio and potential for refinancing, particularly as the hotel’s net operating income may be declining while the increase in the tax assessment from prior years is still phasing in.
If owners, or managers or lenders do make a timely and proper filing with the Tax Commission, it is still incumbent on their representative to make a persuasive presentation before the Tax Commission’s hearing officers, who have available to them a sophisticated array of financial and physical information about each property on the tax rolls. That means marshalling the very best “comparables” available; having detailed and verified proof of any facts not apparent from the face of the application; and knowing how to package the data, the photographs, the blueprints and the stories in a sympathetic light, in the relatively brief time available before the Tax Commission hearing examiner. If handled properly, Tax Commission appeals can lead to administrative reductions of tax bills in the current year. Experience indicates that reductions of as much as 15% may be achievable. While court challenges to tax assessments may produce even more favorable results in the long run, the lag-time between filing and a court trial can easily run to five years. Usually no interest will be paid as part of the award. Therefore, proper filing of applications for appeals to the Tax Commission may be particularly important to hotel owners seeking to preserve cash flow in a period of declining revenues.
This article was prepared by Gerald A. Rosenberg, Chair of the Property Tax Group, and K. C. McDaniel, Chair of the Hotel and Hospitality Group. Rosenman & Colin LLP is a leading full-service law firm with approximately 250 lawyers in New York City, Washington, D.C., Charlotte, North Carolina and Newark, New Jersey. Since its founding in 1912, the firm has earned an international reputation for successfully representing clients in a wide range of legal mattress, including sophisticated transactions, sensitive negotiations and complex litigation. The firm’s clients include Fortune 500 and multinational corporations, major U.S. and financial institutions, government agencies and prominent individuals.
|Also See:||Arbitration: a Better Way to Lower the Property Tax on your Hospitality Property / HVS|
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