April 1994 Vol. 2 No 10
Arbitration: a Better Way to Lower the Property Tax on your Hospitality Property
Richard D. Williams As a good asset manager or concerned property owner, you are constantly on the lookout for ways to reduce property taxes on the real estate in your portfolio. In the past, a serious challenge to the country assesor's valuation of your property was a time consuming and expensive undertaking. Today, many states are offering arbitration as an option. Although this article is directed towards hospitality properties it applies to real estate of all types.
Having had experience in different aspects of these proceedings, I can tell you the key to a successful challenge of the county assesor's valuation of your hospitality property is preparation. Most taxpayers who choose to represent themselves in county board of equalization hearings, board of adjustment appeal hearings, or arbitration hearings lose their case before entering the hearing room. As a citizen challenging a tax assessment, the burden of proof is on you to show that the county assessor is wrong in his appraisal of your property. The ramifications of this burden are usually ignored by taxpayers, who think that merely presenting evidence of any kind should be sufficient to have the value of their property lowered. A taxpayer must not only be able to poke holes in the assessor's evidence but have highly persuasive evidence of a correct value for their property. This does not mean that the protest process is biased in favor of the county assessor. In fact, hearing officers and arbitrators are usually quite fair minded and under no pressure from the county to make a decision in the county's favor.
THE OPTION The suggestions presented in this article for a successful protest of the county assesor's valuation apply at all levels of the protest and appeals process. It can be very costly and time consuming to take your protest to the county assesor, followed by a board of equalization hearing, then a board of assessment appeals hearing or a court trial, and finally an appeal to a higher court. Note that the procedure may differ in your state. Many states have presented property owners with the option of arbitration after a board of equalization hearing if the property owner is not satisfied with the board's decision. The opportunity for you to challenge the valuation of your property through arbitration without spending as much money as you would in a court trial is apparent in the chart on page 3 (these costs are estimates and will vary by state and actual time spent by attorney's, paralegals, expert witnesses, appraisers, and other professionals).
THE FORUM If arbitration is available as an option, the county usually provides an approved list of arbitrators from which you may choose. Usually arbitrators must be licensed appraisers. If this is not the case in your state, at least try to choose an arbitrator who is an appraiser. You will have the opportunity to review the resumes of all the approved arbitrators; choose the one you think has the background to understand your property. You must pay a deposit to the county, usually $150 to $250, to be held by it until the arbitrator hears your case and decides whether the county or you will pay the arbitrator's fee, or if the fee will be split between both parties. The amount of the arbitrator's fee is agreed on by all parties before the hearing. The fee is generally dependent on the complexity of the property and the amount of time the arbitrator must spend preparing for, hearing, and deciding the case.
There is another advantage to selecting an arbitrator who has appraisal experience. You will not have to spend time educating the person hearing your case as you might have to do with a judge. In a courtroom setting you may be lucky and get a judge who thoroughly understands the appraisal process, but you cannot count on it. With aribtration, you can choose your own arbitrator after reviewing the relevant appraisal experience each has in your type of property.
THE PROCESS
The major difference between arbitration and all of the other hearing and
appeal formats is that the arbitrator's decision is final and cannot be
appealed to a higher court. Although you may think this is a negative aspect
of arbitration, remember that if you win your case in arbitration the county
cannot appeal the decision either. The key to winning your case is in preparation
and documentation. You should submit an appraisel and other documentation
to the arbitrator within 10 days prior to the hearing. Although this gives
the county assessor and county attorney time to inspect the sale comparables
and review the income and expense data you provide, it also gives the arbitrator
time to familiarize himsel with the case and prepare questions to ask you
or the county assessor in the hearing. If you show up with a 150-page appraisal
on the day of the hearing, the arbitrator cannot possibly digest the information
you present. The county assessor must provide you with any appraisal or
other evidence the county submits to the arbitrator, which gives you the
opportunity to become familiar with the information the assessor will be
using to support the county's case, and prepare lines of attack on the
assessor's evidence.
THE SUPPORT
It is important to have your appraiser at he hearing to present his findings
and value conclusinos and defend them. Your appraiser can also help you
attack weaknesses in the county assessor's case. Do not expect to win your
case if you or your appraiser do not show up at the hearing. Although the
arbitrator may read your documentation and appraisal into the record, the
arguments you and your appraiser make during a personal appearance can
be far more persuasive.
THE LAW
With the advent of state licensing laws for appraisers, many states allow
only a state licensed appraiser or the property owner to express an opinion
of value in a county board hearing, a court proceeding, or an arbitratio
hearing. If you send a property manager or professional tax protest service
to a hearing in your place, makes sure your representatives are licensed
appraisers or you are wasting your money. This is important because you
must indicate to the hearing officer or arbitrator what you think the market
value is for your property. A hearing officer or arbitrator cannot determine
the value for you. Assuming the assessor's value is at the high end of
value and your opinion of value is at the low end, the hearing officer
or arbitrator will usually choose one of these two values or a value in
between. In rare instances, the value may be greater than that originally
reached by the county assessor. Therefore, it is important that you or
your representative can express an opinion of value that will be recognized
by the hearing officer or arbitrator.
THE METHOD USED
County assessors generally rely on the cost approach to value because they
can easily and quickly arrive at a value using the Marshall Valuation
Service Cost Manual and computer generated cost approach worksheet
or one of the several other valuation service cost manuals and computer
programs. This method of valuation for your hospitality real estate is
based on the cost of replacing the existing improvements in today's dollars
less an amount for depreciation based on the age/life method, and then
adding in the value of the underlying land. This may be a fine method of
determining value for insurance purposes in the event your building burns
down, but would be a potential buyer be willing to pay this amount for
your property? Hospitality Valuation Services has researched and documented,
in thousands of cases during the past 15 years, the fact that buyers of
hospitality properties do not base their purchase on the cost approach
to value.
Another problem with the cost approach to valuation for improvements is the subjectivity inherent in determining the effective age versus the actual age of the improvements and other subjective adustments. For example, your hotel may actually be 15 years old but, because it has been well maintained, the assessor may be of the opinion that is effective age is 10 years. If the economic life of the hotel is expected to be 40 years, the depreciation percentage would be calculated by dividing the effective age of 10 years by the expected economic life of 40 years to arrive at a depreciation figure of 25 percent. Is the economic life of a hotel or restaurant 40 years? Although the improvements may physically remain standing and occupied for more than 50 years or 60 years, it is doubtful the property will remain competitive without major refurbishment. Perhaps in your opinion, the economic life expectancy is 30 years and the effective age 10 years, resulting in a depreciation figure of 33 percent. Assuming the cost to replace your hotel or restaurant improvement is $1 million, the value of the improvement after depreciation using the cost approach would range from $667,000 (33 percent depreciation) to $750,000 (25 percent depreciation).
The cost approach to value is generally the weakest approach for income-producing properties because buyers are usually more interested in the future income stream generated by a hotel or restaurant rather than the cost to replace the improvement. Also, the cost approach often indicates the highest value for a property because of the subjective nature of determining effective age and expected economic life estimates and the resulting depreciation.
THE METHODS PREFERRED
Assessors do not usually have access to reliable income and expense data
for hospitality properties and therefore cannot develop a meaningful value
using the income approach. Although some assessors in different counties
around the country may attempt an income approach based on data from national
accounting firm surveys, the resulting value may have little relation to
the amount that a buyer would be willing to pay for the property based
on all risk factors to the income stream. The assessor can be challenged
by determining a value indicated by the income approach using accurate
income and expense data for your specific property with support from local
competitive property income and expense data.
The sales comparison approach can be useful in determining a range of values for your hospitality property if there are sales of similar properties during the period being examined (usually the tax year and the first six months of the following year). If the assessor cannot find comparable sales in your county, he may be required to broaden the search for comparables outside the county (this depends on the law in your state). You or your appraiser should identify comparable sales outside the county and be prepared to explain why your property is similar, inferior, or superior to these comparables.
The assessor cannot use the excuse that there was not enough time or too little money in the budget to permit a sales comparison approach or an income approach. The only acceptable excuse is lack of sufficient data availablee to undertake these approaches to value. If you can produce details for sales of your type of property during the appropriate period that you have verified, by all means do so. Include color pictures along with a property description, including the square feet of land, square feet of the improvements, year of construction, sale price, and sale data. If the property was a restaurant and was leased at the time of sale, include the lease rate and percentage rent paid, if any. If the sale was a hotel, include the number of rooms, guest amenities, rack rate, average daily rate, and the percentage of occupancy for the tax year and the following six months for each comparable sale.
Make sure you are familiar with the comparable sales you use. Nothing can be more embarrassing or detrimental to your case than using a comparable sale that you thought was a hotel only to be informed by the assessor in the presence of the arbitrator that upon visiting the site he found it to be an office building or vacant land.
A visit to the county assessor's office and the county treasurer's office early on in the appeals process is time well spent. The property tax that your competitors pay is a matter of public record. Take the time to look up the assessed value of their properties and determine if your taxes are fair when compared to other properties similar, superior, or inferior to yours. If you are going to make an argument that the valuations for ad valorem tax purposes in your county for similar properties are not equalized, make sure that all the properties are located in your county. The county assesor does not have to consider the tax rates for similar properties in other counties.
If you follow these guidelines, your chances of successfully challenging the county assessor's indicated value for your hotel or restaurant will be greatly increased. Understanding the way the system works and how to present your evidence in an organized and meaningful manner is 90 percent of the battle. The process of arbitration is fair. However, the average taxpayer is at a disadvantage because he does not know what information is important and how to present the facts in a logical and convincing manner. Furthermore, gathering data and preparing an appraisel is extremely time consuming. If you are too busy to gather and present the necessary data yourself, you will greatly increase your chance of success if you seek the services of an appraiser who is experienced in the valuation of hospitality real estate. County assessors must be generalists by the nature of the job they are required to do, valuing all the different types of property in their county. The well-supported opinion of a specialist in hospitality valuation can be far more convincing to an arbitrator or hearing officer than that of the county assessor.
SUMMARY
The key to a successful protest of the county assessor's valuation of your
hospitality real estate is thorough prepartaion, professional presentation
of your opinion or value, and understanding that the burden of proving
your opion of value is on you, the taxpayer. Seeking the services of a
qualified and licensed appraiser who specializes in hospitality valuation
will increase your chance of a successful arbitration. A profession presentation
of your case can give you the desired result and save you time and money
in the process.
Richard D. Williams is a senior associate with HVS, the leading international hospitality appraisal and consulting firm, and has experience as both appraiser and arbitrator as well as operations experience as an owner of the Buckhorn Exchange Restaurant in Denver.
The Hotel Valuation Journal