Property Taxes; 2005 Taxes
Projected to Rise 5%
|ATLANTA - July 18, 2005 -- Based on historical economic patterns, property
taxes for U.S. hotels are expected to increase significantly for at least
the next two years. The revenue and profit recovery currently underway
within the lodging industry will drive up the property values calculated
by municipal appraisers during their upcoming reassessments. These assessments
serve as the basis for taxation. The preceding observations come from an
analysis of the data collected for the 2005 edition of Trends in the Hotel
Industry published by PKF Hospitality Research (PKF-HR), an affiliate of
"City and county appraisers all across the country have gotten wind of the strong increases in hotel revenues and profits, and they want their piece of the growing pie," said Scott Smith MAI, vice president, PKF Consulting, Atlanta. "For those jurisdictions in which reassessments are required, the increasing levels of hotel income will be a factor in 2005 and 2006. We expect these assessments to result in higher market values, which will then lead to property tax increases. In the hotel industry, we have noticed a distinct one to two-year lag between income growth and property tax increases."
In 2004, property taxes for the average U.S. hotel grew 3.8 percent.
This compares to revenue growth of 7.6 percent. Looking to the end of 2005,
PKF-HR is projecting an 8.0 percent increase in hotel revenues, along with
profit growth of 15.5 percent. Given the fact that revenues and profits
are on the rise, the expectation is that property taxes will increase overall
by 5.0 percent in jurisdictions where property reassessment is required.
This 5.0 percent increase would be the greatest annual change since 1993.
"Since 1989, property taxes have grown at a compound annual rate of 2.5 percent. This compares to average annual growth rates of 3.0 percent for total revenue and 3.9 percent for profits," Smith noted. "It should be noted that historically, property taxes have declined in response to industry recessions, just as they rise in response to industry prosperity."
Property taxes are just one of the 200 discrete hotel revenue and expense items captured by PKF-HR for its 2005 Trends in the Hotel Industry report. The data-rich report is used by hotel owners, investors, operators and brands to help relate their hotel and chain budget and performance to industry benchmarks. The report has become the standard reference for annual planning at the property and corporate levels and for comparing hotel performance in such areas as expenses, revenues and profits. The 2005 report marks the 69th annual review of U.S. hotel operations conducted by PKF. This year's sample draws upon year-end 2004 financial statements received from more than 5,000 hotels across the country.
Transactions and Renovations
In addition to the income approach, municipal appraisers rely on comparable sales data to justify their property values. An increased volume of quality asset hotel transactions and rising prices also will influence the rise in property taxes. "Since 2003, we have tracked a consistent increase in the quality of hotels being bought and sold. In addition, the abundance of cheap capital, and an expectation of continued increases in net operating income, has driven up the prices paid for hotel real estate," Smith said. According to PKF-HR's latest edition of Quarterly Trends in the Hotel Industry, the median price paid per room for hotels during the first quarter of 2005 is significantly above the prices paid during the first quarter of 2004.
Increased profits also have enabled hotel owners to refurbish their hotels. "During the 2001 to 2003 industry recession, a number of hotels postponed their renovation projects. We now see a spike in hotel makeovers," Smith observed. "Buyers must note that property taxes for their newly acquired or renovated hotel going forward now almost surely will be greater than in the past. This is especially true for new owners who plan to completely gut their properties and add amenities in order to reposition the hotel within the marketplace."
Revenue Masks Taxes, Sometimes
When looking at hotel property taxes as a percent of total revenue, PKF-HR finds the ratio has consistently fallen in the range of 3.8 percent to 4.8 percent. This again implies a strong, albeit lagging, correlation between hotel revenue and property taxes. "The consistent expense ratio is also indicative of the fact that historical strong tax expense increases have been masked by equally strong increases in revenue," Smith said. "Therefore, hotel owners and operators need to keep an eye on the total dollars spent on property taxes, not just the expense ratio."
When observing property tax expenses by type of hotel, PKF finds examples
of the disparity that can occur between property tax ratios and dollar
amounts. For instance, limited-service hotels paid the least amount of
property taxes on a dollar-per-available room basis ($730) in 2004. However,
this expense represented 4.6 percent of total revenue. Conversely, property
taxes at resort hotels only made up just 3.0 percent of their revenue,
but these large hotels paid an average of $2,611 per-available-room.
"Property owners should review their local market to determine if they should try to appeal their assessment, but given the rise in industry performance, it will be tough to make a case in the next few years," Smith laments. "Work with your hotel consultant to determine your tax strategy and to determine what renovations or exit strategy is best for your hotel. However, we all know the lodging business is a cyclical industry, and when tax growth starts to surpass revenue growth, tax appeals will be in vogue again."
Copies of the 2005 Trends in the Hotel Industry report, which provides owners, investors, property managers, asset managers and others with detailed information on all aspects of hotel revenues, operating costs and profits, are available at PKF's online store at www.pkfc.com, or by calling Claude Vargo toll free at (866) 842-8754.
PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.
R. Mark Woodworth
|Also See:||Fewer Hotels Deficient on Interest Payments; Low Interest Rates, Refinancing, and Rising Profits Are Major Factors / PKF Study / July 2005|
|Growth in Hotel Food and Beverage Revenues Lack the Same Kind of Sizzle Found in Room Revenues; Expense Controls Help Profits Grow / PKF Study / July 2005|