News for the Hospitality Executive
Are Two Hotels, Comparable in Size, Location, Age and
Condition, Worth the
Same if One is a Ritz-Carlton and the Other is an Unbranded Unknown?
Hotel Valuation Is a Taxing Issue
|By Cheryl Hall, The Dallas Morning News
Knight Ridder/Tribune Business News
Debate centers on how to account for factors like brand recognition
January 25, 2006 - Are two hotels, comparable in size, location, age and condition, worth the same if one is a Ritz-Carlton and the other is an unbranded unknown?
They should be when it comes to property taxes, the hotel industry says.
Not so fast, says the tax assessor.
Intangibles like brand names can't be taxed. That's cut and dried. But just how to value appraisal deductions for these nonphysical assets is increasingly contentious. Commercial property owners, led by major hotel companies, are litigating to get lower assessments in mounting numbers. They contend that traditional valuation methods penalize companies for developing strong name recognition and becoming more profitable.
"This is the central issue of my career," says Mike Hunter, the vice president of property taxes for Irving-based FelCor Lodging Trust who's been waging such battles for 18 years. "If a hotel is renowned for its service, how much of the room rate and hotel income is really attributable to the real estate? Tough question."
Yes, it is, says Ken Nolan, chief tax appraiser for the Dallas Central Appraisal District. "However, we don't believe intangibles are as large a component as they do. We're wary that this is just another scheme to reduce someone's tax liability and shift the burden to homeowners."
Without getting too down and dirty – I promise – there are three general
methods for valuing commercial real estate. None is perfect.
Eddie Tantoco, vice president of property tax in for Starwood Hotels and Resorts Worldwide Inc. in Phoenix, is leading what he calls an "education effort" to help taxing authorities better understand the intricacies of intangibles; i.e., reputation for service, name recognition and marketing skills.
Late last year, Mr. Tantoco helped organize a symposium on the topic. The Chicago event drew more than 300 live and Web cast participants, including tax assessors, hotel owners, judges, tax-appeal officials, tax lawyers and consultants. He sees planning such events as his civic duty.
"Starwood and I view the government as our partner. We don't want to see it waste so much taxpayer money litigating the same issues over and over."
That's a worthy cause, says Mr. Nolan, who's been Dallas' chief appraiser for just under a year and with the district for 25.
"With this appraisal issue – or any other – it's very beneficial to for both sides to sit down and discuss the issue and hopefully arrive at a reasonable methodology that everyone can live with."
Tougher in Texas
Since hotels with higher profits pay higher property taxes, Mr. Tantoco says Starwood and others are in essence paying a discriminatory state corporate income tax. And he says that Texas is among the most challenging states to deal with.
We live in a so-called nondisclosure state, where details of sales transactions and a company's income and expenses don't have to be revealed.
Without this data, Mr. Tantoco says, the government protects itself from erring on the low side by erring on the high. "That's why Texas has more tax consultants than 7-Elevens."
'A huge issue'
Mr. Nolan says he agrees with him, but he's not talking about an overabundance of consultants: "If he's willing to help convince the Legislature that we need to have sales disclosure, I'm more than happy to work with him. It's a huge issue."
So what types of commercial properties qualify for intangible deductions?
Hotels, nursing homes and hospitals – all heavily influenced by the service they give – fit Mr. Nolan's requirements, but not office buildings, apartment complexes or shopping malls.
"The Village apartments might argue that it has intangible value. No. They're an apartment complex. They charge rent based on the real estate – location and amenities. There're no intangibles to that."
Glenn Straus, a tax consultant and principal of Straus & Co., is challenging that view. He's working with a luxury high-rise condo project in Dallas that doesn't want its name in print. He hopes to get a 20 percent reduction in its appraisal.
He intends to compare the price per square foot of his client's building vs. those for lesser-known residential projects. "That's a pretty good indication of the value of the intangibles."
Again, Mr. Nolan warns, not so fast. Yes, a name is an intangible, but it also enhances the value of the real estate. "Like it or not, it does."
Copyright (c) 2006, The Dallas Morning News
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