Hotel Online Special Report Property Taxes Place Toronto Hoteliers at Competitive Disadvantage September 22, 1999 – A recent study completed by KPMG shows that Toronto hotels pay among the highest municipal property taxes in North America as a percentage of room revenue. “Despite near record-level occupancy and room rates, a typical downtown, full-service hotel in Toronto will pay almost 13% of revenue (on a revenue per room basis) towards property taxes compared with 8.5% in Montreal, just over 6% in New York and only 3% in Los Angeles” said Lyle Hall the Director of KPMG’s Toronto-based Hospitality, Leisure & Tourism practice. “At these levels of taxation, it’s no wonder we haven’t seen new hotel development downtown since 1991. Toronto has earned a reputation in the North American hotel development community as a high cost market, in part due to onerous municipal taxation.”
The KPMG study gathered actual municipal taxation and revenue data from comparable, full-service, central business district hotels in 18 North American cities. The calculation of property tax as a percentage of total hotel revenue (expressed on a per-room basis) takes into account not only the average room rate but also the occupancy level achieved in each market. Further, this approach eliminates the need to adjust for currency differences between hotels operating in the United States and Canada. The data is truly comparable between cities.
For a typical full-service, downtown Toronto hotel to achieve the same bottom line as a comparative hotel in Los Angeles (assuming all other costs remain equal), the average rate would need to increase by about 12%. Using the average rate achieved by major downtown Toronto convention hotels in the first half of 1999, such an increase would imply a rate jump of $17 from an average of $144 to $161.
An incremental rate increase of this magnitude is unlikely, particularly when taking into account the fact that inflation-adjusted average room rates in downtown Toronto have only recently returned to 1989 levels. Further, the proportion of group business in downtown Toronto hotels (usually booked at a fixed price one or more years in advance) makes effecting a significant price change a longer-term process. Group business, particularly convention bookings, are at risk over the medium term, says KPMG. While KPMG’s 5-year forward tracking statistics suggest 2000 will be an exceptionally strong year, 2002 and 2003 are much weaker. Part of the issue is a looming shortage of first class hotel rooms in the downtown core, a shortage tied directly to poor investor returns which has resulted in no supply growth since 1991. “If Toronto wants to consistently fill the recently-expanded convention centre and the new National Trade Centre, more hotel development is a must, says KPMG’s Hall.
KPMG LLP is the Canadian member firm of KPMG International. In Canada KPMG partners and professionals provide a wide range of accounting, tax and consulting services. As a provider of information-based services, KPMG delivers understandable business advice—helping clients analyze their business with true clarity, raise their level of performance, achieve growth and enhance shareholder value. KPMG International’s member firms have more than 100,000 professionals, including 6,800 partners, in 160 countries. KPMG’s Canadian Web site is http://www.kpmg.ca Contact: Lyle Hall (416) 777-3098 Jennifer Hind (416) 777-3243 http://www.kpmg.ca Also see New York Hotels Brace for Record Tax Bills / Sept 1999 Toronto and Calgary Sites for Two New Hyatts / Feb 1999