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Hotels Face Continued Over Assessment

by Scott Donald, Irvine, October 2012

Despite strong increases in demand, hotel properties are generally not reaping the higher profits that would be expected. This trend is compounding the problems of over assessment for hospitality properties.


An Interesting Phenomenon


The top 25 markets in the United States have never sold as many rooms as now, which is an indicator that demand is healthy. But hotels are still not charging for it, according to speakers at this year's Hotel Data Conference.


"There's an interesting phenomenon going on right now," explained Brad Garner, COO of Smith Travel Research (STR). "If you notice in previous cycles, following a downturn, there's an upswing led by occupancy growth and the average daily rate (ADR) follows right behind it. That's not happening in this cycle."


Mark Woodworth, president of PKF Hospitality Research agreed that this recovery is different. "Demand has come roaring back, but price hasn't really moved, so that's a very different outcome from what we've seen before."


What's Ahead?


Garner believes not all hope is lost for an increase in hotel rates. "ADR will gather momentum and will contribute to RevPar moving forward," he told the conference.


It's possible the West Coast, dominated by technology, oil and gas industries, could outperform the East Coast, dominated by finance and insurance companies, he added.


STR predicts that the top 25 markets will report a 4.7% increase in ADR for the remainder of 2012 as well as for 2013.


Artificially High Values


Many hotels are seeing their tax valuation increase based on subjective reasoning. For example in strong California markets, huge jumps are occurring for quality properties in the best locations even though the income doesn't support the price (4-5% cap rates).


It's crucial for owners and managers to fully understand their hotel's market and assessment jurisdiction, as well as the mechanics of the industry. Knowledge of issues such as in-place labor, non-assessable items, and personal property versus real property provide ways to differentiate a hotel's value from a one-size-fits-all mass appraisal model.


Hospitality keeps pace with the ever-changing economic climate and you need to maintain the pulse to keep your tax assessment current and correct.