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Dallas Hotel Construction Boom

by Greg Howard, Dallas, September 2018

 

The Dallas Metro area has a total of 156 new hotel development projects with 18,908 rooms in the construction pipeline. This makes Dallas second only to New York City for new hotels in the works, according to the Lodging Econometrics Hotel Construction Pipeline Trend report for the U.S.

 

All this new construction has property tax implications for both new developments and existing properties.

 

Room Supply Could Grow More Than 20%

 

There are 47 hotel projects with 6,350 rooms presently under construction in the Dallas area. Another 73 projects with 8,606 rooms are scheduled to start construction in the next 12 months. Meanwhile, 36 projects with 3,952 rooms are in the early planning stages. If all the projects in the pipeline come to fruition, this will increase the city's guest room supply by 21.3%.

 

Of the nine market tracts in Dallas, the three with the largest hotel construction pipelines are:

 

  • Denton/Lewisville/McKinney with 41 projects/4,860 rooms

  • Southern and Eastern Portions of Dallas with 28 projects/2,352 rooms

  • East Plano/Richardson with 20 projects/2,044 rooms

Combined, these three important market tracks account for 57% of the total hotel construction pipeline in the Dallas area.

 

Taxes and New Development

 

With any new development comes a property tax increase for that project. Taxes will be based on construction costs as of January 1 through the development process.

 

County appraisal districts will notify owners of values beginning in April. It is always possible that the current year notice of value will be below the current acquisition cost of construction. This is a favorable assessment during development. Values that exceed the land and construction costs as of December 31 should be appealed.

 

Once a hotel property is completed and operating, the valuation for property tax purposes will be based the income generated. Local county methodologies focus on room revenues to establish the income attributable to the real estate.

 

It is of primary concern that any property open and operating as of January 1 be evaluated for a property tax appeal based on an income basis as opposed to cost of completion. Appraisal districts will at times rely on the cost model of valuation when a property does not have stabilized incomes to report. Cost models are very often much higher than a valuation model based on income and revenues. In this scenario, various approaches can be taken during the appeal process to ensure the property is correctly valued based on income and is equitable with competitors.

 

"It is of primary concern that any property open and operating as of January 1 be evaluated for a property tax appeal based on an income basis as opposed to cost of completion."

 

Existing Hotel Properties

 

Assessed hotel values must be reevaluated annually. The county is charged with assessing each property at 100% of market value. Existing properties are evaluated and valued based on reported revenues each year.

 

With so many new properties coming online and thousands of new rooms available, existing hotels may see a decline in operating and room revenues. If this is the case, declines should be seen as an opportunity to pursue a property tax reduction.

 

Transaction Activity

 

Where sales data has been released into the public domain, there has been relatively light transaction activity in the Dallas area, according to the report by Lodging Econometrics. There have been only 19 hotels sold in the first half of the year: eight hotels sold to private equity groups, six to real estate investment trusts, three to individual ownership and management groups, and two to private hotel companies. The largest hotel transaction was the sale of a portfolio of five Extended Stay hotels, which sold for an average selling price of $4,959,402 to a private equity group.

 

When transactions occur, it is important for the purchaser to pursue a valuation in the following appraisal year that reflects only the real estate portion of the transaction price. By eliminating any intangible value associated with the transaction, hotel properties can ensure accurate and lower appraisals that include only the taxable real estate.

 

We can expect the area appraisal districts involved to continue to pursue higher hotel valuations. Annual reevaluation of a property based on revenues and market conditions is essential to maintaining a fair and accurate assessment for property tax liability.