Follow these tips to avoid overpaying on hotel property taxes

Hoteliers pay dozens of taxes that other businesses don’t. One of the biggest tax bills is property tax—and often it’s a bill that is filled with errors, according to Craig Cardella, CEO of Property Tax Eagle, a property tax advisor.

“It’s not fair. It’s excessive. We can’t change it, but we can manage it,” he said during a recent webinar titled “Property Tax 101: Keep More of Your Money” hosted by the Asian American Hotel Owners Association.

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Property taxes affect hoteliers’ purchase affordability, profitability, equity value, ability to maintain and upgrade their properties and future sales prices. That’s why it’s important for owners to understand the taxing process and appeal any errors they find.

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“Taxes are bottom line. They change your [net operating income]. They change how much money you have to take home at the end of the day,” Cardella said.

With that in mind, Cardella provided general tips for owners when it comes to property tax bills with the caveat that every jurisdiction may vary.

How Taxes are Assessed

Owners should pay attention to millage rates. Every 1 mill equals $1 of tax per $1,000 assessed value. Cities and schools often tax on county values, and the true value is 100 percent of the market value. The assessment is a percentage of the fair market value.

For example, a hotel worth $10 million in fair market value has an assessed value of $4 million. If the millage rate is 25 mills, the property tax on the hotel is $25 for every $1,000 of assessed value, or $25 times 4,000, which equals $100,000 in property tax.

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A problem could arise when an assessor bases the value on cost to replace. For example, an investor buys a hotel for $4 million and remodels it with historic property tax credits. The all-in cost is $6.5 million. However, when the tax assessment arrives, the investor notices a true assessed value of $9.5 million.

“What happened? They say it’s worth $9.5 million because the Marriott up the street is worth that,” Cardella said. “You should object.”

How to Appeal

Cardella said hoteliers need to ask themselves whether they will actually appeal their tax assessments.

“The simple truth is that you’re going to need help because 60 percent of properties are overvalued by 25 percent,” he said. “If you have a $4-million or $5-million hotel, you’re paying $10,000 to $30,000 that you don’t owe.

“You have to deal with this if you’re going to be successful in this industry,” he said.

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Owners have 30 to 90 days to appeal, but the process isn’t easy and needs to be done correctly, Cardella said. The first step is to call the tax assessor’s office. In many cases, it will be difficult to get the assessor on the phone and hoteliers will need to call back several times to get their questions answered. It’s important to have information at the ready, such as the hotel’s location and the tax ID number. Hoteliers will also want to be sure to ask what methodology was used to assess their properties. Also, owners need to know if they have any exemptions (energy efficiency, handicapped accessible, etc.) because a tax assessor won’t offer that information.

“If you don’t know what to ask, they won’t know what to tell you,” Cardella said, adding that some states will send copies of assessor records if asked, but some will put barriers up. “They don’t want you to know they don’t know how to value your hotel in a lot of cases.”

First, an appeal letter of form must be sent to the tax assessor, Cardella said. Then, the methodology is as follows:

  • stipulate where the appeal is to be heard;
  • describe the nature of the valuation appeal;
  • state the value and reason why;
  • state the correct citation of the law;
  • prepare evidence to appeal the case;
  • prove the case is right with evidence and law;
  • do not attempt to prove the assessor wrong.

“If you do any of this wrong, your appeal gets put in the trash can,” Cardella said. “Tax assessors are notorious for not knowing law and regulations. You can’t try to prove wrong because they are probably right based on what they were taught.”

Cardella said it’s important to appeal errors with property taxes. Chances are that if one hotel is assessed incorrectly, other hotels in the area are, too. In some cases, it might be beneficial to work together.

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“Errors can be corrected better in a group,” he said. “There is strength in numbers.”

In other cases, some property taxes are assessed by outside companies from another state based on a low bid. These companies are not familiar with the area and may only drive by to assess. Hoteliers should take notice and demand to see the data used to assess their properties because they are required by law to provide that information. Be polite and persistent to get the information needed for appeal. In these cases, there are often procedural errors that can help hoteliers win their cases.