How to manage your property taxes

By Bruce Morgan

After labour costs, property taxes are the most significant operating expense impacting hotel profitability and value. Yet taxes are typically viewed as beyond the hotelier’s control. Assessment authorities determine value and municipal/provincial taxing authorities set the tax rates. Notwithstanding such constraints, effective management of assessment/property tax issues should be part of every owner’s business plan.

Legislative context: Know the rules—what to do and when

Assessment and property taxation is provincially legislated. Each province has its own legislation which provides statutory frameworks for critical matters including what is assessable/taxable, assessment base years/taxation cycles, assessors’ rights and property owner obligations, critical dates, appeal procedures and more. All provinces require that real property be assessed with reference to “market value” as defined in the applicable legislation.

Knowing the rules, what to do and when to do it is critical to effective property tax management. Missing an appeal deadline means accepting a tax burden that may be excessive. Failure to provide information to assessors may lead to forfeiture of appeal rights. In some provinces legislation allows authorities to issue partial year assessments/tax bills on new/expanded properties. In others, a hotel opening in the fall may be given the benefit of a deferred assessment until the following annual return. Navigation of the system in Ontario is complicated further by complex legislation, regulations and by-laws involving variable tax classifications/rates, capping/claw-back of assessment related tax increases and decreases etc. Unfamiliarity with the rules can lead to lost savings opportunity.
 
Hotel valuation methodology

As income producing properties, hotels are generally valued using the income approach. The cost and direct comparison (comparable sales) approaches are seldom used.

The methodology most employed is direct capitalization of net income. A stabilized pro forma statement is developed reflecting all operating revenues and deductions are made for departmental and undistributed expenses. Net income is converted to value using an appropriate capitalization rate. Finally, deductions are made for non-assessable tangible personal property (chattels) to arrive at the estimated value of the real estate (land and building).

Determining if a hotel has been appropriately valued requires knowledge of hotel operations, market/performance trends, product/market positioning and valuation. Hotel owners certainly possess these skills but may lack important legislative insights and knowledge of local assessment practices. With respect to valuation methodology, key questions to consider include:

o    Does the stabilization process consider all relevant market factors?
o    Does the valuation use reasonable revenue/expense parameters?
o    Have sufficient allowances been provided for management and franchise fees?
o    Does the valuation provide sufficient FF&E reserve?
o    Are the capitalization rates reflective of the market and reasonable?  
o    Are deductions for non-assessable tangible personal property (chattels) sufficient?
o    How if at all does the valuation remove non-assessable intangible personal property?

Hotels are operating businesses and valuation via the income may include components of non-assessable tangible and intangible personal property that must be removed to arrive at the value of land and building (real property).

Effective property tax management for hotels

Hotel owners/managers are knowledgeable business persons. But they are not experts in property tax assessment nor do they have time to devote to the “minutiae” that property tax management requires. For companies owning/managing a few properties a Do It Yourself approach may work but be wary. Assessors’ superior knowledge of legislation and local valuation/assessment practices can put you at a disadvantage.
Increasingly, hotel owners, managers and lenders are coming to realize the benefits of retaining an experienced hotel property tax advisor who understands the industry, legislative frameworks, and hotel valuation procedures. A property tax professional ensures that critical procedures are followed, that assessments/taxes are fair and offers the best potential to reduce values and taxes.

Professional fees for assessment/property tax services vary depending on the scope of services provided. Preliminary analysis is possible for modest fees and assists in determining potential over assessment and cost/benefits of continuance. Once appeal merits are determined, mutually agreeable fee arrangements can be determined reflecting the complexity of issues involved, potential tax savings, settlement opportunities, and litigation requirements. 

Property taxes for Canadian hotels can range from 3.0 per cent to 8.0 per cent of total revenue. Given the magnitude of this expense item, hoteliers should ensure that property taxes and the assessments on which they are based are fair and reasonable. An effective tax management plan is the key.

Bruce Morgan is a Senior Tax Consultant with Altus Group and specializes in the valuation of hotels for assessment/property tax purposes. He is a Licensed Paralegal (Law Society of Upper Canada) and has been a hotel industry consultant for 24 years.