Are you paying property taxes for your business ?

If you say yes, you are probably right, but you shouldn’t be paying for such.  An overwhelming majority of hotels are paying taxes on the value of their business, and that is money that should never leave your bottom line.  In the state of Texas, only real estate (land and building) and tangible personal property (furniture, fixtures, equipment, inventory, etc.) are taxable.  The tax code clearly states that intangible assets are not subject to taxation, which is exactly what brand affiliation/business enterprise value is.

The appraisal district is tasked with determining market value of all properties as of January 1 of the current year.  As you might imagine, this is not an enviable assignment as they don’t have the time, manpower, or data to complete individual appraisals for every property to ensure accurate assessment.  Thus, the appraisal district must employ mass appraisal.

Mass appraisal is in essence a short-cut or tool utilized to value a large volume of properties in a short time period, with limited information based on parameters the appraiser chooses to use.  In regards to hotels, typically the most common parameters consist of average daily room rates, occupancy, and revenue per available room.  Gross receipts are made available to the appraiser from the State Comptrollers Office.  The data is entered in to an income pro-forma model and expenses are then estimated with resulting net operating income divided by a (supposed) market derived capitalization rate to result in an indication of value.

Sounds pretty straight forward, right?  This seems like same methodology used by fee appraisers for purchases or refinances, so what is the problem?  The problems are many to include that the indication of value from this analysis is indicative of a going concern value and includes business enterprise value, and not the value of just the real estate and business personal property.

Following are additional pitfalls with using mass appraisal:

  • Gross receipts provided by Comptroller may not accurately reflect actual annual room revenue for calendar year due to non-booked refunds or other accounting variances
  • Expenses are estimated by appraiser.  Different property types and revenue streams will require different expense ratios (limited service vs. full service)
  • Sales of hotels have declined, and appraiser does not always know if capitalization rate reported is reflective of trailing 12 months revenue or projections.  A cap rate based on projections that do not materialize dramatically overstates actual cap rate at time of sale.  Additionally, sale price reflects purchase of all assets, including business, and not just taxable property.
  • Brand and/or business enterprise value has not been identified and separated from going concern value to insure that only tangibles are assessed.

What is business enterprise value?

“A term applied to the concept of value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled work force, working capital, trade names, franchises, patents, trademarks, contracts, leases, and operating agreements.” (The Dictionary of Real Estate Appraisal, 4th ed., Appraisal Institute)

Many appraisal districts have begun to concede that a business value deduction needs to be applied to determine fair assessment, however, as you might imagine in mass appraisal it’s a “one size fits all” mentality and an arbitrary 10% adjustment does not accurately reflect business value across the board for all properties.  We have found that the business value can be as little as 10% and as high as 35% depending upon the property.

Make sure you don’t continue paying more than you should in property taxes.  It requires expertise to value just the tangible portions of a hotel, and having the right property tax consultant on your team can be worth their weight in gold (even with today’s prices)!

Mike Eckhoff is President of Assessment Advisors in The Woodlands, Texas.  The firm provides property tax appeals nationwide for commercial real estate, with a focus on income-producing properties.  Mr. Eckhoff can be reached at