Hotel Property Taxes: Long-Term Bargain but a Short-Term Pain.
PKF Hospitality Research (PKF-HR) is the research affiliate of PKF Consulting
Friday, 7th July 2006
Hotel property taxes grew 6.2 percent in 2005 - the greatest single year increase since 1987. Given the projected continued growth in hotel profitability, as well as high levels of transaction activity, property tax payments are forecast to rise another 5.1% in 2006.

This analysis is based on the 2006 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting.

"Property taxes are a cost that hotel managers have limited control over. And, when fixed expenses start to escalate, operators get very concerned," said R. Mark Woodworth, president of Atlanta-based PKF-HR. "Municipal tax assessors know that property values in general have been escalating and that profits have been increasing in the lodging industry. The cities and counties want their piece of the pie, and there is not much hoteliers can do."

While the 6.2 percent rise in 2005 is dramatic, property taxes over the long-term have increased at just the pace of inflation. This rate of growth compares favorably to the increases recorded for other hotel performance measurements. "The 2.9 percent compound annual growth rate (CAGR) for property taxes during the past 13 years is less than the average annual increases in revenue, expenses, and profits during the same period," Woodworth observed.

Property Taxes is just one of the 200 discrete hotel revenue and expense items captured by PKF-HR for its 2006 Trends in the Hotel Industry report. The 2006 report marks the 70th annual review of U.S. hotel operations conducted by PKF. This year's sample draws upon year-end 2005 financial statements received from more than 5,000 hotels across the country.

Taxes Lag Values

Municipal reassessments typically occur every few years. Therefore, it usually takes a while for a jurisdiction to catch up with industry trends. "Intuitively, an outside observer would think there should be a correlation between changes in value and changes in property taxes. However, our analysis has shown that property tax increases have lagged behind the gains in value," Woodworth stated. Using data from its Trends database, as well as Real Estate Research Corporation, PKF-HR estimates that hotel values have increased at a compound annual rate of 6.9 percent from 1992 to 2005. This compares to the 2.9 percent CAGR that property taxes experienced during the same period.

An exception to the lag between changes in property taxes and gains in value occurs when hotel transaction activity escalates. Property tax reassessments are frequently triggered each time a sale takes place. During the past few years, double-digit gains in profitability, along with other investment factors, have attracted the attention of both seasoned hotel investors and first-time lodging buyers. "Hotel transaction activity has been at an all-time high the past three years with eager buyers chasing discriminating sellers." Woodworth said. "Given the increase in transaction activity, there has been more opportunity for city and county appraisers to re-evaluate their assessments."

Property renovations also attract the attention of municipal appraisers. During the recession of 2001 to 2003, most hotels were forced to postpone plans to upgrade and refurbish their properties. Therefore, during 2004 and 2005 we observed the execution of several delayed renovation projects and an uptick in property tax assessments.

All Types Taxed

Property taxes grew for all property types in 2005. All-suite hotels (7.0%) and full-service properties (6.6%) experienced the greatest increases in taxes, while resorts grew at 5.7 percent. "Fortunately, hotel revenue escalated 8.8 percent in 2005, thus masking the impact of the increase in property taxes. In fact, property taxes measured as a percent of total revenue remained at 3.8 percent in both 2004 and 2005," Woodworth noted.

Convention hotels pay the highest property taxes among all hotel categories at $3,202 per available room. Conversely, the $807 per available room paid by limited-service properties is the lowest amount. "Large convention hotels are frequently located in urban city centers where the tax rates are higher than the rural and suburban locations of most limited-service properties. In addition, the extent of facilities and personal property (furniture and fixtures) within a hotel facility influence the amount of tax charged," Woodworth said. The upward pressure on property valuations caused by these factors was exacerbated in many markets by the heightened appeal of in-town residential living, a trend that has served to drive real estate prices even further.

To order a copy of the 2006 Trends in the Hotel Industry report, please visit the firm's online store at www.pkfc.com/store, or call Brandon Culp or Claude Vargo at (866) 842-8754.

PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.
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