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Hospitality Law Conference 2010 - What Lawyers & Operators Need to know about Hospitality Operations Part II - Morris A. Ellison & John M. Keelingit
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Hospitality Law Conference 2010 - What Lawyers & Operators Need to know about Hospitality Operations Part II - Morris A. Ellison & John M. Keelingit

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  • 1. IMPROVING THE BOTTOM LINE: TAX REASSESSMENT APPEALS FOR HOTELS © Prepared for the Hospitality Law Conference by: Morris A. Ellison, Esquire John M. Keeling, CPA CRE MAI Buist Moore Smythe McGee PA The Keeling Consultancy, LLC 5 Exchange Street 4400 Post Oak Parkway, Suite 1640 Charleston, SC 29401 Houston, Texas 77027 mellison@buistmoore.com john@keelingconsultancy.com (843) 720-4614 (713) 871-0221
  • 2. Presenters  Morris A. Ellison, Esquire • Principal with South Carolina Law Firm of Buist Moore Smythe McGee P.A. • Fellow of the American College of Real Estate Lawyers • Past Chair of the Hotel, Resorts and Tourism Committee of the American Bar Association • Listed in Best Lawyer’s in America, Chamber’s USA Leading Lawyers and Super Lawyers  John M. Keeling CPA CRE MAI • Principal, The Keeling Consultancy, LLC Hotel Consultants & Appraisers • Executive Vice President, Valencia Group Developers & Operators of Upscale Full-Service Hotels The Keeling Consultancy, LLC 2 Buist Moore Smythe McGee P.A.
  • 3. Impact of Economy on Hotels Generally  Values of Real Property have declined dramatically  Income of operating properties are down  Expenses are not  Ad valorem real property taxes are one of many expenses which should be examined  Tremendous Pressure on Assessors to Maintain Tax Revenue The Keeling Consultancy, LLC 3 Buist Moore Smythe McGee P.A.
  • 4. Taxes are jurisdiction dependent  Assessors' offices are generally understaffed  Many assistant assessors are not licensed to appraise complicated properties such as hotels outside of their employment  Use of mass appraisal techniques The Keeling Consultancy, LLC 4 Buist Moore Smythe McGee P.A.
  • 5. Hotels generally pay three different forms of taxes  Ad valorem real property taxes  Personal Property taxes  Business License fees The Keeling Consultancy, LLC 5 Buist Moore Smythe McGee P.A.
  • 6. Monies generated by a hotel’s operations are income not rent and must be treated differently The Keeling Consultancy, LLC 6 Buist Moore Smythe McGee P.A.
  • 7. Need to extract business value from hotel  General consensus that assessors should extract the “business value” of a hotel from the real estate value  Methodology for making this complicated calculation has been the subject of substantial argument and disagreement The Keeling Consultancy, LLC 7 Buist Moore Smythe McGee P.A.
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  • 9. General Method of Calculating Real Estate Taxes  Appraised value of the property  Multiply by the taxing ratio applicable to properties of that type.  Product of this calculation is defined as the “assessment ratio.” The Keeling Consultancy, LLC 9 Buist Moore Smythe McGee P.A.
  • 10.  Assessment ratio is then multiplied by the tax rate, the “millage”, to determine the amount of the taxes.  One mill equals 1/1000th of a dollar or 1/10th of a cent.  Example: if the tax rate is 273.8 mills, the treasurer multiplies .2738 by the assessed value to determine the base amount of real property tax due.  Hotel owner has no ability to change the assessment rate or the millage. The Keeling Consultancy, LLC 10 Buist Moore Smythe McGee P.A.
  • 11. Hampton Inn 124 Rooms 2007 2008 Net Operating Income $800,000 $322,000 The Keeling Consultancy, LLC 11 Buist Moore Smythe McGee P.A.
  • 12. Tax Year Value Ratio Assessment Milage Base Tax 2009 Assessor $8,000,000 6% $480,000 0.274 $131,424 Taxpayer $4,000,000 6% $240,000 0.274 $65,712 Resolution $5,000,000 6% $300,000 0.274 $82,140 The Keeling Consultancy, LLC 12 Buist Moore Smythe McGee P.A.
  • 13. Net Tax Savings $49,284 2008 NOI $322,000 Increased NOI $371,284 The Keeling Consultancy, LLC 13 Buist Moore Smythe McGee P.A.
  • 14. Definition of value willing seller willing buyer All Property must be valued for taxation at its true value are not acting under compulsion The Keeling Consultancy, LLC 14 Buist Moore Smythe McGee P.A.
  • 15. Like the Appraisal Institute’s definition of value, the statutory scheme assumes the existence of  A willing seller;  A willing buyer; and  The absence of compulsion.  Fixed valuation date.  A fictional sale on the specific valuation date. The Keeling Consultancy, LLC 15 Buist Moore Smythe McGee P.A.
  • 16. Few comparable sales  Comparables from past years inapplicable  Few willing sellers or buyers.  Few comparable sales under current conditions The Keeling Consultancy, LLC 16 Buist Moore Smythe McGee P.A.
  • 17. Appeal Process generally  Deadlines are jurisdiction specific  Procedures are jurisdiction specific The Keeling Consultancy, LLC 17 Buist Moore Smythe McGee P.A.
  • 18. General Procedure  The filing of an appeal;  Meetings and negotiations with the local assessor;  An appeal to a county board usually consisting of laypeople and professionals;  A de novo appeal to a trial court; and  An appeal through the court system. The Keeling Consultancy, LLC 18 Buist Moore Smythe McGee P.A.
  • 19. Use of Counsel  Few reported decisions involving hotel tax appeals throughout the United States  Lawyers are generally not required to file initial appeals, negotiate with local assessors or appear before local assessment boards.  However, only lawyers can take the appeal to the next step, generally a de novo trial before a trial court.  Secure in the knowledge that appeals will end before local boards, which are usually more favorably disposed to local government revenue needs, assessors tend to be less willing to negotiate the steeper reductions which the current economic climate suggest are appropriate. The Keeling Consultancy, LLC 19 Buist Moore Smythe McGee P.A.
  • 20. Approaches to value  Replacement Cost approach;  Sales comparable approach; and  Income approach  “Equity” value The Keeling Consultancy, LLC 20 Buist Moore Smythe McGee P.A.
  • 21. Cost approach  How much money would it take, using current material and labor costs, to replace the property with similar property. The Keeling Consultancy, LLC 21 Buist Moore Smythe McGee P.A.
  • 22. Sales comparable approach  Examination of sales of similar properties and comparing the values realized in these sales.  Compare the value of all property in the same area/neighborhood to other properties with special emphasis on the prices of properties that have recently sold.  Certain sales are not helpful  Bulk sales  1031 exchanges  Sales of distressed properties The Keeling Consultancy, LLC 22 Buist Moore Smythe McGee P.A.
  • 23. Income approach  Converts the anticipated future benefits of property ownership into an estimate of present value.  Requirements  A calculation of the net income being generated for a property before debt service; and  A determination of a capitalization rate for such net income.  Divide net income by a capitalization rate to determine value. The Keeling Consultancy, LLC 23 Buist Moore Smythe McGee P.A.
  • 24. Determination of Income  Net income of the real estate, as opposed to the business, remaining after the deduction of operating expenses but prior to deducting mortgage debt service and book depreciation.  Negative income. The Keeling Consultancy, LLC 24 Buist Moore Smythe McGee P.A.
  • 25. Determination of capitalization rate  Definition: any rate used to convert income into value  From an investor’s perspective, the earning power of a real estate investment is the critical element affecting its value  Two components:  Financing  Return on investment The Keeling Consultancy, LLC 25 Buist Moore Smythe McGee P.A.
  • 26. On its face, the income approach would seemingly not depend on the existence of comparable sales. The Keeling Consultancy, LLC 26 Buist Moore Smythe McGee P.A.
  • 27. The appraisal profession recognizes seven (7) methods for determining the appropriate capitalization rate to apply to property: 1. Derivation from comparable sales; 2. Derivation from effective gross income multipliers; 3. Derivation by band of investment – mortgage and equity; 4. Derivation by band of investment – land and building; 5. Debt coverage formula; 6. Yield capitalization techniques; and 7. Surveys based on market expectations. The Keeling Consultancy, LLC 27 Buist Moore Smythe McGee P.A.
  • 28. “Equity” approach  The intentional and systematic undervaluation of certain properties while other properties in the same class are valued at fair market value. The Keeling Consultancy, LLC 28 Buist Moore Smythe McGee P.A.
  • 29. Importance of expert testimony  Many appraisers in assessor offices are not licensed to appraise hotels  Importance of a license in the jurisdiction  Contingency fees The Keeling Consultancy, LLC 29 Buist Moore Smythe McGee P.A.
  • 30. Hotels: Approach and terms  Generally need to use the income approach  Income of real estate, not the business  Revenue Per Available Room (RevPAR): a measure of performance which considers both the occupancy percentage and average daily rate  Occupancy Rate = A percentage based on the number of rooms occupied out of total available rooms  ADR = Average Daily Rate  $RevPAR = $ADR X %Occupancy Rate The Keeling Consultancy, LLC 30 Buist Moore Smythe McGee P.A.
  • 31. Assessor is charged with appraising the value of the hotel’s real estate  Components comprising the value elements of a hotel are not sold separately.  Investors base purchases on the income stream generated by the hotel as an operating business, not on the value of its individual components.  Components include:  Land  Improvements  Furniture, Fixtures & Equipment (FF&E)  Working Capital  Business Enterprise Value The Keeling Consultancy, LLC 31 Buist Moore Smythe McGee P.A.
  • 32. The first two items, land and improvements, constitute the real estate or realty which is subject to ad valorem real property taxation.  FF&E and inventory constitute the Tangible Personal Property (“TPP”) and typically be subject to personal property taxation.  Working Capital and Business Enterprise Value (“BEV”) are Intangible Personal Property (“IPP”).  Working capital includes cash, the net of accounts payable and receivable, and other cash equivalents.  Business enterprise value components might include start up costs, an assembled workforce, business organization, non-realty leases and contracts, hotel franchise and residual intangible assets. The Keeling Consultancy, LLC 32 Buist Moore Smythe McGee P.A.
  • 33. Business Enterprise Value  No consensus on how to calculate The Keeling Consultancy, LLC 33 Buist Moore Smythe McGee P.A.
  • 34. The “Rushmore Approach”  Named for Stephen Rushmore, the founder of HVS International. The Keeling Consultancy, LLC 34 Buist Moore Smythe McGee P.A.
  • 35.  Leading reported decision regarding valuing hotels, Glen Pointe Assocs. v. Township of Teaneck, 10 N.J. Tax 380, 1989 N.J. Tax LEXIS 5, at *11-12 (1989), uses the Rushmore Approach. The Keeling Consultancy, LLC 35 Buist Moore Smythe McGee P.A.
  • 36. Business Enterprise Valuation for Hotels The Keeling Consultancy, LLC 36 Buist Moore Smythe McGee P.A.
  • 37. Going Concern The Keeling Consultancy, LLC 37 Buist Moore Smythe McGee P.A.
  • 38. Going Concern  Realty The Keeling Consultancy, LLC 38 Buist Moore Smythe McGee P.A.
  • 39. Going Concern  Realty  Land The Keeling Consultancy, LLC 39 Buist Moore Smythe McGee P.A.
  • 40. Going Concern  Realty  Land  Building The Keeling Consultancy, LLC 40 Buist Moore Smythe McGee P.A.
  • 41. Going Concern  Realty  Land  Building  Tangible Personal Property The Keeling Consultancy, LLC 41 Buist Moore Smythe McGee P.A.
  • 42. Going Concern  Realty  Land  Building  Tangible Personal Property  Furniture, Fixtures & Equipment The Keeling Consultancy, LLC 42 Buist Moore Smythe McGee P.A.
  • 43. Going Concern  Realty  Land  Building  Tangible Personal Property  Furniture, Fixtures & Equipment  Intangible Personal Property The Keeling Consultancy, LLC 43 Buist Moore Smythe McGee P.A.
  • 44. Going Concern  Realty  Land  Building  Tangible Personal Property  Furniture, Fixtures & Equipment  Intangible Personal Property  Working Capital The Keeling Consultancy, LLC 44 Buist Moore Smythe McGee P.A.
  • 45. Going Concern  Realty  Land  Building  Tangible Personal Property  Furniture, Fixtures & Equipment  Intangible Personal Property  Working Capital  Business Enterprise Value (BEV) The Keeling Consultancy, LLC 45 Buist Moore Smythe McGee P.A.
  • 46. Approaches to Separating BEV The Keeling Consultancy, LLC 46 Buist Moore Smythe McGee P.A.
  • 47. Approaches to Separating BEV  Rushmore Method The Keeling Consultancy, LLC 47 Buist Moore Smythe McGee P.A.
  • 48. Approaches to Separating BEV  Rushmore Method  Widely accepted by appraisal districts The Keeling Consultancy, LLC 48 Buist Moore Smythe McGee P.A.
  • 49. Approaches to Separating BEV  Rushmore Method  Widely accepted by appraisal districts  Simple to calculate The Keeling Consultancy, LLC 49 Buist Moore Smythe McGee P.A.
  • 50. Approaches to Separating BEV  Rushmore Method  Widely accepted by appraisal districts  Simple to calculate  Minimizes BEV The Keeling Consultancy, LLC 50 Buist Moore Smythe McGee P.A.
  • 51. Approaches to Separating BEV  Rushmore Method  Widely accepted by appraisal districts  Simple to calculate  Minimizes BEV  Subtracts from cash flow: The Keeling Consultancy, LLC 51 Buist Moore Smythe McGee P.A.
  • 52. Approaches to Separating BEV  Rushmore Method  Widely accepted by appraisal districts  Simple to calculate  Minimizes BEV  Subtracts from cash flow:  Management Fees The Keeling Consultancy, LLC 52 Buist Moore Smythe McGee P.A.
  • 53. Approaches to Separating BEV  Rushmore Method  Widely accepted by appraisal districts  Simple to calculate  Minimizes BEV  Subtracts from cash flow:  Management Fees  Franchise Fees The Keeling Consultancy, LLC 53 Buist Moore Smythe McGee P.A.
  • 54. Approaches to Separating BEV  Rushmore Defends Rushmore Method The Keeling Consultancy, LLC 54 Buist Moore Smythe McGee P.A.
  • 55. Approaches to Separating BEV  Rushmore Defends Rushmore Method  No hard data on sale of the components of value The Keeling Consultancy, LLC 55 Buist Moore Smythe McGee P.A.
  • 56. Approaches to Separating BEV  Rushmore Defends Rushmore Method  No hard data on sale of the components of value  Other methods significantly reduce the value of the Real Estate component The Keeling Consultancy, LLC 56 Buist Moore Smythe McGee P.A.
  • 57. Approaches to Separating BEV  Rushmore Defends Rushmore Method  No hard data on sale of the components of value  Other methods significantly reduce the value of the Real Estate component  May reduce the value that secures a mortgage The Keeling Consultancy, LLC 57 Buist Moore Smythe McGee P.A.
  • 58. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method The Keeling Consultancy, LLC 58 Buist Moore Smythe McGee P.A.
  • 59. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Common in the 1940s – 1950s The Keeling Consultancy, LLC 59 Buist Moore Smythe McGee P.A.
  • 60. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Common in the 1940s – 1950s  REIT leases are not arm’s length The Keeling Consultancy, LLC 60 Buist Moore Smythe McGee P.A.
  • 61. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Common in the 1940s – 1950s  REIT leases are not arm’s length  Can be used to value a component of BEV The Keeling Consultancy, LLC 61 Buist Moore Smythe McGee P.A.
  • 62. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Common in the 1940s – 1950s  REIT leases are not arm’s length  Can be used to value a component of BEV  Restaurant The Keeling Consultancy, LLC 62 Buist Moore Smythe McGee P.A.
  • 63. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Common in the 1940s – 1950s  REIT leases are not arm’s length  Can be used to value a component of BEV  Restaurant  Spa The Keeling Consultancy, LLC 63 Buist Moore Smythe McGee P.A.
  • 64. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method The Keeling Consultancy, LLC 64 Buist Moore Smythe McGee P.A.
  • 65. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Value by the Income Approach The Keeling Consultancy, LLC 65 Buist Moore Smythe McGee P.A.
  • 66. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Value by the Income Approach  Value by the Cost Approach The Keeling Consultancy, LLC 66 Buist Moore Smythe McGee P.A.
  • 67. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Value by the Income Approach  Value by the Cost Approach  Subtract Cost Value from Income Value The Keeling Consultancy, LLC 67 Buist Moore Smythe McGee P.A.
  • 68. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Value by the Income Approach  Value by the Cost Approach  Subtract Cost Value from Income Value  Subtract Value of FF&E The Keeling Consultancy, LLC 68 Buist Moore Smythe McGee P.A.
  • 69. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Excess Profits Method The Keeling Consultancy, LLC 69 Buist Moore Smythe McGee P.A.
  • 70. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Excess Profits Method  Compare RevPAR of Subject with Similar Hotels in Market The Keeling Consultancy, LLC 70 Buist Moore Smythe McGee P.A.
  • 71. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Excess Profits Method  Compare RevPAR of Subject with Similar Hotels in Market  Be Alert to Differences in Location of Facilities The Keeling Consultancy, LLC 71 Buist Moore Smythe McGee P.A.
  • 72. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Excess Profits Method  Compare RevPAR of Subject with Similar Hotels in Market  Be Alert to Differences in Location of Facilities  Consider Superior Net Operating Income The Keeling Consultancy, LLC 72 Buist Moore Smythe McGee P.A.
  • 73. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Excess Profits Method  Compare RevPAR of Subject with Similar Hotels in Market  Be Alert to Differences in Location of Facilities  Consider Superior Net Operating Income  Cap Resulting Difference in NOI The Keeling Consultancy, LLC 73 Buist Moore Smythe McGee P.A.
  • 74. Excess Profits Example  Two Hotels similar in:  Location  Design and construction  Market Orientation (i.e. extended stay, select service, limited service, etc.)  Brand (i.e. Hilton, Marriott)  Age  Homewood-62% Occ X $106 ADR=$65.33 RevPAR  Residence Inn-76% Occ X $108 ADR=$82.08 RevPAR  Adjustments need to be made to account for superior/inferior management,  Compare to overall market of comparable hotels The Keeling Consultancy, LLC 74 Buist Moore Smythe McGee P.A.
  • 75. Approaches to Separating BEV  Rushmore Method  Real Estate Lease Method  Cost Method  Excess Profits Method  Franchise Cost/Benefit Method The Keeling Consultancy, LLC 75 Buist Moore Smythe McGee P.A.
  • 76. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue The Keeling Consultancy, LLC 76 Buist Moore Smythe McGee P.A.
  • 77. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Corporate Internet Sites The Keeling Consultancy, LLC 77 Buist Moore Smythe McGee P.A.
  • 78. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Corporate Internet Sites  Toll-free Reservations Numbers The Keeling Consultancy, LLC 78 Buist Moore Smythe McGee P.A.
  • 79. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Corporate Internet Sites  Toll-free Reservations Numbers  Travel Agent Relationships The Keeling Consultancy, LLC 79 Buist Moore Smythe McGee P.A.
  • 80. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Corporate Internet Sites  Toll-free Reservations Numbers  Travel Agent Relationships  National Group Sales The Keeling Consultancy, LLC 80 Buist Moore Smythe McGee P.A.
  • 81. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Corporate Internet Sites  Toll-free Reservations Numbers  Travel Agent Relationships  National Group Sales  Corporate Promotions The Keeling Consultancy, LLC 81 Buist Moore Smythe McGee P.A.
  • 82. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs The Keeling Consultancy, LLC 82 Buist Moore Smythe McGee P.A.
  • 83. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Franchise Fee The Keeling Consultancy, LLC 83 Buist Moore Smythe McGee P.A.
  • 84. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Franchise Fee  Management Fee The Keeling Consultancy, LLC 84 Buist Moore Smythe McGee P.A.
  • 85. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Franchise Fee  Management Fee  Rooms Accounting The Keeling Consultancy, LLC 85 Buist Moore Smythe McGee P.A.
  • 86. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Franchise Fee  Management Fee  Rooms Accounting  Reservations Fees The Keeling Consultancy, LLC 86 Buist Moore Smythe McGee P.A.
  • 87. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Franchise Fee  Management Fee  Rooms Accounting  Reservations Fees  Marketing Assessment The Keeling Consultancy, LLC 87 Buist Moore Smythe McGee P.A.
  • 88. Approaches to Separating BEV  Franchise Revenue & Cost Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Franchise Fee  Management Fee  Rooms Accounting  Reservations Fees  Marketing Assessment  Frequent Traveler Charges The Keeling Consultancy, LLC 88 Buist Moore Smythe McGee P.A.
  • 89. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Solve for Cap Rate Using Band of Investment The Keeling Consultancy, LLC 89 Buist Moore Smythe McGee P.A.
  • 90. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Solve for Cap Rate Using Band of Investment  Overall Rate The Keeling Consultancy, LLC 90 Buist Moore Smythe McGee P.A.
  • 91. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Solve for Cap Rate Using Band of Investment  Overall Rate  Real Estate Cap Rate The Keeling Consultancy, LLC 91 Buist Moore Smythe McGee P.A.
  • 92. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Solve for Cap Rate Using Band of Investment  Overall Rate  Real Estate Cap Rate  FF&E Cap Rate The Keeling Consultancy, LLC 92 Buist Moore Smythe McGee P.A.
  • 93. Approaches to Separating BEV  Franchise Cost/Benefit Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Solve for Cap Rate Using Band of Investment  Overall Rate  Real Estate Cap Rate  FF&E Cap Rate  Intangible Personal Property Cap Rate The Keeling Consultancy, LLC 93 Buist Moore Smythe McGee P.A.
  • 94. Approaches to Separating BEV  Franchise Revenue & Cost Method  Identify Franchise Generated Rooms Revenue  Identify Associated Franchise Costs  Solve for Cap Rate Using Band of Investment  Cap Difference in Revenue and Cost The Keeling Consultancy, LLC 94 Buist Moore Smythe McGee P.A.
  • 95. Case Study  DoubleTree Hotel  230 rooms  Room Revenue: $4.6 million  Total Revenue $10.7 million  County Assessment $12.6 million The Keeling Consultancy, LLC 95 Buist Moore Smythe McGee P.A.
  • 96. Rushmore Method Amount % Rooms Rev. % Total Rev Franchise Fee $185,320 4.0% 1.7% Management $320,655 3.0% Fee Total $505,975 4.7% The Keeling Consultancy, LLC 96 Buist Moore Smythe McGee P.A.
  • 97. Franchise Cost/Benefit Method Amount % Total Revenue Franchise Fee $0 0.0% Management Fee 320,655 3.0% Rooms Accounting 53,304 0.5% Reservations Fees 28,208 0.3% Marketing 162,141 1.5% Assessment Hilton Honors 119,881 1.1% Total $684,189 6.4% The Keeling Consultancy, LLC 97 Buist Moore Smythe McGee P.A.
  • 98. Real Estate Cap Rate PriceWaterhouse Coopers Korpacz Real Estate Investor Survey Third Quarter 2007 Range Average National Apartment Market 3.50% - 8.00% 5.76% National Full-Service Lodging Segment 6.00% – 11.00% 8.98% The Keeling Consultancy, LLC 98 Buist Moore Smythe McGee P.A.
  • 99. Rushmore Method % % Amount Rooms Rev. Total Rev Franchise Fee $185,320 4.0% 1.7% Management Fee $320,655 3.0% Total $505,975 4.7% Cap Rate 20% BEV $2,530,000 The Keeling Consultancy, LLC 99 Buist Moore Smythe McGee P.A.
  • 100. Franchise Cost/Benefit Method Affiliation Increment Incremental Affiliation Revenue $1,700,000 Incremental Affiliation Cost 684,000 Incremental Affiliation Profit 1,016,000 Incremental Cost of Rooms (20%) 203,000 Net Incremental Affiliation Revenue 813,000 BEV Cap Rate 20% Business Enterprise Revenue $4,065,000 The Keeling Consultancy, LLC 100 Buist Moore Smythe McGee P.A.
  • 101. Value Comparison  Assessed Value - $12.6 million  Appraised Value - $14.0 million  Rushmore Value - $11.5 million  Franchise C/B Value - $9.9 million The Keeling Consultancy, LLC 101 Buist Moore Smythe McGee P.A.
  • 102. Updated Rushmore Method  Start with original income and expense statements  Make deduction for business value  Management fee  Franchise fee  Deduction for Personal Property  Return on  Return of  Superior/Inferior Management Adjustments  Adjustment to occupancy and average rate based on Smith Travel Research and Market Research  Adjustment to income and expense based on comparable operating data The Keeling Consultancy, LLC 102 Buist Moore Smythe McGee P.A.
  • 103. Key issues in the Current Market  Key factor of the valuation dates  Inappropriate use of comparables predating September 1, 2008.  Absence of credit makes determination of capitalization rates very difficult  Serious declines in income in 2008 and 2009.  Pressures for tax revenues have increased. The Keeling Consultancy, LLC 103 Buist Moore Smythe McGee P.A.
  • 104. Challenges to the theory of ad valorem taxation  The theory underlying ad valorem property taxes assumes the existence of  A willing seller;  A willing buyer; and  The absence of compulsion.  Fixed valuation date.  Exposure to the market resulted in a fictional sale on a specific valuation date. The Keeling Consultancy, LLC 104 Buist Moore Smythe McGee P.A.
  • 105. Absence of comparables  Applicability of pre-September 2008 comparables  Dearth of sales involving willing buyers, willing sellers and the absence of compulsion. The Keeling Consultancy, LLC 105 Buist Moore Smythe McGee P.A.
  • 106. Impact of current conditions on hotel property income The Keeling Consultancy, LLC 106 Buist Moore Smythe McGee P.A.
  • 107. Capitalization rates  Many surveys of capitalization rates involved in hotel transactions depend on the availability of comparable sales.  Without current sales of similar and competitive properties, deriving capitalization rates is extremely difficult The Keeling Consultancy, LLC 107 Buist Moore Smythe McGee P.A.
  • 108. IMPROVING THE BOTTOM LINE: TAX REASSESSMENT APPEALS FOR HOTELS © Prepared for the Hospitality Law Conference by: Morris A. Ellison, Esquire John M. Keeling, CPA CRE MAI Buist Moore Smythe McGee PA The Keeling Consultancy, LLC 5 Exchange Street 4400 Post Oak Parkway, Suite 1640 Charleston, SC 29401 Houston, Texas 77027 mellison@buistmoore.com john@keelingconsultancy.com (843) 720-4614 (713) 871-0221 The Keeling Consultancy, LLC Buist Moore Smythe McGee P.A.