Post Covid-19: Tax Appeal Fees for Hotels Should be 2.5%
The tax appeal opportunity

Commercial real estate (CRE) owners and asset managers of all property types typically review annually and appeal, when warranted, real estate taxes by challenging the value assessed by local governments – so CRE owners are well versed with this opportunity of lowering real estate taxes.

Tax appeal valuation dates

Most jurisdictions utilize a January 1 valuation date and will not consider the Covid-19 impact as of January 1, 2020. January 1, 2021 is the first valuation date CRE owners will have to appeal their real estate taxes while considering any negative impact on value from Covid-19. In an average market, about 25% of a portfolio might have merit for a tax appeal. Therefore for 2021, 80% of the properties will likely have merit and be appealed. Now, during 2020, is the opportune time to reevaluate how to lower 2021 real estate tax appeal fees.

Hotels and Covid-19

The negative impact Covid-19 has had on the hospitality industry has been well documented. As of early August 2020, the Dow Jones U.S. Hotel & Lodging REIT Index has been cut in half year-to-date. 100% of hotel properties will be appealed and have excellent appeal merit for 2021.

Historical fee arrangements

The typical fee charged by attorneys and consultants for a tax appeal is 20-25% of the tax savings in low tax (e.g., 1% tax rate) jurisdictions and 10-15% in high tax (e.g., 2%+ tax rate) jurisdictions. Fee percentages have remained at these levels for decades. A 20% value reduction on a $100 million value with a 2% tax rate would result in a $60,000 appeal fee using a fee equal to 15% of the tax savings.

How hotel tax appeal fees could be 2.5%

Even without Covid-19, technology could be used to dramatically reduce tax appeal fees. Technology can be used auto generate appeal evidence, which would contain valuation models based on sales price per room and capitalized NOI. Analyzing properties by service level, amenity, demand segmentation, ADR, Rev Par, occupancy, and other income could all be automated. Please see our article Using Technology to Reduce Tax Appeal Fees.

With Covid-19, assessors will argue, as of January 1, 2021, that the worst is behind us and they’ll assert, based on the principle of anticipation, that pre-Covid-19 sale transactions should control the valuation conclusion. Only a well-organized statistical analysis driven by sophisticated technology adoption will produce the compelling evidence to overcome the assessor’s arguments. For a CBD hotel portfolio, because of the economies of scale, the portfolio fee should be 2.5% of the tax savings.

CREyield is leading the way
CRE owners should embrace those tax appeal companies that are driving dramatic fee compression via technology adoption – CREyield is leading the way. By doing so, CRE owners could bring appeal fees down to acceptable levels – eliminating the excess. Increasing efficiencies and reducing operating costs are what great owners and asset managers do.