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The hospitality market continues to make a dramatic comeback in many parts of the country. In Southern California, the sudden upturn is prompting owners and investors to seek new strategies to minimize their property tax exposure.

KEY NUMBERS ARE UP
Analysts say the hotel industry, especially in the LA area, is enjoying one of its most profitable times ever. The economy is doing well and creating demand. At the same time, supply has been constrained by a lack of new hotel building, partly because of high construction costs.

Despite the high cost to build luxury hotels, several developers have announced new projects. They are banking on numbers that show the average daily room rate in Los Angeles jumped 10% in 2006 and revenue per available room rose nearly 12%.

THE NEW TREND: HOTEL-CONDO PROJECTS
More and more hotels are offering rooms for sale, as well as for rent. In fact, hotel home ownership is a part of nearly every new hotel property these days. This trend has literally helped hotels get built. Developers can get construction loans and build equity much more easily with a condo-hotel project than if they set out to build a traditional hotel.

The concept of private ownership falls into three basic categories:

1. Condo hotels

2. Time-shares

3. Private Residence Communities (PRC) within the hotel

More than 30 hotels offering private ownership opened nationwide in 2006 and another 47 are forecast for this year, according to Lodging Econometrics.

VALUATION ISSUES COMPLICATED
Hotel and hotel-condo properties present unique valuation challenges for assessors primarily because they generate income from both real and intangible business value. Simply put, hotels consist of:

• Real property (land and buildings)

• Tangible personal property (furniture, fixtures, equipment and inventory)

• Intangible business value (name, good will, management, franchise costs, work force, copyrights, contracts and other residual intangibles)

It’s crucial that the proper allocation of value be made for various taxing authorities. Otherwise, the property taxes will be overstated.

Since the hotel industry is still ramping up from the post-9/11 downturn, there may not be adequate comparable sales to help assessors determine equitable market values. It’s common to see a few high-dollar sales increase values market wide. That’s why establishing an equitable base value, as prescribed under Proposition 13, is the most important factor in having a hotel correctly assessed for tax purposes.

POER METHODOLOGY
Our recommended approach is comprehensive, yet flexible and consists of three phases:

1. Gathering Data and Planning
   The preliminary review and property inspection process includes a coordinated exchange of relevant property information, current industry trends and an analysis of underlying documentation. Through this focused discovery process, you can isolate all the Condo related issues that could impact the property’s value.

2. Analysis and Valuation
   Once the required information is gathered, you are able to develop a target tax value of the property and determine if an appeal is warranted. An in-depth and detailed valuation review allows you a full understanding and proactive role to objectively determine whether to pursue an assessment appeal.

3. Appeals
   The final phase involves meeting with the assessor and/or filing a formal appeal to challenge the proposed assessment. Results of these efforts must be fully analyzed to decide if further appeals are justified.

Property tax savings can have a major positive impact on a hotel’s operating budget. As the market grows, it’s essential to have a clear understanding of the unique valuation issues present in hotel properties and to successfully make your case with local assessors.