In David Chitlik’s most recently published article in Hotel Executive Magazine, he explores the complex relationship between Cap Ex, property value, and tax in the first of two articles on this timely topic. The article was co-authored with Renea Linton, Director, Altus Hospitality Tax Group.
“Real estate tax is one of the top three expenditures for property owners, and it can be the most difficult to understand. Owners know that capital expenditures (Cap Ex) influence property valuation, which in turn can have a big impact on taxes. However, the perception of added value can also play a role in the tax assessment,” writes David Chitlik, Altus Group’s Vice President, Property Tax, Hospitality. “For example, some renovations don’t increase the value of a property; they simply maintain it. Unfortunately, tax assessors may perceive any renovation as increasing a property’s value, which would then justify higher taxes. Ensuring the assessor’s perception of increase is a valid one, therefore, helps ensure that the tax is calculated fairly.”
Some of the key drivers of Cap Ex investment in the hospitality arena are brand standards, franchise offerings, and management and franchise agreements – as well as the normal wear and tear of a property. Though a significant portion of Cap Ex satisfies brand standards, it does not necessarily add value.
The article also highlights how each hotel brand has its own replacement schedule for mandatory renovations, such as carpet replacement, before the end of the Business Personal Property’s (BPP) economic life. BPP replacements may raise assessments based on the inaccurate assumption that the expenditure has increased real property value.
In addition, the article breaks down how property owners can make the decision whether to repair, rebrand or tear down – each with its own tax considerations. It also discusses the implications of federal tax reform, and why future costs, and the resulting increase in property taxes, are a critical part of the pre-acquisition feasibility analysis.
Ultimately, it comes down to ensuring the assessor is informed and understands how all of these considerations will impact the assessment – putting the property owner in the best position for a fair and equitable tax assessment.
Stay tuned for the second article in this series, which will highlight how a better understanding of the assessor’s perspective can benefit both parties.
Read the full article here. This is the seventh in David’s series on hospitality property tax issues published by Hotel Executive Magazine.