Lodging – Managing property taxes through a pandemic
Lodging – Managing property taxes through a pandemic
Knockdown pandemic punch and more to come
Canada’s hotel industry was among the first serious casualties of the spreading novel coronavirus pandemic. Since the public health crisis began escalating across North America in March, occupancy for the lodging sector – hotels, motels and resorts – plummeted to rates of 5% to 15%. With international travel restrictions implemented and still largely in place, and most vacations, conferences and conventions cancelled, many hotels chose to shut down completely between March and June in an effort to mitigate losses.
While some segments of this sector are beginning to recover, others remain stalled and full recovery is expected to take years.
Looking forward: a resilient sector
As one of the hardest-hit industry sectors, recovering to pre-COVID-19 levels will be a protracted and fluctuating return. A recent US report3 determined that almost one in four US hotels are at risk of foreclosure, and the situation in Canada appears similar. The supply side will retract as properties close or convert to other uses.
At the same time, hoteliers have proven, again and again, to be innovative and resilient. The industry will bounce back and thrive in the long term.
Meanwhile, relieving the drag of property tax can help owners and operators more flexibly accomplish this on your own terms.
Impact on the hotel industry
Upscale and convention properties, which rely on revenue from international travelers and conferences, have been crippled by the effects of COVID-19, especially those in urban and airport markets. Considering ongoing travel restrictions, this may be among the last segments of the industry to fully recover.
With continued low demand, there will be a corresponding impact on supply. Some properties will close – some by choice, others due to financial hardship. Some may be redeveloped into an alternate use where an opportunity exists.
After a slow restart, economy/mid-scale, extended stay, limited-service hotels and resorts in smaller markets fared better over the summer months because more Canadians were travelling locally and regionally. Provided that a second COVID-19 wave does not once again derail travel, this segment is likely to continue recuperating ahead of the other property types.
Highest expenses require property assessment intervention
Hotels are also grappling with substantially higher costs for guest stays: capacity restrictions, new technologies for mobile check-in/out, enhanced cleaning and disinfecting of guest rooms and common areas, and room resting periods between stays. These and other precautions represent significant added costs for operators. Since transactions in the hotel sector have effectively come to a halt, and given changes in demand and expenses, it’s difficult at this point to quantify the long-term effect on property values. Potential buyers and sellers are generally taking a “wait and see” approach, and assessment authorities have few current transactions to factor into property value analysis.
Hotel owners need to be especially proactive at this time to mine any opportunity for property tax relief.
Initiate discussions with assessors
Some jurisdictions provide an opportunity to pre-negotiate assessments, and these should be pursued vigorously and professionally.
Provide information to assessors
Most assessment authorities collect income and expense information from operators, and it will be important for them to convey the magnitude of business losses and increased expenses. Assessment offices typically prepare pro forma valuations to value lodging properties, so property owners should have inputs ready that will convey a current picture, in addition to their income and expense statements. This includes any closures, new and additional expenses, changes in average daily rate (ADR), and occupancy levels.
Vet financial information before submitting to the assessment authority
Provincial and municipal legislation includes provisions regarding the information an assessor can request from taxpayers for the preparation of assessments. It is important, however, that property owners do not submit financial information that the assessment authority might misinterpret. Consider having a property tax professional review financial information prior to submission. Experienced professionals will ensure that only those documents to which the authority is specifically entitled are provided – and that the financial information reflects a true picture of a property’s current operations.
Scouting acquisitions? Detailed due diligence is critical
During this period of disruption and uncertainty, for any prospective acquisition, purchasers should carefully review assessed values as well as any outstanding assessment appeals to identify potential risks.
Manage property taxes for all of your assets, through the pandemic
To help you closely align property tax mitigation strategies with the current marketplace, this white paper presents a current picture of the challenges facing nine distinct asset classes in the time of COVID-19, along with steps to mitigate the impact of this consequential expense.