Intangible assets in hotel property tax assessments

Hotels are considered complex assets that combine real estate with business value. When it comes to property tax assessments, only the real estate should be taxable. However, assessors often mistakenly include the hotel’s intangible business assets in the assessed value. This can lead to an inflated taxable value due to factors like brand value, management contracts, franchise affiliations, and customer relationships not being properly excluded. Particularly, upscale, select-service, and extended-stay hotels, especially when part of portfolios, are often assessed without deducting these intangible assets.

This article explains the importance of removing intangible assets from hotel property tax assessments, the impact of post-COVID performance data on future income potential, and how the U.S. personal savings rate offers insights into broader economic travel behavior. There is a growing trend in the courts and appraisal community to demand a more thorough removal of intangible value for taxation purposes.

According to appraisal standards and laws, intangible assets should not be included in a hotel’s taxable property value. The accepted practice is to isolate these intangibles so that only the real estate value is assessed. Intangible assets commonly found in hotel valuations include brand and franchise affiliation, management agreements, customer relationships, and licenses. Failure to remove these intangibles can result in an overassessment and may render the assessment unlawful.

Economist and valuation expert KC Conway’s analysis further supports the need to separate intangible value from real estate in property tax assessments. The presence of significant intangible assets in industries like drugstores and retail has become more apparent, highlighting the importance of properly valuing intangibles in tax assessments. Recent court rulings emphasize the necessity of a detailed analysis of intangible assets in hotel valuations to avoid overassessment.

The hospitality industry experienced a significant rebound in performance post-COVID due to “revenge travel,” leading to inflated metrics. However, this bounce in performance needs to be viewed with caution as it may overstate a hotel’s long-term value. Assessors should consider normalizing occupancy and earnings over multiple years to avoid overestimating a hotel’s sustainable value based on short-term post-COVID trends.

The U.S. personal saving rate provides insights into hotel demand trends, with high savings levels driving short-term performance gains in the hotel industry. As personal savings return to normal levels, discretionary travel spending is expected to reflect broader economic conditions. Assessments should take into account these economic trends to ensure an accurate valuation of hotels for tax purposes.

Overall, proper appraisal methodologies that separate real property from enterprise value are crucial in avoiding overassessment of hotels for property tax. The article highlights the importance of removing intangible assets from property tax assessments to ensure fair and accurate valuations based on real estate considerations.