Industry
Hotel & motel property tax consulting
A hotel assessment is usually built by capitalizing total hotel revenue, which is not real estate income. That figure includes the going-concern business — brand, management, reservation system, assembled workforce — and the return on furniture, fixtures, and equipment. In most states none of that is taxable real property. CPT removes the business and personal property components and defends the deduction the assessor resists.
Total revenue is not real estate income
A hotel sells rooms, food, beverage, meeting space, parking, and services. That revenue is produced by a building, a brand, a management company, a reservation system, and an assembled workforce operating together. Capitalize the whole stream and you have valued the going concern — the business — rather than the taxable real estate.
This is the central dispute in hotel assessment, and it is not a technicality. In a full-service property with meaningful food, beverage, and banquet operations the business component is large. Most states tax real property, not business enterprise value, so the appeal is about how much of the capitalized value belongs to something other than the land and improvements.
How the business component gets removed
Two competing frameworks exist, and knowing which one a venue follows shapes the entire case. The Rushmore approach deducts a management fee and a franchise fee from net income and treats the remainder, after an allowance for furniture, fixtures, and equipment, as attributable to the real estate. The business enterprise value approach holds that management and franchise fees do not capture everything the operating business contributes, and deducts a separate return on the intangible business assets.
The two produce different answers, and states and tribunals have not converged on one. What the case requires is a method appropriate to the venue, applied consistently, with the deductions supported by market data on actual management and franchise terms rather than by a rule of thumb.
Furniture, fixtures, equipment, and the brand renovation
A hotel replaces its soft goods and case goods on a cycle measured in years, not decades. That FF&E is personal property in most states, and the income it helps produce has to come out of the real estate value through both a return on and a return of the investment — the reserve for replacement.
Related to it is the property improvement plan. When a brand requires a renovation as a condition of keeping the flag, the cost is a real and near-term obligation that any buyer deducts from what they will pay. An assessment that ignores an outstanding plan is valuing a hotel that has already been renovated.
Services that apply here
Real Estate Assessment Review & Appeal
Annual review of every assessment you carry, and appeals pursued wherever the assessor’s value exceeds fair market value.
Read more →Business Personal Property Tax Compliance
Preparation and filing of personal property returns in every state that levies the tax, with the deadline calendar managed for you.
Read more →Common questions
Why is my hotel assessed on business income when only real estate is taxable?
Because the assessor’s easiest data source is the operating statement, and capitalizing it produces a number. That number is the value of a going concern: real estate, personal property, and an operating business with a brand, a reservation system, and a management team. Separating the three is technical work the assessor typically has neither the data nor the incentive to perform. It falls to the taxpayer to show what portion of the capitalized value is attributable to land and improvements alone, and to support the deductions with market evidence.
What is the difference between the Rushmore method and a business enterprise approach?
Both try to strip business value out of hotel income; they disagree about how much is there. The Rushmore approach treats the management fee and the franchise fee as the full measure of the business contribution — pay those, and what remains belongs to the real estate and the FF&E. The business enterprise approach argues those fees are payments for services rather than a return on the intangible assets themselves, and deducts an additional amount for the assembled workforce, the systems, and going-concern value. Which framework a venue accepts drives the strategy.
Does a required brand renovation affect our assessed value?
It should. A property improvement plan is a contractual obligation to spend a defined amount by a defined date, and failing to spend it puts the flag at risk. Every buyer in the market underwrites that cost as a deduction from price, because it is capital the property must consume before it earns anything further. An assessment that reflects the hotel as it will exist after renovation, rather than as it stands on the assessment date, is valuing improvements that have not been built.
Tell us about your hotels & motels portfolio.
Send the parcel numbers or the most recent assessment notices. We will tell you whether the value is defensible.