How do you get a $7.2 million assessment on a well-run 145 room
Marriott Courtyard hotel reduced to $4,200,000? In a landmark case,
the State Board of Tax Appeals in Tennessee leads the Country in
establishing a proper methodology to separate non-real estate items
from hotel assessments.
Ohio Law mandates that real estate tax be based on the uniform
market value of the real estate. Courts have traditionally interpreted
market value to be the purchase price between an unrelated willing
buyer and willing seller. As a result, assessors and courts tend
to assess based on recent sales in the market place. Hotels present
a distinct problem because they almost always sell as an ongoing
business complete with personal property, inventory, an assembled
workforce, cash, and flag affiliation. Assessors over-tax hotels
by assessing not only real estate, but also the entire business
operation.
The Supreme Court in Ohio has ruled that assessors are only to
tax real estate. NON-REAL ESTATE ITEMS ARE NOT TO BE INCLUDED IN
ASSESSMENTS. The Ohio Supreme Court held that where there is a combination
of business and real estate that the two activities must be kept
separate. Furthermore the separation of income and expenses is important
not only when determining value based upon an income approach, but
also when utilizing sales comparisons. However, the Court did not
give any guidance on how to accomplish this separation.
Ohio courts now have some guidance from the Tennessee State Board
of Equalization and the Appraisal Institute. In Tennessee, the Board
agreed with the Appraisal Institute, the governing body for the
appraisal industry, and has recognized a method of removing income
that is attributable to the return of and the return on the investment
in non real estate items.
The Tennessee Board approved the theory that non-real estate items
can be separated by amortizing the cost of non-real estate items
using a discount rate over the economic life of those items, thus
establishing a stream of income attributed to the non-real estate
items and removing it from the overall going concern. Because the
income derived from non-real estate items include a return on the
investment as well as a return of the investment, the actual impact
on assessments is greater than its cost.
For instance, as shown below, the removal of the income stream
associated with a $500,000 investment in FF&E results in a $671,022
reduction in assessment.
Annual
Interest Rate (Mortgage rate + 200 Basis Point) 7.69
Amortization period 8 years
Cost of FF&E 500,000
Annual return “of and on” (principal & interest)
FF&E 83,877.76
Capitalized Value of annual income flow attributed to FF&E $671,022.04
In addition to approving the removal of income associated with
FF&E, the Tennessee Board approved the removal of the income
associated with the value of start-up costs, as well as the value
for market penetration that measures the premium for a better-run
property.
It is important to note that this methodology is not the only one
used by appraisers. It is however, the first time that a State Board
or a Court has approved a method of separating non-real estate items.
Given that the economy and the industry has not yet rebounded,
there may be no better time to file a real estate tax complaint.
In Ohio, assessments are established by a reappraisal completed
every six years. However, there is an intervening statistical update
that is performed after the third year.
By filing now taxpayers may be able to establish lower assessments.
In some instances the lower value may carry forward for three years.
Furthermore, that reduced assessment is the basis for the statistical
update therefore the low value established now may carry forward
up to six years.
J. Kieran Jennings
Siegel Siegel Johnson & Jennings
kjennings@siegeltax.com
American Property Tax Counsel (APTC)
