Property Tax Appeals 2011: Hotel/Motel

Although hotels are increasingly viewed by institutional investors as an important asset class they are not heavily weighted in asset indexes. Within the NCREIF Property Index (NPI) only 1.9% of the market value is hotels. The number of hotel assets within this index has been steadily increasing from 6 in 1982 to 70 in 2010 but it is still under weighted.

Because hotel rooms are generally leased for such short periods their values are more volatile than other property types. The average daily room rates and occupancy rates can change quickly and are subject to changes in the economic cycle and gross domestic product much sooner than other types of real estate.

Since September of 2009 the number of distressed commercial properties has risen 48% and the number of commercial foreclosures has increased 33% according to CoStar. Of the $62 billion in delinquent commercial mortgage backed securities approximately $9.4 billion are hotel securities according to Realpoint, a ratings firm.

Does it feel like we're only fifteen percent below the 2007 peak? The Green Street commercial property index (CPPI) shows values are up 35 percent since the bottom in May 2009 and are now fifteen to twenty percent below the last peak in pricing. However, this index is weighted toward high end or trophy properties that are part of forty seven real estate investment trusts. In contrast, the Moody index shows the market fell 42.1 percent from the 2007 peak and has since recovered only 5.5 percent. The Moody index uses repeat sales of commercial properties that have sold for more than two and a half million dollars. If you're a typical hotel owner I'm sure you feel like you're part of the Moody index.

Consumer confidence is still not in a good place. A large percentage of residential mortgages are under water and unemployment is still at a high rate. There is concern that higher gasoline prices are going to dampen what confidence remains as unrest in the Middle East drives oil prices higher. High gasoline prices keep consumers at home and hotel occupancies low.

Would you invest in an asset class that has a rental rate that climbs slower than the inflation rate and in every recession results in steeper rate discounts? Welcome to the lodging industry. Things weren't all smiles at the recent Hunter Hotel Investment Conference. Occupancy rates remained below 60% in 2010 and not much investment happens below that level. Although demand has increased from the bottom of the cycle there isn't enough demand there to increase room rates.

Going-in capitalization rates for first-tier (newer construction in prime to good) locations show a range of 6-12% with an average of 9.1% in the South Region estimates Real Estate Research Corporation. Second-tier properties (aging, former first-tier properties, in good to average locations) show a range of cap rates from 7-13% in the South Region with an average going-in cap rate of 9.8%. Third-tier hotels in the South Region (older properties with functional inadequacies and/or marginal locations) show a range of going-in capitalization rates of 7-14% with an average of 10.5%.

Real estate financing conditions improved during 2010. Overall property values are stabilizing and lender confidence has improved. Low interest rates persisted throughout 2010 and credit spreads declined.

The outlook for 2011 includes continued GDP growth, lower unemployment, and low interest rates. On the negative side we are starting the year with a high unemployment rate, home prices are still much lower than the peak, with a large percentage of mortgages under water, public debt levels are high and that risks higher interest rates.

There are many reasons to appeal your property tax assessment in 2011. Even if the assessor has reduced your value in either of the prior two years you may be entitled to additional relief. Property tax rates may rise in response to the falling tax base. Do not let yourself be a victim of your own inaction. Let's all save some money.

< Prev		Next >