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Judy S. Engel

Judy S. Engel Property Tax Appeals

jengel@fredlaw.com
612.492.7118
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What You Need to Know: Strategies to Lower Your Property Taxes on Your Hotel in a Troubled Economy

By: JUDY S. ENGEL

January 2009

Year after year, it’s the same thing: you open your property tax bill and it keeps going up, up, up. Well, it does not have to go up, and in today’s troubled economy, that just is not right. In this article, I will explain why, as well as map out how to reduce your property tax bills now and into the future.

Property taxes in Minnesota are based on the value of the real property. Assessors will attempt to value your hotel real estate using a combination of three methods: (1) estimating the depreciated cost to build the hotel; (2) looking at the price per room for comparable hotels which have sold; and (3) estimating how much money the real property assets of your hotel earn and capitalizing that stream of income into value. Identifying the value of the real estate alone using these three methods can be difficult in hotel properties because so much of a hotel’s value is found in its personal property and intangible assets, which include the hotel’s furniture, fixtures, intangible assets like the hotel’s chain affiliation, reputation, reservations system, franchise rights, and in place workforce, none of which are taxable under Minnesota property tax laws.

Cost Approach


The first valuation method, known as the cost approach, is the only approach that does not include the value of personal property or intangibles, since the idea is that the assessor is only valuing the “bricks and mortar” and land of the hotel. The cost approach does not work well for older hotels since industry design, construction techniques, and building costs change so significantly over time. The cost approach can also be problematic for newer hotels with higher building costs, especially in a troubled economy. Many of the newer, high end Minneapolis boutique hotels provide evidence that cost does not necessarily equate to value. In new or newer hotels, the difference between cost and value is often due to something called external obsolescence. External obsolescence is a negative impact on property value due to forces outside of the hotel itself, such as market conditions during an economic recession. Unfortunately, assessors often ignore external obsolescence in establishing taxable value, especially in newer hotels, even when changes in economic trends and forces are fairly indisputable.

Sales Comparison Approach


The second valuation method, known as the sales comparison approach, can also be problematic in the tax assessment of hotels. Most hotels are sold as operating businesses, rather than as real property alone. Accordingly, hotel sale prices usually include significant amounts of personal property such as furniture, fixtures and equipment, in addition to the intangible assets identified above. Assessors often fail to consider and adjust for these significant amounts of non-taxable assets which are typically included as a part of the sale transaction when conducting a sales comparison analysis, ultimately leading to the over assessment and over taxation of the real property component of a hotel.

Income Approach


The last of the three valuation methods is called the income approach. Because the purpose of operating a hotel is to earn income, the buyers, sellers and appraisers of hotel properties often focus very heavily on the income approach in determining the value of a hotel. As with the other two valuation approaches, however, the income approach is not without problems when it comes to segregating the value of the real property component of a hotel. The problem stems from the fact that much of the hotel’s income stream derives from the non-real property components of a hotel, such as spas, restaurants, room service, laundry, and in room entertainment. The income stream from such services is not income derived from the real property, but rather, income from personal property, services or other business income, which should not be included when capitalizing the income stream from the real property under the income approach. Again, many assessors ignore these fundamental deductions when establishing the taxable value of a hotel.

Taxpayer Options


So, how do you ensure the assessor is fairly valuing the real estate component of your hotel?  The answer is simple: know your hotel and its component parts, and pay close attention to the tax notices you receive in the mail. If the assessor does not listen to reason, you file a property tax petition with the Minnesota Tax Court.

In Minnesota, as in many other states, property taxes are paid in arrears. That means that the assessor establishes a value of your hotel as of January 2 of each year. However, you don’t pay the taxes on that assessment until May 15 and October 15 of the following year. This delay provides taxpayers with a number of opportunities to contest their assessments.

Administrative Appeal


The process of notification regarding your property taxes is governed by statute. Under the law, the assessor must notify you of your assessed property value at least ten days before the initial meeting of your local board of appeal and equalization, which meetings are statutorily required to occur between April 1 and May 31 of each year. In some circumstances, the duties of the local board of appeal and equalization are transferred to the county, in which case the meetings will occur during the month of June. In either case, prior to these meetings, an aggrieved taxpayer may apply to the local or county board for a reduction in their assessed value, and they will be offered an opportunity to be heard. This method of contesting your taxes is often called an “administrative appeal.” Unfortunately, the assessor has no obligation to reduce any assessment through this process, and therefore, it often results in little to no value reduction. Thus, many taxpayers simply bypass this process in favor of bringing their appeal directly to the Minnesota Tax Court.

Appeal to the Minnesota Tax Court


The generally recommended alternative is to file such an appeal with the Minnesota Tax Court. This alternative does not require the completion of the administrative appeal (i.e., no so-called “exhaustion of remedies.”) The Minnesota Tax Court is a specialized Court established by state legislature to hear appeals relating to issues of state taxation. There are three judges on the Minnesota Tax Court, all of whom are appointed by the governor for six year terms. The Minnesota Tax Court generally follows the same rules as required in other state courts, such as the rules of evidence, and the judges issue decisions consistent with generally accepted appraisal methodologies, Minnesota statutes, and Minnesota case law. As a result, it is widely commented that an aggrieved taxpayer is much more likely to receive relief if they opt to appeal their property tax assessment to the Minnesota Tax Court instead of pursuing an administrative appeal.

The deadline to file an appeal of your property tax assessment with the Minnesota Tax Court is April 30 of the year in which your taxes are due. Accordingly, the deadline to appeal your 2009 taxes - which are based on your January 2, 2008 assessment - is April 30, 2009. Because the appeal process is a legal process, and there are backlogs in many assessors’ offices and in the court itself, it can take more than a year to complete. During the pendency of the appeal, you must continue to pay your property taxes when due, although exceptions including a statutory ten percent withholding remedy are available. If your case results in a value reduction, either through settlement or trial, you will be entitled to a refund of the taxes you overpaid, plus interest. Due to the length of the appeal process, cases are also often resolved on a multiple year basis and quite often include the resolution of assessments relating to taxes to be paid in current and/or future years. This can be helpful in the process of budgeting for anticipated fixed expenses, which can be quite beneficial in these uncertain economic times.

If you are concerned that you are being overtaxed on your hotel property, you need to act before April 30, 2009. If you have questions regarding your assessed tax, please contact me at Fredrikson & Byron’s Property Tax Group for a free analysis of your case at (612) 492-7118.