Resort Property Tax Assessments Too High

By John Garippa, As published by Vacation Industry Review, July-September 2003

Hotel and resort properties are complicated
real estate investments that vary greatly from
other types of investment grade property.

The essential difference is that resort real estate requires significant amounts of labor and management expertise in order to make it work.  An apartment complex, for example, requires relatively little labor and management to function properly.  Resort properties, however, require much more.

In setting appropriate property tax assessment on a resort property, it always has been necessary to single out and value just the real property component of the investment.  The non-real property aspect of the investment, including furniture, fixtures, equipment (FF&E), and intangible assets should not be valued for property tax assessment purposes.

Historically, taxing jurisdictions throughout the United States utilized a formula for valuing resort-type property that purports to remove intangible business assets and tangible personal property from value and property tax assessment.  The formula used a deduction from the stream of income for fees attributable to FF&E and property management, and franchise-related costs if appropriate.  Adherents to this model claimed that all the non-real property components of resort property are removed when this formula is properly employed.

Over the past decade, academics and practitioners involved in appraising these types of complex properties began to realize that the old formula could not remove all the non-real property components of these properties because the formula itself was flawed and did not go far enough.  As appraisers became more adept at understanding the truly complicated nature of resort property and the mix of assets necessary in order to successfully operate such businesses, they recognized that massive amounts of labor and management are required to operate such a facility.

They also recognized that this mix of assets had not been properly accounted for in the prior appraisal formulas, and that the formula that had been used in the past to deduct for FF&E did not deduct a sufficient amount to support those assets.

Total Assets of The Business
The Appraisal Institute, an international membership association of professional real estate appraisers, has not only recognized this appraisal problem, but has provided guidelines for how to separate out these non-real property components from the resort property.  IN the most recent edition of its textbook, Appraisal of Real Estate, the institute expresses its position by replacing the old terminology going concern with the phrase total assets of the business (TAB).  TAB includes real property, tangible personal property, and intangible personal property.  Tangible personal property is further delineated into FF&E and inventory.  The intangibles include contracts, business name, patents, copyrights, work force and cash.

This change is not meant to apply solely to hotels or resort property, but rather to a broad range of investment-grade real property in which some type of business activity utilizes the real property as an asset of the business.  The new terminology is meant to define scenarios, as is the case with resorts, where the real property asset is married to significant elements of labor and management.

The new wording reflects the growing importance of intangible assets to resort-type property.  An examination of just one intangible asset proves this point as it relates to resort-type property:  Pre-opening costs are now considered an important intangible asset that must be identified and removed from the income stream as a non-real property component.  The actual building components of a resort property remain inert and nonfunctioning for the purpose for which they were designed until pre-opening costs are expended.  Only when pre-opening costs are expended and a work force is put in place does a property evolve into a working resort and create investment income.

No one would argue that pre-opening expenses are not essential to the creation of a resort, and these expenditures add significant value to the project.  Now, under the theory supported by the Appraisal Institute, this incremental value also will be deducted for tax-assessment purposes as a non-real property component.

Preliminary testing of these new theories indicates that many current property tax assessments are too high.  It is possible that many properties, when properly appraised with this new model, will justify reductions of at least 25 percent in property tax assessments.

At the end of the day, it is not that resort values have changed.  Rather, it is the recognition by appraisal academics that something very different is occurring in these types of complex properties where the property can function only with a thorough infusion of intangible assets.  The recognition that pre-opening expenses are critical to establish a resort underscores the fact that the real property component is only one part of the valuation equation, and justifies the need to remove that part of value that is attributable to the intangible asset.

The need to separate non-real property components from a resort's operating business is a critical exercise for tax-assessment purposes.  When it is performed, property owners will quickly understand the importance of this application to improving their bottom line.

John Garippa is the senior partner of Garippa, Lotz & Giannurio and has specialized in property tax assessment issues for more than 25 years.  He is currently president of the American Property Tax Counsel, an affiliation of property tax attorneys in the United States and Canada.  He may be contacted at john@taxappeal.com