Why hotel owners should provide financial results to assessors

Assessing the damage and the slow recovery ahead

The lodging sector was among the industries hit hardest by the pandemic. Government imposed restrictions on travel and gathering sizes stifled demand and drastically reduced both business and leisure travel.

By all accounts demand will be slow to return, and the industry may take years to recover even if vaccines become widely available in 2021. Reducing operating costs, of which property taxes represent a sizable portion, has never been more important for hospitality properties.

Financial statements can impact your property assessment

If you own or operate a hotel in Canada, you will likely be familiar with the periodic requests for your financial statements from the local assessment office. Assessors typically use an income approach (capitalization of stabilized net operating income) to value hospitality properties and the financials for a property usually are an important part of their analysis and eventual opinion of value. In some jurisdictions, compliance with the assessor’s request is mandatory to preserve assessment appeal rights.

Responding to assessor information requests

Given current economic conditions and a lengthy expected recovery, it is essential that hoteliers provide complete responses to assessor information requests.

• Assessors are aware of the impact of the pandemic (and related travel and gathering restrictions) on the hospitality sector generally, but will want to see, and hopefully factor in, property-specific results before returning a new assessment.

• In a few jurisdictions, the assessment is based on a formula which considers the most recent 3 years of operating results (with various weighting).

• Where an assessor has returned an assessment that does not properly reflect recent results and market conditions, assessment appeals will be necessary, and in some jurisdictions (as described above) compliance with an assessor’s request is required to maintain appeal rights.

In addition to providing the assessor with your most recent operating results, we are also recommending that your budgeted financials for the next/current year be provided, even if not explicitly requested.

As noted, most jurisdictions utilize a form of a stabilized pro-forma income valuation approach, to determine an assessment based on current or market value. In a flat or stable market, a focus on past results is typically sufficient to determine the fair market value of property. In the volatile market, hoteliers are currently facing, it is imperative to consider future performance in valuing an asset.

The stabilized revenue and cashflows of the past are just that, and market value assessments (and appraisals) need to be forward-looking, taking into consideration the current and anticipated future market conditions for each property and the increased risk profile for the asset class in general.

Further, factors such as the hotel type and location (regional vs urban, convention vs limited service), age of the property, and its position within the competitive set, will all influence how quickly it eventually returns to pre-pandemic level financial results.

Change in use of your hotel?

Owners of properties near the end of their useful life, or in markets where an especially long recovery period may be expected, should consider challenging their assessment on the basis that a hotel is no longer the “highest and best use” of the property. In these situations, a HABU value could be an alternative use such as affordable housing, or land value if no reasonable and profitable alternative use is available.

It pays to be proactive

Good cost management requires proactive measures, and property taxes are no different. Assessing authorities will expect to receive property-specific financial results for 2020 and should be provided with 2021 forecasts so they know the full impact of the pandemic, the potentially slow path to recovery, and the downward pressure on values.