1. IMPROVING THE BOTTOM LINE:
TAX REASSESSMENT APPEALS FOR HOTELS ©
Prepared for the Hospitality Law Conference by:
Morris A. Ellison, Esquire John M. Keeling, CPA CRE MAI
Buist Moore Smythe McGee PA The Keeling Consultancy, LLC
5 Exchange Street 4400 Post Oak Parkway, Suite 1640
Charleston, SC 29401 Houston, Texas 77027
mellison@buistmoore.com john@keelingconsultancy.com
(843) 720-4614 (713) 871-0221

2. Presenters
 Morris A. Ellison, Esquire
• Principal with South Carolina Law Firm of Buist Moore Smythe
McGee P.A.
• Fellow of the American College of Real Estate Lawyers
• Past Chair of the Hotel, Resorts and Tourism Committee of the
American Bar Association
• Listed in Best Lawyer’s in America, Chamber’s USA Leading
Lawyers and Super Lawyers
 John M. Keeling CPA CRE MAI
• Principal, The Keeling Consultancy, LLC
Hotel Consultants & Appraisers
• Executive Vice President, Valencia Group
Developers & Operators of Upscale Full-Service Hotels
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3. Impact of Economy
on Hotels Generally
 Values of Real Property have declined
dramatically
 Income of operating properties are down
 Expenses are not
 Ad valorem real property taxes are one of
many expenses which should be examined
 Tremendous Pressure on Assessors to
Maintain Tax Revenue
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4. Taxes are
jurisdiction dependent
 Assessors' offices are generally
understaffed
 Many assistant assessors are not licensed
to appraise complicated properties such
as hotels outside of their employment
 Use of mass appraisal techniques
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5. Hotels generally pay three
different forms of taxes
 Ad valorem real property taxes
 Personal Property taxes
 Business License fees
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6. Monies generated by a
hotel’s operations are
income not rent and must
be treated differently
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7. Need to extract business
value from hotel
 General consensus that assessors should
extract the “business value” of a hotel
from the real estate value
 Methodology for making this complicated
calculation has been the subject of
substantial argument and disagreement
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8. ZZzz
8

9. General Method of Calculating
Real Estate Taxes
 Appraised value of the property
 Multiply by the taxing ratio applicable to
properties of that type.
 Product of this calculation is defined as
the “assessment ratio.”
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10.  Assessment ratio is then multiplied by
the tax rate, the “millage”, to determine
the amount of the taxes.
 One mill equals 1/1000th of a dollar or 1/10th
of a cent.
 Example: if the tax rate is 273.8 mills, the
treasurer multiplies .2738 by the assessed
value to determine the base amount of real
property tax due.
 Hotel owner has no ability to change the
assessment rate or the millage.
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11. Hampton Inn
124 Rooms
2007 2008
Net Operating Income $800,000 $322,000
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12. Tax Year Value Ratio Assessment Milage Base Tax
2009
Assessor $8,000,000 6% $480,000 0.274 $131,424
Taxpayer $4,000,000 6% $240,000 0.274 $65,712
Resolution $5,000,000 6% $300,000 0.274 $82,140
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13. Net Tax Savings $49,284
2008 NOI $322,000
Increased NOI $371,284
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14. Definition of value
willing seller
willing buyer
All Property must be valued for taxation at its true value
are not acting under compulsion
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15. Like the Appraisal Institute’s
definition of value, the statutory
scheme assumes the existence of
 A willing seller;
 A willing buyer; and
 The absence of compulsion.
 Fixed valuation date.
 A fictional sale on the specific valuation
date.
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16. Few comparable sales
 Comparables from past years inapplicable
 Few willing sellers or buyers.
 Few comparable sales under current
conditions
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17. Appeal Process generally
 Deadlines are jurisdiction specific
 Procedures are jurisdiction specific
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18. General Procedure
 The filing of an appeal;
 Meetings and negotiations with the local
assessor;
 An appeal to a county board usually
consisting of laypeople and professionals;
 A de novo appeal to a trial court; and
 An appeal through the court system.
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19. Use of Counsel
 Few reported decisions involving hotel tax appeals
throughout the United States
 Lawyers are generally not required to file initial
appeals, negotiate with local assessors or appear
before local assessment boards.
 However, only lawyers can take the appeal to the
next step, generally a de novo trial before a trial
court.
 Secure in the knowledge that appeals will end
before local boards, which are usually more
favorably disposed to local government revenue
needs, assessors tend to be less willing to negotiate
the steeper reductions which the current economic
climate suggest are appropriate.
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20. Approaches to value
 Replacement Cost approach;
 Sales comparable approach; and
 Income approach
 “Equity” value
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21. Cost approach
 How much money would it take, using
current material and labor costs, to
replace the property with similar
property.
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22. Sales comparable approach
 Examination of sales of similar properties and
comparing the values realized in these sales.
 Compare the value of all property in the same
area/neighborhood to other properties with
special emphasis on the prices of properties
that have recently sold.
 Certain sales are not helpful
 Bulk sales
 1031 exchanges
 Sales of distressed properties
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23. Income approach
 Converts the anticipated future benefits
of property ownership into an estimate
of present value.
 Requirements
 A calculation of the net income being
generated for a property before debt service;
and
 A determination of a capitalization rate for
such net income.
 Divide net income by a capitalization
rate to determine value.
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24. Determination of Income
 Net income of the real estate, as opposed
to the business, remaining after the
deduction of operating expenses but prior
to deducting mortgage debt service and
book depreciation.
 Negative income.
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25. Determination of capitalization rate
 Definition: any rate used to convert
income into value
 From an investor’s perspective, the
earning power of a real estate
investment is the critical element
affecting its value
 Two components:
 Financing
 Return on investment
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26. On its face, the income approach
would seemingly not depend on the
existence of comparable sales.
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27. The appraisal profession recognizes seven
(7) methods for determining the appropriate
capitalization rate to apply to property:
1. Derivation from comparable sales;
2. Derivation from effective gross income
multipliers;
3. Derivation by band of investment – mortgage
and equity;
4. Derivation by band of investment – land and
building;
5. Debt coverage formula;
6. Yield capitalization techniques; and
7. Surveys based on market expectations.
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28. “Equity” approach
 The intentional and systematic
undervaluation of certain properties while
other properties in the same class are
valued at fair market value.
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29. Importance of expert testimony
 Many appraisers in assessor offices are not
licensed to appraise hotels
 Importance of a license in the jurisdiction
 Contingency fees
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30. Hotels: Approach and terms
 Generally need to use the income approach
 Income of real estate, not the business
 Revenue Per Available Room (RevPAR): a
measure of performance which considers both
the occupancy percentage and average daily
rate
 Occupancy Rate = A percentage based on the
number of rooms occupied out of total available
rooms
 ADR = Average Daily Rate
 $RevPAR = $ADR X %Occupancy Rate
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31. Assessor is charged with appraising the
value of the hotel’s real estate
 Components comprising the value elements of a
hotel are not sold separately.
 Investors base purchases on the income stream
generated by the hotel as an operating
business, not on the value of its individual
components.
 Components include:
 Land
 Improvements
 Furniture, Fixtures & Equipment (FF&E)
 Working Capital
 Business Enterprise Value
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32. The first two items, land and improvements,
constitute the real estate or realty which is
subject to ad valorem real property taxation.
 FF&E and inventory constitute the Tangible Personal
Property (“TPP”) and typically be subject to personal
property taxation.
 Working Capital and Business Enterprise Value (“BEV”)
are Intangible Personal Property (“IPP”).
 Working capital includes cash, the net of accounts
payable and receivable, and other cash equivalents.
 Business enterprise value components might include
start up costs, an assembled workforce, business
organization, non-realty leases and contracts, hotel
franchise and residual intangible assets.
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33. Business Enterprise Value
 No consensus on how to calculate
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34. The “Rushmore Approach”
 Named for Stephen Rushmore, the
founder of HVS International.
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35.  Leading reported decision regarding
valuing hotels, Glen Pointe Assocs. v.
Township of Teaneck, 10 N.J. Tax 380,
1989 N.J. Tax LEXIS 5, at *11-12 (1989),
uses the Rushmore Approach.
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36. Business Enterprise
Valuation for Hotels
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37. Going Concern
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38. Going Concern
 Realty
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39. Going Concern
 Realty
 Land
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40. Going Concern
 Realty
 Land
 Building
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41. Going Concern
 Realty
 Land
 Building
 Tangible Personal Property
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42. Going Concern
 Realty
 Land
 Building
 Tangible Personal Property
 Furniture, Fixtures & Equipment
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43. Going Concern
 Realty
 Land
 Building
 Tangible Personal Property
 Furniture, Fixtures & Equipment
 Intangible Personal Property
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44. Going Concern
 Realty
 Land
 Building
 Tangible Personal Property
 Furniture, Fixtures & Equipment
 Intangible Personal Property
 Working Capital
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45. Going Concern
 Realty
 Land
 Building
 Tangible Personal Property
 Furniture, Fixtures & Equipment
 Intangible Personal Property
 Working Capital
 Business Enterprise Value (BEV)
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46. Approaches to
Separating BEV
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47. Approaches to Separating BEV
 Rushmore Method
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48. Approaches to Separating BEV
 Rushmore Method
 Widely accepted by appraisal districts
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49. Approaches to Separating BEV
 Rushmore Method
 Widely accepted by appraisal districts
 Simple to calculate
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50. Approaches to Separating BEV
 Rushmore Method
 Widely accepted by appraisal districts
 Simple to calculate
 Minimizes BEV
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51. Approaches to Separating BEV
 Rushmore Method
 Widely accepted by appraisal districts
 Simple to calculate
 Minimizes BEV
 Subtracts from cash flow:
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52. Approaches to Separating BEV
 Rushmore Method
 Widely accepted by appraisal districts
 Simple to calculate
 Minimizes BEV
 Subtracts from cash flow:
 Management Fees
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53. Approaches to Separating BEV
 Rushmore Method
 Widely accepted by appraisal districts
 Simple to calculate
 Minimizes BEV
 Subtracts from cash flow:
 Management Fees
 Franchise Fees
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54. Approaches to Separating BEV
 Rushmore Defends Rushmore Method
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55. Approaches to Separating BEV
 Rushmore Defends Rushmore Method
 No hard data on sale of the
components of value
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56. Approaches to Separating BEV
 Rushmore Defends Rushmore Method
 No hard data on sale of the
components of value
 Other methods significantly reduce
the value of the Real Estate
component
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57. Approaches to Separating BEV
 Rushmore Defends Rushmore Method
 No hard data on sale of the
components of value
 Other methods significantly reduce
the value of the Real Estate
component
 May reduce the value that secures a
mortgage
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58. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
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59. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Common in the 1940s – 1950s
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60. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Common in the 1940s – 1950s
 REIT leases are not arm’s length
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61. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Common in the 1940s – 1950s
 REIT leases are not arm’s length
 Can be used to value a component of
BEV
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62. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Common in the 1940s – 1950s
 REIT leases are not arm’s length
 Can be used to value a component of
BEV
 Restaurant
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63. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Common in the 1940s – 1950s
 REIT leases are not arm’s length
 Can be used to value a component of
BEV
 Restaurant
 Spa
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64. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
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65. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Value by the Income Approach
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66. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Value by the Income Approach
 Value by the Cost Approach
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67. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Value by the Income Approach
 Value by the Cost Approach
 Subtract Cost Value from Income
Value
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68. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Value by the Income Approach
 Value by the Cost Approach
 Subtract Cost Value from Income
Value
 Subtract Value of FF&E
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69. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Excess Profits Method
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70. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Excess Profits Method
 Compare RevPAR of Subject with
Similar Hotels in Market
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71. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Excess Profits Method
 Compare RevPAR of Subject with
Similar Hotels in Market
 Be Alert to Differences in Location of
Facilities
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72. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Excess Profits Method
 Compare RevPAR of Subject with
Similar Hotels in Market
 Be Alert to Differences in Location of
Facilities
 Consider Superior Net Operating
Income
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73. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Excess Profits Method
 Compare RevPAR of Subject with Similar
Hotels in Market
 Be Alert to Differences in Location of
Facilities
 Consider Superior Net Operating Income
 Cap Resulting Difference in NOI
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74. Excess Profits Example
 Two Hotels similar in:
 Location
 Design and construction
 Market Orientation (i.e. extended stay, select service, limited
service, etc.)
 Brand (i.e. Hilton, Marriott)
 Age
 Homewood-62% Occ X $106 ADR=$65.33 RevPAR
 Residence Inn-76% Occ X $108 ADR=$82.08 RevPAR
 Adjustments need to be made to account for
superior/inferior management,
 Compare to overall market of comparable hotels
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75. Approaches to Separating BEV
 Rushmore Method
 Real Estate Lease Method
 Cost Method
 Excess Profits Method
 Franchise Cost/Benefit Method
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76. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
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77. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Corporate Internet Sites
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78. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Corporate Internet Sites
 Toll-free Reservations Numbers
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79. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Corporate Internet Sites
 Toll-free Reservations Numbers
 Travel Agent Relationships
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80. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Corporate Internet Sites
 Toll-free Reservations Numbers
 Travel Agent Relationships
 National Group Sales
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81. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Corporate Internet Sites
 Toll-free Reservations Numbers
 Travel Agent Relationships
 National Group Sales
 Corporate Promotions
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82. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
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83. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Franchise Fee
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84. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Franchise Fee
 Management Fee
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85. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Franchise Fee
 Management Fee
 Rooms Accounting
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86. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Franchise Fee
 Management Fee
 Rooms Accounting
 Reservations Fees
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87. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Franchise Fee
 Management Fee
 Rooms Accounting
 Reservations Fees
 Marketing Assessment
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88. Approaches to Separating BEV
 Franchise Revenue & Cost Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Franchise Fee
 Management Fee
 Rooms Accounting
 Reservations Fees
 Marketing Assessment
 Frequent Traveler Charges
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89. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Solve for Cap Rate Using Band of
Investment
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90. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Solve for Cap Rate Using Band of
Investment
 Overall Rate
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91. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Solve for Cap Rate Using Band of
Investment
 Overall Rate
 Real Estate Cap Rate
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92. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Solve for Cap Rate Using Band of
Investment
 Overall Rate
 Real Estate Cap Rate
 FF&E Cap Rate
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93. Approaches to Separating BEV
 Franchise Cost/Benefit Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Solve for Cap Rate Using Band of
Investment
 Overall Rate
 Real Estate Cap Rate
 FF&E Cap Rate
 Intangible Personal Property Cap Rate
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94. Approaches to Separating BEV
 Franchise Revenue & Cost Method
 Identify Franchise Generated Rooms
Revenue
 Identify Associated Franchise Costs
 Solve for Cap Rate Using Band of
Investment
 Cap Difference in Revenue and Cost
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95. Case Study
 DoubleTree Hotel
 230 rooms
 Room Revenue: $4.6 million
 Total Revenue $10.7 million
 County Assessment $12.6 million
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96. Rushmore Method
Amount % Rooms Rev. % Total Rev
Franchise Fee $185,320 4.0% 1.7%
Management $320,655 3.0%
Fee
Total $505,975 4.7%
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97. Franchise Cost/Benefit Method
Amount % Total Revenue
Franchise Fee $0 0.0%
Management Fee 320,655 3.0%
Rooms Accounting 53,304 0.5%
Reservations Fees 28,208 0.3%
Marketing 162,141 1.5%
Assessment
Hilton Honors 119,881 1.1%
Total $684,189 6.4%
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98. Real Estate Cap Rate
PriceWaterhouse Coopers
Korpacz Real Estate Investor Survey
Third Quarter 2007
Range Average
National Apartment Market 3.50% - 8.00% 5.76%
National Full-Service Lodging Segment 6.00% – 11.00% 8.98%
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99. Rushmore Method
% %
Amount Rooms Rev. Total Rev
Franchise Fee $185,320 4.0% 1.7%
Management Fee $320,655 3.0%
Total $505,975 4.7%
Cap Rate 20%
BEV $2,530,000
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100. Franchise Cost/Benefit Method
Affiliation Increment
Incremental Affiliation Revenue $1,700,000
Incremental Affiliation Cost 684,000
Incremental Affiliation Profit 1,016,000
Incremental Cost of Rooms (20%) 203,000
Net Incremental Affiliation Revenue 813,000
BEV Cap Rate 20%
Business Enterprise Revenue $4,065,000
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101. Value Comparison
 Assessed Value - $12.6 million
 Appraised Value - $14.0 million
 Rushmore Value - $11.5 million
 Franchise C/B Value - $9.9 million
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102. Updated Rushmore Method
 Start with original income and expense statements
 Make deduction for business value
 Management fee
 Franchise fee
 Deduction for Personal Property
 Return on
 Return of
 Superior/Inferior Management Adjustments
 Adjustment to occupancy and average rate based on Smith Travel
Research and Market Research
 Adjustment to income and expense based on comparable
operating data
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103. Key issues in
the Current Market
 Key factor of the valuation dates
 Inappropriate use of comparables
predating September 1, 2008.
 Absence of credit makes determination of
capitalization rates very difficult
 Serious declines in income in 2008 and
2009.
 Pressures for tax revenues have increased.
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104. Challenges to the theory of
ad valorem taxation
 The theory underlying ad valorem
property taxes assumes the existence of
 A willing seller;
 A willing buyer; and
 The absence of compulsion.
 Fixed valuation date.
 Exposure to the market resulted in a
fictional sale on a specific valuation
date.
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105. Absence of comparables
 Applicability of pre-September 2008
comparables
 Dearth of sales involving willing buyers,
willing sellers and the absence of
compulsion.
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106. Impact of current conditions
on hotel property income
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107. Capitalization rates
 Many surveys of capitalization rates
involved in hotel transactions depend on
the availability of comparable sales.
 Without current sales of similar and
competitive properties, deriving
capitalization rates is extremely difficult
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108. IMPROVING THE BOTTOM LINE:
TAX REASSESSMENT APPEALS FOR HOTELS ©
Prepared for the Hospitality Law Conference by:
Morris A. Ellison, Esquire John M. Keeling, CPA CRE MAI
Buist Moore Smythe McGee PA The Keeling Consultancy, LLC
5 Exchange Street 4400 Post Oak Parkway, Suite 1640
Charleston, SC 29401 Houston, Texas 77027
mellison@buistmoore.com john@keelingconsultancy.com
(843) 720-4614 (713) 871-0221
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