Eye-Opening Hotel Tax Assessment Revelations from the New Texas Hotel Valuation Factbook
By Stanton Leddy, Source Strategies CEO (Article reprinted from the Hotel Brand Report, Issue 147 for the Third Quarter 2021)
Five Billion Dollars. That’s how much Texas hotel room revenue declined from 2019 to 2020. This isn’t breaking news. During the lowest point of the pandemic, many hotels simply closed or operated at bare minimum. There was PPP1 and PPP2, the Employee Tax Credit and several rounds of economic stimulus that helped many hotels survive. But the sharp drop in revenues still made significant impact on those businesses.
Do you know how much the assessed value of Texas hotels changed from 2019 to 2020?
How much did appraisal districts reduce hotel assessments during the crisis? ZERO! The total hotel tax assessment in Texas did not decline. Rather, assessments went up over $90 million dollars.
That’s the sort of startling and informative data contained in the new Texas Hotel Valuation Factbook. And while cherry-picking this nugget is inflammatory, it is illustrative of what hotel owners have been going through this past year. Unfortunately, appraisal districts don’t generally take current year performance into account when calculating assessments. The 2020 assessments were based on 2019 performance before the Covid-19 pandemic, and little could be done to change this approach.
While we don’t have all the 2021 assessment data at this moment, the current evidence shows some reduction in assessment from 2020, yet not as much as would be expected based on revenue losses. Instead, assessments in 2021 are primarily based on hotel sales that show little discounting. This is fully illustrated in the upcoming 2021 Texas Hotel Valuation Factbook.
Do you know the impact of aging on these properties? Source Strategies has done extensive analysis of age on performance, determining an inevitable performance decline for almost all hotels after year 10. Unbelievably, the average hotel age in Texas is 21 years and no metro is under 17 years. As demand returns, this means there is significant opportunity for new construction to replace the older existing supply.
Of the major metros, San Antonio (22 years) is the only market over the state average hotel age. Digging a little deeper, zip code 78227, with a 30-year average age, is tied for the oldest zip in the metro, possessing only one hotel under 10 years. That property (a Candlewood Suites) was dramatically outperforming all competition, earning a $70.96 RevPAR versus $24.20 for the market. While additional research and vetting is necessary, this sort of intel quickly highlights areas warranting new development consideration.
Do you know how the tax assessment was determined? From an individual property standpoint, a near-complete picture of any hotel can be seen in the Texas Hotel Valuation Factbook. Sticking with the Candlewood Suites in 78227 as an example, the age and performance metrics clearly indicate that the hotel is superior to any other in its local market. The newest property in the area garnered a 293% RevPAR Index ($70.96/$24.20) or nearly three times its fair share of total revenue in the zip code. This happened while both occupancy and revenue declined from 2019 but exceeded 2018.
The appraisal district reviewed this room count, age and performance data to assign a value of $6.1 million or $79.5 thousand per room. This equated to 2.7 times the hotel’s 2019 room revenues, also known as the Room Revenue Multiplier (RRM). The RRM ratio is the industry standard for determining if tax assessments are fair and “equitable”. The Candlewood RRM of 2.7 is very close to the zip average of 2.6 and below the San Antonio/Bexar County average of 3.0, a good initial indicator that the tax assessment is reasonable. If the RRM comes in above the average, a hard look should be given to understand why. In Bexar County, every $100,000 of value equals $2,700 of property taxes, providing ample motive to know both performance and assessment data.
Ultimately, it’s important to know and understand the performance, opportunity and value of every market and hotel in the state of Texas.
The Texas Hotel Valuation Factbook is one of the most comprehensive publications of hotel data ever produced, making it an indispensable resource for any hospitality or hospitality-adjacent professional.
Bringing together both valuation and performance information in this way provides an unprecedented level of insight that is critical to those operating, developing, buying, selling or appraising lodging properties. The old saying is that “Knowledge is Power”, in this case knowledge is both power and value.
Stanton Leddy is the CEO of Source Strategies, Texas’ leading hotel consultancy. During his career in the hotel industry, he has cultivated excellence in fact-based decision-making that leads to positive revenue growth. He has more than 15 years of experience in data analysis and market research, and served on the Finance Committee of the Choice Hotels Regional Advisory Board. In 2014, Hotel Business magazine recognized him as an “Up and Comer.” Today, he guides Source Strategies’ role as the trusted, must-have resource for the Texas lodging industry.
This article is excerpted from the Hotel Brand Report, Issue 147 for the Third Quarter of 2021.[/vc_column_text][/vc_column][/vc_row]