CapEx, Taxes, and the Assessor's Perspective

By David Chitlik Vice President - Hospitality Tax, Altus Group | November 11, 2018

Co-authored by Renea Linton, Director - Hospitality Tax, Altus Group

In the hotel industry, capital expenses (CapEx) projects are driven by numerous factors, such as improving, maintaining, or repairing a property, or fulfilling the requirements of brand standards. For owners, CapEx are necessary to preserve the property's competitive edge. But assessors often misunderstand the function of CapEx and see reserves and CapEx as interchangeable when applying adjustments to assessed value.

In the June 10, 2018 edition of the Hotel Business Review, we explored the relationship between CapEx and tax assessments from the owner's perspective. In this article, we'll focus on the assessor's point of view. Understanding both perspectives is the first step toward reaching consensus on the role of CapEx in valuations and assessments.

Permits, Property Valuations, and Supplemental Assessments

As a hotel owner or manager, you will have a multiple year plan to spend CapEx on property renovations, repairs, or improvements. In contrast, assessors learn about the scope and cost of your project at the time of the project or even after through one of several means, such as the annual income and expense questionnaires required by jurisdictions, articles in the media, or construction equipment onsite.

However, the most common way assessors are notified is when a building permit is issued for renovations or improvements. The permit process is similar in each of the 8,000 taxing jurisdictions nationwide, but how and when the assessment will be impacted can be vastly different. Assessments of two comparable properties in two jurisdictions only a few miles apart can differ by thousands of dollars, and taxes by as much. So, before you get the permit, make sure you understand the tax implications.

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The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.