TORONTO — Although most hotel revenues and operating expenses have decreased in the current environment, property taxes will likely continue to increase. Hotel owners should be considering how best to address this growing threat to their profitability or viability. CBRE has three directors across the country specializing in property tax services. They are: Louis Poirier, director of property tax services in Montreal, Jeff Cuzner in Halifax and Scott Meiklejohn in Calgary. They are supported, by the full team of 12 CBRE Hotels Valuation and Advisory Services team nationally.
“We are taking our first steps to a more concentrated and co-ordinated effort to the hotel sector,” said David Larone, senior managing director and co-practice lead, and former national managing director of PKF Consulting Canada.
When PKF joined CBRE in 2015, they brought a deep knowledge of Canadian hotel property tax going back 40 years, to a company that already had property tax services in a wide range of sectors in Canada and abroad.
“We are getting in front for the hotel industry North America-wide and even globally,” Poirier told CLN. “We are combining our efforts with the U.S., but the relief options the hotel industry have are quite different. For example, the U.S. has Calamity Claims, but we don’t have that in Canada.”
Why property tax relief is so important for hotels
It’s no secret that COVID-19 has been devastating for the hotel industry. CBRE’s promotional information advises owners and operators to review their property taxes when the property tax burden continues to increase, assessments are not addressing a decline in value, exterior forces are impacting their business, and facility utilization is forced to change. COVID has made all of these valid concerns.
Poirier noted one instance where an owner converted one of their hotel properties to residential, since there wasn’t enough revenue even to stay open, and it was on a site suitable for apartments.
Property tax is the most important operating cost for owners, said Poirier. Depending on where you are in the country, property tax accounts for 25 to 50 per cent of a hotel’s real estate operating costs. “It erodes the bottom line and has an impact on value. COVID was devastating, but the industry is coming back. How many years will it take to get back to normal?” he asked.
Larone has an answer for that. “Looking at the impact on cash flow and recovery time, [the pandemic] has a closer feel to the 1990s than it does to 9/11, SARS and the Great Financial Crisis. It took three or four years to get back to the RevPAR levels prior to the catastrophe. We are at least facing that. The bottom line impact will be in the range of six to seven years — based on CBRE/PKF financial statements that go back 45 years. That’s the time frame we are looking at.
“We’re also looking at the impact of COVID on cash flow and the value of appraisals — necessary for financing or value transaction assessment. The tax guys become more critically important,” Larone said.
Looking at hotel value, if you ignore 2020 as a lost year and look at values starting January 1, 2021, the aggregate is about a 20 per cent impairment of value effective January 1, 2021, compared to Dec. 31, 2019. Looking at 2025, they are expecting a 10 per cent impairment of value as compared to Dec. 31, 2019, according to Larone.
The hyper-local nature of property tax
“During COVID, things creep in that are municipal and sometimes provincial. In each province, each city, there are different considerations. For example, Montreal has 27 taxing municipalities,” Poirier said.
Property tax is charged on the basis of property type, with luxury assets having property taxes in the neighbourhood of $10,000 per key per year. According to CBRE, the average property tax burden across the country is $2,700 per room. “For a 150-room hotel, that’s more than $400,000 per year,” said Larone. “In downtown cores like Toronto and Montreal, it’s not unusual to have taxes of $8,000 per room. For a 400-room hotel in a downtown core, that’s more than $3 million, or about five to seven per cent of gross. The national average is 4 per cent. That’s a heck of a lot of money!”
Taxation is based on assessed value and the mill rate, or a percentage of assessed value. The tax burden is generally 3 to 3.5 per cent of the value, impacting operating costs and values across the board.
“We can challenge a value, but we can’t challenge the tax rate,” said Poirier.
Adding to the confusion is that different provinces and municipalities have different assessment cycles. For example, Ontario is on a four-year cycle from 2017 to 2020; and Ontario has extended the cycle for another year. Quebec is on three-year cycles whereas some other provinces are on annual cycles that are easier to deal with.
Challenging hotel property tax values
If a hotel hires a company like CBRE to look at its property assessment and taxes, the first consideration is what municipality the hotel is in and what the municipal government is doing. Almost all municipalities are offsetting the dates when property taxes are due, but those dates are fast approaching or have passed.
While values can be challenged, it’s hard. For example, in Quebec, there is a three-year cycle, because not everyone has the same cycle. In Ontario, you can challenge an assessment every year, whereas in Quebec you can only challenge at the beginning of the cycle. One of the most valuable services CBRE offers is to assist and help people navigate the system. “Don’t try this at home,” Poirier joked. “It’s a case of, ‘you don’t do your own dental work, so don’t do your own property tax work’.”
CBRE’s services include:
Assessment review and appeal services: This depends on the area of the country. Some jurisdictions are formal and some are informal. Either way, it’s important to establish some dialogue with the assessing authority. This can help with speed and is important going forward.
Budget, accruals and pre-acquisition due diligence. If you know the opportunities for tax abatement and deferrals, it can help you plan your budget. Find out if you may be in a position for relief going forward. You can take that to the bank. If you need to borrow money to pay property tax, you need to know when you will need the money.
Compliance — requests for information, complaint filing. CBRE can help with compliance and navigating red tape by figuring out the paperwork, dates and what you will need. Governments in Alberta and B.C. are requesting information now — if you comply with this, you don’t lose the right to negotiate. “Get in front of things with the assessors, and do everything to be proactive and ahead of the curve,” Poirier said. “Find out what things will look like next year. Most provinces will welcome that.”
What hotel owners can do about property tax
“Don’t think you can’t do anything,” said Poirier. “You can. We’re after truth, not conflict. The last thing we want to do is drag a client into an appeal hearing. The majority of work we do is to prepare for battle to avoid going to battle.”
The property tax management industry is less adversarial and more cooperative, more proactive,” Larone added. “It’s important to prepare a well-supported value position for assessment. Quite often, people are working in the past. We are good at helping people manage and budget for property tax and [showing them] financing opportunities that they are not aware of.”
Property assessment uses mass appraisal technology, meaning that much of the calculations are done by computer. The process is meant to be fair and equitable, but averaging, combined with offsetting valuation dates can result in errors. In some areas of the country, you can invoke equity as a basis for challenge, so if your neighbour is assessed a lower value for taxation, you should get the same value. However, not all provinces have this option.