Hotel Tax Assessments Miss the Mark
A recent Op-Ed article in Crain's Chicago Business by Cook County Assessor Fritz Kaegi describes his agency's commitment to transparency and data-based assessments. These are commendable goals. I also believe the assessor should not be the main target of owner frustration about high property taxes in Cook County. The county's large budget is the more direct cause of high taxes; the assessor mainly figures out how the resulting overall tax burden should be allocated among property owners.
However, after a brief review of Kaegi's online hotel assessment data, I believe there are several potential problems that need to be addressed.
Every hotel in the United States can be classified into one of six categories, published annually by STR, now owned by CoStar. These categories include: luxury; upper upscale; upscale; upper midscale; midscale; and economy hotel classes, as alluded to by Mr. Kaegi in his op-ed article. But numerous hotels are currently misclassified on the assessor's online spreadsheet. For example, the Omni Chicago is classified as luxury when it should be upper upscale. Conversely, the 21c Museum Hotel Chicago is classified as upper upscale when it should be luxury. The DoubleTree at 300 E Ohio as well as the SpringHill Suites and Residence Inn at 410 N Dearborn are all classified as upper upscale when they should all be upscale. Hotel Felix and The Godfrey Hotel are both classified as upscale when they should be upper midscale and upper upscale, respectively. Numerous additional misclassifications were apparent during my recent observation and we offer to help the assessor's team correct these misclassifications.
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Personal property and staffing strategies can also account for big differences in revenue levels generated by hotels within the same class or chain scale. For example, hotel analysts knowledgeable about the Chicago hotel market know there is a big difference between the rates charged at the Peninsula versus the InterContinental, even though both are luxury class hotels. Some of the variance is due to differences in personal property, often referred to as FF&E (furniture, fixtures, and equipment) in the hotel industry. The assessor is responsible for assessing the market value of the real property only, including land and building values. But personal property can make up a significant component of a hotel's ability to generate revenue and earnings. Applying a capitalization rate directly to the assessor's estimate of EBITDA, as their spreadsheet shows, results in an indication of real property value plus personal property value. Estimates and adjustments for personal property values seem to be missing from the assessor's online spreadsheet, though perhaps this issue is accounted for elsewhere.
Important adjustments for property characteristics such as age, location, and demand segmentation also appear to be unaddressed in the assessor's online analysis. Mr. Kaegi references the recent sale of the St. Regis Chicago, which was sold for nearly $490,000 per room in May 2023. However, the St. Regis is brand new, having opened in 2023. Compare this with the Fairmont Chicago, located nearby, which opened in 1987. Both hotels have the same assessment per room, even though buyers would have different capital expenditure expectations when buying these two hotels. Similarly, the SpringHill Suites in Chinatown shows an identical assessment per room as The Palmer House, which exhibits different location characteristics. Finally, hotels that target extended-stay customers versus transient business and leisure travelers are treated identically in the assessor's spreadsheet, even when average guestroom sizes vary. For example, the Residence Inn at 11 S LaSalle, which features rooms with kitchens, has the same assessed value per room as the South Loop Hotel.
The mass appraisal approach employed by assessors around the country may be the most reasonable approach, given limited resources and the intended use of their valuations. So, assessment appeals may always be an important part of the property tax assessment process for hotels. However, we should work towards maximizing accuracy and minimizing the need for assessment appeals. Fritz Kaegi's commitment to transparency is a good step in this direction. But the Cook County Assessor's office should work to: (1) correctly reclassify all hotels in their database; (2) separate personal property values from real property assessments; and (3) consider using some basic adjustment methodologies for property characteristics that significantly affect hotel values. Perhaps an industry advisory board could help generate consensus around these ideas. My company, Hotel Appraisers & Advisors, is also available to provide input and guidance if the assessor or his team members want to discuss suggestions.