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| 2011 Assessment Monitor |
| Calgary Hotels in 2011 - Are they assessed fairly? |
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Property assessments in Alberta must be fair and equitable.
It could be argued that when the assessment is based on equality it is fair but the law makes a finer distinction and says it must be both fair and equitable. Equitable implies that the same standard was used to arrive at the value of all similar property. Fair, on the other hand, implies that the assessment is at market value. The taxpayer is entitled to the lower of these two values.
There were up till last year five but now four areas of hotel assessment refinement needed in Calgary. To understand the problem with hotel assessments it is helpful to consider the condition of a hotel which is cold and dark, devoid of any business enterprise. This is the state in which the assessment should be calculated according to the Alberta legislation. While it is extreme, it is helpful in the assessment calculation to determine the value of a hotel as though it were in foreclosure. This serves to illustrate the extent to which the assessor must go to be accurate in assessing the value of hotel and lodging properties. Any amount above this foreclosure value is the value attributable to the business enterprise - something which does not attract a property tax in Alberta.
In Calgary the 2010 Composite Assessment Review Board ordered the first of the five technical errors, that of timing, be corrected for those hotels under complaint for 2010. A group effort seemed to play a part in this successful complaint. Until then the reference period of a hotel's current property tax was inappropriately set over the 18 prior months whereas 6 months prior (July of the previous year) is the guideline set out in the legislation. On average this produced a 7% reduction in hotel property taxes for those properties under complaint.
A 2009 study done for the Calgary Hotel Association indicated that the allowance for Management was understated in the city's calculations. The author was Dr. Edward Thompson, PhD a long time member of the Alberta Municipal Government Board. His analysis showed that while the city's allowance for Management and Reserves (for replacement) was 8%, on average the amount being spent was much higher. In Assessment Review Board hearings the assessor revealed that the allowance for Management was set at 5%. Dr Thompson, on the other hand, found there was an onsite Management fee equal to this amount plus an offsite amount of up to the same amount. The latter amount was required for acquisition of the capital for refurbishment, negotiations with the Franchisor and strategic planning, etc.
A second conclusion of Dr. Thompson's study was that best indication of Calgary's normalized operating expense ratios would come from the data supplied by the very hotels being assessed, and not a normative study by a consulting firm based on Alberta wide data. Including full service hotels data from Fort Macleod to Fort McMurray is not as conclusive on this topic as hotel information collected annually by the Calgary Assessment Department. Rural and less urban hotels are expected to have different operatingexpense ratios. Twenty-four hour kitchen staff and higher cost for Downtown parking are examples of costs not normally associated with non Downtown hotels. The over dependence on the Alberta wide data source gives rise to understated expenses and therefore Net Operating Incomes that are too high. When this attributed cash flow is converted into a capital value it results in property taxes that are too high.
A third indication of over-assessment amongst Calgary Hotels identified in Dr. Thompson's Study included the City's understated allowance for Reserves for Replacement, especially amongst older hotels. The probability, Dr. Thompson said, was greater rather than lesser that a hotel, would spend over the allowed 3% of Net Operating Income on replacement reserves. This conclusion was further supported by "CapEx 2007, a study of capital expenditure in the hotel industry," produced by the International Society of Hospitality Consultants. Both Dr. Thompson and the Capex Study indicated the allowance should be one to two percentage points higher. This would need to be doubled to reflect the capital expenditures on hotels older than 25 years.
The fourth conclusion of the CHA study was that the 15% of Net Operating Income allowed by the Calgary Assessor for Hotel Furniture, Fixtures and Equipment expenses was also understated. Dr. Thompson reported that in all probability hotels would spend an additional 3% on FFE. Even newer hotels face lobby upgrades to replace noncurrent colour schemes or fading fabrics; something that is important because so many decisions about staying in a hotel and the quality of the rooms are made in the hotel lobby.
In summary, these four remaining areas of investigation into hotel over-assessment in Calgary can be pursued by filing assessment complaints, to keep the matter alive. Additionally it is recommended that an alignment be formed amongst hoteliers to cause the problems to attain greater weight in the minds of the members of the Calgary Composite Assessment Review Board.
There is one other area of assessment concern of particular importance to the airport hotels located in the North East of Calgary. It is the closing of Barlow trail in spring 2011 for a period of three or more years. This should be reflected in a higher than normal hotel Capitalization Rate in the assessor's calculations. To ignore the impact of this sales dampening road closure suggests an insensitive assessment system that belittles the definition of Capitalization Rate theory - that the cash flow will remain largely unchanged at the present rate for an indefinite period of time into the future. Capitalization rates reflect the level of risk. When Barlow Trail closes and the NE advantage is reduced temporarily for some and others longer term, the Capitalization Rate for the hotels during the affected period should receive an uptick.
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