Assessors Say Doctoroff Tilted Hotel Valuations; 'Finance' Denies He Had Role, Defends Lower Tax Bills

Assessors Say Doctoroff Tilted Hotel Valuations;
'Finance' Denies He Had Role, Defends Lower Tax Bills

By REUVEN BLAU

For the first time in over 20 years, the Department of Finance used a new method to value hotels which resulted in million-dollar reductions in tax obligations for a group of prominent Manhattan properties including the Hilton, Grand Hyatt, and Westin hotels, THE CHIEF-LEADER has learned.

DANIEL DOCTOROFF: Did he pull strings? According to several veteran City Assessors, Assistant Finance Commissioner Dara Ottley-Brown told roughly 40 Assessors in three separate meetings that Deputy Mayor Daniel L. Doctoroff had specifically requested that the department change the methodology used for assessing hotels.

Assessors Had Beefed

The conferences were held after Assessors complained about the multitude of allegedly inaccurate values created by the switch during March 8, 9 and 10 gatherings held in The Bronx, Queens, and Manhattan.

A Finance Department spokesman categorically denied that Mr. Doctoroff played a role in the process. "We got no direction from City Hall to lower or raise hotel values," Owen Stone asserted.

But many familiar with the process questioned why the change was implemented right before the assessment roll was completed in January. "If I just flat-out lower taxes - that seems crooked," said a source. "On the other hand, if I just lower their assessment, it doesn't seem like something's wrong."

DAVID MOOG: Questions new methodology. Mr. Stone acknowledged that the department changed the assessment methodology, but maintained that the new evaluation system, called a room rent income multiplier, is more effective.

'Made Values Consistent'

"We wanted to make the hotel values more consistent and predictable," he said, noting that overall hotel values were up 8.3 percent and that only 10 percent of the hotels evaluated this year were decreased. "You can't look at a few hotels in a vacuum."

But under the new appraisal approach, the market values of several Manhattan hotels were drastically reduced. Under the initial evaluation, the market value of the Grand Hyatt was reduced by $60 million, with a corresponding drop in its tax obligations.

That valuation would have cost the city $3 million a year in tax revenue. A somewhat higher valuation was subsequently made, but the city will still lose a significant amount in taxes.

RICHARD D. WILLIAMS: A boon for hotel owners. Other Manhattan hotels were also dramatically altered. For instance, the market value for the Hilton was reduced by more than $32 million, for the Westin by $30 million, and for the Hotel Pierre by $24 million. Other hotels that had their values and tax liabilities dropped include the Helmsley, Crowne Plaza, and the Carlton.

Several experts in the hotel tax-assessment field blasted the new method, which they called overly simplistic and highly problematic. "If someone taking my real-estate finance class used that, I would flunk them," said Joshua Kahr, a New York University Professor.

Mr. Kahr, a real-estate expert, completed a report last year financed by the union representing Assessors that concluded that the city is losing up to $2 billion annually by under-evaluating apartment and commercial buildings.

'May Not Reflect Value'

Richard D. Williams, a managing director of Hospitality Valuation Services (HVS) International, agreed. "The new methodology being used is very simplified and may not accurately reflect the market value of the subject hotel," he said during a phone interview May 11.

For the first time in years, hotel evaluations were conducted by Finance supervisors on the last day they were able to make changes to the annual assessment roll, Jan. 12. "They were basically done by the Deputy Commissioner's Office, last minute," said one Assessor, who out of fear of retaliation asked to remain anonymous. "With a quick-and-dirty method applied to the most complex aspects of the appraisal industry."

Mr. Stone maintained that the supervisors were working on the assessments for several months. "It's not like they just did it," he contended. The department switched its methodology, he said, because "the old method did not take into account changes in expenses over time and was arbitrary. [The] new approach is clear, easy to implement and created more equity and predictability for hotel owners."

'Not Really Orthodox'

But David Moog, the president of Assessors Local 1757 of District Council 37, also questioned the new system. "It's not really an orthodox method," he said. "I think questions should be asked of this method to see if it's a true way to evaluate hotels."

Local 1757 has been urging elected officials for the past several years to hold oversight hearings concerning the equity of the assessment process, to no avail. The issue has been compared by many to a political third rail, since any changes could lead to tax increases that would greatly anger voters.

"We've tried to bring it to the attention of certain people," Mr. Moog said. "But it's tough when you have no court-case precedent stating how hotels should be done."

Hotels are the most difficult properties to assess because it is hard to differentiate between their real-estate values and business assets. "Valuing hotels is not easy, because a significant portion of hotel income is derived from personal property and from business interests," Mr. Stone said. "You want to exclude income attributable to the personal property such as furniture and fixtures that are essential elements of a hotel."

But the new appraisal method created "wild gyrations" in the tax-assessment roll, Mr. Moog said. "I think a lot of Assessors are concerned about this issue," he commented. "If it becomes so inaccurate, it reflects badly on them, even though they didn't do the evaluation."

Used Mix of Factors

Mr. Stone explained that in the past Finance used a nine-step process to evaluate hotels. That evaluation practice included examining room income from filings or based on estimates, expenses, and net income.

The assessment also used to involve estimating operating expenses for the hotel business and for food and beverages. In addition, the department used to add the net income from other retail operations on the property. Finally, the total income was divided by a city-established capitalization rate.

According to Mr. Stone, the department now values hotels by multiplying the daily room income by a multiplier of between 750 and 1,000, depending on the class of hotel. The department then checks for the consistency of the values by determining taxes as a percentage of room income, he said.

"Adding income from food and beverage bore no relationship to [the] actual cost of operating a restaurant in a hotel, and was seen as ancillary to and a necessary component of the business," he added.

But Mr. Williams, who has testified as an expert witness in assessment cases throughout the nation, said the city's new method of accounting for food and beverage revenues makes no sense. "[It] is the equivalent of imputing rent on the space occupied by the food and beverage outlet," he remarked. "This income could be from one or more restaurants and lounges in the hotel, plus room service and banquet sales."

Mr. Stone maintained that a multiplier approach "is not unusual in the industry."

Mr. Williams, however, called the income multiplier method a "down-and-dirty" approach. "It doesn't really look at the individual attributes to each property," asserted the Colorado-based Member of the Appraisal Institute. "It is true that the approach is easy to apply, and any idiot can come up with a value number using this methodology."

'Not Valid for Hotels'

The multiplier system is frequently used to value apartments and small motels, he noted. "But it loses its credibility when applied to complex full-service hotels," he argued.

Mr. Stone stressed that the overall hotel assessments this year were increased and pointed out that no hotel owners have objected to the new system.

"If people don't complain, they must feel they are undervalued," Mr. Williams countered. "Because you know darned well that if they feel they are overvalued, they are going to protest." Mr. Kahr echoed that sentiment. "Generally, people only open their mouths when things don't go their way," he remarked. "Maybe things haven't gone up as much as they should have." The new methodology, he added, is "a very lazy way of doing things."

According to Mr. Williams, the switch directly benefits hotel owners. "It certainly doesn't help someone who owns a co-op in Manhattan," he said. "They have to pick up more of the tax burden."