City Comptroller Probes Shift In Hotel Valuations; 'Finance,' Assessors Clash on Role Of Deputy Mayor

City Comptroller Probes Shift In Hotel Valuations;
'Finance,' Assessors Clash on Role Of Deputy Mayor

The City Comptroller's Office is examining the Finance Department's decision to use a new method to value hotels which resulted in million-dollar reductions in tax obligations for a group of high-profile properties including the Grand-Hyatt, Hilton, and Westin hotels.

WILLIAM C. THOMPSON Jr.: 'Taking a peek at it.' The investigation is based on THE CHIEF-LEADER's report earlier this month that several veteran City Assessors said they were told by Assistant Finance Commissioner Dara Ottley-Brown that Deputy Mayor Daniel L. Doctoroff had specifically requested that the department change the methodology used for assessing hotels.

Thompson: Checking

"It is something, given the allegations, we are going to take a peek at," said Comptroller William C. Thompson Jr. May 24.

The Finance Department has emphatically denied that Mr. Doctoroff had anything to do with the decision to change valuation methods.

But one Assessor, referring to Ms. Ottley-Brown's previous remarks, said, "I don't see anywhere how she can deny it. Three days, three meetings, in front of 120 people."

DANIEL L. DOCTOROFF: Did he play role, and why? Owen Stone, a Finance spokesman, has stressed that the overall hotel values were up 8.3 percent and that only 10 percent of the hotels evaluated this year had their valuations decreased. The new method, called a room rent income multiplier, is a more straightforward and efficient evaluation system, he contended.

It is unclear why Mr. Doctoroff, a millionaire businessman who joined the Bloomberg administration for $1 a year, would purportedly tinker with the assessment methodology while the hotel industry is flourishing. A mayoral spokesman referred questions about Mr. Doctoroff to the Finance Department.

"Typically what happens is when the industry is booming, cities then start to review the taxes, and generally speaking, when any market is hot they raise the taxes," said Jerry Daly, a spokesman for Interstate Hotels and Resorts. "When times go bad, the hotels then push back and say the value of our hotel isn't what it was two years ago."

After Sept. 11, 2001, he noted, thousands of hotels successfully applied to have their taxes lowered. But 2006 is projected to be "a record year," he added.

GENE RUSSIANOFF: Not sure Doctoroff benefits.

Old Firm's Connection

Before becoming Deputy Mayor, Mr. Doctoroff resigned from his position on the board of MeriStar Hospitality Corp., one of the nation's largest hotel companies. On May 2, MeriStar was purchased by The Blackstone Group, a major hotel ownership firm that has been actively buying properties for several years.

Blackstone, however, does not currently own a single Manhattan hotel that was positively affected for tax purposes by the new assessments, according to the company's spokesman John A. Ford. In fact, the one Manhattan hotel that MeriStar used to partially own, the Radisson on Lexington Ave., had its market value increased from $67.4 million to $88.9 million.

When Mr. Doctoroff became Deputy Mayor, he placed his personal investments in two blind trusts in an attempt to avoid even the appearance of a conflict of interest. In December 2003, the city's Conflicts of Interest Board issued an advisory opinion which noted that Mr. Doctoroff controlled 60 companies in various industries. In all, Mr. Doctoroff resigned from 34 companies when he entered the public sector, but he still retains his stake in those businesses.

Some have questioned how several companies in one of those trusts have been able to win contracts with the city.

May Be No Conflict

Since none of Mr. Doctoroff's properties were apparently affected by the new valuation system, however, his ostensible involvement in the decision would likely not represent a conflict of interest. "The benefits are speculative," said Gene Russianoff, a good government advocate at the New York Public Interest Research Group. "Do you really want a conflict-of- interest code for things that may benefit someone 10 years from now?"

Finance maintains that the new assessment system is more effective. But several veteran Assessors wondered why the change was implemented right before the assessment roll was completed in January.

"You become so suspicious," said one Assessor, who out of fear of retaliation asked to remain anonymous. "Why should anybody do that when you have an established procedure?"

Spurred by Complaints

According to the Assessors, Ms. Ottley-Brown held meetings March 8, 9 and 10 after they complained about the multitude of allegedly inaccurate values created by the switch. At those conferences, they say, she explained that the move was made at the behest of Mr. Doctoroff.

Under the new approach, several Manhattan hotels were drastically reduced in value. Based on the new evaluation, the market value of the Grand Hyatt was initially 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. The reduction would have been compounded in future years, because any valuation increases are based on prior assessments.

Understated Profits

Interestingly, the city owns the land at Grand Central Station where the hotel is located. As a result, the Tischman family, which purchased the hotel in 1996, pays the city net rent, a tax-equivalency fee, and a percentage rental.

An audit completed by the Comptroller's Office last year found that the hotel understated its net profits by $445,743 in 2002. According to the review, that resulted in an additional $222,871 percentage rental fee due to the Department of Citywide Administrative Services.

Other Manhattan hotels also had their market values drastically decreased by the new method. For instance, the market value for the Hilton was reduced by more than $32 million, 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.

By all accounts, hotels are the most difficult properties to assess because it's hard to differentiate between their real-estate values and business assets.

But experts in the hotel tax-assessment field have blasted the city's new method, which they call overly simplistic. Richard D. Williams, a managing director of Hospitality Valuation Services (HVS) International, said the new system "may not accurately reflect the market value of the subject hotel."

'Old Method Arbitrary'

Mr. Stone countered that the department switched because "the old method did not take into account changes in expenses over time and was arbitrary." The new approach, he added, is clear, easy to implement, and creates more equity and predictability for hotel owners.

In the past, Finance used a complex nine-step process to evaluate hotels. 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 classification of the hotel. The department then checks for the consistency of the values by determining taxes as a percentage of room income, he said.

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 in mid-May. "This income could be from one or more restaurants and lounges in the hotel, plus room service and banquet sales."

Like a Rough Draft

He called the income multiplier system a "down-and-dirty" approach. "It doesn't really look at the individual attributes of each individual 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."

According to Mr. Williams, the change directly benefits hotel owners. "It certainly doesn't help someone who owns a co-op in Manhattan," he remarked. "They have to pick up more of the tax burden." The Comptroller's Office has audited other aspects of the Finance Department's tax-assessment systems over the past two years. In August 2004, a review found that medical offices in Brooklyn were being misclassified by Finance as family homes.

Last June, the Comptroller released a report that showed that the DOF inspected residential properties in fiscal year 2005 only after it was informed by the Department of Buildings that the home was being altered or renovated. The brief suggested that Assessors conduct annual inspections of those types of properties each year to ensure that they are properly classified.

"By law, Finance is only required to inspect Class 1 properties every three years," the department responded in a written statement. "Through the use of state-of-the-art technology, Finance will in effect be collecting property-specific information on an annual basis."

The department plans to eventually use digital photography data obtained from several flyovers of the city that were conducted over the past five years.