Upholds 'Finance' Method: Comptroller: Hotel Shift Makes Sense

Upholds 'Finance' Method
Comptroller: Hotel Shift Makes Sense

The City Comptroller's Office has concluded that the Finance Department's new method to assess the value of hotels is appropriate after the union that represents assessors and several appraisal experts charged that the intervention of a Deputy Mayor had produced an oversimplified approach to the most complex properties.

WILLIAM C. THOMPSON Jr.: Value change adds up. "As you know, I directed my staff to review the Department of Finance's new methodology for assessing hotels," Comptroller William C. Thompson Jr. said in a statement. "Based on their analysis, I am satisfied that the switch to the new methodology is appropriate."

The new approach resulted in multi-million-dollar reductions in tax obligations for a group of prominent properties including the Grand Hyatt, Hilton, and Westin hotels.

Claim Doctoroff Involved

City Assessors who were concerned by those drastic decreases complained to Assistant Finance Commissioner Dara Ottley-Brown, who reportedly responded during three separate meetings that Deputy Mayor Daniel L. Doctoroff had specifically requested that the department change the methodology used for assessing hotels.

The Finance Department has emphatically denied that Mr. Doctoroff had anything to do with the decision to change valuation methods. The department has also stressed that the overall hotel valuations were up 8.3 percent, and that only 10 percent of the hotels examined this year had their valuations decreased.

"We are pleased that Comptroller Thompson recognizes that the change in how we value hotels is an improvement," said Finance spokesman Owen Stone in a statement. "We will continuously improve our methodologies to ensure that the public understands the tax structure and system, allowing them to pay the right amount on time."

It remained unclear why Mr. Doctoroff, who has played a key role in the city's flourishing tourism business, would purportedly tinker with the assessment methodology while the hotel industry was prospering. Jennifer Falk, a mayoral spokes woman, referred questions about Mr. Doctoroff to the Finance Department.

DAVID MOOG: Concerns not allayed. "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."

Expect Record Year

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.

An official from the Hotel Association, which represents more than 200 high-profile hotels in the city, said the group was "consulted" before Finance made the change. The official, who was not intimately involved with the issue, said that the group believed the old method was flawed and the new system is more transparent and an improvement.

Mr. Stone, however, denied the department consulted the Hotel Association before the switch. "They didn't play a role," he contended. "But they did know we were looking into changing the methodology and told us that they could not support any change that would result in the higher assessed values for their hotels."

The Hotel Association and Mr. Doctoroff were involved in creating a $1.50 daily tax for each hotel room to help finance the planned expansion of the Javits convention center.

'Fairer, More Accurate'

According to Mr. Stone, the new method, called a room rent income multiplier, is a more straightforward and efficient evaluation system. "It's more predictable, fair, and accurate," he contended. "It's just a better system overall. We now have an accessible tax administration policy, which is something that has been lacking."

The Comptroller's Office agreed. "The new procedure utilizes an Average Daily Room Rate Multiplier to determine market value for property tax purposes," Mr. Thompson noted. "The ADRRM appears to be set at appropriate levels, depending on the class of hotel. The use of this new formula seems much less complex and arbitrary than the old methodology, in that it values hotels based on their top-line room revenues rather than on their bottom-line results."

Richard Williams, a managing director of Hospitality Valuation Services (HVS) International, has charged that the income multiplier system is a "down-and-dirty" approach.

He called the Comptroller's remarks "an interesting response," adding, "I am not aware of any hotel investors who purchase hotels based on their 'top-line room revenues rather than on their bottom-line results.'''

Different Priorities

Economists at the Comptroller's Office involved in examining the new system maintained that hotel investors concentrate on different aspects of revenue than tax assessors. The previous method, they argued, overtaxed the business income of hotels.

David Moog, the president of Assessors Local 1757 of District Council 37, also questioned the results of the Comptroller's investigation. "It's very disappointing that the City Comptroller, the person in charge of oversight of the city's financial revenues, is failing to exercise proper judgment on this issue," he charged during a June 13 phone interview. "It is still the belief of our local that experts in the real-estate business should be consulted to make sure this method is valid." 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.

Others Reduced

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 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.

Simplified System

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.

"It doesn't really look at the individual attributes of each individual property," countered Mr. Williams, 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."

Questioned Old Method

The Comptroller's Office "peek" concluded that the prior sophisticated system did not necessarily lead to the most accurate assessments.

According to the Tax Commission, 378 hotel owners have appealed their assessment this year, compared to 387 last year. Mr. Stone contended those figures were not a true barometer. "There is no penalty to challenge your assessment, so these businesses have nothing to lose and they challenge every year; that's all there is to it," he replied.