Sticker shock

Downtown hotels balk at spike in assessments

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Madison’s economy is surging. Property values increased more than 10 percent in 2017, the largest overall increase since 2002. The city added $750 million in new construction and its existing residential property increased in value from $471 million to $789 million.

One group was unmistakably socked by the new assessments: hotel owners. Some saw their properties double, even triple in value this year.

The Edgewater Hotel was assessed at $17.1 million in 2016. It’s now assessed at $52.6 million, a $35 million jump in one year. The assessment on the newly remodeled Park Hotel on the Capitol Square increased from $4.3 million to $32.5 million. The value of the Hilton Madison Monona Terrace hotel rose nearly $30 million to $51 million. The assessment on the Madison Concourse Hotel — $19.4 million in 2016 — skyrocketed to $61 million, more than tripling in value.

Matt Brink, executive director of the real estate developers group Smart Growth Greater Madison, says hotel owners were “blindsided” when they received their property assessments this spring.

“This came out of nowhere. If taxes go up $500,000 on a hotel property, that cannot be recouped by raising room rates. How in the world do you cover that?” Brink asks. “Our members are very concerned about how they are going to compete and where they have to cut the fat. Employee wages is one of the first areas that’s going to be looked at.”

Thirty of about 50 hotels in Madison are appealing their 2017 property assessments, according to Laura Doherty, assistant city assessor, who says hotel property values have largely been undervalued since the recession.

“It is kind of sticker shock. But the market has come back a lot in the hotel industry,” says Doherty, who evaluated hotel property value this year. “When you change the values that much in one year, you’re going to get a lot of appeals. But I don’t anticipate the assessments will dramatically change on appeal.”

Hotels across Madison were given extra scrutiny in the city assessor’s office this year. Since the economy has roared back after the global recession of 2008, Doherty says the office has wanted to reevaluate hotels. But due to understaffing, it wasn’t until this year that the department was able to verify that property values were being assessed at the true market rate. Unlike previous years, Doherty evaluated all of Madison’s hotels at the same time to ensure equity. Market reports and recent sales were used to guide assessments.

“During the recession, a lot of hotels weren’t doing as well. People didn’t have as much disposable income. So values went down. When the market came back, [property values] hadn’t been looked at in quite some time. We were seeing sale prices of hotels considerably higher than what they were assessed at,” Doherty says. “We just want to get it right. It’s not that we want to raise assessments and get all these appeals. We are required by state statute to assess at the fair market value.”

Doherty cites the Sheraton Hotel on John Nolen Drive as an example of why hotel values in Madison need to be adjusted to match the market. In 2016, the Sheraton was assessed at $8 million. In April, it sold for $19 million.

“For this year, I assessed it at $24 million,” she says. “So if this was a fair market sale, it will be reduced by $5 million. But it’s far closer to the sales price this year than it was last year.”

Not all downtown hotels saw huge increases. The Hampton Inn & Suites on West Johnson Street, valued at $15.9 million in 2016, was assessed this year at $17.3 million. The Hyatt on West Washington is assessed at $22.6 million, up $890,000 from last year. Neither hotel is appealing its assessment.

Doherty attributes Hampton Inn’s more modest property value increase to the fact that it was built in 2013, more recently than other downtown hotels. She says the Hyatt’s property value was brought in line with the market in 2014, after being sold for $31.5 million.

But Brink says many hoteliers were in the dark about the city’s effort to reevaluate hotel values. He says owners now must hire lawyers and turn over their books in order to lodge an appeal.

“Hotel owners, like all businesses, want predictability,” says Brink. “Many of our members now have to expose private financial data to challenge these assessments when they were not given a proper explanation on why their property values went sky high in the first place.”

Higher property values may mean more tax revenue. In Wisconsin, property assessments are used to calculate taxes for the state, county, school district, technical colleges and local municipalities. The steep increase in property values means downtown hotels might see their tax bills go up dramatically, too. Brink says hotels don’t have much wiggle room to cover a large tax hike.

“You can’t triple the room rate and still stay competitive. The going rate is the going rate,” says Brink. “Labor costs are one of the few areas where you can make up the loss. If the assessments aren’t lowered, [hotel owners] are going to be forced to consider whether they can pay $15 an hour for a cook. Maybe they have to lower that to $13.50 an hour.”

Under the current tax rate, the Concourse will owe an additional $1 million in (gross) property taxes this year, increasing from $464,000 to $1.4 million. The Edgewater is facing a $850,000 tax increase. Unless successful on the appeal, the Park Hotel could see its property taxes climb $600,000. When asked if downtown hotel owners might have been getting a break on taxes in recent years — as the city contends — by having their properties undervalued, Brink asks, “Whose fault is that?”

“If the city is going to admit they’ve made evaluation mistakes in the past and then say they want to correct it, we can tackle that issue,” says Brink. “But there are a lot questions about the assessments that still need to be answered. Any increase should be phased-in so it can be anticipated and budgeted for.”

There is local precedent for hotels successfully challenging a high assessment. The Edgewater Hotel appealed its property value in 2015. After submitting income and expense information, the Board of Assessors lowered the hotel’s initial assessment of $64.8 million to $17.1 million.

Laurie Hobbs with Marcus Hotels & Resorts, which owns the Hilton attached to Monona Terrace, says the hotel has appealed its assessment. The Edgewater, The Concourse, HotelRED, Park Hotel, and the DoubleTree by the Kohl Center — none of whom replied to Isthmus’ request for comment — are also appealing their property assessments to the Board of Appraisers, a panel of city assessors, according to Doherty. If an initial appeal fails, property owners have the option of appealing to the Board of Review, made up of Madison residents.

At a news conference in mid-April, Mayor Paul Soglin said that he was “pleasantly surprised” by the increase in Madison’s property values, especially in commercial properties. He says it would provide much-needed revenue for next year’s budget.

“It builds on the increases we’ve seen the last several years. And in fact, [assessments are] significantly higher than anticipated,” Soglin told reporters.

He noted that the increased value of commercial properties outpaced that of residential properties by 10 percent; he said that was evidence of more equity in the tax base. “It helps reverse a trend that went on too long where a greater and greater proportion of the property tax was the responsibility of single-family homeowners.” 

The graph for this article has been corrected. In the original version, the improvements and land categories were accidentally transposed.