It is property tax appeal time in the great state of Georgia and Atlanta hotels have been through an awful time during the Great Recession. Although much of the commercial real estate sector is now on the upswing and cap rates have been falling, hotels still have some of the highest cap rates of any commercial property class. I know many hotel owners who continue to tell me that the hotel market is still bad. If your gross revenue is down and your operating expense ratio has shrunk, and there appears to be no end to your nonexistent net operating income, then the Great Recession is not over.
Real Estate Research Corporation (RERC) stated in their most recent report that demand for hotels and a lack of new supply makes the hotel sector a good investment opportunity. But they also went on to say that replacement cost is higher than value. As a result, development capital is not readily available. RERC's required pre-tax yield rate for the hotel sector decreased in the fourth quarter, although it retained the highest yield rate among the property sectors. According to Smith Travel Research fourth quarter hotel occupancy declined to 45.4%, a 7.2% year-over-year decrease, the average daily rate fell 1.6%, and revenue per available room declined 8.7% to $68.43. Apparently lack of new supply is not helping out the existing hotels.
RERC analyzes data for Atlanta hotels, but only first-tier investment properties, those that are new or newer quality construction in prime to good locations. First-tier hotels in Atlanta have a pre-tax yield estimate of 10.2%, a going-in cap rate percentage of 8.4%, and a terminal cap rate of 9.1%. For second-tier investment properties or Atlanta hotels that are aging, former first-tier properties in good to average locations RERC uses data from the whole Southern United States region. Here, the pre-tax yield ranges from 8% to 14%, with an average of 10.9%, the going-in cap rate ranges from 6.5% to 13% with an average of 9.1%, and a terminal cap rate of 7.5% to 14%, with an average of 9.8%. For third-tier investment properties or those properties that are older with functional inadequacies and or are located in marginal locations the pre-tax yield ranges from 8.5% to 15% with an average of 12%, the going-in cap rate ranges from 7.5% to 13% with an average of 10.3%, and the terminal cap rate ranges from 8% to 14%, with an average of 10.9%.
Realty Rates is another company that publishes cap rate information for commercial property types and their information is not broken down by city or region. They insist that their data, which is national in scope, closely mirrors what is happening in markets all over the country. For their surveyed cap rates Realty Rates reports that for full service hotels the minimum surveyed rate was 5.46% the maximum surveyed cap rate was 14.61%, and the average surveyed cap rate is 11.12%. For limited service hotels the minimum surveyed cap rate was 7.14%, the maximum surveyed cap rate was 17.41%, and the average surveyed cap rate was 11.74%.
Obviously the Realty Rates surveyed cap rate information is considerably higher than the RERC first tier cap rate information for Atlanta hotels. The Realty Rates full service and limited service average surveyed cap rates are both higher than the RERC average cap rate for third-tier properties. If your gross income is down and your operating expenses as a percentage of gross income are up perhaps you don't need to worry about the cap rate that's being used to generate your hotel value. However, if the question of value hinges on the selection of a cap rate, it is obvious that the higher Realty Rates cap rates will help out in a Atlanta hotel property tax appeal.
I have worked a lot of Atlanta hotels property tax appeals successfully and if you're not out of the woods yet, and you need help getting your property tax assessment reduced contact Fair Assessments. Although I have been in real estate valuation for over 20 years, including fee appraisal, mass appraisal, and property tax consulting, my business Fair Assessments is just two years old. Our client list is small but growing, and we will continue to provide the best service to those commercial property owners that choose to use our services.
