D REAL POINTS: FRACKING AND HOTEL VALUES, PROPERTY TAXES

By Amish Gupta – COO, RETC

In certain pockets of Texas, some local economies have the good fortune of being part of the ever increasing popular practice, fracking – the new methodology of extracting natural gas. Almost overnight, these previous sleepy towns are turning into mini boomtowns. And as a result, local hotels are reaping the rewards.

Pearsall (a small town located on I-35 between San Antonio and Nuevo Laredo) is one of these towns. According to the Texas Hotel Performance Factbook, which sources its data from the state comptroller, in 2011 the average occupancy and ADR (average daily rate) for the city were 87 percent and $109 respectively resulting in a $94 RevPAR (revenue per available room). As a comparison, in Dallas ZIP code 75201 which includes the Ritz-Carlton and other notable hotels, this area had an average occupancy and ADR of 62 percent and $146. The resulting RevPAR was $91, which is lower than Pearsall!

Having said that, I don’t think anyone could argue that hotels in Pearsall are worth more than Uptown/downtown Dallas on a per key basis.

Nonetheless, often times local taxing entities change the assessed value of the property (up or down) based on the income it generates. If income increases by 10 percent, then the assessed value will also increase by 10 percent. In a broad sense, this is a reasonable practice when things are “normal” or stabilized. However, as people in Pearsall can attest, things are not normal, and fracking is never a sure bet.

Since the local appraisal districts have been using the same methodologies for a number of years, at times it can be difficult for them to understand why values would not increase commensurate with revenues. As such, hotel owners should make sure that they appeal their values, especially those owners who are experiencing thriving revenue due to fracking.

Using Pearsall as an example, this small town saw an increase of 44 percent in hotel room revenue in 2011. However, one could argue that the values have not increased by the same amount for the following couple of reasons:

First, just as quickly as the revenues have increased, the revenues could decrease. Hotel investors should be concerned with the sustainability of the fracking industry in the local area. But let’s face it, most hotel investors are not experts in the energy industry. It’s very difficult to assess the risk associated with gas prices (a macro-level comment) and the localized success of the fracking (requiring geo-technical expertise). For every boomtown, there is a ghost town.

Second, even if there is some level of sustainable growth as caused by the fracking industry, other competitors will rise. As with everything else, real estate follows the laws of supply and demand. Seeing the RevPAR numbers, bankers and developers will be quick to underwrite and build new hotels. In most of these remote towns, land is available and cheap, making the barriers to entry virtually non-existent. As a hotel owner, you may see a year or two of increased revenues, but the competition is coming, and pretty soon your hotel won’t be the newest on the block.

While some owners may feel hesitant to share revenue figures with the appraisal districts when they have increased quite significantly, keep in mind that the local jurisdictions already have the revenue numbers (released by the comptroller). Additionally, one can use logic-based arguments on why the assessed values should not increase commensurate to the revenue.

As a hotel owner, you want to ensure you are managing your expenses even when revenues are increasing, as is the case with many of these hotels that are experiencing overnight success. In the event that revenues decline quickly and dramatically, you don’t want to be caught with your pants down.