-by Renea Linton
here are many questions that drive the uniqueness of timeshares and the possibility of misunderstanding property tax valuations.
With more than 1,600 timeshare resorts across the United States encompassing in excess of seven million weeks or interests, this has caused diverse timeshare definitions among the taxing authorities, which in turn creates varying degrees of valuation methodologies.
Understanding the business of timeshares — and how they fit in the jurisdiction — is the best foundation for valuing timeshares in ways that are fair and equitable to all parties.
For example, one jurisdiction may value on a cost approach, while another utilizes a residential sales comparison approach, and yet another will be based on third party resales and/or developer sales. Also, depending on local laws and applications, these timeshares can be assessed by the week, the unit, the building, or as one economic unit.
More often than not, timeshares have created a confused perception in the marketplace as well as among taxing authorities. A false perception of high market values coupled with non-recoverable, extraordinary marketing costs has produced equity issues within the property type. These issues may create inequities of timeshares being unfairly assessed in relation to other property types (i.e., residential condominium projects) or being classified improperly.
Timeshares are not just condominiums or apartment buildings, but a business with a real estate that is complex and needs to be recognized. It is the process of a jurisdiction to value the real estate, bricks and mortar, not the added business component for assessment purposes.
Timeshares are unique properties that deserve specific valuation methodologies. Applying best practices to assessment valuations benefits the jurisdictions as well as taxpayers by providing the tools necessary to treat the property equitably and fairly with similar property types.
Across the United States, there are varying timeshare classifications. Most governments have statutes that determine how the timeshares are assessed. However, this is different from jurisdiction to jurisdiction and even county to county within a state.
First, there is the “one parcel” concept where the entire project is incorporated into one economic unit encompassing all the common area and amenities. Typically the association manages the real estate assessment/taxes and then bills the individual owners through maintenance fees. The tax is allocated based typically on the owner’s usage, unit size, season purchased and view.
Second is the concept of assessing the individual units similar to residential condominiums. The common area and amenities are evenly distributed to each of the units based on their size. Similar to the “one parcel” concept, the property taxes are billed through the maintenance fees. Examples of this basis are in Florida, South Carolina and parts of Hawaii.
Third is the concept of assessing and taxing each individual interest separately to the owner of record. California is the only state that assesses the individual interest. Through Proposition 13, the state can reassess and tax an interest based on a transfer of ownership or new construction. This practice can potentially lead to a 300-room property having 15,600 individual parcels, which are taxed annually.
In addition, as part of this Proposition, the taxing authority has the right to collect additional taxes during a fiscal year if a sale price is more than the current assessment. Because timeshares transfer and/or are sold quite frequently, these “supplemental” taxes are an additional expense to the owner and can become burdensome to the property (as well as the taxing jurisdiction).
There are four major valuation methodologies that are employed across the United States indicating the differing opinions across the assessment community.
The first is based on residential condominium sales. The local assessing jurisdiction determines a comparable residential condominium property, and analyzes the sales that have occurred within the time frame required for the current assessment. There are typically no deductions when comparing these sales to timeshares for the extraordinary sales/marketing costs as well as the removal of business personal property. South Carolina is an example of this method.
The second are developer sales where transfers are tracked and then applied to an individual interest. Developer sales are the upper limit of the market, since there are more intangible components and sometimes these advantages are incorporated into the sale price.
They have the ability to “throw in” extras such items as free nights, airfare and other perks. These sales are typically the highest in the market so they can recoup these marketing costs as well as other intangibles.
In California, these individual sale prices are assigned to the interest without an appropriate adjustment for the business personal property or intangibles that go into the sale. Arizona is also an example of this methodology when dealing with original gross sales in the beginning years of the project. However unlike California, they do recognize the business and make appropriate adjustments.
The third are re-sales and third party markets. When there are an adequate number of re-sales in a project to determine a fair market value, the jurisdiction applies this methodology while deducting intangible costs, which can include personal property, financing and sales and marketing. Arizona is also an example of this methodology as well as Kauai, Hawaii.
The final valuation method is the Cost Approach where the actual construction costs are applied to the improvements without consideration for business, intangibles and personal property. One of the very few jurisdictions that uses this methodology is Oahu, Hawaii
Valuation best practices do not just benefit taxpayers, but also the tax assessor by giving them the tools for looking at the property fairly and equitably.
Timeshares as well as other vacation ownership properties are unique — with many components driving sale prices that should be considered in valuation methodologies. Valuing these properties correctly develops fair and equitable assessments within the property type as well as within the jurisdiction.
A valuation inequity example is when comparing a timeshare to a residential condominium. The condo is sold one time, however a timeshare unit can be sold 51 times (the 52nd week is sometimes reserved for a maintenance week).
In addition to the high volume expense of selling/marketing these 51 weeks, there is the management, financing, personal property, cost of services as well as the cost of a resale market rolled up into a timeshare sale price. This same process is repeated for every single unit in the complex. Yet a taxing authority may value the timeshare based on one condominium sale price without adequately accounting for these extraordinary marketing/sales costs, personal property and/or cost of services. These costs are incorporated into the timeshare sale prices and in some projects, with the costs exceeding 40 percent.
Along these same lines are the many options for purchasing timeshares, which are typically not recognized.
There can be many different sales prices in one unit from the initial “developer” sale to third party sales, from re-sales to equity trades. Developer sales start the project off and are for all unsold inventory. As mentioned, these sales usually command the highest price. On the other end of the spectrum are the third party sales. These are through timeshare brokerage firms, which have a large inventory and want to make the sales quickly on behalf of the owner. The fees associated with third party sales are being paid by the owner and are not usually recouped by the sale. However, a jurisdiction may not recognize the difference between the varying sales types and assign a higher value without considering or adequately applying deductions.
In all timeshare sales there is personal property that is part of the transfer. Most all timeshare units are fully furnished – full kitchens, bedroom suites, dining areas – which accommodate the owner’s stay. Not removing this from the sale price when valuing timeshares can possibly lead to double taxation or a tax that is not permissible in a State where personal property is not taxable (such as New Jersey and Hawaii).
Valuation Best Practices
A few states have best practices in place for valuing timeshares where fair deductions are given to the extraordinary costs that go into selling and running the business. Arizona, Florida and Kauai, Hawaii are examples of jurisdictions that recognize the business and have statutes in place to guide the valuation. Others do not, such as California, which assigns the sale price without deductions and Maui, Hawaii, which compares timeshares to condominiums with no adjustments.
The timeshare business has come a long way since the concept began over 45 years ago. Many large hospitality companies have become involved in the development of resorts. There is legislation in place governing timeshare operations in most states. Additionally, American Resort Development Association (“ARDA”) is an advocate organization on timeshare issues that has increased consumer confidence and awareness in the industry.
Even though timeshares are now better managed, sold and more favorably recognized across the United States, the valuation methodologies have not kept up with the industry.
Applying best practices to assessment valuations benefits the jurisdictions as well as taxpayers by giving the tools to treat the property equitably and fairly with similar property types.
The timeshare industry is large, continues to grow and requires a fair and best practice approach.
About the Author:
Renea Linton is the Director of Property Tax, Hospitality at Altus Group, provides insights on property valuation best practices for timeshares. She has been in the property tax consultant business for 25 years and for the last 16 of those years, she was part of Marriott’s Tax Department focusing on hotels, senior living and timeshares generating large tax savings for both real and business personal property.
To learn more about Altus Group, click here.
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