Madison hotel and apartment owners are contesting huge spikes in property values this year — many increases are over 100 percent — but city officials say properties were undervalued and increases are appropriate and warranted.
Ahead lies a potentially lengthy appeal process and court fights with results deciding tens of millions of dollars in property value, millions in property taxes, and the balance of tax burden between commercial and residential property owners.
The Madison Concourse, 1 W. Dayton St., the city’s biggest hotel, saw the largest dollar jump among hotels, a whopping $41.7 million, or 215 percent increase, to $61 million. The Hub Madison apartments, 437 N. Frances St., leaped $64 million, or 123 percent, to $115.9 million, the highest among apartment buildings.
The big increases surprised hoteliers and are “pretty unreasonable,” said Charlie Eggen, president of the Greater Madison Hotel & Lodging Association.
The Concourse is among 30 hotels and the Hub among 46 apartment buildings with eight or more units to formally challenge assessments this year. The challenges from hotels is triple the highest sum in the past decade, while those from bigger apartments second most in 10 years.
The number of challenges from hotels is “astonishing,” Eggen said, adding that others are also concerned but likely missed the May 8 deadline for filing a challenge.
Developer Terrence Wall, who owns apartment buildings, called the increases “outrageous” and said they’ll ultimately affect renters.
City assessor Mark Hanson said increases result from many factors, including undervalued properties, improving markets, limited information in the assessor’s office to keep up with changes, and a surge of hotel construction and a new type of luxury apartments that triggered a sharper look at those properties.
“It’s a big jump for some of them in one year,” Hanson said. “I’m sure some of them were caught off guard by that, but we needed to get caught up. It’s a big shock, but it’s warranted.”
All told, the city received 228 appeals from all types of commercial properties, second most in 10 years, and 497 appeals from residential owners, which include single-family homes and apartments with up to three units, third most in 10 years.
“I think these kind of things do happen occasionally, but this is a big increase,” said professor Tim Riddiough, James A. Graffkamp chair in real estate and urban land economics at UW-Madison. “I don’t think you’ve seen anything like this locally for a long, long time.”
Mayor Paul Soglin, who was surprised by the number of big increases, said the city has not had a policy of intentionally under-assessing commercial properties, but noted that the result of new values will reduce the property tax burden for homeowners.
“The purpose of the system is equity and fairness,” he said.
A closer look
The assessor’s office felt a need to look more closely at commercial properties due to trends including the volume of building permits and sales above assessed value after the Great Recession, Hanson said.
Like most places, the recession affected city property values for years, with revaluations for commercial properties plummeting $377 million in 2009 and falling slightly for three more years. Revaluations for hotels fell $11.3 million in 2010 and more the next year before steady, modest increases began in 2012. Apartments with eight or more units dropped $102 million in 2009 and began to rebound a few years later.
The Downtown, which rarely saw a new hotel in previous decades, suddenly saw a surge of hotel construction and proposals, Hanson said. Meanwhile, the city began to see new “student-influenced” apartments, towers with spectacular amenities like swimming pools and hot tubs on rooftops, never built here before.
Hanson said he’s not sure when the city last did a deep re-examination of hotels and apartments.
Two of the city’s prominent hotels saw little annual change in value for nearly two decades. The Concourse and Hilton Madison, 15 E. Wilson St., had no change from 2001 to 2006 and from 2010 to 2014. The Concourse, valued at $16.5 million in 2001, edged to $19.4 million in 2016. The Hilton, valued at $18.5 million in 2001, was at $21.7 in 2016.
For this year, the assessor’s office secured special funding for outside help to get better information on hotels and specific, income-based appraisals on student-influenced apartments, said Laura Doherty, assistant assessor for commercial property.
The result shocked many commercial owners, especially hoteliers.
George Wiesner, general manager of the Park Hotel, 22 S. Carroll St., which just completed a significant renovation, called the hotel’s $28.2 million increase — a staggering 651 percent — to $32.5 million, “alarming.”
Weisner declined further comment due to the pending appeal. The hotel’s building permit for its renovation begun in 2015 shows the estimated cost of work at $4.8 million, far less than the increase in the hotel’s new value.
“Business has been good. No one really expected no increase,” Eggen said. “But you look at the scale of the increases. The increases go way beyond what is typical.”
The increases, he said, mean hotels will face potentially skyrocketing property tax bills, a challenge for operations that already have top-end room rates and are paying rising wages to retain staff, he said.
The values are appropriate, Doherty said. “A lot of this has been expected for the last couple of years,” she said. “I don’t believe any of these would have listed properties (for sale) at 2016 assessed value.”
Soon after the city announced new values, the city noted a rare hotel sale, a sign it’s on the right track on hotel values, she said.
The Sheraton Madison, 706 John Nolen Drive, was assessed at $8 million in 2016 and saw a 202 percent jump of $16.3 million to $24.4 million in value for this year. In mid-April, days after new values were announced, the city learned the hotel had sold for $19.25 million, 143 percent more than the 2016 assessment but still $4.9 million less that the 2017 value.
“It tells me we’re a lot closer this year than last year,” Doherty said, adding that the hotel’s value could be lowered to the sale price if the sale meets factors for a true fair-market transaction.
The Hilton Madison Monona Terrace, 15 E. Wilson St., which saw its assessment rise $29.3 million, or 135 percent, to $51 million, is working cooperatively with the assessor’s office to provide more information to reach an accurate value, said Laurie Hobbs, spokeswoman for Marcus Hotels & Resorts, which owns the property.
“The recent sale of the Sheraton Madison, in which we owned a small equity interest, is helping us to establish a baseline for local hotel valuation in our efforts with the city to create an accurate assessment for the Hilton Madison,” she said.
The city will always consider new information, Doherty said.
Luxury high rises
The apartment market is evolving, too, with the luxury high rises plush with amenities catering to a mix of students and young professionals, Hanson said.
“It’s been a surprise to see projects like that,” he said. “No one could foresee that type of housing on campus.”
Doherty added, “It’s gotten very complex. And we don’t have more people. It’s been a learning process for us, too.”
The city, Soglin said, looked more closely at many types of apartments.
Newer upscale apartments, such as the Hub and Ovation 309, at 309 W. Johnson St., both opened in 2015, showed substantial increases over the first three years of operations, the norm for such properties, Hanson said.
The Hub’s new $115.9 million value still may not be high enough, Hanson and Doherty said. New information suggests a transfer of ownership with the property selling for $188.5 million, they said. News of a possible sale didn’t come through the state Department of Revenue, as usual, but after a tip and checking sources that track increasingly complex financial transactions, they said.
That means the Hub’s value could rise or fall during the challenge process, depending on actual income information or proof of a fair market sale at the higher price, Doherty said.
Core Campus of Chicago, which built the Hub and is now constructing another upscale apartment building near UW-Madison, declined comment.
Not all apartments seeing big increases are Downtown. Wall said his Watermark Lofts, 950 John Nolen Drive, rose 18 percent, while Wingra Point, 1033 High St., jumped almost 60 percent. The higher assessments mean Watermark residents will pay an extra $52 monthly in rent, while residents at Wingra Point will pay another $106, he said.
The city is now beginning a potentially lengthy appeal process that begins with conversations and could end before the state Supreme Court.
“We still hope the process will work,” Eggen said. “(But) my feeling is there’s general will to take this far, if necessary.”
Getting better information
Assessing values of commercial properties is more challenging and complicated than for single-family homes, which is based on comparable sales in a property class where there’s usually a large sample, Hanson said.
For commercial properties, including hotels and apartments, assessors can consider cost of construction, which often doesn’t align with value; income, the most common method; and comparable sales, which is attractive but offers a relatively small sample size.
The income approach is tricky because state law allows commercial owners to withhold information unless challenging a new value. The city sometimes asks for the information but usually doesn’t get it and must set values based on estimates produced through analysis of multiple factors, including number of rooms or units, room or rental rates, quality, location, expenses and more.
As a result, revaluations for many commercial properties, including hotels and apartments, soared this year. All commercial properties rose a stunning $745 million, including a $258.2 million jump for hotels, while apartments with more than eight units jumped $175 million. The increases are the most in at least 15 years.
“It would have been nice if we had done this a couple of years ago. Then you wouldn’t have seen such a big jump,” Hanson said. “We’re doing the best we can with the information we have.”