Hotel occupancy rates plummeted in 2020 as coronavirus-related restrictions and fears kept people from booking travel. The damage was especially harsh in New York City, which was initially flagged as the outbreak's epicenter. In fact, a number of prominent New York City hotels closed their doors in the course of the pandemic, while those that didn't struggled immensely. And now, those hotels are asking for a break.
Canceling property tax penalties
A number of New York City hotels have been late on their property tax bills due to cash flow constraints resulting from massive revenue declines. And now, those hotels are asking to have the penalties associated with that lateness forgiven.
A trade group that represents a number of well-known brands, like Hilton (NYSE: HLT), Sheraton, and Marriott (NASDAQ: MAR), as well as a number of smaller boutique hotels, is asking New York City Mayor Bill de Blasio to waive the 18% interest hotels have been slapped with for being late with property taxes. Their plea stems from the fact that shelling out that money is just an extra burden to bear at a time when business is far from booming.
Indeed, the occupancy rate for New York hotel rooms was just 36% in December, down significantly from 88% a year prior, according to lodging data hub STR. During that time, room rates also averaged $130 a night -- a serious decline from the $303 per night guests paid a year before. To force hotels to pay tax penalties could effectively drive some of them into the ground.
But while these hotels make a compelling argument for catching a break, the problem is that New York City is starved for tax revenue itself and needs all the money it can get. In fact, budget officials say the city will lose about $10.5 billion in revenue through June 2022 thanks to the pandemic, so it may not be in a position to forgive those penalties so easily.
While it's tough to get a handle on exactly how much outstanding property tax New York City hotels owe, it's estimated that close to 60 properties are behind on that obligation, owing a total of $23.5 million in taxes, plus another $2 million in accrued interest.
And while hotels that are part of larger chains may have corporate capital to bail them out, boutique hotels don't have nearly the same access to funding -- so they especially risk permanent closures without some help. Around 47% of the city's 700 hotels are smaller businesses, hosting 150 rooms or less.
The Millionacres bottom line
If New York City hotels are forced to make good on their property tax penalties, it could seriously hurt hotel REITs (real estate investment trusts) -- and other REITs with heavy concentrations in area properties. That's a hit investors don't want right now, but if hotels keep pushing back, they may be in line for some sort of reprieve -- even if it ends up being a compromise and not a complete bailout on the property tax penalty front.