|
|
|
Using a Limited Purpose Receivership to Collect Hotel Transient Occupancy Taxes By Gemberling, Dennis* In this time of a downturn in business and leisure travel cities and counties across the nation are collecting lower tax income from overnight room sales tax and hotel transient occupancy tax (“TOT”) at area lodging facilities. This loss is particularly critical from popular tourist destination hotels and resorts. Even worse, hotel TOT is often underreported or not paid at all by hotel owners who face dramatic reduction in their own cash flow. Some dubious owners skim income off room revenues before reporting reduced tax amounts to be paid even in good economic times. Much of this abuse goes undiscovered for long periods unless the taxing city or county has the financial resources to perform periodic audits or do a substantial comparative analysis of like properties. The problem is less pointed for hotels that are branded or franchised, where room revenues are tracked through the operator’s / franchisor’s reservation and property management software. This assures reliable revenue figures to calculate hotel TOT. But this does not solve a second problem — the owner using the collected hotel TOT as a line of credit rather than timely paying it to the taxing entity. To Receive or Not To
Receive Where the objective is to jump-start the collecting and paying of both current and overdue hotel TOT, a “limited-purpose” receivership is an appropriate and less costly alternative. The best mechanism is for all the parties – the taxing entity and the owner – to stipulate to a court-appointed receiver taking control over the bank deposit accounts while the hotel continues business as usual. Short of this cooperation the city or county will have to convince the judge that appointment of a limited capacity receiver can easily satisfy collecting the TOT judgment / debt, while creating little interference with hotel daily operations. The defaulting owner may benefit from such a carefully-crafted receivership solution. The city or county may be willing to forego future interest and collection fees on past-due TOT as part of the hotel receivership cost. The owner may avoid further tax liens and defaults while the receiver controls accounts and makes payments on an agreed-upon plan. Often the appointment of a full-purpose receiver to take over an entire hotel business triggers a default or adversary action by one the hotel’s mortgagors or franchisor (or operator). A less-intrusive limited-purpose hotel receivership can be conducted without impact to the hotel’s lenders or franchisor. Hotels are complex assets. Such a limited-purpose receiver should have specific expertise and experience in hotel administration (and the nuances of lodging operation, staffing and dealing with its many customer accounts). Equally important is that the aggrieved city or county consults experienced legal counsel regarding its legal options and how they play out in the context of applicable law. Measure Twice, Cut
Once A key issue affecting a receiver’s take-over of necessary bank accounts is to understand where those monies flow from the respective hotel revenue deposits and on-site property management systems. Equally important is that the receiver be the sole signatory on these same bank accounts, to avoid future conflicts with the owner. It is also important to identify and specify what the individual deposits that will be controlled by the receiver consist of and in what form the assets flow within the hotel’s operation. Deposits may be in the form of cash, credit cards, guest advance deposits or gift certificate payments. Other aspects of daily deposits are often overlooked where the receiver should gain control under the order. These include accounts receivable, which includes company and group billings and set asides for FF&E (fixtures, furnishings and equipment) reserves (often required by a lender or franchisor). This can amount to a large sum in airport hotels that hold several airline crew contracts, or major convention center hotels, with many group meeting accounts. Even should the owner lose the hotel to other creditors or incur a major judgment, the receiver will still retain control of these accounts pursuant to the appointing order. The receiver will be able to continue accounts receivable collections to be used toward satisfying the city’s or county’s TOT judgment. Limited Hotel
Receivership Overview This economic evaluation requires an understanding of the impact of the bank-deposit set-asides for payment of the current hotel TOT as well for as payments under the delinquent TOT installment plan, and impact on the day-to-day operations cash flow. Absent surprises and assuming the economic viability of a limited-purpose receivership, the receiver can proceed with her/his duties. In marked contrast to a full-purpose hotel receivership, usually the only assets the limited purpose receiver will inventory and control (for the purpose of enforcing and collecting the hotel TOT judgment) are those set aside from the daily deposits, accounts receivables and FF&E reserves accounts. The receiver can easily set up a simplified off-site accounting system separate from the hotel’s accounting in order to monitor, control and transfer monies from the bank deposit accounts on a daily basis to the respective parties other bank accounts which the agreed-upon plan will control. The receiver will often make set-asides daily for payment to the city or county and to pay hotel receivership costs. Remaining sums will then be transferred to the hotel’s operating accounts to fund its operations. A monthly accounting and report will be submitted to the court and the respective parties as part of the receiver’s duties, as in any other receivership. Primary advantages of a limited-purpose hotel receivership are less cost and intrusion to the day-to-day operation (contrasted with a full-purpose receiver taking over all of the hotel assets and operating its entire business). Significant savings in time and travel for the receiver and receiver’s staff should also be realized, since regular visits to oversee the hotel’s day-to-day operation will not usually be necessary. There are disadvantages to the described limited-purpose receivership, however. These can include a lack of cooperation from the owner and staff, increasing the time required for the receiver to carry out his or her duties. This is especially true if the hotel’s daily reporting and banking information is not made readily available or the receiver’s requests for answers and clarification are continually delayed. Lack of total control over the entire hotel and its business may also pose a problem if the hotel is facing another default or judgment by an outside party. These defaults or judgments may require the limited-purpose receiver to seek further instruction from the appointing court about his/her continued duties. Summing Up This assumes that the parties are open
to such an arrangement. When seeking appointment of a limited capacity
receiver such as this, it is especially important that the appointing
court order be both comprehensive and address issues specific to a hotel
and its operating environment. Overriding this, however, is the importance
of cooperation between the parties if the receiver is to be successful in
carrying out his or her duties in a timely and cost-effective manner.
Absent such cooperation, the city or county may be better off petitioning
the court for a full-purpose hotel receivership to collect its TOT
judgment. |