Park Hotels and Resorts, which said last month it was stopping debt payments on two of San Francisco’s most prominent hotels, has filed a lawsuit against the city alleging it was improperly taxed.
Three lawsuits filed in San Francisco Superior Court on June 27 allege that city agencies “illegally and erroneously imposed” property transfer taxes on the Virginia-based real estate investment firm after it took control of three hotels in the city.
The legal dispute is just one example of real estate upheaval arising from the pandemic, when hotels and office buildings fell into financial distress. The city is seeing an uptick in property tax appeals, and some Downtown office buildings have sold at significant price cuts.
At issue in the lawsuit are three hotels acquired by Park Hotels in 2019 in the wake of its acquisition of Chesapeake Lodging Trust: the Le Méridien in the Financial District, the Hotel Adagio near Union Square and the Hyatt Centric Fisherman’s Wharf San Francisco.
When Park Hotels took over control of the hotels, the company valued the properties in total at $353 million and paid a transfer tax of around $10.6 million on the three properties.
A few months later, the suit alleges, the Office of the Assessor-Recorder came back to Park Hotels and said its determination of fair market value for the properties was around $532 million, and therefore, a higher level of transfer tax was required.
Concurrently, Park Hotels filed property tax assessment appeals for the three hotels disputing the number posed by the assessor-recorder. In February, the assessment appeals board set a new fair market value at $484.3 million, in between Park Hotels’ and the assessor-recorder’s number.
The lawsuits allege that the assessor-recorder incorrectly determined the higher tax charge, which included late payment penalties and non-taxable assets such as personal property as part of their calculation.
“The 25% Penalty and 10% Penalty are unconscionable, excessive, illegal, and unconstitutional as they are punitive in nature and bear no reasonable relationship to the offense of Plaintiffs’ alleged underpayment of real property transfer tax,” the lawsuits state.
Park Hotels is seeking a refund of roughly $8 million in transfer tax payments that it said were incorrectly calculated, in addition to costs and interest on the refund and attorney’s fees.
“Once we are served with the lawsuit, we will review the complaint and respond appropriately,” said Alex Barrett-Shorter, a spokesman for the City Attorney’s Office.
Somewhat ironically, Park Hotels has already divested from two of these properties, selling off the 360-room Le Méridien in the Financial District for $221.5 million and the 171-room Hotel Adagio for $82 million in 2021.
Park Hotels still currently owns the 344-room JW Marriott Union Square in addition to the 316-room Hyatt Centric Fisherman’s Wharf.
In explaining its decision to abandon the 1,921-room Hilton San Francisco Union Square and the nearby 1,024-room Parc 55 San Francisco, Park Hotels said it was trying to “materially reduce our current exposure” to the San Francisco market.
“Now, more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges—both old and new,” Park Hotels CEO Thomas J. Baltimore Jr. said in a statement at the time.