Court Orders Tax Refund for SF’s Westin St. Francis Hotel

Movie rentals at the Westin St. Francis may cost the City of San Francisco millions of dollars.

The California Supreme Court has ordered the city to pay the Blackstone unit that owns the Union Square hotel a tax refund for classifying intangible assets such as revenue from movie rentals and laundry service as taxable property, the San Francisco Chronicle reported.

The decision by the court to deny review of San Francisco’s appeal of a state appellate court decision in August could force millions in refunds to owners of similar hotels across the state.

The order will require San Francisco to refund some of the taxes assessed on the Westin St. Francis after it was sold in 2015 to the Blackstone subsidiary. The city must now reassess the hotel and refund the overcharges, which could amount to $1 million a year since the sale, according to the hotel’s attorney.

The city could have to pony up as much as $8 million for overvaluing the hotel at 335 Powell Street.

“We are disappointed with the decision and are evaluating next steps,” Jen Kwart, spokeswoman for City Attorney David Chiu, told the newspaper.

The court’s order is binding on trial courts statewide and will apply to many transactions in other counties, where for years cities have used the same approach to assess the value of newly sold hotels, according to Colin Fraser, attorney for the Westin St. Francis owners.

“The most important impact of this decision is not just on this property, but that it will affect hotel evaluations for property taxes throughout the state of California,” Fraser told the Chronicle.

The 1,195-room Westin St. Francis, with a 14-story building and a 31-story tower, is the third largest hotel in San Francisco. BRE Diamond Hotel, a unit of New York-based Blackstone, bought the luxury property in December 2015 for $671 million, or $561,506 per room. The change of ownership required a property tax reassessment.

The city assessor determined the Westin was worth $785 million — while the Chicago-based Blackstone unit argued its taxable value was $645 million. The property tax rate is now 1.18 percent of net value.

The dispute centered on the city’s lumping intangible assets into the property value. The $56.9 million worth of intangibles included revenue generated by the hotel’s management agreement with its new owners and income from guests who rent movies, pay for laundry service, or pay for rooms but leave early or fail to check in.

The 1st District Court of Appeal ruled in August that payments from guests who fail to show up or stay at the hotel could be considered part of the hotel’s value and included in taxable property.

But the court said movie and laundry fees, while generating income for the hotel, were not an “integral part” of its value and could not be taxed as property. The court also said the city had overvalued the effect of the hotel’s management agreement with its new owners.

Last year, eight San Francisco landlords with properties assessed at more than $100 million sought to have their property tax bills cut in half.

Some of the city’s largest landlords have filed appeals to the city’s Assessment Appeals Board seeking a 50 percent reduction in last year’s taxable assessment, the San Francisco Business Times reported.

— Dana Bartholomew