Hotel Property Tax Appeals: Removing Intangible and Business Value

Three layers in a hotel's value

The going-concern value of an operating hotel has three layers. Real property: land and improvements. Tangible personal property: furniture, fixtures and equipment (FF&E), which in most states is either taxed separately on a personal property return or exempt, but in no case belongs in the real property assessment. Intangible property and business value: the franchise affiliation, the management agreement, the assembled and trained workforce, favorable contracts, and the goodwill of the operating business.

An income approach applied to hotel net operating income values all three layers together. Each layer has to be removed explicitly before the result is a real property value. If it is not, the owner pays real property tax on the business, and in states that also tax FF&E, on the furniture twice.

The Rushmore method and its limits

The most common assessor approach, often called the Rushmore method, deducts a market management fee and franchise fees from income as operating expenses, capitalizes the remaining NOI, and subtracts the value of FF&E. The premise is that once the owner has paid a manager and a brand, any income left is attributable to the real estate.

Courts have been skeptical of that premise. In SHC Half Moon Bay v. County of San Mateo (2014), the California Court of Appeal rejected the county's position that deducting management and franchise fees removed all of a resort hotel's intangible value. In Olympic and Georgia Partners, involving the Ritz-Carlton and JW Marriott towers in downtown Los Angeles, the California Supreme Court unanimously held the county's method invalid because the county had not shown empirical support for the premise that a franchise fee removes every intangible benefit the franchise provides, and it noted that deducting a management fee does not remove the value of the operating enterprise.

The practical lesson is not that fee deductions are wrong. Market management and franchise fees belong in the expense line. It is that they are a starting point, and any remaining intangibles the owner can identify and value must also come out.

What California law requires after Olympic and Georgia

California's rule comes from Revenue and Taxation Code §110 and §212(c): intangible assets and rights are not taxable and may not enhance the value of taxable property, although the assessor may assume the presence of intangibles necessary to put the property to beneficial or productive use. In Elk Hills Power v. Board of Equalization (2013), the California Supreme Court held that the value of intangibles that can be identified and valued must be removed from the income stream.

Olympic and Georgia, decided August 28, 2025, drew the line more precisely. The majority asked whether revenue is primarily attributable to the activity of the operating business or is income of the real property or its beneficial use. On that test, the court held that the assessor could consider two items the Court of Appeal had excluded: transient occupancy tax payments the City of Los Angeles agreed to make to the developer, and key money the hotel managers paid the owner for the management rights. The majority described its holding on the occupancy tax payments as narrow and tied to that agreement.

For owners and consultants, the decision cuts both ways. Fee-only removal of enterprise value is out, which strengthens the case for valuing and deducting the workforce, brand benefits and other operating intangibles. But revenue that flows to the property itself, whoever owns or operates it, can stay in the assessment even when it arises from a contract.

A worked allocation

Harborline Suites is a 220-key upscale hotel. The table starts from the operating statement, deducts market fees and an FF&E reserve, capitalizes at a loaded rate, then removes the FF&E and the intangibles the owner can identify and value.

The fees-only indication of $29,971,000 is where a Rushmore analysis stops. Removing the assembled workforce (valued at the cost to recruit, hire and train a replacement staff) and a favorable long-term parking agreement takes the real property value to $28,521,000. In California that difference matters more than the annual tax suggests: if the error sits in a base year value set at acquisition, it carries forward, growing by up to 2% a year, for as long as the owner holds the hotel.

Building the evidence

Intangible deductions succeed when they are specific and supported. A line that says "business enterprise value, 15%" invites rejection. A line that identifies the asset, the method, and the source data gives the board something to accept.

• Management and franchise agreements, with fees benchmarked to market terms rather than the contract alone.
• An FF&E schedule with acquisition dates and costs, reconciled to the personal property return so the same assets are not taxed twice.
• Workforce valuation from actual recruiting, hiring and training costs and turnover data.
• Any contract that adds income or reduces cost (parking, retail leases, development incentives), with an analysis of whether the benefit belongs to the property or to the business.
• Market cap rates for hotel transactions, with a note on whether the source rates were derived from going-concern prices, which already include FF&E and business value.

Outside California

Every state taxes real property and most exclude intangibles from the real property assessment, but the methods boards accept vary. Some accept fee deductions as sufficient, some require separate removal of business value, and the case law moves. Check the jurisdiction's appeal board decisions before choosing a method, and present the analysis so the board can accept part of it: separate lines for FF&E, fees and each intangible, rather than one combined deduction.

ATALI ELECTRIC's Income Valuation module separates hotel income into real property, FF&E and intangible layers with each deduction logged, and the Petition Generator assembles the agreements and schedules behind each line into the hearing binder. The consultant, appraiser or attorney presenting the case decides which intangibles to claim and how to value them.