Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Fortunately for hotel owners, a recent decision by the California Court of Appeals makes clear that measuring a hotel’s intangible value solely by deducting franchise fees and management fees understates a hotel’s intangible value. Assessors must exclude all intangible value to tax the hotel’s real property properly. Proper exclusion of intangible value will necessarily result in lower taxes.

The debate
It is axiomatic that investors buy operating hotels based on the income generated by the hotel’s business. The income is generated by the combination of the property’s real estate, tangible personal property, and intangible personal property. All of these components are essential and the absence of any of these elements severely compromises a hotel’s ability to generate revenue.

Ad valorem taxing authorities are not investors or lenders. They are charged with valuing only the real estate component of a hotel for tax purposes. Isolating a hotel’s taxable value requires that the assessor remove from the hotel’s overall value both the value of tangible personal property and the value of the intangible personal property used in conjunction with the operating business.

Valuing the hotel’s tangible personal property, such as beds, furniture and the like, is relatively easy. Valuing intangible assets poses a far greater challenge. How should the assessor separate the value of intangible assets from the hotel’s overall value? The answer to that question has been the subject of heated debate.

Evolving methodology
The Appraisal Institute’s current curriculum recognizes the presence of intangible value in hotels but avoids the issue of how to calculate this value. This omission implicitly acknowledges that the value of an operating hotel lies at the intersection of real property appraisal and business valuation, and both skill sets are required to value a hotel property appropriately.

Stephen Rushmore developed the initial approach to the problem over 30 years ago. To account for a hotel property’s intangible value, the Rushmore Approach simply subtracts management fees and franchise fees from the hotel’s revenue and capitalizes the remaining revenue to determine real estate value.

The debate about valuing intangible property in a hotel has been long, loud and heated. While revolutionary at the time, the Rushmore Approach has been criticized for years. Rushmore’s defenders have responded to the criticism on several fronts.

Critics argue the Rushmore Approach offers the attraction of simplicity at the expense of understating the contribution made by intangible personal property to the hotel’s revenue. Critics further argue that the Rushmore Approach’s assumption that the deduction of management and franchise fees effectively accounts for a hotel’s entire intangible value is contrary to the experience of market participants in owning and operating a hotel. Rushmore’s detractors often advocate an alternative method known as the business enterprise approach, which casts a wider net to account for intangibles.

Rushmore’s supporters note the absence of hard data to quantify sales of a hotel’s individual components. The absence of this data, however, is unsurprising, considering investors buy and sell hotels based on income generated rather than on the value of individual components.

Rushmore’s advocates also suggest that alternative approaches overstate intangible value, thereby reducing the mortgage-asset-secured value lenders rely upon for hotel financing.

Courts weigh in
The Rushmore Approach certainly accounts for some intangible value, but, does it reveal the full intangible value associated with a hotel such as licenses to use software and websites?

Until recently, Glen Pointe Associates vs. Township of Teaneck, a 1989 New Jersey opinion, was the seminal hotel property tax decision that adopted the Rushmore Approach to extract the real estate value of an operating hotel. A May 2014 California Court of Appeals opinion, however, suggests the tide may be turning against the Rushmore Approach and in favor of the business enterprise approach.

In SHC Half Moon Bay vs. County of San Mateo, the California Court of Appeals held that “the deduction of the management and franchise fee from the hotel’s projected revenue stream pursuant to the income approach did not - as required by California Law - identify and exclude intangible assets” such as an assembled workforce and other intangibles.

In overturning the taxing authority’s methodology as a matter of law, the appellate court held that the taxing authority had failed to explain how the deduction of the management and franchise fee, i.e. the Rushmore Approach, captures the value of all of the hotel’s intangible property. Considering that consumers increasingly make hotel reservations online instead of using a flag’s reservation system, it is increasingly difficult to argue that the Rushmore Approach sufficiently captures the value of the hotel’s website or its relationship to on-line providers outside of the flags.

The arrival of Airbnb in the market also provides food for thought. Airbnb is a controversial web platform where an apartment owner advertises an apartment online for overnight paying guests. The platform boasts over 800,000 listings in 33,000 cities in 192 countries. Many local governments argue Airbnb allows apartment owners to avoid hospitality taxes or other hotel regulations.

Airbnb’s success demonstrates the difficulty of isolating a hotel’s real estate value by only excluding management and franchise fees. Airbnb doesn’t charge management or franchise fees, yet the service allows owners to increase the income potential of their apartments far beyond market rent.

The debate between advocates and critics of the Rushmore Approach rages on. The challenge for valuing hotel real estate remains. The beauty of the Rushmore Approach is its simplicity, but in the days of the Internet and Airbnb, simplicity may not equate to accuracy. In the wake of the decision from California, the tide may be running out on the Rushmore Approach.

Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it..."

By Elliott B. Pollack, Esq., as published by Hotel News Resource - July 2010

The first step a real estate appraiser must take before valuing a property is to identify its highest and best use (HBU). Indeed, it is a truism that everything in an appraisal flows from this determination.

HBU is "the reasonable, probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible and that results in the highest value." That being said, appraisers rarely conclude that the HBU of a property is different from the current use. Why? Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it. Moreover, the fee structure under which many appraisers function discourages them from taking on this often expansive mission.

Nevertheless, the horrible economic conditions of the last two-plus years have severely undermined the viability of many hospitality properties. As more operations become marginal, appraisers should question whether the profitable years of a particular hotel may be in its past. This is true even if it wouldn't make sense to immediately demolish and construct some other use, or to simply turn the property into a parking lot.

Take the case of a tired, decades-old, un-flagged property that suffers from deferred maintenance. Is it reasonable to conclude that a buyer, or even the current owner, would make the necessary investment to prolong its life much longer? If not, then the appraiser should consider whether the amount of physical, functional and economic obsolescence inherent in the property has numbered its days. Even though operations may continue for another few years, given the lack of alternative uses presently, the effect on appraised value is the same.

With properties struggling to remain viable, the appraiser should research whether or not current hospitality HBU will likely come to an end in the foreseeable future. If that outcome is likely, the appraiser should consider developing a discounted cash flow that incorporates demolition costs and future revenues as a surface parking lot or some other improved use. If similar properties in the area have been demolished or converted to alternate uses, such as housing for senior citizens, then support for a new HBU becomes even stronger.

The appraiser who fails to grapple with the sort of fact pattern set forth above will be doing his client a disservice, and may generate an excessive valuation and an unduly heavy ad valorem tax burden for her client.

Elliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..