How Much Is a Hotel Worth?
By Allison Fogarty, Managing Director of Pinnacle Advisory Group
n the case of property tax assessments in Florida, probably somewhat less than the county property appraiser assumes. A recent court decision invalidated the method used by many county property tax appraisers in Florida to develop "just" values for hotels.
Walt Disney Parks and Resorts successfully argued that the Orange County Property Appraiser improperly considered income from the business activities conducted on the premises in establishing the just value of the Disney Yacht & Beach Club Resort which includes restaurants, retail shops, a spa and convention center in addition to its 1,197 guest rooms.
Florida's Constitution requires annual reassessment to determine the "just" or fair market value of the "Real property" defined as land, buildings, fixtures, and all other improvements to land. Notably, real property specifically does not include personal property and "Intangible personal property" which includes all other forms of property where value is based upon that which the property represents rather than its own intrinsic value.  The Orange County Property Appraiser's staff, in common with most county appraisers, considers eight statutory factors in deriving just value, but places greatest reliance on the Income Approach. Resources available to county appraisers include access to sales tax returns. The Orange County Property Appraiser (Appraiser) also sends an annual income and expense survey to each of the county's numerous hotel properties.
Hotels are complex assets, combing real estate with an operating business that takes considerable marketing, management, and financial skill to operate successfully. In addition, an operating hotel includes a significant investment in personal property - the furniture, fixtures, and equipment, which incudes everything from beds, to stoves, to computers. In general, when hotel properties are purchased as a going concern, investors /purchasers are focused on the overall EBITDA projected for the asset, any capital improvements necessary to achieve that EBITDA, their risk assessments and ROI requirements. Most hotel investors do not allocate yield between realty and non-realty components of the business in making their investment decisions, and most hotel mortgages are package loans which include the FF&E. Allocating the value among the various components is however critical in determining ad valorum taxes, which include real estate taxes, sales tax (on transfers of personal property included in a transaction) and documentary stamp taxes on transfers of real estate.
The Orange County Tax Appraiser used a methodology popularized by Steve Rushmore to remove the income attributed to the business and personal property components from the hotel's overall value. Briefly, the value associated with the management is deducted via a management fee, the value of a brand is attributed to the franchise fees and the value of the FF&E is deducted from the overall capitalized net income.  Disney argued that this approach, adopted by the county appraiser, underestimated the intangible assets associated with the property including the value of the brand/copyright/ goodwill, loyal customers, and an assembled workforce.
The Court's Analysis and Conclusions
The original trial court found that the Appraiser improperly considered income from business activities conducted on the property in establishing the just value of the property, and rejected the Appraiser's contention that the intangible assets identified by Disney did not qualify as intangible property.  The appeal court found that the Appraiser's methodology inappropriately included the value of Disney's intangible business assets in developing its assessment, because it did not provide for adjustments to the gross business income for intangible business value prior to deducting franchise and management fees. The court concluded that "the Rushmore Method ignores the fact that an intangible business value may be directly benefiting a business's income stream" and found the "explanation of how the deductions for franchise and management fee expenses removed the entire intangible business value from Disney's income stream is unconvincing". The Florida Court also noted that a California court had similarly found that an assessment determined by the Rushmore Method had failed to exclude intangible assets in contravention of California law.( SHC Half Moon Bay v. County of San Mateo, 171 Cal. Rptr. 3d 893, 911) (Ct. App. 2014). The Florida Appeals Court also agreed that the space used to generate ancillary income - that is income from sales of food, beverage, retail merchandise and other services (such as the spa) - should be valued differently from the rooms operation. Although it disagreed with some technical aspects of Disney's capitalization of the comparable rental value of the restaurant, retail, and spa spaces, it seemed to agree that Disney's methodology was reasonable.  Ultimately, the Appeal Court has determined that the Property should be reassessed using a methodology consistent with the its opinion.
Since many of the county appraisers throughout Florida use the "Rushmore Method" to assess hotel properties, this decision has wide ranging implications for hotel properties in Florida, particularly full service properties and larger resorts, where rooms revenues represent a smaller percentage of the property's total revenues. The value of some comp services (airport shuttles, concierge services, free parking, luggage handling) offered to guests may be deductible in determining the ADR associated with the real property component of the operation. It is evident, at least in Florida and California, that taxable real estate values heavily reliant upon the Rushmore Method are vulnerable to appeal.
This ruling may also imply that properties that achieve above average results, though a combination of branding, management and service have some justification or arguing that they should not be penalized with higher property taxes for their superior operating performance.
Clearly intangible business value my be in for closer scrutiny in the lodging industry over the next several years.
 Chapter 199 Florida statutes  Rushmore, Stephen. In Defense of the "Rushmore Approach" for Valuing the Real Property Component of a Hotel".  Rick Singh, as Property Appraiser v. Walt Disney Parks and Resorts US, (Fla. 5th Dist. Ct. App. 2020) Pg. 8  Ibid Pg. 11  Ibid, pg. 12  Ibid. 13 -16