In May of this year, in the case of Olympic and Georgia Partners, LLC v. County of Los Angeles,1 the appeals court in California ruled that Los Angeles County overvalued a downtown convention center hotel, co-managed by The Ritz-Carlton and Marriott, by $150 million. California tax assessors appraise hospitality assets, using the income method to calculate the property’s assessed value. There are three items of income that are at issue in the case—the subsidy, the key money, and the hotel enterprise assets. The assessor included all three as items of income in the determination of value, while the taxpayer believes that some of these items should be excluded in the calculation of value under the income method.
In the early 2000s, the city of Los Angeles offered to give the room taxes paid by guests to the developer of the property, Olympic and Georgia Partners, LLC (“the subsidy”). This deal was designed to drive hospitality development in the area and is calculated as worth $80 million today. Olympic and Georgia Partners, LLC also made an agreement with The Ritz-Carlton and Marriott for flag and franchise benefits valued at $34 million and agreed to pay both corporations a percentage of the hotel’s gross revenues and cash flows to manage the property under this agreement. The Ritz-Carlton and Marriott paid Olympic and Georgia Partners, LLC $36 million for entering into the management agreement. This payment is called key money or the discount. The final item is a collection of intangible assets titled “enterprise assets,” consisting of flag and franchise, food and beverage, and assembled workforce.
The court reasoned that the subsidy is an incentive given to the developers, not a stream of income to be considered in the value of the property. The key money or discount again is not a stream of income to the hotel operators, but a price break the managers gave to the hotel to obtain the contract. The court also analyzed the “enterprise assets,” determining that the value of these assets is not removed from the value of the property under a method called the Rushmore method. This method is commonly used in assessing hotels and claims to remove the value of intangible assessments by deducting the expenses associated with those assets.
The Court of Appeals determined that in appraising the value of a hotel property, the county assessor erroneously included income from the following intangible assets: 1) the subsidy, 2) a “key money” payment, and 3) “enterprise assets.” In doing so, the court explicitly rejected the Rushmore method. The California Supreme Court will now review the case to determine if the county improperly included intangible assets accounting for a subsidy from the city, a discount from the hotel companies, and hotel enterprise assets.
Any owner of a hospitality asset in California that has been valued with these and perhaps similar intangible assets should examine whether this decision may support a property tax appeal to reduce the assessment of its asset. The local California and hospitality industry experts at Ryan will continue to monitor the case and the potential impact it will have on the industry. We encourage you to reach out with any questions.
1Olympic and Georgia Partners, LLC v. County of Los Angeles, No. B312862, Cal. Ct. App. (April 7, 2023).
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