United States: Property Tax Assessments

Last Updated: September 30 2015
Article by Peggy Vyborny

Court of Appeals Weighs in on Tax Assessment

Property taxes often represent a significant chunk of an owner's annual expenses. Even when tax bills are high, many taxpayers simply accept the billed amounts calculated by their assessors.

That might not be wise, as a recent case in California illustrates. In SHC Half Moon Bay, Inc. v. County of San Mateo (Cal. App. 2014), the California Court of Appeals, applying property tax laws similar to those in some other jurisdictions, found that a county's assessment improperly inflated a hotel's value — in turn improperly inflating the hotel's property taxes.

Hotel Owner Challenges Property Tax

In 2004, SHC Half Moon Bay purchased the Ritz-Carlton Half Moon Bay Hotel for about $124 million. The purchase price included real and personal property (furniture, fixtures and equipment), as well as intangible assets and rights. As part of an income valuation approach, the San Mateo County assessor assessed the hotel at its purchase price and deducted the value of personal property. It ultimately reached a total value of about $117 million.

SHC challenged the property tax assessment, asserting that it erroneously included the value of more than $16 million in nontaxable intangible assets — specifically, the hotel's assembled workforce, leasehold interest in the employee parking lot, agreement with the golf course operator and goodwill. It argued that simply deducting the hotel's management and franchise fee of $1.6 million was not enough to exclude intangible assets from the assessment, as required by state law. Instead, SHC contended, the assessor was required to identify, value and exclude the value of the intangible assets from the calculation.

The county Assessment Appeals Board upheld the assessment. SHC then sued for a property tax refund, but the trial court also sided with the county. SHC appealed.

Court Sides with Owner

The Court of Appeals began its review by noting that California law mandates that the quantifiable fair market value of intangible assets that directly enhance a property's income stream — such as goodwill, customer base and favorable franchise terms or operation contracts — be deducted from an income stream analysis prior to taxation. (Many county laws similarly provide that property tax valuations should be based on the value of the real estate only.)

The court concluded that the assessor's deduction of the management and franchise fee from the hotel's projected revenue stream did not identify and exclude intangible assets. It pointed out that the assessor's expert had conceded to the appeals board that the assessor's methodology didn't remove all intangible assets and rights.

His report stated that only "the majority of the property's business value" was removed by deduction of the fee. The report also acknowledged that the capitalized value of necessary pre-opening expenses — for example, the cost of assembling and training a workforce, pre-opening marketing expenses and working capital — is frequently deducted as an intangible value of a hotel.

According to the court, the expert's report and testimony demonstrated that the assessor's methodology failed to attribute a portion of the hotel's income stream to the enterprise activity that was directly attributable to the value of the intangible assets and deduct that value prior to assessment. Therefore, the methodology was "legally incorrect."

The court did, however, uphold the Assessment Appeals Board's finding that the fee largely captured the goodwill. Although there may be situations where a taxpayer can establish that the deduction of a management and franchise fee does not capture goodwill, it said, SHC failed to do so here.

Appeal Leads to Savings

As a result of the appellate court's ruling, the board was required to recalculate the value of the property, applying the income method consistently with the court's findings. In other words, it will have to exclude the value of the hotel's assembled workforce, leasehold interest in the employee parking lot and agreement with the golf course operator — which should produce substantial tax savings.

Should You Challenge Your Property Taxes?

Unlike the property taxes at issue in SHC Half Moon Bay, which were the result of an individually tailored assessment, property taxes are often based on estimates derived from mass appraisal techniques. These techniques might prove accurate overall, but the individual estimates do not necessarily reflect specific properties' characteristics.

So don't just blindly pay your tax bill. Take a close look at the factors that were applied to your property and determine whether they actually do apply. For example, you might find errors in the property description, such as square footage, age, condition and construction materials. To contest an assessment, you can present testimony from a professional appraisal, financial data for the property (such as income and cash flow statements), current leases and assessments for similar properties.

If you decide to appeal your assessment, pay attention to the relevant jurisdiction's deadlines. While some jurisdictions have a "rolling" appeals process, many observe strict deadlines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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