In New York, and many states around the country, only real property is subject to property tax assessment and taxation. However, many properties’ values are intertwined with business operation. Accordingly, the going concern elements, tangible and intangible, of a piece of property must be identified, allocated and extracted so that only the real property is properly assessed. Many property types have significant going concern elements which should not be assessed under New York law, including, but not limited to hotels, motels, resorts, restaurants, golf clubs, department stores, golf clubs, and self-storage facilities. HKCC is committed to identifying properties with going concern elements and ensuring that this is removed from your real property assessment- and tax bill. The most recent example was its successful litigation on behalf of the self-storage industry.
Going concern value includes both personal property, eg. the furniture, fixtures and equipment in a hotel, and other tangible and intangible elements such as management, franchise/flag, staff, contracts, and good will.
This issue is perhaps most controversial and most often litigated in the case of hotels. No matter which side of the debate one lies, it is beyond dispute that hotels contain a significant amount of going concern. The issue lies entirely with how much and how to identify and extract.
There are two significant, conflicting approaches which often find themselves opposing each other in tax appeals throughout the country: the “Rushmore approach”, developed by longtime hospitality valuation expert Stephen Rushmore from HVS, and the “business enterprise approach” (BEA) developed by David Lennhoff, another prominent hospitality valuation expert.
The Rushmore approach addresses going concern through the deduction of a management and franchise fee as an expense in its income capitalization approach. Lennhoff’s BEA determines this is an inadequate deduction, and makes additional adjustments for start up costs and for other intangible elements driving income, such as goodwill and the enhanced revenue resulting from a particular hotel flag. Both experts also extract the value of the personalty, albeit in different ways.
These approaches have been the basis of much litigation around the country, perhaps most significantly in cases in California and New Jersey. While both states ultimately reached decisions closer to the Rushmore methodology proffered by the assessors, both left the door open for adoption of BEA-like concepts, should more compelling evidence be presented. These concepts have also been the topic of much debate within the upper levels of the appraisal industry, leading to much study, correspondence and review.
HKCC represents several hotel owners and flag operators, so this topic is of great interest to the firm and its clients. While hotel cases have reached the courts in New York, none has specifically dealt with these competing methodologies. As we look at the valuations placed on our client’s hotel properties, it seems that such litigation is inevitable. This issue becomes even more obvious as our clients re-flag and refurbish their hotels.
Bob Katz’ handling of complex hotel valuations over the last 35 years, within New York City, around New York State, and even around the country, made his moderation of the hotel debate presented by the Institute for Professionals in Taxation (IPT), at its annual property tax symposium, a perfect fit. The debate was both energetic and informative, with both HVS and Lennhoff sticking ardently to their respective positions.
Therefore, ultimately, it will probably be the courts who decide what the appropriate method is for determining how to separate going concern from real property. Hotel operators and owners should carefully select experienced counsel when a dispute arises over real property taxes.