California Property Tax Assessment

The California Court of Appeals recently decided a case in which the California Property Tax Assessment on the assessed value of a hotel was in dispute. California property taxes are based on the assessed value of a property. The California appeals court partially sided with the hotel property owners in SRH St. Francis LLC v. City and County of San Francisco because the City of San Francisco improperly included certain intangible assets in the value of the property.

There are two main approaches county assessors may use to value a property. The comparable sales approach, with which most of us are familiar, involves looking at comparable sales to determine the value of a particular property. Under this approach, if a house similar to your house in your neighborhood just sold for X dollars, your house is worth X dollars (more or less).

The second approach is an income-based approach. County Assessors often apply this methodology for commercial properties. Under this approach, a property is valued based on the income stream the property can produce. If a property can generate $50,000 a year worth of income, and the market capitalization rate is 5%, the property will be valued at $1,000,000 ($50,000 divided by 5% equals $1,000,000).

Under California law, the values of certain intangibles like franchises or going concern value are generally excluded from the assessed value of a property for property taxes. For example, an unremarkable building in an undesirable location may be valuable because it happens to house a successful fast-food franchise. A county assessor must exclude the intangible value of the fast-food franchise when assessing its value for property taxes. However, intangibles may be included in the assessed value of a property if “necessary to put the property to good use.” 

The SRH St. Francis case involved the property tax valuation of a hotel in San Francisco. The San Francisco County Assessor valued the hotel at over $700 million. The property owners argued the county assessor improperly included a management agreement, income from cancellations, income from laundry services, and income from in-room movies into the valuation of a hotel.

The court sided with the property owners because the county assessor failed to properly exclude the value of the management agreement from the assessed value of the hotel. The assessor treated the management fees the hotel paid under the management agreement merely as an expense to be deducted from the hotel’s income when determining the hotel’s value. The court ruled the management agreement could be a profit center for the hotel and determined the management agreement could generate net income for the hotel and this net income should be excluded from the hotel’s income. The property owner in the case claimed the management fees generated a 20% rate of return which should be excluded from the hotel’s income for valuation purposes.

The court also sided with the property owners in determining income from the laundry services and in-room movies should have been excluded from the income used for the hotel valuation. According to the court, these services were a side-business that did not relate directly to the hotel’s property. The court did rule that income from cancellation fees should be considered when valuing the hotel because the cancellation fee income “relates directly” to the hotel property.

When it comes to California Property Taxes, determining the assessed value of a property is not always as simple as looking at a couple comparable sales. Property owners may want to scrutinize any assessments to determine if they improperly include intangibles.

RJS LAW helps clients with all types of tax matters including property tax matters. Please contact us online at RJS LAW or phone at 619-595-1655 for a free no obligation consultation.

Written by Joseph Cole, Esq., LL.M.