LawFlash

California Supreme Court Clarifies Treatment of Intangibles in Hotel Property Tax Valuation

September 29, 2025

The California Supreme Court in Olympic and Georgia Partners, LLC v. County of Los Angeles addressed how certain payments and valuation methods should be treated in property tax assessments of hotel properties. While the court sided with the county on some issues, it rejected the county’s widely used Rushmore Method, marking a significant development for taxpayers.

In Olympic and Georgia Partners, LLC v. County of Los Angeles, the California Supreme Court analyzed the property tax treatment of certain intangible assets for assessing the value of hotel properties. At issue for the court was whether an occupancy tax incentive paid by the City of Los Angeles as a subsidy to the hotel owner and a “key money” payment that the hotel manager paid to the hotel were included in the computation of the value of the real property or were intangible assets excluded from the value of the real property. In addition, the court analyzed whether hotel enterprise assets were intangibles required to be excluded from the real estate value.

COURT’S DECISION REGARDING TREATMENT OF INCENTIVE REVENUES & INTANGIBLE ASSETS

Occupancy Tax Incentive Included in Real Estate Value

The City of Los Angeles had agreed to assign nightly transient occupancy tax revenues, valued at $80 million, to the hotel developer as an incentive to build and operate the hotel. The court held this revenue stream was properly included in the hotel’s real property valuation because it was tied directly to the property’s use and increased income each time a guest rented a room, regardless of the hotel owner or how they run the business.

Key Money Payments Included in Real Estate Value

The hotel management company made a one-time $36 million “key money” payment to secure a 50-year management and branding agreement. The court determined this payment was income derived from the beneficial use of the hotel property and not a non-taxable intangible asset. In other words, these contractual rights were tied to the real property itself—not to the enterprise or business value—and thus were includible in the value of the real property.

Hotel Enterprise Assets Excluded as Intangibles

The court unanimously confirmed that certain “enterprise assets”—including goodwill associated with brand value, value of food and beverage operations, marketing ability, and an assembled and stable workforce—were intangible assets that could not be included in the taxable value of the real property. Importantly, the court rejected the county’s use of the Rushmore Method, under which counties had asserted that deducting management fees from the hotel’s revenue stream accounted for all going-concern value of the non-taxable intangible enterprise assets. The court rejected this categorical approach and held that when a taxpayer identifies and values specific intangible assets, the assessor must provide evidence that the deduction of management fees fully accounts for those intangible values. Accordingly, absent such proof, further deduction of intangible enterprise value is required.

KEY TAKEAWAYS FOR TAXPAYERS

The court’s decision draws a sharper line between taxable contractual rights tied to hotel real estate and non-taxable enterprise intangible assets, with practical impacts across the hospitality and commercial real estate industries. Property owners should consider the property tax impact when structuring contractual incentives since the terms of the agreement may determine whether such revenue streams are included in the real property tax valuation or excluded as intangibles.

Most importantly, based on the court’s rejection of the Rushmore Method, counties are required to exclude broader enterprise assets from the property tax valuation as intangibles. The ruling is expected to reshape valuation disputes for hotels and other income-producing properties in California in favor of taxpayers and may provide significant opportunities for taxpayers to reduce assessments where enterprise intangibles are properly quantified. Taxpayers should review ongoing or future assessments carefully in light of this ruling, as assessors will be required to exclude intangible enterprise assets from the real property tax valuation.

Contacts

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Authors
William H. Gorrod (San Francisco / Silicon Valley)
Marc A. Liverant (Los Angeles)
Cosimo A. Zavaglia (New York)
Scott J. Lee (San Francisco)