The income approach, however, does give due weight to the realities of the hotel marketplace and to the considerations that active
participants deem important (that is, income generation). As such, the income approach is recognized to be the best method and is
usually given the greatest weight.
Under this approach, revenues are calculated on the basis of average room rates over a period of
time, adjusted for stabilized occupancy rates, which are predicated upon the hotel’s recent operating history. Because a hotel’s
income is derived from the total assets of the business (including real property, tangible personalty, and intangible elements), when
attempting to determine value for real property tax purposes, all components of net operating income not attributable to the real estate
must be isolated and deducted.
This process requires two key steps.
First, the business component must be separated from the real property interest. This is often
accomplished by extracting the management fees paid by the owner pursuant to a management contract from the hotel’s revenues.
Second, as only real property is taxable, the value of the hotel’s personal property (known as Furniture, Fixtures and Equipment, or
“FF&E”) must also be deducted.
This last step is, however, the subject of much debate. There are two methods recognized and utilized by the appraisal community to
perform this critical calculation: the “Rushmore method” and the “Business Enterprise Approach” (“BEA”). These methods differ in that the
BEA is substantially more aggressive in attributing value to the non-taxable personal property components of the hotel, and therefore its
application typically results in a lower value for tax assessment purposes.
In the first instance, the Rushmore method excludes the value of and the income derived from FF&E.
In addition, “separate
adjustments are made to provide for the periodic replacement of the personal property (the return of FF&E) and also for a yield on the
investment in personal property (the return on FF&E).”
The BEA, on the other hand, goes further by also excluding the value attributable to the hotel franchise, or “flag;” various residual
intangibles, including goodwill and business and credit relationships; and developmental outlays associated with the start-up of the hotel
business. Due to the aggressiveness of this approach, it has been criticized for “moving a disproportional share of the hotel’s value
out of the real property component and into the business and personal property components, thereby significantly reducing a hotel’s
property tax assessment.”
Alternatively, and much to the chagrin of hotel owners, the Rushmore method has been embraced by courts as the appropriate
methodology for determining fair valuation in the real property tax context. For example, Stephen Rushmore, the brainchild of the selftitled
method, was appointed by a Michigan bankruptcy court to appraise the hotel property in question. Additionally, a New York
bankruptcy court expressly described Mr. Rushmore as “a well recognized and eminent expert in the field of hotel appraisers.”
Moreover, both parties’ experts in a District of Columbia matter recognized Rushmore as a leading authority in the field of hotel
valuation. Furthermore, an appellate court in Kansas affirmed the trial court’s finding that the Rushmore method was appropriate in
arriving at a fair market value of the hotel property in question.
New Jersey courts first adopted the Rushmore approach in 1989 in Glenpointe Assocs. v. Teaneck Twp. where Stephen Rushmore
testified as an expert witness, and the court cited Rushmore’s hotel valuation guide as authority on this very subject matter. Since
then, the Rushmore method has been accepted in a number of New Jersey matters. For example, in Prudential Ins. Co. v. Twp. of
Parsippany-Troy Hills: While the parties disputed the appropriate stabilized room revenue, capitalization rates, and the value of the return
on FF&E, both parties’ appraisers agreed that the Rushmore method was appropriate to determine the relevant net operating income
attributable to real property.
However, 'Chesapeake Hotel' perhaps best demonstrates the wide variance of value that can result from employing these different
approaches. There the court recognized that the BEA method resulted in a final taxable value of 36% of the hotel’s total value.
Alternatively, application of the Rushmore method yielded a valuation at approximately 60% of the total hotel value. Although the
'Chesapeake Hotel' court recognized that its decision “should not be understood as a definitive pronouncement on appraisal practices
designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments,” it does
echo a long line of cases which have found the Rushmore method preferable to the BEA in determining the “value” of a hotel for real
property tax purposes.
The consistent utilization of the Rushmore method by appraisers and its widespread acceptance by the courts therefore signifies its
established position as the leading methodology in the realm of hotel property tax valuation. While the BEA may be more useful in
determining the real property component of certain kinds of structures (for example, multi-use properties, supermarket chains,
and shopping malls(2)), hotels appear to fall into a category of their own. While hotel owners should continue to attempt to employ
elements of the BEA in their challenges to lower the value of the real property component of hotel income, they must be mindful that it
may very well be an uphill battle considering the strong preference courts have afforded the Rushmore method.
