Tax case on Disney resort may have significant implications for future hotel assessments in Florida
Tax case on Disney resort may have significant implications for future hotel assessments in Florida
The DCA issued an amended decision in August 2020 which softened many of the criticisms against the Rushmore methodology contained within their original ruling. In the amended ruling, the DCA removed the original statement that the Rushmore method violates Florida law. The amended decision still holds that the Rushmore method improperly includes intangible business value elements that should be removed in this case. However, in the revised ruling, the court stopped short at stating that the Rushmore method violates Florida law. In other words, the court indicated that the Rushmore method should be scrutinized on a case-by-case basis, but did not outright declare that it violates Florida law.
The following is a timeline and more detailed breakdown of the case. Our goal is to examine the rulings of each court in an effort to gain some direction on similar cases moving forward.
Trial court decision (July 2018)
The trial court decision was issued in July 2018 and included the following guidance:
“The main issue in this case is whether it was legally proper to include this ancillary income in determining the just value of said property.” Per the court, “The Property Appraiser’s assessment included approximately $74 million of income from Disney’s sale of food, beverages, merchandise and other services on the hotel property, identified by the Property Appraiser as ‘Ancillary Income’. Unlike rental income, Disney’s income from its restaurants and other profit centers is not revenue attributable to the ‘land, buildings, fixtures, and improvements to land,’ but is rather revenue attributable to Disney’s non-rental business activities on the real property. Under well-established Florida law, the Property Appraiser cannot lawfully include that non-rental income to value Disney’s real property using the income method of appraisal.”
Disney’s appraiser (Todd Jones) calculated the projected rental income that could be generated by the restaurant and retail space using rent comparables. The court adopted this methodology as a way to remove the intangible value associated with business income that extends beyond the basic rental of real property. The court went on to adopt the county appraiser’s (J. Richard Tuck) income figures but replaced the originally concluded ancillary income number of $73,727,719 with $1,743,408, the projected rental income concluded by Todd Jones. This resulted in a substantial reduction in the NOI and greatly reduced the original 2015 assessment. It is worth noting that the trial court entered an amended order after erroneously applying the concluded 80% expense rate against the projected rental income of the retail and restaurant space. In addition, the amended order adopted a lower tangible personal property adjustment as Todd Jones’ adjustment repetitively adjusted for retail and restaurant personal property components (already removed by correcting the ancillary income number).
Additionally, Todd Jones argued that the value of certain items (magic bands, extra magic hours, etc.) should have been deducted from the ADR because they are not real estate related assets. Unfortunately, the court refused to consider this adjustment, since Disney did not complete and return the income and expense survey. The trial court stated “the court finds that Disney is barred from asserting the specific items it now claims should have been considered as intangible assets.” As discussed in the following section, the appellate court deemed this ruling to be an “abuse of discretion.”
The Orange County property appraiser appealed the decision to the 5th District Court of Appeals (DCA).
Appeals court decision (June 19, 2020 and amended August 7, 2020)
The original DCA decision was issued on June 19, 2020. However, after the original opinion was issued, the Orange County Property Appraiser filed a motion for a rehearing. The motion was granted. On August 7, 2020, the 5th District Court of Appeals (DCA) of the State of Florida filed an amended opinion.
The DCA reversed and remanded the 2018 trial decision with instructions, however, this was a technical action as much of the language favored the taxpayer’s methodology. There were two major takeaways from the DCA opinion.
- The use of the “Rushmore” method (specifically regarding ancillary income).
- The DCA stating that the trial court abused its discretion by rejecting the Disney appraiser’s ADR analysis.
The Rushmore Method is a handle that has been given to a hospitality appraisal methodology promulgated by Steve Rushmore, MAI a tenured hotel appraiser and principle of the national hotel consulting firm HVS. The primary assertions of the Rushmore method are that management and franchise fees sufficiently remove all business value from the net operating income. Furthermore, this methodology commonly removes the assessed market value (sometimes called the “eBay” value) of the personal property as a short-hand approach to removing the value these items have on the hotel operation. The Rushmore Method is widely used by taxing jurisdictions in Florida. In the original opinion, the DCA stated that “the Rushmore Method violates Florida law because it does not remove the non-taxable, intangible business value from an assessment.” In the amended opinion, this statement was removed. However, regarding the ancillary income used in the Rushmore Method, the DCA stated that “the trial court did not err in rejecting [the Orange County] Appraiser’s ancillary income figure, derived using the Rushmore method.” The DCA affirmed the trial court’s decision that using ancillary income without adjustment is inappropriate.
In the decision, the DCA referred to the SHC Half Moon Bay v. County of San Mateo case (decided May 22, 2014) as instructive. Therefore, it is worth studying how California assessors adapted to this ruling in order to gain some insight about what to expect in Florida going forward.
Despite the SHC Half Moon Bay v. County of San Mateo case, the California Assessors Association is still promoting the use of the Rushmore Approach. While some assessors have adopted methodologies for separating the intangible component of the going concern, most California assessors still use the Rushmore Approach when assessing hotel properties. Therefore, especially with the amended ruling, it should not be assumed that all the assessors across Florida will completely abandon the Rushmore Approach. However, the use and validity of the approach will need to be more scrutinized, especially in properties with large amounts of ancillary income.
Although the DCA opined that the trial court was correct to reject the county Appraisers ancillary income, there was not sufficient evidence provided to support the alternative figure provided by the taxpayer’s appraiser. The opinion stated “the trial court did not err in rejecting Appraiser’s ancillary income figure, derived using the Rushmore method”, it also indicated that “Jones’s assessment of the rental value of the restaurant, retail, and spa spaces was not supported by competent substantial evidence.”
The Court gave three reasons for rejecting the rental value concluded in Todd Jones’ appraisal.
- The DCA found the rent comparables utilized to determine the rent for the restaurant space to be insufficient and not truly comparable. The DCA indicated that substantial evidence was not provided to show that freestanding restaurants have similar rental rates to hotel restaurants. Additionally, the configuration of the hotel restaurant space and the rent comps was materially different.
- The DCA ruled that Todd Jones’ appraisal did not account for the 10,000 square foot conference center on the property. The DCA noted that “if Disney did hypothetically lease the restaurants on the Property, it would also lease the conference center or would account for the lost value of the conference center in determining its restaurant lease prices.”
- Evidence was not provided for the adjustment made to personal property to remove the personal property from the retail and restaurant space.
The impact of the DCA decision on ancillary income will have a much greater impact on full-service hotels, convention center hotels, resort hotels, and luxury hotels. If this decision is to be utilized to instruct cases moving forward, all hotels with significant ancillary incomes will require specialized analysis and experienced professionals to determine and support a rental rate for ancillary space.
Analysis of intangibles within the ADR
The DCA condemned the trial court’s decision barring Disney from asserting that certain aspects of ADR were attributable to intangible assets. Specifically, the DCA noted that the income and expense survey did not address Disney’s non-taxable, intangible amenities that contribute to the value of the rooms. Therefore, the DCA found that the “trial court abused its discretion by rejecting Jones’s testimony without considering whether the items Jones testified about were subject to the Survey.” Based on this, the Disney appraiser’s testimony regarding the intangibles inherent in the hotel’s ADR should be reconsidered upon remand.
With the amended decision issued, the next step is for the Orange County Property Appraiser to rework the value based on the guidance provided by the DCA. The main sources of contention will be determining a fair market rental value for the ancillary space (restaurant, retail, convention, etc.) as well as the consideration of the ADR bifurcation (removing intangibles from the ADR). If the county’s revised value is rejected by Disney, and it is unable to be worked out through mediation/negotiation, the matter could end up back in trial court.
Overall, while the amended DCA decision does not completely invalidate the Rushmore approach, it does open it up to more scrutiny. Due to this, it is more important than ever to ensure your property tax representatives are experienced and knowledgeable about the complex intricacies of hotel valuation.
As the entire hospitality industry is writhing in the midst of an unprecedented crisis, it is critical that every dollar of market value lost to the crisis be removed from each year’s tax assessment. Our Hospitality Tax practice at Altus Group has been successfully arguing hotel valuation principles with jurisdictions for years. On many cases, our experts have been able to effectively discredit the Rushmore approach. We have achieved substantial tax savings through applying methodologies that effectively isolate a hotel’s real estate value from the going concern. At Altus Group, we continue to monitor and follow cases across the country to ensure our clients are always treated fairly by the taxing jurisdictions.
If you have any additional questions or want any additional information regarding the Disney case or Altus Group, please reach out to our team.