Tag: hotel tax appeal

When a hotel, gas station, or golf course appeals its assessment, the first question is what the number is really taxing. These properties earn money from a business that runs inside the building, and that income can drift into the value of the real estate. For property tax attorneys, sorting out business value in tax appeals is usually the center of the case.

Why Business Value in Tax Appeals Shows Up on Operating Properties

Most commercial property gets valued from the rent its space earns. Hotels, gas stations, and golf courses work differently, because their revenue comes from a business operating on the property.

That revenue reflects the land and buildings. But it also reflects a brand, a management team, equipment, and contracts. In most places, the assessment should reach only the first part.

An IAAO committee guide on intangible assets makes the same point. It notes that in most jurisdictions, intangible assets are not taxable as part of the real estate assessment. It also sorts all property into three types, real property, tangible personal property, and intangible property.

So the appraisal question is narrow. What is the real estate worth with the business taken out? Bruce Jones, MAI, covers that split in our Appraisers on Purpose episode on going concern appraisal.

What Illinois Taxes and What It Leaves Out

Illinois draws part of the line in its constitution. Article IX, Section 5 required the General Assembly to abolish all ad valorem personal property taxes by January 1, 1979. So the assessment covers real property. The Property Tax Code defines that as land, buildings, structures, improvements, and other permanent fixtures (35 ILCS 200/1-130).

The value standard is fair cash value. Section 1-50 of the code ties it to a sale between a willing buyer and a willing seller, not under duress. A franchise, a management contract, and movable equipment have no place in that number.

Still, where an item falls is not always clean. Permanent fixtures count as real property, and Section 24-5 keeps items in the class they held before 1979. Whether a fuel canopy or a built-in kitchen is real or personal property is a legal call for counsel and the board. The appraiser measures each piece once that call is made.

Other states draw these lines in their own ways. If your clients own operating properties in more than one market, PahRoo also appraises in Dallas-Fort Worth, Philadelphia, Phoenix, and Naples, under each state’s rules. In Cook County, our Chicago appraisal team handles the local work.

How Appraisers Take a Hotel Apart

Hotels get valued from their operating income, so the business has to come out of the math. The common tool is the management fee method, often called the Rushmore approach. The appraiser deducts a management fee and a franchise fee as expenses. Then a reserve and a return on the furniture, fixtures, and equipment take the FF&E out.

Not everyone thinks that goes far enough. Some appraisers argue that workforce, start-up costs, and other intangibles need their own deductions, an approach often called business enterprise value. The IAAO guide, written for assessors, favors the fee method and notes that courts have mostly disallowed those extra deductions. In practice, expect the method itself to be contested.

A recent Illinois decision shows the fee method at work. In a 2023 Property Tax Appeal Board decision on a 74-room hotel in Rantoul, the taxpayer’s MAI appraiser reconciled the property at $6,100,000. The appraiser then deducted $455,000, made up of $250,000 tied to the FF&E and $205,000 tied to the business through its franchise and management fees. That left $5,645,000 for the real property.

The assessment reflected about $6.77 million, and PTAB reduced it to the appraised figure. One caveat applies here. The appraisal was the only market value evidence in that record. For how the underlying income model works, see our guide to the income approach for commercial property.

Gas Stations and Golf Courses Need Their Own Split

A gas station with a convenience store mixes real estate with a retail business. The IAAO guide notes that properties earning revenue from a business on site, such as minimarts, often sell with intangible business assets included in the price. Supply contracts and franchise agreements also appear on its list of potential intangible assets. So a sale price or an income figure may carry more than the site and its buildings.

Golf courses blend the same way. Under the IAAO guide, objects permanently affixed to land or buildings usually count as real estate, while customer relationships and contracts sit on its list of potential intangible assets. A course’s improvements fall on one side of that line, and its member relationships and operating contracts fall on the other. The guide lists both convenience stores and golf courses among property types that may carry intangible value.

For these properties, the cost approach makes a useful cross-check. It builds value from land and improvements, so it leaves the business out by design. The IAAO guide notes that courts have often favored it when intangibles complicate the income approach. Sales still matter too, but each comparable sale should be checked for what the price included. Our piece on special use property appraisal covers why these buildings have so few clean comparables.

For Hotel Owners, Pull These Records Before the Appeal

If you own a hotel and your attorney is preparing an appeal, the appraiser will need more than a profit and loss statement. Start with the franchise agreement and the management agreement, since the fees in them drive the deductions. Then pull three years of operating statements with management, franchise, and reserve expenses on their own lines.

Next, build a list of the furniture, fixtures, and equipment with purchase dates and costs. If you bought the hotel, find the purchase price allocation and any IRS Form 8594 filed for the sale. The IAAO guide points to that form as evidence of how a price was split.

Finally, if the hotel is in Cook County and you run it yourself, ask your attorney whether the Board of Review treats it as owner occupied. A Board of Review appeal checklist says owner-occupied commercial property needs an appraisal completed within the past three years.

Settle the Split Before the Hearing Date

For attorneys, the useful move is to agree on the allocation method with the appraiser at engagement, not after the board’s evidence arrives. Ask which method will handle the business and the FF&E, whether a cost approach will back it up, and how each comparable sale was verified. Those answers shape the record you carry from the Board of Review to PTAB. A reduction is never guaranteed, but a clean split gives the board something it can test.

Real Estate Values Built for the Appeal Record

PahRoo Appraisal & Consultancy appraises commercial and special use property for property tax attorneys and owners across Cook County and the Chicago area. Michael Hobbs, MAI, signs our Illinois reports and is available to testify on them. See our commercial appraisal services and our Chicago appraisal coverage.