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Suburban hotel whose business value is separated from the real estate in a tax appeal
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Property Tax
How Business Value in Tax Appeals Can Raise Your Tax Bill

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.

By the end of this article, you’ll know:

  • Why operating properties carry more than real estate in their numbers
  • How appraisers pull franchise, management, and FF&E value out of a hotel
  • What gas station, golf course, and hotel files need before the appeal

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.

Is the Assessment Taxing the Business Too?

PahRoo appraises the real estate on its own, with the business and FF&E pulled out and every deduction shown. Tell us about the property and the tax year under appeal.

Isolate the Real Estate

Frequently Asked Questions

Is business value taxed in an Illinois property assessment?

Illinois taxes real property. Its constitution required ad valorem personal property taxes to end by 1979, so the business, its contracts, and its movable equipment should stay out of assessed value. How a specific item gets classified is a question for counsel and the board.

What is the Rushmore approach in hotel tax appeals?

It values a hotel from operating income after deducting a management fee, a franchise fee, and charges for furniture, fixtures, and equipment. The appraiser treats what remains as the income the real estate earns.

Why are hotels, gas stations, and golf courses hard to assess?

Their income comes from a business run on the property, not from rent. An appraiser has to separate what the land and buildings earn from what the brand, management, and equipment earn.

Can the cost approach help in a business value appeal?

Yes, as a cross-check. It builds value from land and improvements, so it leaves the business out by design. It works best alongside income and sales evidence.

What records does a hotel owner need for a tax appeal appraisal?

Start with the franchise and management agreements, three years of operating statements with fees on their own lines, an FF&E list with costs, and any purchase price allocation from a recent sale.

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.

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Former church building on a residential block, a common subject of a special use property appraisal
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Commercial Appraisals
When There Are No Comps for a Mixed-Use or Special Use Building

What do you tell a client who asks what a former church is worth? Or a bowling alley, or a storefront with four apartments upstairs? A special use property appraisal starts where the usual shortcuts stop. There may be no recent sales of anything like it, and no rental market to borrow from. So the report has to show more of its reasoning, and counsel should know where to look.

By the end of this article, you’ll know:

  • What makes a property special use or mixed-use, and why comparable sales fall short.
  • How highest and best use and the cost approach carry the analysis.
  • Which value, interest, and use questions to settle before the engagement letter goes out.

Why a Special Use Property Appraisal Takes More Work

A special use property is a building designed around one purpose. Its layout, structure, or equipment fits that use and little else. Think of a house of worship, a school, a theater, a car wash, a gas station, or a bowling alley. Appraisal texts usually call it special purpose property, but the idea is the same.

The trouble starts with the market. Few buyers want a building they would have to gut, so these properties sell rarely. When one does sell, the price often reflects a conversion or a teardown. Because of that, the sale may say little about what the building is worth in its current use.

So the appraiser widens the search. Sales from other counties or other states may come in, along with older ones. Each needs more adjustment and more explanation. The income approach has limits too, because many of these buildings have no rental market to speak of. Our guide to the three approaches to value explains how each one works on ordinary commercial property.

Highest and Best Use Comes Before Any Number

Every appraisal rests on a use. Highest and best use is the use that passes four tests. It has to be legally permissible, physically possible, financially feasible, and maximally productive. On a special use building, that analysis can decide the whole assignment.

Take a closed church on a residential block. It may be worth the most to another congregation. Or a developer may pay more to convert it to housing, if zoning allows. Sometimes the land is worth more with the building gone. Those are three different values for the same parcel.

The first test is where your work and ours meet. Zoning, a special use permit, legal nonconforming status, deed restrictions, and easements all shape what a buyer can do. The appraiser reports what the analysis relied on. But if the legal status is in doubt, that call belongs to counsel, not to us. In that case the report should state the assumption plainly, so any reader knows what the value depends on.

Federal bank guidance takes the same view. Under the Interagency Appraisal and Evaluation Guidelines, market value should reflect the property’s actual physical condition, use, and zoning as of the effective date. If the highest and best use is redevelopment, demolition and site preparation costs also belong in the analysis.

Where the Cost Approach Earns Its Place

When sales and rents are thin, the cost approach often carries the most weight. It adds land value to the cost of building the improvements new, then subtracts depreciation. On a special use building, depreciation is the hard part.

Physical wear is easy enough to see, but functional obsolescence takes more judgment. A 600-seat sanctuary or a 40-lane bowling center may cost far more to build than the market would pay for it today. That gap has to come off the cost, and the report should say how the appraiser measured it.

Consider a hypothetical single-purpose building. Say the land is worth $600,000 and the improvements would cost $3,200,000 to replace. Physical depreciation of 35 percent takes off $1,120,000. Functional obsolescence then takes off another $480,000. So the improvements contribute $1,600,000, and the cost approach indicates $2,200,000.

In a dispute, that $480,000 line is the one the other side will test. The same goes for the land value, which still comes from sales. The interagency guidelines also expect the appraiser to explain any approach left out. If the report skips sales comparison, it should say why.

Mixed-Use Property Is Several Buildings in One

Mixed-use property has the opposite problem. There is plenty of market evidence, but it belongs to different markets. A building with retail at grade and apartments above answers to retail rents and apartment rents at once. Each part has its own vacancy pattern, expense load, and lease structure.

So the income approach gets built one component at a time. The appraiser estimates net operating income for the retail and for the apartments, then asks who buys the building as a whole. The cap rate should come from sales of buildings with a similar mix. If it can’t, the report should explain how the appraiser blended the rate.

Leases need a close read as well. The interagency guidelines note that a long lease below market rent can make the leased fee worth less than the fee simple. For that reason, the report must state which interest it values.

In Cook County, the mix also drives the tax line. Under the Assessor’s class definitions, revised in December 2024, a mixed-use building with six or fewer units and under 20,000 square feet is Class 2-12. That class sits at a 10 percent level of assessment, while commercial classes sit at 25 percent. Larger buildings can end up split between the two. The Assessor makes that call, but the appraisal still has to model the taxes a buyer would expect.

The Real Estate Is Not the Business

Some special use properties sell as operating businesses. A car wash or a hotel changes hands with its equipment and its customer base. That total is going concern value, and it is not the value of the real estate.

The distinction matters for lending. The same federal guidelines say going concern value, value in use, and value to a specific user may not stand in for market value in a federally related transaction. An appraisal can report them, but only as separate opinions with clear labels.

SBA lending went a step further. In a 2015 notice, SBA said going concern appraisals of special purpose property must allocate separate values to land, building, equipment, and intangible assets. SBA has revised its procedures since then, so confirm the current rule with the lender.

Still, the allocation question comes up in purchase agreements, collateral descriptions, and ownership disputes too. How those pieces get characterized legally is your call. Our job is to support each number.

What Owners and Investors Should Hand the Appraiser

If you own or are buying one of these buildings, the file you hand over shapes the report. So pull these together first.

  • Every commercial lease, plus a rent roll that separates commercial space from apartments.
  • Three years of income and expenses, with shared costs such as taxes and insurance split by component where you can.
  • The certificate of occupancy and any special use permit, variance, or zoning letter.
  • For a single-purpose building, the construction costs or recent contractor bids.
  • A list showing which equipment stays with the building and which belongs to the business.

If your own company occupies the building, put a written lease in place at a rent you can support. Then the appraiser has something to analyze besides your word. Also, before you buy a special use building, price the exit. Ask a contractor what conversion would cost, because the next buyer will ask the same thing.

Settle Four Questions Before the Engagement Letter Goes Out

Most trouble with these appraisals starts before anyone hires the appraiser. So settle four points up front and put them in the engagement letter.

  • Start with the value, whether market value of the real estate, value in use, or going concern.
  • Then name the interest, fee simple or leased fee.
  • Next comes the use, as the property stands today or under a stated zoning or conversion assumption.
  • Finally, fix the date, either today or a past date the matter turns on.

A special use property appraisal that answers those four on page one is far easier to defend. It is also easier to compare when the other side produces its own report.

Drafting Around a Hard-to-Value Building?

PahRoo lays out the highest and best use, the approaches, and any allocation step by step, so counsel can follow how the value was reached.

Discuss Your Commercial Assignment

Frequently Asked Questions

What counts as special use property?

A property built for one purpose, with a design or layout that suits that use and little else. Common examples are houses of worship, schools, theaters, car washes, gas stations, and bowling alleys. Appraisers often call it special purpose property. Because few buyers want such a building as it stands, sales are scarce.

How do you appraise a church or school?

Usually with the cost approach in the lead. The appraiser values the land from sales, estimates the cost to build the improvements new, then subtracts physical wear and functional obsolescence. Sales of similar buildings, often from a wider area, serve as a check. Highest and best use analysis comes first, since conversion or redevelopment may be worth more than continued use.

How is mixed-use property valued?

Mostly through the income approach, built one component at a time. Retail, office, and apartment space each get their own market rent, vacancy, and expense analysis. The appraiser then applies a cap rate supported by sales of buildings with a similar mix, and checks the result against those sales directly.

What is a going concern in appraisal?

It is the value of an operating business together with its real estate, equipment, and intangible assets. Federal bank guidance says going concern value may not be used as market value for a federally related transaction, though an appraisal may report it as a separate, clearly identified opinion.

Why are special use properties hard to value?

They rarely sell, and many have no rental market, so two of the three approaches have little data. The cost approach fills the gap, but it depends on a judgment about how much value the specialized design has lost. That judgment needs clear support in the report.

Appraisals for Buildings That Don’t Fit a Template

Odd buildings are regular work at PahRoo Appraisal & Consultancy. Our MAI and SRA designated team serves Chicago and Cook County, Dallas-Fort Worth, Philadelphia, Phoenix, and Naples. See our commercial appraisal services for the property types we cover, mixed-use and special purpose assignments included. Or start with our Chicago appraisal services page for local scope questions.


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Newly built commercial property valued through a cost approach commercial appraisal
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Real Estate
The Sales Comparison and Cost Approaches in Commercial Appraisal

Two of the three approaches to value get less attention than they deserve. The income approach dominates most commercial reports, so brokers and lenders tend to skim the rest. That is a mistake on the wrong property. A cost approach commercial appraisal is often the only credible path to value on a new building or a special-use facility. And the sales comparison approach tells you whether a buyer’s likely price lines up with what the income says. So here is how each one works, when it leads, and what to check when you read one.

By the end of this article, you’ll know:

  • How the sales comparison approach is adapted for commercial property with thin data
  • What a cost approach actually adds up, and how depreciation is measured
  • When each approach should carry the weight, and how to check that it does

How the Sales Comparison Approach Works for Commercial Property

The sales comparison approach values a property by what similar properties sold for, adjusted for the differences. Residential appraisers usually have several nearby sales from the last few months to work with. Commercial appraisers rarely have that luxury. A submarket may produce four flex-industrial sales in two years, and none of them is a twin of the subject.

So the method bends to fit the data. The search area widens, sometimes to the whole metro. The time window stretches too. Then a market conditions adjustment has to account for price movement between the comparable’s sale and the effective date. The unit of comparison also changes with the property type: price per square foot for industrial and office, price per unit for apartments, price per net rentable square foot for self-storage, price per key for hotels.

Adjustments are where the work lives. Location, size, age and condition, construction quality, ceiling height, loading, parking ratio, and lease status all get weighed. Where possible, paired sales or market participants support each adjustment, not the appraiser’s instinct. A grid of round-number adjustments with nothing behind them is the first thing a reviewer questions. Our overview of the three approaches to value covers how they fit together. This piece goes deeper on the two that get skipped.

One more commercial wrinkle. A sale of a leased building reflects the leases, not just the bricks. A comparable with a credit tenant on a ten-year lease is not the same as a vacant building of the same size. So the appraiser has to know the terms of each sale. Confirming them with a broker or a principal is part of the job, not a courtesy.

What a Cost Approach Commercial Appraisal Adds Up

The cost approach asks a simple question. What would it cost to buy the land and build this property new today, less the value the existing building has lost? The formula runs: site value, plus replacement cost new, plus entrepreneurial incentive, minus accrued depreciation.

Site value comes from land sales, so the cost approach starts with its own small sales comparison analysis. Replacement cost new is the cost to build a modern equivalent with the same utility, not an exact copy. That distinction matters on older buildings. Reproducing a 1920s masonry warehouse with its original details would cost far more than replacing its function with a tilt-up box. Buyers pay for function. Cost figures come from published cost services, contractor bids, and recent local projects. They cover direct costs such as labor and materials, plus indirect costs such as architecture, permits, financing, and lease-up.

Entrepreneurial incentive is the profit a developer would need to take on the project. Leaving it out understates cost. Including it without market support overstates it. Either way, it should be visible in the report, not buried.

The Uniform Standards of Professional Appraisal Practice require a developed cost approach to address site value, cost new, and accrued depreciation. That last item is where most of the judgment sits.

How Depreciation Is Measured

Depreciation in an appraisal is not the tax schedule. It is the gap between what the building would cost new and what it contributes to value today. It comes in three forms.

Physical deterioration is wear. Roofs age, parking lots crack, mechanical systems reach the end of their lives. Some of it is curable, meaning the cost to fix is less than the value it adds back, and some is not. Functional obsolescence is a design problem. Think 14-foot clear height in a market that wants 32 feet, or too little power for modern loads. External obsolescence comes from outside the property line, such as rising submarket vacancy or a highway interchange that moved the traffic.

Appraisers measure depreciation several ways. The age-life method compares effective age to total economic life. Market extraction pulls depreciation out of actual sales. Subtract land value from the sale price, then compare what remains to cost new. Breakdown analysis prices each form of depreciation separately. On a new building the number is small and easy to support. On a 45-year-old building it can exceed half of cost new. The further the estimate has to reach, the less weight the approach deserves.

A Worked Example on an Industrial Building

Consider a 36,000 square foot warehouse, twelve years old, in a stable industrial submarket. The cost approach might run like this:

  • Site value from land sales: $900,000
  • Replacement cost new, including indirect costs and entrepreneurial incentive: $4,200,000
  • Less accrued depreciation at 30 percent: $1,260,000
  • Depreciated cost of improvements: $2,940,000
  • Indicated value by the cost approach: $3,840,000

Now the sales comparison approach. Four metro warehouse sales, adjusted for location, age, clear height, and market conditions, bracket $98 to $112 per square foot. The appraiser reconciles to $105 per square foot, which indicates $3,780,000.

The two approaches land within two percent of each other. That agreement is itself evidence. When the approaches disagree by 20 percent, something is wrong with an input, and the reconciliation should say which one.

When There Are No Comps

Some properties have almost no market. A fire station, a school, a church, or a purpose-built manufacturing plant may trade once in a generation, and often not as the same use. These are special-use properties. Income struggles because there is no rental market. Sales comparison struggles because there are no sales. Cost is usually the only approach with real evidence behind it.

New construction is the other clear case. A building completed last year has minimal depreciation, current cost data, and a land value that can be supported. Lenders financing construction lean on cost for exactly that reason. Still, they expect it to reconcile against the completed value from the other approaches.

Cost also plays a quieter role on ordinary income property. When the income approach lands well below what it would cost to build, new supply is not feasible at current rents. That gap tells a lender something about competitive risk. It tells a broker something about how long existing stock will hold its pricing. An appraiser who develops cost even when it does not lead is giving you that signal for free.

Where Each Approach Earns Its Weight

On a stabilized multi-tenant building, income leads and sales comparison supports it. On an owner-occupied building with an active market, sales comparison may lead. Owner-user buyers think in price per square foot, not cap rate. On a special-use facility or a building still in its first year, cost leads. Our piece on what drives office building value shows the income-led case in detail.

The weighting is a judgment the appraiser has to explain. A report that develops all three approaches and then averages them has not reconciled anything. A report that leans on one approach should say why its evidence is stronger. Read the reconciliation with that question in mind, and you will know quickly whether the report was built or assembled.

Ask Which Approach Carried the Weight, and Why

Before relying on a commercial value, find the reconciliation and check three things. First, was the leading approach the right one for this property type and its data? Second, do the sales adjustments and the depreciation estimate have market support the report actually shows? Third, do the approaches agree, and if not, is the gap explained? If any answer is no, the cover-page number rests on less than it appears to. So ask the appraiser. A good one will walk you through it.

Selling a Building With No Clean Comps?

PahRoo develops the sales comparison and cost approaches with the support shown, so brokers can price with confidence and lenders can see the evidence.

Scope a Commercial Appraisal

Frequently Asked Questions

When is the cost approach used in commercial appraisal?

It leads on new or nearly new buildings, where depreciation is small and costs are current, and on special-use properties such as schools, churches, and purpose-built plants that have few or no comparable sales. On ordinary income property it usually supports the conclusion and serves as a feasibility check against the income approach.

How does the sales comparison approach work for commercial property?

The appraiser locates sales of similar properties, confirms the terms of each sale, and adjusts for differences in location, size, age, condition, lease status, and market conditions. Because commercial sales are scarce, the search often covers a wider area and a longer time period, and the unit of comparison changes by property type.

Why is the cost approach used for special-use property?

Special-use properties rarely sell and rarely rent, so the sales comparison and income approaches have little evidence to work with. The cost approach can still be developed from land sales, current construction costs, and a supported estimate of depreciation, which makes it the most credible path to value for those properties.

How is depreciation measured in a commercial appraisal?

Appraisal depreciation is the gap between cost new and the building’s current contribution to value. It includes physical deterioration, functional obsolescence, and external obsolescence. Appraisers estimate it through the age-life method, market extraction from actual sales, or a breakdown of each form, and the estimate should be supported in the report.

Are there enough comps for commercial property?

Often not many. A submarket may produce only a handful of relevant sales over two years. Appraisers widen the geography, extend the time window, and adjust for market conditions to compensate. When comparable sales are too thin to support a conclusion, the report should say so and lean on the cost or income approach instead.

Sales, Cost, and Income Analysis From One Appraisal Team

PahRoo Appraisal & Consultancy develops all three approaches to value on commercial assignments across Chicago and Cook County, Dallas-Fort Worth, Philadelphia, Phoenix, and Naples, from single-tenant industrial to special-use facilities. Our commercial appraisal services page covers scope and property types, our guide to net operating income explains the income side, and you can contact our team or call 773-388-0003 to discuss a specific property.

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