Florida assessors will have to fundamentally change the way they value hotels, golf courses, senior living facilities, and other franchised properties managed by third parties following a landmark ruling by Florida’s Fifth District Court of Appeal.
In Singh vs. Walt Disney Parks and Resorts, the court found the so-called Rushmore appraisal method is illegal. Specifically, the appellate court concluded that the Rushmore method used by the Orange County Property Appraiser “violates Florida law because it does not remove the nontaxable, intangible business values from an assessment.”
The dispute began in 2015, when the tax assessment on Disney’s Yacht & Beach Club property increased by 118% from the previous year. The property includes 65 acres of land, featuring 1197 guest rooms, a 70,000 square foot conference center, dining outlets, retail stores, a spa, and other recreational amenities. It is located adjacent to Epcot, on a lagoon, near several other hotels.
The appraiser assessed the value of the property at $336,922,772 as of January 1, 2015. Disney challenged the assessment arguing that the assessment did not comply with Florida Statutes and professionally accepted appraisal practices because it exceeded market value and erroneously included the value of certain intangible property.
At trial, the parties agreed that the income approach to value was a professionally accepted appraisal practice and provided the most reliable indicator of value, but they disputed the proper methodology for performing such an assessment.
The appraiser’s main witness was Richard Tuck, the senior valuation expert from appraiser’s office, who had performed the initial assessment of the property. Tuck testified that he used the income approach, also known as the Rushmore method. Tuck multiplied the potential room income by a 75% occupancy rate. He then calculated what he called “ancillary income,” which he testified was all income that is not from room revenue.
Tuck added the effective room income and ancillary income, then deducted an 80% expense factor from that value, consisting of 70% hotel operation expenses, a 4% management fee expense, and 6% for the franchise fee expense. He explained that deducting a management and franchise fee removed the business-related income from the gross ancillary income figure. Tuck did not make adjustments to revenue for any amenities, or for the fact that the property is Disney-branded.
In its rebuttal case, Disney presented Dr. Henry Fishkind, an economist with experience in business valuation, who stated that the Rushmore method was inconsistent with economic theory and market behavior and that it underestimated business value, thereby overestimating the remaining value of the real estate.
Dr. Fishkind said the Rushmore method ignored certain aspects of the hotel business, such as goodwill, loyal customers, and an assembled workforce. He gave examples of the Disney brand, Disney characters, ability to use the theme parks, character breakfasts, transportation, and high-quality service as some of the values not recognized by the Rushmore method.
Disney’s appraisers, Todd Jones and Michael Mard, identified and quantified numerous intangible assets deemed nontaxable under Florida law. The court concluded that taxable value for retail and restaurant space within the resort should be predicated on proxy rents for comparable space in other hotels, and not on the business income reported in the property’s financial statements.
The Rushmore Method claimed to remove the value of intangibles from an income approach by simply deducting the franchise and management fees as operating expenses, explained Rob Kelley with the law firm Hill Ward Henderson, who represented Disney. The fallacy of this theory is that the deductions do not account for a return on those expenses, he said.
“Under the Rushmore Method, a hotel owner would presumably enter into a franchise agreement and hire a management company expecting only to increase gross revenue by the exact cost of those services. The court concluded that made no economic sense. The owner would not reasonably undertake those extra expenses unless he/she thought revenues would increase greatly in excess of the expense,” Kelley said.
The trial court found that appraiser improperly considered income from the business activities conducted on the property in establishing its assessed value. It also rejected the appraiser’s contention that the intangible assets identified by Disney did not qualify as intangible property saying the appraiser was “essentially asking this Court to unlawfully expand the statutory definition of ‘real property’ to include something other than land, buildings, fixtures, and other improvements to land.”
Moreover, it ruled that even if the Rushmore method was a professionally accepted appraisal practice, it could still not be used in a manner that violated Florida law. The trial court found that the testimony demonstrated that the restaurants and retail spaces operate independently from the room rentals. Thus, it adopted the appraiser’s effective gross room income but used Disney’s figure for the value of the property based on the restaurant, retail, and spa spaces. It concluded that the just value of the property was $209,156,074.
The Appeal Court decision states, “While we would have preferred drafting an opinion that would resolve the parties’ dispute, we find the record evidence is insufficient for us to do so. Accordingly, we reverse and remand to the trial court, with instructions that it remand to the appraiser for a reassessment of the property.”
The controversial Rushmore Method has been used throughout the country by a number of assessor’s offices but has been judicially rejected in other states. Now the State of Florida is added to the list of states that consider Rushmore an improper valuation method for hotels and other properties with significant ancillary income.