Income Approach Requires Assessors To Identify And Deduct Specific Intangible Assets

When the “fair market value” of real property is assessed in California, intangible assets and rights must be deducted in determining taxable value. In SHC Half Moon Bay v. County of San Mateo (2014) 226 Cal.App.4th 471, the Court of Appeal concluded that the approach used to assess the value of the Ritz Carlton Half Moon Bay Hotel violated state law because it failed to remove certain intangible assets prior to assessment.


The Ritz Carlton Half Moon Bay (“the hotel”) is located on approximately 14 acres of land on the bluffs of the Pacific Coast. In 2004, SHC Half Moon Bay, LLC (“SHC”) purchased the hotel for $124.35 million. The purchase price included real property, personal property (e.g., furniture, fixtures, equipment), and intangible assets and rights. The San Mateo County Assessor (“Assessor”) assessed the hotel pursuant to the income approach to value and deducted management and franchise fees to remove the value of intangible assets. The Assessor valued the tangible taxable assets at $116.98 million.

SHC challenged the income approach used by the Assessor, alleging that it failed to include goodwill. SHC further argued that other intangible assets should be included in the valuation, such as the hotel’s assembled workforce, the hotel’s leasehold interest in the employee parking lot, and the hotel’s agreement with the golf course operator. SHC argued that the proper method to exclude intangible assets was to identify, value, and deduct specific categories of assets in accordance of Section 502 of the Board of Equalization’s Assessors’ Handbook (“Handbook”). SHC argued that the Handbook is “completely at olds” with the Assessor’s appraisal because the appraisal did not identify specific categories of assets. SHC calculated the hotel's taxable tangible assets at $99.5 million. The great majority of the difference between the SHC assessment and the Assessor’s valuation was due to SHC’s calculation of $14.15 million in goodwill additional to the management and franchise fees deduced by the Assessor.

The San Mateo County Assessment Appeals Board (“Board”) upheld the assessment. The Board noted that the Handbook does not bind assessors and that assessors’ determinations are granted deference if assessors provide evidence to justify their analysis. The Board further agreed with the Assessor on valuing goodwill at $0 because the deducted franchise fees already captured goodwill.

SHC appealed the Board’s decision to the Superior Court. The Superior Court upheld the Board’s decision, finding that it fully complied with the requirements of the Revenue and Taxation Code. SHC appealed.


The Court of Appeal (“Court”) partially reversed the Board’s decision. The Court held that the “de novo” standard of review, which provides no deference to the Board or the Assessor, applied to SHC’s attack on the legal issue of whether the Assessor properly applied the income approach. Regarding this issue, the Court held that the Assessor’s failure to identify and deduct the value of specific intangible assets in determining taxable value violated state law. The Court further noted that although the Handbook is not law, it is “accorded great weight” by the courts. However, the Court deferred to the Assessor's and the Board's factual determination that the deduction of the management and franchise fees sufficiently captured and accounted for the hotel’s goodwill. On the issue of goodwill, the Court found that substantial evidence supported the Assessor's and Board’s determination.

What This Means To You

This decision explains that the proper application of the income approach to value requires an assessor to specifically identify and exclude intangible assets prior to assessment. The decision also clarifies that a court will only provide deference to an assessor’s factual determinations, but not necessarily to the assessor's application of law to those facts.


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