When Contractual Intangibles Generate Property-Use Income: Occupancy-Tax Rebates and Hotel “Key Money” May Be Included in Ad Valorem Valuation; Enterprise Intangibles Still Must Be Backed Out

Introduction

In Olympic and Georgia Partners, LLC v. County of Los Angeles (Cal. Supreme Ct. Aug. 28, 2025), the California Supreme Court clarifies a recurring fault line in property tax law: how to distinguish income “from the property itself or from the beneficial use thereof” from income “derived in large part from enterprise activity” when applying the income capitalization method to hotels and similarly operated properties.

The case involved two unusual revenue streams tied to the development and operation of a major convention center hotel:

• A City of Los Angeles agreement assigning to the developer a 14% transient occupancy tax (TOT) collected on nightly room charges for a defined period and amount cap (present value stipulated at $80 million).
• A $36 million “key money” payment made by Marriott to secure a 50‑year right to manage and brand the property.

The Assessor included both in the hotel’s income, and offset “enterprise” intangibles (brand/flag, food and beverage operations, workforce in place) solely by deducting hotel management fees under the “Rushmore Approach.” The Board agreed; the trial court upheld inclusion of the two streams but remanded for further work on enterprise intangibles. A divided Court of Appeal excluded the TOT and key money; unanimously remanded on intangibles. The Supreme Court reverses on the income streams and affirms the remand on enterprise intangibles.

Summary of the Opinion

The Court (Groban, J., joined by Guerrero, C.J., Corrigan, and Jenkins, JJ.) holds:

• Revenue from the City’s occupancy‑tax assignment and Marriott’s key money is properly included in the hotel’s income because each represents “earnings from the [taxable] property itself or from the beneficial use thereof,” even though they flow through intangible contracts.
• Elk Hills Power, LLC v. Board of Equalization (2013) does not impose a categorical exclusion for all income that passes through or is traceable to intangible rights; the controlling question is whether the income is primarily attributable to enterprise activity or to property use.
• By contrast, the value of three undisputed enterprise intangibles—Marriott flag/franchise goodwill, food and beverage enterprise operations, and assembled workforce—must be removed from the property’s income; the Assessor’s blanket reliance on management‑fee deductions (the “Rushmore Method”) without empirical proof was insufficient. The matter is remanded to the assessment appeals board for valuation and deduction of those intangibles.

Separate writings:

• Liu, J., concurs/dissents: agrees the occupancy‑tax proceeds are includable but would exclude key money for reasons in Kruger’s opinion; joins the remand on enterprise intangibles.
• Kruger, J., concurs/dissents (joined by Evans, J.): would exclude both the occupancy‑tax and key‑money amounts as enterprise‑side income; agrees with the remand on enterprise intangibles.

Analysis

Precedents Cited and How They Shaped the Decision

• Roehm v. County of Orange (1948) 32 Cal.2d 280: Intangibles (unless specifically taxable) cannot be directly taxed, but their presence can be assumed insofar as they enable the property’s beneficial use and affect value. The Court reaffirms Roehm’s core distinction and harmonizes it with statutes (§ 110(d), (e); § 212(c)).
• Elk Hills Power, LLC v. Board of Equalization (2013) 57 Cal.4th 593: Clarifies two poles. Income attributable to enterprise intangibles (goodwill, franchise terms, beneficial operating contracts) must be excluded, but income from the property’s beneficial use can be included, and necessary intangibles can be “assumed.” The Court emphasizes Elk Hills does not create a per se exclusion for every income stream tied to an intangible; the question is attribution—to enterprise activity or to property use.
• American Sheds, Inc. v. County of Los Angeles (1998) 66 Cal.App.4th 384: A landfill’s permits affect capacity and income; their presence may be assumed, and their effect on property-generated income may be recognized without directly valuing the intangible permit. This supports treating the occupancy‑tax arrangement as enhancing property‑use income.
• De Luz Homes v. County of San Diego (1955) 45 Cal.2d 546: Where a government contract guarantees stable, predictable income (military leases), “actual income” under the agreement can be used in the income method because it is attributable to property use, not enterprise acumen. The Court analogizes TOT and key money to contractually assured, property‑use income streams.
• Freeport-McMoran Resource Partners v. County of Lake (1993) 12 Cal.App.4th 634; Watson Cogeneration Co. v. County of Los Angeles (2002) 98 Cal.App.4th 1066: SO4 contracts guaranteed above‑market power purchase revenues to qualifying facilities developed under policy incentives; those revenues were includable as they represented the “means by which [the] properties are put to beneficial use.” The Court finds these cases closely analogous to the City’s occupancy‑tax assignment: a government-facilitated contract that makes an otherwise uneconomic, publicly beneficial project viable and assures a predictable income increment from property use.
• SHC Half Moon Bay, LLC v. County of San Mateo (2014) 226 Cal.App.4th 471; SHR St. Francis, LLC v. City and County of San Francisco (2023) 94 Cal.App.5th 622: On the Rushmore Method and enterprise intangibles. These cases require evidence that management‑fee deductions actually capture the fair market value of identified intangibles; formulaic deductions are not per se sufficient. The Court adopts this case-by-case evidentiary approach and affirms the remand.
• California valuation rules (Cal. Code Regs., tit. 18, rule 8): Generally value encumbered property as if unencumbered at market rent; above/below‑market leases are enterprise side. The Court distinguishes the occupancy‑tax assignment from private, manipulable leases, aligning it with government-facilitated income guarantees in De Luz, Freeport, and Watson.

Legal Reasoning

1) Governing framework

• Constitutional baseline is fair market value; intangibles generally are exempt from direct ad valorem taxation.
• Statutory harmonization:
  • Section 110(d): Remove direct value of intangible assets/rights and enterprise income when using unit/income valuation.
  • Section 110(e) and § 212(c): Assume the presence of intangibles necessary to put property to beneficial use; consider earnings from property use.
• Key test from Elk Hills: Is the revenue primarily attributable to enterprise activity, or is it income from the property itself/its beneficial use?

2) Occupancy-tax assignment is taxable property-use income

• Substance: Each room night produces an extra 14% remitted to the owner; the increment exists regardless of who owns or operates the hotel; it is tied to use of the property as a hotel.
• Government-facilitated: Like SO4 PPAs and De Luz government guarantees, the arrangement assured stable, predictable property‑use income and was integral to making a high‑public‑value, otherwise uneconomic asset feasible.
• Ongoing beneficial-use obligations: Payment tied to continued hotel use and a room‑block agreement for conventioneers; the arrangement shapes the property’s beneficial use and its income profile.
• No contradiction with above/below‑market lease cases: Private lease terms are enterprise-side and manipulable; here the arrangement is publicly structured, integral to financing, and not susceptible to private manipulation.
• Transferability immaterial: Assessment is of the property’s fair market value (sum of interests); private assignment of income is a matter for private allocation, not valuation methodology.
• “Subsidy” label not controlling: California has no categorical rule excluding all incentives. The Legislature expressly excluded particular incentives (e.g., § 402.95 for low-income housing tax credits), confirming the general rule is contextual.
• Purpose vs. structure: Even if intended to defray construction cost, what matters is how the revenue is generated (as a per‑use increment) and that it is expected from property use over time.

3) Key money is taxable property-use income

• Nature of the payment: A management company pays the owner to secure rights to occupy, manage, and brand the property—akin to a lump‑sum rent-like payment for rights to conduct commercial activities on the premises and fly the flag.
• Market practice: Evidence showed that owners of hotels with desirable physical attributes routinely receive key money; if unencumbered, this hotel would command similar key money from the market. That ties the payment to the property’s physical desirability rather than to the manager’s operational prowess.
• Distinct from management services: The Court carefully separates (i) the owner’s income from conveying rights of beneficial use (key money) from (ii) any enterprise value attributable to the manager’s skill (which must be excluded by valuing and deducting enterprise intangibles).
• One-time vs. recurring: For valuation, what matters is market expectation for an unencumbered property. If the market would pay comparable key money for the property’s beneficial use, the present value of that expectancy belongs in the income model; refund obligations under a particular contract do not control fair market valuation.

4) Enterprise intangibles must be valued and deducted; management-fee deduction is not automatically sufficient

• Undisputed intangibles: Marriott flag/franchise goodwill, food & beverage enterprise operations, and assembled workforce are nontaxable enterprise assets; their value must be removed.
• Evidence requirement: The assessor must present empirical evidence that management‑fee deductions fully capture the value of identified intangibles. Citation to the Rushmore Approach, without more, is insufficient.
• Remand scope: The Board must quantify and deduct the value of the identified intangibles; the County may present additional evidence on remand.

The Separate Opinions

• Justice Liu concurs/dissents: Inclination to treat occupancy‑tax proceeds as property‑side but key money as enterprise‑side income; reiterates the complexity of characterizing income streams that intertwine property use and business arrangements.
• Justice Kruger (joined by Justice Evans) concurs/dissents: Would exclude both streams. She views the TOT assignment as financing assistance for construction (enterprise side, even if funded through per‑use remittances) and the key money as a bargaining tool in a managerial services contract (enterprise side), not akin to rent payable for a possessory property interest. She urges possible legislative clarification given persistent uncertainty at the boundary between §§ 110(d) and 110(e).

Impact and Practical Implications

What this decision does

• Clarifies that not all income associated with an “intangible” must be excluded. The dispositive question is whether the income is primarily attributable to the property’s beneficial use versus enterprise activity.
• Validates inclusion of two prevalent hospitality revenue mechanisms in California valuations:
  • Publicly structured TOT rebates/assignments that increment room-night revenue and are integral to a project’s feasibility and continued use.
  • Key money as a market-expected, property-tied payment to secure management/branding use rights, assuming the owner can demonstrate the market would pay it for a property with similar physical attributes.
• Reins in blanket reliance on the Rushmore Approach. Assessors must show, with evidence, that management-fee deductions fully capture identified enterprise intangibles; otherwise, those intangibles must be separately valued and deducted.

Who is affected

• Assessors and assessment appeals boards: Must analyze whether contractual revenue streams enhance income from property use (in) or enterprise activity (out). Must build records on market practice for key money and on the existence and value of enterprise intangibles.
• Hotel owners, developers, and management companies: Should expect inclusion of TOT‑style per‑use revenue adders and market‑expected key money in assessed value. Should be prepared to document and defend deductions for brand/flag goodwill, food & beverage enterprise value, and workforce in place with empirical support.
• Local governments: Public financing mechanisms that allocate per‑use revenues (e.g., TOT sharebacks) may increase assessed values. Structure and documentation matter; arrangements that ensure stable, per‑use income tied to beneficial use will likely be includable.
• Other asset classes with government‑facilitated revenue (e.g., qualifying energy facilities with PPAs, publicly subsidized venues): The decision reinforces De Luz/Freeport/Watson principles; carefully structured, property‑use revenue guarantees can be includable.

Open questions

• Line-drawing remains fact-intensive. The Court eschews categorical rules. Other subsidies (production tax credits, grants, fee waivers) may have different tax consequences depending on whether they are per‑use, property‑tied revenue or purely financing aids.
• Modeling key money in capitalization: The opinion treats key money as a property-use revenue expectation for unencumbered property. Appraisal practice must translate that into present value without double-counting, and reconcile one-time payments with stabilized income models.
• Legislative clarification: Justice Kruger flags persistent ambiguity at the enterprise/property boundary for hotels; the Legislature could specify treatment of common hospitality and public-incentive arrangements.

Complex Concepts Simplified

• Income capitalization method: Value equals the present worth of expected future net income from the property. Start with income expected from property use, subtract enterprise‑side income, then apply a capitalization (discount) rate.
• Property-use income vs. enterprise income:
  • Property-use income: Rent; room-night charges; per‑use increments payable because guests use the property; payments a third party makes to obtain property use rights (akin to rent/key money). Include these.
  • Enterprise income: Gains from brand goodwill, superior management, workforce efficiencies, favorable private contracts that enhance operations rather than the property’s ability to yield income. Exclude these.
• Unit valuation and intangibles:
  • Section 110(d): Don’t directly tax intangibles or enterprise value in the unit value.
  • Section 110(e)/§ 212(c): Assume necessary intangibles (e.g., licenses) so the property is valued in beneficial use; consider the effect on property income, but don’t sneak in the direct value of the intangible itself.
• Rushmore Approach: A hotel valuation method that deducts management and franchise fees to remove enterprise intangibles. The Court says this deduction is not automatically enough; empirical proof is required that the deduction fully captures identified intangibles.
• Key money: Up‑front payment by a manager or brand to secure long‑term management/branding rights. If the market would pay such sums for rights to a property with the subject’s physical qualities, it is treated like property-use income (similar in concept to prepaid rent).
• TOT assignments: Agreements allocating a share of occupancy taxes back to the owner per room night. If structured as a per‑use increment that persists independent of operator and assures stable income from property use, the increment is includable.

Practical Guidance and Checklists

For assessors

• Identify revenue streams. For each stream, ask: Is the driver property use (e.g., per‑night payments, payments for rights to manage/brand on the premises) or enterprise performance (e.g., brand goodwill boosts, superior sales efforts)?
• Occupancy‑tax sharebacks: Document that payments are calculated per guest stay, persist across owners and operators, and are integral to continued beneficial use (e.g., room‑block obligations). Include the present value of expected per‑use increments subject to contractual caps and terms.
• Key money: Build a market record showing when and why market participants pay key money, tied to the subject’s physical attributes; convert into a valuation‑consistent income or present value measure without double counting.
• Enterprise intangibles: When taxpayers present valuations for brand value, F&B enterprise value, or workforce in place, present empirical evidence that management/franchise fees fully capture those values or be prepared to quantify and deduct them.

For taxpayers

• Anticipate inclusion of per‑use revenue allocations and market‑expected key money in hotel valuations.
• Prepare robust, data‑driven valuations of enterprise intangibles (flag/franchise goodwill, F&B enterprise, workforce in place) and be ready to prove that fee deductions do not fully capture those assets.
• When arguing exclusion, focus on attribution: Show that a revenue stream depends materially on enterprise performance (marketing, pricing power, service quality), not on property use per se.

Conclusion

Olympic and Georgia Partners refines California’s income‑capitalization jurisprudence by anchoring the analysis in attribution, not labels. The Court confirms that:

• Income that flows through an intangible contract may be included in the property’s income if it is paid because the property is used (e.g., per‑night TOT assignments; key money paid to secure management/branding rights on a desirable physical asset).
• Conversely, income attributable to enterprise intangibles—brand/flag goodwill, food and beverage enterprise operations, assembled workforce—must be identified, valued, and deducted; management‑fee deductions are not a universal proxy without evidence.

The decision is consequential for hospitality and public‑private developments, where financing and operating arrangements frequently intertwine property use and enterprise activity. It adopts a measured, fact‑intensive approach: structure and market practice matter, and courts will resist categorical exclusions or inclusions untethered to how revenue is actually generated. At the same time, by insisting on empirical support for the treatment of enterprise intangibles, the Court ensures that California assessors continue to assess “full cash value” while respecting constitutional and statutory limits on the taxation of intangible assets.