Opinion

Olympic and Ga. Partners, LLC v. County of L.A.

Court: California Supreme Court
Filed: Aug 28, 2025
Status: Published
Cited by: 0 cases
Authority: More cited than 39.0%

The opinion

IN THE SUPREME COURT OF

CALIFORNIA

OLYMPIC AND GEORGIA PARTNERS, LLC,

Plaintiff and Appellant,

COUNTY OF LOS ANGELES,

Defendant and Appellant.

S280000

Second Appellate District, Division Eight

B312862

Los Angeles County Superior Court

BC707591

August 28, 2025

Justice Groban authored the opinion of the Court, in which

Chief Justice Guerrero and Justices Corrigan and Jenkins

concurred.

Justice Liu filed a concurring and dissenting opinion.

Justice Kruger filed a concurring and dissenting opinion, in

which Justice Evans concurred.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

S280000

Opinion of the Court by Groban, J.

Hotels are typically assessed for property tax purposes by

estimating the property owner’s future income stream and then

discounting that amount to present value. This income

capitalization method of valuation “is complicated by the

circumstance that . . . assessors may not include the value of

intangible assets and rights in the value of taxable property.”

(Elk Hills Power, LLC v. Board of Equalization (2013)

57 Cal.4th 593, 601 (Elk Hills).) To ensure compliance with this

rule, the assessor must deduct from its income stream analysis

any revenue that is “ ‘ “derived in large part from enterprise

activity . . . . [I]nstead, it is the earnings from the [taxable]

property itself or from the beneficial use thereof which are to be

considered.” ’ ” (Id. at p. 619, italics omitted.)

In this case, property owner Olympic and Georgia

Partners, LLC (Olympic), argues that the Los Angeles County

Assessor (the County or the Assessor) violated these principles

by declining to remove two sources of hotel revenue that derive

from nontaxable intangible assets. The first category of revenue

is a 14 percent nightly occupancy tax that the City of Los

Angeles (the City) agreed to assign to the original hotel

developer as an incentive to construct the hotel. The second

category of revenue is a one-time “key money” payment that the

hotel’s management company, Marriott International, Inc.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

(Marriott), paid to Olympic in exchange for the right to manage

the hotel and brand it as a Marriott-related property for a 50-

year period. Citing our decision in Elk Hills, supra, 57 Cal.4th

593, Olympic argues that both forms of revenue should have

been excluded from the County’s income stream analysis

because they are attributable to intangible assets — contractual

rights — that resulted from the enterprise activity of Olympic

and its predecessor in interest. The County, however, contends

that while the payments flow through intangible contractual

rights, they nonetheless constitute earnings from the use of the

property and were therefore properly included in the valuation.

We agree with the County. Contrary to Olympic’s reading

of the case, our decision in Elk Hills, supra, 57 Cal.4th 593, does

not require the assessor to exclude all revenue that derives from

any conceivable form of intangible asset that is capable of

valuation. Elk Hills’s analysis focused on intangible assets that

relate to the enterprise activity of the business, including “the

goodwill of a business, customer base, and favorable franchise

terms or operating contracts.” (Id. at p. 618.) In summarizing

our holding, we emphasized that revenue “ ‘ “derived in large

part from enterprise activity” ’ ” may not be considered when

assessing the value of commercial property (id. at p. 619);

instead, the assessor may only consider “ ‘ “earnings from the

[taxable] property itself or from the beneficial use thereof” ’ ”

(ibid.). The key inquiry in this case, then, is not merely whether

the occupancy tax and key money payments derive from

intangible assets, but rather whether those forms of revenue

represent income that is primarily attributable to enterprise

activity or whether they constitute “income of the real property

or on account of its beneficial use.” (Olympic & Georgia

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Partners, LLC v. County of Los Angeles (2023) 90 Cal.App.5th

100, 119 (dis. opn. of Grimes, J.) (Olympic).)

Applying those principles here, we conclude that the

Assessor was permitted to include the occupancy tax and key

money payments when assessing the value of the hotel. Unlike

the situation we addressed in Elk Hills, both payments derive

from a type of intangible asset that effectively enable the

property itself — as opposed to the business operating the

property — to generate more revenue. Under the occupancy tax

agreement, the hotel generates an additional 14 percent in

revenue every time a customer rents out a room. This revenue

source will continue regardless of who owns the hotel or how

they run their business. With respect to the key money

payment, the Assessor presented undisputed evidence that

management companies routinely pay owners of hotels that

have certain desirable physical features (such as location, size

or overall quality) key money as a means of securing the right

to manage the property and advertise the hotel under the

management company’s brand. Thus, much like a commercial

lease, key money is a form of revenue that owners of desirable

hotels expect to receive in exchange for assigning a management

company the right to make beneficial use of the property.

Because both the occupancy tax and key money payments

“represent[] income from the use of the taxable property itself”

(Olympic, supra, 90 Cal.App.5th at p. 116 (dis. opn. of Grimes,

J.)) the assessor was permitted to include those payments in

determining the hotel’s assessed value. (See Elk Hills, supra,

57 Cal.4th at p. 619 [“ ‘ “earnings from the . . . property itself or

from the beneficial use thereof . . . are to be considered [in

assessing the value of the property]” ’ ”].)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

The County raises a separate claim regarding the

valuation of various “enterprise assets” that derive from its

management agreement with Marriott, including the customer

goodwill associated with the Marriott brand, the value of the

hotel’s food and beverage operations and an assembled, stable

workforce. Unlike the two revenue streams described above, the

County does not dispute that these three enterprise assets are

nontaxable and that their value must therefore be excluded from

the assessment. The County argues, however, that the Assessor

properly accounted for the value of those assets by deducting the

management fees that Olympic pays to Marriott. Olympic

disagrees, contending that the County produced insufficient

evidence to support its claim that the management fees

captured the entire value of the three enterprise assets. The

trial court and Court of Appeal agreed with Olympic and

remanded the matter to the County’s assessment appeals board

(Board) for further proceedings regarding the valuation of these

three assets. We affirm the lower courts’ findings on this issue.

I. BACKGROUND

A. The Occupancy Tax Agreement and the Key

Money Payment

The hotel at issue in this case was developed pursuant to

a series of contracts between the City and the original developer,

L.A. Arena Land Company (L.A. Arena). Those contracts

include the hotel development agreement (the HDA), which is

effectively the master development agreement, the “Occupancy

Tax Agreement”1 and the “Room Block Agreement.” Under the

The parties’ contracts refer to the Occupancy Tax

Agreement as the “Funding Agreement.”

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Occupancy Tax Agreement, the City agreed to assign L.A.

Arena, during the first 25 years of the hotel’s operation, a 14

percent occupancy tax that the City imposes on nightly hotel

room charges, subject to a cap of $246 million. After the first 25

years, the City and L.A. Arena would split the occupancy tax up

to an additional $24 million cap (meaning a total cap of $270

million). For the purposes of this appeal, the parties agree that

the Assessor properly assessed the present value of the

Occupancy Tax Agreement at $80 million.

The HDA states that the Occupancy Tax Agreement was

offered to L.A. Arena as an inducement to construct a hotel that

would service the Los Angeles Convention Center. Although the

project was expected to generate significant revenue for the

City, the HDA explains that the cost of building and operating

a convention center hotel would “not justify private development

. . . without some level of public support.” The HDA further

explains that “in consideration of the development of the

[hotel],” the parties had entered into a separate agreement —

the Occupancy Tax Agreement — “to provide . . . financial

assistance to the Developer.” The Occupancy Tax Agreement

includes similar language.

As a condition of receiving the occupancy tax payments,

L.A. Arena agreed to construct the property and maintain it as

a hotel for a period of 30 years. It also agreed to comply with

the Room Block Agreement, which guaranteed that the hotel

would make available up to 750 rooms for conventioneers for a

period of 30 years. The Room Block Agreement was intended to

“ensure that the Convention Center has adequate hotel capacity

for future conventions and trade shows.” Under the HDA, a

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

breach of the Room Block Agreement provided the City grounds

to terminate the Occupancy Tax Agreement.

Prior to the completion and opening of the hotel, L.A.

Arena conveyed the property to Olympic, a newly formed entity

affiliated with L.A. Arena. As part of the sale, L.A. Arena

assigned Olympic its rights under the Occupancy Tax

Agreement. Olympic thereafter entered into a management

agreement with Marriott that gave two Marriott-related

entities, Ritz-Carlton and JW Marriott, the right to manage

different sections of the hotel, which included the right to brand

the hotel as a Marriott-related property. In exchange for the

management services, Olympic was to pay a management fee of

approximately three percent of gross revenues, plus certain

performance-based incentives. The management agreement

further provided that to secure the right to manage the property

for a period of 50 years, Marriott agreed to pay Olympic a one-

time $36 million key money payment. In the event the

management agreement was terminated, Marriott was entitled

to a pro rata refund of the payment.

B. Procedural History

1. Proceedings before the Board

a. Parties’ contentions

After the County issued an assessment on the newly

constructed hotel, Olympic filed a tax challenge that was

initially heard by the Board. Citing Elk Hills, supra, 57 Cal.4th

593, Olympic argued that the Occupancy Tax Agreement should

be excluded from assessment because it was an “intangible

contractual” asset with an “identifiable income stream [that

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

could] easily be segregated from the [hotel’s] operational

revenues.”

Olympic presented similar arguments regarding the key

money payment, contending that “since the . . . Key Money was

paid for . . . [the] contractual right to manage the Hotel,” it was

“not related to taxable real property rights, but to a non-taxable

intangible, namely the right to manage/operate [the property].”

Olympic further argued that because key money is “never paid

when a management agreement is already in place,” and “it was

unlikely that the Hotel’s owners would terminate the

Management Agreement . . . in the foreseeable future, to obtain

a Key Money payment from another hotel management

agreement, the Assessor’s inclusion of the Key Money was not

proper.”

Finally, Olympic identified three “enterprise assets” that

should be valued and removed from the assessment, all of which

were related to the benefits Olympic enjoyed under its

management agreement with Marriott: (1) the “Flag and

Franchise” value of its association with Marriott entities Ritz-

Carlton and JW Marriott (i.e., customer goodwill, marketing

ability, etc., valued by Olympic at $17 million); (2) food and

beverage operations, meaning the enterprise value of the

management company’s restaurant operations (valued at $13

million); and (3) the value of an assembled, stable workforce

(valued at $4 million). In support of these valuations, Olympic

presented the reports and testimony of an expert appraiser

specializing in business valuation.

In response, the County argued that the proceeds of the

Occupancy Tax Agreement were properly included in the

valuation of the hotel because the payments “go[] to the

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

landowner and follows the land.” The County also asserted that

the funds were provided to the hotel owner as an inducement

“not just to develop the [hotel], but to continue its operation in

conformity with the [Room Block Agreement],” which required

the hotel to reserve a certain number of rooms for use by

conventioneers. The County argued the key money payment

was likewise assessable because it was revenue that Olympic

received from a third party (Marriott) in exchange for certain

rights in the property, namely “the right to manage the

property.” The Assessor testified that if the current

management agreement was terminated, it was “highly likely

that other operators would compete for the same opportunity

and would pay this same contribution.”

Regarding the enterprise assets, although the County

agreed that the value associated with the flag and franchise and

the assembled workforce could not be considered in the

assessment, it argued that the Assessor had fully accounted for

these assets by deducting the amount that Olympic had paid to

Marriott under the terms of the management agreement. In

support, it relied on an article written by Stephen Rushmore

that advocates for the “Rushmore Approach” of hotel valuation

(which Stephen Rushmore created). Under that approach, the

assessor accounts for the “business component of a hotel’s

income” — i.e., the portion of income generated through the

enterprise activity of the hotel rather than the property itself —

by deducting the costs due under the management agreement.

The County did not specifically address the value of the food and

beverage operations.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

b. The Board’s ruling

The Board ruled in favor of the County on all three issues.

The Board found that the occupancy tax payments were

assessable because they represented “income to the property

and related to real property.” Distinguishing Elk Hills, supra,

57 Cal.4th 593, the Board explained that the intangible rights

at issue in that case had not been related to real property, while

the Occupancy Tax Agreement is “an intangible asset of real

property that runs with the land.” The Board also agreed with

the County that the Occupancy Tax Agreement was related “not

just to the development of the Hotel but to its continued

operation.” The Board explained that the tax payments were

predicated on compliance with the Room Block Agreement,

which required the hotel to set aside a certain number of

“[g]roup rate” rooms for conference attendees that generally had

lower rates than standard nongroup rates. Thus, the Occupancy

Tax Agreement not only incentivized the construction of the

hotel but also benefitted the City by guaranteeing that

conference goers would receive group booking rates.

The Board also concluded the key money payment was

properly included in the assessment because it was a payment

“received in exchange for a tangible right in real property,”

namely the “right to manage the hotel.” The Board rejected

Olympic’s argument that the key money could not be considered

income because it “was paid prior to the opening of the Hotel,”

explaining: “If this property was not encumbered by the

Management Contract, the Hotel owner would have the ability

to enter into another Management Contract [after opening the

hotel] and receive a similar payment.”

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Finally, regarding the enterprise assets, the Board did not

directly address the County’s argument that the value of the

hotel’s enterprise assets had been accounted for by deducting

the total amount of management fees Olympic had paid to

Marriott. Instead, the Board ruled that it was “not persuaded

by [Olympic’s] valuation of these intangibles . . . and believes

there is no compelling evidence to isolate [their value] from the

real estate value.”

2. Proceedings in the trial court and the Court of

Appeal

Following the Board’s ruling, Olympic filed a complaint in

Los Angeles County Superior Court for refund of property taxes.

At the conclusion of a bench trial, the court entered a judgment

concluding that the proceeds from the Occupancy Tax

Agreement and the key money payment were “income from the

property and [were] properly included in the assessed value of

the property.” Regarding the enterprise assets, however, the

trial court remanded the matter to the Board with directions “to

determine the value of the Flag and Franchise, Workforce in

Place, and Food and Beverage Income and to deduct that value

from the assessed value of the Property.” Although the court did

not issue a statement of decision, its judgment suggests that it

rejected the County’s argument that the evidence established

these nontaxable enterprise assets had been fully accounted for

through the deduction of the management fees that Olympic

paid to Marriott.

In a split decision, the Court of Appeal reversed the trial

court on the first two issues and unanimously affirmed on the

third. Citing Elk Hills, supra, 57 Cal.4th 593, the majority

concluded that assessors must exclude the value of any

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

intangible asset that is necessary to put the property to

productive use and is capable of valuation. Applying that test,

the majority explained that the occupancy tax payment was

“intangible” (insofar as it derives from a development contract

between the City and the original contractor), “capable of

valuation” (as both parties agree it provides revenue valued at

$80 million) and was “necessary because without it the hotel

would not have been built.” (Olympic, supra, 90 Cal.App.5th at

p. 109.) Regarding the key money, the majority characterized

this one-time payment as “a price break the managers gave the

hotel on payments from the hotel.” (Id. at p. 110.) In the court’s

view, because the payment was not “income” to Olympic, but

rather a “discount” on management fees, it was not taxable.

(Ibid.)

Finally, with respect to the Board’s treatment of the

enterprise assets, the majority concluded that Olympic’s expert

witnesses had “proposed credible values for all three” categories

of assets “and backed up [the] estimates with . . . analysis and

exhibits.” (Olympic, supra, 90 Cal.App.5th at p. 111.) The court

explained that “[w]hen the taxpayer offers an apparently

credible valuation of the intangibles, as here, the assessor and

Board must diligently grapple with this substance.” (Id. at

pp. 111–112.) The court rejected the County’s assertion that the

deduction of the management fees had “completely account[ed]

for the value” of the enterprise assets. (Id. at p. 112.) The court

explained that the only evidence the County had cited in support

of that argument was “an article by Stephen Rushmore . . . , but

this article contains no empirical support for the illogical

premise that every franchise fee wipes out all intangible benefits

a franchise agreement might offer a hotel owner.” (Ibid.)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Justice Grimes dissented in part, concluding that the

occupancy tax and key money payments were both properly

included in the hotel’s valuation. The dissent believed that the

analysis in Elk Hills, supra, 57 Cal.4th 593, was focused on

intangible assets that “ ‘make a direct contribution to the . . .

value of the business,’ ” such as “ ‘the goodwill of a business,

customer base, and favorable franchise terms or operating

contracts.’ ” (Olympic, supra, 90 Cal.App.5th at p. 115 (dis. opn.

of Grimes, J.).) In contrast, the occupancy tax and key money

payments “derive[] directly from Olympic’s use of its taxable

property, much like lease payments from a tenant to the

landlord derive from the use of the property, not just from the

lease agreement. While [the occupancy tax and key money

payments] flow[] through a contract that the parties agree is an

intangible asset, the value of [those payments] derive[] directly

from the use of the property as a hotel.” (Ibid.) In the dissent’s

view, Elk Hills had simply not addressed “an income-producing

intangible asset that derives its value from taxable property.”

(Ibid.)

II. DISCUSSION

A. Standard of Review

“The proper scope of review of assessment decisions is well

established. [Citation.] ‘When the assessor utilizes an approved

valuation method, [its] factual findings and determinations of

value based upon the appropriate assessment method are

presumed to be correct and will be sustained if supported by

substantial evidence.’ [Citation.] However, where the taxpayer

attacks the validity of the valuation method itself, the issue

becomes a question of law subject to de novo review.” (Elk Hills,

supra, 57 Cal.4th at p. 606.) Whether the assessor’s valuation

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

improperly subsumed the value of nontaxable intangible

property generally “ ‘presents a question of valuation

methodology, which is a legal issue subject to . . . independent

review.’ ” (SHC Half Moon Bay, LLC v. County of San Mateo

(2014) 226 Cal.App.4th 471, 486 (SHC Half Moon Bay); see Elk

Hills, supra, 57 Cal.4th at p. 606 [plaintiff’s claim that assessor

failed to exclude the value of an intangible asset “is a question

of law”]; GTE Sprint Communications Corp. v. County of

Alameda (1994) 26 Cal.App.4th 992, 1001 (GTE Sprint).)

As the County correctly notes, however, to the extent the

Board’s conclusions regarding such assets require the resolution

of disputed questions of fact about the nature or characteristics

of the assets in question, the Board’s factual findings on those

issues are generally subject to the substantial evidence

standard. (Compare SHR St. Francis, LLC v. City and County

of San Francisco (2023) 94 Cal.App.5th 622, 632 (SHR St.

Francis) [substantial evidence standard applies where tax

“challenge ‘ “present[s] a question about the facts specific to

[the] plaintiffs’ case or the data to insert when calculating the

value of the property” ’ ”] with Union Pacific Railroad Co. v.

State Bd. of Equalization (1991) 231 Cal.App.3d 983, 992

[“where the claim is that, due to the basic undisputed

characteristics shared by an entire class of properties, the

challenged method will produce systematic errors if applied to

properties in that class, the issue is not factual but legal”].)

B. Legal Background Regarding Taxation of

Intangible Assets

We begin with a review of general principles governing the

taxation of intangible assets.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

1. Relevant provisions of the Constitution

“[T]he California Constitution requires generally the

assessment of property at ‘fair market value.’ . . . .” “[A]ssessors

have a constitutional mandate to tax all property at fair market

value if not exempt under federal or state law.” (Elk Hills, supra,

57 Cal.4th at pp. 606, 607.) Although earlier versions of the

California Constitution allowed for the taxation of intangible

property, former section 14 of article XIII (which now appears in

substantially the same form in § 2 of art. XIII) was amended in

1933 to permit the Legislature “to tax, or to exempt from

taxation, certain forms of intangible property,” including

(among other things) “notes, debentures, capital stock, and

bonds.” (Elk Hills, at p. 607.)

In Roehm v. County of Orange (1948) 32 Cal.2d 280

(Roehm), we “found that the effect of the 1933 amendments” was

to exempt all forms of intangible property except those expressly

listed in article XIII, former section 14 (now art. XIII, § 2) of the

California Constitution. (Elk Hills, supra, 57 Cal.4th at p. 607;

see Roehm, at p. 285 [art. XIII, former § 14 “does not grant

power to provide for the taxation of intangible assets other than

those listed”].) At issue in Roehm was a property tax assessment

that had been levied against a liquor license. We held that

because the license did not fall within any of the categories of

intangible property enumerated in the 1933 amendment, the

county had no authority to directly tax the asset. Significantly,

however, Roehm clarified that “[i]ntangible values . . . that

cannot be separately taxed as property may [nonetheless] be

reflected in the valuation of taxable property. Thus, in

determining the value of property, assessing authorities may

take into consideration earnings derived therefrom, which may

OLYMPIC AND GEORGIA PARTNERS, LLC

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Opinion of the Court by Groban, J.

depend upon the possession of intangible rights and privileges

that are not themselves regarded as a separate class of taxable

property.” (Roehm, at p. 285.) As stated by one court, under the

principles of Roehm, “intangibles associated with the realty,

such as zoning, permits, and licenses, are not real property and

may not be taxed as such. However, insofar as such intangibles

affect the real property’s value, for example by enabling its

profitable use, they may properly contribute to an assessment of

fair market value.” (American Sheds, Inc. v. County of Los

Angeles (1998) 66 Cal.App.4th 384, 392 (American Sheds).)

2. Statutory provisions governing the taxation of

intangible assets

Revenue and Taxation Code sections 110 and 2122

implement article XIII, sections 1 and 2 of the California

Constitution, as we interpreted those provisions in Roehm. (See

Elk Hills, supra, 57 Cal.4th at pp. 610–612.)

Section 110, subdivision (a) defines the term “ ‘fair market

value’ ” to mean “the amount of cash or its equivalent that

property would bring if exposed for sale in the open market

under conditions in which neither buyer nor seller could take

advantage of the exigencies of the other. . . .” For purposes of

valuing hotels, “fair market value” is typically determined using

the income capitalization method, which is a form of unit

valuation.3 (See, e.g., California Portland Cement Co. v. State

Unless otherwise noted, all further statutory citations are

to the Revenue and Taxation Code.

“ ‘The essence of the unitary valuation concept is the

determination of the value of an enterprise as a whole without

OLYMPIC AND GEORGIA PARTNERS, LLC

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Opinion of the Court by Groban, J.

Bd. of Equalization (1967) 67 Cal.2d 578, 583–584 (California

Portland Cement) [“the capitalization of income method is a

generally accepted method of valuing property from which

income is or may be derived”]; see also Cal. Code Regs., tit. 18, §

8, subd. (a); Rev. & Tax. Code, § 723 [authorizing and defining

unit valuation].) “ ‘ “Under the income method the assessor

capitalizes the sum of future income attributable to the

property, less an allowance for the risk of partial or no receipt of

income [citation]. The income method rests upon the

assumption that in an open market a willing buyer of the

property would pay a willing seller an amount approximately

equal to the present value of the future income to be derived

from the property.” ’ ” (SHC Half Moon Bay, supra,

226 Cal.App.4th at p. 486; see American Airlines, supra,

12 Cal.4th at p. 226.)

However, when conducting a unit valuation, assessors

must deduct revenue that derives from the enterprise activity of

the business, such as customer goodwill or beneficial operating

contracts, which are generally deemed to be forms of nontaxable

intangible assets. To that end, as explained in Elk Hills, section

110, subdivision (d) (section 110(d)) “prevents the direct

taxation of intangible rights and assets when assessors use

methods of unit valuation. Section 110(d)(1) prevents tax

regard to the value of the individual assets making up the

enterprise.’ [Citation.] The value of such property ‘depends on

the interrelation and operation of the entire utility as a unit.

Many of the separate assets would be practically valueless

without the rest of the system.” (American Airlines, Inc. v.

County of San Mateo (1996) 12 Cal.4th 1110, 1125 (American

Airlines); see Elk Hills, supra, 57 Cal.4th at p. 604.)

OLYMPIC AND GEORGIA PARTNERS, LLC

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Opinion of the Court by Groban, J.

assessors from including the value of intangible assets that

relate to the going concern value of a business[ — i.e., enterprise

activity4 —] within the unit value of property prior to

assessment. Section 110(d)(2) requires taxing authorities to

value intangible assets and actively remove that value from a

unit’s taxable base value, so that the intangibles are not directly

taxed.” (Elk Hills, supra, 57 Cal.4th at p. 608.)

Consistent with Roehm, however, section 110, subdivision

(e) (section 110(e)) further provides that despite section 110(d)’s

directive to remove the value of nontaxable, intangible assets or

rights, “[t]axable property may [nonetheless] be assessed and

valued by assuming the presence of intangible assets or rights

necessary to put the taxable property to beneficial or productive

use.” (§ 110(e).) Section 212, subdivision (c) provides similar

guidance, stating: “Intangible assets and rights are exempt

from taxation and, except as otherwise provided in the following

sentence, the value of intangible assets and rights shall not

enhance or be reflected in the value of taxable property. Taxable

property may be assessed and valued by assuming the presence

of intangible assets or rights necessary to put the taxable

property to beneficial or productive use.”

3. Elk Hills

In Elk Hills, supra, 57 Cal.4th 593, we considered how

sections 110 and 212 applied to emission reduction credits

“The going concern value of a business means ‘[t]he value

of a commercial enterprise’s assets or of the enterprise itself as

an active business with future earning power, as opposed to the

liquidation value of the business or of its assets.’ ” (Elk Hills,

supra, 57 Cal.4th at p. 608, quoting Black’s Law Dict. (abridged

8th ed. 2005) p. 1294.)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

(ERCs) that a powerplant owner was required to purchase as a

condition of constructing and operating a new powerplant. In a

tax assessment challenge, the owner argued that the assessor

had erred by failing to “attribute a portion of the plant’s income

stream to the ERCs” — valued at $11 million — “and deduct

that value from the plant’s projected income stream prior to

taxation.” (Id. at p. 605.)

As part of our analysis, we set out to harmonize section

110(d)’s requirement that assessors remove the value of

intangible rights when conducting a unit valuation, and section

110(e)’s provision allowing assessors to “assum[e] the presence

of intangible assets or rights necessary to put the taxable

property to beneficial or productive use.” The Court of Appeal

in Elk Hills interpreted section 110(e) to mean that whenever

an intangible asset is necessary to put the property to its

productive use, the value of that asset should always be included

in the valuation. Applying that interpretation, the court

concluded that because the ERCs were necessary to put the

powerplant to beneficial use — indeed, the powerplant could not

be legally operated without them — their value did not need to

be removed.

Although we agreed with the Court of Appeal’s conclusion

that no deduction was necessary for the ERCs, we disagreed

with its interpretation of the governing statutes. After

reviewing Roehm and the legislative history of sections 110(d)

and (e) and 212, subdivision (c) (all of which effectively codified

Roehm), we concluded that “several points emerge.” (Elk Hills,

supra, 57 Cal.4th at p. 614.) First, an intangible asset cannot

be “directly taxed” even when it is “ ‘necessary to put the taxable

property to beneficial or productive use.’ ” (Ibid., quoting § 212,

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

subd. (c).) For example, while a liquor license is necessary to

put property to beneficial use as a bar, the assessor cannot

include the actual price of a liquor license in the valuation of the

property. The assessor may, however, “ ‘assume the presence of

a license so that a bar’s taxable property may be taxed as a bar

and not at salvage value (i.e., as a warehouse).’ ” (American

Sheds, supra, 66 Cal.App.4th at p. 393 [discussing example from

legislative history]; see Roehm, supra, 32 Cal.2d at p. 285.)

Second, “if the assessor assumes the presence of an

intangible asset necessary to put taxable property to beneficial

use . . ., and does no more than this, then by definition the

assessor has not violated . . . [section 110](d)(1). . . . But there

is no reason why an intangible asset cannot enhance both

taxable property and the going concern value of the business on

which the property resides. The case law recognizes that

assessors, if they are valuing taxable property according to the

income produced, may have to apportion income between

enterprise activity and the property itself.” (Elk Hills, supra,

57 Cal.4th at p. 614.)

Third, assessors must “remove intangible assets that are

improperly included in the unitary value of property prior to

assessment. [Citation.] Thus, even when an intangible asset

enhances the value of taxable property . . . , to the extent that

the unitary valuation reflects a direct valuation of the asset

itself, or includes income appropriately attributed to enterprise

value, section 110(d)(2) requires the removal of such values.”

(Elk Hills, supra, 57 Cal.4th at p. 615.)

We then went on to apply that framework to determine

whether the assessor should have deducted the value of the

ERCs when calculating the applicable income of the property.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

We explained that there were “two lines of income capitalization

cases that illustrate when a section 110(d)(2) deduction is and is

not required.” (Elk Hills, supra, 57 Cal.4th at p. 617.) In the

first line of authority, “courts have upheld income-based

assessments that properly assumed the presence of intangible

assets necessary to the productive use of taxable property

without deducting a value for intangible assets.” (Id. at p. 618.)

As an example, we discussed American Sheds, supra,

66 Cal.App.4th 384, which involved the valuation of a landfill.

Several years after the owner had acquired the landfill, the

government restricted the landfill’s use permit “to about 10

percent of its previous capacity,” which caused the owner’s tax

assessment to drop 90 percent compared to previous

assessments. (Elk Hills, at p. 618.) The owner challenged the

assessments that had been imposed prior to the permit’s

amendment, arguing that the 90 percent assessment reduction

demonstrated that the assessor’s earlier valuations had

improperly subsumed intangible “permit[]” rights to operate as

a landfill. (American Sheds, at pp. 389, 392.) The Court of

Appeal disagreed, reasoning that the assessment “was

‘consistent with treating the intangibles as nontaxable, while

recognizing the impact of their presence or absence on the

beneficial use of the property, and consequently the amount of

income it could yield.’ ” (Elk Hills, at p. 618, quoting American

Sheds, at p. 395.) In other words, the court found that the

assessor had not directly assessed the value of the use permit

but rather had properly assumed the presence of the permit for

purposes of putting the property to its beneficial use.

We contrasted American Sheds with a second line of cases

that had “disapproved assessments that failed to attribute a

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

portion of a business’s income stream to the enterprise activity

that was directly attributable to the value of intangible assets

and deduct that value prior to assessment.” (Elk Hills, supra,

57 Cal.4th at p. 618.) We noted that in those cases “intangible

assets like the goodwill of a business, customer base, and

favorable franchise terms or operating contracts all make a

direct contribution to the going concern value of the business as

reflected in an income stream analysis.” (Ibid.; see id. at p. 619,

citing, e.g., GTE Sprint, supra, 26 Cal.App.4th 992.) We

contrasted these types of enterprise assets with “intangible

rights . . . [that] merely allow for the taxable property to

generate income when put to its beneficial or productive use.”

(Elk Hills, at p. 618.) Summarizing these two lines of cases, we

explained that “ ‘ “[i]ncome derived in large part from enterprise

activity,” ’ ” such as customer goodwill and favorable franchise

terms, is deemed to be a form of intangible asset that must be

excluded from the valuation. (Id. at p. 619, italics omitted.) In

contrast, “ ‘ “the earnings from the [taxable] property itself or

from the beneficial use thereof,” ’ ” including items such as the

rental income of a commercial building or nightly room fees in

the case of a hotel, are deemed to derive from tangible property

and is thus taxable. (Ibid.)

Applying those rules to the case before us, we concluded

that the board had not erred in declining to remove the value of

the ERCs, explaining that “the sole purpose” of the credits was

to “enable the taxable property in question to function and

produce income as a powerplant, thereby enhancing the value of

that property.” (Elk Hills, supra, 57 Cal.4th at p. 619.) We

emphasized that the owner of the powerplant had made “no

credible showing that there is a separate stream of income

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

related to enterprise activity or even a separate stream of

income at all that is attributable to the ERCs.” (Id. at p. 602;

see id. at p. 619.)

C. The Board Did Not Err in Including the Value of

the Occupancy Tax Agreement

Olympic’s initial claim in this tax challenge is that the

Board erred in declining to remove the value of the Occupancy

Tax Agreement ($80 million) from the hotel’s projected income

stream. Adopting the reasoning of the Court of Appeal, Olympic

argues that Elk Hills requires that the assessor’s income stream

analysis must exclude all revenue that derives from any form of

intangible asset that is capable of valuation. Olympic further

contends that those elements are satisfied here because the

Occupancy Tax Agreement is a form of intangible asset, namely

contractual rights, that is capable of valuation insofar as it

generates a separate stream of revenue.

The County, however, argues that we should follow the

analysis in the dissent below, which reasoned that “Elk Hills’s

discussion about adjustments for intangible asset income”

(Olympic, supra, 90 Cal.App.5th at p. 114 (dis. opn. of Grimes,

J.)) is of limited relevance here because that case did not address

“an income-producing intangible asset that derives its value

from taxable property” (id. at p. 115). According to the dissent,

unlike the types of intangible assets discussed in Elk Hills,

which related to the enterprise activity of the business using the

property, the proceeds of the Occupancy Tax Agreement are

assessable because they “represent[] income from the use of the

taxable property itself.” (Id. at p. 116.)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

1. The Assessor properly considered revenue from the

Occupancy Tax Agreement

We agree with the County that Elk Hills does not establish

a broad, categorical rule compelling the assessor to exclude

revenue that derives from any type of intangible asset that is

capable of valuation. We also agree that Elk Hills does not

dictate the result for evaluating the proper tax treatment of the

type of asset here, which effectively enables the property

itself — as opposed to the enterprise operating the property —

to generate more revenue.

As noted above, our discussion and analysis in Elk Hills

focused primarily on assets that increase the “going concern

value” of the business that operates on the property being

assessed, including items such as the goodwill of a business or

favorable franchise terms. (Elk Hills, supra, 57 Cal.4th at

p. 618 [“intangible assets like the goodwill of a business,

customer base, and favorable franchise terms or operating

contracts all make a direct contribution to the going concern

value of the business as reflected in an income stream

analysis”].) The shared characteristic of the types of assets

discussed in Elk Hills is that they increase the value of the

business operating on the taxable property without necessarily

increasing the amount of income that the property itself is

capable of generating.

A paradigmatic example of such an asset is franchise

rights. As explained in the State Board of Equalization’s

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Assessors’ Handbook, 5 franchise rights “represent[] an economic

contribution by the owner, who generally has paid a substantial

sum as consideration for the franchise contract” and thus

“relate[] primarily to the business entity’s enterprise-related

activities. Thus, [franchise rights] are examples of intangible

rights whose primary purpose is not to authorize a more

productive use of taxable property, but rather to authorize the

use of a trade name . . . or the right to conduct a specified

business operation, in the conduct of a business entity’s

enterprise-related activities.” (Bd. of Equalization, Assessors’

Handbook, § 502, Advanced Appraisal (reprinted Jan. 2015)

p. 155 (Assessors’ Handbook).) For example, the mere fact that

a McDonalds franchise can generate a certain amount of income

does not mean that a restaurant operating on the same property

without such franchise rights could generate the same amount

of income. In that situation, an assessor valuing the property

under the income method would have to make an adjustment

representing the additional revenue the restaurant was able to

generate because of the franchise rights. Stated differently, if

the franchise rights allow the owner to generate more revenue

from operating a business on the property than it otherwise

would, then those franchise rights are a nontaxable intangible

asset and any additional income flowing from them should not

“Tax assessors use the Assessors’ Handbook ‘as a basic

guide.’ [Citation.] ‘[A]ssessors’ handbooks are not regulations

and do not possess the force of law . . .,’ but ‘they serve as a

primary reference and basic guide for assessors, and have been

relied upon and accorded great weight in interpreting valuation

questions.’ ” (SHC Half Moon Bay, supra, 226 Cal.App.4th at

p. 485.)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

be included in determining a property’s assessed value under

the income approach.

Applying that framework in Elk Hills, we concluded that

the assessor was not required to make an adjustment for the

powerplant owner’s ERCs, which were valued at $11 million,

because there was no showing that those credits had increased

the business’s income stream. Rather, we likened the ERCs to

a license that simply allowed for the property to be put to use as

a powerplant. (See Elk Hills, supra, 57 Cal.4th at p. 619 [“the

sole purpose of the surrendered ERCs is to enable the taxable

property in question to function and produce income as a

powerplant”].) Because there had been no showing that the

ERCs increased the income stream of the business, there was no

basis to deduct their value in assessing the overall income value

of the property.

As Justices Grimes noted in her dissent, the “intangible

asset” at issue here — and the revenue stream that it

generates — differs in important ways from the types of assets

we discussed in Elk Hills. Unlike franchise rights or customer

goodwill, the Occupancy Tax Agreement is, in effect, “an income-

producing intangible asset that derives its value from [the use

of ] taxable property.” (Olympic, supra, 90 Cal.App.5th at p. 115

(dis. opn. of Grimes, J.).) Stated differently, the agreement

increases the amount of revenue generated by the use of the

property as distinguished from that generated by operating a

business on the property: Each time a guest stays at the hotel,

the property will generate additional revenue in an amount that

is equal to 14 percent of the nightly rental rate. The hotel will

continue to generate that revenue for the property owner

regardless of what business is operating the hotel or how well or

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

poorly the business is being run. That is substantially different

than an asset like customer goodwill, which allows the entity

that is operating the property to generate more business (and

more income) for reasons that are unrelated to the property

itself.

Moreover, while Elk Hills did not require us to consider

the tax treatment of revenue that derives from contractual

rights that enable the property itself to generate additional

income, some of our discussion supports the County’s view that

such proceeds are taxable. We explained, for example, that

when using the income stream approach, “ ‘ “it is the earnings

from the [taxable] property itself or from the beneficial use

thereof which are to be considered.” ’ ” (Elk Hills, supra,

57 Cal.4th at p. 619.) We likewise approved the analysis in

American Sheds, supra, 66 Cal.App.4th 384, which concluded

that the assessor had not erred in valuing “ ‘the impact’ ” that

intangible rights — namely the operating capacity limits set

forth in a landfill permit — had “ ‘on the beneficial use of the

property, and consequently the amount of income it could

yield.’ ” (Elk Hills, at p. 618.) That analysis is in clear tension

with Olympic’s contention that Elk Hills created a categorical

rule requiring that an assessor deduct all forms of revenue that

derive from intangible contractual rights that are capable of

valuation.

Consistent with the approach in American Sheds, supra,

66 Cal.App.4th 384, other cases support the view that, at least

under some circumstances, an assessor may properly consider

revenue derived from intangible contractual rights that increase

the amount of income that a property can yield. For example,

in De Luz Homes v. County of San Diego (1955) 45 Cal.2d 546

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

(De Luz Homes), we addressed the valuation of leasehold

interests in property owned by the federal government.6 The

plaintiff, De Luz Homes, entered into an agreement to lease the

property at a nominal fee ($100 per annum) for a period of 75

years. It further agreed to construct a housing project on the

property and then lease the units to military personnel at a

guaranteed rental rate.

In addressing whether the leasehold interests could be

valued using the guaranteed rental rates set forth in the

development agreement we acknowledged that an assessor

must generally estimate income based on the rental value that

the property could generate on the open market, not the amount

the property would generate under the existing leases on the

property. (See De Luz Homes, supra, 45 Cal.2d at p. 565; Dennis

v. County of Santa Clara (1989) 215 Cal.App.3d 1019, 1030

(Dennis); see also Cal. Code Regs., tit. 18, § 8, subd. (d).)7 We

Although “[a] lease of private property is not taxable”

(Jewish Community Centers Development Corp. v. County of Los

Angeles (2016) 243 Cal.App.4th 700, 709), “when there is a lease

. . . of land owned by a tax-exempt governmental agency, . . . the

possessory right under the lease is subject to assessment and

taxation.” (City of Desert Hot Springs v. County of Riverside

(1979) 91 Cal.App.3d 441, 449, citing De Luz Homes, supra,

45 Cal.2d at p. 563.)

The “[State Board of Equalization] regulations referred to

as the ‘Property Tax Rules,’ . . . which can be found in the

California Code of Regulations, title 18 . . . ‘have the force and

effect of law.’ ” (Paramount Pictures Corp. v. County of Los

Angeles (2023) 95 Cal.App.5th 1246, 1252.) Rule 8, subdivision

(d) provides that, “In valuing property encumbered by a lease,

the net income to be capitalized is the amount the property

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

concluded, however, that under the circumstances of the case,

the valuation of De Luz Homes’ leasehold interests should be

based on the “actual income” it was scheduled to receive under

its contractual arrangements with the government. We

explained that while this method may not be appropriate when

“valuing property wherein actual income is derived in large part

from enterprise activity and cannot be ascribed entirely to the

use of the property” (De Luz Homes, at p. 572), it was

nonetheless appropriate to consider the owner’s actual

income — i.e., the amount the government had guaranteed to

pay for the units pursuant to the original development

agreement — because “future income can be expected to remain

stable, for rents are controlled in amount by the [federal

agencies] and occupancy is assured by the fact that the project

is located on a military installation” (ibid.).8

would yield were it not so encumbered, whether this amount

exceeds or falls short of the contract rent . . . .” (Cal. Code Regs.,

tit. 18, § 8, subd. (d).)

Justice Kruger’s concurring and dissenting opinion

(hereafter the dissent) reasons that because the Occupancy Tax

Agreement was “successfully negotiated” (conc. & dis. opn. of

Kruger, J., post, at p. 8) between the original developer of the

hotel and the City “before the hotel was ever built” (id. at p. 12),

the additional revenue that Olympic (and all subsequent

owners of the hotel) receive under that agreement must be

attributed to the original developer’s “enterprise activity” (ibid.)

and not to the property. That reasoning, however, cannot be

squared with De Luz Homes, 45 Cal.2d 546, in which the federal

government guaranteed the developer a stable rate of rental

income over a specified period of time in exchange for building a

housing facility. As in this case, the developer and the

government “negotiated” (conc. & dis. opn. of Kruger, J., at p. 8)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Freeport-McMoran Resource Partners v. County of Lake

(1993) 12 Cal.App.4th 634 (Freeport-McMoran), and Watson

Cogeneration Co. v. County of Los Angeles (2002) 98 Cal.App.4th

1066 (Watson), applied similar reasoning in a pair of cases

involving the valuation of powerplants that were governed by

federal and state legislation incentivizing the development of

“cogeneration” (Watson, p. 1068) power production facilities.

The statutes governing these “ ‘qualifying facilities’ ” (Freeport-

McMoran, at p. 638) allowed the owners to enter into long-term

power purchase agreements with utilities that guaranteed a

specified rate for their electricity. Due to unanticipated

fluctuations in energy markets, the guaranteed rates in those

contracts rose above market rates. (See Watson, at pp. 1068–

1069.)

The assessors used an income capitalization method to

value the powerplants based on the rates set forth in the

guaranteed contracts (known as SO4 contracts). The owners

challenged the assessments, contending that the income

calculations “should not have included the full value of [the

owners’] power purchase agreement because th[ose] favorable

contract[s] [were] an intangible asset exempt from property

taxation.” (Watson, supra, 98 Cal.App.4th at p. 1069.) In

support, the owners relied on “cases holding that the value of

properties . . . must be determined by reference to the income

the properties could generate on the open market rather than

those favorable rental terms “before the [project] was ever built”

(id. at p. 12). We nonetheless concluded that those rental

guarantees were properly considered in valuing the property

and expressly rejected the suggestion that they should be

attributed to “enterprise activity.” (De Luz Homes, at p. 572.)

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

the income generated under the actual contracts.” (Freeport-

McMoran, supra, 12 Cal.App.4th at p. 642.)

Citing De Luz Homes, supra, 45 Cal.2d 546, Freeport-

McMoran rejected the plaintiffs’ assertions that “property must

be valued without consideration of any type of contract

pertaining to income to be derived from property” (Freeport-

McMoran, supra, 12 Cal.App.4th at p. 644) or that

“consideration of the SO4 contract income impermissibly taxes

nontaxable intangible property [rights]” (id. at p. 645). The

court explained that under the principles of Roehm, supra,

32 Cal.2d 280 (see ante, at pp. 14–15), assessors “ ‘ “may take

into consideration earnings derived [from the property], which

may depend upon the possession of intangible rights and

privileges that are not themselves regarded as a separate class

of taxable property.” ’ [Citations.] ‘ “[M]arket value for

assessment purposes is the value of property when put to

beneficial or productive use.” ’ ” (Freeport-McMoran, at p. 645.)

According to the court, “[i]n this case the SO4 contracts are the

means by which [the owner’s] properties are put to beneficial

use and must be considered in assessing the properties’ ‘full

value.’ ” (Id. at p. 646.)

Watson, supra, 98 Cal.App.4th 1066, involved essentially

identical facts and likewise rejected a qualifying facility owner’s

assertion that assessors had erred in utilizing its SO4 contracts

when calculating the facility’s value under the income method.

Consistent with the approach in De Luz Homes and Freeport-

McMoran, the court reasoned that “[w]here, as here, the income

flow can be expected to remain stable, based on controlled

pricing and assured usage, the value of the property ‘can best be

estimated in terms of actual income.’ ” (Watson, at p. 1072,

OLYMPIC AND GEORGIA PARTNERS, LLC

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Opinion of the Court by Groban, J.

quoting De Luz Homes, supra, 45 Cal.2d at p. 572.) The court

distinguished cases that had addressed the tax treatment of

franchise rights and other forms of intangible assets that are

“attributable to the enterprise value of the business” (Watson,

at p. 1075), explaining that the qualifying facilities “were the

result of government incentives and regulations specifically

intended to encourage their development. Among these

government-facilitated arrangements were the power purchase

agreements . . . of the projects. . . . The power purchase

agreement is inextricably intertwined with the creation and

operation of the project as a qualified facility.” (Ibid.)

We conclude that the reasoning of De Luz Homes,

Freeport-McMoran and Watson, apply equally here. As in those

cases, Olympic’s hotel was developed pursuant to “government-

facilitated” (Watson, supra, 98 Cal.App.4th at p. 1075)

contractual rights (the Occupancy Tax Agreement) that enable

the property to generate more revenue than it otherwise would.

These contractual rights are “integral to the economic viability

of the [project]” (Freeport-McMoran, supra, 12 Cal.App.4th at

p. 644) and provide “ ‘the means by which appellant’s properties

are put to beneficial use’ ” (Watson, supra, 98 Cal.App.4th at

p. 1073). Indeed, it is undisputed that without the additional

revenue provided by the Occupancy Tax Agreement — which

amounts to a 14 percent increase in nightly rental rates — the

costs of the project would have been prohibitively

uneconomical.9

The dissent acknowledges that cases such as De Luz

Homes, Freeport-McMoran and Watson permit an assessor to

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

Moreover, the Board found that the occupancy tax

payments were “related not just to the development of the

[h]otel but to its continued operation.” According to the Board’s

factual findings, which the parties have not challenged here (see

generally SHR St. Francis, supra, 94 Cal.App.5th at p. 632

consider the “ ‘actual income’ ” a property owner “is guaranteed

to collect” under government-facilitated contracts that enable

the economic viability of a publicly beneficial project. (Conc. &

dis. opn. of Kruger, J., post, at p. 3.) According to the dissent,

however, those cases are distinguishable because the occupancy

tax payments are not “income” that derives from hotel guests’

use of the property. (See id. at p. 6.) Instead, the dissent views

these payments as taxes that the hotel guests pay “to the City,”

which the City then “assign[s]” to the property owner. (Id. at

p. 8, italics omitted; see id. at p. 13, fn. 5.) We are not persuaded

that the reasoning of De Luz Homes and its progeny applies only

when the payments are made directly by the customer. Whether

characterized as an additional fee that a guest pays directly to

the hotel or as a tax that is first paid to the City and then

transferred to the hotel, the fact remains that the hotel owner

receives 14 percent more in revenue each time a guest rents a

hotel room. From the perspective of a potential buyer of the

hotel analyzing future revenue that the property can be

expected to generate, it is of no moment whether the hotel owner

receives that additional 14 percent payment directly from the

customer or through a third party intermediary (i.e., the City).

(See SHC Half Moon Bay, supra, 226 Cal.App.4th at p. 486

[income method assumes that a buyer would pay “ ‘ “an amount

approximately equal to the present value of the future income

to be derived from the property” ’ ”].) What matters is that

Olympic obtained a 14 percent premium on every room rental,

which is income derived from use of the property. That

additional revenue does not become a non-taxable component of

the hotel valuation simply because the City transferred the

customer money to Olympic rather than Olympic receiving the

money directly “through customer payments.” (Conc. & dis. opn.

of Kruger, J., post, at p. 13, fn. 5.)

OLYMPIC AND GEORGIA PARTNERS, LLC

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Opinion of the Court by Groban, J.

[Board’s factual findings are reviewed for substantial evidence]),

the occupancy payments were made in part to secure guarantees

regarding how the property would be used in the future.

Specifically, the occupancy tax payments were conditioned on

the owner agreeing that it would maintain the property as a

hotel for a period of 30 years and that it would set aside a certain

number of rooms for conference goers, as detailed in the Block

Room Agreement. The Board also found that in the absence of

the Block Room Agreement, “the income of the subject [property]

would be higher” because the evidence showed that “[g]roup

rates [were] typically lower” than nongroup rates.

Thus, based on the Board’s factual findings, the payment

was made not only to incentivize the development of an

otherwise uneconomic project, but to ensure the owner utilized

the property in a way that was beneficial to the City. (See Elk

Hills, supra, 57 Cal.4th at p. 619 [under the income method,

“ ‘ “it is the earnings from the [taxable] property itself or from

the beneficial use thereof which are to be considered” ’ ”].) As

aptly described by Justice Grimes’s dissent in the proceedings

below, the Occupancy Tax Agreement was, in effect, “part of the

overall return on investment the hotel’s original developer,

Olympic’s predecessor in interest, required to agree to use its

property the way the City wanted.” (Olympic, supra,

90 Cal.App.5th at p. 116 (dis. opn. of Grimes, J.).) Unlike

franchise rights or customer goodwill, which increase the going

concern value of the business, the Occupancy Tax Agreement

ensures that the taxable property (the hotel) will generate an

additional 14 percent each time a room is rented. Because the

occupancy tax payments constitute “ ‘ “earnings from the

[taxable] property itself or from the beneficial use thereof,” ’ ”

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Opinion of the Court by Groban, J.

they are subject to assessment. (Elk Hills, supra, 57 Cal.4th at

p. 619.)

And much like the contractually guaranteed streams of

income at issue in De Luz Homes, Freeport-McMoran and

Watson, the Occupancy Tax Agreement ensures the property

will continue to generate 14 percent of additional income every

time a room is rented regardless of how well or poorly the owner

may run its hotel business. In that way, the income cannot be

said to “ ‘ “derive[] in large part from enterprise activity,” ’ ” but

is more aptly characterized as “ ‘ “earnings from the [taxable]

property itself or from the beneficial use thereof [as a hotel].” ’ ”

(Elk Hills, supra, at p. 619, italics omitted; see De Luz Homes,

supra, 45 Cal.2d at p. 572 [rental income due under

development contracts was not “derived in large part from

enterprise activity”]; Freeport-McMoran, supra, 12 Cal.App.4th

at p. 646 [“The [guaranteed] higher price received under the

SO4 contract is not the result of [the owner’s] successful

operation of its plants”]; Watson, supra, 98 Cal.App.4th at

p. 1075.)10

Olympic argues that Freeport-McMoran and Watson are

distinguishable because in both cases the courts described

powerplants with SO4 contracts as being in a separate “market”

from powerplants without “assured” government contracts.

Olympic contends that, in contrast, there was no showing that a

separate “market” exists for hotels that are entitled to collect

occupancy tax payments.

While it is true that both cases made references to a

distinct market for power facilities with SO4 contracts (see

Freeport-McMoran, supra, 12 Cal.App.4th at pp. 644–645;

Watson, supra, 98 Cal.App.4th at p. 1076), we do not read either

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Opinion of the Court by Groban, J.

The Court of Appeal majority did not consider these

authorities. Instead, it concluded that our decision in Elk Hills

established a categorical rule requiring the assessor to deduct

any and all forms of revenue that derive from intangible

contractual rights that are necessary to put the property to its

productive use and are capable of valuation. As explained

above, we reject that broad reading of Elk Hills. (See ante, at

pp. 22–26.) Rather, we hold that when, as here, a project came

into existence as the result of contractual guarantees that

enable the property to generate additional revenue that is

unrelated to the enterprise activity of the entity that owns the

property, the assessor may properly consider that additional

revenue when conducting an income method valuation. Indeed,

excluding a source of revenue that both derives from the use of

the property and “is inextricably intertwined with the creation

and [continued] operation of the [hotel]” (Watson, supra,

98 Cal.App.4th at p. 1075) would “artificially deflate the value

of the property, in violation of the assessor’s obligation to

determine the full cash value of the property” (id. at p. 1072).11

case as turning on that factor. Indeed, both decisions focused

primarily on the fact that the powerplants had been developed

pursuant to contractual rights that assured the “income flow

[would] . . . remain stable” (Watson, at p. 1072) and that those

rights provided the “ ‘means by which appellant’s properties are

put to beneficial use’ ” (id. at p. 1073, quoting Freeport-

McMoran, at p. 646).

Olympic suggests that the occupancy tax payments should

not be treated as income from the property because the

Occupancy Tax Agreement was itself the product of business

negotiations between the original developer and the City. The

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Opinion of the Court by Groban, J.

2. Olympic’s counter arguments

a. Our holding does not mean that all forms of

intangible assets that derive value from the use

of property are taxable

Olympic argues that “[n]o California law supports the

County’s position that an intangible asset with a quantifiable

value may be assessed for . . . property taxation if its value

depends upon a business using tangible property.” According to

Olympic, adopting such a standard would “swallow the rule that

intangible assets are exempt from property taxation” because

“[m]any intangible assets derive value from the use of real

estate, but they remain exempt from property taxation.” As

examples, Olympic cites “[t]he patents used in a manufacturing

facility, the franchise rights of a fast-food restaurant, and the

operating manuals of a retail store,” all of which “depend on real

property to generate value, but [have traditionally been treated

as] exempt from property taxation as intangible assets.”

Contrary to Olympic’s suggestion, our conclusion that the

Assessor did not err by including revenue from the Occupancy

Tax Agreement does not effectuate any sea change in the tax

treatment of intangible assets. Indeed, we view our holding,

which is predicated on the rather unique characteristics of the

Occupancy Tax Agreement, as being narrow in scope.

fact that the Occupancy Tax Agreement might have been the

product of negotiation, however, does not alter the fact that the

structure of the agreement that the parties settled on entitles

the property owner to receive 14 percent more in room rates by

virtue of being the property owner. We express no view regarding

the appropriate tax treatment of other forms of negotiated

payments that lack the characteristics of the Occupancy Tax

Agreement.

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Opinion of the Court by Groban, J.

Preliminarily, we find no merit in Olympic’s sweeping

assertion that no California court has ever found it permissible

to include revenue that derives from an intangible asset that

increases the amount of income the property can generate when

determining a property’s assessed value. Several of the cases

discussed above approved of the assessor’s inclusion of income

that flowed through an intangible asset. (See, e.g., De Luz

Homes, supra, 45 Cal.2d 546 [assessor was permitted to

calculate income based on rights set forth in the parties’

development contracts]; American Sheds, supra, 66 Cal.App.4th

at p. 395 [assessor was permitted to consider how capacity limits

set forth in operating permits “impact[ed]” the “amount of

income [the landfill] could yield”]; Freeport-McMoran, supra,

12 Cal.App.4th at p. 644 [rejecting plaintiff’s assertion that

“property must [always] be valued without consideration of any

type of contract pertaining to income to be derived from

property”]; Watson, supra, 98 Cal.App.4th 1066 [accord].)

Moreover, the various forms of intangible assets that have

traditionally been exempted from property taxation are easily

distinguishable from the Occupancy Tax Agreement. For

example, as explained above, while it is true that franchise

rights or customer goodwill might in some sense “derive value

from the use of real estate,” they do so by increasing the going

concern value of the business operating on the property. (See

ante, at pp. 23–24.) The franchise rights do not alter the ability

of the property itself to generate more income. Stated

differently, if the taxpayer is able to show that an intangible

asset such as franchise rights or customer goodwill allows the

business operating on the property to generate more revenue

than would be expected from a generic business operating on the

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Opinion of the Court by Groban, J.

same property without such assets, the additional revenue

deriving from those assets is nontaxable and must be deducted

from the income stream analysis.

The same could be said of the other forms of intangible

assets Olympic has identified, such as a patent owned by a

business running a manufacturing plant or the operating

manuals of a retail store. Again, those intangible assets might

well increase the value of the business operation that is utilizing

the taxable property, but they do not directly increase the ability

of the taxable property to generate additional income. As stated

by one court, such assets “ ‘ “relate to the real property only in

their connection with the business using it.” ’ ” (SHR St.

Francis, supra, 94 Cal.App.5th at p. 640.)

The Occupancy Tax Agreement, in contrast, is a

government-provided contractual incentive that allowed the

property to be put to use as a hotel by increasing the revenue

that is generated each time a guest uses the property: Every

time a room is rented, the hotel generates 14 percent more in

revenue than it otherwise would. This will remain true

regardless of who might own the hotel or how well or poorly the

hotel business might be run. In that way, the Occupancy Tax

Agreement is an example of an intangible right “ ‘whose primary

purpose is . . . to authorize a more productive use of taxable

property.’ ” (SHR St. Francis, supra, 94 Cal.App.5th at p. 640,

quoting Assessors’ Handbook, p. 155; see Olympic, supra,

90 Cal.App.5th at p. 115 (dis. opn. of Grimes, J.) [“value of the

[Occupancy Tax Agreement] derives directly from Olympic’s use

of its taxable property, much like lease payments from a tenant

to the landlord derive from the use of the property, not just from

the lease agreement”]; see Elk Hills, supra, 57 Cal.4th at p. 619

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Opinion of the Court by Groban, J.

[“ ‘ “[i]ncome derived in large part from enterprise activity [may

not] be ascribed to the property being appraised; instead, it is

the earnings from the [taxable] property itself or from the

beneficial use thereof which are to be considered” ’ ” (italics

omitted)].)

Nor do we find persuasive Olympic and amici curiae’s

contention that allowing the assessment of the Occupancy Tax

Agreement would conflict with well-established case law holding

that an above or below market lease is to be treated as a

nontaxable intangible asset. Those holdings require that when

valuing property encumbered by a lease, the assessor must

generally utilize the fair market rental income of the property,

not the amount generated under the property’s current lease.

(See ante, at pp. 27–28 & fn. 7; Clayton v. County of Los Angeles

(1972) 26 Cal.App.3d 390, 393; Cal. Code Regs., tit. 18, § 8, subd.

(d).) This rule rests on the premise that the negotiation of a

nonmarket lease is effectively a matter of the owner’s enterprise

activity, rather than a reflection of the value of the property

itself. (See Clayton, at p. 393.) Courts have likewise expressed

concern that assessing value based on the income of existing

leases would allow savvy property owners to manipulate their

property taxation rates, thereby requiring assessors to

investigate whether the lessor and lessee may have exchanged

additional benefits that might not be reflected in the rental

price. (See Carlson v. Assessment Appeals Bd. I (1985)

167 Cal.App.3d 1004, 1013, 1012 (Carlson) [the parties’ sales

price “provided a distorted notion of value” given other aspects

of the transaction; assessors should not be required to “ferret[]

out the often undisclosed and secret intentions of lessors and

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Opinion of the Court by Groban, J.

lessees relative to the terms of a lease”]; Dennis, supra,

215 Cal.App.3d at p. 1030.)

Relying on those authorities, Olympic and its amici curiae

argue that the Occupancy Tax Agreement cannot be

meaningfully distinguished from a nonmarket lease insofar as

it is a negotiated contractual right that guarantees the hotel will

receive room rate payments that are in excess of the market

rental rate. Similar arguments were considered and rejected in

Freeport-McMoran, supra, 12 Cal.App.4th 634, and Watson,

supra, 98 Cal.App.4th 1066. Those courts explained that unlike

leases, the power purchase agreements at issues in those cases

“present[] no possibility of . . . manipulation” (Freeport-

McMoran, at p. 644), but rather were “fixed by contract terms”

that “cannot be modified by the parties without governmental

approval” (ibid.). That same reasoning applies.

More fundamentally, we see a meaningful distinction

between an owner negotiating a lease on an existing (or soon to

be completed) property, which is essentially a form of enterprise

activity, and a government-facilitated agreement that allows

the property to generate an elevated level of revenue as a means

of financing an otherwise uneconomical, publicly beneficial

project. As explained, the Occupancy Tax Agreement was

necessary to both bring the hotel into existence and “enabl[e] its

profitable [and beneficial] use” as a hotel. (American Sheds,

supra, 66 Cal.App.4th at p. 392.) That is substantially different

than a standard above-market lease or any of the other types of

intangible business assets that have traditionally been deemed

nontaxable. (See Watson, supra, 98 Cal.App.4th at p. 1075

[distinguishing guaranteed power purchase agreements from

nontaxable intangible “assets [such] as franchise rights,

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Opinion of the Court by Groban, J.

concession rights, cable licenses, liquor licenses, and other

assets attributable to the enterprise value of the business”].)

b. It is immaterial whether the proceeds of the

Occupancy Tax Agreement can be sold to a

third party

Olympic also argues that the Occupancy Tax Agreement

should not be treated as income from the property because the

underlying HDA makes clear that it “can be transferred

independent of the Hotel and does not run with the land.”

According to Olympic, the fact that the Occupancy Tax

Agreement is “transferable” and can “be monetized separately

from the Hotels” demonstrates that payments flowing from that

agreement should not be treated as income from the property

itself. The County disputes Olympic’s interpretation of the hotel

development contracts, asserting that the Occupancy Tax

Agreement payments are contractually required to go to the

owner of the hotel.

In the proceedings below, the Board agreed with the

County’s interpretation, concluding that the contracts

governing the development of the project were most reasonably

construed as creating a requirement that the Occupancy Tax

Agreement “runs with the land.” (Ante, at p. 9.) Although the

trial court affirmed the Board’s finding that the Occupancy Tax

Agreement was assessable, it did not state whether it agreed

with the Board’s interpretation of the governing contracts. The

Court of Appeal, in turn, concluded that “[w]hether the subsidy

runs with the land” was immaterial to its analysis and likewise

declined to address the parties’ conflicting interpretations of the

governing contracts. (Olympic, supra, 90 Cal.App.5th at p. 109.)

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Like the Court of Appeal, we are not persuaded that the

taxation status of the revenue generated from the Occupancy

Tax Agreement turns on whether the agreement can be

transferred to an entity that does not actually own the property

in question. It is well established that “fair market value . . .

equals the sum total of interests in the property.” (Dennis,

supra, 215 Cal.App.3d at p. 1030.) “ ‘Separate legal interests in

property . . . will not affect the manner of assessment, because

the assessment is against the property itself, and . . . payment

of the tax should be a matter of “private arrangement” among

the owners of various interests in the property.’ ” (290 Division

(EAT), LLC v. City and County of San Francisco (2022)

86 Cal.App.5th 439, 454 (290 Division), quoting De Luz Homes,

supra, 45 Cal.2d at p. 563.)

Applying that reasoning here, the Assessor’s duty in

valuing the hotel under the income method was to calculate the

total earnings that could be derived from the use of the property.

(See, e.g., Dennis, supra, 215 Cal.App.3d at p. 1030 [“the

assessor’s valuation equals the sum total of all parties’ interests

in the property”].) Whether the hotel owner could theoretically

choose to transfer some portion of those earnings to another

entity does not alter the fact that the earnings were generated

from the use of the property itself. To the extent Olympic

chooses to sell the revenue from the Occupancy Tax Agreement

to a third party entity (and assuming the agreement permits it

to do so), the question of which entity would be responsible for

paying the property taxes associated with that revenue would

be a matter of private arrangement. (See De Luz Homes, supra,

45 Cal.2d at p. 563; 290 Division, supra, 86 Cal.App.5th at

p. 454.)

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Opinion of the Court by Groban, J.

c. The tax treatment of other forms of government

incentives is not relevant here

Olympic and its amici curiae also argue that the Assessor

should have removed the revenue generated from the

Occupancy Tax Agreement because “California law prohibits the

assessment of subsidies that incentivize a business enterprise

or construction of uneconomic Property.” In support, Olympic

cites to various authorities that relate to the tax treatment of

subsidies incentivizing low-income housing and wind energy

facilities.

Before addressing those two specific categories of

subsidies, we note that the Board found that the Occupancy Tax

Agreement was not offered solely as an incentive to develop the

project, but also as a means of ensuring that the hotel would

continue to operate in a manner that would benefit the

convention center. (See ante, at p. 9.) As explained, payment of

the Occupancy Tax Agreement was dependent on compliance

with the Room Block Agreement, which required the hotel to set

aside a certain number of rooms for conference attendees. Thus,

while Olympic characterizes the Occupancy Tax Agreement

solely as a financial incentive to construct the hotel, the record

demonstrates that the payments were also provided to ensure

the owner continued to operate the property in a way that was

beneficial to the City.

Second, even accepting Olympic’s characterization of the

Occupancy Tax Agreement as a subsidy, Olympic has made no

showing that California has embraced a categorical rule

prohibiting the assessment of all government incentives that are

offered as an inducement to develop projects that are beneficial

to the public. Indeed, our discussion of Freeport-McMoran,

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Opinion of the Court by Groban, J.

supra,12 Cal.App.4th 634, and Watson, supra, 98 Cal.App.4th

1066, makes clear that courts have not embraced such a

categorical rule. To the contrary, those cases effectively held

that when a project was developed pursuant to incentives that

allow the property itself to generate more income, that revenue

should be included in the relevant income calculation. (See ante,

at pp. 29–31.)

Third, the two discrete types of subsidies Olympic has

identified as being exempt from taxation do not persuade us that

the Occupancy Tax Agreement should likewise be exempt from

taxation. The first of those subsidies, which relates to low-

income housing, is the subject of an express statutory

exemption. Section 402.95 provides that in “valuing property

under the income method of appraisal, the assessor shall

exclude from income the benefit from federal and state low-

income housing tax credits.” The fact that the Legislature has

chosen to exempt one specific form of subsidy does not support

the conclusion that California generally prohibits the

assessment of government subsidies. In fact, this statutory

exemption would seem to undercut Olympic’s position: If such

subsidies are generally nontaxable under California law, there

would have been no need for the Legislature to create a special

law excluding the taxation of one type of incentive.

The other category of incentive Olympic identifies relate

to wind energy projects, which are described in the State Board

of Equalization’s Guidelines for the Assessment of Wind Energy

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Opinion of the Court by Groban, J.

Properties (June 2017) (Wind Energy Guidelines).12 We express

no opinion on the Wind Energy Guidelines’ approach to taxing

production tax credits, which is not a question presented in this

case. We think it clear, however, that those incentives — which

provide an income tax credit that could be altered by future

federal action — share little in common with the Occupancy Tax

Agreement, which guarantees that the hotel will generate 14

percent more in actual revenue each time a customer stays on

the premises during the initial 25 years of the hotel’s operation.

More generally, we emphasize that the terms “subsidy” or

“incentive” may be subject to different definitions, depending on

the context. Merely labeling a particular form of revenue as a

“subsidy” or an “incentive” is not dispositive of whether that

revenue can be properly considered when evaluating the

property’s assessed value.13 Nor does our holding create any

Available at https://www.boe.ca.gov/proptaxes/pdf/

lta17020.pdf (as of Aug. 28, 2025.) All Internet citations in this

opinion are archived by year, docket number and case name at

<http://www.courts.ca.gov/opinions/cited-supreme-court-

opinions>.

The dissent argues that the type of “financing credits”

(conc. & dis. opn. of Kruger, J., at p. 8) at issue here cannot be

considered in the valuation of the property. But the cases the

dissent cites in support of that proposition do not address

whether “financing credits” or any other form of financial

incentive may be considered when calculating a property’s

expected net income. Instead, those cases considered whether

favorable interest rates that the government extends to

developers of low-income housing may be considered in

calculating the capitalization rate that is to be applied to the

relevant income stream. (See Bontrager v. Siskiyou Assessment

Appeals Bd. (2002) 97 Cal.App.4th 325, 332 [describing “the

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Opinion of the Court by Groban, J.

categorical rule governing the ad valorum taxation of incentives

that are tied to the development of publicly beneficial projects.

Whether the revenue associated with a particular type of

subsidy or incentive may be properly included in an income

stream analysis must be evaluated based on the individual

characteristics of the incentives at issue.

d. The purpose of the Occupancy Tax Agreement

does not control whether the revenue may be

considered in valuing the hotel

Finally, Olympic contends that the proceeds from the

Occupancy Tax Agreement should not be considered in

assessing the value of the hotel because that agreement was

intended to finance a portion of the construction costs of the

hotel. The dissent raises a similar argument, asserting that

because the parties intended the occupancy tax payments to

operate as a means of offsetting construction costs, those

payments cannot be properly treated as earnings that are

generated from the use of the property. (See conc. & dis. opn. of

Kruger, J., post, at pp. 7–12.)

Much like Olympic’s arguments regarding the tax

treatment of revenue derived from subsidies, we do not believe

that the purpose of the Occupancy Tax Agreement dictates

whether the revenue generated from that agreement may be

considered in assessing the value of the hotel. Nor do we believe

issue at hand” as what “[interest] rate [should] . . . be used to

compute the debt component of the capitalization rate”]; Maples

v. Kern County Assessment Appeals Bd. (2002) 96 Cal.App.4th

1007, 1015 [assessing whether subsidized interest rate or

standard interest rate should be considered when “deriving a

capitalization rate”].)

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that the property owner’s decisions regarding how that revenue

should be put to use (i.e., to offset construction costs) dictates

whether the revenue may be considered in valuing the property.

Rather, our prior holdings make clear that when valuing

property under the income method, the proper inquiry is

whether the revenue qualifies as “earnings from the [taxable]

property itself or from the beneficial use thereof.” (California

Portland Cement, supra, 67 Cal.2d at p. 584.) We simply

disagree with the dissent’s suggestion that this analysis should

be altered merely because Olympic planned to spend that

additional revenue to pay down construction costs or because

the City wanted to help them pay those costs. Regardless of why

the parties may have entered into the Occupancy Tax

Agreement or how the owner may have intended to use the

revenue derived therefrom, the key point is that the agreement

enables the property to generate 14 percent more on room rental

revenue than it would otherwise be able to in the absence of the

agreement. And that will remain true regardless of who owns

the property or how they run their business. In the end, the

proper inquiry in determining whether a revenue stream should

be included in the valuation of the property is how the revenue

is generated (in this case, each time a customer rents a room)

not, as the dissent suggests, how the property owner intends to

use that revenue. (See conc. and & dis. opn. of Kruger, J., post,

at pp. 7–10.)

The dissent also argues that the occupancy tax payments

should not be considered in assessing the value of the property

because the parties could have chosen a different mechanism to

finance the construction costs that would not enable the hotel to

generate more revenue. (See conc. & dis. opn. of Kruger, J., post,

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Opinion of the Court by Groban, J.

at pp. 11–12.) The dissent explains, for example, that rather

than assigning the hotel owner the proceeds of the occupancy

tax, the City could “have given the developer a lump-sum grant”

(id. at p. 11) or “could have contracted for a bank loan for $62

million (the then-present value of future tax payments)” (ibid.)

and then assigned the proceeds of that loan to the developer.

But it matters that the City did not provide a lump-sum

payment or assign the proceeds of a bank loan. Instead, it

agreed to a mechanism that generated more revenue for the

hotel every time a room was rented. In our view, there is

nothing remarkable in concluding that the manner in which a

funding agreement or financial incentive is structured could

have different tax consequences. Nor is there anything

particularly surprising in concluding that it is the nature and

structure of the payments that matters for purposes of

determining whether they can be considered in valuing the

property, not how the owner intends to use those payments. In

Freeport-McMoran, supra, 12 Cal.App.4th 634, and Watson,

supra, 98 Cal.App.4th 1066, for example, the government chose

to incentivize the development of cogeneration power production

facilities by “approv[ing] favorable [power purchase] contracts”

(Watson, at p. 1076) that enabled those facilities to receive a

guaranteed level of income. Presumably, the government could

have chosen a different mechanism to encourage the

development of such facilities, including “a lump-sum grant”

(conc. & dis. opn. of Kruger, J., post, at p. 11) toward

construction costs. But the courts in those cases nonetheless

concluded that the revenue derived from the financial

mechanism that the government did choose to adopt —

favorable power purchase agreements — was properly included

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Opinion of the Court by Groban, J.

in the income stream analysis because those agreements

“guarantee[d]” that the property would generate “a higher

income.” (Watson, at p. 1072.)

The same is true here. Whether these highly sophisticated

parties could have structured their deal differently does not

alter the fact that the agreement they did make enabled the

property to be “ ‘put to beneficial use’ ” as a hotel by allowing the

owner to generate additional revenue each time a customer

rented a room. (Watson, supra, 98 Cal.App.4th at p. 1073).14

D. The Assessor’s Treatment of the Key Money

Payment

The second category of revenue at issue in this case is a

$36 million key money payment that Marriott made to Olympic

pursuant to the terms of the parties’ hotel management

agreement. Olympic does not dispute that Marriott paid the key

money to secure the right to manage the hotel for a period of 50

years. As compensation for those management duties, Olympic

pays Marriott approximately three percent of revenues along

with other incentive-based management fees.

1. The key money payment constitutes earnings from

the use of property

Unlike the Occupancy Tax Agreement, the Court of

Appeal majority’s analysis of the key money payment was not

directly tied to Elk Hills. Instead, the majority reasoned that it

was improper for the County to treat this payment as “income

to the hotel” because the money was in fact provided to Olympic

as a “discount on income to the managers from the hotel.”

We express no view on how other financing mechanisms

might be treated under property tax law.

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Opinion of the Court by Groban, J.

(Olympic, supra, 90 Cal.App.5th at p. 111.) Stated differently,

the majority viewed the key money as a reduction of the total

management fees that Olympic would have to pay to Marriott.

The dissent below disagreed with that characterization,

explaining that the key money paid by Marriott to Olympic was

closer in nature to a commercial lease between a landlord and

tenant: The money was offered to secure tangible rights in the

property that the management company then used “to conduct

commercial activities that generate income of their own.”

(Olympic, supra, 90 Cal.App.5th at p. 118 (dis. opn. of Grimes,

J.).)

We agree with the reasoning of the dissent below. As

explained above, under the income method, an assessor is to

consider “ ‘earnings from the [taxable] property itself or from the

beneficial use thereof.’ ” (Portland Cement, supra, 67 Cal.2d at

p. 584; accord, Elk Hills, supra, 57 Cal.4th at p. 619.) Here, the

Board expressly found that Marriott paid the key money “to

acquire the right to manage the hotel, collect an income stream

from the hotel, and to fly their flag in a prominent and high-

profile location.” Thus, much like a commercial tenant pays rent

to a landlord to make beneficial use of the property, so too here

Marriott paid the key money to secure the ability to use

Olympic’s property to generate its own income stream (in the

form of management fees) and brand the property with its

corporate logo.15

As explained more fully in Justice Grimes’s dissent below:

“In a typical commercial real estate lease, a property owner

generates income from its property by granting property rights

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Opinion of the Court by Groban, J.

The Assessor also presented undisputed evidence that: (1)

management companies offer key money to hotels that have

certain desirable physical attributes, such as their location

within “coveted markets,” their overall size and scope or their

perceived “quality” as a hotel; (2) key money is an expected

source of revenue for owners of hotels that have these types of

desirable attributes; and (3) were Olympic’s hotel not currently

encumbered with a management agreement providing key

money, the owner would be able to enter into another agreement

offering key money of like value.16 Because the evidence showed

that the $36 million key money payment was a market rate form

of revenue that the owner of a desirable hotel would expect to

receive in exchange for enabling a management company to put

the property to beneficial use, the Assessor properly included

that revenue in its income stream analysis. (See, e.g., California

Portland Cement, supra, 67 Cal.2d at p. 584 [when the “income

method is employed . . . . it is the earnings from the property

to a business in exchange for payments. The business then uses

the property rights, in combination with its efforts, to conduct

commercial activities that generate income of their own. An

equivalent arrangement was established here under the

management agreement. [¶] Olympic owns the hotel as an

income-generating investment. [Marriott is] in the business of

managing hotels. To carry out this business, [it] . . . paid $36

million to Olympic in exchange for the right to enter and control

the hotel and assume it as its place of business to the exclusion

of other hoteliers.” (Olympic, supra, 90 Cal.App.5th at pp. 119–

120 (dis. opn. of Grimes, J.).)

Olympic has not challenged the Board’s findings that the

amount Marriott paid in key money ($36 million) reflected the

fair market value of what a management company would be

expected to pay to secure the right to occupy and manage the

type of property at issue in this case.

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Opinion of the Court by Groban, J.

itself or from the beneficial use thereof which are to be

considered”]; SHC Half Moon Bay, supra, 226 Cal.App.4th at

p. 486 [the income method assumes a buyer would pay “ ‘ “an

amount approximately equal to the present value of the future

income to be derived from the property” ’ ”].)

The dissent sees things differently, arguing that the key

money cannot be viewed as income generated from the property

because the “relationship between the hotel owner and the hotel

managers pertains to the prototypical enterprise activities

occurring at the hotel.” (Conc. & dis. opn. of Kruger, J., post, at

p. 15.) The dissent explains that the owner hires the manager

to “run the business,” which includes tasks such as “marketing

the hotel”; “finding and retaining qualified staff”; and “running

nonproperty businesses on the hotel’s premises.” (Ibid.) Given

the nature of this business relationship, the dissent does not

believe that the key money can be properly characterized as

having been paid by Marriott in exchange for the right to put

the property to beneficial use because “[i]t is . . . ultimately

Olympic, not Marriott, that puts the property to use.” (Id. at

p. 16.)

We agree with the dissent that many aspects of the owner-

manager relationship are entrepreneurial in nature, as are

many of the tasks that the manager is hired to perform. We also

agree that the value a hotel owner might derive from the

manager’s competent performance of the entrepreneurial tasks

the dissent has identified — such as “marketing the hotel,”

“finding and retaining qualified staff” and “running non-

property businesses” (conc. & dis. opn. of Kruger, J., post, at

p. 15) — cannot be included in the income stream analysis

insofar as those activities relate to the “business relationship

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Opinion of the Court by Groban, J.

between hotel owner and hotel managers” (ibid.). But unlike

the dissent, we view the key money payment as a stream of

revenue that is distinct from any value the hotel derives from

those entrepreneurial activities. Rather, as the Board explained

in its factual findings, management companies pay owners of

desirable hotels key money in order to secure the right to “collect

an income stream from the hotel” (in the form of management

fees) and place its corporate flag on “a prominent and high

profile” property. Because Marriott paid Olympic the key money

so that it could conduct its own commercial activities on the

property, the assessor was permitted to consider that payment

when valuing the hotel.

Stated differently, we view Olympic as deriving two

distinct forms of value from the relationship embodied in the

management agreement: revenue that Marriott paid to secure

the right to brand the hotel and conduct its commercial

management activities on the property (which may be

considered when assessing the value of the property) and

revenue derived from Marriott’s competent management of the

property (which may not be considered when assessing the value

of the property). Whatever value Olympic’s business might

derive from Marriott’s ability to increase profits through its

management skills is distinct from the key money, which is a

routine form of payment that owners of hotels with certain

desirable physical characteristics (location, size or overall

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Opinion of the Court by Groban, J.

quality) expect to receive from whichever entity it might choose

to manage the property.17

The dissent ultimately reasons that Marriott cannot be

said to have paid the key money to put the property to use

because Marriott was merely hired to put the property to use on

behalf of Olympic. (See conc. & dis. opn. of Kruger, J., post, at

p. 16.) That view, however, fails to account for the fact that both

entities put the property to beneficial use in their own way:

Olympic, using Marriott as its manager, obtains whatever

revenue is generated from the hotel above its operating costs.

But Olympic also received a substantial key money payment

from Marriott that secured Marriott’s right (to the exclusion of

all other management companies) to collect its own income

stream for the commercial activities it performs on the property

and brand the hotel with its corporate logo. And the evidence

before the Board established that key money is tied directly to

the desirable physical attributes of a hotel. Properties lacking

such characteristics receive no such payment. Because Marriott

paid Olympic the key money to obtain certain rights in the hotel

because of its desirable physical characteristics, the assessor

was permitted to consider that payment when valuing the

property. (See Elk Hills Power, supra, 57 Cal.4th at p. 619

The management agreement makes clear that while the

management fee and key money payment provisions were

housed in the same written instrument, they were distinct

obligations made in exchange for separate consideration. The

management agreement, for example, states that Marriott

agreed to pay the key money in exchange for Olympic agreeing

to “enter[] into th[e] Agreement,” whereas Olympic was required

to pay management fees to Marriott in exchange for Marriott’s

management services.

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Opinion of the Court by Groban, J.

[when applying the income method, the assessor considers

“ ‘ “the earnings from the [taxable] property itself or from the

beneficial use thereof” ’ ”].)18

2. Olympic’s counterarguments

Olympic raises several counterarguments as to why, in its

view, the key money payment should have been excluded from

the Assessor’s income stream analysis. First, echoing the

arguments raised in the dissent of Justice Kruger, it contends

that prior case law has-established that “management

agreements are non-taxable intangible assets.” The cases

Olympic cites, however, merely stand for the proposition that

The dissent rejects the view that generating an income

stream by providing management services can be accurately

characterized as a form of commercial activity performed on the

property. It likewise rejects the view that putting a corporate

logo on a commercial building qualifies as a form of putting the

property to beneficial use. Indeed, the dissent finds those

conclusions “inexplicabl[e]” (conc. & dis. opn. of Kruger, J., at

p. 15, fn. 6), reasoning that the key money was actually an

“offset[]” against future management fees (id. at p. 16). This

view does not acknowledge the Assessor’s testimony that key

money is paid only to those hotel owners whose properties have

desirable physical characteristics that will make them

particularly lucrative to manage. Thus, despite the dissent’s

own view that key money merely serves as an offset against

future management fees, the evidence before the Board

demonstrated that key money is paid to obtain the right to

perform certain activities on a hotel property that has

particularly desirable physical characteristics; hotels lacking

such features cannot expect any similar payment. It is a

payment that goes only to those who own an especially valuable

hotel property. We therefore find nothing “inexplicabl[e]” (id. at

p. 15, fn. 6) in concluding that such payments are properly

treated as earnings derived from the property itself.

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Opinion of the Court by Groban, J.

any increase in enterprise value that a business may enjoy as

the result of a beneficial management agreement should be

excluded from taxation. (See, e.g., GTE Sprint, supra,

26 Cal.App.4th at p. 1006; County of Orange v. Orange County

Assessment Appeals Bd. (1993) 13 Cal.App.4th 524, 533–534.)

Under these authorities, a hotel owner would be entitled to a

deduction if it presented evidence establishing that its

relationship with the management company increased the value

of its business operations by, for example, driving more business

to the hotel or otherwise making the hotel more profitable than

would occur in the absence of the management company’s

efforts.

As explained above, we agree (as does the County) that

any increase in the going concern value of the hotel’s business

resulting from a beneficial management agreement may not be

considered in valuing the property. (See ante, at pp. 52–54.)

But the cases Olympic cites regarding the taxation of

management agreements do not address the question at issue

here: Whether key money that a management company pays to

the property owner to secure the right to generate its own

income stream from the hotel must also be excluded from the

valuation. For the reasons set forth above, we conclude that the

answer to that question is no. Unlike the value a hotel owner

derives from a management company’s entrepreneurial

activities, key money is properly included in the valuation of the

hotel because it is paid by the management company to secure

the right to make beneficial use of the property. (See ante, at

pp. 49–55.)

Second, in a related argument, Olympic contends that

while the management agreement provided Marriott the right

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Opinion of the Court by Groban, J.

to manage the property, the agreement did not create “ ‘a

taxable possessory interest’ in the property being managed.” In

support, it cites cases establishing that the right to manage a

property is a form of “intangible asset exempt from property

taxation” (Shubat v. Sutter County Assessment Appeals Bd.

(1993) 13 Cal.App.4th 794, 802), not a taxable interest in

property. Contrary to the situation here, however, those cases

address the taxation of a management company’s contractual

right to manage the property, concluding that the mere right to

manage a property does not create a property interest assessable

to the management company. (See generally Pacific Grove-

Asilomar Operating Corp. v. County of Monterey (1974)

43 Cal.App.3d 675.) Again, those cases have no relevance to the

question here, which is whether a payment that a hotel owner

receives from a management company to conduct commercial

activities on the property and advertise the hotel under the

management company’s brand can be considered in assessing

the property owner’s tax liability.

More generally, we reject Olympic’s suggestion that the

only form of revenue that may be considered when assessing the

value of a hotel is payments that derive from persons or entities

who have an actual possessory interest in the property, such as

a formal lease. Hotel guests, for example, do not enter into a

landlord-tenant relationship with the hotel or otherwise obtain

a formal legal interest in the property, but the money they pay

to use the hotel unquestionably constitutes a form of property-

generated income. So too, regardless of whether they obtain a

true possessory interest in the property, management

companies pay hotel owners key money “to conduct commercial

activities [on the property] that generate income of their own.”

OLYMPIC AND GEORGIA PARTNERS, LLC

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Opinion of the Court by Groban, J.

(Olympic, supra, 90 Cal.App.5th at p. 118 (dis. opn. of Grimes,

J.); see Elk Hills, supra, 57 Cal.4th at p. 619 [“ ‘ “earnings from

the . . . property itself or from the beneficial use thereof . . . are

to be considered [in assessing the value of the property]” ’ ”].)

Third, adopting the reasoning of the Court of Appeal

majority, Olympic argues that under well-established case law,

a “discount reduces the fair market value of property . . . so it is

not subject to property taxation. . . . Thus, . . . the discount on

the intangible Management Agreement is excluded from

assessment.” Much like Olympic’s argument regarding the

occupancy tax payments, we do not view its labeling of a certain

type of revenue as a “discount” to be dispositive of whether that

revenue may be considered in assessing the value of the hotel.

The management agreement makes clear that the $36 million

Marriott paid to Olympic was paid separate and apart from the

management fees that Olympic agreed to pay Marriott. (See

ante, at p. 54, fn. 17.) As Olympic itself acknowledges, Marriott

paid the key money “ ‘[t]o secure [a] trophy [management]

agreement[].’ ” The Assessor, in turn, presented undisputed

evidence that key money is a routine, market rate form of

payment that an owner of a hotel with certain desirable physical

qualities would expect to receive in exchange for assigning the

right to manage the property, which is itself an incident of

ownership of the property. In other words, much like the

physical features of a residential home can increase the value of

the property, owners of hotels with certain desirable physical

features can likewise expect to receive additional revenue in the

form of key money, which is paid to manage the property and

brand it under the management company’s corporate flag for a

specified period of time. Because the key money is a routine

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Opinion of the Court by Groban, J.

form of payment offered in exchange for “ ‘ “the beneficial use” ‘ ”

of the property itself, the Assessor was permitted to consider it

when valuing the property under the income method of

appraisal. (Elk Hills, supra, 57 Cal.4th at p. 619.)

Finally, Olympic argues that because the key money was

a one-time payment that Marriott paid to Olympic to secure a

50-year right to manage the property, “a prospective buyer

would never increase the Hotel’s purchase price to reflect a long-

gone payment of Key Money that future operations will never

produce.” According to Olympic, it would be improper to assess

a one-time key money payment that Marriott has already made

to Olympic because the income method is intended to

“ ‘estimate[] the future income stream a prospective purchaser

could expect to receive from the enterprise.’ ” (Quoting Elk

Hills, supra, 57 Cal.4th at p. 604, italics added.) Olympic also

notes that the terms of the management agreement require it to

refund the key money in the event the agreement is prematurely

terminated. Olympic contends that “[t]he penalty not only

eliminates any incentive to terminate the [m]anagement

[a]greement, but entirely offsets the hypothetical key money a

new owner would purportedly receive from a new manager.”

The problem with that argument, however, is that when

valuing property, the assessor’s role is generally to estimate the

income of the property based on fair market value regardless of

the specific terms of any private agreements that may currently

encumber the property. (See 290 Division, supra,

86 Cal.App.5th at p. 455 [“where private parties restrict a

property’s use, such as by encumbering property with a lease at

below-market rent, such privately imposed restrictions are not

considered in determining the property’s value for taxation

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Opinion of the Court by Groban, J.

purposes”]; Carlson, supra, 167 Cal.App.3d at p. 1013 [appraisal

board “should not have considered . . . privately imposed

restrictions [on the property]. . . . Ownership of title in fee

simple absolute includes the rights . . . of full use and

disposition of the property”].) The Assessor testified that the

owner of a hotel like the one at issue in this case would expect

to receive a key money payment in an amount equivalent to

what Marriott paid to Olympic. The Assessor further testified

that if the property were not already encumbered with this

management agreement, the hotel owner would expect to obtain

a similar payment from another operator. The Board credited

that testimony in its findings, explaining that “[i]f this property

was not encumbered by the [m]anagement [agreement], the

Hotel owner would have the ability to enter into another

[m]anagement [agreement] and receive a similar payment.”

Olympic, in turn, acknowledges that the $36 million key money

payment represents the fair market rate that an owner of this

type of hotel would expect to receive in exchange for the right to

occupy and manage the property. (See Elk Hills, supra,

57 Cal.4th at p. 606 [“the California Constitution requires

generally the assessment of property at ‘fair market value’ ”].)

Whatever restrictions Olympic may have entered into with

Marriott regarding that market rate payment — including any

repayment obligations or penalties in the event that the

management relationship is terminated early — are not

material to determining the hotel’s unencumbered fair market

value.

E. Valuation of Enterprise Assets

The third issue presented in this appeal is whether the

lower courts erred in finding that the County failed to

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Opinion of the Court by Groban, J.

adequately address evidence that Olympic presented regarding

the valuation of three intangible enterprise assets: (1) flag and

franchise benefits that the hotel enjoyed as a result of its

management relationship with Marriott entities (i.e., customer

goodwill associated with Marriott brands and their worldwide

marketing efforts, valued by Olympic at $17 million); (2) the

enterprise value of the hotel’s food and beverage operations

(valued by Olympic at $13 million); and (3) the workforce in

place value (i.e., an assembled, stable workforce valued by

Olympic at $4 million).

The County does not dispute that “those assets are

intangible and that their value to Olympic must be removed

from [the] assessment.” However, relying on a model of hotel

valuation known as the “Rushmore Method,” the County argues

that it did fully account for each of the enterprise assets by

deducting the management fee paid to Marriott. (See SHR St.

Francis, supra, 94 Cal.App.5th at p. 636, fn. 7 [“The Rushmore

Method . . . ‘holds that the deduction of management fees and

franchise fees accounts for any and all intangible assets

contributing to a hotel’s going-concern income’ ” (italics

omitted)].) Stated more succinctly, the County asserts that

deducting the management fee paid to Marriott necessarily

“accounts for and removes” all value that Olympic receives from

its management relationship with Marriott. Olympic, however,

contends that its enterprise assets have value over and above

the management fee, and that the County failed to make any

showing that the management fee fully accounts for such assets.

The trial court ruled in Olympic’s favor on this issue. The

court remanded the matter to the Board with directions that it

“determine the value of the Flag and Franchise, Workforce in

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Opinion of the Court by Groban, J.

Place, and Food and Beverage Income and to deduct that value

from the assessed value of the Property.” The Court of Appeal

unanimously affirmed that portion of the judgment, concluding

that the County had failed to provide sufficient “empirical

support” for the “premise that every franchise fee wipes out all

intangible benefits a franchise agreement might offer a hotel

owner.” (Olympic, supra, 90 Cal.App.5th at p. 112.) As in the

trial court, the Court of Appeal’s disposition remanded the

matter “to the Board for valuation and deduction” of the three

enterprise assets. (Ibid.)

While the County’s arguments regarding the enterprise

assets appear to have shifted somewhat throughout the

litigation, we understand its current argument to be that the

amount a hotel pays in management fees is, as a matter of law,

always sufficient to account for the full value of any enterprise

value that a hotel may have derived from its relationship with a

management company.19

During the Board proceedings, the County does not appear

to have argued — at least not directly — that the Rushmore

Method is always an appropriate means of accounting for all of

a hotel’s enterprise assets. The Board, in turn, does not appear

to have addressed the propriety of the Rushmore Method.

Instead, the Board’s findings state only that it was “not

persuaded by [Olympic’s] . . . valuation of these intangibles and

[did not] believe[] there [was any] . . . compelling evidence to

isolate [them] from the real estate value.” In the present appeal,

the County has not challenged the credibility of Olympic’s

valuations nor has it challenged the Court of Appeal’s finding

that Olympic did in fact provide “credible values” for each of the

assets in question. (Olympic, supra, 90 Cal.App.5th at p. 111.)

The County instead appears to seek a blanket endorsement of

the Rushmore Method.

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Opinion of the Court by Groban, J.

The parties have not identified any Court of Appeal

decision that has categorically accepted, or categorically

rejected, the Rushmore Method of valuation. Instead, the few

decisions that have addressed similar claims have generally

considered the propriety of the Rushmore Method on a case-by-

case basis. In particular, courts have considered whether the

taxing authority presented evidence demonstrating that the

Rushmore Method adequately accounted for the specific

intangible asset at issue in the case at hand. For example, in

SHC Half Moon Bay, supra, 226 Cal.App.4th 471, the Court of

Appeal concluded that the taxing authority’s evidence, which

included testimony from both the assessor and an expert on

hotel valuation, was sufficient to demonstrate that the

deduction of a hotel management fees had captured the value of

one particular form of enterprise asset, namely, the goodwill the

hotel owner derived from its relationship with the management

company. (Id. at p. 493.) The court further held, however, that

the taxing authorities had failed to introduce any evidence

demonstrating that the deduction of the management fee

adequately accounted for other enterprise assets, such as “the

cost of assembling and training a work force.” (Id. at p. 490.)

In SHR St. Francis, supra, 94 Cal.App.5th 622, the court

held that the City of San Francisco had failed to establish that

deducting the hotel management fees fully accounted for the fair

market value of the management agreement. The court

explained that while San Francisco “could have presented

evidence that the return generated by the management

agreement . . . did not exceed the management fees themselves,”

it had failed to do so. (Id. at p. 636; see id. at p. 637 [assessor

had provided no evidence that it had “independently quantified

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Opinion of the Court by Groban, J.

the value of the management agreement in the amount

attributed to the management fees”].) “Absent [such] evidence,”

the court reasoned, San Francisco’s “otherwise formulaic

deduction of those fees from the hotel’s income stream was

legally erroneous.” (Id. at p. 637.)

We agree with the general approach of these cases, which

is also consistent with guidance set forth in the Assessors’

Handbook. (See Assessors’ Handbook, supra, at p. 162 [“the

deduction of a management fee from the income stream of a

hotel does not recognize or remove the value attributable to the

business enterprise that operates the hotel”].) While we do not

foreclose the possibility that the Rushmore Method may be

appropriate to account for intangible enterprise assets that

relate to services provided under a hotel management

agreement, we agree with our Courts of Appeal that when the

property owner has identified and valued a nontaxable

enterprise asset, the assessor must provide evidence that the

value of that asset does not exceed the management fees.

In this case, the only evidence the County cites in support

of its contention that the deduction of the management fee fully

accounted for the three enterprise assets at issue consists of an

academic article written by Stephon Rushmore (the originator

of the Rushmore Method), titled In Defense of the ‘Rushmore

Approach’ for Valuing the Real Property Component of a Hotel.

We are not persuaded that merely referencing an article

regarding the Rushmore Method is sufficient to prove that, as a

matter of law, the deduction of management fees is always a

sufficient means to “account[] for any and all intangible assets

contributing to a hotel’s going-concern income.” (SHR St.

Francis, supra, 94 Cal.App.5th at p. 636, fn. 7.) Nor is citation

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Opinion of the Court by Groban, J.

to that article sufficient to prove that the management fees

account for the value of the three enterprise assets that Olympic

quantified in the board proceedings.20

The judgment of the trial court and disposition of the

Court of Appeal make clear that on remand the County will have

another opportunity to litigate Olympic’s claims regarding the

value of these enterprise assets. At that time, the County is free

to present additional evidence in support of its claim that the

deduction of the management fees accounted for the full value

of the enterprise assets that Olympic identified during the

initial board hearing.21

To provide one example, the Rushmore Method article the

City relies on argues that it is generally inappropriate to make

a deduction for the value of an assembled workforce — which is

one of the intangible assets Olympic sought a deduction for

here — because “[h]otels have extremely high turnover rate and

as a result, [the management company] must constantly recruit

and train new staff.” When testifying before the Board,

however, the Assessor acknowledged that it had not conducted

any investigation as to whether Olympic’s property, a luxury

hotel that might invest more robustly in its workforce as

compared to other hotels, exhibited the high turnover rates that

would justify the Rushmore Method’s reasoning with respect to

this form of intangible asset.

The County has filed a motion requesting that we take

judicial notice of three additional journal articles that

purportedly address the validity of the Rushmore Method. The

County appears to take the position that these articles lend

further support to the use of the Rushmore Method. Whether

the Rushmore Method appropriately accounted for all the

enterprise assets that Olympic identified is a matter to be

addressed in the first instance by the Board. We decline to

consider materials regarding that issue that were not included

in the administrative record.

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v. COUNTY OF LOS ANGELES

Opinion of the Court by Groban, J.

III. DISPOSITION

We reverse the portion of the Court of Appeal’s judgment

finding that the Assessor was not permitted to consider the

occupancy tax or key money payments in determining the hotel’s

assessed value under the income approach. We affirm the

portion of the judgment remanding the matter to the Board with

directions to hold further proceedings, consistent with this

opinion, regarding the valuation of Olympic’s flag and franchise,

food and beverage, and workforce assets.

GROBAN, J.

We Concur:

GUERRERO, C. J.

CORRIGAN, J.

JENKINS, J.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

S280000

Concurring and Dissenting Opinion by Justice Liu

Although the legal principles that govern property

assessment make sense conceptually, I confess they are quite

tricky to apply in this case. As is true in many matters of

taxation, the characterization issues here are challenging and

do not have entirely satisfying answers. I appreciate the well-

reasoned opinions of my colleagues, which ably elucidate the

contending views. In the end, I agree with today’s opinion that

the occupancy tax payments are properly included in the hotel’s

value for property tax purposes. But I would hold that the key

money payments may not be included for substantially the

reasons set forth by Justice Kruger in her separate opinion. And

I join my colleagues in affirming the Court of Appeal’s decision

to remand the valuation of the three enterprise assets to the

assessment appeals board.

LIU, J.

OLYMPIC AND GEORGIA PARTNERS, LLC

v. COUNTY OF LOS ANGELES

S280000

Concurring and Dissenting Opinion by Justice Kruger

Like the majority, I would affirm the Court of Appeal’s

decision to remand the matter to the assessment appeals board

to further consider the value of the three so-called enterprise

assets. Unlike the majority, however, I would also affirm the

Court of Appeal’s conclusion that the Los Angeles County

Assessor was not permitted to include the two revenue streams

at issue here — what we are calling the “occupancy tax” and

“key money” payments — when assessing the hotel’s value for

property tax purposes.

As we have interpreted the relevant property tax statutes,

the answers to these questions turn on whether the payments

enable the hotel to generate additional revenue as property or

instead constitute revenue to the hotel as a business. This is

admittedly a tricky line to draw; a hotel is, after all, in the

business of renting its property. But in my view, the majority

confuses matters when it treats these particular payments as

attributable to the hotel property, as opposed to the business

activities and arrangements the payments were designed to

incentivize. Considering the substance of the transactions at

issue, I would place both payments on the business side of the

line and so would not include them in the taxable value of the

hotel property.

OLYMPIC AND GEORGIA PARTNERS, LLC v. COUNTY OF LOS

ANGELES

Kruger, J., concurring and dissenting

Our decision in Elk Hills Power, LLC v. Board of

Equalization (2013) 57 Cal.4th 593 (Elk Hills) sets out the basic

binary we must apply here. As we there explained, the property

tax laws prohibit the direct taxation of intangible assets. But

they do permit assessors employing the income method of

property valuation to assume the presence of intangible assets

that are “ ‘necessary to put the taxable property to beneficial or

productive use.’ ” (Id. at p. 618, quoting Rev. & Tax. Code § 110,

subd. (e).) So, for instance, an assessor valuing property used

as a restaurant may assume the presence of the necessary

licenses and any other intangible assets necessary to operate the

property as a restaurant, as opposed to a supermarket or

parking lot. But the rule against the taxation of intangible

assets means that the assessor may not “ ‘add[] an increment to

the value of taxable property to reflect the value of intangible

assets’ ” or income appropriately attributable to such intangible

assets. (Elk Hills, at p. 616.) The assessor employing the

income method thus must be careful to distinguish between

income that is attributable to the restaurant property and

income that is attributable to, for instance, the manner in which

the restaurant is run, staffed, funded, or marketed — what Elk

Hills termed “enterprise value.” (Id. at p. 615.)

The appellate case law has explained how these lines are

typically drawn in the property taxation of hotels. “ ‘ “Under the

income method the assessor capitalizes the sum of future income

attributable to the [hotel] property, less an allowance for the

risk of partial or no receipt of income.” ’ ” (SHC Half Moon Bay,

LLC v. County of San Mateo (2014) 226 Cal.App.4th 471, 486

(SHC Half Moon Bay).) As a first step, the assessor typically

adds up the market rates for room fees and other fees that

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guests are expected to pay the hotel over time, into what

constitutes the baseline property income. (Id. at pp. 478–479

[adding up room fees]; SHR St. Francis, LLC v. City and County

of San Francisco (2023) 94 Cal.App.5th 622, 641 [adding

“cancellation, no show, and attrition fees”].) The assessor may

adjust these fees upward based on the presence of certain

intangibles. A management agreement with a high-end hotel

management company, for example, allows the owner to put the

property to “ ‘beneficial use’ ” as a luxury hotel commanding

higher fees from the market. (Elk Hills, supra, 57 Cal.4th at

p. 618; see American Sheds, Inc. v. County of Los Angeles (1998)

66 Cal.App.4th 384, 392 (American Sheds).)1 In some

circumstances, the assessor may consider the “actual income”

from fees the owner is guaranteed to collect under its contracts,

instead of market rates. (De Luz Homes v. County of San Diego

(1955) 45 Cal.2d 546, 572 (De Luz Homes) [adding up actual

rents to be paid by tenants]; see Freeport-McMoran Resource

Partners v. County of Lake (1993) 12 Cal.App.4th 634, 643–644

(Freeport-McMoran); Watson Cogeneration Co. v. County of Los

Angeles (2002) 98 Cal.App.4th 1066, 1072 (Watson).) As a

second step, the assessor evaluates whether a portion of the

stream of income from guest fees is attributable to the hotel’s

“ ‘enterprise activity’ ” — as opposed to the property itself — and

should be accordingly deducted from the property’s baseline

In this case, the Assessor assumed the presence of

competent management of Marriott’s caliber when forecasting

the hotel’s market-rate income. The Assessor “gathered data”

from “hotels within the competitive set” and used these data

alongside pro-forma financial predictions provided by Marriott

to estimate the future income from nightly room fees that the

hotel could expect.

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income. (SHC Half Moon Bay, at p. 491; see, e.g., id. at p. 490

[requiring deduction of portion of the stream of income

attributable to intangible assets including the hotel’s assembled

workforce, agreement with its golf course operator, and goodwill

derived from its management agreement with its hotel

managers]; Elk Hills, at pp. 618–619.) As a third step, the

assessor capitalizes the remaining fee income by applying the

appropriate “capitalization rate” to discount the property’s

future income to its present worth. (SHC Half Moon Bay, at

p. 487; Bd. of Equalization, Assessors’ Handbook, § 501, Basic

Appraisal (reprinted Jan. 2015) p. 99.)

Olympic and Georgia Partners, LLC (Olympic), owns and

operates a hotel in downtown Los Angeles. Like your typical

hotel owner, Olympic generates revenue from its property by

renting rooms to and collecting nightly room fees from guests.

The two separate income streams at issue here, however, stem

from somewhat less typical arrangements: financial

contributions to the hotel project that Olympic (or its

predecessor in interest) secured before the hotel ever opened its

doors.

First, to incentivize the construction of the hotel — which

it believed would play an important role in a decades-long

project to revitalize downtown Los Angeles’s Convention Center

area — the City of Los Angeles (the City) entered into the

occupancy tax agreement with Olympic’s predecessor (the

original hotel developer), which later assigned the agreement to

Olympic. Under that agreement, which the parties’ contracts

called the “Funding Agreement,” the City committed to

“reimburse [Olympic] for approximately $62,000,000 (the

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‘Present Value Costs’) of its costs of constructing the Hotel,

which Present Value Costs would be reimbursed to [Olympic]

. . . over approximately 25 years.” Rather than reimbursing

Olympic all at once, the City agreed to fund this reimbursement

on a pay-as-you-go basis. Under local tax laws, the City collects

from all hotel guests a 14 percent nightly occupancy tax, which

is generally collected by the hotel as part of the hotel bill and

then remitted to the City. Under the funding agreement, the

City agreed to reimburse Olympic for approximately $62 million

over approximately 25 years by remitting, on a monthly basis,

the occupancy taxes collected from guests at Olympic’s hotel.

The City conditioned the reimbursements on Olympic’s

continued operation of the hotel and compliance with their room

block agreement, under which the hotel was to reserve a certain

level of room capacity for conventions and trade shows held at

the nearby Convention Center over the next 30 years.

Second, to entice Olympic to choose its services over those

of other hotel management companies, Marriott International,

Inc. (Marriott) offered what is known in the industry as “key

money” — an upfront cash payment that hotel management

companies sometimes offer hotel owners, particularly when

competition to manage the hotel is fierce, to secure a long-term

management agreement. In its management agreement,

Marriott agreed to pay a $36 million “contribution” to Olympic

“[i]n consideration of [Olympic] entering into” the management

agreement and abiding by the agreement for the length of its 50-

year term. If terminated early, Olympic would have to refund a

prorated amount of key money.

The debate over these two additional streams of income

does not concern the Assessor’s first-step estimation of the

nightly fees that guests were expected to pay the hotel over time.

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(See ante, fn. 1.) In particular, Olympic’s agreements with the

City and Marriott do not allow the hotel to do more business or

operate at a higher tier of luxury or quality. (Cf. American

Sheds, supra, 66 Cal.App.4th at p. 392.) Neither do they

guarantee guest fees above market rate, leading to an increase

in “actual income.” (Cf. De Luz Homes, supra, 45 Cal.2d at

p. 572; Freeport-McMoran, supra, 12 Cal.App.4th at pp. 643–

644; Watson, supra, 98 Cal.App.4th at p. 1072.) Nor does the

relevant debate concern how much to deduct, as a second step,

from the hotel’s baseline property income. (Cf. SHC Half Moon

Bay, supra, 226 Cal.App.4th at pp. 475–479.) The debate

concerns, rather, whether the separate occupancy tax and key

money income streams should be added on top of the baseline

income from nightly room fees.

Under the basic binary framework of Elk Hills, this is

permissible only if the payments are properly considered income

to the real property, as opposed to income generated by

enterprise activities associated with the property — its

construction, or the operation of the hotel business (or hotel

enterprise) at the property. As noted, Elk Hills instructed that

the property tax rules “ ‘do not authorize adding an increment

to the value of taxable property to reflect the value of intangible

assets.’ ” (Elk Hills, supra, 57 Cal.4th at p. 616.) Unless we can

say that the proceeds from the occupancy tax agreement and

management agreement somehow qualify as income generated

by the property itself — and not just income generated from

intangible contracts to which the business owning the property

is a party or beneficiary — their value cannot be added to the

property’s assessed valuation.

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I’ll turn first to the occupancy tax agreement. The

majority concludes that the occupancy tax payments belong on

the property side of the line because they “ ‘derive[] [their] value

from [the use] of taxable property.’ ” (Maj. opn., ante, at p. 25.)

The majority’s observation is true in the sense that the

payments accrue each time a guest stays at the hotel property.

(See id. at pp. 25–26.) But the observation is also incomplete,

because it overlooks the underlying source of the obligation to

pay over the money: the City’s commitment of financial

assistance to the hotel project as an incentive to develop and

operate the hotel, using taxes that are owed to the City. As I see

it, the City’s commitment to provide financial assistance for the

development and operation of the hotel is attributable to

Olympic’s business, not its property.

The majority’s contrary conclusion about the payments

focuses not on the object of the financial assistance, but on the

mechanism the parties chose for financing a part of that

assistance — recoupment of the occupancy taxes paid by hotel

guests to the City. The majority reasons: “Each time a guest

stays at the hotel, the property will generate additional revenue

in an amount that is equal to 14 percent of the nightly rental

rate. The hotel will continue to generate that revenue for the

property owner regardless of what business is operating the

hotel or how well or poorly the business is being run. That is

substantially different than an asset like customer goodwill,

which allows the entity that is operating the property to

generate more business (and more income) for reasons that are

unrelated to the property itself.” (Maj. opn., ante, at pp. 25–26.)

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The majority’s view of the tax agreement does have

superficial appeal. But it turns on the happenstance of how the

parties happened to structure the payments rather than the

substance of their deal. As the majority acknowledges, the

occupancy tax agreement — to which, not incidentally, the

parties’ contracts refer as the “Funding Agreement” — assigned

a nightly occupancy tax, which is revenue to the City, to the

original hotel developer to help it fund the hotel’s construction.

(Maj. opn., ante, at pp. 1, 4 & fn. 1, 5.) The City was to collect

the tax payments from guests into a “facilities reimbursement

fund,” whose funds would be disbursed as monthly

reimbursements over 25 years. At the time of the agreement,

the parties estimated the overall reimbursement payments to

have a net present value of $62 million. In any event, the

reimbursement would be capped at $270 million. As extra

financial assistance, the City immediately paid Olympic a $5

million grant and a few million dollars in development and

permit fee reimbursements. In effect, using the occupancy tax

as the funding mechanism for the vast majority of its

reimbursement guarded the City against the risk of owing

money it does not presently have.

This funding structure, designed for the convenience of the

City, does not alter the substance of the transaction or the

character of the revenue Olympic receives as a result of the

transaction. As the agreement itself aptly characterizes the

occupancy tax payments, they are part of the financial

inducement — essentially, financing credits — that Olympic’s

predecessor successfully negotiated to offset its considerable

costs to build the property. This sort of financing assistance is

not included in a property’s net income under the income

method, even though it may increase the project’s return on

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investment — and even though the financing assistance may

come with strings attached.2 (Cal. Code Regs., tit. 18, § 8, subd.

(c); see Bontrager v. Siskiyou Assessment Appeals Bd. (2002)

97 Cal.App.4th 325, 330–332 (Bontrager) [government subsidy

guaranteeing lower mortgage interest rate over 50 years and

conditioned on the property’s use as low-income housing affects

the applicable capitalization rate, not the property’s net

income]; Maples v. Kern County Assessment Appeals Bd. (2002)

96 Cal.App.4th 1007, 1015–1016 (Maples) [same].) It so

happens, however, that the funding mechanism for the largest

of Olympic’s financing credits depends on collecting and

remitting tax revenue that, although owed to the City, is

generated when guests rent rooms at Olympic’s hotel.

Certainly, receiving an extra payment every time a guest rents

a room, in an amount proportional to the room fees, might look

like extra income for the property. But here the appearance is,

The majority suggests that something more than

financing assistance is involved here because the parties’

agreement includes provisions requiring Olympic to reserve

certain rooms for conventioneers. (Maj. opn., ante, at pp. 32–33,

43.) But financing of this sort often comes with conditions on

use. For instance, a bank might agree to certain mortgage terms

on the condition that a specific business (say a hotel or a mall) —

with a sufficient amount of expected revenue — operates on the

property. A government might offer preferential financing

terms in exchange for a commitment to use the property in a

certain way. (Bontrager, supra, 97 Cal.App.4th at p. 328

[federal government guarantees a favorable interest rate, and,

“in return,” the owner must operate the property as low-income

housing and “lower[] the rent to make it affordable”]; Maples,

supra, 96 Cal.App.4th at p. 1015 [same].) Conditions on use do

not convert financing assistance into revenue subject to property

taxes.

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I think, deceiving; it distracts from the substance of the

transaction that generated those payments in the first place.3

To be clear, I wholly agree with the majority that “[m]erely

labeling a particular form of revenue as a ‘subsidy’ or an

‘incentive’ is not dispositive of whether that revenue can be

properly considered when evaluating the property’s assessed

value” (maj. opn., ante, at p. 45), and that the fact the subsidy

was agreed to before the property started operating is not

dispositive either (contra, id., at p. 28, fn. 8).

The government subsidies at issue in Bontrager, supra,

97 Cal.App.4th 325 and Maples, supra, 96 Cal.App.4th 1007

provide a helpful illustration of how different “subsidies” may

give effect to substantively different transactions that should

receive different property tax valuation treatments. (Contra,

maj. opn., ante, at p. 45, fn. 13.) Under the “Rural Rental

Housing Program,” the federal government provided two

subsidies to facilitate the development and operation of low-

income housing units. First, it provided financing credits by

guaranteeing a lower interest rate on the financing for the

property. (Bontrager, at p. 328.) Second, “[i]t also provide[d] a

rental subsidy to the tenants,” that is, “[i]f the tenant [could not]

afford the reduced rent, the government . . . pa[id] the owner the

difference between what the tenant can afford and the reduced

rent.” (Id. at p. 330.) The government committed to both

subsidies before the property started operating as low-income

housing. (Ibid.) The first subsidy, a financing transaction, had

the effect of lowering the applicable capitalization rate (id. at

p. 332) but did not increase the property’s net income (ibid. [“the

income to be capitalized is the restricted income” from low-

income rental rates]; see Cal. Code Regs., tit. 18, § 8, subd. (c).)

But the second subsidy filled potential gaps in the property’s

rental revenue, which was included in net income. (Bontrager,

at p. 332; see De Luz Homes, supra, 45 Cal.2d at p. 572 [net

income includes actual rental revenue guaranteed by the

government].)

The occupancy tax payments at issue here more closely

resemble the former type of “subsidy” than the latter. In

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To test the hypothesis, consider how the parties’ funding

agreement might have been structured differently to achieve its

central aim. The City could, for example, have given the

developer a lump-sum grant, simply adding to the $5 million

grant and development and permit fees that it immediately

reimbursed — which no one argues is assessable income. (SHC

Half Moon Bay, supra, 226 Cal.App.4th at p. 485 [income

method considers “future income” from “ ‘operating [the]

property’ ”].) Or, in a structure more closely resembling this

case, the City could have contracted for a bank loan for $62

million (the then-present value of future tax payments),

immediately sent this amount to Olympic to cover construction

costs, and committed to reimburse the loan over 25 years by

sending to the bank the proceeds from the hotel’s occupancy tax.

In this scenario, I doubt we would include the occupancy tax in

the property’s income; Olympic would not receive it, the bank,

acting as an intermediary, would. But, in effect, that structure

would achieve substantially the same construction cost

reimbursement as the funding agreement. Unless we can

identify a reason why including an intermediary should make a

substantive difference, I think it follows that the revenue from

this funding agreement likewise should be excluded from the

taxable value of the hotel property. (Cf. Microsoft Corp. v.

Franchise Tax Bd. (2006) 39 Cal.4th 750, 760 [As a general rule,

“[f]or purposes of taxation, what matters is substance, not

form”]; Roehm v. County of Orange (1948) 32 Cal.2d 280, 290

[general exclusion of intangible assets from property taxation

substance, not just in form, the payments represent financing

assistance that should not be counted as part of the revenue

generated by the hotel property.

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prevents the risk of “induc[ing] taxpayers to convert highly

taxable intangibles into tax-free intangibles”]; contra, maj. opn.,

ante, at p. 48.)

To the point that the City could have structured its

reimbursement plan differently, the majority responds that “it

matters that the City did not provide a lump-sum payment or

assign the proceeds of a bank loan [but] [i]nstead . . . agreed to

[the specific] mechanism” in the funding agreement. (Maj. opn.,

ante, at p. 48.) If, as it appears, it is just the funding mechanism

that drives the analysis, then the majority’s decision will

presumably have limited practical effect; next time a local

government wishes to accomplish what the City did here, it will

figure out a different way to fund the project. But it bears

repeating that the structure of the funding mechanism does not

alter the nature of the funding. The revenue in question was

committed by the City before the hotel was ever built, in

exchange for a commitment to develop and operate the hotel,

based on funds remitted to the City. If the City pays that money

to Olympic as per-room occupancy taxes accrue to it, it is still

the enterprise activity of building the hotel — the undisputed

object of the occupancy tax agreement — that is the ultimate

source of this stream of income, and not the rental of any

particular room.4

The majority argues that “the property owner’s decisions

regarding how that revenue should be put to use (i.e., to offset

construction costs)” should not “dictate[] whether the revenue

may be considered in valuing the property.” (Maj. opn., ante, at

p. 47.) Fair enough. But we are here concerned with the City’s

decisions to incentivize Olympic to build a hotel by offering

financing assistance, not with what Olympic chooses to do with

the money once it has been received.

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The majority offers various responses in support of its

property-focused characterization of the occupancy tax

payments, but many of the arguments simply assume the

conclusion. The majority argues, for instance, that the

payments, although not paid to the hotel by guests for their use

of the property, are part of the hotel property’s “actual income”

and properly included in the property’s valuation under De Luz

Homes, supra, 45 Cal.2d 546, Freeport-McMoran, supra,

12 Cal.App.4th 634, and Watson, supra, 98 Cal.App.4th 1066,

because the intangible rights at issue “enable the property to

generate more revenue than it otherwise would.” (Maj. opn.,

ante, at p. 31.)5 The majority also argues that intangible assets

As the majority acknowledges, De Luz Homes, Freeport-

McMoran, and Watson did not concern any arrangements

comparable to the one at issue here (maj. opn., ante, at p. 32, fn.

9); in each case, the revenue streams at issue were generated

through customer payments, whereas here, the City agreed to

pay off its reimbursement commitment over time by turning

over amounts owed to the City as those amounts became due.

(De Luz Homes, supra, 45 Cal.2d at p. 572 [property owner

agreed to lease housing units to military personnel at a

guaranteed rental rate]; Freeport-McMoran, supra,

12 Cal.App.4th at p. 639 [powerplant owner’s power purchase

agreements guaranteed sale of electricity at a specified rate];

Watson, supra, 98 Cal.App.4th at p. 1068 [same].)

The majority reasons the distinction between this case and

the De Luz Homes line of cases makes no difference because,

“[f]rom the perspective of a potential buyer of the hotel

analyzing future revenue that the property can be expected to

generate, it is of no moment whether the hotel owner receives

[an] additional 14 percent payment [each time a guest rents a

hotel room] directly from the customer or through a third-party

intermediary (i.e., the City).” (Maj. opn., ante, at p. 32, fn. 9.)

This phrasing again assumes the conclusion; that is, it assumes

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exempted from property taxation such as franchise rights,

customer goodwill, or patents are distinguishable because they

“do not alter the ability of the property itself to generate more

income” (id. at p. 37); and that government subsidies exempted

from property taxation have “little in common” with the City’s

financial incentive, “which guarantees that the hotel will

generate 14 percent more in actual revenue” for the property (id.

at p. 45). Again, all of these arguments miss the essential point

that the revenue in question stems from the City’s commitment

to fund the development of the hotel, not merely from nightly

rentals.

In sum, as I see it, although the stream of income at issue

here may be structured in a way that superficially resembles

property revenue, its source and substance mark it as

attributable to enterprise activities. It is, in other words, a

stream of income that should flow beyond the reach of property

tax.

I’ll turn next to the key money payments — which, in my

view, fall even more clearly on the “business” side of the Elk

Hills line.

According to the majority, Marriott paid the $36 million in

key money to “secure the right . . . to conduct its commercial

that, from the hotel owner’s (or future owner’s) perspective, the

money at issue is generated in the first instance by room rentals,

as opposed to the hotel’s business contract with the City. As I

see it, whatever value the contract at issue may have to a

potential hotel buyer, that value is properly attributable to the

enterprise and not the hotel property, and should be taxed

accordingly.

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management activities on [Olympic’s] property.” (Maj. opn.,

ante, at p. 53.) The key money payment, in the court’s view, is

thus akin to a commercial lease whose value should be included

in the property’s valuation. (Id. at p. 50.)

Here too, the majority’s description does not capture the

substance of the parties’ transaction. The central question is

whether a managerial relationship, in the particular context of

a hotel business, is equivalent to a tenant relationship. I do not

think it is. The relationship between the hotel owner and the

hotel managers pertains to the prototypical enterprise activities

occurring at the hotel. The owner hires the managers to run the

business, and whether to hire managers in the first place, and

who to hire among a list of managers competing for the hotel’s

business, are business decisions. The managers are tasked,

among other responsibilities, with marketing the hotel to

maintain a profitable level of occupancy, finding and retaining

qualified staff, and running nonproperty businesses on the

hotel’s premises, such as restaurants, spas, or golf courses.

Managers do not pay rent to the hotel owner for the privilege of

occupying the premises; rather, the hotel owner pays fees to

managers for their services in operating the hotel. 6

Though the majority’s fundamental premise is that the

key money secured for Marriott the right to “conduct its own

commercial activities on the property,” the majority

acknowledges that the key money’s ultimate purpose was to

secure the right to receive fees in exchange for operating the

hotel. (Maj. opn., ante, at p. 53; see id. at p. 50.) That is the

more fitting characterization. Inexplicably, the majority fails to

appreciate the import of this acknowledgement: In securing the

right to be paid to operate the

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