Among the more challenging elements of a real estate tax assessment on a golf or club property is the allocation of real and personal property value. A recent case (5D18-2927) in the Florida 5th District Court of Appeals (Disney v. Singh) clearly demonstrates the complexity of the issue.
Though not a golf property, this case refers to the assessment of the Disney Yacht and Beach Club in Orange County. At issue is the valuation methodology used to estimate the “just value” (market value) of the real property.
Lodging properties, like golf courses and clubs are typically purchased and sold as going concerns, with considerable tangible and intangible personal property intertwined within the fabric of the bundle of rights. With golf properties, there are the following sources of revenue (and expense) that are typically considered as personal property:
- Golf Carts
- Food & Beverage
In many states, including Florida these items have been removed from the income/expense pro-forma in an attempt to isolate real property value and replaced by a market rental estimate for those areas of the property in order to allow for those areas to be included in the real estate assessment. In the Disney case, the question arose as to whether these items, which are “Disney branded” contributed to the value of the rooms, which generated rent for the real property, and whether that rental income was enhanced by the intangible property that is the Disney brand.
The property appraiser (assessor) simply deducting a management and franchise fee from the equation removed the business income through a method known as “The Rushmore Method” (RUSHMORE). Disney argued that this underestimated business value, thereby overestimating real property value. They said that RUSHMORE ignored things like goodwill, loyal customers and an assembled workforce. In a golf property, this could be assumed to coincide with members or loyal patrons and club staff and crew. In its use of RUSHMORE, the court ruled the property appraiser was asking the court to unlawfully expand the statutory definition of real property beyond “land, buildings, fixtures and other improvements to land”.
The Florida Constitution specifically prohibits counties from levying ad valorem taxes on intangible personal property, which means these elements cannot be assessed. RUSHMORE was considered to violate Florida law because it doesn’t adequately remove non-taxable, intangible business value from the assessment.
In this case Disney’s expert’s rental value of the spaces was not considered supported by competent substantial evidence. Supporting same is likely a high bar, especially with golf course properties given the actual relevant lease comparables. Further, a question that begs asking is how much of the golf cart fee should be attributable to the real property (golf course) and how much to the personal property (golf cart)?
The Appeals Court said first that the property appraiser should reassess the property but NOT use the Rushmore method and secondly that it would have preferred resolving the dispute but that sufficient evidence was not presented to resolve these questions.
Thus, here are some thoughts on resolving ad valorem tax assessment cases, for golf properties in Florida and other states with similar allocation procedures:
- Consider both return on and return of capital for golf carts to allow for apportioning revenue that may be attributable to real property;
- Consider what might be truly comparable rental space for golf property spaces for pro-shop and food and beverage areas. Research relevant data for same;
- Identify and consider intangible assets that impact the club’s rates and prices and analyze that impact;
The law on these issues is clear. Only real property should be assessed. What is less clear is how to estimate and allocate the value of a going concern for purposes of a real property ad valorem assessment.
One method used in New York State is called the “Market Rent Approach” which estimates a rental value for a golf property and capitalizes that rental into a value indication. Unfortunately, that method is not representative of market value (which presumes a sale) because it is not reflective of the actions of market participants. Furthermore, in most cases golf course leases include equipment, the branding of the property already established and other elements not considered real property.
While we await the lower court’s potentially revised decision, the appeals court has advised us that we need to consider each of these elements contributory value to the whole and that we need to identify relevant market data to do so.