Filed 4/7/23

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION EIGHT

OLYMPIC AND GEORGIA 

PARTNERS, LLC,

Plaintiff and Appellant,

v.

COUNTY OF LOS ANGELES,

Defendant and Appellant.

 B312862

 Los Angeles County

 Super. Ct. No. BC707591

APPEAL from a judgment of the Superior Court of 

Los Angeles County, Malcolm H. Mackey, Judge. Affirmed in 

part, reversed in part, and remanded with directions.

Greenberg Traurig, Charles Stephen Davis and Colin W. 

Fraser for Plaintiff and Appellant.

KJM Law Partners, Kevin J. Moore and Evan T. Chavez for 

California Alliance for Taxpayer Advocates as Amicus Curiae on 

behalf of Plaintiff and Appellant.

Renne Public Law Group, Michael K. Slattery, Thomas G. 

Kelch, and Imran M. Dar for Defendant and Appellant.

____________________

CIRCU

LATIN

G 

DRAF

T
2

Tax assessors sometimes appraise commercial property 

using the income method: they forecast yearly income the 

property will yield and discount the future stream to present 

value. This method requires assessors to subtract income fairly 

ascribed to intangible assets, including those directly necessary to 

the productive use of the property. (Roehm v. Orange County

(1948) 32 Cal.2d 280, 285 (Roehm); Elk Hills Power, LLC v. Board 

of Equalization (2013) 57 Cal.4th 593, 614–615, 617–619 (Elk 

Hills).) 

Defendant and appellant County of Los Angeles violated the 

Roehm and Elk Hills rules. The County incorrectly assessed a 

hotel owned by the protesting taxpayer, Olympic and Georgia 

Partners, LLC (Olympic). The County’s assessor erroneously 

included income from three intangibles: a subsidy; a discount; 

and some hotel enterprise assets.

We reverse the portion of the judgment concerning the 

subsidy and the discount. Regarding the hotel enterprise assets, 

we affirm the trial court’s remand of the case to the County’s 

Assessment Appeals Board (Board) for re-evaluation. We remand 

the issue of fees and costs to the trial court. 

I

We begin by describing the three disputed items: the 

subsidy, the discount, and the hotel enterprise assets. Then we 

recount the case’s history.

A

The items in dispute are the $80 million subsidy, the $36 

million discount, and the $34 million hotel enterprise assets. All 

figures, now and later, are in round numbers.

CIRCU

LATIN

G 

DRAF

T
3

1

The $80 million subsidy was from the City of Los Angeles to 

Olympic. 

The City of Los Angeles is different from the County of Los 

Angeles, which is the defendant and appellant here. The City was 

deeply involved with this hotel project from the start—indeed, the 

hotel was the City’s brainchild—but the City is not a party to this 

County tax case.

Last century, the City decided its downtown convention 

center was uncompetitive in the national market because it lacked 

an adjoining convention hotel: a nearby place with 1,000 rooms 

for conventioneers. The City figured a large hotel project in this 

location would be publicly beneficial but privately uneconomic: 

that it would yield extensive municipal benefits, but that no 

private developer would go it alone because the cost would 

outweigh the private payoff. So the City agreed to pay Olympic a 

monthly subsidy to build this tall convention hotel, which today is 

a feature of the downtown skyline.

The subsidy is a function of the room tax the City charges 

hotel guests. The City agreed to give to Olympic the room tax the 

City collects from Olympic’s guests, subject to certain restrictions. 

The County calculated the subsidy’s present value was $80 

million.

Over Olympic’s protest, the County added this $80 million 

figure to the hotel’s assessment. The Board affirmed this 

treatment, as did the trial court.
4

2

The second item is the $36 million discount. Olympic owns 

the hotel but decided to get someone else to manage it, so Olympic 

contracted with two established hoteliers to hire staff, to set rates, 

and to run the place day to day. These two hoteliers are RitzCarlton and Marriott. Each operates a different part of Olympic’s 

building. The public perceives two hotels—one of each brand—

but the two are contiguous and Olympic owns them both, so we 

refer to “the hotel.”

Owner Olympic agreed to pay hotel managers Ritz-Carlton 

and Marriott for their management services.

Obviously, it is a big effort to run a 1,000-room hotel 

successfully. But it is also obvious there could be a sizable profit 

potential from this large venture if you get the contract on good 

terms, if market conditions are favorable, and if you are efficient. 

The lawyerly contract governing this arrangement is some 90 

pages long and later amendments make the whole thing even 

longer. But, for our purposes, the contractual essence is simple: 

owner Olympic promised to pay managers Ritz-Carlton and 

Marriott to run the hotel, and they promised to do a first-rate job. 

The record contains no complaints about the quality or success of 

the whole operation.

This deal has Olympic paying the managers a percentage of 

the hotel’s gross revenues and cash flows. The details do not 

matter here. The thrust is that money flows over time from 

Olympic to the managers in return for the managers’ continuing 

service of running the hotel. 
5

The controversy is about a one-time up-front payment of 

$36 million the managers paid to Olympic. The parties’ jargon for 

this payment is “key money.” In the main, we forsake their jargon 

in favor of the economic substance of the item: it is a discount. 

The bulk of the money flows from owner Olympic to managers 

Ritz-Carlton and Marriott over time, so the logical way to think of 

the up-front, one-time $36 million payment going the other way is 

as a discount the managers paid to secure their deal with 

Olympic—like a cash rebate a dealer gives to prompt a car sale on 

credit. It is a sweetener, a price break: a discount. 

The question is whether a management company’s discount 

to a hotel owner is “income” an assessor should attribute to the 

hotel. The County and the trial court said yes.

3

The third item is a collection of three hotel enterprise assets 

that Olympic valued at $34 million. The assessor and the Board

declined to subtract any of the $34 million. To set out the 

controversy, we describe this item’s three components: flag and 

franchise, food and beverage, and assembled workforce.

“Flag and franchise” refers to the intangible benefits flowing 

to Olympic from its deals with Ritz-Carlton and Marriott. The 

benefits include, for instance, the general customer goodwill 

accompanying these trademarks, together with Olympic’s access 

to these hoteliers’ worldwide marketing systems, toll-free 

numbers, reservation systems, websites, and loyalty programs. 

Olympic likewise gained advantages from their experience and 

expertise in recruiting and training a workforce. Ritz-Carlton and 

Marriott also gave Olympic covenants not to compete in the 
6

vicinity. Olympic’s analysis was that flag and franchise should be 

valued at $17 million.

“Food and beverage operations” denotes the hotel’s two 

restaurants—each affiliated with a different and professedly 

prominent chef—as well as a pool bar, 24-hour in-room dining, 

and banquet operations. The revenue from these sources is 

separate from room revenue. A large percentage comes from 

people who merely visit the hotel for a drink or to dine. Olympic 

proposed a present value of $13 million for the intangible asset 

flowing from these operations.

“Assembled workforce” signifies the intangible benefits 

Olympic gets from the more than 800 trained people employed at 

the hotel. Employers suffering strikes understand the value of 

good labor relations. The employee turnover rate at Olympic’s 

hotel was below average: about 33 percent in 2010 (the first year 

of operation, and a partial year), 20 percent in 2011, 17 percent in 

2012, and 12 percent in 2013. This low and downward trend 

contrasted with a 2001 survey of 98 hotels (not including 

Olympic’s) that showed other hotels had an average workforce 

turnover rate every six months of 47 percent. (Simons & Hinkin, 

The Effect of Employee Turnover on Hotel Profits: A Test Across 

Multiple Hotels (Aug. 2001) Cornell Hotel and Restaurant 

Administration Quarterly, 65, 67.) The authors of the 98-hotel 

survey found lower employee turnover rates confer financial 

benefits because lower rates reduce the costs of recruiting, 

interviewing, and training. (Id. at p. 66.) The savings were 

greater for hotels with higher room rates. (Id. at pp. 67-68.) 

Olympic valued this intangible at $4 million.
7

B

We summarize the case’s history and posture.

This big hotel project was in the works for a long time. The 

City got an environmental impact report for its hotel plan in 2001. 

Olympic entered the picture in 2007 through contracts with the 

City and with Ritz-Carlton and Marriott. Once Olympic 

completed construction, the County sought to value the new 

building and to levy property taxes upon it. 

Olympic argued the assessor should subtract from the 

hotel’s assessment the $80 million, $36 million, and $34 million 

sums just set forth. The County disagreed, and Olympic brought 

the dispute to the Board. The parties could not agree on the right 

way to treat the first two numbers. The third number was the 

$34 million for the hotel enterprise assets, and on this issue 

Olympic supported its claim with an analysis by its expert on 

business valuation, Mary O’Connor. O’Connor submitted her 

credentials, which included her past work of this kind for many 

other companies. She relied on established appraisal methods 

and authorities to identify and value these intangibles. She 

presented worksheets and documents to verify the existence of, 

and the value applied to, these intangibles. O’Connor added up 

$17 million, $13 million, and $4 million to get a total of $34 

million for the hotel enterprise assets. 

Olympic maintained the Roehm and Elk Hills decisions 

required the Board to exclude the three disputed items from the 

hotel’s value.

The Board rejected Olympic’s request.
8

Regarding the subsidy, the Board ruled it would include the 

$80 million because it was “an intangible asset of real property 

that runs with the land and is associated with ownership of the 

property.” 

The Board refused to deduct the $36 million discount, which 

the parties called key money. The Board reasoned the $36 million 

was “a payment received in exchange for a tangible right in real 

property.” It was “a valuable income component of the property,

that runs with the land and should be included in the valuation of 

the property.”

As to the hotel enterprise assets, the Board devoted four 

sentences to its analysis of the issue: 

[The Board] finds that the intangibles relating to the Flag 

and Franchise as well as the Workforce in place are the property of 

[Ritz-Carlton and] Marriott, not of [Olympic]. [Olympic] has a 

right to use them as long as they maintain the Management 

Contract. The Board is not persuaded by the valuation of these 

intangibles by [Olympic] and believes there is no compelling 

evidence to isolate the potential Flag and Franchise and Workforce 

value from the real estate value. As for the last intangible 

identified by [Olympic], [i.e.], the Food and Beverage business 

value, the Board does not find the rents or income used in

[Olympic’s] analysis a reliable [indicator] of the level of income 

and expense to be allocated to the food and beverage business.

Olympic took the matter to the superior court, which held a 

bench trial and heard closing arguments in 2021. The court did 

not issue a statement of decision, but its judgment ruled the 

Board was right to include the subsidy and discount in its 
9

valuation. As to the hotel enterprise assets, the judgment 

remanded this issue for the Board to determine and deduct these 

sums. The court ordered all sides to bear their own costs and fees. 

Olympic and the County both appealed the adverse portions 

of the judgment.

II

We summarize our holding. The County erred by including 

the subsidy and the discount. We reverse the judgment on those 

items. The County also erred by including the value of the hotel 

enterprise assets. The trial court correctly remanded this issue to 

the Board. We remand the fee and cost issue to the trial court.

A

We review the pertinent law in three steps.

1

The modern law of California property taxation began when 

Justice Roger Traynor wrote the Roehm opinion. 

Before appointment to the bench, Justice Traynor had been 

a nationally recognized tax expert, tax scholar, and tax 

administrator. As a professor, he wrote some 20 law review 

articles about taxation. In the era of the Great Depression, 

Professor Traynor served not only as a tax scholar but also as a 

tax advisor, a tax legislative draftsman, and a tax administrator 

during a crisis period for tax policy. (White, The American 

Judicial Tradition (3d ed. 2007) pp. 262–263; Johnson, History of 

the Supreme Court Justices of California, Vol. 2, 1900-1950 (1966) 

pp. 182, 184, 187–189, 191–192, 194–195.) 

With his Roehm opinion, Justice Traynor laid the 

foundation for modern California law on property taxation. 
10

Roehm established that the government’s power to impose 

property taxes turned on whether the property was tangible or 

intangible. Governments within the state could tax tangible 

property directly. But the only forms of intangible property these 

governments could tax directly were (1) notes, (2) debentures, (3) 

shares of capital stock, (4) bonds, (5) solvent credits, (6) deeds of 

trust, and (7) mortgages. (Roehm, supra, 32 Cal.2d at pp. 284–

285; see Cal. Const., art. XIII, § 2 [authorizing property taxes on 

these seven intangibles].) 

This list of seven intangibles stemmed from historical roots 

that Professor Traynor had traced before his appointment to the 

bench. (See Traynor, National Bank Taxation in California

(1929) 17 Cal. L.Rev. 456, 474-478, 490, fn. 105.)

Apart from these seven intangibles, according to Roehm, all 

other intangibles are “immune” from direct property taxation. 

(Roehm, supra, 32 Cal.2d at p. 285.) 

Justice Traynor’s opinion gave the logic for California’s 

fundamental distinction between tangible and intangible 

property. Experience showed attempts to tax intangible property 

had produced more “concealment of intangible assets” than 

revenue for the public fisc. (Roehm, supra, 32 Cal.2d at p. 287.) 

As support, Justice Traynor cited a book by Professor Edwin 

Seligman of the Columbia Law School. (Roehm, supra, 32 Cal.2d 

at p. 287 [citing Seligman, Essays in Taxation (10th ed. 1925) 

(Seligman)].) Seligman’s book recounted that, “especially where

the taxpayers are required to fill out under oath detailed blanks 

covering every item of their property, the inducements to perjury 

are increased so greatly as to make its practice universal. . . . 
11

Official documents tell us that ‘instead of being a tax upon 

personal property, it has in effect become a tax upon ignorance 

and honesty.’ ” (Seligman at p. 27.) This system of taxing 

intangibles was “ ‘debauching to the conscience and subversive of 

the public morals—a school for perjury, promoted by law.’ ” (Ibid

[citing the Illinois Report of the Revenue Commission (1886) p. 

8].) 

For this reason, California forbade direct taxation of 

intangible property, apart from the list of seven assets. 

Roehm’s specific holding was the County of Orange could 

not impose a direct property tax on a liquor license because the 

license was intangible property that was not on this list. (Roehm, 

supra, 32 Cal.2d at p. 290.) 

2

The second major doctrinal step was GTE Sprint 

Communications Corp. v. County of Alameda (1994) 26 

Cal.App.4th 992, 1004, 1007 (GTE).

In GTE, a county assessor valued a company, and the trial 

court affirmed the assessment. (GTE, supra, 26 Cal.App.4th at 

pp. 997–1000.) The GTE appellate court reversed because the 

county had ignored GTE’s evidence of intangible assets and had 

assumed “without adequate explanation” that the assessor’s 

methods automatically had appraised only the enhancement 

value of those intangible assets. (Id. at p. 1001.) GTE’s own 

experts had reasonably established the existence of intangible 

assets as part of the company’s value. These intangibles included 

trademarks, a customer base, an assembled workforce, and the 

goodwill associated with a going concern. (Id. at p. 998.)
12

As they had for many other companies, GTE’s expert 

witnesses relied on established appraisal methods and authorities 

to identify and value these intangible assets. The experts 

presented worksheets and documents to establish the existence 

and value of these intangibles. (GTE, supra, 26 Cal.App.4th at p. 

1003.) Yet the county dismissed all that “without adequately 

addressing” GTE’s evidence. (Ibid.) The county’s view, with our 

emphasis, was simply that, “ ‘[u]nder California law, the income 

attributable to tangible property can be enhanced by the existence 

of intangibles.’ ” (Id. at p. 1004.) But the GTE opinion held that 

“[t]his absolutist approach obscures the [assessor’s] duty to 

exclude intangible assets from assessment.” (Ibid.) Thus, a 

county’s assessment must adequately address the taxpayer’s 

“credible” evidence of intangible valuation. (Id. at p. 999.)

In 2013, the Supreme Court wrote GTE into Supreme Court 

law by citing it seven times in its Elk Hills decision. (See Elk 

Hills, supra, 57 Cal.4th at pp. 604, 606, 610, 613, 615, 619 [citing 

GTE].) 

3

The third and most recent step in the development of the 

governing law was the 2013 Elk Hills decision itself, which 

tackled an apparent contradiction within California tax law. With 

our emphasis, one part of that law directed that “assessors may 

not include the value of intangible assets and rights in the value 

of taxable property.” (Elk Hills, supra, 57 Cal.4th at p. 601 [citing 

Cal. Const., art. XIII, § 2; Rev. & Tax. Code, §§ 110, 212].) 

Another part, however, seemed to give assessors liberty to assume 

the presence of intangible assets necessary to put the taxable 
13

property to beneficial or productive use. (Elk Hills at p. 602 

[citing § 110, subd. (e)].) 

The Elk Hills court resolved this apparent contradiction in 

the treatment of intangible assets necessary to the productive use 

of taxable property by holding that, when using the income 

method to ascertain property value, assessors must quantify and 

subtract income fairly ascribed to such assets. (Elk Hills, supra, 

57 Cal.4th at pp. 614–615, 617–619.) 

Applying this rule, the assessor won on this issue in Elk 

Hills because that taxpayer could not articulate a basis for 

attributing a separate stream of income to its intangible asset. 

(Elk Hills, supra, 57 Cal.4th at p. 619.) But in other cases where 

the taxpayer can fairly value the intangible, assessors must 

deduct that amount from the final assessment. (Id. at pp. 618–

619.)

B

We apply this law to the three assets in this case. Our 

review is independent. (GTE, supra, 26 Cal.App.4th at p. 1001.)

1

For the $80 million subsidy, Elk Hills required the assessor 

to subtract this sum from the hotel’s valuation. This asset was 

intangible and capable of valuation. It directly contributed to the 

hotel’s income stream: the City pays monies to Olympic based on 

hotel usage. It was necessary because without it the hotel would 

not have been built. The law thus required the assessor to deduct 

the $80 million. (Elk Hills, supra, 57 Cal.4th at pp. 614–615, 

617–619.)

The County argues the Board properly found the subsidy 

“runs with the land and is associated with ownership of the 
14

property.” Whether the subsidy runs with the land, however, is 

not the Elk Hills test. Rather, that test is whether the asset is 

directly necessary to the productive use of the property, whether 

it is intangible, and whether it can be valued. (Elk Hills, supra, 

57 Cal.4th at pp. 614–615, 617–619.) Where the answer to these 

questions is yes, as here, then Elk Hills requires the deduction. 

The County seeks to distinguish Elk Hills in three ways. 

These bottles will not hold water.

First, the County notes the assessor won the pertinent part 

of the Elk Hills case. This superficial point overlooks the 

taxpayer’s decisive failure to articulate any basis for valuing the 

intangible in that case. (See Elk Hills, supra, 57 Cal.4th at p. 

619.) Here we have the opposite: Olympic has articulated this 

basis for valuation, which the parties agree was $80 million.

Second, the County points out these payments were to, not 

from, Olympic. By acknowledging Olympic received income from 

this intangible, however, the County places this case within the 

Elk Hills rule.

Third, the County argues there is no agreement the subsidy 

is an intangible asset. But the Board did find it was an intangible 

asset. The County does not argue the subsidy is something 

tangible you can touch. This argument is ineffective.

2

Moving now to the $36 million discount, the County and the 

trial court erred by treating it as income to the hotel. The 

discount was not income to the hotel; it was a price break the 

managers gave the hotel on payments from the hotel. When I get 

a dealer discount for buying a car, the discount is not income to 

me. My payment is income to the dealer, not the other way 
15

around. The assessor’s logic was flawed because discounts are not 

income. 

The County’s defense of its decisionmaking is unsuccessful.

The County cites Civil Code section 1950.8, subdivision (b) 

and Edamerica, Inc. v. Superior Court (2003) 114 Cal.App.4th 

819, 824, which do not concern property taxation and are not 

controlling. The County also argues the discount is “like prepaid 

rent,” but, as pertains to this case, neither Olympic nor the 

managers rented anything from anyone.

The County next argues the contract gave the managers 

rights and duties “tied to” the use of the hotel property. The 

County offers no case support for its proposed and unprecedented

tied-to-property test, which fails to address the fact the main 

management payments go from the hotel and not to the hotel.

The County cites Pacific Southwest Realty Co. v. County of 

Los Angeles (1991) 1 Cal.4th 155, which held a sale and leaseback 

changed ownership and triggered reappraisal. (Id. at pp. 159–

171.) There is, however, no sale and leaseback here. Similarly 

irrelevant is Forster Shipbuilding Co. v. Los Angeles County

(1960) 54 Cal.2d 450, 455–456, which held leases are considered 

real property for purposes of property taxes. That holding is not 

germane. 

The County argues a hypothetical buyer would pay for the 

right to key money. The hypothetical conduct, however, does not 

alter the fact the $36 million was a discount on income to the 

managers from the hotel and was not income to the hotel. This 

argument has the economics backwards.
16

For good reason, the County does not dispute Olympic’s 

assertion the management agreement is an intangible asset. (See 

GTE, supra, 26 Cal.App.4th at p. 1006.)

3

The third item in controversy is the collection of hotel 

enterprise assets. The County treated this collection incorrectly: 

these intangibles directly contributed to the hotel’s success and 

can be quantified.

We explain in more detail.

The county’s treatment was in error. Valuation of these 

intangibles was possible: O’Connor proposed credible values for 

all three and backed up her estimates with 16 pages of analysis 

and exhibits. The Board did not engage O’Connor’s analysis, 

method, or data but rather rejected this work without meaningful 

explanation.

The Board gave two wrong reasons for rejecting O’Connor’s 

valuations. First, Olympic did not own these intangibles; 

someone else did. Second, the analysis was not “compelling” or 

“reliable.” 

The first reason fails. No California law says an assessor 

can require a taxpayer to pay property tax on an intangible so 

long as the taxpayer does not own it. The County cites no 

supporting legal authority for this approach, which offends the 

rule that intangibles are “immune” from direct property taxation. 

(Roehm, supra, 32 Cal.2d at p. 285.) This first reason is 

unavailing.

The Board’s second reason was O’Connor’s analysis was not 

“compelling” or “reliable.” The GTE decision disapproved of 
17

peremptory dismissals. (GTE, supra, 26 Cal.App.4th at pp. 995, 

999, 1001, 1003–1008.) When the taxpayer offers an apparently 

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

Board must diligently grapple with this substance. (Ibid.) The 

trial court properly required the Board to ascertain and deduct 

the value of these intangibles. 

The County vainly tries to distinguish GTE. 

First, “the County makes no claim that all of the value of 

[Olympic’s] intangible assets are taxable ‘enhancement’ value.” 

Be that as it may, the County still must diligently respond to 

credible valuation efforts.

Second, the County argues its assessment “identified and 

completely removed” the value of Olympic’s interest in the 

managers’ franchises and workforces because “the deduction of 

the hotel owner’s payment of a franchise fee to an operator like 

[Ritz-Carlton and] Marriott completely accounts for the value of 

the franchise affiliation and the associated workforce.”

This argument is incorrect. If a franchise fee were so high 

as to account completely for all intangible benefits to a hotel 

owner, the owner would have no reason to agree to the franchise 

deal. The County put an article by Stephen Rushmore in the 

record, 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. (Cf. 

SHC Half Moon Bay, LLC v. County of San Mateo (2014) 226 

Cal.App.4th 471, 492 [disagreeing with a county’s claim that all 

intangible value was removed by deducting the management and 

franchise fee].)
18

C

Olympic argues that, as the prevailing party, it was entitled 

to costs and fees. Determination of this issue is best suited for the 

trial court in the first instance. We remand this matter to the 

trial court.

DISPOSITION

We reverse the trial court’s ruling that the subsidy and key 

money are taxable as property. We affirm the trial court’s order 

remanding to the Board for valuation and deduction of the flag 

and franchise, food and beverage, and workforce assets. In 

recalculating the property assessment, the Board shall exclude 

the values of the subsidy, the key money, and whatever values it 

assigns to the flag and franchise, food and beverage, and 

workforce assets. We remand to the trial court to consider any 

motions for costs and fees. We award costs on appeal to Olympic. 

The requests for judicial notice are denied.

WILEY, J.

I concur:

HARUTUNIAN, J.*

* Judge of the San Diego Superior Court, assigned by the 

Chief Justice pursuant to article VI, section 6 of the California 

Constitution.
1

B312862

Olympic and Georgia Partners, LLC v. County of Los Angeles

GRIMES, Acting P. J., Dissenting. 

I respectfully dissent from the majority’s reversal of the 

trial court’s ruling that the transient occupancy tax and the key 

money were correctly included as taxable income from the use and 

operation of the hotel. The majority invent a new label for the 

transient occupancy tax payments from the City, worth an 

estimated $80 million over 25 years, recharacterizing the 

payments as a “monthly subsidy to build” the hotel. (Maj. opn. 

ante, at p. 3.) The majority invent another new label for the 

$36 million the hotel’s managers paid in “key money” at the 

inception of their relationship with Olympic, recharacterizing it as 

a “discount.” (Id. at p. 5.) I do not think the majority’s new 

terminology and new concepts correctly describe the categories of 

income in question, with the result that the majority reaches the 

incorrect conclusion that these categories of income are not 

properly included in calculating the base year tax value of the 

hotel.

In this dissent, I use the majority’s terminology for 

consistency only. My use is not an endorsement of the judgments 

the terms imply.

The parties agree it was correct for the County to assess the 

real property based on the income approach, which estimates the 

income the hotel could produce under competent management, 

considering the duration and riskiness of the income stream, 

divided by a reasonable rate of return, to arrive at the value of the 

real property, or a capitalization rate (discounted cash flow 

analysis). The valuation of hotels presents issues that do not 
2

arise with office or other buildings that generate income only from 

the real property. Hotel income is derived from the real property 

and a business, and involves income from many sources, including 

intangibles like a good trade name and an experienced workforce. 

For the reasons that follow, I believe that the Board and trial 

court were correct in concluding that the “subsidy” and “discount” 

were properly counted as taxable income of the hotel real property 

for purposes of assessment.

The Subsidy.

The subsidy arises from an agreement between the City and

the hotel’s original developer, L.A. Arena Land Company, LLC. 

The purpose of this agreement was to induce the developer to

build, on land it owned near the Los Angeles Convention Center, a

hotel that would increase use of the convention center. The City

agreed to pay the developer for 25 years the transient occupancy

taxes the City collects from hotel guests—the “subsidy”—in

exchange for the developer building the hotel. The City also 

required that the developer make available up to 750 rooms in the 

hotel for conventioneers. The benefits and burdens of this

arrangement now inure to Olympic. The original developer

assigned the subsidy rights to Olympic at the same time it sold

Olympic the hotel. As a result, every time a guest rents a room at

the hotel, the guest pays a City tax that is ultimately paid to

Olympic.

The majority succinctly sum up this arrangement as follows: 

“the City pays monies to Olympic based on hotel usage.” 

(Maj. opn. ante, at p. 13.) But they lose sight of this reality in 

their conclusion that the subsidy should be ascribed to the 

intangible asset—the City’s agreement to do so.
3

The majority conclude the subsidy is nontaxable pursuant 

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

57 Cal.4th 593 (Elk Hills). The majority interpret Elk Hills as

holding that where, as here, taxable real property is assessed

using the income method of valuation, income streams directly

attributable to intangible assets that are necessary to the

property’s productive use must be excluded. Based on this

interpretation, the majority conclude cash flow from the subsidy

must be excluded from the value of the hotel because it was

(1) generated by an intangible asset; (2) capable of valuation; and

(3) “necessary because without it the hotel would not have been

built.” (Maj. opn. ante, at p. 13.)

I believe the majority misinterpret Elk Hills.

The subsidy is income generated by the use of the taxable 

property, not by an intangible asset. I believe the majority’s facile 

application of the Elk Hills income method valuation discussion

ignores the Elk Hills command to value taxable property based on

all earnings of the taxable property or flowing from its beneficial

use.

Elk Hills’s discussion about adjustments for intangible asset

income when valuing taxable property by the income method is

found at pages 618 through 619 of the Elk Hills opinion. There,

the Supreme Court classifies intangible assets into two categories. 

(Elk Hills, supra, 57 Cal.4th at pp. 618–619.) The first category is

those intangible assets necessary to the productive use of taxable

property but which generate no income of their own. The

emission credits the Elk Hills taxpayer had to buy to operate its

taxable powerplant fell into this category. They were necessary to

operate the powerplant, but no revenue could be ascribed to the

credits. The credits allowed the taxpayer to do business and
4

thereby generate income. (Id. at p. 619.) But there was no “basis

for attributing to [them] a separate stream of income related to

enterprise activity, or indeed any separate stream of income at

all.” (Ibid.) Thus, there was no income from the emission credits 

to deduct from the powerplant’s income used to calculate the 

powerplant’s value.

The second category of intangible assets Elk Hills identifies 

is those which “make a direct contribution to the going concern 

value of the business as reflected in an income stream analysis.” 

(Elk Hills, supra, 57 Cal.4th at p. 618.) The Elk Hills court 

identifies the following as examples: “the goodwill of a business, 

customer base, and favorable franchise terms or operating 

contracts.” (Ibid.) When performing an income method valuation, 

their direct contribution to income “has a quantifiable fair market 

value that must be deducted from an income stream analysis

prior to taxation [of the related taxable asset being valued].” (Id. 

at p. 619.) Excluding income from these types of intangible assets 

was consistent with the Elk Hills taxing authority’s valuation 

manual that excluded “income from intangibles related to 

enterprise activity, such as ‘customer base’ and ‘patents and 

copyrights.’ ” (Ibid.)

After discussing these two kinds of intangibles, the Elk 

Hills court reaffirmed the fundamentals of income method 

valuation: “Under the income stream approach, the fair market 

value of property is based on the projected amount of income that 

property will earn over its lifetime. [Citation.] When using this 

approach, ‘ “[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 
5

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

supra, 57 Cal.4th at p. 619.) 

The majority’s analysis of the subsidy ignores this last

aspect of Elk Hills. In ascribing the income stream (the transient

occupancy tax payments) to the intangible asset (the contract

between the City and the original developer) and stopping there,

the majority ignores this economic reality: The value of the

subsidy 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. While flowing through a contract that the parties 

agree is an intangible asset, the value of the subsidy derives 

directly from the use of the property as a hotel. If the property 

were not being used as a hotel, there would be no subsidy.

Importantly, the Elk Hills court was not presented with, nor

did it discuss, an income-producing intangible asset that derives

its value from taxable property. Rather, it considered only

goodwill, customer base, and favorable franchise terms and

operating agreements (Elk Hills, supra, 57 Cal.4th at p. 618),

each of which derive value from enterprise, or business activity. 

The income from these types of intangible assets is not earned

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

thereof.” ’ ” (Id. at p. 619.) Since Elk Hills did not address income

from intangible assets that is attributable to the taxable property

itself, it does not prohibit counting such income in valuing the

taxable property. (See Hagberg v. California Federal Bank (2004)

32 Cal.4th 350, 374 [“cases are not authority for propositions not

considered”].) The teaching from Elk Hills that applies to such

assets is that an income valuation of taxable property should
6

account for all income properly attributable to such taxable

property.

Here, the subsidy represents income from the use of the

taxable property itself. The fundamental objective of commercial

real estate development is to generate income streams with a

present value greater than the cost to the developer of its

improvements and other costs. Olympic explains that developing

the hotel without public support was uneconomical “because the 

[h]otel cost more than it can generate in capitalized income over 

its lifetime.” The subsidy solved this problem by substituting

payment of the transient occupancy tax for a portion of the income

the hotel would otherwise need to generate from room rentals. 

The record is clear that the subsidy is 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. If the original developer did not agree to 

use the property as a hotel, with 750 rooms set aside for 

conventioneers, no subsidy would have been paid. Because it did 

agree to use the property this way, it earned the subsidy plus the 

returns from the hotel’s operation. For Olympic to acknowledge 

the subsidy effectively “substitute[d]” for unobtainable room 

rental income is to acknowledge the hotel income and the subsidy

were fungible sources of return to justify development of the 

property as a hotel. Both the hotel room rentals and the subsidy 

provide a return from the property in the same way: they both 

flow directly from the use of the property as a hotel. Put another 

way, they are both “ ‘ “earnings from the [taxable] property itself

or from the beneficial use thereof.” ’ ” (Elk Hills, supra, 

57 Cal.4th at p. 619.) Elk Hills commands that such earnings be
7

considered in valuing taxable property under the income method. 

(Ibid.)

Olympic concedes that fees charged guests for use of hotel 

rooms (not just room rental amounts but also no-show charges, 

early departure and late check out fees, pet fees, and charges for 

rollaway beds and cribs) add to the value of its taxable property 

under an income method valuation. I am unpersuaded by 

Olympic’s reasons offered to treat the subsidy any differently.

I reject Olympic’s contention that, because the subsidy is 

not paid in exchange for the City acquiring a property interest in 

the hotel, it cannot be attributed to the property. Many properties 

generate income from transactions that do not grant a property 

interest in that property. An obvious example is the room rental 

fees that Olympic agrees are properly counted in the taxable 

property’s income calculation. By Olympic’s own authority, “ 

‘[g]uests in a hotel . . . have only a personal contract and no 

interest in the realty.’ ” (Schell v. Schell (1946) 74 Cal.App.2d 

785, 789.)

I disagree with Olympic that, because the hotel’s managers 

do not treat the subsidy as income on their books and records, 

that means it is not income from the property. Olympic agreed 

with the managers that the managers’ compensation would vary 

according to hotel operating revenue, without regard to the 

subsidy. The managers therefore understandably included only 

operating revenue in reporting income; there was no reason to 

report the subsidy. The terms of Olympic’s agreement with the 

managers do not delineate the universe of income generated from 

Olympic’s use of the property.

Last, Olympic relies on Revenue and Taxation Code 

sections 402.9 and 402.95 as evincing a state policy against 
8

assessors “including government subsidies in property tax 

assessments.” However, Olympic acknowledges, as it must, that 

these provisions “concern low-income housing.” The government’s 

interest in low-income housing is not analogous to the City’s 

interest in developing a hotel to increase use of its convention 

center. Low-income housing subsidies further broad social policy 

but provide no quantifiable economic benefit to a government 

agency or the general welfare. The existence of the tax code 

provisions Olympic cites indicates they were necessary to create a 

low-income housing subsidy exception to the general rule that 

subsidies may be considered as part of income for assessment 

purposes—not that there is a broad rule against including 

subsidies in income. In jurisdictions where no such exception has 

been made, government subsidies have been included in property 

income for valuation purposes. (See, e.g., Rebelwood, Ltd. v.

Hinds County (Miss. 1989) 544 So.2d 1356, 1365 [“the value of

any federal subsidy or benefits enjoyed by Taxpayer by reason of

its ownership of [low-income housing project] must be considered

in establishing [project’s value for assessment purposes]”]; ibid.

[citing cases in accord].) 

The Discount.

Unbidden by the parties, the majority characterize the 

$36 million the hotel’s managers paid Olympic as key money at 

the inception of their business relationship as a “discount” akin to 

the price reduction a consumer might get when buying a new car. 

(Maj. opn. ante, at pp. 14-15.) Because a discount is not income, 

the majority reason, the Board should not have counted it as 

income of the property for purposes of assessment. The majority’s 

flawed characterization drives their flawed result.
9

As Olympic explains, the managers paid Olympic 

$36 million “[i]n consideration of [Olympic] entering into 

th[e hotel management] Agreement.” The hotel management 

agreement gives the managers the right, and obligation, to use 

their trade name and intellectual property at the hotel and to 

conduct specified business operations there for a term of 50 years, 

for which they are to be compensated by Olympic. If Olympic 

defaults or terminates the agreement early for reasons unrelated 

to the managers’ performance, it must repay the $36 million on a 

prorated basis. If Olympic terminates the agreement early for the 

managers’ failure to satisfy agreed performance benchmarks, it 

must repay half of the $36 million on a prorated basis. And if the 

managers default, Olympic is entitled to terminate and retain the 

full $36 million. 

This projected 50-year business relationship bears no 

resemblance to a consumer car purchase incentivized through a 

price discount—a transaction fully consummated at the time of 

delivery after which the parties go their separate ways. A far 

better analogy is the one the County suggests—a lease of 

commercial property for the purpose of carrying on a business. 

In a typical commercial real estate lease, a property owner 

generates income from its property by granting property rights 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. The managers are in the business of managing 

hotels. To carry out this business, they must have certain rights 
10

in hotel properties they manage. The managers paid $36 million 

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

and assume it as their place of business to the exclusion of other 

hoteliers. As set forth in the management agreement, subject to 

its other terms, the agreement placed “operation of the [h]otel[] 

under the exclusive supervision and control of [the managers]” 

and gave them “discretion and control in all matters relating to 

management and operation of the [h]otel[], free from interference, 

interruption or disturbance.” Inherent in this delegation of rights 

is the right of the managers to occupy and possess the hotel to the 

extent necessary to operate it. (Cf. Civ. Code, § 3522 [“One who 

grants a thing is presumed to grant also whatever is essential to 

its use”].) Without such right, the managers would have no 

ability to rent rooms to guests whose relationship is exclusively 

with the managers. 

The agreement details rights of control over the hotel above 

and beyond the right to operate the hotel. These include the right 

to make certain capital improvements; the right to make repairs; 

and the right to contract with third parties to advertise on the 

hotel’s exterior. And confirming the possessory nature of the 

managers’ rights in the hotel, the managers are obligated at the 

conclusion of their management term to “peacefully vacate and 

surrender the [h]otel to [Olympic].”

That the $36 million was paid for the managers’ use of the 

hotel for 50 years to conduct their business is confirmed by its 

treatment upon termination. If Olympic deprives the managers of 

the right to the full term despite due performance by the 

managers, Olympic must refund a prorated portion of the 

$36 million. The right to use property over time for an agreed 

sum is another attribute shared between the management 
11

agreement and a commercial lease. In my view the Board 

properly treated the $36 million as hotel income, akin to prepaid 

rent under a lease, for purposes of valuing the hotel.

Olympic argues that the $36 million cannot be treated in 

the same way as income from a lease because the management 

agreement is not actually a lease. Rather, Olympic says, it is an 

intangible asset. Olympic’s focus on characterizing the 

management agreement instead of its economic substance misses 

the point. Again, the asset being valued is the hotel, not the 

management agreement. The mode of valuation is the income 

method. The relevant question is therefore whether the 

$36 million paid under the management agreement represents 

income of the real property or on account of its beneficial use. 

Once again, I do not read Elk Hills as excluding from the 

income valuation of a taxable asset all income streams 

represented by intangible contract rights without regard to the 

true source of the income. Elk Hills requires an income valuation 

to be based on “ ‘ “the earnings from the [taxable] property itself

or from the beneficial use thereof . . . .” ’ ” (Elk Hills, supra, 

57 Cal.4th at p. 619.) The usual means of generating income from

real property is through the exchange of traditional property

interests, like lease interests. While it is true that income

generated by intangible assets like goodwill is not properly

counted in real property income, that does not mean every

contract right to receive real property income must be excluded

from the taxable value of the real property. Again, there is no 

dispute that revenue from renting guest rooms is properly 

included in calculating a hotel property’s taxable value, and 

Olympic concedes the guests acquire no property interest in hotels 

during their stays. Like the room rents deriving from intangible 

occupancy agreements, the $36 million, though paid pursuant to a 
12

contract that is not a conventional lease, is income directly 

generated by Olympic’s exploitation of its property rights in the 

hotel. It was money Olympic received on account of conveying

rights founded entirely in Olympic’s ownership interest in the 

property. 

Finally, in supplemental briefing, Olympic asked that the 

majority’s opinion reflect that “a payment made to secure an 

intangible asset (like the Management Agreement) is also 

intangible and therefore exempt from property taxes.” The 

majority declined this request and rightfully so. Where the 

payment secures rights derived directly from taxable property, it 

should be considered income of the property for purposes of the 

income method valuation. In any event, the majority’s analysis 

that the $36 million “discount” does not amount to income at all 

cannot be construed as implying Olympic’s proposed rule.

GRIMES, Acting P. J.