Court Opinion

ID: 9385707
Source: CourtListenerOpinion
Date Created: 2023-04-07 21:02:15.314645+00
Date Added: 2024-06-11T17:18:04.061766
License: Public Domain

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                     B312862
 PARTNERS, LLC,
                                         Los Angeles County
         Plaintiff and Appellant,        Super. Ct. No. BC707591

         v.

 COUNTY OF LOS ANGELES,

         Defendant and Appellant.

CIRCU  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.

LATIN
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.

  G    Renne Public Law Group, Michael K. Slattery, Thomas G.
Kelch, and Imran M. Dar for Defendant and Appellant.
                           ____________________

DRAF
CIRCU 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

LATIN
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

  G
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

DRAF
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

  T
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.

                                   2
                                     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.

                                     3
                                  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 Ritz-
Carlton 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.

                                  4
      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

                                 5
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.

                                 6
                                  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.

                                  7
      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

                                  8
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.

                                 9
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. . . .

                                  10
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.)

                                 11
      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

                                 12
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

                                  13
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

                                 14
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.

                                 15
      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

                                 16
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].)

                                  17
                                 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.

                                 18
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

                                 1
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.

                                2
       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

                                 3
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

                                 4
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

                                 5
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

                                6
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

                                7
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.

                                 8
       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

                                 9
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

                                10
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

                                11
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.

                                12