Is a developer entitled to exclude from assessed value of a property the income received from subsidies and a property operator’s agreement?

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

Facts: A developer enters into an agreement with a city to build a transient occupancy property for use as a hotel. The developer receives a subsidy from the city. On completion of construction, the developer enters into an agreement with a transient occupancy operator to occupy and manage the property under which the developer pays the operator a percentage of the revenues for their operations on the property. On assessing the property, the county assessor included the value of the subsidy and revenue from the developer’s agreement with the operator as income produced by the property. The developer seeks to exclude the value of the subsidy and the management contract from the property’s assessed fair market value (FMV).

Claim: The developer claims the assessor improperly included the values of the subsidy and the operator’s agreement in the property’s assessed FMV since they are intangibles, not real property.

Counterclaim: The county claims the assessor properly included the values of the subsidy and the operator’s agreement in the property’s assessed FMV since the subsidy and the operator’s agreement run with the ownership of the property.

Holding: A California appeals court holds the assessor improperly included the values of the subsidy and the operator’s agreement in the assessment since they are intangibles, not real property, as the property was built due to the subsidy and the operator’s business contributed to the property’s productive use. [Olympic and Georgia Partners LLC, v. County of Los Angeles (2023) 90 CA5th 100]

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

Editor’s Note: The Supreme Court of California has granted a petition for review of this case. It is crucial to consider income flowing from a property to the owner, whether directly or indirectly, when determining its fair market value. Without ownership of the property, the income in this case – which is comparable to rental income from a net lease agreement – would not be received, and thus, it must be a factor in the evaluation process. The appellate court erred by not treating indirect income received solely due to ownership of the property as contributing to the worth of the property.

Stay tuned to the ft Journal for updates on the evaluation of income property in appraisals and broker price opinions (BPOs) this case will clarify.