Florida court revises Rushmore method decision

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The District Court of Appeal of Florida, Fifth District, has retracted its recent decision rejecting the use of the Rushmore valuation method to assess real property owned and operated by Disney Parks and Resorts. In a newly released opinion, the Court clarified that the use of the method, as applied, improperly included the value of nontaxable intangible assets in the property’s assessed value.¹ While the revised opinion again remanded the decision to the trial court for reassessment, the Court excluded previous language that had absolutely rejected use of the Rushmore method and had compelled the assessor to use a different valuation method.

Background In 2015, the Orange County, Florida, appraiser assessed the value of the Disney Yacht & Beach Club Resort, one of Disney’s premium properties, at nearly $337 million, an increase of 118% over the prior year’s value. Disney appealed the assessor’s value. At the trial court, both parties agreed to the use of an income approach to value the property, but disagreed as to the methodology in performing the assessment. The senior valuation expert from the Orange County appraiser’s office testified to using the Rushmore method to assess the property.² In doing so, the valuation expert computed the average daily rate (ADR) of the rooms at the property to arrive at gross potential room income. The potential room income was then multiplied by a 75% occupancy rate. Next, the Rushmore method was used to calculate the property’s ancillary income, and that amount was added to the effective room income, ultimately resulting in the nearly $337 million assessment.³

At trial, Disney argued that the Florida Constitution prohibits counties from levying ad valorem taxes on intangible personal property,⁴ and provided expert testimony reflecting its disagreement with the proposed assessment. Disney’s experts determined that the property’s intangible values to be excluded from a real property assessment included the following elements: (i) cash / working capital; (ii) favorable operating licenses; (iii) assembled workforce; and (iv) brand, copyright and goodwill. Disney’s experts valued the property enterprise at approximately $342 million, and the overall tax assessment of the property at approximately $181 million.

The trial court ultimately concluded that the assessor’s effective gross room income calculation was proper, but Disney’s value of the property based on its restaurant retail and spa spaces was appropriate. Based on these adjustments, and the erroneous inclusion of intangible property in the valuation, the trial court determined that the just value of the property was approximately $209 million.⁵

Following an appeal by the assessor, the Fifth District Court of Appeal could not fully resolve the dispute, but did conclude that the Rushmore method was inappropriate. The Court of Appeal remanded the case to the trial court with instructions for the Orange County assessor to perform a new assessment of Disney’s property.⁶ The assessor was specifically instructed not to use the Rushmore method in the new valuation, as a means to ensure that intangible items are not included in the assessed value of the property.

Revised Court of Appeal decision The Court of Appeal granted a motion from rehearing by the assessor, withdrew its previous opinion and issued a substitute opinion in its place. In its revised opinion, the Court of Appeal maintained that the trial court was correct in finding that the assessor impermissibly included Disney’s intangible business assets in its assessment. The Court of Appeal clarified that the Rushmore method, in the manner applied by the assessor in this case, failed to follow the statutory requirement that intangible assets such as goodwill be removed from the total assessed value of the property. Further, the appraiser “did not establish that the trial court erred in its determination that the Rushmore method ignores the fact that an intangible business value may be directly benefiting a business’s income stream.” Maintaining its rejection of Disney’s valuation methodology as in its original decision, the Court of Appeal again remanded the case to the trial court with instructions for reassessment. However, the revised decision no longer includes language requiring the assessor refrain from using the Rushmore method to revalue the property. Likewise, the revised decision eliminates a statement from the original decision unequivocally stating that the Rushmore method violates Florida law.

Commentary The Court of Appeal’s retraction and reissuance of an issued opinion resulting from a request for a rehearing rarely occurs, and doing so in this matter may well change the approach taken by the assessor in its prospective effort to value the Disney resort. As the Rushmore method of valuation is a recognized industry standard, the revised opinion should provide some level of comfort for both assessors and real property owners who have historically relied on its application to value like kinds of real property. Clarity on this issue is especially important for the taxpayer at issue, which owns a very material amount of real property in Orange County, Florida.

By removing the language concluding that application of the method itself violated Florida law, and clarifying that the inclusion of nontaxable intangible assets in the real property assessment was a result of how the method was applied in this case, the Court of Appeal does not restrict use of the Rushmore method, as long as intangible assets embedded into the operation of the resort ultimately are not included in the overall valuation. However, the dispute remains open and litigation is likely to continue if the assessor’s revised valuation does not comport with the Court of Appeal’s revised guidance, or if such valuation continues to reflect a substantially higher level than the taxpayer’s proposed valuation.

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1 Singh v. Walt Disney Parks and Resorts US, Inc., No. 5D18-2927, 2020 WL 3394725 (Fla. Dist. Ct. App. Aug. 7, 2020). For a discussion of the earlier decision, see GT SALT Alert: Florida Rejects Valuation Method on Resort.
2 The Rushmore method for valuing hotel and motel real estate was published in 1984 by Stephen Rushmore and gained popularity among county assessors. See HVS International, The Valuation of Hotels and Motels for Assessment Purposes, Stephen Rushmore & Karen E. Rubin, April 1984.
3 The valuation expert explained that in the case of appraising a hotel, the ancillary income was all income that is not from room revenue. He determined that the property at issue earned nearly $74 million in ancillary income. The valuation expert added the effective room income and ancillary income, then deducted an 80% expense factor from that value, consisting of 70% hotel operation expenses, a 4% management fee expense, and 6% for the franchise fee expense. Following that adjustment, the valuation expert divided the net operating income by a 9.732% capitalization rate, and subtracted nearly $16 million for tangible personal property value, leading to the final assessment of nearly $337 million.
4 FLA. CONST. Art. VII, § 9.
5 The trial court found that the appraiser improperly considered income from the business activities conducted on the Property in establishing the just value of the Property. It also rejected the appraiser’s contention that the intangible assets identified by Disney did not qualify as intangible property. It held that the appraiser was “essentially asking this Court to unlawfully expand the statutory definition of ‘real property’ to include something other than ‘land buildings, fixtures, and other improvements to land…”
6 Singh v. Walt Disney Parks and Resorts US, Inc., No. 5D18-2927, 2020 WL 3394725 (Fla. Dist. Ct. App. June 19, 2020).

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