California Supreme Court Clarifies Taxation of Certain Intangible Assets in Hospitality Sector

On August 28, 2025, the California Supreme Court issued a pivotal decision in Olympic & Georgia Partners, LLC v. County of Los Angeles, 574 P.3d 642 (2025), addressing how certain intangible assets are treated in property tax assessments for hotels and similar properties. This ruling has important consequences for hotel owners, operators and developers.

Background

The dispute centered on the property tax assessment of the JW Marriott and Ritz-Carlton Hotel in downtown Los Angeles. The Court examined whether certain revenue streams should be included in the taxable value of hotel properties. Three categories of intangible assets were at issue:

• Occupancy Tax Assignment: An assignment of transient occupancy tax revenues received by the City of Los Angeles to the hotel owner to incentivize hotel construction.
• Key Money: A substantial payment from the hotel manager to the owner for management rights.
• Hotel Enterprise Assets: Business-related assets including the hotel’s flag and franchise (branding), food and beverage operations and workforce.

Supreme Court’s Ruling

The Court’s majority held that both the occupancy tax subsidy and key money payments could be included in the property’s taxable value, reasoning that these revenue streams are derived from the property itself rather than the business operating it. The decision distinguished between intangible assets that enhance the value of the business operating on the property and those that directly enable or increase the income potential of the property itself.

The Court also rejected the County of Los Angeles’ deduction of the management fee to exclude a hotel’s enterprise assets from its income, emphasizing that the management fee alone does not necessarily account for the full value of these intangible business assets (brand value, franchise agreements and workforce). Instead, when a hotel owner has valued such nontaxable assets, the tax assessor must demonstrate that the management fee accurately represents their value.

The Court clarified that its holding is narrow and specific to the unique characteristics of the intangible assets at issue in this case. Not all intangible assets are subject to real property tax by virtue of their association with real property; rather, each must be evaluated independently based on its relation to the business versus the property.

Practical Implications

• Hospitality Owners and Developers: Should review how subsidies, incentives, management agreements and other intangible assets are structured, categorized and accounted for in their projects. Careful drafting may help mitigate adverse tax consequences.
• Tax Planning: Agreements should be reviewed and, if necessary, revised to ensure that each revenue stream is independently described and categorized to minimize risk of unfavorable tax treatment.

Client Considerations

Clients in the hospitality industries are encouraged to:

• Assess current and future agreements for potential tax exposure.
• Consult with legal counsel to ensure compliance and optimize tax positions in light of this decision.
• Monitor further developments, as the Court emphasized that tax classification of each intangible asset depends on its unique characteristics.

Best Practices for Structuring Hotel Management Agreements

To minimize property tax exposure and ensure compliance with the latest legal standards, hotel owners and developers should consider the following:

• Clearly Distinguish Property Income from Business Income:
  Structure agreements so that revenue streams attributable to business operations (such as brand licensing, management expertise and goodwill) are clearly separated from those tied to the real estate.
• Document Management Fees and Franchise Payments:
  Ensure that management and franchise fees are well documented and reflect the value of services provided, not the value of the property itself.
• Review and Update Existing Agreements:
  Review current management and franchise agreements to confirm that intangible assets are properly accounted for and excluded from the value of the real estate.
• Consult with Legal and Tax Advisors:
  Work with counsel to draft agreements that align with the Court’s guidance and to develop strategies for defending property tax valuations.
• Monitor Future Developments:
  Stay informed about further legal developments and adjust agreements as needed.

For further guidance or a review of your hotel management agreement or property tax strategy, please reach out to our team.