With franchise properties, whether it be hotels, restaurants, self-storage facilities, department stores, etc., the value of the franchise is an intangible that should not be taxed. Although appraisal districts accept the existence of this intangible value for the franchise, some districts discount the property’s franchise value by claiming that the property expenses account for this intangible value. Most notably, appraisal districts have argued that since royalty fees are included as an expense, the value of the franchise is already assumed into an income capitalization workup. However, this argument is flawed. Royalty expenses account for the cost of a franchise, not the value. The value that the franchise brings to the property must be more than the royalty costs, otherwise the property would not have its flag in the first place. Property owners have realized that the value of flags are above the fees paid to the franchisor and therefore take on those expenses. Still though, the problem becomes how to calculate the amount of the value above the royalty fees. Although there is no doubt that the value is greater than the cost, the difficulty is in determining how much greater is the value over the cost. In addition, since no two properties are alike, determining this additional value requires a case-by-case review.
Feel free to contact me for more information on this issue.
Niral Gandhi
