Blog

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

Every franchise hotel owner will agree that a large portion of their revenue is due to the flag under which they operate.  Whether it be because of people booking reservations on the flag’s home website, franchise award programs, franchise brand marketing, or just people staying at the hotel because of the certainty the flag provides to its clients, clients look for brand names they can trust.  This added value is an intangible that increases the revenue produced by the franchise hotel compared to a comparable independent hotel.  Texas law does not allow the appraisal districts to include the valuation of intangibles in the total market value.  Therefore, this intangible franchise value must be reduced from the total market value of the hotel itself.  A major issue has been how to calculate this value.  In my experience in the hospitality market and just driving up and down any major corridor, it is obvious that independent hotels are becoming a thing of the past.  There are fewer quality, independent hotels across the state and nationally.  This problem adds to the difficulty in calculating the franchise value, but at the same time, proves that this intangible value does exist.

Please feel free to contact me if you would like to discuss this or any other property tax issue.

Niral Gandhi