The Rushmore Method proposes a very simple process to account for and isolate the value of all intangible non-realty assets.  It is Rushmore’s opinion when a hotel/motel owner enters into a management contract with a hotel management company it allows the owner to assume a totally passive role with respect to various business activities involved with the running the hotel. The hotel company is paid a management fee for these services, which can be recognized as compensation for running the business. As such the management fee represents a portion of the income stream attributed to the business component. Similarly when a hotel owner requires a chain affiliation and benefits associated with a brand and reservation system, there are two choices:

• Hire a management company that combines both management and brand.
• Contract with a separate hotel franchise company to provide the affiliation and reservation system.

Whichever option is chosen it is Rushmore’s opinion that the combination of management and franchise fees represents the income attributed to the intangible business component and can be measured in value terms in one of two ways:

• Capitalizing the management and franchise fees, then deducting that value from the going concern values, or
• Including the management and franchise fees in the operating expenses, thereby reducing the net operating income (NOI), and effectively removing the business or intangible value from the final value.

The strength of the Rushmore approach is that there is a correlation between the value of the going concern and the value of the intangible non-realty value.  As the value of the going concern rises or falls, so too does the value of the intangible non-realty value.  In this respect, value is consistent with performance.  But it is suggested that in one important respect the Rushmore approach is too simplistic.

There is general agreement that different assets attract different risks and that the hierarchy of risk from lowest to highest is real property, tangible property (FF&E), and intangible property (BEV).  The Rushmore Method does not account for this hierarchy.

In Rushmore’s Option 1 and Option 2 above, a blended overall capitalization rate or a blended tax-loaded overall capitalization rate is used.  A blended capitalization rate reflects the combination of rates for real property, FF&E and BEV.  This works fine for valuing the going concern as a whole but application of a blended rate to only the real property, FF&E or intangible personal property in isolation will result in an overstatement or an understatement of value for the particular asset type.  Real property value will be understated, while FF&E value and BEV will be overstated.

An overall blended going concern capitalization rate is lower than a BEV capitalization rate.  Thus, when the blended rate is applied to the management and franchise fees the BEV will be overstated.

A complication arises when the blended capitalization rate is tax loaded to account for real property taxes.  A tax loaded rate applied to FF&E or BEV will implicitly deduct a tax component that should only be removed in respect of the real property.