Sections 9.1 to 9.5 discuss the various methodologies advocated in the assessment community to wrestle with the issue of isolating the value of the FF&E from the going concern. One thing is apparent; there is no universally accepted method.  A methodology is required that is uniform, equitable, rooted in market evidence and is easily understood and administered. Further it must stand the best chance of withstanding challenge.

There is no dispute that a going concern hotel/motel is a mixture of real property (land and improvements), personal tangible property (FF&E) and intangible personal property, i.e. Business Enterprise Value (BEV).  By extension there is no dispute that the revenue, expenses, and net operating income of a going concern hotel/motel is a conglomeration of these components. They all work together to create the going concern. For instance, the room rate achieved is a combination of the real property and the FF&E installed in the rooms.  If the room rate rises or falls, intuitively the contribution of both the real property and the FF&E to the going concern will likewise rise or fall. So it is reasonable to assume that the value of the FF&E will rise or fall at least in tandem with the going concern value. Although it could be argued the shorter life of FF&E relative to real property imputes greater risk, therefore greater fluctuations in value, this proposition merely serves to complicate an already complex issue.

If the FF&E rises or falls in tandem with the value of the going concern it seems that a strong argument can be made that the value of the FF&E remains at a constant percentage of the going concern value. Though there may be suggestions that all hotels/motels do not have a single percentage contribution to the overall going concern value, research on the topic reveals a fairly tight range.  As an example, HVS produce an annual survey of development costs for hotels broken down by assets within the going concern and it reveals a fairly tight range. (See Appendix G). This source can be supplemented and benchmarked by local data collected by the assessor.

A model with a range of percentages based on hotel type increases the likelihood of a challenge by the taxpayer for inclusion in the type which attracts the highest percentage. A single percentage deduction has the strength of being tied to the overall going concern value, which is driven by revenue and expenses.  It follows on balance that the higher valued properties will tend to be the better quality properties and the varying amounts of FF&E will be reflected in higher deductions as a result of a single percentage allowance.

This methodology has the following advantages:

• It fits within the mandate of mass appraisal.
• There are a variety of sources from which market data can be obtained to support the percentage.
• It provides for a direct relationship between the value of the FF&E and the going concern value.
• Since the overall NOI is capitalized into value by direct capitalization which inherently provides for a return on and of an asset, a percentage of the going concern value will inherently provide for a return on and of FF&E.

In conclusion it is suggested a single percentage deduction, with no reserve for replacement expensed out of the NOI will produce FF&E values which are:

• Equitable.
• Rooted in market evidence.
• Easily understood and administered.
• Meet the test of mass appraisal.
• Most likely to withstand challenge.

The following example demonstrates the authors’ suggestion:

Going concern value = $10,000,000

Less return on and of FF&E = 12.0% = $1,200,000

The results of the FF&E deduction and BEV deduction are contained at the conclusion of section 10.4.