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CHH Capital Hotel Partners, LP v. District of Columbia

Court of Appeals of Columbia District

February 2, 2017

CHH Capital Hotel Partners, LP, Appellant,
District of Columbia, Appellee.

          Argued December 19, 2016

         Appeal from the Superior Court of the District of Columbia (CVT-9455-09) Hon. John M. Campbell, Trial Judge.

          On Appeal from the Superior Court of the District of Columbia Civil Division

          Steven W. Zoffer for appellant.

          Mary L. Wilson, Senior Assistant Attorney General, with whom Karl A. Racine, Attorney General for the District of Columbia, Todd S. Kim, Solicitor General, and Loren L. AliKhan, Deputy Solicitor General, were on the brief, for appellee.

          Ralph A. Taylor, Jr., and Matthew Wright filed a brief for amicus curiae Omni Shoreham Corporation in support of appellant.

          BEFORE: FISHER and BLACKBURNE-RlGSBY, Associate Judges; and NEBEKER, Senior Judge.


         This case came to be heard on the transcript of record and the briefs filed, and was argued by counsel. On consideration whereof, and as set forth in the opinion filed this date, it is now hereby

         ORDERED and ADJUDGED that the judgment of the Superior Court is affirmed.


          John Fisher, Associate Judge

         Every year the District of Columbia ("the District") estimates the market value of real property to assess taxes.[1] Appellant CHH Capital Hotel Partners, LP ("CHH"), owner of the Capital Hilton Hotel ("Capital Hilton" or "the Hotel"), contends that the Superior Court erroneously sustained an assessment for the 2009 tax year that failed to properly distinguish the value of the Hotel's real property from the value of its other business components. We hold that the trial court did not err in concluding that CHH had failed to carry its burden of proof. Finding no reversible error with respect to the other rulings challenged on appeal, we affirm.

         I. Factual Background

         The Capital Hilton, located at 100116th Street, Northwest, is a 14-story, full-service hotel offering, among other things, 544 guestrooms, a restaurant, meeting spaces, and a health club. The hotel building was originally constructed and opened for business during the Second World War. CHH purchased the Hotel in 2007.

          Larry Hovermale, an assessor with the District's Office of Tax and Revenue ("OTR"), conducted the 2009 tax year assessment of the Hotel, valuing its real property-the land and improvements on the land[2]-as of the January 1, 2008, valuation date. Using the income capitalization approach, [3] Mr. Hovermale initially assessed the real property at $124, 937, 100. CHH administratively appealed the assessment, and OTR sustained Mr. Hovermale's valuation.

         CHH next appealed to the Board of Real Property Assessments and Appeals[4]("BRPAA" or "the Board"). Prior to the Board's hearing on the matter, OTR accepted additional information, including an income and expense report for the 2008 calendar year and a CHH plan forecasting substantial capital outlays for the next five years. Mr. Hovermale updated his income and expense projections, accepted and discounted some-but not all-of the intended capital expenditures, and submitted to the Board a revised assessment of $118, 701, 607. Explaining only that it had "accept[ed] the [OTR] recommendation for a reduced value, " the Board nevertheless lowered the assessment to $113, 148, 379. CHH paid the taxes levied against the Hotel and appealed to the Superior Court, seeking a reduction in the assessed value and a refund of excess taxes paid.

         The taxpayer bears the burden of proving that the District's assessment is "incorrect or illegal, not merely that alternative methods exist giving a different result." Safeway Stores, 525 A.2d at 211; see also Super. Ct. Tax R. 12 (b). At a four-day trial, CHH presented testimony from real estate appraisal expert David Lennhoff, who criticized the District's use of a form of the income capitalization method known as the "Rushmore Approach"[5] (for its creator Stephen Rushmore) and championed an alternative-one he had developed-called the "Business Enterprise Approach" ("BEA" also known as the "Lennhoff Approach"). Using BEA, Mr. Lennhoff valued the Hotel's real property at $95, 700, 000. In conducting his analysis, he assumed that the Hotel would undergo major renovations planned for 2008 even though, at the time he assessed the property, he was aware that CHH did not, in fact, renovate as projected. Since on the valuation date, a prospective buyer would not have known about the ultimate departure from the renovation plans, Mr. Lennhoff thought it inappropriate to consider the actual income collected and expenses incurred after the valuation date.

         David Clark, an assessor with OTR, described the Rushmore-based process Mr. Hovermale had apparently used to assess the Capital Hilton.[6] Rafael Menkes, a major properties assessor with OTR-who the court permitted to testify as an expert for the District in spite of CHH's contention that he was not sufficiently experienced in hotel valuation-testified that, using the Rushmore method, he valued the Hotel's real property at $126, 432, 000. He also explained the logic underlying Mr. Hovermale's assessments and pointed out flaws in the methodology backed by Mr. Lennhoff.

          The testimony revealed that both the Rushmore Approach and BEA use historical operating revenue and expenses to project a company's future net income.[7] Further, under both methods, appraisers identify and deduct income derived from intangible property and personal property to isolate income attributable to real property. [8] The approaches diverge on the details of implementation. With regard to intangible assets, the Rushmore Approach deducts management and franchise fees and, if necessary, adjusts for any residual intangibles. BEA takes these deductions and another for business start-up costs. Mr. Lennhoff contended at trial that the business start-up deduction removes from the income stream unaccounted-for costs associated with getting a hotel up and running-assembling and training a workforce, advertising a new business, and the like-which remain in the value of the property. He maintained that such a deduction is necessary even when valuing a property like the Capital Hilton, which has been operating since the 1940s. Devotees of the Rushmore Approach insist that hotels are ...

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