Why assisted living is the new property tax frontier

Chris O'Neall specializes in property and local tax matters as a partner in the law firm of Cahill, Davis and O'Neall LLP, the California member of American Property Tax Counsel. Chris O'Neall specializes in property and local tax matters as a partner in the law firm of Cahill, Davis and O'Neall LLP, the California member of American Property Tax Counsel.

Like hotels, these facilities feature non-taxable intangibles

By Cris K. O’Neall, Esq.

Assisted living is moving to the forefront of the ongoing debate over the role of intangible assets in property taxation. Over the past 10 or more years, property tax professionals and the courts have focused discussions of intangible assets on hotel and resort properties, which tend to rely on brands, assembled workforces and other intangible assets in their operations. 

Intangibles are exempt from property taxation in most states, so hospitality property owners have fought to exclude the value of those intangibles from their property assessments.

The courts have resolved the question of whether the value of intangibles can be included in the value of hospitality properties, establishing case law through key decisions such as those by California’s Supreme Court and Court of Appeal in Elk Hills Power vs. Board of Equalization and SHC Half Moon Bay v. County of San Mateo.

In those cases, the courts have explained that assessors must remove the value of non-taxable intangible assets and rights from a property’s value so that only real property is assessed for property tax purposes.

Owners should take page from hotel playbook

Now tax industry professionals are asking whether the principles used to exclude intangibles from hospitality property assessments can also apply to assisted living properties. The answer to that question might have been “no” just 15 years ago, prior to the explosion in the number and sophistication of assisted living communities. At that time, it would have been impossible to argue that there were significant intangible assets and rights involved in the operation of most assisted living facilities.

But assisted living operations have become more sophisticated in recent years, incorporating more valuable and more numerous intangibles. That trend has created opportunities to reduce property taxes
in the same way that hospitality operators limit tax exposure for their properties.

Today’s assisted living facility is much more than a building with a license to provide convalescent care. Top-rated facilities employ staffs with a variety of expertise in caring for the aged, including highly specialized skills to care for residents suffering from memory loss due to dementia or Alzheimer’s disease. 

Staff-to-resident ratios can be as high as 2-to-1. And the personal care for residents occurs 24 hours a day, seven days a week, so the number of employees needed to operate an assisted living facility has greatly increased.

In addition, high-end assisted living facilities offer more services to their residents today than properties typically provided in the 1990s, making them increasingly similar to hospitality businesses. Nowadays, residents have full food and beverage services, often with a choice of several meal plans. 

Assisted living facilities also offer hairdressing and barber services, laundry, housekeeping, transportation and, in some cases, staff-coordinated activities. The operator provides all of the services mentioned above in addition to any medical supervision, physical therapy or other healthcare offerings.

Nearly all of the recent improvements in assisted living reflect the increased number of intangible assets and rights that assisted living facilities must use in order to deliver the services that their residents require — and the residents’ families demand. 

Much like a high-end hotel or resort, the many services that upscale assisted living facilities provide to residents bear little relation to the building and location where the service delivery occurs. Rather, the trained workforce provides those services.

Generally speaking, only the building and land are subject to property taxation. Consequently, value created by the workforce and the services it provides is a non-taxable intangible asset, which must be excluded for property tax purposes.

To identify assisted living intangibles, first consider that the facility is an income-producing property. The income produced there derives from more than the rental of space. In fact, rent for residents’ living space accounts for as little as one-quarter or one-third of the revenue an assisted living facility generates. 

The balance of the income that assisted living facilities receive is payment for services that the workforce provides. In addition, some assisted living properties likely benefit from brand recognition or have accumulated business goodwill.

Three ways to remove intangibles from equation

Property tax practitioners have three primary ways of removing identifiable, non-taxable intangible assets and rights from the value of an assisted living enterprise. 

1 Determine the cost of the land and buildings that the facility uses. This method directly values the “sticks and bricks” at the facility, and works well if the facility is fairly new so that there has been little physical deterioration. Some taxing authorities recommend this method, as does a textbook on the appraisal of assisted living facilities, published by the Appraisal Institute.

2 Identify facilities where an operator leases the land and buildings, so the rental payment only represents rent for use of the land and building. Similarly, professionals who appraise or value assisted living facilities for property tax purposes should seek sales of assisted living center land and buildings only for a proper comparison. Unfortunately, leases and sales of only land and buildings for assisted living tend to be elusive. 

3 Value the specific intangible assets and rights in use and deduct the value of those intangibles from the full business enterprise value of the facility. This method applies to most assisted living facilities. Assessors already use this method for hospitality properties, so it is readily applied to assisted living.

Property taxes are a significant expense for assisted living operators. Fortunately, the hospitality industry has already blazed the path to tax relief. With some ingenuity, the taxpayer can borrow the same methods that help control hospitality property taxes and use them to reduce taxes on assisted living facilities as well.

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