Chatham Investment Trust of Newton, Michael F. Iodice, Sr. and Michael F. Iodice, Jr. v. Board of Assessors of the City of Newton (June 1, 2007)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



CHATHAM INVESTMENT		     v.     BOARD OF ASSESSORS OF
TRUST OF NEWTON,	      	       THE CITY OF NEWTON
MICHAEL F. IODICE, SR.
and MICHAEL F. IODICE, JR.

Docket No. F272464				  Promulgated:
							  June 1, 2007


	This is an appeal filed under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee to abate a tax on real estate assessed under G.L. c. 59, §§ 11 and 38, for fiscal year 2004.
	Commissioner Gorton heard the appeal and was joined in a decision for the appellee by former Chairman Foley and Commissioners Scharaffa, Egan and Rose.
	These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.  

	Saul J. Feldman, Esq. for the appellants.
	Richard G. Chmielinski, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
On January 1, 2003, Chatham Investment Trust of Newton ("appellants"), Michael F. Iodice, Sr. and Michael F. Iodice, Jr., was the assessed owner of a parcel of real estate located at 29 Crafts Street, Newton ("subject property").  The subject property is a 48,732 square foot parcel of land improved with a four-and-a-half-story, multi-tenanted office building, containing a gross building area of 68,700 square feet, a basement garage and an attached two-level parking deck with spaces for 190 cars.    
For fiscal year 2004, ("fiscal year at issue") the Board of Assessors of the City of Newton ("assessors") valued the subject property at $7,480,000 and assessed a tax thereon, at the rate of $19.37 per thousand, in the amount of $146,348.21.  On December 31, 2003, the City of Newton Collector of Taxes sent out the town's fiscal year 2004 actual real estate tax bills.  In accordance with G.L. c. 59, § 57C, appellant timely paid the tax without incurring interest.  On January 28, 2004, in accordance with G.L. c. 59, § 59, appellants timely filed its application for abatement with the assessors which was denied on April 26, 2004.  Subsequently, on May 7, 2004, appellants seasonably filed its petition with the Appellate Tax Board ("Board").  Based on these facts, the Board found that it had jurisdiction over the subject appeal.
The City of Newton is located six miles west of Boston bordered by Needham on the southwest, Wellesley and Weston on the west, Waltham and Watertown on the north and Brookline and Boston on the east. The subject property is located in the Newtonville district of Newton at the corner of Lenglen Road and Crafts Street.  Major retail centers in Newton include Newton Corner, Newton Centre and Chestnut Hill.  The subject property is located approximately ¾ mile from Newton Corner.  Major highways providing access to and from Newton include I-90 ("MassPike"), which travels in an east-west direction, and I-95 which is accessible via I-90 and travels in a north-south direction.  The subject property is approximately ¼ mile from the MassPike.  Secondary roads include state routes 9, 16 and 30, which all generally travel in an east-west direction.  
In support of its claim that the subject property was overvalued for fiscal year 2004, appellants presented the testimony and appraisal report of James R. Johnston, a certified real estate appraiser.  Based on his education and experience, the Board qualified Mr. Johnston as an expert witness in the field of real estate valuation.  Mr. Johnston was of the opinion that the subject property's highest and best use was its current use as a multi-tenanted office building.  Mr. Johnston noted that although the subject property is in average to average/good overall condition, the property is located in a secondary location.
To value the subject property, Mr. Johnston relied solely on the income-capitalization approach.  To determine the market rent to use in his income-capitalization methodology, Mr. Johnston considered the subject property's location, its purported status as Class B office space, existing leases, and the overall direction of the commercial rental market.  He also examined rents published in recognized surveys and reports such as Spaulding & Slye, Cushman & Wakefield and C.B. Richard Ellis.  Weighing all the data, Mr. Johnston estimated the market rent for the subject property at $20.00 per square foot.
Mr. Johnston initially reported that the subject property is located in the Nonantum district of Newton, remote from the Massachusetts Turnpike and interstate access.  On cross-examination, however, Mr. Johnston conceded that the subject property is actually located in the Newtonville district of Newton and is easily accessible to the MassPike.  Mr. Johnston also acknowledged that he was unfamiliar with the subject property's proximity to numerous public transportation buses and commuter rail locations.  Moreover, Mr. Johnston recognized the fact that many of the building's tenants were physicians and attorneys for whom the subject property's ease of access to Boston area hospitals as well as the Newton District Court is a benefit.  Accordingly, the Board found that Mr. Johnston's failure to determine and consider such a critical property characteristic as its location raised significant doubt about his ability to accurately determine the property's fair market value.
Next, to calculate the subject property's effective gross income ("EGI") Mr. Johnston deducted a vacancy allowance.  He based his vacancy rate primarily on the market survey reports of space availability ranging between twenty and twenty-five percent.  Weighing the subject property's minimal vacancy together with the reported rates, Mr. Johnston determined that a vacancy rate of fifteen percent was reasonable.  Admittedly, Mr. Johnston's analysis was based on space "availability" which is defined as "space which is being marketed for immediate or future occupancy, including both direct and sublease space."  Mr. Johnston was not aware of the percentage breakdowns.   Mr. Johnston also acknowledged that the "suburban" office rates on which he relied included communities more remote from the subject property and metropolitan Boston, with high vacancy levels which could have caused an artificially high vacancy average.
Further, Mr. Johnston conceded that historically the subject property and several surrounding properties had virtually no vacancy.  Moreover, as detailed in the Spaulding & Slye report, surrounding towns that also border the subject property and the MassPike, such as Wellesley, Weston, Allston, Brookline and Brighton, showed vacancy rates that ranged from 2.5 to 5.6 percent.  Based on these facts, the Board found that Mr. Johnston failed to justify his vacancy rate of fifteen percent.
Mr. Johnston's $7.00-per-square-foot operating expense figure was derived from the subject property's historical data and ranges reported in Building Owners and Managers Association (BOMA) Report for Boston, and also Institute of Real Estate Management (IREM) Report for metropolitan areas.  He used a combine factor of $1.00 per square foot for tenant-improvement reserve.  His reserve for certain non-recoverable, shorter-term capital expenditures, including roof, HVAC, and elevators, was 1.25 percent of EGI.  The Board found that Mr. Johnston's operating expenses were unjustifiably high and therefore lacked probative value.  
Mr. Johnston's operating expenses of $7.00 per square foot calculated to 48.2 percent of EGI, significantly higher than the subject property's actual expenses which calculated to 34.7 percent of EGI and the reported industry averages, which ranged from 22.9 to 29.4 percent of EGI.  The Board found that this inflated operating expense rate was not credible.  In reaching this conclusion, the Board found that Mr. Johnston failed to take into consideration the subject property's historic $6.00 expense stop whereby tenants would be required to reimburse appellant for all expenses in excess of $6.00 per square foot.  Consequently, the Board found that a $7.00 per square foot expense allowance was unreasonable.
In setting his base capitalization rate, Mr. Johnston researched capitalization rate ranges for non-institutional-grade suburban office properties published in industry surveys, such as the Price-Waterhouse Coopers-Korpacz report.  The range of capitalization rates fell between nine and fifteen percent.  Because he considered the subject property to be a class B, non-institutional-grade investment property, Mr. Johnston selected a rate of 11.79 percent.  Mr. Johnston also formulated a base capitalization rate using a band-of-investment approach.  His basic assumptions included a mortgage loan to value ratio of seventy-five percent, a mortgage loan term amortized at twenty-five years and payable monthly, mortgage interest at the Treasury rate plus an appropriate premium, an equity investment of twenty-five percent, and an equity dividend rate similar to Korpacz' "unleveraged" capitalization rates plus risk premium.  These assumptions resulted in mortgage and equity components of 6.33 percent and 2.95 percent, respectively.  Mr. Johnston added these two components together to achieve his total band-of-investment rate of 9.27 percent.
Reconciling the capitalization rates derived from these two approaches, Mr. Johnston selected a base capitalization rate of 10.50 percent to use in his income-capitalization methodology.  Adding a tax factor to his base rate resulted in an overall capitalization rate of 12.44 percent.
Mr. Johnston estimated the value of the subject property for fiscal year 2004 by dividing his net income figure by his overall capitalization rate to arrive at his opinion of value for fiscal year 2004 of $4,900,000.
On cross-examination Mr. Johnston acknowledged that he made several errors in his band of investment analysis, including: the wrong 10-year Treasury note rate, an improper loan rate spread of 1.85 percent based on a B to B- property class instead of 1.75 percent based on a B to B+ property class appropriate for the subject property.  Correction of these two errors would result in a net ½ point decrease in the band of investment rate with a corresponding reduction in Mr. Johnston's base capitalization rate.
Recognizing the errors in his band of investment analysis, Mr. Johnston proclaimed that he placed greater emphasis on the Investor Survey rate derived from the Korpacz report.  However, as the appellee argued and the Board concurred, the Korpacz report states that it is not generally applicable to "non-institutional grade investments," such as the subject property, and also is based on 5-10 year investment projections.  Moreover, despite the existence of market area sales, Mr. Johnston failed to verify the Korpacz numbers against comparable sales.
Given his lack of familiarity with the location of the subject property, his excessive vacancy allowance and expense estimates, and the errors undercutting his capitalization rate analysis, the Board found that Mr. Johnston's income capitalization methodology was significantly flawed and therefore of little probative value.  Because the appellants' evidence fell far short of satisfying its burden of proof, the Board decided this appeal in favor of the appellee.

OPINION
The assessors are required to assess real estate at its "fair cash value." G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  
The appellant has the burden of proving that the property has a lower value than that assessed.  "'The burden of proof is upon the petitioner to make out its right as a matter of law to abatement of the tax.'"  Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)).  "[T]he board is entitled to 'presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.'"  General Electric Co. v. Assessors of Lynn, 393    Mass. 591, 598 (1984) (quoting Schlaiker, 363 Mass. at 245).
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to ascertain the fair cash value of property: income capitalization; sales comparison; and cost of reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  "The Board is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  Regardless of which method is employed to determine fair cash value, the Board must determine the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market.  Irving Saunders Trust v. Board of Assessors of Boston, 26 Mass. App. Ct. 838, 845 (1989).  The validity of a final estimate of market value depends to a great extent on how well it can be supported by market data.  The Appraisal Institute, THE APPRAISAL OF REAL ESTATE 134 (12th Ed., 2001). 
	The income capitalization method "is frequently applied with respect to income producing property."  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In applying this method, the income stream used must reflect the property's earning
capacity or market rental value.  Pepsi-Cola Bottling, 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Authority, 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Authority, 9 Mass. App. Ct. 877, 878 (1980) (rescript); AVCO Manufacturing Corporation v. Assessors of Wilmington, ATB Findings of Fact and Reports 1990-142.  It is the earning capacity of real estate, rather than the actual income, which is probative of fair market value.  Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 64 (1941).  Vacancy rates must also be market based when determining fair cash value.  Donovan v. City of Haverhill, 247 Mass. 69, 71 (1923).  
After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984).  Real estate taxes are not considered operating expenses for purposes of determining net operating income when valuing property for real estate
tax purposes.  Alstores Realty Corporation v. Assessors of Boston, 391 Mass. 60, 70 (1984).  See also Trolley Square I, ATB Findings of Fact and Report 2007-1, 12.  Expenses should also reflect the market.  General Electric, 393 Mass. at 610.  A capitalization rate based on the return necessary to attract investment capital is then applied to  the net operating income to determine the property's fair market value.  Taunton Redevelopment, 393 Mass. at 295.  
The opinion of an expert witness must be based on a proper foundation. State Tax Commission v. Assessors of Springfield, 331 Mass. 677, 684 (1954).  To endow opinion evidence with probative value, it must be based on facts proven or assumed sufficient to enable the expert to form an intelligent opinion.  Giannasca v. Everett Aluminium, Inc. 13 Mass. App. Ct. 208, 211 (1982).  Based on the evidence presented, the Board found that Mr. Johnston's testimony and opinion of valued lacked credibility because his income capitalization analysis was so seriously flawed as to drain it of any plausibility.  
Accordingly, because the appellants failed to either present persuasive evidence that the assessors overvalued the subject property or to demonstrate any errors in the
assessors' valuation methods, the Board found and ruled that the appellants failed to meet its burden of proving that the subject property was overvalued in fiscal year 2004.  The Board, therefore, issued a decision for the appellee in this appeal. 

						APPELLATE TAX BOARD


				 By:	___________________________________
					Thomas W. Hammond, Jr., Chairman



A true copy,

Attest:____________________________
	  Assistant Clerk of the Board

   Given the component parts assumed by Mr. Johnston, his total band-of-investment rate actually computed to 9.28 percent.

ATB 2007-298