LVF Newport Avenue LLC and SSB Realty LLC v. Board of Assessors of the City of Quincy (October 23, 2012)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD




LVF NEWPORT AVENUE LLC and	  v.		BOARD OF ASSESSORS OF THE 
SSB REALTY LLC						CITY OF QUINCY

Docket Nos.: F309063 (FY 2010)			Promulgated: 
		   F312538 (FY 2011)			October 23, 2012 



	These are appeals under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the City of Quincy (the "appellee" or the "assessors") to abate taxes on certain real estate located at 200 Newport Avenue Extension in the City of Quincy (the "subject property") owned by and assessed to LVF Newport Avenue, LLC ("LVF Newport Avenue") under G.L. c. 59, §§ 11 and 38 for fiscal years 2010 and 2011 and leased by SSB Realty LLC ("SSB Realty") (jointly, the "appellants").  
	Commissioner Mulhern heard these appeals.  Chairman Hammond and Commissioners Scharaffa, Rose, and Chmielinski joined him in the decision for the appellants for fiscal year 2010 and the decision for the appellee in fiscal year 2011.    
	These findings of fact and report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
	David G. Saliba, Esq. for the appellants.

	Peter E. Moran, chairperson of the assessors, and Marion Fantucchio, member of the assessors, for the appellee.

   

FINDINGS OF FACT AND REPORT
	On January 1, 2009 and January 1, 2010, the relevant assessment dates for the fiscal years at issue in these appeals, LVF Newport Avenue was the assessed owner of the subject property, which is also referred to as the Josiah Quincy Building.  LVF Newport Avenue had acquired the subject property from SSB Realty in December, 2006 for $17.5 million under a sale-leaseback arrangement.  At all relevant times, SSB Realty was the realty division of State Street Corporation and leased the subject property for State Street Corporation or an affiliate.  In May, 2011, approximately one and one-half years after the relevant assessment date for fiscal year 2011, the later fiscal year at issue in these appeals, LVF Newport Avenue sold the subject property to Newport Avenue Holdings, LLC for approximately $25 million subject to a newly extended lease.  For assessment and real estate tax purposes, the subject property is identified as "Parcel ID: 022972" and "MBL: 6159/42/8."  
	For fiscal years 2010 and 2011, the city's Tax Collector mailed the real estate tax bills on or about December 31, 2009 and December 30, 2010, respectively.  The assessors valued the subject property at $17,794,700 for fiscal year 2010 and at $15,817,400 for fiscal year 2011 and assessed taxes thereon, at the corresponding commercial rates of $27.45 and $27.85 per thousand, in the amounts of $493,004.83 and $444,637.76, respectively.  In accordance with G.L. c. 59, § 57C, the appellants timely paid the real estate taxes without incurring interest.  
On January 29, 2010, in accordance with G.L. c. 59, § 59, LVF Newport Avenue timely filed its abatement application for fiscal year 2010 with the assessors.  On January 7, 2011, in accordance with G.L. c. 59, § 59, SSB Realty timely filed its abatement application for fiscal year 2011 with the assessors.  The abatement application for fiscal year 2010 was deemed denied on April 29, 2010, and on April 6, 2011, the assessors voted to deny the abatement application for fiscal year 2011.  On July 19, 2010 and June 14, 2011, respectively, in accordance with G.L. c. 59, §§ 64 and 65, the appellants seasonably filed with the Appellate Tax Board (the "Board") their corresponding Petitions Under Formal Procedure.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
At the hearing of these appeals, in support of their requests for abatement, the appellants presented one witness, Edward K. Wadsworth, whom the Board qualified as their real estate valuation expert, and one exhibit, his written appraisal report.  In support of the assessment, the chairperson of the assessors, Peter E. Moran, testified and introduced numerous exhibits, including the requisite jurisdictional documents, the subject property's property record card, property record cards for other properties located in Quincy, economic income valuation cards, and several other submissions.  Based on this evidence, the Board made the following findings of fact.  
The parties are in agreement regarding the description of the subject property which consists of approximately 2.20 acres of land (the "subject parcel") improved with an eight-story, 157,303-square-foot, single-tenanted, class A, commercial office building with approximately 145,752 square feet of rentable space (the "subject office building") and an adjoining four-level, 361-space parking garage (the "subject parking garage").  Additional "satellite" parking is available on a nearby parcel.  
Of the subject parcel's 2.20 acres, about 2.03 acres are usable by the tenant with the remainder reserved for the MBTA up to a height of fifteen feet for purposes of drainage and the use of staircases, overpasses, and overhangs associated with the North Quincy MBTA subway station.  There are adequate curb cuts and appropriate frontage and visibility.  All of the usual services are available, including municipal water and sewer, as well as electric, natural gas, and telephone.  The zoning is Business C, Central Business, and the subject property is conforming.  The on-site parking ratio is 2.48 spaces per 1,000 square feet of rentable area which is below the suburban norm of four spaces per 1,000 square feet.  The satellite parking compensates for this difference.
The subject office building and parking garage were constructed in 1984 and extensively renovated in 2005.  They both have poured concrete foundations without basements.  The subject office building has a steel frame and metal deck floors with light-weight concrete infill.  Its exterior walls are a combination of concrete blocks and bricks, as well as tilt-up concrete panels with exposed aggregate finish.  The windows are double-pane window bands, and the roof is fully adhered rubber membrane.  The parking garage also has a steel frame; its exterior walls are precast concrete panels.
The subject office building's interior finishes include commercial grade carpeting over concrete flooring, textured and painted sheetrock walls, textured and painted sheetrock ceilings, as well as suspended acoustical tile ceilings, and parabolic and compact florescent lighting.  The subject office building's HVAC is all electric.  Its wet sprinkler system provides 100% coverage and is wired into the fire department.  There is a men's and a women's lavatory on each floor.  The subject office building has three traction-style elevators, and the subject parking garage has one hydraulic elevator.                        
	The subject property is located in North Quincy, on the easterly side of Newport Avenue Extension just north of its intersection with Squantum Street and just off Hancock Street and Quincy Shore Drive.  North Quincy is immediately south of and separated from the Neponset section of Dorchester, which is part of Boston, by the Neponset River.  Primary access to the area is provided by the Southeast Expressway, a major artery that traverses Quincy, Milton, and Dorchester in a north/south direction.  Access from the Southeast Expressway to the subject property is provided by Exits 11 and 12; travel time is about 10 minutes.  Logan International Airport is located approximately 7 miles from the subject property; travel time is about 20 minutes.  
Public transportation is readily available and provided by the MBTA rapid transit Red Line and by fixed-route bus service.  The subject property abuts the North Quincy MBTA subway station, and access is incorporated into the subject office building.  
The nearest commercial area with restaurants, convenience stores and support services is along Hancock Street and Newport Avenue, only several minutes driving time from the subject property.  Within easy walking distance are several fast-food and other dining options, including MacDonald's, Applebee's, Panera Bread, Subway, and a Chinese food restaurant.  There is also a commissary or café located across the street from the subject property that is operated by State Street Corporation or an affiliate.  The closest lodging facilities are located within a five to ten minute drive.  In Quincy, those facilities include the Best Western Inn at 29 Hancock Street, President's City Inn at 845 Hancock Street, and the Marriott Boston-Quincy at 1200 Crown Colony Drive.     
	In discussing his methodology for ascertaining the fair cash value of the subject property for the fiscal years at issue, Mr. Wadsworth reported and testified that he first conducted an exterior and interior inspection of the subject property and analyzed various economic indicators and trends for Norfolk County and the area surrounding the subject property, as well as the market for office space in Boston and the South Shore/South Suburban office submarket.   He concluded that "the lingering effects of the economic downtown will limit growth in demand for real estate in Norfolk County" in the short term, but the "demand for real estate" will strengthen "over the long term."  He anticipated the stabilization of property values as "the economic recovery gains momentum."  Mr. Wadsworth also reported and testified that he researched the inventory of class A and B office space and their absorption and vacancy rates for the relevant time period and also examined relevant statistics and other pertinent information available through various industry sources and publications such as REIS, Inc. ("REIS"), Co-Star Group, Inc. ("Co-Star"), Korpacz Real Estate Investor Survey ("Korpacz"), Integra Realty Resources Viewpoint ("IRR-Viewpoint"), American Council of Life Insurers Investment Bulletin ("ACLI National"), and Building Owners & Managers Association ("BOMA") data.  In addition, he stated that he received important basic and financial information from the subject lease and the manager of the subject property.  After considering information, statistics, and data obtained from all sources, along with the recognized criteria for formulating a property's highest-and-best use, Mr. Wadsworth determined that the subject property's highest-and-best use was its existing use as a single-tenanted commercial office building.   
	To estimate the fair cash value of the subject property for fiscal years 2010 and 2011, Mr. Wadsworth developed values using an income-capitalization methodology.  He considered but rejected using a cost approach because: he was not an "architect[], engineer[], or licensed builder[] in the Commonwealth"; there were "few, if any, arm's-length office land sales during the [relevant time period]"; and "an estimate of accrued depreciation would be very subjective at best."  He did not use a sales-comparison approach because "there have not been any arms-length sales involving [fee simple interests during the relevant time period]."   He opted for an income-capitalization methodology because it is usually "applied [when] there is good support for estimating the subject's market rent . . . market vacancy rate, and . . . market capitalization rate."  Moreover, he recognized that it "is often the most reliable [method to use] when appraising income producing property, like the subject, especially for estimating fair cash value for assessment purposes."  Accordingly, Mr. Wadsworth considered his direct income-capitalization approach to be the most viable methodology to use to estimate the fair cash value of the subject property for the fiscal years at issue.   
	To determine the most appropriate office rents to use in his income-capitalization methodology for the fiscal years at issue, Mr. Wadsworth reported and testified that he investigated market rental rates by surveying what he regarded as similar class A commercial office properties in Quincy and Braintree, with leasing dates close to the appraisal dates for spaces with over 50,000 square feet of rental area.  The competitive set that he chose included ten purportedly comparable properties but only two with triple-net leases like the subject property.  The two triple-net leases were for $12.00 and $12.49 per square foot.  The one leased for $12.49 per square foot is a seven-story, 234,668-square-foot building that was rented to State Street Corporation or an affiliate.  The one leased for $12.00 per square foot is a five-story, 132,000-square-foot building that was rented by Arbella Insurance Group.  The remaining properties' leases were primarily gross or modified gross types.    
Mr. Wadsworth adjusted his ten purportedly comparable properties' rents for expense structure, conditions of lease, market conditions, location, access, size, building quality, age and condition, economic characteristics, and parking ratio.   The eight purportedly comparable properties that were not subject to triple-net leases required adjustments ranging from 42% to 60%.  The major adjustment that Mr. Wadsworth applied to these properties was for his expense structure category through which he attempted to transform gross or modified gross leasing scenarios to ones that were equivalent to triple-net leasing situations.  He based this adjustment on expense information obtained primarily from BOMA.  Mr. Wadsworth adjusted only one of the two properties subject to the triple-net leases, and those adjustments totaled just 8%.  Mr. Wadsworth's adjusted rents for all of his purportedly comparable properties ranged from $8.92 to $15.47 per square foot with an average of $11.87 per square foot which he rounded to $12.00 per square foot.  That average figure coupled with the rents associated with the two triple net-leases led to his adoption of $12.00 per square foot for his indicated rent for both of the fiscal years at issue.  Mr. Wadsworth then applied this rent to the subject building's leasable area of 145,752 square feet producing a potential gross income of $1,749,024 for the fiscal years at issue.  According to the actual lease in place for the subject property, the annual fixed rent during the relevant time period was $13.85 per square foot.   Mr. Wadsworth did not rely on this figure.               
Mr. Wadsworth based his 7% and 14% vacancy and collection loss rates for fiscal years 2010 and 2011, respectively, on "Quincy-wide office vacancy trends and vacancy trends in the subject's surrounding area," which he gleaned from various industry surveys and data, such as REIS and Co-Star.  He did not give any weight to the subject property's continuous occupancy over many years and its recent lease renewal.  Application of what he believed to be appropriate industry and market vacancy rates of 7% for fiscal year 2010 and 14% for fiscal year 2011 resulted in effective gross incomes of $1,626,592 and $1,504,161 for fiscal years 2010 and 2011, respectively.     
For his operating expenses, Mr. Wadsworth observed that in a triple-net leasing scenario, the tenant is responsible for most operating expenses.  Accordingly, he deducted only those expenses that he reported and testified remained the landlord's responsibility - tenant improvements, leasing commissions, and replacement reserves.  He developed his tenant improvements expense using information contained in nine of the leases associated with his competitive set of purportedly comparable properties.  These tenant improvements allowances ranged from $16.00 to $60.00 per square foot and averaged $33.79 per square foot.  Only two of these leases contained tenant improvements allowances in excess of $35.00 per square foot.  Nonetheless, Mr. Wadsworth selected a $40-per-square-foot tenant improvements expense over ten years.  He then annualized this cost over the ten-year term using a 7% sinking fund rate for fiscal year 2010 and a 6% sinking fund rate for fiscal year 2011, which he based on a rounded average of Moody's Aaa and Baa corporate bond yields as of January 1, 2009 and January 1, 2010.  These selections resulted in annual tenant improvements costs of $2.90 per square foot or $422,681 for fiscal year 2010 and $3.03 per square foot or $441,629 for fiscal year 2011.  
Relying on an analysis of the actual leasing commissions associated with two of the purportedly comparable properties in his competitive set, which he again annualized over ten years using the same sinking-fund premises that he used for his tenant improvements expense, Mr. Wadsworth determined a leasing commission cost of $0.54 per square foot or $78,706 for both fiscal years at issue.  
Relying on replacement reserves data that he gleaned from Korpacz for the first quarter of 2009 and 2010, which ranged from $0.15 per square foot to $0.35 per square foot for both of the fiscal years at issue, Mr. Wadsworth estimated his replacement reserves at $0.21 per square foot and $0.25 per square foot for fiscal years 2010 and 2011, respectively.  These estimates resulted in replacement reserves costs of $30,608 for fiscal year 2010 and $36,438 for fiscal year 2011.
To determine his net-operating incomes for fiscal years 2010 and 2011, Mr. Wadsworth subtracted the costs associated with these three expense categories from the corresponding fiscal year's effective gross income.  These calculations yielded net-operating incomes of $1,094,598 for fiscal year 2010 and $947,388 for fiscal year 2011.            
	In determining capitalization rates for the subject property for the fiscal years at issue, Mr. Wadsworth utilized both industry sources and a band-of-investment technique.  The national data on capitalization rates that he reviewed from industry surveys for the year-end or fourth quarter of 2008 included national ranges of 7.0% - 9.5% from IRR-Viewpoint and 5.5% - 10.5% from Korpacz, as well as a national average of 7% from ACLI National.  For the year-end or fourth quarter of 2008, IRR-Viewpoint reported a national range of 7.0% - 12.5%; Korpacz reported a national range of 5.6% - 11.0%; and ACLI National reported a national average of 9.30%.  Based on these statistics, Mr. Wadsworth concluded that a capitalization rate within the 7.0% - 7.9% range for fiscal 2010 and a capitalization rate within the 8.2% - 9.3% range for fiscal year 2011 would be appropriate.  
	For fiscal year 2010, and after studying information assembled from various industry sources, Mr. Wadsworth's basic band-of-investment assumptions included a mortgage loan-to-value ratio of 70%, a mortgage interest rate of 6.86%, an amortization period of 25 years, a mortgage constant of 0.0837, an equity investment of 30%, and an equity dividend rate of 5.10%.  These assumptions yielded weighted mortgage and equity components of 5.86% and 1.53%, respectively.  Mr. Wadsworth then added these two components together to determine his indicated capitalization rate which he rounded to 7.40%.
  	For fiscal year 2011, and again relying on information assembled from various industry sources, Mr. Wadsworth's basic band-of-investment assumptions included a mortgage loan-to-value ratio of 70%, a mortgage interest rate of 6.96%, an amortization period of 25 years, a mortgage constant of 0.0845, an equity investment of 30%, and an equity dividend rate of 5.30%.  These assumptions yielded weighted mortgage and equity components of 5.92% and 1.59%, respectively.  Mr. Wadsworth then added these two components together to determine his indicated capitalization rate which he rounded to 7.50%.  He did not use a tax factor for either of the fiscal years at issue because of the triple-net leasing scenario under which he performed his valuation assignment. 
	Mr. Wadsworth concluded his capitalization-rate analysis by rating the impact of certain risk factors, including income characteristics, competitive market position, location, market, and highest and best use, on the capitalization rates that he derived from his band-of-investment methodology.  After determining that the overall impact of these factors was essentially neutral, he concluded that the most appropriate capitalization rates to use in his income-capitalization methodology for fiscal years 2010 and 2011 were 7.40% and 7.50%, respectively.  	
Mr. Wadsworth estimated the value of the subject property for the fiscal years at issue by dividing his net-operating-incomes by his corresponding capitalization rates. His indicated values for fiscal years 2010 and 2011 were $14,791,858 and $12,631,840, respectively, which he then rounded to $14,800,000 for fiscal year 2010 and $12,600,000 for fiscal year 2011.  Summaries of his income-capitalization methodology for fiscal year 2010 and fiscal year 2011 are contained in the following two tables. 
Summary of Mr. Wadsworth's Income-Capitalization Methodology
for Fiscal Year 2010
January 1, 2009 Valuation & Assessment Date


INCOME                              Size(SF)   Rate/SF

Commercial Office Space             145,752     $12.00             $1,749,024

Potential Gross Income:                                            $1,749,024	

Less: Vacancy & Collection Allowance - 7.0%
             ($ 122,432)


	
Effective Gross Income:                                            $1,626,592	
	
EXPENSES
	
  Tenant Improvements    $422,681 @ $2.90/sq. ft.
  Leasing Commissions    $ 78,706 @ $0.54/sq. ft.
  Replacement Reserves   $ 30,606 @ $0.21/sq. ft.  

Total Expenses:          $531,995                                 ($  531,995) 	
  	
Net-Operating Income:                                              $1,094,598	
	
 Divide by: Capitalization Rate              7.40%	
	
Indicated Value for Fiscal Year 2010                               $14,791,858
Rounded Value for Fiscal Year 2010                                 $14,800,000	

Summary of Mr. Wadsworth's Income-Capitalization Methodology
for Fiscal Year 2011
January 1, 2010 Valuation & Assessment Date


INCOME                              Size(SF)   Rate/SF

Commercial Office Space             145,752     $12.00             $1,749,024

Potential Gross Income:                                            $1,749,024	

Less: Vacancy & Collection Allowance - 14.0%
             ($ 244,863)


	
Effective Gross Income:                                            $1,504,161	
	
EXPENSES
	
  Tenant Improvements    $441,629 @ $3.03/sq. ft.
  Leasing Commissions    $ 78,706 @ $0.54/sq. ft.
  Replacement Reserves   $ 36,438 @ $0.25/sq. ft.  

Total Expenses:          $556,773                                 ($  556,773) 	
  	
Net-Operating Income:                                              $  947,388	
	
 Divide by: Capitalization Rate              7.50%	
	
Indicated Value for Fiscal Year 2010                               $12,631,840
Rounded Value for Fiscal Year 2010                                 $12,600,000	

In support of the assessments, Mr. Moran cross-examined Mr. Wadsworth and testified for the assessors.  During his cross-examination of Mr. Wadsworth, Mr. Moran elicited from him that at least two big box stores, Lowe's and BJ's, and a large 300-unit apartment complex, Neponset Landing, were developed in North Quincy or Quincy during or shortly before the relevant time period and that the nearby "sprawling complex" "developed by State Street," as well as other nearby office buildings have been and continue to be fully occupied and stable.
In his direct testimony, Mr. Moran testified and introduced property record cards of neighboring commercial office properties to support his proposition that the subject property, which is reasonably similar to these other properties, has been assessed at a lower or comparable per-square-foot value during the relevant time period.  Mr. Moran also observed that recent sales of commercial office properties that he claimed were comparable to the subject property, and similarly assessed, have sold for values significantly higher than their assessed values.  
Finally, Mr. Moran described the income-capitalization approach that the assessors used to test the fiscal year 2010 and 2011 assessed values assigned to the subject property by Vision Government Solutions, Inc. ("Vision"), the mass appraisal vendor hired by Quincy to provide the city with assessed values for the properties located in Quincy.  In the assessors' income-capitalization methodology, they also considered the subject property's highest-and-best use to be its continued use as a commercial office building, but used a gross, as opposed to a triple-net leasing scenario.  Relying on information contained in local taxpayers' responses to § 38D requests for their income, vacancy, and expense estimates, the assessors used $22.00 per square foot for their rent estimate.  Using the subject property's property record card, they estimated the subject property's rentable area at 143,468 square feet which is 2,284 square feet less than the area relied upon by the appellants' real estate valuation expert.  This per-square-foot rental estimate and area measurement produced a potential gross income of $3,156,296.  The assessors next adopted a vacancy and credit allowance rate of 5% which resulted in an effective gross income of $2,998,482.  The assessors based this rate on the experience of local taxpayers from the subject property's area.  The assessors then applied an all-inclusive expense estimate of 35% of effective gross income, founded on local taxpayers' responses to § 38D requests, for a total of $1,049,470.  Subtracting this amount from their effective gross income resulted in a net-operating-income estimate of $1,949,012.  The assessors' expense percentage was not broken down into categories. 
	Mr. Moran did not explain how the assessors developed their 10.7% and 11.5% capitalization rates for fiscal years 2010 and 2011, respectively.  
To estimate the value of the subject property for fiscal years 2010 and 2011, the assessors divided their net-operating income for the appropriate fiscal year by the corresponding capitalization rate.  Their income-capitalization analysis is replicated below.
Gross living area = 143,468 sf. x $22.00 psf. =  $3,156,296
Vacancy 5% =         $157,814
Expense 35% =      $1,049,468
NOI =              $1,949,012
FY10Cap @ 0.107 = $18,215,073
FY11Cap @ 0.115 = $16,947,930
The economic income valuation cards that the assessors provided to the Board exhibited the methodology that Vision employed to estimate the value of the subject property for the fiscal years at issue.  Like the assessors, in its income-capitalization approach, Vision used a rentable area of 143,468 square feet.  It then used for both of the fiscal years at issue a rent of $22.84 per square foot, a 10% vacancy rate, and an all-inclusive expense estimate of 34%.  The adoption of these figures produced a net-operating income of $1,946,424 which resulted in a "total income value" of $17,378,800 for fiscal year 2010 and $16,636,100 for fiscal year 2011.  By dividing the net-operating income by the indicated value, the Board deduced that Vision had used an 11.20% capitalization rate for fiscal year 2010 and an 11.70% capitalization rate for fiscal year 2011.  The record was essentially devoid of any testimony or demonstrative evidence supporting or providing the underpinnings for any of Vision's selections.    
Based on all of the evidence, the Board agreed with the parties that the highest-and-best use of the subject property for the fiscal years at issue was its existing use as a commercial office building and that an income-capitalization methodology was the best approach to use to estimate the value of this income-producing property.  The record contained little useful or reliable evidence to support the use of a sales-comparison or a cost approach, and the Board, like the parties, therefore declined to use them.  The Board further agreed with Mr. Wadsworth that the subject building was best utilized as a single-tenanted facility.  Accordingly, the Board also adopted his triple-net leasing scenario.  In addition, the Board accepted his estimate of the subject property's rentable area because it was based on the actual lease in place during the relevant time period and he had recently inspected the subject property.  Mr. Wadsworth's estimate exceeded, by almost 2,300 square feet, the area utilized by the assessors, for which there was no foundation other than its presence on the property record card.
	The Board found that the most appropriate rent to use for the subject property for the fiscal years at issue was $12.50 per square foot.  The Board based this rent on the two comparable properties that were under triple-net leases in Mr. Wadsworth's competitive set.  These properties were leased at $12.00 and $12.50 per square foot.  Even though Mr. Wadsworth adjusted the $12.50 per square foot rent downward to $11.55, the Board disagreed with his only two adjustments -- for building quality and parking ratio -- because the subject building had recently undergone a substantial renovation and there was plenty of parking available in the four-story garage, in a nearby satellite parking lot, and even at the adjacent North Quincy MBTA subway station.  Moreover, the subject property's location at the subway station likely enticed workers at the subject property to utilize certain forms of mass transportation in lieu of driving.  In addition, the comparable property that was leased at $12.50 was occupied by State Street Corporation or an affiliate, as was the subject property.  Further, this comparable contained approximately 60% more rentable space than the subject property.  As stated in the Appraisal Institute, The Appraisal of Real Estate (13th ed. 2008): "Generally as size increases, unit prices decrease.  Conversely, as size increases, unit prices decrease."  Ibid. at 212.  Accordingly, it was appropriate for the Board to adjust this rent upward to accommodate its size differential compared to the subject property.  Lastly in this regard, according to the actual lease for the subject property, the annual fixed rent during the relevant time period was $13.85 per square foot.  However, because SSB Realty's occupancy was pursuant to a sale-leaseback agreement, the Board did not place any weight on this figure other than as a check on its previously selected finding regarding market rent.    
	For its vacancy and credit allowance, the Board used 5% of potential gross income for both of the fiscal years at issue just as the assessors had done in their income-capitalization approach.  The Board based its adoption of this figure on the fact brought out in the cross-examination of Mr. Wadsworth that commercial office buildings in the subject property's area were fully occupied during the relevant time period and the vacancy rate in that area was lower than in other areas of Quincy or the broader market.  The Board also gave credence to the assessors' rate and their assertion that the subject property's location next to the North Quincy MBTA subway station enhanced its desirability over other similar properties.  
	For expenses, the Board adopted the categories proposed by Mr. Wadsworth but not all of his estimates.  For tenant improvements, the Board found that Mr. Wadsworth's estimate of $40.00 per square foot was excessive under the circumstances and instead used $30.00 per square foot while accepting the assumptions that he applied to his sinking-fund calculations.  The Board found that $30.00 per square foot better reflected the market data introduced into evidence by Mr. Wadsworth, including his competitive set's average of $33.79 per square foot and the most comparable property's $30.50 allowance.  A $30.00-per-square-foot allowance over a ten-year term at a 7% sinking-fund rate results in an annual cost of $2.17 per square foot for fiscal year 2010.  That same allowance over the same term at a 6% sinking-fund rate results in an annual cost of $2.28 per square foot for fiscal year 2011.    
For leasing commissions, the Board adopted Mr. Wadsworth's recommendation of $0.54 per square foot because it was supported by market data in his competitive set and is consistent with a ten-year term.  As it did with his tenant improvements, the Board again adopted here those same assumptions that he applied to his sinking-fund calculations.
	With respect to replacement reserves, the Board, like Mr. Wadsworth, relied on the data contained in the Korpacz reports.  Unlike Mr. Wadsworth, however, the Board did not rely on the average of this data, but instead looked to the lower end of the reported array, which ranged from $0.15 - $0.35 per square foot, because of the recent substantial renovations and repairs to the subject property and the relief that this work provides for deferred maintenance items.  Accordingly, the Board used $0.15 per square foot for its replacement reserves for the fiscal years at issue.  
	Lastly, the Board adopted Mr. Wadsworth's capitalization rates for both of the fiscal years at issue.  The Board found that they were well-supported and premised on appropriate market data.  The capitalization rates suggested by the assessors and Vision were wholly without support or foundation and appeared to be inappropriate for the triple-net leasing scenario adopted by the Board.  
Summaries of the Board's income-capitalization methodologies for fiscal years 2010 and 2011 are contained in the following two tables.                      
Summary of the Board's Income-Capitalization Methodology
for Fiscal Year 2010
January 1, 2009 Valuation & Assessment Date


INCOME                              Size(SF)   Rate/SF

Commercial Office Space             145,752     $12.50             $1,821,900

Potential Gross Income:                                            $1,821,900	

Less: Vacancy & Collection Allowance - 5.0%
             ($  91,095)


	
Effective Gross Income:                                            $1,730,805	
	
EXPENSES
	
  Tenant Improvements    $316,282 @ $2.17/sq. ft.
  Leasing Commissions    $ 78,706 @ $0.54/sq. ft.
  Replacement Reserves   $ 21,863 @ $0.15/sq. ft.  

Total Expenses:          $416,851                                 ($  416,851) 	
  	
Net-Operating Income:                                              $1,313,954	
	
 Divide by: Capitalization Rate              7.40%	
	
Indicated Value for Fiscal Year 2010                               $17,756,135
	
Rounded Value for Fiscal Year 2010                                 $17,756,000	


Summary of the Board's Income-Capitalization Methodology
for Fiscal Year 2011
January 1, 2010 Valuation & Assessment Date


INCOME                              Size(SF)   Rate/SF

Commercial Office Space             145,752     $12.50             $1,821,900

Potential Gross Income:                                            $1,821,900	

Less: Vacancy & Collection Allowance - 5.0%
             ($  91,095)


	
Effective Gross Income:                                            $1,730,805	
	
EXPENSES
	
  Tenant Improvements    $332,315 @ $2.28/sq. ft.
  Leasing Commissions    $ 78,706 @ $0.54/sq. ft.
  Replacement Reserves   $ 21,863 @ $0.15/sq. ft.  

Total Expenses:          $432,884                                 ($  432,884) 	
  	
Net-Operating Income:                                              $1,297,921	
	
 Divide by: Capitalization Rate              7.50%	
	
Indicated Value for Fiscal Year 2011                               $17,305,613
	
Rounded Value for Fiscal Year 2011                                 $17,305,000	

	On this basis, the Board decided the fiscal year 2010 appeal for the appellants and the fiscal year 2011 appeal for the appellee.  Accordingly, the Board lowered the subject property's assessed value for fiscal year 2010 by $38,700, from $17,794,700 to $17,756,000 and granted a tax abatement in the amount of $1,072.94.    

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).  
In determining fair cash value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The goal is to ascertain the maximum value of the property for any legitimate and reasonable use.  Id.  If the property is particularly well-suited for a certain use that is not prohibited, then that use may be reflected in an estimate of its fair market value.  Colonial Acres, Inc. v. North Reading, 3 Mass. App. Ct. 384, 386 (1975).  "In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted."  Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate at 315-316 (12th ed., 2001)), aff'd, 62 Mass. App. Ct. 428 (2004).   On this basis, the Board ruled that the highest-and-best use of the subject property during the fiscal years at issue was, as the appellants' real estate valuation witness recommended, its existing, single-tenanted, commercial office use.  In making this ruling, the Board considered, among other factors, the subject property's history, size, location, and layout, as well as the uses of properties similar to the subject property and located in its market area.  The assessors also valued the subject property as a commercial office building but did not directly consider the likely number of tenants.            
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  "The [B]oard is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  In these appeals, the Board ruled that neither sales-comparison nor cost approaches were appropriate under the circumstances.  The appellants' real estate valuation expert agreed.  At the hearing of these appeals, the assessors used only an income-capitalization method.  The Board accepted the premise advanced by the appellants' real estate valuation expert that there were not any, or at least not enough, fee-simple market sales of reasonably comparable properties to meaningfully estimate the value of the subject property using a sales-comparison technique.  See Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 247 (1998)("The assessors must determine a fair cash value for the property as a fee simple estate, which is to say, they must value an ownership interest in the land and the building as if no leases were in effect.").  
Furthermore, the Board ruled that "[t]he introduction of evidence concerning the value based on [cost] computations has been limited to special situations in which data cannot be reliably computed under the other two methods."  Correia, 375 Mass. at 362.  The Board found here that no such "special situations" existed, and, even if they did, there was no verified or substantiated evidence on which to base a value using a cost approach.  As the appellants' valuation expert remarked, there were no land sales on which to develop a value for the subject property's parcel and the extent of depreciation and obsolescence in the subject office building and subject garage would be difficult to determine under the circumstances.  Accordingly, the Board ruled that this method of valuation was not an appropriate technique to use for valuing the subject property for the fiscal years at issue.  
The use of the income-capitalization approach is appropriate when reliable market-sales data are not available.  Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 810, 811 (1975); Assessors of Lynnfield v. New England Oyster House, 362 Mass. 696, 701-702 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  It is also an appropriate technique to use for valuing income-producing property.  Id. at 64-65.  In these appeals, the Board relied exclusively on the values determined from the income-capitalization approach because the other methods were not suitable under the circumstances, and the approach that the Board used was equivalent to the one that the appellants' real estate valuation expert and the assessors preferred.  
"Direct capitalization is widely used when properties are already operating on a stabilized basis and there is an ample supply of comparable [rentals] with similar risk levels, incomes, expenses, physical and locational characteristics, and future expectations."  Appraisal Institute, The Appraisal of Real Estate 499 (13th ed., 2008).  The Board found that there were an adequate number of comparable rentals to support the use of a direct income-capitalization methodology to estimate the value of the subject property for the fiscal years at issue.  "The direct capitalization of income method analyzes the property's capacity to generate income over a one-year period and converts the capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved."  Olympia & York State Street Co., 428 Mass. at 239.  "It is the net income that a property should be earning, not necessarily what it actually earns, that is the figure that should be capitalized."  Peterson v. Assessors of Boston, 62 Mass. App. Ct. 428, 436 (2008) (emphasis in original).  Accordingly, the income stream used in the income-capitalization method must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co., 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 Auth., 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Auth., 9 Mass. App. Ct. 877, 878 (1980)(rescript).  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).  The expenses should also reflect the market.  Id.; see Olympia & York State Street Co., 428 Mass. at 239, 245.
The Board's selection of its market rent and its rentable area for the fiscal years at issue were largely consistent with those suggested by the appellants' real estate valuation expert and were supported by the more compelling evidence.  The Board found that the most appropriate rent to use for the subject property for the fiscal years at issue was $12.50 per square foot.  The Board based this rent on the two comparable properties that were under triple-net leases in Mr. Wadsworth's competitive set and were, in the Board's view, the most comparable.  These properties were leased at $12.00 and $12.50 per square foot.  Even though Mr. Wadsworth adjusted the $12.50 per square foot rent downward to $11.55, the Board disagreed with his only two adjustments -- for building quality and parking ratio -- because the subject building had recently undergone a substantial renovation and there was plenty of parking available in the four-story garage, on a nearby satellite parking lot, and even at the adjacent North Quincy MBTA subway station.  Moreover, the subject property's location at the subway station likely enticed workers at the subject property to utilize certain forms of mass transportation in lieu of driving.  In addition, the comparable property that was leased at $12.50 was occupied by State Street Corporation or an affiliate, like the subject property.  Further, this comparable contained approximately 60% more rentable space than the subject property.  "Generally as size increases, unit prices decrease.  Conversely, as size increases, unit prices decrease." The Appraisal of Real Estate at 212.  Accordingly, it was appropriate for the Board to adjust this rent upward to accommodate its size differential compared to the subject property.  The Board did not rely on the subject property's actual rent during the relevant time period because it was pursuant to a sale-leaseback transaction which the Board found did not reflect a true market rental.  See Appraisal Institute, The Dictionary of Real Estate Appraisal 255 & 161 (4th ed. 2002)(defining a "sale-leaseback" as "[a] financing arrangement in which real property is sold by its owner-user, who simultaneously leases the property from the buyer for continued use" and a "leaseback" as "[a]n arrangement in which the seller of a property is obligated to lease the property from the buyer under terms and conditions that are not negotiable"); see also Fox Ridge Assoc. v. Assessors of Marshfield, 393 Mass. 652, 654 (1984)("Choosing an appropriate gross income figure for establishing an income stream was within the board's discretion and expertise.").    
 For its vacancy and credit allowance, the Board used 5% of potential gross income for both of the fiscal years at issue just as the assessors had done in their income-capitalization approach.  The Board based its adoption of this figure on the fact that commercial office buildings in the subject property's area were fully occupied during the relevant time period and the vacancy rate in that area was lower than in other areas of Quincy or the broader market.  The Board also gave credence to the assessors' rate and their assertion that the subject property's location next to the North Quincy MBTA subway station enhanced its desirability over other similar properties.   Olympia & York State Street Co., 428 Mass. at 242 (acknowledging that it is appropriate for the Board to "exercise . . . independent decision-making based on the evidence").   
The Board's expense deductions were based on the categories and conclusions contained in the appellants' real estate valuation expert's testimony and appraisal report, as well as the supporting information contained in his report regarding the relevant market.  The Board made appropriate adjustments to the tenant improvements and replacement reserves expenses recommended by the appellants' real estate valuation expert based on this market data and the Board's evaluation of the subject property during the relevant time period.  "The issue of what expenses may be considered in any particular piece of property is for the board."  Alstores Realty Corp. v, Assessors of Peabody, 391 Mass. 60, 65 (1984).  The Board adopted the premises underpinning Mr. Wadsworth's sinking-fund calculations because they were reasonable and supported by appropriate market data.  See Flatley v. Assessors of Bolton, Mass. ATB Findings of Fact and Reports 2000-372, 405-06 (ruling that a sinking fund was an appropriate type of reserve account).       
The capitalization rate selected should consider the return necessary to attract investment capital.  Taunton Redevelopment Assoc. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  The "tax factor" is a percentage added to the capitalization rate "to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula."  Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  It is not appropriate to add a tax factor in most single-tenancy situations, however, because the tenant is assumed to be paying the tax under a triple-net lease.  See General Electric Co., 393 Mass. at 609 ("Under the single tenancy model used by the board, . . . the tenant pays the real estate taxes as well as most other expenses associated with operating the property."); see also The Appraisal of Real Estate at 451 ("a triple net lease [is one] in which the tenant pays utilities, taxes, insurance, and maintenance and the landlord pays for structural repairs only."); The Dictionary of Real Estate Appraisal at 194 (defining a "net net net [or triple-net] lease" as "[a] net lease under which the lessee assumes all expenses of operating the property, including both fixed and variable expenses and any common area maintenance that might apply, but the landlord is responsible for structural repairs.").  Relying on these principles and its findings, the Board selected capitalization rates of 7.40% and 7.50% for fiscal years 2010 and 2011, respectively.  These rates are the ones recommended by the appellants' real estate valuation expert and are also consistent with the supporting data contained in his appraisal report.  In the Board's view, these capitalization rates also appropriately incorporate the risks associated with the subject property's highest-and-best use.  "The essential requirement is that the board exercise judgment."  New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981).    
In reaching its opinion of fair cash value in these appeals, the Board was not required to believe the testimony of any particular witness or to adopt any particular method of valuation that an expert witness suggested.  Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight.  Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp., 383 Mass. at 473; New England Oyster House, Inc., 362 Mass. at 702.  In evaluating the evidence before it, the Board selected among the various elements of value and appropriately formed its own independent judgment of fair cash value.  General Electric Co., 393 Mass. at 605; North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass.1 296, 300 (1984).
The Board need not specify the exact manner in which it arrived at its valuation.  Jordan Marsh v. Assessors of Malden, 359 Mass. 106, 110 (1971).  The fair cash value of property cannot be proven with "mathematical certainty and must ultimately rest in the realm of opinion, estimate and judgment."  Boston Consol. Gas Co., 309 Mass. at 72.  "The credibility of witnesses, the weight of the evidence, and inferences to be drawn from the evidence are matters for the [B]oard."   Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977).  
 "'The burden of proof is upon the [appellant] 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)).  The appellant must show that it has complied with the statutory prerequisites to its appeal, Cohen v. Assessors of Boston, 344 Mass. 268, 271 (1962), and that the assessed valuation of its property was improper.  See Foxboro Assoc., 385 Mass. at 691.  The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise.  Schlaiker, 365 Mass. at 245.  The Board ruled here that the appellants met their burden of proving that the subject property was overvalued for fiscal year 2010, but not for fiscal year 2011.
The Board applied these principles in reaching its opinion of the fair cash value of the subject property for the fiscal years at issue.  On this basis, the Board determined that the subject property was overvalued by $38,700 for fiscal year 2010, but was not overvalued for fiscal year 2011.

The Board, therefore, decided the fiscal year 2011 appeal for the appellee and the fiscal year 2010 appeal for the appellants, granting a tax abatement in the amount of $1,072.94 for fiscal year 2010.  
   					    THE APPELLATE TAX BOARD


By: _______________________________
    Thomas W. Hammond, Jr. Chairman


A true copy,


Attest: ________________________
   Clerk of the Board

 Each of these amounts includes a Community Preservation Act ("CPA") surcharge and, for fiscal year 2011, a $50.00 special assessment, as well.  The CPA surcharge amounted to $4,540.31 in fiscal year 2010 and $4,073.17 in fiscal year 2011.
  General Laws c. 59, § 59, provides, in pertinent part, that: "A tenant of real estate paying rent therefor and under obligation to pay more than one-half of the taxes thereon may apply for such abatement."  There is no dispute that SSB Realty leased the subject property and was under an obligation to pay at least one-half of the real estate taxes. 	
 The assessors used 143,468 square feet as the subject property's rentable area.  The Board adopted the figure proposed by the appellant's real estate valuation expert because it was based on the actual lease in place during the relevant time period and he had recently inspected the subject property.  
 Mr. Wadsworth referred to the potential gross income as "potential net rent." 
 The time period in the lease for this rent extended from October 3, 2008 to April 2, 2011.  
 Curiously, Mr. Wadsworth did not include or provide any information on management fees. 
 The tax abatement includes applicable CPA surcharges.  
 See footnote 7, supra.

ATB 2012-1111