Charles S. & Esther Pappas v. Board of Assessors of the Town of Brookline (September 20, 2006)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD




CHARLES S. & ESTHER PAPPAS	v.	BOARD OF ASSESSORS OF 								THE TOWN OF BROOKLINE

Docket No. F272965				Promulgated:
							September 20, 2006


	This is an appeal filed under the formal procedure pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate taxes on real estate located in the Town of Brookline, owned by and assessed to the appellants under G.L. c. 59, §§ 11 and 38, for fiscal year 2004.
	Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by former Chairman Foley and Commissioners Gorton and Rose.  
	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.
		
	Matthew A. Luz, Esq. for the appellants.
	Jennifer Dopazo, Esq. for the appellee.


	



FINDINGS OF FACT AND REPORT

	On January 1, 2003, Charles S. and Esther Pappas ("appellants") were the assessed owners of a parcel of real estate located at 1459 Beacon Street in the Town of Brookline ("subject property"), identified by the Board of Assessors of the Town of Brookline ("assessors") as Lot 29, Block 214 on Map 42.
	For fiscal year 2004, the assessors valued the subject property at $3,885,000 and assessed a tax thereon, at the rate of $17.26 per thousand, in the amount of $67,055.10, which the appellants paid without incurring interest.  On January 30, 2004, appellants timely filed their application for abatement with the assessors, which was denied on March 23, 2004.  Appellants seasonably filed their appeal with the Appellate Tax Board ("Board") on May 24, 2004.  On the basis of these facts, the Board found that it had jurisdiction over this appeal.
	The subject property is an 8,480 square-foot lot improved with a four-story masonry structure, with a gross building area of 24,792 square feet, attached to adjoining buildings in a row-house fashion.  The subject property is located near the Coolidge Corner section of Brookline.  Due to the lot's sloping topography, the partially
finished basement is above grade at the rear only.  Built in 1931, the dwelling was originally licensed as a lodging house for three floors only.  In 1947, the property owners were granted a license to operate on all four floors.  Since that time, the property has been used as a mixed-use of residential apartments, its legal use, and a lodging house, its non-conforming permitted use.
	The building's basement has a total of six apartments, three two-bedroom and three one-bedroom.   There are a total of forty-one guest rooms, five on the first floor and twelve each on floors two, three and four.  The owners also have a two-room office located on the first floor.  The building does not have an elevator, much of the interior is in need of updating, and there is limited parking. 
	In support of their claim that the subject property was overvalued for fiscal year 2004, the appellants offered into evidence the testimony and appraisal report of Roger J. Marquis, a certified real estate appraiser.  Based on his education and professional experience, the Board qualified Mr. Marquis as an expert witness in real estate valuation.  To value the subject property, Mr. Marquis first performed a highest-and-best-use analysis.  Mr. Marquis determined that the subject property's current
use as a lodging house was "ineffective," for various reasons, and found instead that the subject property's highest and best use was as a multi-family dwelling.
	Mr. Marquis relied on both the income-capitalization and the sales-comparison methodologies to estimate the value of the subject property.  Despite finding that the subject property's highest and best use was as a multi-family dwelling, Mr. Marquis' income capitalization approach valued the subject property based on its current use and calculated the fair market value based on a combination of two separately calculated estimated values by use.  Mr. Marquis calculated his income stream based on a value of $50 per night for the forty-one lodging rooms and $1,000 per month for each of the three two-bedroom apartments and $750 per month for each of the three one-bedroom apartments.  Mr. Marquis attributed no income to the owner-occupied two-room office space.   Mr. Marquis offered no evidence to support his value of $50 per night for lodging rooms, noting that he was "unable to locate reliable 'market rents' for the various rooms" and offered only a cursory explanation that he "searched Brookline rentals" to determine his rental rates used for the subject property's apartments.   
	To calculate the subject property's effective gross income, attributable to its separate uses of apartments and lodging rooms, Mr. Marquis first made allowances for vacancy calculated at ten percent and sixty percent, respectively.  He noted that although the sixty-percent vacancy attributable to the lodging rooms was "admittedly high," he ultimately chose this value based on his observation on the day of his inspection that only one unit was rented.  As for the ten percent vacancy allowance applied to the apartments, he offered no explanation as to how he derived this percentage.  Mr. Marquis then deducted from the calculated effective gross incomes, operating expenses, salaries (lodging rooms only), insurance, management and miscellaneous, and real estate taxes, to arrive at the subject property's net operating incomes by use.  Again, Mr. Marquis failed to provide evidence to prove that these expenses were representative of the market.  
	Lastly, Mr. Marquis applied different capitalization rates, which he claimed were also assigned by the assessors, of 7.5 percent to the income generated from the apartments and 10.65 percent to the income generated from the lodging rooms to calculate the subject property's values by use of $622,040 and $1,964,760, respectively.  Mr. Marquis concluded that when added together, these values represented the subject property's total fair market value of $2,580,000.
For his comparable assessment analysis, Mr. Marquis relied on four properties located in close proximity to the subject property and which he considered comparable to the subject property, but were assessed for less.  He did not, however, establish these properties' overall comparability to the subject property or suggest any quantitative adjustments for existing differences.  Further, Mr. Marquis failed to relate these properties' assessments to the market or to the fair cash values of the alleged comparables and also the subject property.  The assessors offered no evidence of value but instead rested on their assessment.
Based on the evidence presented, the Board found that the appellants failed to meet their burden of proving that the subject property was overvalued for fiscal year 2004.  Despite Mr. Marquis' conclusion that the subject property's current use was "ineffective," and that the subject property's highest and best use would be as a multi-family dwelling, he calculated the subject property's fair market value, using the income capitalization approach, based on
its current income stream of eight-percent generated from apartments and ninety-two-percent generated from lodging rooms.
The Board also found that due to the subject property's mixed use, Mr. Marquis, by his own admission, was unable to locate reliable comparable market rents for the subject property's various lodging units and offered no explanation for his chosen value of $50 per day applied to the forty-one lodging rooms.  Furthermore, Mr. Marquis failed to offer supporting evidence of his chosen market rents for the property's apartments and attributed no income value to the two-room owner-occupied office.  Moreover, Mr. Marquis failed to offer any supporting evidence for his operating expenses.  Accordingly, the Board found that Mr. Marquis' income-capitalization approach was flawed and, therefore, unreliable.
In sum, the Board found that the appellants failed to meet their burden of proving that the subject property was overvalued for fiscal year 2004 and issued a decision for the appellee.

OPINION
	The assessors are required to assess real estate at its fair cash value.  G.L. c. 59, § 38; Coomey v. Assessors of Sandwich, 367 Mass. 836, 837 (1975).  Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market 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) ("Boston Gas").
"Prior to valuing the subject property, its highest and best use must be ascertained, which has been defined as the use for which the property would bring the most."  Tennessee Gas Pipeline Co. v. Assessors of Agawam, ATB Findings of Fact and Reports 2000-859, 875 (citing Conness v. Commonwealth, 184 Mass. 541, 542-43 (1903); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989) and the cases cited therein). "[T]he phrase 'highest and best use' implies the selection of a single use for a single property and . . . the Board is required to make its best judgment as to what that use is likely to be, considering all the evidence presented."  New England Telephone and Telegraph Co. v. Board of Assessors of the Town of Framingham, ATB Findings of Fact and Reports 1988-95, 150.  In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted.  See Leen v. Board of
Assessors of Boston, 345 Mass. 494, 504 (1963); Boston Gas, 334 Mass. at 566.  A property's highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive. Appraisal Institute, The Appraisal Of Real Estate at 305-308 (12th ed., 2001); see also Skyline Homes, Inc. v. Commonwealth, 362 Mass. 684, 687 (1972) ("Skyline Homes");  DiBaise v. Town of Rowley, 33 Mass. App. Ct. 928 (1992).  Property cannot be valued on the basis of hypothetical or future uses that are remote or speculative.  See Skyline Homes, 362 Mass. at 687; Tigar v. Mystic River Bridge Authority, 329 Mass. 514, 518 (1952); Salem Country Club, Inc. v. Peabody Redevelopment Authority, 21 Mass. App. Ct. 433, 435 (1986).  
In the present appeal, in his appraisal report the appellants' expert real estate appraiser noted that the subject property's present non-conforming use as a lodging house is "not effective" for various reasons and concluded that, given the character of the neighborhood and the zoning limitations, the property's highest and best use is a multi-family dwelling.  The appellant's expert, however, failed to value the subject property based on this highest and best use. 
   
	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 [an] abatement of the tax.'" Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) ("Schlaiker") (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). "[T]he [B]oard 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) ("General Electric Co.") (quoting Schlaiker, 365 Mass. at 245).  
In appeals before this Board, a taxpayer "'may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors' method of valuation, or by introducing affirmative evidence of value which undermines the assessors' valuation.'"  General Electric Co., 393 Mass. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  The Board found and ruled in this appeal that the appellants failed to prove that the assessors' valuation method was flawed and also failed to produce affirmative evidence showing that the subject property's assessed value exceeded its fair cash value for the fiscal year at issue.
	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) ("Taunton Redevelopment").  In applying this method, the income stream used must reflect the property's earning capacity or market rental value.  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 451 (1986).  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 its 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, 393 Mass. at 610.  The expenses should also reflect the market.  Id.  
The capitalization rate should consider the return necessary to attract investment capital.  Taunton Redevelopment, 393 Mass. at 295.  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).  Generally, it is appropriate to add a tax factor to the capitalization rate in most multiple tenancy scenarios because the landlord is assumed to be responsible for paying the real estate taxes, and the tenant's contribution toward the real estate tax is included in the landlord's gross income.  Taunton Redevelopment, 393 Mass. at 295-296; see also General Electric Co., 393 Mass. at 610. 
In the present appeal, the Board found that both methodologies used by Mr. Marquis to value the subject property for the fiscal year at issue were flawed.  First, the Board found that in his income-capitalization approach Mr. Marquis failed to value the subject property reflecting
its highest and best use.  The Board further found that Mr. Marquis failed to sufficiently analyze and establish the rental rates used for both the lodging rooms and the apartments. 
The Board also found that Mr. Marquis' rates for vacancy/rent loss and operating expenses were not verified with market data.  The lack of reliability of Mr. Marquis' net-operating income figure was further compounded by the fact that the vacancy/rent loss rates were based on a percentage of what the Board found to be unreliable potential gross income figures.   The Board further found that Mr. Marquis failed to prove that his operating expenses were reflective of the market.  In addition, the Board found that Mr. Marquis did not sufficiently analyze and explain his chosen capitalization rate, simply stating that they were the rates assigned by the assessors.  
Mr. Marquis also attempted to prove that the subject property was overvalued using assessment information from purportedly comparable properties.  General Laws c. 58A, § 12B provides in pertinent part that "at any hearing relative to the assessed fair cash valuation or classification of property, evidence as to fair cash valuation or classification of property at which assessors have assessed other property of a comparable nature or class shall be admissible." "The introduction of ample and substantial evidence in this regard may provide adequate support for . . . abatement." Chouinard v. Assessors of Natick, ATB Findings of Fact and Reports 1998-299, 307-308 (citing Garvey v. Assessors of West Newbury, ATB Findings of Fact and Reports 1995-129, 135-36; Swartz v. Assessors of Tisbury, ATB Findings of Fact and Reports 1993-271, 279-80). See also Turner v. Assessors of Natick, ATB Findings of Fact and Reports 1998-309, 317-18.  In the present appeal, the Board found that Mr. Marquis failed to prove that the purportedly comparable properties used in his analysis were in fact comparable to the subject property and that he failed to adjust for existing differences.  
Accordingly, because the appellants failed to present persuasive evidence that the assessors had overvalued the subject property and failed to demonstrate errors or flaws in the assessors' valuation method for the fiscal year at issue, the Board ruled that the appellants failed to meet their burden of proving that the subject property was overvalued for fiscal year 2004. 



The Board, therefore, issued a decision for the appellee in this appeal.


					THE APPELLATE TAX BOARD



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




				
A true copy,

Attest:	____________________________
		Assistant Clerk of the Board					

ATB 2006-665