2101 Washington Street, LLC v. Board of Assessors of the City of Newton (April 11, 2016)

COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD

2101 WASHINGTON STREET, LLC	   v.    BOARD OF ASSESSORS OF                                                                                 THE CITY OF NEWTON

Docket Nos.  F315951 (FY 2012)
		   F318993 (FY 2013)		  Promulgated:
								  April 11, 2016

These are appeals under the formal procedure pursuant to G.L. c. 58A, § 7, G.L. c. 59, §§ 64 and 65, and 831 CMR 1.03 and 1.04, from the refusal of the Board of Assessors of the City of Newton (the "assessors" or "appellee") to abate taxes on a parcel of real estate located in the City of Newton owned by and assessed to 2101 Washington Street, LLC (the "appellant") under G.L. c. 59, §§ 11 and 38 for fiscal years 2012 and 2013.
	Commissioner Good heard these appeals. Chairman Hammond and Commissioners Scharaffa and Rose joined her in the decisions for the appellant.  Commissioner Chmielinski recused himself from these appeals and did not participate in the deliberations or decision-making process leading to the decisions in these appeals.
	These findings of fact and report are made pursuant to the Appellate Tax Board (the "Board")'s own motion under G.L. c. 58A, § 13 and 831 CMR 1.32 and are promulgated simultaneously with the decisions.

	Mark J. Witkin, P.C. for the appellant.

	Julie B. Ross, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
	Based on the evidence submitted into the record at the hearing of these appeals, including testimony, expert reports, and other submissions, as well as the Board's view, the Board made the following findings of fact.
Introduction and Jurisdiction
	On January 1, 2011 and January 1, 2012, the appellant was the assessed owner of the property known as the Newton Health Care Center which is a skilled nursing facility located in Newton at 2101 Washington Street (the "subject property").  For assessment and real estate tax purposes, the subject property is identified as map/block/lot - 42/009/0017.  The site associated with the subject property contains approximately 126,432 square feet (2.90 acres) and is improved with an 81,360-square-foot, multi-story building.  There is parking for about 100 vehicles.  The subject property is situated in the Newton Lower Falls neighborhood proximate to I-95 and the Mass Turnpike at the juncture of Beacon Street extension and Washington Street (Route 16).  
The skilled nursing facility is licensed for 202 beds, permitted for 180 beds, and was operated with 128 beds on the relevant valuation and assessment dates.  At all relevant times, HealthBridge Management, a well-regarded professional skilled nursing facility operator, managed the Newton Health Care Center.  
	The subject property has two building sections: an original section in the front built in 1971, which has three levels - a second floor, a first floor, and a ground level; and an addition in the back built in 1977, which also has three levels - a first floor, a ground level, and a basement.  Overall, the building has four levels in these two three-story sections.  
The first floor houses: the 57-bed Bradford unit, which was closed on the assessment dates; a middle area, which contains a TV room, library, conference room, dining area and administrative area; and, in the rear of the facility, the recently renovated 28-bed Lowell unit.  The second floor consists of: the 55-bed Transitional Care Unit and an office area in the front, as well as an elevator lobby and public restrooms and nursing, physician, administrative, and janitorial offices and areas, plus patient hygiene, activity, physical therapy, dining, and conference rooms.  The ground floor contains the 45-bed Paloma Unit for dementia care, as well as public restrooms and nursing, administrative, housekeeping, maintenance, storage, laundry, and janitorial offices and areas, plus patient hygiene, activity, physical therapy, dining, and conference and break rooms.  There is also a beauty parlor, the main kitchen, and related food preparation and delivery areas.  The basement level contains several business, housekeeping, medical record, and other administrative office areas, an elevator lobby, an elevator equipment room, various storage rooms, a copy/printer room, an employees' kitchen and lunch room, a telephone room, the sprinkler room and janitorial areas, and public restrooms.  There are a number of unfinished areas where rugs have been removed but not replaced.
As of the relevant assessment dates, elderly housing throughout the country and in Massachusetts had been in a state of flux.  The parties' valuation experts agreed that assisted and independent living facilities, as well as home health care options for the elderly, were expanding rapidly, while skilled nursing centers, like the subject property, were trending in the opposite direction.  Statistics compiled by the Massachusetts Senior Care Association reveal that skilled nursing home facilities and beds had been declining in Massachusetts from 2004 to 2013 just as occupancy rates had been likewise falling.  The Massachusetts Department of Health determined that for the foreseeable future there is and will continue to be an oversupply of nursing home beds, and it has therefore instituted a moratorium on new construction, licensing, and re-licensing of nursing home facilities.  Nursing homes are considered risky ventures because of these elderly housing trends, the continuous cuts in Medicaid and Medicare payments, and Medicaid reimbursement rates which are well-below those of other payers.  Moreover, Medicare has a 100-day coverage limit better suited for rehabilitation as opposed to long-term care.  Consequently, nursing home facilities have been attempting, with varying degrees of success, to re-position themselves toward more lucrative rehabilitation services.  The subject property has likewise joined this movement by reducing its number of beds and expanding its rehabilitation services.                    
For both of the fiscal years at issue, 2012 and 2013, the assessors valued the subject property at $8,472,600 and assessed real estate taxes of $180,635.83, at the tax rate of $21.32 per thousand, for fiscal year 2012 and $185,804.12, at the tax rate of $21.93 per thousand for fiscal year 2013.  The appellant timely paid these taxes without incurring interest.  Based on the jurisdictional information summarized in the following table, the Board found and ruled that it had jurisdiction to hear and decide these appeals.

	Tax Bill
Mailed	Abatement Application Filed	Abatement Application Denied	Petition Filed	
Fiscal Year 2012	12/30/2011	01/27/2012	03/09/2012	05/29/2012	
Fiscal Year 2013	12/31/2012	01/29/2013	03/07/2013	04/23/2013	

The following table compares the assessments to the values estimated by the parties' real estate valuation experts - Robert L. Coleman for the appellants and Zachariah T. Bowyer for the assessors:
	Fiscal Year 2012	Fiscal Year 2013	
Assessments	$ 8,472,600	$ 8,472,600	
Mr. Coleman's Values	$ 5,640,000	$ 5,610,000	
Mr. Bowyer's Values	$10,593,961	$10,593,961	

Methodology Employed By Appellant's Real Estate Valuation Expert
	The Board qualified Robert L. Coleman as an expert in commercial real estate appraising with a specialty in elderly and assisted living facilities.  In his appraisal report and testimony, Mr. Coleman described his inspection and investigation of the subject property and its environs; his investigation of the social, political and economic conditions affecting the subject property's fair cash value, including an extensive discussion of the skilled nursing home industry in Massachusetts; his investigation of the zoning, municipal records, and assessed value of the subject property; his review and analysis of records furnished by the appellant; his investigation of the market in which the subject property is located; his consultations with knowledgeable persons in the market regarding market conditions and those affiliated with the Newton Health Care Center; and his collection and investigation of relevant market transactions and data, particularly those of skilled nursing home properties in the area.
	To carry out his valuation assignment, Mr. Coleman first analyzed the subject property's highest and best use, which he determined was its continued use as a skilled nursing facility with an operating capacity of 128 beds.  And because of the income stream generated by this going concern, and the difficulty of applying the other two most commonly used valuation approaches, he decided that an income-capitalization methodology was the most appropriate valuation technique to use to value the subject property for the fiscal years at issue.
	Mr. Coleman examined the operating history of the subject property as well as other facilities in the subject property's market.  He studied the subject property's income and expenses and what he considered to be the eight most comparable properties' as contained in the so-called HCF-1 reports filed with the Massachusetts Center for Health Information and Analysis.  He compared the subject property's patient days and its income and expenses for each category of patient with his comparable facilities' patient days and their income and expenses for each category of patient.  Using this information and relying primarily on the subject property's actual experience because it best reflected the subject property's operating potential given its competent management and its unique nature and character, Mr. Coleman utilized the subject property's actual income of $14,563,071 for calendar year 2011 as best reflecting a stabilized and traditional operating year income for the fiscal years at issue, which contained the proper mix of private pay, Medicare, Medicaid, and other patients.  Mr. Coleman stabilized expenses at 87% of effective gross income, which was lower than the subject property's experience for calendar years 2010-2012 because he deemed those amounts to be excessive for a variety of reasons.  When he converted his stabilized expense figure of $11,128,985 into an average total operating expense per patient day, it equaled almost exactly both the average and median of his comparable facilities' expenses.  
	As for vacancy and credit loss, and for the same reasons that he adopted the subject property's actual income, Mr. Coleman applied the subject property's actual vacancy and credit loss experience of 12.16% to the potential gross income because he considered it to be reflective of the market for the subject property.  Application of his vacancy and credit loss to his potential gross income resulted in an effective gross income of $12,791,937.  Mr. Coleman's 7% return on effective gross income for entrepreneurial profit was based on his conversations with owners, operators and others involved in the industry, including prospective purchasers who expected a higher return than the 4-6% market fee paid for management because of the elevated risks and responsibilities associated with ownership.  Mr. Coleman also considered Board precedent and the level recognized by the Department of Revenue in its most recent related case before the Board.
	In addition, Mr. Coleman consulted with the management for the subject property and other market participants and also examined the historical costs for reserves for short-lived real estate items and for FF&E.  Based on this information, he calculated reserves for FF&E at $350 per bed and reserves for short-lived real estate items at 5% of effective gross income.  After subtracting operating expenses, entrepreneurial profit, and reserves from his effective gross income, he arrived at a net-operating income of $684,340.  
	Mr. Coleman's final inquiry was to determine an appropriate capitalization rate.  He reviewed surveys related to the industry, senior housing in general, and rates of return for safer investments.  He also analyzed the difference in rates of return for nursing home real estate distinguished from both the nursing home business itself and an overall rate for the going concern.  Mr. Coleman then synthesized capitalization rates using a band of investment methodology and a debt coverage ratio analysis.  Based on this data and information, he concluded that an appropriate capitalization rate was 10% for each of the fiscal years at issue to which he added applicable tax factors.
	Mr. Coleman's income-capitalization methodology resulted in estimates of the subject property's fair cash of $5,640,000 for fiscal year 2012 and $5,610,000 for fiscal year 2013.  His methodology is depicted in the table appended and labeled "Appendix A."  The Board finds that Mr. Coleman's methodology and the values derived from it are credible, reliable, and well-founded.   
Appellant's Other Witness
	The appellants also called Michael Flynn, the commercial assessor for Newton, as a witness.  He testified that the assessors did not rely on the cost approach depicted on the property record card in setting the assessments for the subject property for the fiscal years at issue, but rather relied on the income-capitalization methodology shown on the card.  In implementing that methodology, the assessors used a gross income of $40,000 per 202 beds, a vacancy allowance of 6%, an expense allowance of 86%, and a capitalization rate of 13%, all of which resulted in a value of $8,742,600 for the subject property.  If the assessors had used 128 beds, the actual number of operative beds at the subject property, instead of 202, the total number of beds for which it was licensed, in their income-capitalization methodology, the resulting value would have been $5,183,015.  Mr. Flynn maintained, however, that the $12,791,937 gross income figure reported by the appellant for the subject property would still have been used in the assessors' income capitalization methodology and would have simply resulted in a higher per bed value, which would not have altered the assessors' estimate of the subject property's fair cash value.  
Methodology Employed By Assessors' Real Estate Valuation Expert
	The Board qualified the assessors' real estate valuation witness, Zachariah T. Bowyer, as an expert in commercial real estate valuation with a specialty in elderly and assisted living facilities.  Mr. Bowyer is the manager, director, and practice leader of CBRE's senior housing and health care practice.  To fulfill his assignment, Mr. Bowyer reported that he collected relevant public information about and inspected the subject property.  He also studied relevant physical and economic factors by interviewing regional and local market participants, reviewing available public data, and researching demographics, income and expense data, and what he considered to be comparable data.  To estimate the subject property's value for the fiscal years at issue, Mr. Bowyer used an income-capitalization approach as his primary methodology and several sales-comparison methodologies as checks to find a going-concern value for Newton Health Care Center from which he then subtracted a value for FF&E and a value for the subject property's real estate, which he ascertained by capitalizing a market rent rate that he determined using his lease coverage analysis.  
	In his traditional sales-comparison methodology, Mr. Bowyer included five Massachusetts skilled nursing facility properties that were located in Needham, Sandwich, Medford, Cambridge, and Pittsfield.  He made no adjustments to the sale prices of these properties for property rights conveyed, financing terms, deferred maintenance, conditions of sale, market conditions, size, average unit size, amenities, or parking.  At trial, he acknowledged that several of the very few adjustments that he had made for location, age/condition, and quality of construction were likely incorrect.  Moreover, he admitted that the sale prices reflected on the deeds associated with these sale properties were allocated from the amount paid for the going concern and, in at least one case, were from a portfolio sale.  In addition, Mr. Bowyer did not differentiate between for-profit and not-for-profit buyers or consider that at least one of the sales was the buyout of a lease while the seller in another may have been under some financial duress.  Consequently, the Board finds that the values derived from this methodology are unreliable.  Furthermore, the Board finds that the value which he derived from this methodology was a value for the going concern, as opposed to the real estate.  
Mr. Bowyer's second sales methodology was his "Net Operating Income Analysis" in which he analyzed, using a regression analysis, the net-operating incomes  and sale prices associated with forty-seven purportedly comparable sale properties.  This analysis was not included in his appraisal report, and no witness was presented to competently explain or defend it.  Furthermore, these sales included assisted living, independent living, nursing care and skilled nursing facilities and were sales of going concerns.  Moreover, Mr. Bowyer did not provide important details regarding these sales, any operating metrics for the facilities involved, or a breakdown as to each facility's type and location.  Consequently, the Board finds that the values derived from this methodology are inapposite and unreliable.  Once again, the Board finds that Mr. Bowyer used this methodology to obtain a value for the going concern, as opposed to the real estate.  
Mr. Bowyer also employed another sales methodology that he termed an "Effective Gross Income Multiplier."  This methodology compares the subject property's income characteristics with those of the five purportedly comparable properties that he used in his traditional sales-comparison methodology to develop an appropriate multiplier. Because of his reliance on the data associated with his five purportedly comparable-sale properties for this methodology, the Board finds that the infirmities previously discussed with respect these properties carryover into this methodology as well and render the values that he derived from it unreliable.  As with his other sales methodologies, the Board finds that Mr. Bowyer employed this technique to obtain a value for the going concern as opposed to the real estate.                   
	In his income-capitalization methodology, Mr. Bowyer first valued the Newton Health Care Center as a going concern.  He then valued the real estate using a lease coverage analysis.  By subtracting the real estate value that he derived using his lease coverage analysis and the value of the FF&E which he used as an expense in his income-capitalization methodology from the value that he developed for the going concern, he attained an indicated business value.  More specifically and similar to Mr. Coleman's research, Mr. Bowyer reviewed both the subject property's and his rent comparables' incomes from private, Medicare, Medicaid, and other patient rates for calendar years 2010, 2011, and 2012.  In estimating his gross rental of $14,542,840, Mr. Bowyer used the rate and census mix from only calendar year 2010, wrongly assuming that the subject property was operating with 128 beds in 2010, as it had in 2011 and 2012.  He then applied a vacancy rate of 12%, which resulted in an effective gross income of $12,808,952.  From this amount, Mr. Bowyer calculated his net-operating income of $1,668,549, by subtracting operating expenses of $11,140,403, which included, among other items, real estate taxes of $185,804, a $640,448 reserve for replacement of personal property, and a 5% management fee.  He did not include in his methodology a reserve for short-lived real estate items or a deduction for entrepreneurial return or profit.  The assessors maintained that inclusion of a management fee and a deduction for entrepreneurial profit was double counting.  On cross examination, Mr. Bowyer, however, acknowledged that there was a conceptual difference between an expense and a profit.   Mr. Bowyer then capitalized his net income at his going concern rate of 13% without a tax factor to achieve an estimate of the value of the going concern, which he rounded to $12,800,000.  The Board finds that it was error for Mr. Bowyer to include real estate taxes as an item of expense instead of as a tax factor and to omit a reserve deduction for short-lived realty.  The Board further finds that management fees are not equivalent to or inclusive of entrepreneurial profit.
	To estimate the value of the real estate associated with the going concern, which is the actual object of these appeals, Mr. Bowyer applied what he termed a "market-based lease coverage ratio" to the "concluded stabilized net-operating income" for the subject property resulting in an "indicated annual market lease payment" for the subject property, which he assumed to be on a 20-year, "absolute net basis," with no expenses to the lessor.  He then capitalized this amount using an "absolute net lease capitalization rate."  Mr. Bowyer's lease coverage analysis methodology is summarized in the below table.
	January 1, 2011	January 1, 2012	
Concluded Stabilized NOI	$ 1,668,549	$ 1,668,549	
Lease Coverage Ratio	1.50	1.50	
Inferred Market Lease Payment	$ 1,112,366	$ 1,112,366	
Absolute Net Lease Cap Rate	10.50%	10.50%	
Inferred Leased Fee/Real Property Value	$10,593,961	$10,593,961	

	The Board finds little indicia of reliability in either the methodology or the underlying data upon which Mr. Bowyer relied to craft his estimate of the subject property's value for the fiscal years at issue.  He reported that he obtained his lease coverage ratio of 1.50 from sixteen lease transactions and a recent survey of various healthcare REITS, which indicated that a typical lease coverage ratio for a property like the subject property would range from 1.50 to 2.00.  By comparing the rent in the first year of these leases to the property's stabilized net-operating income, Mr. Bowyer obtained his lease coverage ratio.  During cross-examination, Mr. Bowyer acknowledged that the recent survey upon which he relied was little more than discussions with clients over an unspecified time period and his lease transactions were virtually all multi-property or portfolio transactions in which only six contained any skilled nursing facilities and none of those was located in Massachusetts. With but one exception, Mr. Bowyer had not read any of the leases or any of purchase and sale agreements and was not familiar with their terms or with the patient mix of the properties involved.  The Board finds that Mr. Bowyer neither established comparability between the subject property and any of these properties nor suggested any adjustments. 
Furthermore, for all of these transactions, the rental amount that he reported is the total for all the included properties, whether skilled nursing facilities or not, and the associated lease coverage ratio is likewise for all the included properties, and not for any one property contained in the portfolio.  In addition, Mr. Bowyer admitted that many of these bulk or portfolio transactions were between related parties and involved sales-leasebacks and leased fees; transactions to which the Board ordinarily grants little to no credence without more.  Moreover, similar infirmities and deficiencies exist in the data upon which Mr. Bowyer relied for his derivation of an absolute net capitalization rate.    
	In sum, Mr. Bowyer did not use his sales-comparison and income-capitalization methodologies to obtain a fee simple real estate value for the subject property, but instead used them to obtain what he determined to be a going-concern value for Newton Health Care Center, thereby merging the associated real estate, personal property, and business values into an homogeneous whole.  To obtain a real estate value, Mr. Bowyer employed a completely separate and distinct methodology - a lease coverage analysis - which may be appropriate for determining value for certain multi-property or portfolio financing or acquisition purposes within the industry, but which the Board finds is clearly inappropriate for determining the fee simple value of an individual property within a given market area for ad valorem tax purposes.                              
Conclusion
	The Board agrees with the real estate valuation experts and the assessors that the highest and best use for the subject property is its existing use as a skilled nursing facility with an operating capacity of 128 beds, and that an income-capitalization methodology is the most appropriate method to use for valuing it.  The Board further agrees with Mr. Coleman's income-capitalization methodology for determining the value of the subject property, which capitalized the net income associated only with real estate, as opposed to the entire skilled nursing facility enterprise.  Mr. Bowyer's income-capitalization methodology, on the other hand, which he uses for multi-property or portfolio financing or acquisition purposes, capitalized the net income associated with the entire skilled nursing facility enterprise thereby valuing not simply the real estate, but also the intangible (business) and personal property (FF&E) assets associated with the skilled nursing facility.  To value the real estate itself, Mr. Bowyer employed a completely separate and distinct valuation methodology - lease coverage analysis - and data points which were unsuitable and seriously flawed for ad valorem tax purposes.    
Mr. Coleman primarily relied on relevant HCF-1 reports for his income and expenses and applied the subject property's actual vacancy.  The HCF-1 reports include management expenses.  The Board finds that Mr. Coleman's methodology, which includes deductions for operating expenses, including management fees, reserves for personal property and short-lived real estate items, and entrepreneurial profit, is consistent with the methodology which the Board has historically adopted to value nursing homes, skilled nursing facilities, or continuing care or in-patient psychiatric facilities.  The Board further finds that the information and data upon which Mr. Coleman relied in determining the potential gross income, vacancy, operating expenses (including management costs), entrepreneurial profit, and reserves for FF&E and short-lived real estate items that he used in his income-capitalization methodology was appropriate and credible, and the Board therefore adopts them as well.  As for his suggested 10.00% capitalization rate, the Board finds that it too is well-grounded and appropriately reflects a rate necessary to attract investment capital for this type of real estate.  The Board also finds that Mr. Coleman correctly applied tax factors and, unlike Mr. Bowyer, did not include real estate taxes as an expense item.  For these reasons, the Board approves and adopts Mr. Coleman's overall capitalization rate.          
Based on all of the evidence and the foregoing findings, the Board ultimately finds that the appellant met its burden of proving that the assessments for fiscal years 2012 and 2013 exceeded the fair cash value of the subject property.  The Board further finds that Mr. Coleman's income-capitalization methodology as depicted in "Appendix A" and summarized below credibly estimated the fair cash value of the subject property in these appeals for the fiscal years at issue and therefore finds and rules that the fair cash value of the subject property is $5,640,000 for fiscal year 2012 and $5,610,000 for fiscal year 2013.  





Summary of Income-Capitalization Methodology Adopted by the Board
For Fiscal Years 2012 and 2013

INCOME				
	Patient Days	Rate per Day	Amount	
Private	 2,385 	$575.11	$ 1,371,667	
Medicaid	32,844	$200.18	$ 6,574,961	
Medicare	 9,025	$609.55	$ 5,500,872	
Other	 2,466	$452.40	$ 1,115,572	
Potential Gross Revenue	   		$14,563,071	
				
Vacancy		@ 12.16%	 ($ 1,771,134)	
				
Effective Gross Revenue			 $12,791,937	
				
EXPENSES				
				
Operating Expenses	   	87% of EGI	 ($11,128,985)	
Entrepreneurial Profit	 	 7% of EGI	 ($   895,436)	
				
Effective Gross Income Attributable to Real Estate 			 $   767,516	
				
Reserve for FF&E		@ $350 per bed	 ($    44,800)	
Reserve for Short Lived Real Estate		 5% of EGI	 ($    38,376)	
				
NET-OPERATING INCOME			 $   684,340	
				
Capitalization Rate	 10.000%			
Tax Factor - FY 2012	  2.132%			
Overall Rate                12.132%				
				
Value Indication			$5,640,788	
				
FAIR CASH VALUE - FY 2012			$5,640,000	
				
Capitalization Rate	 10.000%			
Tax Factor - 2013	  2.193%			
Overall Rate	  12.193%			
				
Value Indication			$5,612,568	
				
FAIR CASH VALUE - FY 2013			$5,610,000	

Accordingly, the Board concludes that the subject property was overvalued by $2,832,600 for fiscal year 2012 and $2,862,600 for fiscal year 2013, and decides these appeals for the appellant.  The Board grants abatements in the amounts of $60,994.94, including the CPA surcharge for fiscal year 2012 and $63,404.59, including the CPA surcharge for fiscal year 2013.
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 market value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Newton Girl Scout Council, Inc. v. Massachusetts Turnpike Authy., 335 Mass. 189, 193 (1956); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The idea 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).  On this basis, the Board rules that the highest-and-best use of the subject property during the fiscal years at issue in these appeals was its continued use as a skilled nursing facility with an operating capacity of 128 beds.  Mr. Coleman and Mr. Bowyer also valued the subject property on this premise.         
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.  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 rules that the sales-comparison approach is not an appropriate methodology to use to estimate the value of the subject property.  The Board found that the sales contained in the record were not credibly or properly adjusted, were, for the most part, different types of properties, reflecting allocated or going-concern sale prices, and were often not arm's-length or market transactions.  Moreover, Mr. Coleman did not utilize a sales approach while Mr. Bowyer used his various sales approaches only as checks on the value that he derived using his income-capitalization methodology which found a going concern, as opposed to a fee simple, value.   
The Board also rules 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 that no such "special situations" existed here, and, even if they did, there was not enough evidence in the record on which to base a value using a cost approach.  Neither Mr. Coleman nor Mr. Bowyer chose this method to estimate the value of the subject property, nor did they introduce any direct evidence supporting this technique.  Accordingly, the Board rules that this method of valuation is not appropriate for valuing the subject property for the fiscal years at issue in these appeals. 
Mr. Coleman relied on an income-capitalization methodology to estimate the value of the subject property.  Mr. Bowyer also employed an income-capitalization technique.  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 Consol. 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 value determined from the income-capitalization methodology because the other approaches were not appropriate, and the method that the Board adopted was equivalent to how it has historically valued nursing homes or skilled nursing facilities. See Leominster Nursing Home, Inc. v. Assessors of Leominster, Mass. ATB Findings of Fact and Reports 1991-46, 55-6; Guidrey v. Assessors of Wayland, Mass. ATB Findings of Fact and Reports 1997-654, 663-65.  
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); Avco Manufacturing Corp. v. Assessors of Wilmington, Mass. ATB Findings of Fact and Reports 1990-142, 166.  After accounting for vacancy and rent losses, the net-operating income is obtained by deducting appropriate expenses.  Pepsi-Cola Bottling Co., 397 Mass. at 452-53.  "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 found and now rules that Mr. Coleman's income-capitalization methodology was well-suited for determining the value of the subject property.  Mr. Coleman's approach capitalized the net income associated only with real estate, as opposed to the entire skilled nursing facility enterprise.  Mr. Bowyer's income-capitalization methodology, on the other hand, which he uses for multi-property or portfolio financing or acquisition purposes, capitalized the net income associated with the entire skilled nursing facility enterprise thereby valuing not simply the real estate, but also the business and personal property assets associated with the skilled nursing facility.  To value the real estate itself, Mr. Bowyer employed a completely separate and distinct valuation methodology - lease coverage analysis - and data points which the Board found and now rules were unsuitable and seriously flawed for ad valorem tax purposes.    
Mr. Coleman primarily relied on relevant HCF-1 reports for his income and expenses and applied the subject property's actual vacancy.  The HCF-1 reports include management expenses.  "For nursing homes, net income to be capitalized is obtained by further subtracting reserves for short-lived real estate and personal property (or FF&E) and entrepreneurial return, thereby excluding the income attributable to the tangible and intangible assets associated with the entire enterprise from the income attributable to the real estate." The Willows at Westborough v. Assessors of Westborough, Mass. ATB Findings of Fact and Reports 2002-469, 517 (citation omitted), aff'd 60 Mass. App. Ct. 1121 (2004), further appellate review denied, 441 Mass. 1108 (2004).   The Board found and now rules that Mr. Coleman's methodology, which includes deductions for operating expenses, including management fees, reserves for personal property and short-lived real estate items, and entrepreneurial profit, is consistent with the methodology which the Board has historically adopted to value nursing homes, skilled nursing facilities, or continuing care or in-patient psychiatric facilities. See, e.g., Leominster Nursing Home, Mass. ATB Findings of Fact and Reports at 1991-55-56; The Willows at Westborough, Mass. ATB Findings of Fact and Reports at 2002-517; Khan v. Assessors of Brookline, Mass. ATB Findings of Fact and Reports 2004-403; 444-46.  See also, e.g., Bear Hill Nursing Center, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2004-586 (appealing the Commissioner of Revenue's refusal to abate corporate excise taxes but reflecting the Commissioner's acceptance of the value derived from the Board's generally accepted valuation methodology for nursing homes).  The Board further found and now rules that the information and data upon which Mr. Coleman relied in determining the potential gross income, vacancy, operating expenses (including management costs), entrepreneurial profit, and reserves for FF&E and short-lived real estate items that he used in his income-capitalization methodology was appropriate and credible, and the Board therefore adopted them as well.  The Board also found and now rules that Mr. Coleman's suggested capitalization rate of 10.00% was well-grounded and appropriately reflected a rate necessary to attract investment capital for this type of real estate.  See Taunton Redev. Assocs. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  The Board also found and now rules that Mr. Coleman correctly applied tax factors and, unlike Mr. Bowyer, did not include real estate taxes as an expense item.  See Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  For these reasons, the Board adopted Mr. Coleman's overall capitalization rate.
As for Mr. Bowyer's sales-comparison and income-capitalization methodologies, the Board found and now rules that these techniques obtained a going concern value for the Newton Health Care Center, as opposed to a fee simple value for the real estate.  To obtain a real estate value, Mr. Bowyer employed a completely separate and distinct methodology - a lease coverage analysis - which may be appropriate for determining value for certain multi-property or portfolio financing or acquisition purposes within the industry, but which the Board found and now rules is clearly inappropriate for determining the fee simple value of an individual property within a given market area for ad valorem tax purposes.  Moreover, the underlying data upon which he relied for this valuation method was seriously flawed; it resulted in a lease coverage ratio for all properties included in various portfolio sales, whether skilled nursing facilities or not, and not for any one property.  Furthermore, comparability was never established.  In addition, Mr. Bowyer admitted that many of these bulk or portfolio transactions were between related parties and involved sales-leasebacks and leased fees; transactions to which the Board ordinarily grants little to no credence without more.  See, e.g., Genzyme Corp. v. Assessors of Cambridge, Mass. ATB Findings of Fact and Reports 2011-280, 345 ("The actual sale of the subject property . . . did not provide reliable evidence of its individual fair cash value because it was sold in a portfolio sale involving multiple properties."); LVF Newport Avenue, LLC v. Assessors of Quincy, Mass. ATB Findings of Fact and Reports 2012-1111, 1142-43 (ruling that rent under a sale-leaseback arrangement "did not reflect a true market rental" because it is part of a financing arrangement); Foxboro Assocs. v. Assessors of Foxborough, 385 Mass. 679, 682 (1982) (holding that recent sales of comparable properties in the market "furnish strong evidence of market value, provided they are arm's-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller"); Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 247-48 (1998) ("The value of the . . . leased-fee interest . . . differ[s] from the fee simple value of the property . . . . The relationship of the leased-fee value . . . to the fee simple value of the property is not a simple sum . . . . [I]t must be derived by performing a series of evaluations and computations.").  Moreover, the Board found that similar infirmities and deficiencies exist in the data upon which Mr. Bowyer relied for his derivation of an absolute net capitalization rate, compromising that component in his analysis, as well.  Lastly, neither Mr. Bowyer nor the assessors provided any authority for the use of this valuation methodology under the circumstances present in these appeals.                                 
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 Assocs., 385 Mass. at 683; New Boston Garden Corp., 383 Mass. 456, 473 (1981); New England Oyster House, Inc., 362 Mass. at 702.  Moreover, "[i]n making its determination of fair cash value, the Board may take its view of the premises into account." Harbor Dreams, LLC v. Assessors of Hingham, Mass. ATB Findings of Fact and Reports 2004-56, 97 (citing Westport v. County Commissioners of Bristol, 246 Mass. 556, 563 (1923)).  In evaluating the evidence before it, the Board formed its own independent judgment of fair cash value which coincided with Mr. Coleman's.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 605 (1984); North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass 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 board."   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 Associates, 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 found and now rules here that the appellant met its burden of proving that the subject property was overvalued for both fiscal years at issue in these appeals, and the Board therefore decides these appeals for the appellant.

                                APPELLATE TAX BOARD
		  
                	   	   By: ________________________________
						  Thomas W. Hammond, Jr., Chairman


A true copy,

Attest: _________________________
		Clerk of the Board


Appendix A 
			STABILIZED CAPITALIZATION SCHEDULE 				
				NEWTON HEALTH CARE CENTER 				
			2101 WASHINGTON STREET, NEWTON MA 				
	FISCAL YEAR 							2012 & 2013 				.' 	VALUATION DATE 							1/1/2011 & 2012 		
	ASSESSED VALUE - FY2011 & FY2012 						$8,742,600 			
	TAX RATE· 2012 							$21.32 					TAX RATE· 2013 							$21.93 					TOTAL LICENSED BEDS 							128 	OCCUPANCY 				AVALABLE PATIENT DAYS 							46,720 	100.00% 				AVERAGE REPORTED PATENT DAYS 							41,038 	87.84% 				POTENTIAL GROSS INCOME 		YE 2011 	SOURCE 	% 	PATlENT 	RATE PER 	AMOUNT 	% OF EGI 	DAlLY 							OCCUPANCY 	DAYS 	DAY 2011 		SNF 	RATE 			SOURCES OF REVENUE 			PRIVATE 	5.11% 	2,385 	$575.11 	$1,371,667 								MEDICAID 	70.30% 	32,844 	$200.18 	 $6,574,961 								MEDICARE 	19.32% 	9,025 	$609.55 	$5,500,872 								OTHER 	5.28% 	2,466 	$452.40 	$1,115,572 					TOTAL POTENTIAL GROSS INCOME 				I 			$14,563,071 					LESS: VACANCY 			I 		12.16% 	$1,771,134 			
	AMOUNT OF EFFECTIVE GROSS 							$12,791,937 	100.00% 	$311.71 			INCOME·SNF 												LESS: OPERATING EXPENSES 												REAL ESTATE TAXES 							FACTOR 					OPERATING EXPENSES· NURSING 		87.00% 		2010 	2011 	2012 	$11,128,985 	87.00% 	$271.19 			HOME (% OF EGI @) 												TOTAL OPERATING EXPENSES 				 $13,969,616  $11,632,928 	$11,371,496 	$11,128,985 	. 87.00% 	$271.19 	
	- 												LESS: ENTRPRENEURIAL PROFIT (% 		7.00% 					$895,436 					OF EGI- SNF @) 																								TOTAL OPERATING EXPENSES & 							$12,024,421 					ENTRPRENEURIAL PROFIT 																								REAL ESTATE· EFFECTIVE GROSS 							$767,516 					INCOME 														- 										LESS: RESERVES 												FURNITURE, FIXTURES & EQUIPMENT 		$350 					$44,800 					PER BED @) 												REAL ESTATE (SHORT LIVED BUILDING 	5.00% 					$38,376 			
	EXPENSES - % OF RE EGI@) 												TOTAL RESERVES 							$83,176 																	NET OPERATING INCOME 							$684,340 																	CAPITALIZATION RATE 							10.000% 					TAX FACTOR-FY2012 							2.132% 					OVERALL RATE 							12.132% 																	VALUE INDICATION							$5,640,788 						I 								
	FAIR CASH VALUE· FY 2012 							$5,640,000 																	FAIR CASH VALUE PER BED 							$44,063 																	CAPITALIZATION RATE 							10.000% 					TAX FACTOR-FY2013 							2.193% 					OVERALL RATE 	I 						12.193% 																	VALUE INDICATION 							$5,612,568 																	FAIR CASH VALUE· FY 2013 							$5,610,000 																	FAIR CASH VALUE PER BED 							$43,828.13 				

 The Board took under advisement the appellant's motion to strike certain testimony given by the assessor's real estate valuation witness.  The Board denies that motion.  
 Recently, in MH Gateway Trust Cape Cod, LLC v. Assessors of Rochester, Mass. ATB Findings of Fact and Reports 2014-1307, which concerned the valuation of an RV resort, the Board rejected this approach.  Id. at 1324.
3 Mr. Bowyer also prepared an exhibit in which he utilized a tax factor in his methodology in lieu of taking real estate taxes as an expense, "not to change my conclusions presented [in my report]; just to provide more information to [the Board]."  This methodology resulted in a $12,300,000 and $12,200,000 estimate of the going concern's value for fiscal years 2012 and 2013, respectively.      

ATB 2016-122