Bostonian Realty, LLC v. Board of Assessors of the City of Boston (May 22, 2008)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


BOSTONIAN REALTY, LLC	   v.       THE BOARD OF ASSESSORS							       OF THE CITY OF BOSTON

Docket Nos. F268349, F274768     	  
            F277663       		  Promulgated:
							  May 22, 2008


	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 appellee to abate taxes on certain real estate in the City of Boston owned by and assessed to appellant under G.L. c. 59, §§ 11 and 38 for fiscal years 2003 through 2005, inclusive ("fiscal years at issue").  
	Commissioner Scharaffa heard these appeals.  Chairman Hammond and Commissioners Egan, Rose, and Mulhern joined him in the decisions for appellee.  
	These findings of fact and report are made at the request of appellant pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.  

Matthew A. Luz, Esq., for appellant.
	
	Laura Caltenco, Esq., for appellee. 
FINDINGS OF FACT AND REPORT	
On the basis of testimony and exhibits introduced at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.  
On January 1, 2002, January 1, 2003, and January 1, 2004 (the "relevant assessment dates"), Bostonian Realty, LLC ("appellant") was the assessed owner of a 12,939-square-foot improved parcel of real estate located at 3-5 Lothian Road in the Brighton section of the City of Boston ("subject property"). 
For the fiscal years at issue, the Board of Assessors of Boston ("assessors") valued the subject property and assessed taxes thereon as follows: 
Docket
No.	Fiscal
Year	Assessed     Value	Tax
Assessed
	
F268349
F274768
F277663	2003
2004
2005	$2,957,500
$3,060,500
$3,007,000	$31,733.98
$31,064.08
$33,949.03	

Appellant paid the assessed taxes without incurring interest and timely filed abatement applications with the assessors.  The assessors denied appellant's applications, and appellant seasonably filed petitions with the Board.  On the basis of the foregoing, the Board found that it had jurisdiction to hear and decide these appeals.
Appellant's case-in-chief consisted primarily of the testimony of its real estate valuation expert, Eric Wolff, a certified real estate appraiser.  Appellant also submitted exhibits into evidence, including Mr. Wolff's summary appraisal report for the fiscal years at issue.  The assessors relied on the presumed validity of the assessments and presented no affirmative evidence of value.
The Board makes the following findings with respect to all times relevant to these appeals.  The subject property is located on Lothian Road, a one-way roadway in a primarily residential area in the Brighton section of the City of Boston.  The neighborhood is bordered by Commonwealth Avenue (Route 30) and the town of Brookline, and features multi-unit apartment or condominium buildings as well as single and two-family housing units.  The subject property is located just east of the Boston College campus, and just northwest of the Cleveland Circle area of Brighton, which features predominately retail properties.  The subject property has very good access to major driving roads and public transportation.  The Massachusetts Bay Transit Authority ("MBTA") "Green line" trolley system runs through the center of Commonwealth Avenue and makes frequent stops along the route, providing direct access from the subject property to downtown Boston.  There is also an extensive network of MBTA bus lines in the neighborhood.  Mr. Wolff's summary appraisal report conceded that at all relevant times, there was a demand for apartment units at the subject property, because the Brighton area was densely populated and was accessible to nearby colleges, including Boston College. 
The subject property's parcel has a rectangular shape configuration and is landscaped with grass, shrubs, and large trees.  It is improved with an apartment building that has a 7,534 square-foot footprint, which occupies approximately 58 percent of the parcel's total area.  The subject property is located in an area zoned for multi-family residences.  The subject property was constructed prior to implementation of the current zoning regulations, and the City of Boston Department of Inspectional Services records indicate that the subject property is considered a legal non-conforming property.  
The subject building is actually two buildings, each with its own entrance, which are connected to comprise a single, four-story, walk-up-style apartment building that contains a total of thirty-five units.  Two of the units are studios, thirty have one bedroom, and three have two bedrooms.  The building was constructed in 1930.  The building is of masonry frame construction with a brick façade, a concrete foundation, and a flat roof with a tar and gravel covering.  Heat is provided by an oil-fired steam heating system with radiators.  The subject property is not equipped with central air conditioning.  The building has hard-wired smoke detectors.  Electrical service is a 400-amp, three-phase system with separate panels for each unit.  Mr. Wolff testified that, to the best of his knowledge, the building's plumbing is original from the date of construction.  The building's amenities include three coin-operated washers and dryers in the basement, but there is no on-site parking, as is typical of the neighborhood.  On-street resident sticker parking is available for tenants.
The building's interior contains four main stairways, which provide access to each floor.  The common hallways are finished with ceramic tiles.  The apartment units are finished with plaster and drywall walls and plaster ceilings.  The bedrooms and living rooms feature hardwood floors, and the kitchens and bathrooms have ceramic tile floors and walls.  Each of the thirty-five units has one bathroom.  
Mr. Wolff testified that he inspected the subject property on December 28, 2005.  In his summary appraisal report, Mr. Wolff observed certain "adverse conditions" which included:  some broken marble stairs in the hallways; falling plaster in the hallways caused by water damage; water stains on the ceilings of some of the units; heating pipes running through some of the units; the roof appeared to need resurfacing; and the bathrooms and kitchens in the units needed updating.  Mr. Wolff testified that the building's "[o]verall condition is considered fair to average."  Mr. Wolff also testified that, on the date of his inspection, the owner was in the process of replacing some of the windows, but Mr. Wolff did not know when the replacement process began and how many windows were replaced as of each assessment date.  Mr. Wolff also could not prove that the water damage depicted in the photographs taken on the date of inspection was present on each of the relevant assessment dates.  A permit for electrical work to repair the water damage was approved on July 7, 2005, beyond any of the relevant assessment dates.  The Board thus found that the permit did not support the existence of water damage on any of the relevant assessment dates.
In addition to inspecting the subject property, Mr. Wolff researched market sales of what he found to be comparable properties.  Having considered these comparable properties and other relevant information, Mr. Wolff concluded that the subject property's highest and best use was its continued use as an apartment building.
To arrive at his opinion of value for the fiscal years at issue, Mr. Wolff performed sales-comparison and income-capitalization analyses, which yielded the following indicated values:
Fiscal year	Sales-      comparison	Income- capitalization	Indicated     value	
FY 2003
FY 2004
FY 2005	$2,975,000
$2,975,000
$2,975,000	$2,690,000
$2,610,000
$2,330,000	$2,690,000
$2,610,000
$2,330,000	
			
	First, for his sales-comparison approach, Mr. Wolff utilized the following five sales:
	
Address	Sale Date	# of Units	Sales Price	$/Unit		445 Washington St., Brighton	11/18/03	15	$2,310,000	$154,000		5, 7, 11, 15 Carol Ave., Brighton	06/03/03	56	$8,600,000	$153,571		1844 and 1846 Commonwealth Ave., Brighton	10/25/02	37	$5,075,000	$137,162		1470 Beacon St., Brookline	10/03/01	54	$6,000,000	$111,111		103A Gordon St., Brighton	09/25/01	16	$2,500,000	$156,250		
Mr. Wolff then made both positive and negative adjustments to these sales figures to account for differences in property location, building condition, and building size.  Comparable one was adjusted downwards by 45%; comparables two, three, and five were adjusted downwards by 40%; and comparable four was adjusted downwards by 25%.  In his report, Mr. Wolff stated that "[a]ll of the sales are considered to be reflective of market conditions at the time of valuation" for all three fiscal years at issue.  Therefore, Mr. Wolff did not make any adjustments for appreciation or depreciation over time. 
On cross-examination, however, Mr. Wolff admitted that his first comparable property, 445 Washington Street, had been sold four times between July 18, 2002 and June 1, 2005, and each of the three sales after the initial sale reflected a sale price increase, first of 15 percent, then of 4 percent, and finally of 7.5 percent.  The increase of 15 percent occurred between July 18, 2002 and November 18, 2003, within the relevant assessment dates.  The Board thus found that this sales data contradicted Mr. Wolff's claim that adjustments for time were not appropriate for some of his comparable sales.  Moreover, because appellant failed to prove the existence of water damage on any of the relevant assessment dates, the Board thus found that Mr. Wolff could not prove his adjustments for the condition of the subject property. 
In both his summary appraisal report and his testimony, Mr. Wolff stated that he considered the income-capitalization methodology to be the most reliable indicator of value for the subject property.  Mr. Wolff gave no weight to his sales-comparison approach, which yielded higher indicated values than his income-capitalization analysis for each of the fiscal years at issue, and he did not perform a reconciliation of his sales approach and income-capitalization approach values, instead relying solely on his income-capitalization approach values.  The Board found that, given the large adjustments which Mr. Wolff used - four of the five purportedly comparable properties required an adjustment of at least 40 percent, and the remaining comparable required an adjustment of 25 percent - Mr. Wolff's comparable properties were not shown to be comparable to the subject property, and therefore, Mr. Wolff failed to establish a fair market value for the subject property through his sales-comparison approach.  
Mr. Wolff's income-capitalization analysis commenced with a survey of the Allston/Brighton apartment rental market to determine the market rental capacity of the subject property.  Mr. Wolff considered rental information relating to the subject property as well as rental data from twelve other apartment complex properties.  Collectively, this data yielded monthly rental amounts for studio, one-bedroom and two-bedroom units for the fiscal years at issue, from which Mr. Wolff derived the property's potential gross income.  From these sums, Mr. Wolff deducted a vacancy allowance of 7.5 percent to arrive at effective gross income.  He then deducted various expenses, including maintenance and repairs (between thirteen and fifteen percent for each fiscal year at issue) and reserves (5 percent for each fiscal year at issue), which he stated were "based on both market and actual expenses," to calculate net operating income.  
Mr. Wolff arrived at his chosen capitalization rates by employing the Akerson format analysis assuming a 9.67 percent mortgage interest rate, a 75 percent loan-to-value ratio, and a 16 percent return on equity for each of the fiscal years at issue.  These assumptions yielded a base capitalization rate of 11.25 percent.  Mr. Wolff then deducted for equity accrual and added the tax factor applicable to each fiscal year: 1.129 percent in 2003; 1.015 percent in 2004; and 1.073 percent in 2005.  This calculation yielded the following total capitalization rates: 11.13 percent for fiscal year 2003; 11.0 percent for fiscal year 2004; and 11.1 percent for fiscal year 2005.  Mr. Wolff applied these capitalization rates to the subject property's net operating income to arrive at the indicated values set forth supra.
On cross-examination, Mr. Wolff was uncertain as to the source of the rental data for his market rental survey.  He testified that the rental data for the apartment complexes other than the subject property came "[e]ither through a broker in the area or it may have been a property that I may have appraised at a time," but he provided no specifics as to which apartment complexes he had appraised and when.  He also could not state definitively the periods for which the rents rolls were given: "I told you I don't know whether that was 2001, but it's within the period of time of that evaluation."  Moreover, Mr. Wolff did not detail whether, and to what extent, he had observed similarities or differences with the subject property in his inspections of the various apartment complexes.  The Board thus found and ruled that Mr. Wolff failed to demonstrate that his market rental survey was sufficiently supported by the relevant rental markets for each of the fiscal years at issue. 
As stated above, Mr. Wolff's revenue figure included a vacancy rate of 7.5 percent.  However, the rent roll records for the subject property provided to the assessors indicated zero vacancies for December 2001, and a $1,400 vacancy expense for December 2002, which the Board found yielded a rate of about 3.9 percent, compared with Mr. Wolff's 7.5 percent vacancy rate.  Mr. Wolff did not include the subject property's actual vacancy rate, as recorded in the rent roll, in his summary appraisal report.  Mr. Wolff also failed to substantiate his substantially higher vacancy rate with any relevant market evidence.  The Board thus found and ruled that Mr. Wolff's 7.5 percent vacancy rate was too high, was not supported by the market, and was actually contradicted by the rent rolls for the subject property.  Moreover, Mr. Wolff also did not include revenue from the subject property's laundry in his income-capitalization calculation.    
On the basis of the above failings - the failure to demonstrate that the market rental survey and vacancy rate were supported by the relevant market and the lack of laundry income - the Board found and ruled that Mr. Wolff's revenue figure was too low and not reliable or credible.
Mr. Wolff's expense figures were also flawed in crucial areas.  Mr. Wolff failed to support with any relevant market data his figures for maintenance and repairs (between 13 and 15 percent) and his figure for reserves (5 percent).  The Board found that these figures were not shown to be supported by the market, and accordingly, Mr. Wolff's overall expense figure was not shown to be supported by the relevant market. 
Mr. Wolff also failed to substantiate the elements of his capitalization rates with relevant market data.  In his analyses, Mr. Wolff used the same mortgage rate and return of investment for each of the fiscal years at issue, yet his summary appraisal report gave no indication of the foundation upon which he had based the mortgage rate or return on equity.  When questioned about these issues, Mr. Wolff stated that he based the rates on conversations he had with representatives from local banks with which he did business.  However, Mr. Wolff did not indicate whether these conversations considered investments substantially similar to the subject property.  Also, Mr. Wolff failed to provide a holding period for the property or an amortization period for the mortgage.  Therefore, the Board could not determine whether his adjustment for equity build-up was appropriate.  
Similarly, Mr. Wolff's calculation failed to offer market data supporting the lack of appreciation over the investment's holding period which he cited in his calculation. The fact that the sales price of 445 Washington Street, Mr. Wolff's first comparable property, had appreciated by about fifteen percent during the relevant assessment dates indicated to the Board that appreciation was a factor that should have been accounted for in a capitalization rate calculation reflective of the market.  Mr. Wolff further admitted that he had never used market economic indicators to verify his capitalization rate.  On the basis of the above shortcomings, the Board found and ruled that Mr. Wolff failed to substantiate the capitalization rates used in his summary appraisal report. 
Based on the foregoing, and for the reasons discussed further in the following Opinion, the Board found that appellant failed to sustain its burden of proving that the subject property's assessed value exceeded its fair cash value for any of the fiscal years at issue.  The Board, therefore, decided these appeals for the appellee. 


OPINION
"All property, real and personal, situated within the commonwealth . . . shall be subject to taxation."  G.L. c. 59, § 2.  The assessors are required to assess real estate at its fair cash value determined as of the first day of January of each year.  G.L. c. 59, §§ 2A and 38.  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).  
Appellant has the burden of proving that the subject property had 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) (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 taxpayer[] sustain[s] the burden of proving the contrary.'"  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245).  In appeals before the 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)).  
Generally, real estate valuation experts, 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).  
"[S]ales of property usually 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."  Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982).  Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date contain credible data and information for determining the value of the property at issue.  McCabe v. Chelsea, 265 Mass. 494, 496 (1929).  Required are "'fundamental similarities'" between the subject property and the comparison properties.  See Lattuca v. Robsham, 442 Mass. 205, 216 (2004) (citation omitted).  The appellant bears the burden of "establishing the comparability of     . . . properties [used for comparison] to the subject propert[ies]."  Fleet Bank of Mass. v. Assessors of Manchester, Mass. ATB Findings of Fact and Reports 1998-546, 554.  Accord New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470 (1981).  
When comparable sales are used, however, allowances must be made for various factors which would otherwise cause disparities in the comparable prices.  See Pembroke Industrial Park Co., Inc. v. Assessors of Pembroke, Mass. ATB Findings of Fact and Reports 1998-1072, 1082.  "Adjustments for differences are made to the price of each comparable property to make that property equivalent to the subject in market appeal on the effective date of the opinion of value."  Appraisal Institute, The Appraisal of real estate (12th ed.) 430. 
Four out of five of Mr. Wolff's comparable sales required adjustments of at least 40 percent relative to the subject property, and the remaining sale required an adjustment of 25 percent.  The Board found that such substantial adjustments indicated that these properties were not sufficiently comparable to the subject property.  Mr. Wolff himself did not rely on his comparable sales analysis.  Mr. Wolff also could not prove that the water damage depicted in the photographs taken at the subject property on the date of inspection was actually present at the subject property on the relevant assessment dates, and therefore, he could not prove his adjustments for the condition of the subject property.  Thus, consistent with Mr. Wolff's own conclusion, the Board found that Mr. Wolff's sales-comparison analysis should not be relied upon to meet the appellant's burden of proving that the subject property was overvalued.    
The income-capitalization method "is frequently applied with respect to income producing property."  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In applying this method, the income stream used must reflect the property's earning capacity or market rental value.  Pepsi-Cola Bottling 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 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).  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).  
After accounting for vacancy and rent losses, net operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co. 393 Mass. at 610.  The expenses should also reflect the market.  Id.  A capitalization rate based on the return necessary to attract investment capital is then applied to the net operating income to derive the property's fair market value.  Taunton Redevelopment Associates, 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).  
The Board found that the income-capitalization methodology was appropriate for valuing the subject property.  However, certain fundamental elements of Mr. Wolff's calculation were flawed.  As explained in the Findings, Mr. Wolff's market rental survey was flawed because he failed to detail any inspections of the rent rolls or of the apartment complexes for similarities and differences with the subject property.  The Board thus found and ruled that appellant failed to meet his burden of proving that his market rental survey was supported by the relevant market and thus probative evidence of potential income for the subject property.  
As also detailed in the Findings, Mr. Wolff's 7.5-percent vacancy rate was not supported by market data and in fact contradicted by the actual rent rolls from the subject property.  Mr. Wolff also failed to include revenue from the laundry in his income calculations.  The Board thus found and ruled that these failings rendered artificially deflated figures for revenue, which were not supported by the relevant market.  Mr. Wolff also failed to demonstrate that his figures for maintenance and repairs and for reserves were supported by the relevant market.  Therefore, the Board found and ruled that these failings rendered figures for expenses which were not supported by the relevant market.  Because Mr. Wolff's total figures for revenue were too low and his total figures for expenses were not shown to be supported by the relevant market, the Board accordingly found and ruled that appellant's net operating income figures were not supported by the relevant market and, therefore, not probative evidence on the subject property's market value for each of the fiscal years at issue.   
Finally, Mr. Wolff failed to substantiate elements of his capitalization rate calculation with support from the market.  Mr. Wolff used the same figures for mortgage interest rate and rate of return on equity for all three fiscal years at issue.  However, he did not substantiate these figures with information from investments substantially similar to the subject property.  Mr. Wolff also neglected to include a holding period or amortization period in his equity build-up calculations, and therefore, the Board could not discern whether his adjustments for equity build-up were appropriate.  Similarly, Mr. Wolff's calculations failed to justify the lack of appreciation during the holding period which he assumed.  In fact, the sales evidence from his purportedly comparable property, 445 Washington Street, suggested that appreciation did occur in the marketplace over the course of the fiscal years at issue.  Thus, the Board could not conclude, from the evidence presented, whether Mr. Wolff's chosen capitalization rates were appropriate for the subject property during the fiscal years at issue.     
The Board thus found that Mr. Wolff's income-capitalization analyses were not supported by relevant market data and, therefore, did not provide probative evidence of the subject property's fair cash value for the fiscal years at issue.  The Board, therefore, found and ruled that appellant failed to meet its burden of proving that the subject property's assessed values for the fiscal years at issue exceeded its fair market values for those years.  
On the basis of the foregoing, the Board issued decisions for the appellee in these appeals.


			                   THE APPELLATE TAX BOARD

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




A true copy,

Attest: ________________________________
         Clerk of the Board

 

  According to the summary appraisal report, the sales of 445 Washington Street were as follows:

Date			Sale price
07/18/2002		$2,000,000
11/18/2003		$2,300,000
10/12/2004		$2,400,000
06/01/2005		$2,580,000
  Mr. Wolff's figures for maintenance and repairs were 13.49 percent for fiscal year 2003, 13.88 percent for fiscal year 2004, and 14.93 percent for fiscal year 2005.
   Mr. Wolff's summary appraisal report indicated that he had used the band-of-investment technique for calculating the capitalization rate, but on cross-examination, Mr. Wolff admitted that he had actually used the Akerson format.

ATB 2008-634