Campanelli Westfield LLC v. Board of Assessors of the City of Quincy (March 10, 2014)

COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
	
CAMPANELLI WESTFIELD LLC    	 v.	     BOARD OF ASSESSORS 	
               OF THE CITY OF QUINCY

Docket Nos. F307928, F311818      	     Promulgated:
								March 10, 2014

 
	These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the City of Quincy ("assessors" or "appellee"), to abate taxes on certain real estate located in the City of Quincy owned by and assessed to Campanelli Westfield LLC ("Campanelli Westfield" or "appellant") under G.L. c. 59, §§ 11 and 38 for fiscal years 2010 and 2011 ("fiscal years at issue").
	Commissioner Chmielinski heard these appeals and was joined by Chairman Hammond and Commissioners Scharaffa and Rose in the Corrected Decision for the appellant.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.  Corrected Decisions in these appeals are promulgated herewith.  

Mark J. Witkin, Esq. for the appellant.
Paul J. Hines, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of testimony and evidence offered into evidence at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact. 
On January 5, 2010, the appellant became the assessed owner of a 6.248-acre parcel of land improved with a 117,339-square-foot office building, identified on appellee's Map 4033 as Block 1, Lot 2A and located at 300 Crown Colony Drive in Quincy ("subject property").  The purchase price for the subject property was $8,950,000.00. Shortly after the purchase, the appellant began renovations to the subject property, as described infra.  
For fiscal year 2010, the assessors valued the subject property at $16,070,700 and assessed a tax thereon, at the commercial real estate rate of $27.45 per thousand, in the total amount of $441,140.72, plus a Community Preservation Act ("CPA") surcharge of $3,350.03.  The tax due was paid timely without the incurring of interest.  On January 15, 2010, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on April 15, 2010.  On June 23, 2010, 
the appellant seasonably filed an appeal with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2010.  On September 10, 2010, the assessors granted a partial abatement reducing the subject property's assessed value to $14,780,200, but abated the tax corresponding to this reduced value to the prior owner of the subject property and not to the appellant.  
For fiscal year 2011, the assessors valued the subject property at $15,759,000 and assessed a tax thereon, at the commercial real estate rate of $27.85 per thousand, in the total amount of $438,888.15, plus a CPA surcharge of $3,365.64.  The tax due was timely paid without the incurring of interest.  On January 13, 2011, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on April 13, 2011.  On May 25, 2011, the appellant seasonably filed an appeal with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2011.  
The subject property is a five-story, class A, steel-framed office building built in 1987 with an effective year of 1999, which houses a variety of office tenants including medical users, a law firm and other small businesses.  The facility features a five-story atrium lobby with a skylight and a 1,200-square-foot on-site cafeteria for tenant use.  The subject building has a glass and masonry/brick exterior, drywall interior walls, carpeting and tile over concrete floors, fluorescent lighting in suspended ceilings, and a flat rubber membrane roof with stone ballast.  Heating is provided by forced hot air.  Systems include central air conditioning, four 90-ton rooftop HVAC units with 3 compressors per unit, nine Hydrotherm gas-fired boilers, 1,500-amp electric service, and an emergency generator.  Other amenities include three Dover 2500-pound Passenger Hall Hydraulic elevator units with no freight elevator, and closed circuit video security.  The subject property has a 110,000-square-foot parking area with 429 parking spaces surrounding the subject building.  The subject property is also improved with extensive pavement and concrete pedestrian walkways as well as perimeter landscaping, trees and decorative plantings along the main driveway access to the front door.
The subject property is located in the Crown Colony Business Park, a 175-acre office park that is situated at the juncture of routes 3, I-93 and 128, with its own on-ramp access to Burgin Parkway on a roadway that is called Crown Colony Drive.  The subject property is conveniently located across from the MBTA Quincy Adams station on the MBTA's "red line."  Other Crown Colony Business Park tenants include a 472-room Marriott Hotel, a Bright Horizons Day Care facility, Harvard Pilgrim Health Care, Arbella Insurance, State Street Bank and Boston Financial.  
The appellant presented its case-in-chief through the testimony of Ralph Perelis, the Project Executive with the appellant, the testimony and appraisal report of Donald P. Bouchard, a real estate appraiser, and the testimony of Jordan Berns, the asset manager for the subject property.  
Mr. Perelis, who holds a bachelor's degree in architecture, testified to the condition of the subject property as of the assessment date and to the repairs that had been and remained to be performed.  The Board qualified Mr. Perelis as an expert in the area of construction costs.  Mr. Perelis explained that he had performed an analysis of the subject property after the appellant had purchased it in January of 2010.  He identified five crucial repairs that needed to be performed as of the purchase date:  (1) the roof needed to be replaced; (2) the exterior masonry was damaged from water infiltration; (3) four HVAC rooftop units were dysfunctional; (4) the parking lot needed repaving; and (5) some of the tenant interior areas needed renovation and/or repair, such as painting and improvements to the cafeteria area.
Mr. Perelis testified that, with the help of its architect, the appellant had developed specifications for repair work to be performed, particularly the roof and parking lot work.  Requests for bids were solicited and then reviewed, and the work was awarded to the lowest competent bidders.  The roof was repaired for approximately $280,970 and the parking lot repaved for approximately $237,876.  These figures included hard and soft costs.  Mr. Perelis testified that, in his opinion, the costs reflected the cost for work done according to the standards of the construction industry in the Quincy/Braintree area at that time, and that these repairs were made within a year of the appellant's acquisition of the subject property.  Other work that was similarly bid included the cafeteria renovation, improvements to the common area like upgraded lighting, the addition of an emergency management system to help control the lighting, improvements to the HVAC system, upgrading of some tenant spaces, caulking and painting.  As of the time of the hearing for these appeals, additional work remained to be performed, including replacing the four roof top HVAC units.  The appellant's budget for all of its proposed repair work to the subject property was approximately $900,000.00.  The appellee stipulated to Mr. Perelis' expertise in the area of construction costs and did not dispute his construction cost figures.
Next to testify was Mr. Bouchard, whom the Board qualified as an expert in the area of commercial real estate valuation.  Mr. Bouchard first determined that the highest and best use of the subject property as improved was its current use as a first class office building.  Mr. Bouchard then developed an income-capitalization approach to value the subject property for both fiscal years at issue.  This approach is detailed as follows.
Mr. Bouchard described the impact of the economy on the office-building market, testifying that the recent economic recession had resulted in a 70-90% drop in sales of office buildings in the third quarter of 2009 as well as drops in office rental prices and higher office vacancies, particularly during 2009.  Mr. Bouchard's data was extrapolated from the markets of suburban Boston to Route 128 South to the Quincy-Braintree submarket, which included the Crown Colony Park in Quincy, as well as Battery Park and Flately Hill in Braintree, direct competitors of the subject property.
Mr. Bouchard claimed that the capital improvements to the subject property, outlined by Mr. Perelis in his testimony, were immediately required upon the appellant's purchase.  Mr. Bouchard stated that the appellant knew of the existence of the deficiencies when it purchased the subject property.  
Mr. Bouchard next analyzed the subject property's actual rental income during the relevant time period.  He testified that the subject property had an interior rental space of 117,339 square feet, although the city's property record card reflected 117,284 square feet.  Mr. Bouchard then testified that the subject property had experienced a revenue decline over the past few years, with the average per-square-foot rental dropping from $22.91 in 2006 to $14.64 by 2009.  He cited five recent leases at the subject property to demonstrate that new tenants were paying $23 per square foot in 2008, $21 per square foot in 2009, and $18.50 to $19.50 per square foot with escalation clauses of $0.75 per square foot per year in 2010.  
Mr. Bouchard next testified that the landlord was responsible for the payment of most expenses at the subject property, but he acknowledged that some leases at the subject property included clauses for tenant reimbursement of some expenses and escalation clauses under which the tenant was obligated to pay the excess over a certain base-year expense figure.  The rental income at the subject property was $2,896,915 for fiscal year 2010 and $2,896,915 for fiscal year 2011.   
Mr. Bouchard next cited thirteen purportedly comparable rental properties, consisting of class A office buildings, all located in Quincy or neighboring Braintree, which ranged in size from 1,861 square feet to 18,400 square feet.  The listing dates ranged from May, 2008 through June, 2010, and the rentals ranged from $17.00 to $24.50 per square foot.   Mr. Bouchard reported that minimal adjustments to the rentals were required because of their close proximity to the subject and "their directly competitive environment."  Mr. Bouchard next considered the real estate market's decline between January 1, 2009 and January 1, 2010.  He thus selected the following per-square-foot market rents: $20.50 for fiscal year 2010 and $19.50 for fiscal year 2011.  Applying these to the subject property's 117,339 square feet of class A office space, Mr. Bouchard thus obtained gross rental revenue of $2,405,450 for fiscal year 2010 and $2,288,111 for fiscal year 2011.
Mr. Bouchard further testified that, pursuant to the subject leases, it was appropriate to include a $0.50 per square foot "miscellaneous and electrical reimbursement" for the subject property for both fiscal years, for a total reimbursement of $58,670.  This increased Mr. Bouchard's total gross potential income to $2,464,119.
Mr. Bouchard next determined a vacancy rate.  He testified that the historic vacancy rate at the subject property between the first quarter of 2007 through the first quarter of 2010 averaged 32.45%.  Mr. Bouchard testified that as of the date of purchase, January 5, 2010, the subject property's vacancy was 27%.  Mr. Bouchard also looked to Class A office-market vacancy rates in the subject property's general region (south of Boston along Route 128) as well as in the Braintree and Quincy markets.  He reported that Class A vacancy rates in the Quincy/Braintree submarket for January 2009 and 2010 were 17% and 18.3%, respectively, as reported by Costar.  After consideration of the marketplace regionally and locally, and giving consideration to the actual conditions present at the subject property, Mr. Bouchard derived an opinion of vacancy rates for the subject property of 14% for fiscal year 2010 and 15% for fiscal year 2011.  Applying these vacancy rates yielded effective gross revenue figures of $2,119,142 for fiscal year 2010 and $1,994,763 for fiscal year 2011.
Mr. Bouchard then determined expenses.  Mr. Bouchard first analyzed the historic per-square-foot operating expenses at the subject property from 2006 to 2009.  The expenses included in Mr. Bouchard's analysis were payroll, marketing, general and administrative, management fee, landscaping, repair and maintenance, janitorial, security, utilities, insurance, and non-reimbursable expenses.  Mr. Bouchard discovered a low of $6.72 in 2006, a high of $7.38 in 2009, and an average of $7.09 for the four-year period.  None of these figures included reserves for replacements or expenditures for capital projects, tenant allowances, or real estate brokerage commissions.  
Mr. Bouchard also reviewed industry information provided by the Building Owners and Managers Association (BOMA).  For 2008, suburban Class A office buildings with a size range of between 100,000 and 299,999 square feet had average operating expenses of $9.18 with a range of $7.85 to $10.85 per square foot, while in the next smallest category of office buildings, the average operating expense was $7.85 with a range of $7.22 to $9.07.  For 2009, BOMA reported that the average expense level declined for suburban Boston office buildings in the 100,000 to 299,999 square-foot-size range, to $8.38 with the range of $6.19 to $9.97.  For the next smallest category, the median was essentially stable at $7.93 with a range of $5.71 to $9.53.
Mr. Bouchard rejected the notion that a higher vacancy will decrease expenses, because most of the expenses are fixed and thus do not vary with occupancy.  For example, the subject building, because of its four-quadrant vertical orientation, still needs to be heated even if areas are vacant, and therefore no expense savings result from vacant areas.  The one area that does offer some flexibility for vacancy, however, is janitorial and cleaning services, because these expenses fluctuate depending on occupancy. 
On the basis of all of his information, Mr. Bouchard opined that the stabilized operating expenses for the subject property were $7.50 per square foot for fiscal year 2010 and $7.60 per square foot for fiscal year 2011.  Applying these figures yielded total expenses for the subject property of $880,043 for fiscal year 2010 and $891,776 for fiscal year 2011.  Mr. Bouchard thus arrived at net operating incomes of $1,239,100 for fiscal year 2010 and $1,102,987 for fiscal year 2011.
Mr. Bouchard explained that he did not take separate deductions for tenant improvements, brokers' fees, or reserves for replacements.  He theorized that, although these constitute real expenses for the landlord, they have already been subsumed in his capitalization rate.  
With respect to the capitalization rate, Mr. Bouchard first employed an investment-rate analysis by extracting rates from the market.  He used three leased fee Class A office building sales in 2009 located in Wakefield, Newton and Burlington.  Capitalization rates extracted from those sales ranged from 7.7% to 9%.  Other factors that Mr. Bouchard considered were survey data, particularly the quarterly data provided by PriceWaterHouseCoopers in their Korpacz Market Survey ("Korpacz Survey").  The Korpacz Survey reported average rates for the Boston area were 7.41% for the fourth quarter in 2008 and 8.45% for the fourth quarter in 2009.  Mr. Bouchard looked closer at distinctions between the downtown and the suburban markets, and noted that rates for suburban locations, like the subject property's location, were higher than those for downtown Boston and Cambridge.  Finally, Mr. Bouchard looked to the band-of-investment technique.  Mr. Bouchard explained that the difficulty with this technique during the relevant time period was that the capital markets were in dire straits following the "debacle on Wall Street and in the other financial markets," a phenomenon experienced both nationally and internationally, and which resulted in loan rates priced at between 300 and 600 basis points above comparable-term treasury notes, as well as limits in the availability of funds.  Given the problems in the capital markets, Mr. Bouchard used a 60% loan-to-value ratio for January 1, 2009 and a 65% ratio for January 1, 2010.  The adoption of those figures provided equity ratios of 40% and 35%, respectively, for those dates.  Mr. Bouchard also used a 400 point spread above comparable-term treasury notes as of January 2009 and 325 points above treasury notes as of January 1, 2010.  This produced mortgage rates over a 25-year amortization period of 5.98% and 6.46%, respectively, for those periods.  For the equity component of his analysis, Mr. Bouchard estimated cash-on-cash-return requirements of 8.0% and 8.75%, respectively, for the fiscal years at issue.  Given the low interest rate environment as of January 1, 2009 and the lack of attractive alternative investment vehicles, Mr. Bouchard estimated a 200 basis point premium over the 6% yield on mortgage debt.  For January 1, 2010, Mr. Bouchard concluded that an additional 75 point increase in the equity dividend rate to 8.75% was appropriate. 
In selecting overall capitalization rates, Mr. Bouchard also considered the capital markets and recent trends in interest rates and selected 7.90% for January 1, 2009 and 8.40% for January 1, 2010.  He next added the commercial tax factors for the City of Quincy for fiscal years 2010 and 2011, which were $27.45 and $27.85, respectively.  These produced overall capitalization rates of 10.645% for fiscal year 2010 and 11.185% for fiscal year 2011. 
Finally, Mr. Bouchard testified that, in his opinion, a below-the-line deduction was warranted to account for the fact that the appellant was faced with substantial out-of-pocket costs when they purchased the subject property.  Mr. Bouchard found that the total capital costs expended by the new owner shortly after acquisition amounted to $824,894.  However, he included only the specific costs for the new roof and repaving of the parking lot.  These costs totaled $446,846, which Mr. Bouchard applied as a below-the-line deduction for both fiscal years at issue.
On the basis of his analysis, Mr. Bouchard's ultimate opinion of the subject property's fair market value for the fiscal years at issue was:  $11,200,000 for fiscal year 2010 and $9,400,000 for fiscal year 2011.  A summary of his analysis is reproduced below:
Fiscal Year 2010
Building square foot area			117,339
Market Rent per square foot		    @ $        20.50
Gross rental revenue			    =	$ 2,405,450.00
Misc. and electric reimbrs. (@ $0.50)	$    58,670.00
Gross potential revenue				$ 2,464,119.00
Vacancy/Collection (@ 14%)		     ($   344,977.00)
Effective gross revenue			    =	$ 2,119,142.00
Operating expenses (@ $7.50 psf)	     ($   880,043.00)
Net Operating Income			    = $ 1,239,100.00
Overall cap. Rate incl. tax rate	    /	10.645%
Capitalized value				    = $11,640,205.00
Below-the-line deduction		     ($   446,846.00)
Indicated value				    =	$11,193,359.00
Fair cash value opinion (rounded)		$11,200,000.00

Fiscal Year 2011
Building square foot area			117,339
Market Rent per square foot		    @ $       19.50
Gross rental revenue			    =	$ 2,228,111.00
Misc. and electric reimbrs. (@ $0.50)	$    58,670.00
Gross potential revenue				$ 2,346,780.00
Vacancy/Collection (@ 15%)		     ($   352,017.00)
Effective gross revenue			    =	$ 1,994,763.00
Operating expenses (@ $7.60 psf)	     ($   891,776.00)
Net Operating Income			    = $ 1,102,987.00
Overall cap. Rate incl. tax rate	    /	11.185%
Capitalized value				    = $ 9,861,302.00
Below-the-line deduction		     ($   446,846.00)
Indicated value				    =	$ 9,414,456.00
Fair cash value opinion (rounded)		$ 9,400,000.00

The appellant's third and final witness was Jordan Berns, the subject property's Asset Manager.  Mr. Berns testified that the subject property's interior was measured to be 117,339 square feet by an architect using Board of Mass Appraisal ("BOMA") standards.  The Board found Mr. Berns' testimony on this issue to be credible.
For its case-in-chief, the appellee presented as a witness Peter Moran, Assessor for the appellee.  Mr. Moran first testified to the boom in the downtown Quincy real estate market during the fiscal years at issue, the result of new developments by Street-Works Development and supported by federal funding, which separated Quincy from other communities along the Route 128 loop.  Mr. Moran submitted copies of newspaper articles as support for his testimony concerning Quincy's redevelopment boon.  He thus disagreed with the appellant's use of statistics from the general Route 128 loop area.  
Citing ten purportedly comparable rental properties from the Quincy and Braintree real estate market for the relevant time period, for which he submitted supporting documentation printed from LoopNet, Mr. Moran stated that rents in these comparable properties ranged from $16.50 to $23.00 per square foot.  This supported his figure of $22 per square foot as the market rental for the subject property for both fiscal years at issue, he concluded.  All but one of Mr. Moran's purportedly comparable properties were leased on a modified gross basis; the tenth comparable property was leased on a pure gross basis.
With respect to the rentable area of the subject property, Mr. Moran selected 126,586 square feet.  This figure conflicted with the city's property record card, which reflected a figure of 117,284 square feet.  Mr. Moran did not explain why his figure differed from that on the property record card.
Mr. Moran next selected his vacancy rate.  Mr. Moran actually performed two separate analyses for two different vacancy rates.  He first selected 5% as the appropriate vacancy rate in the relevant market during both fiscal years at issue.  This produced a vacancy deduction of $139,244.  Mr. Moran next selected 30%, the subject property's actual vacancy during the fiscal years at issue, for the vacancy figure for the second analysis.  This produced a vacancy deduction of $835,467.  Mr. Moran presented both analyses to the Board, presumably for the Board's selection of a preferred analysis.
Next, Mr. Moran claimed that all of the subject property leases were triple net leases, not gross, even though the city's property record card stated that the leases were on gross terms and listed expenses at 34%, or $7.56 per square foot.  Mr. Moran pointed to the appellant's Commercial Expenses Schedule for the subject property, and claimed that the landlord was being reimbursed by his tenants for the 62 individual line items, which constituted "net recoverable expenses" with zero "gross-up adjustments."  He further testified that the landlord was receiving tenant reimbursements under escalation and stop clauses in the lease agreements.  On the basis of his assumption that tenants were reimbursing the owner for expenses under triple net leases, Mr. Moran chose a deduction for expenses of only 20% of the effective gross income, or $389,884.
Next, Mr. Moran selected a capitalization rate. He essentially adopted the appellant's expert's rate of 7.9% for fiscal year 2010, to which he added the city's fiscal year 2010 tax factor, which produced an overall capitalization rate of 10.65%, which Mr. Moran rounded up to 10.7%.  Mr. Moran adopted this same overall capitalization rate for both fiscal years at issue.  Capitalizing the subject property's net operating income produced a fair cash value of $14,575,135.00, Mr. Moran's opinion of the fair cash value of the subject property for both fiscal years at issue.
A summary of Mr. Moran's analyses is reproduced below:

Analysis #1 for Fiscal Years 2010 and 2011
Building square foot area			126,586
Market Rent per square foot		    @ $       22.00
Gross potential rental revenue   	    =	$ 2,784,892.00
Vacancy/Collection @ 30% (actual)	     ($   835,467.00)
Effective gross revenue			    =	$ 1,949,425.00
Operating expenses @ 20% LL reimb.       ($   389,884.00)
Net Operating Income			    = $ 1,559,539.00
Overall cap. Rate			 	    /	10.7%
Indicated value				    = $14,575.135.00
Fair cash value opinion 			$14,575,135.00
FY 2010 assessed value				$16,070,700.00
FY 2010 assessed value after abatement	$14,780,000.00
FY 2011 assessed value 				$15,759,000.00

Analysis #2 for Fiscal Years 2010 and 2011
Building square foot area			126,586
Market Rent per square foot		    @ $       22.00
Gross potential rental revenue   	    =	$ 2,784,892.00
Vacancy/Collection @ 5%		    	     ($   139,244.00)
Effective gross revenue			    =	$ 1,949,425.00
Operating expenses @ 20% LL reimb.       ($   389,884.00)
Net Operating Income			    = $ 2,116,517.00
Overall cap. Rate			 	    /	10.7%
Indicated value				    = $19,780,541.00
Fair cash value opinion 			$19,780,541.00
FY 2010 assessed value				$16,070,700.00
FY 2010 assessed value after abatement	$14,780,000.00
FY 2011 assessed value 				$15,759,000.00

Mr. Moran admitted that, under his Analysis #1, abatements were owed in each fiscal year.  However, he contended that the assessors had settled the abatement application for fiscal year
2010 with the previous owner. For fiscal year 2010, using Mr. Moran's Analysis #1, the abatement owed would be $41,053.26, and the assessors settled the fiscal year 2010 assessment with the previous owner for $40,976.81. 
Mr. Moran also submitted data and property record cards detailing sales of purportedly comparable properties, apparently as a sales-comparison analysis.  The first sale was the sale of the subject property on January 5, 2010 for $8,900,000.00, or $70.31 per square foot.  The second sale was for adjacent 200 Crown Colony Drive, which sold on August 14, 2009 for $10,575,000.00; however, this was a land sale because the building was razed for construction of a new retail establishment.  Comparable Sales 3 through 8 were all located on Crown Colony Drive, but four of these purportedly comparable properties were purchased between 1996 and 2005, and thus far removed from the relevant valuation dates; another was not a sale but merely a comparable assessment property; and the final property was a leased-fee sale.  The final purportedly comparable property offered by Mr. Moran was located across town on Hancock Street, which sold in July of 2011 but was also a leased-fee sale.  Mr. Moran did not include an analysis with any adjustments as part of his comparable-sale or comparable-assessment analysis.
  
The Board's ultimate findings.  
Based on all of the evidence of record, the Board made the following ultimate findings of fact.  The Board first agreed with the parties that the highest and best usage of the subject property was its current use as Class A office space.  The Board further determined that the income approach was the most appropriate method for valuing the subject property, as the parties primarily relied upon this method and the sales proffered by Mr. Moran were either leased-fee sales or unadjusted and too distinguishable from the subject so as to produce any meaningful comparison.  
The Board next adopted the appellant's figure of 117,339 square feet for the subject property's interior rental space.  This figure was closest to that listed on the city's property record card and was well supported by the appellant's expert witness, Mr. Bouchard, and by Mr. Berns. 
On the basis of the leases in evidence from the relevant market and the subject property, as well as Mr. Bouchard's testimony, the Board found that the market rents for the subject property should be based on a modified gross leasing scenario with an income provision for miscellaneous and electric reimbursements.  The Board found, however, that neither Mr. Bouchard's suggested market rents of $20.50 and $19.50 for fiscal years 2010 and 2011, respectively, nor Mr. Moran's recommended market rent of $22.00 for both fiscal years at issue were suitable.  Rather, in examining and analyzing the underlying data and information in the record, the Board determined that $22.50 for fiscal year 2010 and $21.50 for fiscal year 2011 were the most appropriate market rents to use in its income capitalization methodology.  The leases upon which Mr. Bouchard relied specified a range of rents from $17.00 per square foot to $24.00 per square foot for the relevant time periods.  These leases also demonstrated that market rents declined modestly from the earlier fiscal year to the next.  The Board found that those properties in the upper quadrant of Mr. Bouchard's range were the ones that were most similar to the subject property.  The Board further found that the subject property's historical rents provided additional support for its selections.  Much of the purported market data upon which Mr. Moran relied was either unsubstantiated hearsay or mere asking, as opposed to consummated, rents.  Mr. Moran also premised his income capitalization methodology on a triple net leasing scenario, which the Board did not adopt in consideration of the overwhelming credible evidence indicating the appropriateness of a modified gross leasing arrangement.
With respect to vacancy, the Board found that Mr. Bouchard's figures of 14% and 15% did not properly account for lower vacancies in the Quincy-Braintree submarket.  Considering all of the evidence, the Board selected vacancy rates of 12% for fiscal year 2010 and 13% for fiscal year 2011.
The Board next found that Mr. Moran's expenses were far too low, resulting from his incorrect assumption that the leases were on a triple-net basis.  The Board, instead, found that Mr. Bouchard's expenses of $7.50 per square foot were reasonable.  While Mr. Bouchard raised his expenses to $7.60 per square foot for fiscal year 2011, he introduced no data or other evidence to explain this increase.  Although the Board found that Mr. Bouchard credibly testified that vacancy was rising in this period, he did not offer sufficient evidence to show that expenses were also rising.  The Board thus adopted the $7.50-per-square-foot expense figure for both fiscal years at issue.
The Board next found that Mr. Bouchard fully documented his choice of a capitalization rate of 7.9% for fiscal year 2010, which the Board found was well developed, justified and reasonable.  However, with respect to fiscal year 2011, the Board found that a higher capitalization rate was not warranted.  The Board noted that Mr. Bouchard selected his fiscal year 2010 capitalization rate from the high end of the Korpacz Survey range, yet the Korpacz Survey itself reported no change between fiscal year 2010 and 2011.  The Board further found that any additional risk resulting from a further decline in the real estate marketplace was already compensated for by the drop in rental rate by $1 per square foot and the increase in vacancy by 1% between fiscal year 2010 and 2011.  The Board thus selected the same 7.9% base capitalization rate for both fiscal years at issue.  
Finally, the Board found that Mr. Bouchard's deductions of $446,846 in additional expenses for the new roof and parking lot as below-the-line deductions were not justified.  The Board found that these expenses should be amortized over time, not taken as a below-the-line deduction.  Moreover, to take this deduction in both fiscal years resulted in an improper double-counting of these expenses. The Board thus rejected Mr. Bouchard's proposed deduction of $446,846 for both fiscal years.  Instead, the Board adopted Mr. Bouchard's $0.25-per-square-foot reserves-for-replacements deduction, which he included in his report narrative but not in his calculations, as the appropriate means for accounting for these expenses.  
The Board's analysis is reproduced below: 



 


Fiscal Year 2010
Building square foot area			   117,339
Market Rent per square foot		    @ $        22.50
Gross rental revenue			    =	$ 2,640,128.00
Misc. and electric reimbrs. (@ $0.50)	$    58,670.00
Gross potential revenue				$ 2,698,798.00
Vacancy/Collection (@ 12%)		     ($   323,856.00)
Effective gross revenue			    =	$ 2,374,942.00
Operating expenses (@ $7.50 psf)	     ($   880,042.50)
Reserves for replacements (@ $0.25 psf)  (     29,334.75)	
Net Operating Income			    = $ 1,465,564.75
Overall cap. rate	incl. tax rate	    /	10.645%
Indicated value				    = $13,767,635.03
Fair cash value (rounded)	$13,750,000.00
Fiscal year 2010 value as abated		$14,780,200.00
		Overvaluation					$ 1,030,200.00 

Fiscal Year 2011
Building square foot area			   117,339
Market Rent per square foot		    @ $       21.50
Gross rental revenue			    =	$ 2,522,789.00
Misc. and electric reimbrs. (@ $0.50)	$    58,670.00
Gross potential revenue				$ 2,581,459.00
Vacancy/Collection (@ 13%)		     ($   335,590.00)
Effective gross revenue			    =	$ 2,245,869.00
Operating expenses (@ $7.50 psf)	     ($   880,042.50)
Reserves for replacements (@ $0.25 psf)  ($    29,334.75)
Net Operating Income			    = $ 1,336,491.75
Overall cap. Rate incl. tax rate	    /	10.685%
Indicated value				    = $12,508,111.83
Fair cash value (rounded)	$12,500,000.00
Fiscal year 2011 value				$15,759,000.00
Overvaluation					$ 3,259,000.00

	The Board found and ruled that the appellant was entitled to abatements in both fiscal years.  The Board, therefore, ordered abatements as follows:  $28,278.99 plus CPA charge of 1% for fiscal year 2010, and $90,763.15 plus CPA charge of 1% for fiscal year 2011.
	Accordingly, the Board issued, and promulgated simultaneously with these Findings, Corrected Decisions for the appellant in the instant appeals.

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 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).
In determining fair cash value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The goal is to ascertain the maximum value of the property for any legitimate and reasonable use.  Id.  If the property is particularly well-suited for a certain use that is not prohibited, then that use may be reflected in an estimate of its fair market value.  Colonial Acres, Inc. v. North Reading, 3 Mass. App. Ct. 384, 386 (1975).  "In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted."  Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate 315-316 (12th ed., 2001)), aff'd, 62 Mass. App. Ct. 428 (2004).   On this basis, the Board ruled that the highest-and-best use of the subject property during the fiscal years at issue was, as the appellant's real estate valuation expert recommended, its existing, multi-tenanted, class A commercial office use.  In making this ruling, the Board considered, among other factors, the subject property's history, size, location, and layout, as well as the uses of properties similar to the subject property and located in its market area.  The assessors also valued the subject property as a multi-tenanted, class A commercial office building.            
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  "The board is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  In these appeals, the Board ruled that neither sales-comparison nor cost approaches were appropriate under the circumstances.  The appellant's real estate valuation expert agreed.  At the hearing of these appeals, the assessors' witness, although he preferred the income-capitalization method, seemingly used a sales-comparison method as well as an income-capitalization method; however, the assessors offered no adjustments to account for differences between the subject property and his purportedly comparable properties.  The Board accepted the premise advanced by the appellant's real estate valuation expert that there were not any, or at least not enough, fee-simple market sales of reasonably comparable properties to meaningfully estimate the value of the subject property using a sales-comparison technique.  See Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 247 (1998)("The assessors must determine a fair cash value for the property as a fee simple estate, which is to say, they must value an ownership interest in the land and the building as if no leases were in effect.").  The sale of the subject property to the appellant, as a leased-fee sale, is also not reliable evidence of fair cash value in these appeals.  See Cambridge Park 125 Realty Corp. v. Assessors of Cambridge, Mass. ATB Findings of Fact and Reports 2008-746, 787.   
The use of the income-capitalization approach is appropriate when reliable market-sales data are not available.  Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 810, 811 (1975); Assessors of Lynnfield v. New England Oyster House, 362 Mass. 696, 701-702 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  It is also an appropriate technique to use for valuing income-producing property.  Id. at 64-65.  In these appeals, the Board agreed with the parties that the income-capitalization approach was the appropriate method of valuing the subject property.   
 "The direct capitalization of income method analyzes the property's capacity to generate income over a one-year period and converts the capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved."  Olympia & York State Street Co., 428 Mass. at 239.  "It is the net income that a property should be earning, not necessarily what it actually earns, that is the figure that should be capitalized."  Peterson v. Assessors of Boston, 62 Mass. App. Ct. 428, 436 (2008) (emphasis in original).  Accordingly, the income stream used in the income-capitalization method must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co., 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Auth., 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Auth., 9 Mass. App. Ct. 877, 878 (1980)(rescript).  After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co., 393 Mass. at 610.  The expenses should also reflect the market.  Id.; see Olympia & York State Street Co., 428 Mass. at 239, 245.
The Board's selection of the appropriate rentable area and market rent per square foot for the fiscal years at issue were largely consistent with those suggested by the appellant's expert and were supported by the more credible and persuasive evidence.  The Board first found that Mr. Bouchard's 117,339-square-feet figure for the interior rental space was well supported, very closely in line with the assessors' property record card for the subject property, and thus the most appropriate measurement to use.  
The Board's review of the appellant's Commercial Expense Schedule indicated that the figures reported constituted accounting entries for expenses which were already included in the base rents of each tenant.  However, the Board's review of the subject property's leases revealed tenant reimbursements under the escalation and stop clauses as well as a $0.50 miscellaneous and electrical reimbursement.  Therefore, the Board found that the leases at the subject property were modified gross leases.  
The Board next found that the most appropriate rent to use for the subject property was $22.50 per square foot for fiscal year 2010 and $21.50 per square foot for fiscal year 2011.  The Board found that these rental figures best comported with the rental evidence that was introduced by both parties.  See Fox Ridge Assoc. v. Assessors of Marshfield, 393 Mass. 652, 654 (1984)("Choosing an appropriate gross income figure for establishing an income stream was within the board's discretion and expertise."); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 462 (1981)(ruling that Board may select "higher range components of value" from the entirety of the record).  The Board then adopted Mr. Bouchard's $0.50 per square foot miscellaneous and electrical reimbursement as an additional source of income for the subject property, finding that this category and amount were well supported by the evidence of record.      
For its vacancy and credit allowance, the Board used 12% of potential gross income for fiscal year 2010 and 13% of potential gross income for fiscal year 2011.  The Board arrived at this figure independently, having considered the fact that the subject property was 30% vacant during the fiscal years at issue but also considering the evidence of the Quincy-Braintree submarket, which showed a much lower vacancy rate.  In addition, the Board found that single-tenanted buildings (with lower vacancy rates) should have been included in the sampling for the vacancy analysis of the relevant market.  The Board also gave credence to the assessors' testimony regarding the development and revitalization of the Quincy real estate market.  Olympia & York State Street Co., 428 Mass. at 242 (acknowledging that it is appropriate for the Board to "exercise . . . independent decision-making based on the evidence").   
With respect to the expense deductions, the Board based its deductions on the categories and conclusions contained in Mr. Bouchard's appraisal report, including his supporting information contained in his report regarding the relevant market.  The Board adopted Mr. Bouchard's $7.50 per square foot figure for fiscal year 2010.  However, with respect to fiscal year 2011, the Board found that Mr. Bouchard produced no evidence to justify his increase to $7.60 per square foot.  The Board thus applied the $7.50 per square foot expense figure to fiscal year 2011 as well.  "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 capitalization rate selected should consider the return necessary to attract investment capital.  Taunton Redevelopment Assoc. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  The "tax factor" is a percentage added to the capitalization rate "to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula."  Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  The Board found that the capitalization rate recommended by the appellant's expert for fiscal year 2010 was well developed and reasoned.  The appellee also utilized this same capitalization rate.  The Board thus adopted Mr. Bouchard's capitalization rate of 7.9% for fiscal year 2010.   
However, the Board found that Mr. Bouchard's increase of the base capitalization rate to 8.4% for fiscal year 2011 was unwarranted, based particularly on the facts that this rate was at the upper end of the Korpacz Survey's range for that year, while the Korpacz Survey itself reported no change in the base capitalization rate between the two fiscal years, and the fact that any added risk due to the decline in the market was already recognized by the Board's lowering of the rent by $1 per square foot and increasing the vacancy by 1% for fiscal year 2011.  The Board thus adopted 7.9% as the base capitalization rate for fiscal year 2011 as well.  In the Board's view, these capitalization rates also appropriately incorporated the risks associated with the subject property's highest-and-best use.  "The essential requirement is that the board exercise judgment."  New Boston Garden Corp., 383 Mass. at 473.
Finally, the Board rejected Mr. Bouchard's deduction of $446,846 in additional expenses for the new roof and parking lot, finding that these expenses did not properly constitute or warrant a below-the-line deduction.  The Board thus rejected Mr. Bouchard's proposed deduction of $446,846 for both fiscal years and instead, relying on Mr. Bouchard's reasoning in his report, added a deduction of $0.25 per square foot as a reserve for the replacement of short-lived real estate items for both fiscal years at issue.
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 Assoc., 385 Mass. at 683; New Boston Garden Corp., 383 Mass. at 473; New England Oyster House, Inc., 362 Mass. at 702.  In evaluating the evidence before it, the Board selected among the various elements of value and appropriately formed its own independent judgment of fair cash value.  General Electric Co., 393 Mass. at 605; North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 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 Assoc., 385 Mass. at 691.  The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise.  Schlaiker, 365 Mass. at 245.  

The Board applied these principles in reaching its opinion of the fair cash value of the subject property for the fiscal years at issue.  On this basis, the Board determined that the subject property was overvalued by $735,200 for fiscal year 2010 and by $2,959,000 for fiscal year 2011.  The Board thus ordered abatements to be paid to the appellant as follows:  $28,278.99 plus CPA charge of 1% for fiscal year 2010, and $90,763.15 plus CPA charge of 1% for fiscal year 2011.

 THE APPELLATE TAX BOARD



By:	_____	   ________________	       
 Thomas W. Hammond, Jr., Chairman 



A true copy,

Attest:				_____undefinedundefinedundefinedundefined______
	      Clerk of the Board

 G.L. c. 59, § 59 provides that a property owner who acquires title to a property after January 1 in any year is treated as the assessed owner and therefore is entitled to apply for an abatement.
 The appellant submitted the Petition using the name Three Hundred Crown Colony, Inc., the prior owner of the subject property. By Order dated December 23, 2011, the Board denied the appellee's Motion to Dismiss the petition, ruling that the appellant, who had acquired title to the subject property after the January first assessment date, had an independent statutory right under G.L. c. 59, § 59 to prosecute an abatement claim, irrespective of whether the prior owner had settled its own abatement claim with the assessors. The Board further ordered the appellant's counsel to amend the petition to substitute the appellant's name for that of the prior owner.
 See supra, note 2, with respect to the abatement paid to Three Crown Colony on the original assessment for fiscal year 2010.

ATB 2014-101