Maguire Road Limited Partnership v. Board of Assessors of the Town of Lexington (August 13, 2015)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


MAGUIRE ROAD LIMITED           v.   	   BOARD OF ASSESSORS OF PARTNERSHIP                                THE TOWN OF LEXINGTON


Docket Nos. F315206, F319041		        Promulgated:
							        August 13, 2015


	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 Town of Lexington ("appellee" or "assessors") to abate taxes on certain real estate in Lexington owned by and assessed to Maguire Road Limited Partnership ("appellant") under G.L. c. 59, §§ 11 and 38, for fiscal years 2012 and 2013 ("fiscal years at issue").
	Commissioner Good heard these appeals.  Chairman Hammond, and Commissioners Scharaffa, Chmielinski, and Rose joined her in the decisions for the appellee. 
	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.

	Matthew A. Luz, Esq. for the appellant.
	Anthony M. Ambriano, Esq. for the appellee.  
 
FINDINGS OF FACT AND REPORT
On January 1, 2011 and January 1, 2012, the appellant was the assessed owner of a 3.12-acre parcel of real estate improved with a 25,664-square-foot office building located at 1 Maguire Road in the Town of Lexington ("subject property"). For assessment purposes, the subject property is identified as Map 85, Lot 17A.   
For fiscal year 2012, the assessors valued the subject property at $3,177,000 and assessed a tax thereon, at the rate of $28.45 per thousand, in the total amount of $90,385.65.  On December 30, 2011, Lexington's Collector of Taxes ("Collector") sent out the town's actual real estate tax bills for fiscal year 2012.  In accordance with G.L. c. 59, § 57C, the appellant timely paid the tax due without incurring interest.  On January 19, 2012, in accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on April 19, 2012.  On April 24, 2012, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed an appeal with the Appellate Tax Board ("Board"). On the basis of the preceding facts, the Board found and ruled that it had jurisdiction over the appeal for fiscal year 2012.
For fiscal year 2013, the assessors valued the subject property at $3,177,000 and assessed a tax thereon, at the rate of $28.97 per thousand, in the total amount of $92,037.69.  On December 31, 2012 the Collector sent out the town's actual real estate tax bills for fiscal year 2013.  In accordance with G.L. c. 59, § 57C, the appellant timely paid the tax due without incurring interest.  On January 10, 2013, in accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on April 10, 2013.  On April 25, 2013, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed an appeal with the Board.  On the basis of the preceding facts, the Board found and ruled that it had jurisdiction over the appeal for fiscal year 2013.
The subject property is located on Maguire Road situated in the northwestern section of Lexington near the Bedford municipal border.  The subject property is located on Hartwell Avenue, which is a moderately traveled roadway improved with a mix of commercial and industrial uses.  The immediate area is bordered by Routes 4/225 to the north, Route 128/Interstate 95 to the east, and Route 2A to the south.  As a result, the subject property is considered to have a good location for its current office use. 
The subject property is improved with a single-story, office building that was built in 1996 ("subject building").
The subject building was built as a multi-tenant building and, as of the relevant dates of assessment, was occupied by two tenants - GI Dynamics and MGH/Partners.  The space occupied by GI Dynamics contains a reception area, a large open office bullpen area with temporary office cubicles, 14 private offices, a conference room, a copy room, a lab area, an inventory room, a production area, a machine shop, a shipping/receiving area, an employee break area, a kitchenette, and 2 bathrooms.  The space occupied by MGH/Partners contains a reception/waiting area, 9 exam rooms, 18 private offices, 3 physical therapy rooms, a conference room, and 2 bathrooms.
The appellant presented its case-in-chief through the testimony and appraisal report of Eric Wolff, whom the Board qualified as an expert in the area of commercial real estate valuation. To develop a value for the subject property for the fiscal years at issue, Mr. Wolff first examined the subject property's highest-and-best use and concluded that it was the subject property's existing use as an office building.  Mr. Wolff then considered the three usual methods for estimating the value of the subject property for the fiscal years at issue.  He rejected both the cost and sales-comparison approaches and instead used the income-capitalization approach to estimate the fair cash value of the subject property for the fiscal years at issue because it was an income-producing property.
To determine what he considered to be the most appropriate office rent to use in his income-capitalization methodology for the fiscal years at issue, Mr. Wolff reviewed the subject property's actual rents and also testified that he investigated market rental rates by surveying what he regarded to be similar office space in Lexington and by having conversations with local real estate brokers in this market.  For fiscal year 2012, GI Dynamics and MGH/Partners paid annual rents of $401,579 and $297,080, or $26.68 and $28.79 per square foot, respectively, which included reimbursements for operating expenses.  For fiscal year 2013, GI Dynamics and MGH/Partners paid annual rents of $408,600 and $311,520, or $27.14 and $29.36 per square foot, respectively, which included reimbursements for operating expenses.  Mr. Wolff conducted a survey of eleven purportedly comparable office spaces located in Lexington.  Of these eleven spaces, four rented on a gross leasing scenario with rents ranging from $17.48 to $24.50 per square foot, and seven rented under modified gross leases ranging from $21.00 to $23.00 per square foot.  Mr. Wolfe made no adjustments to his comparable rents and he also acknowledged that he had not seen the interiors of any of his purported comparables.  Based on his review of market rents, Mr. Wolff selected a rent of $23.00 per square foot on a gross-plus-electric basis for both fiscal years at issue.  Applying this rate to the subject building's net rentable area of 25,664 square feet, Mr. Wolff obtained a potential gross income of $590,272 for both fiscal years at issue.
The next step in Mr. Wolff's income-capitalization analysis was the determination of a vacancy rate.  Mr. Wolff testified that he consulted with local real estate brokers who reported that vacancy rates in Lexington during the fiscal years at issue ranged between 10% and 20% for this type of property.  He further testified that a market survey conducted by CoStar indicated that the vacancy rate for office space in the Lexington area was between 14.3% and 15.7%.  Mr. Wolff selected 10% as the vacancy and collection loss deduction for the subject property for both fiscal years at issue, testifying that this rate was justified because of the subject property's favorable location, relative size, and current physical condition.  This allowance resulted in an effective gross income figure of $531,245 for both fiscal years at issue. 
With respect to operating expenses, Mr. Wolff reported that the subject property's average per-square-foot operating expenses for the fiscal years at issue, as reported by the owner, was $7.89 per square foot, including electric.  He compared this figure to the operating expenses of four other purportedly comparable properties, two located in Lexington and two located in Belmont, which ranged from $7.29 to $8.62 per square foot and also included electric.  In addition, Mr. Wolff testified that a survey conducted by the Institute of Real Estate Management ("IREM") indicated that the average total operating expenses for suburban office buildings was $8.95 per square foot in 2010 and $8.32 per square foot in 2011.  Mr. Wolff never clarified whether these expense totals included electric expenses.  Based on this data, Mr. Wolff selected operating expenses of $7.50 per square foot for the fiscal years at issue.  In addition, Mr. Wolff adopted a management fee at 5% of effective gross income and also a replacement reserve allowance at 2% of potential gross income, which he testified were typical in the market.  
Finally, Mr. Wolff determined the capitalization rate for each of the years at issue using the band-of-investment technique.  For fiscal year 2012, Mr. Wolff assumed an interest lending rate of 5.75% and an equity yield rate of 11% to determine a capitalization rate of 8.5%.  He also consulted the rates published by national surveys, which ranged from 6.75% to 12.5%.  Mr. Wolff opined that the capitalization rate of 8.5% that he derived was in keeping with the rates published in these publications.  Mr. Wolff then added the fiscal year 2012 tax factor of 2.845% to produce an overall capitalization rate of 11.345% for fiscal year 2012. 
For fiscal year 2013, Mr. Wolff assumed an interest lending rate of 4.5% and an equity yield rate of 12% in deriving a capitalization rate of 8%.  He also consulted the rates published by national surveys, which ranged from 5.6% to 12.5%.  Mr. Wolff opined that the capitalization rate of 8% which he derived was consistent with the rates published in these publications.  Mr. Wolff then added the fiscal year 2013 tax factor of 2.897% to produce an overall capitalization rate of 10.897% for fiscal year 2013.
Mr. Wolff's income-capitalization analyses are reproduced in the following table.
Mr. Wolff's Income-Capitalization Approach

INCOME                             
Office Space                                                25,664 square feet 
  @ $23.00 psf          
Potential Gross Income:                                            $  590,272	
Vacancy & Collection Allowance (10%)                              ($   59,027)        	
Effective Gross Income:                                            $  531,245	
	
EXPENSES
	
  Management Fee         $ 26,562  @ 5% of EGI
  Replacement Reserves   $ 11,805  @ 2% of PGI
  Operating Expenses     $192,480  @ $7.50/sq. ft.  

Total Expenses:                                                   ($  230,848) 	
  	
Net-Operating Income:                                              $  300,397	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 11.345%	
	
Indicated Value for Fiscal Year 2012                               $2,647,836	
Rounded Value for Fiscal Year 2012                                 $2,650,000	
	
Divide by: Total Capitalization Rate for Fiscal Year 2013 - 10.897%	
	
Indicated Value for Fiscal Year 2013                               $2,756,695	
Rounded Value for Fiscal Year 2013                                 $2,755,000	

	In defense of their assessments, the assessors cross-examined Mr. Wolff and introduced into evidence the requisite jurisdictional documents and the subject property's property record cards for the fiscal years at issue.  
On the basis of the documents and testimony admitted into evidence during the hearing of these appeals, as well as reasonable inferences drawn therefrom, the Board found that the appellant failed to meet its burden of proving that the subject property was overvalued for the fiscal years at issue.  Specifically, the Board found that Mr. Wolff's determination of a market rent for the fiscal years at issue was largely unsubstantiated and lacked credibility.  
Mr. Wolff acknowledged on cross-examination that he did not inspect any of the purportedly comparable lease properties nor did he review the cited leases, but instead relied on information provided to him by local real estate brokers.  Further, despite differences in size, location and use between the subject property and his comparable lease properties, Mr. Wolff made no adjustments.  Finally, Mr. Wolfe failed to address why his market rents were significantly less than the actual rents paid for space in the subject property.  The subject property's actual leases for fiscal year 2012 were $26.68 and $28.79 per square foot, on a modified gross basis; for fiscal year 2013 the subject property's actual leases were $27.14 to $29.36 per square foot, on a modified gross basis.  There was little evidence to suggest that the actual rents were not reflective of market value, particularly given the inadequate support for Mr. Wolfe's determination of a $23.00 per square foot market rent. 
Given the flaws in his selection of a fair market rent, the Board found that the values derived from Mr. Wolff's income-capitalization methodology were not a reliable indicator of the subject property's fair cash value for the fiscal years at issue.  Therefore, the Board found that the appellant failed to meet its burden of proving values for the subject property that were less than the assessments at issue. Accordingly, the Board issued decisions for the appellee.

OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion.  Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  
In determining fair cash value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The goal is to ascertain the maximum value of the property for any legitimate and reasonable use.  Id.  If the property is particularly well-suited for a certain use that is not prohibited, then that use may be reflected in an estimate of its fair market value.  Colonial Acres, Inc. v. Assessors of 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).  The Board accepted the highest-and-best-use determination of the appellant's real estate valuation expert as consistent with the evidence and existing use of the subject property. 
Generally, real estate valuation experts, Massachusetts courts, and this Board rely upon three approaches to ascertain the fair cash value of property: income capitalization; sales comparison; and cost of reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  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, 701-02 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  It is also recognized as an appropriate technique to use for valuing income-producing property.  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In the present appeals, the Board agreed with the appellant's real estate valuation expert that the income-capitalization approach was the most appropriate method to value the subject property.  
	In the present appeals, the Board found that Mr. Wolff's selection of a fair market rent was flawed for several reasons, including his failure to view the purportedly comparable properties and their leases, his failure to make any adjustments, including for differences in size, location and use, and his failure to properly consider the subject property's actual leases and leasing scenarios for the fiscal years at issue, which the Board found to be the best evidence of the market rent on this record.  As a result, the Board found that Mr. Wolff's income-capitalization lacked credibility and did not provide probative evidence of the subject property's fair cash value for the fiscal years at issue.  
"'[E]vidence of a party having the burden of proof may not be disbelieved without an explicit and objectively adequate reason.'"  New Boston Garden v. Assessors of Boston, 383 Mass. 456, 473 (1981) (quoting L.L. Jaffe, Judicial Control of Administrative Action 607 (1968)).  However, the mere qualification of a person as an expert does not endow his testimony with any magic qualities.  Boston Gas Co., 334 Mass. at 579.  
"'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. Board of 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 v. Assessors of Foxborough, 385 Mass. 679, 691 (1982).  The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise.  Schlaiker, 365 Mass. at 245.  The Board found and ruled here that the appellant failed to meet his burden of proving that the subject property was overvalued for either of the fiscal years at issue in these appeals. Accordingly, the Board issued decisions for the appellee.
On the basis of the Board's subsidiary findings, the Board found and ruled that the appellant failed to prove that the subject property was overvalued for the fiscal years at issue.  Accordingly, 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

   While Mr. Wolff included in his appraisal report a sales-comparison analysis for each of the fiscal years at issue, he did not testify about this method, except to say that he rejected the sales-comparison approach and the values derived from it. The Board, therefore, gave no weight to Mr. Wolff's sales-comparison approach or to the estimates of value obtained from it.
 Mr. Wolff never clarified whether he grossed up the rent to include electric expense.

ATB 2015-410