Robert L. & Douglas A. Aron, Trustees, Trolley Square Realty Trust v. Board of Assessors of the Town of Framingham (January 9, 2007) (fiscal years 2003 & 2004)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD




ROBERT L. & DOUGLAS A. ARON,	  v.	  BOARD OF ASSESSORS OF
TRUSTEES, TROLLEY SQUARE			  THE TOWN OF FRAMINGHAM
REALTY TRUST


Docket Nos. F268354, F272745		  Promulgated:
							  January 9, 2007


	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 appellee to abate taxes on real estate located in the Town of Framingham, owned by and assessed to the appellants under G.L. c. 59, §§ 11 and 38, for fiscal years 2003 and 2004.
	Commissioner Scharaffa heard these appeals.  He was joined in the decisions for the appellants by Commissioners Gorton, Egan, and Rose.  
	These findings of fact and report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
		
	Matthew A. Luz, Esq. for the appellants.
	James F. Sullivan, Esq. for the appellee.

FINDINGS OF FACT AND REPORT
On January 1, 2002 and January 1, 2003, the relevant dates of assessment for fiscal years 2003 and 2004 ("fiscal years at issue"), Robert L. & Douglas A. Aron, Trustees, Trolley Square Realty Trust ("appellants"), were the assessed owners of the real estate located at 855 Worcester Road in the Town of Framingham ("subject property").  The property consists of 3.83 acres of land improved with a two-story, brick retail/office mixed use building with a gross building area of 56,700 square feet.  Also located on the lot is a wood-frame, two-story storage building with a building area of 1,500 square feet.
The Town of Framingham is located in Eastern Massachusetts and bordered by Southborough and Marlborough on the west, Sherborn and Ashland on the south, Natick on the east, Wayland on the northeast, and Sudbury on the north.  The town has a total area of 26.44 square miles.  Framingham is located nineteen miles west of Boston and is roughly midway between Boston and Worcester.  Framingham is serviced by Interstate 90 (the "MassPike") and State Route 9 ("Route 9"); both highways run in an east/west direction.  
The subject property is a level lot located at the northwest corner of Route 9 and Auburn Street.  There is one curb cut along Auburn Street and two along Route 9.  Access is from the westbound side of Route 9.  Route 9 in Framingham is in general comprised of various commercial and residential uses, with a daily traffic count in excess of 50,000 vehicles.  Commercial uses along Route 9 in Framingham account for over seventy-five percent of the land use, with a mix of retail strip centers and smaller single-user retail properties.  
The structure on the subject parcel was built around 1900, and was originally used as a trolley station known as "Trolley Square."  In 1975, the building was converted into retail and office space.  As of the relevant dates of assessment, the subject building had a total of twenty-one retail and office units ranging in size from 400 to 7,000 square feet, with a total gross building area of 56,700 square feet.  The first floor includes 37,313 square feet of retail space and 13,430 square feet of office space.  The second floor contains 2,700 square feet of retail space and 3,257 square feet of office space.  
The exterior doors are metal frame with plate glass.  There are thermo-pane windows on the ground floor and double-hung windows on the second floor.  There are front awnings.  The flat, rubber-membrane roof was replaced within the last five years.  The interior walls are drywall partitions with stucco finish.  There is a drop ceiling with acoustic tiles and commercial grade carpeting on the floors throughout the building.  The first floor office spaces share separate men's and ladies' multi-stalled rest rooms.  The retail and second floor office spaces have individual rest rooms.  There are roof-mounted, forced-hot-air heating systems fueled by gas and also separate air conditioning systems.  The building has hardwired smoke detectors with a panel box and also a sprinkler system.  Overall the building is in average condition.
For fiscal year 2003, the Board of Assessors of the Town of Framingham ("assessors") valued the subject property at $6,004,700 and assessed a tax, at the rate of $29.20 per thousand, for $175,337.24, which the appellants paid without incurring interest.  The appellants timely filed its abatement application with the assessors on January 3, 2003.  The application was denied on March 3, 2003, and, on May 29, 2003, the appellants timely filed an appeal with the Appellate Tax Board ("Board").  
For fiscal year 2004, the assessors valued the subject property at $6,047,500 and assessed a tax, at the rate of $29.68 per thousand, for $179,489.80, which the appellants paid without incurring interest.  The appellants timely filed its abatement application with the assessors on January 28, 2004. The application was deemed denied on April 28, 2004, and, on May 19, 2004; the appellants timely filed an appeal with the Board.  On the basis of these facts, the Board found that it had jurisdiction over these appeals.
The appellants presented their case through the testimony and appraisal report of Steven Porcaro, a certified real estate appraiser.  Based on his education and experience, the Board qualified Mr. Porcaro as an expert witness.  In his appraisal report, Mr. Porcaro used both the sales-comparison and the income-capitalization methodologies to estimate the value of the subject property for the fiscal years at issue, but gave greater weight to the income-capitalization approach when deriving his final estimate of value.  
For his sales-comparison approach, Mr. Porcaro relied on four sales of purportedly comparable commercial properties located in Marlborough, Northborough and Framingham, which took place between October 31, 2000 and October 21, 2002.  After adjusting for factors such as             building size, location, quality, condition, site and parking, Mr. Porcaro determined that the comparable properties' adjusted sale prices ranged from $84.00 to $102.00 per square foot.  He selected an indicated value of $88.00 per square foot, which he applied to the subject property's gross building area of 56,700 square feet to arrive at an opinion of value under the sales-comparison approach of $5,000,000 for fiscal years 2003 and 2004.  
However, Mr. Porcaro relied more heavily on an income-capitalization approach to value the subject property.  To estimate the subject property's potential gross income, Mr. Porcaro relied primarily on the subject property's actual income for calendar year 2002 of $925,992, which included rent and various tenant reimbursements.  This calculated to a per-square-foot rental value of approximately $17.00, which Mr. Porcaro concluded most accurately reflected the fair market rental value of the subject property.  On cross-examination, however, Mr. Porcaro noted that as of the relevant dates of assessment there were several existing leases in the range of $24.00 to $30.00 per square foot.  As for the 2,500 square feet of owner-occupied space, Mr. Porcaro used, without explanation, a rate of $15.00 per square foot for a total of $37,500.  Added to the property's actual income, this calculated to a potential gross income of $963,492.
Mr. Porcaro testified that as of the relevant dates of assessment, the subject property was fully occupied and that it had a very stable rental history.  Despite these facts, Mr. Porcaro chose a vacancy rate of eight percent.  Applying an eight percent vacancy factor to his suggested potential gross income of $963,492, Mr. Porcaro calculated an effective gross income ("EGI") for the subject property of $886,412.
Next, he deducted the following expenses from EGI: management; common area maintenance ("CAM"); capital reserves; and, other expenses.  Due to the subject property's unique configuration and number of tenants, Mr. Porcaro calculated his management expense at six percent of EGI.  Capital reserves and other expenses were calculated at five percent and two percent of EGI, respectively.  Mr. Porcaro's CAM expense not only included the expenses attributable to the common areas, but also included an amount of $178,219 for real estate taxes.  Mr. Porcaro's total expenses amounted to $396,255.  Subtracting this expense total from the subject property's EGI, Mr. Porcaro calculated a net operating income of $490,157.
	Mr. Porcaro divided his net operating income by a capitalization rate of ten percent, which did not include a tax factor, to determine that the subject property's fair cash value for fiscal years 2003 and 2004 was $4,900,000.  By relying more heavily on the income-capitalization approach, and using the sales-comparison analysis as a support, Mr. Porcaro concluded that as of January 1, 2002 and January 1, 2003, the subject property had a fair market value of $4,900,000. 
The assessors offered no affirmative evidence of value nor rebutted or attempted to discredit the appellants' estimates of value, and simply rested on the presumed validity of the subject property's assessments.
	Based on the evidence presented, the Board agreed with the appellant's expert that the income-capitalization approach was the appropriate method to use in valuing the subject property for the fiscal years at issue.  The Board did not, however, concur with Mr. Porcaro's opinions concerning the elements used in his approach.  Based on the evidence presented by the appellants' real estate valuation expert, the Board found that the more appropriate rental rate for the subject property, including the owner-occupied space, was $18.00 per square foot.  The Board also found on this record that the fair market rent of $18.00 included the tenants' portion of real estate taxes.  Furthermore, given the subject property's strong rental history and its full occupancy for the fiscal years at issue, the Board allowed for a five percent vacancy factor, rather than the eight percent used by Mr. Porcaro.
 
With respect to the operating expenses, the Board found that Mr. Porcaro's use of five percent of EGI for capital reserves was excessive, based on the evidence contained in Mr. Porcaro's appraisal report, and adjusted this figure to three percent of EGI.  Furthermore, the Board found that Mr. Porcaro erroneously included real estate taxes as part of his CAM expense, and that real estate tax payments should have been taken into account through the use of a tax factor in deriving the overall capitalization rate.  Relying on the evidence of record in this appeal and recognizing that the assessors presented neither affirmative evidence of value nor discredited Mr. Porcaro's evidence of value, the Board used a capitalization rate of .12968, the ten percent used by Mr. Porcaro plus a tax factor of .02968, based on the fiscal year 2004 tax rate of $29.68 per $1,000 valuation, to determine the subject property's fair cash value of $5,900,000 for fiscal year 2003 and 2004.
Based on these facts, the Board found that the subject property was overvalued for the fiscal years at issue and granted abatements in the amounts of $3,057.24 and $4,377.80 for fiscal years 2003 and 2004, respectively.

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).  
Generally, real estate valuation experts, the 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 Board is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  Regardless of which method is employed to determine fair cash value, the Board must determine the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market.  Irving Saunders Trust v. Board of Assessors of Boston, 26 Mass. App. Ct. 838, 845 (1989).  The validity of a final estimate of market value depends largely on how  well it can be supported by market data. The Appraisal Institute, THE APPRAISAL OF REAL ESTATE 134 (12th Ed., 2001). 
	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).  Under this approach, a valuation figure is determined by dividing net operating income by a capitalization rate.  Board of Assessors of Brookline v. Buehler, 396 Mass. 520, 522-23 (1986).  The net income figure is computed by deducting operating expenses from gross rental income.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 609 (1984).
In applying the income-capitalization method, the income stream used must reflect the property's earning capacity or market rental value.  Pepsi-Cola Bottling, 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, rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Authority, 9 Mass. App. Ct. 877, 878 (1980) (rescript); AVCO Manufacturing Corporation v. Assessors of Wilmington, ATB Findings of Fact and Reports 1990-142.  It is the earning capacity of real estate, rather than its actual income, which is probative of fair market value.  Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 64 (1941).  Vacancy rates must also be market based when determining fair cash value.  Donovan v. City of Haverhill, 247 Mass. 69, 71 (1923). 
After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984).  The expenses should reflect the market.  Id.  Real estate taxes are not considered operating expenses for purposes of determining net operating income.  Alstores Realty Corporation v. Assessors of Peabody, 391 Mass. 60, 70 (1984).  "The expense of local taxation turns on the very point in dispute, the fair cash value of the property.  Logically, therefore, income should be capitalized before taxes."  Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. 696, 700 n.2 (1972). See also, Board of Assessors of Lynn v. Shop-Lease Co., Inc., 364 Mass. 569, 572 (1974) (a property's net-operating income is determined before real estate taxes).  Real estate taxes are accounted for by use of an effective tax factor in the capitalization rate.  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  
The capitalization rate should consider the return necessary to attract investment capital.  Taunton Redevelopment, 393 Mass. at 295.  The "tax factor" is a percentage added to the capitalization rate "to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula."  Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  "Logically, therefore, income should be capitalized before taxes 'with the capitalization rate increased to yield the return the investor expects plus the amount of local taxes payable.'"  Alstores, 391 Mass. at 70 n. 19, quoting England Oyster House, Inc. 362 Mass. at 700 n. 2.      
Generally, in multiple tenancy properties like the subject property, it is appropriate to add a tax factor to the capitalization rate because the landlord is assumed to be responsible for paying the real estate taxes, and the tenant's contribution toward the real estate tax is included in the landlord's gross income.  Taunton Redevelopment, 393 Mass. at 295-296; see also General Electric Co., 393 Mass. at 610.  If, however, the tenants' tax payments are not included in gross income then the tax factor must be proportionately reduced.  Alstores, 391 Mass. at 69.    
The Board is entitled to presume that the assessment is valid until the taxpayer sustains his or her burden of proving otherwise.  Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974).  Accordingly, the burden of proof is upon the taxpayer to make out his or her right as a matter of law to an abatement of the tax.  Id. The taxpayer must demonstrate that the assessed valuation of his or her property was improper.  See Foxboro Associates, 385 Mass. at 691.  In appeals before this Board, a taxpayer "may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors' method of valuation, or by introducing affirmative evidence of value which undermines the assessors' valuation."  General Electric Co., 393 Mass. at 600, (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  
"[The Board can] accept such portions of the evidence as appear[s] to have the more convincing weight.  The market value of the property [can] not be proved with mathematical certainty and must ultimately rest in the realm of opinion, estimate, and judgment . . . .  The board [can] select the various elements of value as shown by the record and from them form . . . its own independent judgment."  Assessors of Quincy v. Boston Consolidated Gas Company, 309 Mass. 60, 72 (1941).  See also North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984); New Boston Garden, 383 Mass. at 473; Jordan Marsh Co. v. Assessors of Malden, 359 Mass. 106, 110 (1971).  
	In the present appeals, the Board found that the rental values of $17.00 per square foot for the leased spaces and $15.00 per square foot for the owner-occupied space, as suggested by the appellant's real estate valuation expert, were below market.  Based on evidence presented by the appellants' real estate valuation expert, the Board found that the more appropriate rental rate for all areas, including the owner-occupied space, was $18.00 per square foot.  The Board further found on this record that a portion of the $18 value represented the tenants' payment of real estate taxes.  See Fox Ridge v. Assessors of Marshfield, 392 Mass. 652, 654 (1984) ("choosing an appropriate gross income figure for establishing an income stream is within the Board's discretion").  Further, given the subject property's strong rental history and its full occupancy for the fiscal years at issue, the Board determined that the appropriate vacancy allowance was five percent.

With respect to the operating expenses, based on evidence contained in Mr. Porcaro's appraisal report, including the fact that the subject property's rubber roof had been replaced within the last five years, the Board found that Mr. Porcaro's use of five percent of EGI for capital reserves was excessive and adjusted this figure to three percent of EGI.  The Board also found that Mr. Porcaro erred by including real estate taxes in his CAM expense.  Alstores, 391 Mass. at 70.  Instead, real estate taxes were taken into account by including tax reimbursements paid by the tenant in gross rental income and using a full tax factor in the capitalization rate.  Id.  And, since the tenants' payment of real estate taxes were included in the gross rental income, no reduction in the tax factor was necessary.  Id.  Ultimately, the Board adopted Mr. Porcaro's capitalization rate but added to it a tax factor of .02968, based on the fiscal year 2004 tax rate of $29.68 per $1,000 of valuation, to derive an overall capitalization rate of 0.12968.
Based on the foregoing facts, the Board found that the subject property's fair market value for the fiscal years at issue was $5,900,000.   Accordingly, the Board foundthat the subject property was overvalued for the fiscal years at issue and granted abatements in the amounts of $3,057.24 and $4,377.80 for fiscal years 2003 and 2004, respectively.

					APPELLATE TAX BOARD


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




A true copy,


Attest:	____________________________
		Assistant Clerk of the Board

ATB 2007-1