Charles D. Flanagan v. Board of Assessors of the City of Worcester (September 28, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD





CHARLES D. FLANAGAN			v.	   BOARD OF ASSESSORS OF
							   THE CITY OF WORCESTER


Docket Nos.:	F254696 			   Promulgated:
			X290092			   September 28, 2001
							   


	These are appeals under the formal and informal procedures pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate real estate taxes assessed under G.L. c. 59, § 38 for fiscal years 1999 and 2000.  
	Commissioner Gorton heard these appeals.  Chairman Burns and Commissioners Scharaffa and Egan joined him 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  8.31 CMR 1.32.  

	Arthur Goldstein, Esq. for the appellant.
	John F. O'Day, Esq. for the appellee.  




FINDINGS OF FACT AND REPORT
	On January 1, 1998 and January 1, 1999, the appellant, Charles D. Flanagan, was the assessed owner of an irregularly shaped parcel of real estate in the City of Worcester located at 35 New Street.  The parcel contains about twelve acres of land and is situated partially in an industrial and partially in a residentially zoned area.  It is improved with an approximately 136,200-square-foot industrial building.  Some portions of the lot contain steep grades that slope away from the structure.  The subject property is located in an area that is bordered by I-290 on the east and Lincoln Street on the west.  
	The cement-block building was built on a slab in several different stages from 1910 to 1953.  It has varying ceiling heights, but is primarily low bay construction.  The roof is flat and finished with part tar and gravel and part membrane coverings.  There are several truck bays and loading docks, and ample on-site paved parking for the property's present use as a metal plating manufacturing operation.  The building also contains some office space and a lunchroom with vending machines.  The Worcester Assessor described the property's condition as "tired."  A sewer easement and a forty-foot right of way to an adjoining parcel run through the property.  A small wetland area that contains contaminates is fenced off from the rest of the property, apparently to prevent unauthorized access.  Telephone, water, electric, gas, and sewer utilities service the site.  
	For both fiscal years 1999 and 2000, the Board of Assessors of Worcester ("Assessors") valued the subject property at $1,211,000.  For fiscal year 1999, the Assessors assessed real estate taxes at the industrial rate of $37.63 per $1,000, in the amount of $45,569.93, and, in fiscal year 2000, they assessed real estate taxes at the industrial rate of $36.34 per $1,000, in the amount of $44,007.74.  The appellant timely paid the real estate taxes for both of the fiscal years at issue in these appeals.  
	The appellant timely filed his application for abatement of the fiscal year 1999 real estate tax assessment with the Assessors on January 7, 1999.  The Assessors denied the application on January 20, 1999, but did not send notice of their denial to the appellant until February 5, 1999.  The appellant never received the notice.  G.L. c. 59, § 63 provides that: "Assessors shall, within ten days after their decision on an application for abatement, send written notice thereof to the appellant."  Accordingly, the Board found that the Assessors failed to comply with their statutory obligation under § 63, and, therefore, after finding that the appellant "by mistake or accident failed to [timely] enter [his] appeal," allowed the appellant's petition for late entry under G.L. c. 59,  § 65C.  The Board further found that the petition was filed seasonably before the expiration of the deadline in its order and, on this basis, determined that it had jurisdiction over the fiscal year 1999 appeal.  
	For fiscal year 2000, the appellant timely filed his application for abatement of his real estate tax with the Assessors on February 1, 2000.  The Assessors denied his request for abatement on February 29, 2000, and the appellant then seasonably filed his petition contesting the denial with this Board on May 26, 2000.  On this basis, the Board found that it had jurisdiction over this appeal as well.
	The appellant presented his case in chief through the testimony of three witnesses, including the appellant, Charles D. Flanagan, Worcester's Assessor, Paul F. Leary, and an expert real estate appraiser, Martin Segel.  The Assessors did not call any witnesses to testify.  Both parties submitted exhibits and written legal arguments.  
	Mr. Flanagan testified that he acquired the subject property and metal plating business in December 1985.  At that time, a Chapter 21E evaluation of the subject revealed significant groundwater contamination from naturally occurring arsenic and metals.  Following this evaluation, he entered into an agreement with the Massachusetts Department of Environmental Quality Engineering ("DEQE"), the predecessor to the Massachusetts Department of Environmental Protection ("DEP"), to construct and use a wastewater treatment plant to treat groundwater following its utilization in the metal plating operations.  The process included drawing groundwater from two nearby wells, using the water in the manufacturing processes, treating the water, and then discharging the treated water into the Upper Blackstone Water Pollution Abatement District's sewer system.  Mr. Flanagan estimated that the treatment plant's annual operational costs, including chemicals, supplies, personnel, power, and licensing fees, were approximately $150,000 per year.  As an owner familiar with the subject property, and without regard to the effects of pollution, Mr. Flanagan valued the subject in the $500,000 to $700,000 range for fiscal years 1999 and 2000.  When considering the effects of pollution, he valued the subject at less than $200,000.  
	During cross-examination, Mr. Flanagan admitted that neither DEQE nor DEP nor any other governmental authority required the remediation of any of the naturally occurring arsenic and metal contamination.  He also conceded that he contractually agreed to pre-treat his industrial discharge from the metal plating business before releasing it into the Upper Blackstone Water Pollution Abatement District's sewer system and that this treatment was required regardless of any groundwater contamination.  
	The appellant also called to testify Worcester's Assessor, Paul F. Leary.  Mr. Leary verified some of the characteristics of the subject property and described the income-capitalization methodology that the Assessors used to estimate the value of the subject property for the fiscal years at issue in these appeals.  He testified that the Assessors used $2.70 per-square-foot value for their economic rent based on a citywide survey of comparable industrial properties.  The forty-five percent vacancy rate included a twenty-percent consideration for contamination, as did the rather high capitalization rate of 15.20 percent.  The Assessors did not factor the $150,000 per year cost for operating the treatment plant into the subject property's expenses for income-capitalization purposes, because the Assessors believed that this cost was related to the business on the subject property rather than the property itself. 
	The appellant's final witness was his expert real estate appraiser, Martin Segel.  Mr. Segel estimated the value of the subject property at $690,000 for both of the fiscal years at issue, without any consideration of the possible effects of contamination or remediation on its value.  He stated in his appraisal report that "he is neither qualified, nor responsible for the inspection and investigation of possible hazardous/toxic materials of any kind, type, and quality which may be present at the subject property."  He further qualified his opinion of value by writing that his estimates of the subject property's value identify the "fair value of the property without regard to a value created by (reported) contaminated soils and the requirement of continuously pumping and treating of ground water to remove heavy metals and volatile organic contaminants."  
	Mr. Segel used both sales-comparison and income-capitalization techniques to estimate the value of the subject property as of January 1, 1998 and January 1, 1999.  In his sales-comparison methodology, he relied on three sales of industrial properties in Worcester to support his $681,000 estimate of value using this technique.  One of these sales occurred in 1995, while the other two closed in 1997.  All of land areas associated with these purportedly comparable properties were considerably smaller than the subject's parcel, and they also contained improvements and specific uses that were dissimilar from the subject's.  Some of these differences include the structure and type of construction of the buildings; their size, ceiling heights, and number of stories; their use, condition, layout, and age; as well as their composition.  In addition, Mr. Segel did not attempt to demonstrate that these purportedly similar properties were located in the same or even comparable neighborhoods to the subject.  
	In analyzing his purportedly comparable properties' sale prices, Mr. Segel apparently only adjusted for differing "administrative uses" within the properties as compared to the subject property.  There is no evidence that he adjusted, or even considered adjusting the sale prices, for any other factors, including time, location, physical characteristics, economic characteristics, uses other than "administrative" ones, zoning, or possible non-realty components of value.  Neither his testimony nor his appraisal report explains his failure even to consider adjusting his allegedly comparable properties' sale prices for so many obvious differences with the subject.  
	In his income-capitalization approach, Mr. Segel obtained his market rentals, vacancy, expense, and capitalization-rate data for manufacturing properties in Worcester from mass appraisal information, specifically property data and value listing ("PDVL") sheets, from the Assessors' office, regarding four properties that he considered reasonably comparable to the subject property.  A summary of his income-capitalization methodology, that assumes a triple-net leasing scenario, and his rounded calculations for estimating the indicated fair cash value of the subject property at $692,500 for both of the fiscal years at issue in these appeals is contained in the following table.


Potential Gross Income		
     136,200 sq. ft. x $1.25 per sq. ft.	 $ 170,200	
Vacancy/Rent Loss (30%)	($  51,100)	
Potential Effective Gross Income	 $ 119,100	
Operating Expenses		
     Management (6%)     ($7,100)		
     Professional Fees   ($2,500)		
     Reserves (5%)       ($6,000)	($  15,600)	
Potential Net Operating Income	 $ 103,500	

Fiscal Year 1999 Capitalization Rate (0.149)		
Fiscal Year 1999 Estimate of Value	 $ 694,631	

Fiscal Year 2000 Capitalization Rate (0.150)		
Fiscal Year 2000 Estimate of Value	 $ 690,000	
		
Indicated Fair Cash Value for Both Fiscal Years	 $ 692,500	


Similar to some of the shortcomings previously described with respect to his comparative-sales analysis, Mr. Segel never established the comparability to the subject of the properties upon which he relied for the rental data that he used in his income-capitalization methodology.  He failed to address obvious differences between these properties and the subject in zoning, location, size, and building configuration.  
Furthermore, he never investigated any of these properties' actual leasing arrangements, but simply relied on unverified information appearing on the Assessors' PDVL sheets that are used for mass appraisal purposes.  Moreover, Mr. Segel admitted that some of the information on the PDVL sheets that he used was from prior, and not contemporaneous, fiscal years.  With respect to at least two of his comparable rental properties, the correct fiscal years' PDVL rental data actually supported the assessments.  In addition, Mr. Segel provided no support for his vacancy and expense figures, other than his experience as an appraiser in the area.  Finally, despite using a triple-net premise, Mr. Segel still added a tax factor to the capitalization rates that he applied to the net income figures for both of the fiscal years at issue.                   
In reconciling his estimates of the subject property's value as of January 1, 1998 and January 1, 1999 using both his sales-comparison and income-capitalization methods, Mr. Segel relied primarily on the value derived from his income-capitalization methodology, and used the value achieved from his sales-comparison approach more as a check, in determining that the fair cash value of the subject property, without considering any possible contamination or remediation issues, was $690,000.  
On the basis of all of the evidence, the Board found that the appellant failed to show that his property was overvalued in fiscal years 1999 and 2000.  In making this determination, the Board found that the appellant's expert real estate appraiser's two approaches for valuing the subject property were fatally flawed and, therefore, without merit.  The Board also found that the appellant failed to quantify any adverse effects of contamination or remediation on the value of his property.  
With respect to the effects of contamination and remediation on the value of the subject property during the fiscal years at issue, the Board found that under the circumstances present in these appeals, the costs associated with the treatment of the ground water before its disposal into the sewer system but after its use in the manufacturing process were business and not real estate expenses.  The metal plating manufacturing operations required water, and the water's subsequent treatment, after its use in the manufacturing operations, was necessary for its disposal into the sewer system regardless of the initial condition of the water.  There was no evidence submitted by the appellant that the cost of the treatment was increased by the presence of the alleged groundwater contamination.  Nor was there clear evidence that the treatment would be required during the relevant fiscal years if the manufacturing operations ceased.  The Board further found that the appellant did not show that there otherwise were any pending or foreseeable clean-up or remediation costs, stigmas, or risks associated with the ownership or purchase of the property.  
Notwithstanding the foregoing, the Board also found that the appellant did not show how the alleged existence of any of these possible contamination, treatment, remediation, or stigma factors affected the value of the subject property during the fiscal years at issue.  The appellant did not submit any evidence from an expert in this regard.  There was no consideration of the possible effect of the potential liability of others, such as previous owners or insurers, on the value of the subject property during the fiscal years at issue.  Under these circumstances, the Board determined that the appellant had not proven the effects of the alleged contamination and its repercussions on the value of the subject property.  
With respect to the appellant's expert real estate appraiser's two approaches for valuing the subject property during the fiscal years at issue, the Board found that both methodologies were replete with errors and much of the underlying data was either non-existent or lacked a proper foundation and supporting documentation.  Under the circumstances, the Board found that the expert's estimates of the subject property's value that relied on these approaches were without merit.  Finally, the Board considered Mr. Flanagan's estimates of the subject property's value, but found that they totally lacked any supporting data or bases in credible methodologies. 
On this basis, the Board decided these appeals 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).
	The burden of proof is upon the appellant to make out his right as a matter of law to an abatement of the tax.  Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974); Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922).  The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise.  Schlaiker, 365 Mass. at 245.  To overcome this burden, "[t]he taxpayer may present persuasive evidence of overvaluation [of real estate] either by exposing flaws or errors in the assessors' method of valuation, or by introducing affirmative evidence of value which undermines the assessors' valuation."  Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983).  In this appeal, the Board ruled that the appellant failed to expose flaws in the Assessors' method of valuation and also failed to introduce persuasive evidence of value undermining the Assessors' valuation.  Furthermore, the appellant offered no credible evidence or methodologies for accounting for the purported effects of contamination and remediation on the value of the subject property during the fiscal years at issue. 
	In valuing property for the purpose of assessing real estate taxes, Assessors must take into account the effects of contamination on the fair cash value of the property.  Reliable Electronic Finishing Co. v. Assessors of Carver, 410 Mass. 381, 382-383 (1991); see Parkinson v. Assessors of Medfield, 398 Mass. 112, 116 (1986); Boston Edison Co. v. Assessors of Watertown, 387 Mass. 298, 304 (1982); Coomey v. Assessors of Sandwich, 367 Mass. 836, 837 (1975).  Here, the appellant never introduced any expert opinions of value or persuasively demonstrated how the contamination on the subject property affected its value.  Consequently, the Board ruled that the appellant did not meet his burden in this regard.  See generally Reliable Electronic Finishing Co. v. Board of Assessors of the Town of Canton, 13 Mass. App. Tax Bd. Rep. 1 (1990), aff'd, 410 Mass. 381 (1991); and Transport Properties Trust and Ralph B. Carver, Jr., Trustee v. Board of Assessors of the Town of Avon, 23 Mass. App. Tax Bd. Rep. 115, 123 (1997).  See also Morris Realty Trust v. Assessors of Randolph, 24 Mass. App. Tax Bd. Rep. 193, 197 (1998) and Morris Realty Trust v. Assessors of Seekonk, 25 Mass. App. Tax Bd. Rep. 351, 356 (1998).
	In Woburn Services, Inc., et. al. v. Board of Assessors of the City of Woburn, 19 Mass. App. Tax Bd. Rep. 170 (1996), the Board held that the owners of properties that were contaminated by waste from abutting properties met their burden of proving that, in light of the contamination, the Assessors had overvalued their properties.  Id. at 185.  The properties in Woburn Services were, like the subject property, capable of being used as intended.  Unlike the subject property, however, the values attributable to the Woburn Services' properties were proven to be adversely affected by one or both of the stigmas of being located within a federal Superfund site and/or containing contamination in excess of federal standards.  Their situation had received widespread national publicity.  Furthermore, the experts testifying on behalf of the owners of the Woburn Services' properties presented extensive and credible evidence regarding how these stigmas affected the value of the taxpayers' properties.  The methodology that they used to account for the effects of contamination on the value of the affected properties was reasonable under the circumstances. Id. at 575. Consequently, the Board, in Woburn Services, was persuaded through the presentation of substantial evidence that the Assessors had overvalued their properties.
	In the present appeals, the appellant has not shown that the property was affected by a widespread and notorious stigma.  In fact, the appellant has not shown the existence of any stigma at all related to the property.  Nor was there any credible quantification of the contamination's potentially negative impact on the value of the property.  Moreover, the appellant did not employ any recognized or meaningful methodology for accounting for the effects of contamination or remediation on the value of the subject property during the fiscal years at issue. See Morris Realty Trust v. Assessors of Randolph, 24 Mass. App. Tax Bd. Rep. at 197; Morris Realty Trust v. Assessors of Seekonk, 25 Mass. App. Tax Bd. Rep. at 356.
Furthermore, the Board found and ruled that both of the methodologies that the appellant's expert real estate appraiser used to value the subject property during the fiscal years at issue were replete with errors and much of the underlying data was either non-existent or lacked a proper foundation and supporting documentation.  Under the circumstances, the Board found and ruled that the expert's estimates of the subject property's value that relied on these approaches were without merit.  Finally, while the Board considered Mr. Flanagan's estimates of the subject property's value as estimates from an owner familiar with his property, see Menici v. Orton Crane & Shovel Co., 285 Mass. 499, 503-504 (1934), and the cases cited therein, the Board found and ruled here that they totally lacked any supporting data or credible methodologies, and, accordingly, were also without merit. 
	Because the appellant did not present persuasive evidence that the Assessors had overvalued the subject property, and because the appellant did not demonstrate errors in the Assessors' valuation methods, the Board ruled that the appellant did not meet his burden of proving that, as a matter of law, he was entitled to abatement of the real estate taxes assessed for fiscal years 1999 and 2000.
	Therefore, the Board decided these appeals for the appellee.

						   APPELLATE TAX BOARD



						By:__________________________						 	   Abigail A. Burns, Chairman




A true copy,



Attest: ______________________
          Clerk of the Board

	

 "Non-realty components of value include personalty, business concerns, and other items that do not constitute real property but are included in either the sale price of the comparable or the ownership interest in the subject property." Appraisal Institute, The Appraisal of Real Estate 437 (12th ed. 2001).
 "The first step in any comparative analysis is to identify which elements of comparison affect property values in the subject market.  Each of the basic elements of comparison must be analyzed to determine whether an adjustment is required. . . . Adjustments for differences are made to the price of each comparable property equivalent to the subject in market appeal on the effective date of the opinion of value."  Appraisal Institute, The Appraisal of Real Estate 428 (12th ed. 2001).
 Under a triple-net lease, the tenant ordinarily pays utilities, taxes, insurance, and maintenance costs, while the landlord pays for structural repairs only.  See Appraisal Institute, The Appraisal of Real Estate 477 (12th ed. 2001).
 Mr. Segel's appraisal report states that he used a rental figure of $1.15 per square foot in calculating the subject property's potential gross income at $170,250.  During cross-examination, Mr. Segel acknowledged that the $1.15 per-square-foot rental figure was inconsistent with his estimate of the building's area at 136,200 square feet and his potential gross income calculation of $170,250.  He then characterized his $1.15 per-square-foot rental figure as a "typo" and determined that it should be $1.25 per square foot.  The Board further notes that his table, reproduced above, fixes the potential gross income at $170,200, not $170,250.   
 The Board also noted several inconsistencies in Mr. Segel's rounding procedures.  For example, the results of his calculations for the capitalization rates that he used in his income-capitalization methodologies for fiscal years 1999 and 2000 are 0.1499 and 0.1486, respectively.  For fiscal year 1999, he rounded this higher figure to just 0.149, but then rounded fiscal year 2000's lower figure up to 0.150.  Mr. Segel did not explain this apparent anomaly.    

ATB 2001 - 721