Quincy Office Investors, LLC v. Board of Assessors of the City of Quincy (November 4, 2014)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



QUINCY OFFICE INVESTORS, LLC	   v.        BOARD OF ASSESSORS OF
							        THE CITY OF QUINCY

Docket Nos. F314173, F317873		        Promulgated:
								   November 4, 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 ("appellee" or "assessors") to abate taxes on certain real estate in Quincy owned by and assessed to Quincy Office Investors, LLC ("appellant") under G.L. c. 59, §§ 11 and 38, for fiscal years 2011 and 2012 ("fiscal years at issue").
	Commissioner Chmielinski heard these appeals.  Chairman Hammond, and Commissioners Scharaffa, Rose and Mulhern joined him in the decisions for the appellant. 
	These findings of fact and report are made pursuant to requests by both the appellant and the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.

	James F. Sullivan, Esq. for the appellant.
	Peter E. Moran, Director of Assessing, for the appellee.

FINDINGS OF FACT AND REPORT
On the basis of testimony and exhibits offered into evidence at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact. 
Introduction and Jurisdiction
On January 1, 2010 and January 1, 2011, the appellant was the assessed owner of a 5.16-acre parcel of land ("subject property") improved with a 118,325 square-foot office building ("subject office building") located at 400 Crown Colony Drive in Quincy.  For assessment and real estate tax purposes, the subject property is identified as "Parcel ID: 24874" and "Map ID 4033/42/7."  
For fiscal year 2011, the assessors valued the subject property at $16,735,400 and assessed a tax thereon, at the commercial real estate rate of $27.85 per thousand, in the total amount of $469,896.92.  In accordance with G.L. c. 59, § 57C, the appellant timely paid the tax due without incurring interest.  On February 1, 2011, in accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on May 1, 2011.  On July 26, 2011, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed an appeal with the Board.    
For fiscal year 2012, the assessors valued the subject property at $17,143,500 and assessed a tax thereon, at the commercial real estate rate of $28.66 per thousand, in the total amount of $495,376.69.  In accordance with G.L. c. 59, 57C, the appellant timely paid the tax due without incurring interest.  On January 31, 2012, in accordance with G. L. c. 59, § 59, the appellant timely filed an abatement application with the assessors, which was deemed denied three months later.  On July 25, 2012, in accordance with G.L. c. 59, §§ 64 and 65, 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 these appeals.  
The subject office building is a six-story, plus penthouse, multi-tenanted, Class A, commercial office building built in 1987 with an effective year of 2002.  The building is a steel-framed structure constructed on spread footings with a slab foundation.  The building has a six-story atrium ascending above the lobby area, topped by a gable skylight.  There are two entrances to the main lobby which houses the tenant mailboxes, janitorial and management offices, and a loading area.  There is an open staircase providing access to the second floor only, as well as three additional stairwells for access to floors two through six.  
The exterior of the subject office building is primarily glass and masonry with a hexagonal "tower" on the front façade which is clad in brown polished granite with decorative inlays.  The roof is flat with a rubber membrane covering and interior drains.  The heating, ventilation and cooling system consists of a series of approximately 230 separate heat pump units and distribution is through ceiling diffusers.  The subject property has a 3.8-acre parking area with 450 parking spaces located at the rear of the building.  The subject property is also improved with pedestrian walkways as well as perimeter landscaping, trees and decorative plantings.  The subject office building's interior finishes include carpeting and tile over concrete flooring, painted drywall, as well as suspended acoustical tile ceilings with fluorescent lights.  Additional amenities include:  three Dover 3500-pound passenger elevators -- one shared for freight, another for passengers only and one with access to the penthouse; sprinklers and smoke detectors; a closed circuit video security system; a card access system for "after-hours" entry; a cafeteria located on the third floor; and a loading dock.  The penthouse, which is usually rented together with the sixth floor, is accessible from an open stairway on the sixth floor, as well as the middle elevator and one of the stairwells.    
The subject property is located in the Crown Colony Business Park ("Crown Colony"), a 175-acre office park that is situated adjacent to I-93 and state route 3.  Main access into the office park, Crown Colony Drive, is off of Burgin Parkway and is located across from the entrance to the MBTA Quincy Adams station on the MBTA's "red line."  The business park includes approximately 1.5 million square feet of development with many first-class buildings and tenants and occupants, including a 472-room Marriott Hotel, a Bright Horizons Day Care facility, Boston Financial Data Services, Harvard Pilgrim Health, Arbella Insurance and State Street Bank.  
Appellant's Case-in-Chief
The appellant presented its case-in-chief through the testimony of Donald P. Bouchard, whom the Board qualified as an expert in the area of commercial real estate valuation, and the submission of Mr. Bouchard's summary appraisal report. 
After determining that the subject property's highest and best use was its continued use as a multi-tenant office building, Mr. Bouchard considered the three usual methods for estimating the value of the subject property for the fiscal years at issue.  However, Mr. Bouchard 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.
The first step in Mr. Bouchard's income-capitalization approach was to determine the subject property's potential gross revenue.  He first reviewed the subject property's operating history for calendar years 2006 through 2010, which showed that the subject property's average per-square-foot rent decreased between 2006 and 2008, with a slight increase in 2009 and 2010.  Next, based on a review of the subject property's existing leases for the fiscal years at issue, Mr. Bouchard found that rental rates "hovered" around $19.50 per square foot for 2009 and $20.00 per square foot for 2010.  Mr. Bouchard also cited eleven leases from purportedly comparable Class A rental properties located in Quincy and Braintree.  These spaces ranged in size from 2,542 square feet to 22,552 with rental rates that ranged from $18.75 to $22.50.  Mr. Bouchard determined that minimal adjustments were required in the analysis of these rental rates due to the very close proximity of these buildings to the subject property and their directly competitive environment.  Based on the subject property's operating history, the subject property's existing leases, and the purportedly comparable leases, Mr. Bouchard selected a rent of $20.00 per square foot for fiscal year 2011 and $19.50 per square foot for fiscal year 2012.  Applying these rates to the subject property's 118,325 square feet, which was the total leasable space as reported to him by the building manager and confirmed by the subject leases, Mr. Bouchard obtained gross rental revenues of $2,366,500 for fiscal year 2011 and $2,307,338 for fiscal year 2012. 
Mr. Bouchard also included in his analysis an additional source of revenue for reimbursements by tenants for tenant electricity charges calculated at $1.00 per square foot, or $118,325, for both fiscal years at issue.  When added to his rental income, Mr. Bouchard obtained potential gross incomes of $2,543,988 for fiscal year 2011 and $2,425,663 for fiscal year 2012.
The next step in Mr. Bouchard's income-capitalization analysis was the determination of a vacancy rate.  Mr. Bouchard testified that for 2010 the subject property's vacancy rate was approximately 35% and that for 2011 the vacancy rate was down to approximately 13%.  Mr. Bouchard also looked at Class A office vacancy rates, as reported by CoStar, in the Route 128-south market, the Quincy-Braintree submarket, and also within Crown Colony.  He reported that the Class A vacancy rates in the Quincy/Braintree submarket for the fourth quarter of 2009 and 2010 were 18.3% and 19.60%, respectively.  Further, vacancy rates within Crown Colony for the same time periods were 15.28% and 10.80%, respectively.  After consideration of the marketplace regionally and locally and giving consideration to the actual conditions present at the subject property, Mr. Bouchard derived a stabilized vacancy rate for the subject property of 15% for both fiscal years at issue.  These allowances resulted in effective gross income figures of $2,112,101 for fiscal year 2011 and $2,061,813 for fiscal year 2012.
With respect to operating expenses, Mr. Bouchard first reviewed the subject property's actual per-square-foot operating expenses from 2007 through 2010, which ranged from a low of $7.72 in 2010 to a high of $8.38 in 2008 with an average of $7.97 per square foot.  Mr. Bouchard testified that these figures did not include 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), which showed that for 2009 the per-square-foot average expense level for suburban Boston office buildings in the 100,000 to 299,999 square-foot-size range were $8.38, with a range of $6.19 to $9.97, while in the next smallest category of office buildings, the average operating expense was $7.93 with a range of $5.71 to $9.53.  Based on this information, Mr. Bouchard determined operating expenses of $7.75 per square foot for fiscal year 2011 and $7.85 per square foot for fiscal year 2012, which resulted in net-operating incomes of $1,195,083 and $1,132,962 for fiscal years 2011 and 2012, respectively.  
Mr. Bouchard further testified that he did not allow deductions for tenant improvements, brokers' fees, or reserves for replacements because these expenses are "typically accounted for in a purchase price" and are further taken into account in the determination of the capitalization rate. 
The next step in Mr. Bouchard's income-capitalization analysis was the selection of a capitalization rate for each of the fiscal years at issue, which was based on a blended analysis.  First, Mr. Bouchard applied an investment-rate analysis based on the sales of three Class A office buildings that sold in 2009, which produced extracted capitalization rates that ranged from 7.7% to 9%.  Mr. Bouchard noted that while the sales of this type of office building typically involve leased fee interests, the transaction data offers the appraiser information as to the state of the market, demand for the property and pricing structures, including extracted capitalization rates.  Of particular note to Mr. Bouchard was the property located at 300 Crown Colony, which is located directly across the street from the subject property.  This property sold for $8,900,000 on January 5, 2010, with an extracted capitalization rate of 7.75%.  Mr. Bouchard noted in his appraisal report that extracted capitalization rates typically include tenant improvements, brokers' fees and reserves for replacements.
Next, Mr. Bouchard considered the 2009 and 2010 fourth quarter rates published in the PriceWaterhouse Coopers Korpacz Market Survey ("Korpacz") for both the Boston and suburban office markets.  The average rate for the Boston area was 8.45% for the fourth quarter of 2009 and 8.31% for the fourth quarter of 2010, and the average rate for the national suburban office market was 8.75% for the fourth quarter of 2009 and 8.17% for the fourth quarter of 2010.  Mr. Bouchard testified that these rates were derived from the sale prices and net incomes of properties which did not include expense categories for replacement reserves, tenant improvements, or brokerage commissions.    
Mr. Bouchard also employed a band-of-investment technique.  In his analyses, Mr. Bouchard assumed a 65% loan-to-value ratio for both fiscal years at issue.  He further assumed lending rates of 6.61% for fiscal year 2010 and 5.74% for fiscal year 2012, and equity yield rates of 8.75% and 8.50%, respectively.  Relying on the sale at 300 Crown Colony, Korpacz, and his band-of-investment data, Mr. Bouchard selected capitalization rates of 8.30% for fiscal year 2011 and 8.00% for fiscal year 2012.  Mr. Bouchard added to his base capitalization rates the applicable tax factor to arrive at his overall capitalization rates of 11.085% and 10.866% for fiscal years 2011 and 2012, respectively.
Finally, applying the corresponding overall capitalization rate to the net-operating income for each of the fiscal years at issue, Mr. Bouchard derived an indicated value of $10,781,078 for fiscal year 2011, and $10,426,669 for fiscal year 2012.  Mr. Bouchard further reduced the value for each of the fiscal years at issue by $296,000 to account for the cost of a new roof.  On the basis of his analyses, Mr. Bouchard's rounded opinion of the subject property's fair market value was $10,800,000 for fiscal year 2011 and $10,150,000 for fiscal year 2012. 
Mr. Bouchard's income-capitalization analyses are reproduced in the following table.
			Fiscal Year 2011		Fiscal Year
2012	
INCOME						
Building area	 118,325 sf					
Market Rent (psf)		$20.00		$19.50	
Gross Rental Revenue			$2,366,500		$2,307,338	
Misc and Elec Reimbursement	$1.00 psf		$118,325		$118,325	
Gross Potential Revenue			$2,484,825		$2,425,663	
						
 Less: Vacancy & Collection Allowance-15.0%	($372,724)		($363,849)	
						
Effective Gross Income			$2,112,101		$2,061,813	
						
OPERATING EXPENSES		$7.75 psf	($917,019)	 $7.85 psf	($928,851)	
						
						
Net-Operating Income:		$1,195,083		$1,132,962	
					
Base Rate 
Tax Factor
Overall Capitalization Rate			8.30%
.02785
11.085%		8.00%
.02866
10.866%
	
Capitalized Value			$10,781,078		$10,426,669	
Less Required Capital Expenditures			($296,000)		($296,000)	
Adjusted Capitalized Value			$10,485,078		$10,136,669	
						
Rounded Fair Cash Value			$10,500,000		$10,150,000	

Appellee's Case-in-Chief
In support of their assessments, the assessors relied on the testimony of Peter Moran, who is chairman of the assessors, and the introduction of several exhibits, including the requisite jurisdictional documentation, the subject property's property record cards for the fiscal years at issue, the assessors' income valuation cards for the fiscal years at issue, and the assessors' Valuation Report.
Mr. Moran testified that prior to and during the tax years at issue, the city of Quincy was in the midst of a revitalization, including the renovation of the downtown area, an upgrade of the city's infrastructure, and the construction of a new on-ramp providing direct access from I-93 to Crown Colony.  Mr. Moran further testified that these improvements, Crown Colony's amenities, the city's proximity to Boston, the location of the MBTA station, and the city's historical landmarks, had a positive effect on real estate market values.  
Like Mr. Bouchard, Mr. Moran also developed his opinion of value using the income-capitalization approach.  To arrive at his determination that a market rental rate of $22.00 per square foot, on a gross basis, was appropriate for both fiscal years at issue, Mr. Moran relied on: information contained in local taxpayers' responses to § 38D requests for income, vacancy and expense data; the appellant's 38D responses for fiscal years 2008, 2009 and 2010; and the asking rents for ten purportedly comparable Class A office buildings located in Quincy and Braintree, obtained from LoopNet.  Mr. Moran applied this rate to the assessors' building area of 125,724 square feet, which was based on the subject property's exterior measurements, to calculate gross rental revenue of $2,765,928 for both fiscal years at issue.  
Next, Mr. Moran selected his vacancy rates for the fiscal years at issue.  Mr. Moran testified that vacancy rates in Quincy ranged from 5% to 15% during the relevant time periods.  Therefore, he prepared two separate analyses for each fiscal year at issue utilizing both ends of the range.  He first selected 5% as the appropriate vacancy rate, which produced a vacancy deduction of $138,296, and resulted in an effective gross income of $2,627,632 for both fiscal years at issue.  Mr. Moran then selected a vacancy factor of 15%, which produced a vacancy deduction of $414,889, and resulted in an effective gross income of $2,351,039 for both fiscal years at issue.  
With respect to his deduction for operating expenses, Mr. Moran testified that typical expenses in office buildings range from 30% to 35% during the relevant time period.  He further testified that under the escalation and stop clauses in the standard operating leases, the landlord received, in addition to the base rent, tenant reimbursements.  On the basis of his assumption that the appellant was reimbursed for various expenses, Mr. Moran chose a deduction for expenses of only 20% of the effective gross income.  
Mr. Moran selected capitalization rates, including the applicable tax factor, of 10.7% for fiscal year 2011 and 11.0% for fiscal year 2012.  He based these rates on information contained in local taxpayers' responses to § 38D requests.  Finally, applying the corresponding overall capitalization rate to his net-operating incomes for each of the fiscal years at issue, Mr. Moran derived the following indicated values: using 5% vacancy, $19,645,839 for fiscal year 2011 and $19,110,036 for fiscal year 2012; using 15% vacancy, $17,577,860 for fiscal year 2011, and $17,098,464 for fiscal year 2012.  
Mr. Moran's income-capitalization analyses are summarized in the following tables.
 

Income Capitalization Analysis for Fiscal Years 2011 & 2012

Building square foot area			125,724
Market Rent per square foot		    @ $        22.00
Gross potential rental revenue   	    =	$    2,765,928
Vacancy/Collection @ 5%			     ($      138,296)
Effective gross revenue			    =	$    2,627,632
Operating expenses @ 20%        	     ($      525,526)
Net Operating Income			    = $     2,102,106

Fiscal Year 2011
Overall Cap. Rate						10.7%
Fair cash value opinion				$   19,645,839
FY 2011 assessed value				$   16,735,400

Fiscal Year 2012
Overall Cap. Rate	including Tax Factor		11.0%
Fair cash value opinion				$   19,110,036
FY 2012 assessed value				$   17,143,500




Income Capitalization Analysis for Fiscal Years 2011 & 2012

Building square foot area			125,724
Market Rent per square foot		    @ $        22.00
Gross potential rental revenue   	    =	$    2,765,928
Vacancy/Collection @ 15%		     ($      414,889)
Effective gross revenue			    =	$    2,351,039
Operating expenses @ 20%        	     ($      470,207)
Net Operating Income			    = $     1,880,832

Fiscal Year 2011
Overall Cap. Rate	Including Tax Factor		10.7%
Fair cash value opinion				$   17,577,860
FY 2011 assessed value				$   16,735,400

Fiscal Year 2012
Overall Cap. Rate						11.0%
Fair cash value opinion				$   17,098,464
FY 2012 assessed value				$   17,143,500


Mr. Moran acknowledged that under his income-capitalization analysis for fiscal year 2012, using the higher vacancy rate of 15%, a tax abatement was owed in the amount of $45,036, which he rounded to $45,000.
Mr. Moran also cited four purportedly comparable Class A office properties located in Quincy, which sold between August 2009 and July 2011, with sale prices that ranged from $10,575,000 to $31,300,000.  Mr. Moran opined that these sales supported his opinion of the subject property's fair cash value for the fiscal years at issue.
  IV. Board's Findings
The Board agreed with the parties that the highest-and-best use of the subject property was its continued use as Class A office space and that the preferred method for ascertaining the fair cash value of the subject property for both fiscal years was through an income-capitalization methodology.  The Board further found that the subject property's leasable space was the interior measurement used by the appellant's real estate valuation expert witness, Mr. Bouchard.  The evidence revealed that the assessors simply relied on the subject property's property record cards which captured exterior or gross measurements.
Based on the subject property's existing leases and also the market leases offered into evidence by both parties, the Board agreed with Mr. Moran that $22.00 per square foot was the appropriate rent for fiscal year 2012, but found that $21.50 more accurately reflected market rents for fiscal year 2011.  The Board further agreed with Mr. Bouchard that additional income of $1.00 per square foot, or $118,325, was necessary to account for electric utility reimbursements and escalation clauses contained in the appellant's leases, which were equivalent to those types of clauses in market leases.  
With respect to vacancy, the Board found that the subject property experienced significant unexplained vacancy issues during the fiscal years at issue.  The Board further found that during this time period vacancies in the Quincy-Braintree area and, more specifically Crown Colony, were significantly lower.  Considering all of the evidence presented on this issue, the Board determined that a vacancy rate of 12% for fiscal year 2011, decreased to 10% for fiscal year 2012, best reflected the subject property's market during the relevant time periods.
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.  On the other hand, the Board found that Mr. Bouchard's operating expenses of $7.75 per square foot for fiscal year 2011, increased to $7.85 per square foot for fiscal year 2012, were slightly excessive.  Instead, based on industry data in the record, as well as Mr. Bouchard's analysis, the Board found that an operating expense of $7.50 per square foot best comported with the market during the relevant time periods for the fiscal years at issue.
As for capitalization rates, the Board found that both Mr. Bouchard's pre-tax factor capitalization rates of 8.3% and 8.0% for fiscal years 2011 and 2012, respectively, as well as Mr. Moran's pre-tax factor capitalization rate of 7.915% for both fiscal years at issue were too high.  Instead, relying on the extracted capitalization rate that Mr. Bouchard derived from the sale of 300 Crown Colony, adjusted for various features including the subject property's architecturally better features, penthouse, age, and more modern look, the Board determined that capitalization rates of 7.6% and 7.5% for fiscal years 2011 and 2012, respectively, plus tax factors, were appropriate.  The Board agreed with Mr. Bouchard that this sale was particularly helpful in deriving a capitalization rate and the Board considered it because of its proximity to the subject property, its timeliness to the valuation and assessment dates, and its overall comparability to the subject property. 
Because the Board relied upon an extracted capitalization rate from a sale in which that property's net income did not include deductions for tenant improvements, brokerage commissions, or replacement reserves, the Board did not find or include expense deductions for those three categories of costs in its methodology; rather, the Board found that they were accounted for in the higher capitalization rate which resulted from a higher net income.  See Appraisal Institute, The Appraisal of Real Estate 503 (13th ed., 2008)("[I]t is imperative that the appraiser analyze comparable sales and derive their capitalization rates in the same manner used to analyze the subject property and capitalize its income.").  "An overall capitalization rate provides compelling evidence of value when [among other conditions] income and expenses [are] estimated on the same basis for the subject property and all comparable properties."  Id.
Finally, the Board rejected Mr. Bouchard's deduction of $296,000 in additional expense for the new roof, finding that this expense did not properly constitute or warrant a below-the-line deduction.  Instead, the Board found that this expense is part of the replacement reserve which is accounted for in the higher capitalization rates.
The Board's analysis is contained in the following two tables. 












Fiscal Year 2011
Building square foot area			   118,325
Market rent per square foot		    @ $        21.50
Gross rental revenue			    =	$    2,543,988
Misc. and electric reimburse (@ $1.00)	$      118,325
Gross potential revenue				$    2,662,313
Vacancy/Collection Loss (@ 12%)	     ($      319,478)
Effective gross revenue			    =	$    2,342,835
Operating expenses (@ $7.50 psf)	     ($      887,438)
Net-operating Income			    = $     1,455,397
Capitalization Rate					    7.6%
Tax Factor							 0.02785
Overall Capitalization Rate		  	       10.385%
Indicated value				    = $    14,014,415
Fair cash value (rounded)			$    14,100,000
Fiscal Year 2011 assessed value		$    16,735,400
Overvaluation					$	2,635,400


Fiscal Year 2012
Building square foot area			   118,325
Market rent per square foot		    @ $        22.00
Gross rental revenue			    =	$    2,603,150
Misc. and electric reimburse (@ $1.00)	$      118,325
Gross potential revenue				$    2,721,475
Vacancy/Collection Loss (@ 10%)	     ($      272,148)
Effective gross revenue			    =	$    2,449,327
Operating expenses (@ $7.50 psf)	     ($      887,438)
Net-operating Income			    = $     1,561,889
Base Capitalization Rate				    7.5%
Tax Factor   						 0.02866
Overall Capitalization Rate     	    	       10.366%
Indicated value				    = $    15,067,422
Fair cash value (rounded)			$    15,100,000
Fiscal Year 2012 assessed value		$    17,143,500
Overvaluation					$     2,043,500

	On this basis, the Board found and ruled that the appellant was entitled to tax abatements in both fiscal years and ordered abatements in the amount of $74,129.85, including a CPA surcharge, for fiscal year 2011 and $59,152.38, including a CPA charge, for fiscal year 2012.

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 appellant has the burden of proving that the property has a lower value than that assessed. "'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)).  "[T]he board is entitled to 'presume that the valuation made by the assessors [is] valid unless the taxpayer[]  . . . prove[s] the contrary.'"  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245). 
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, 393 Mass. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  In these appeals, the appellant demonstrated overvaluation "'by introducing affirmative evidence of value which undermined the assessors' valuation.'"  Id.
"'Prior to valuing the subject property, its highest and best use must be ascertained.'"  Tsissa, Inc. v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2011-198, 216 (quoting Tennessee Gas Pipeline Co. v. Assessors of Agawam, Mass. ATB Findings of Fact and Reports 2000-859, 874).  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 at 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 parties agreed, its existing, multi-tenanted, 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.             
Generally, real estate valuation experts, Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  When reliable sales data are not available and when the subject is income-producing property, the use of the income-capitalization approach is appropriate. Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 807, 881 (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).  In these appeals, the Board agreed with the parties that the subject property's fair cash value could most reliably be estimated by using the income-capitalization approach, and the Board therefore adopted that approach.
"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. 236, 239 (1998).  "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. v. Assessors of Boston, 397 Mass. 447, 451 (1986).  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).  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., 393 Mass. at 610.  The expenses should also reflect the market.  Id.; see Olympia & York State Street Co., 428 Mass. at 239, 245.
In these appeals, the Board found that the subject property's leasable space was the interior measurement used by the appellant's real estate valuation expert witness, Mr. Bouchard.  The evidence revealed that the assessors simply relied on the subject property's property record cards which captured outside or gross measurements.  
Next, the Board found that the most appropriate rents to use for the subject property were $21.50 per square foot for fiscal year 2011 and $22.00 per square foot for fiscal year 2012.  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.").  The Board further found that additional income of $1.00 per square foot was necessary to account for electric utility reimbursements and escalation clauses contained in the appellant's leases, which were equivalent to those types of clauses in market leases.
For its vacancy and credit allowance, the Board found that the subject property experienced significant unexplained vacancy issues during the fiscal years at issue.  The Board further found that during this time period, vacancies in the Quincy-Braintree area and, more specifically Crown Colony were significantly lower.  Considering all of the evidence presented on this issue, the Board determined that a vacancy rate of 12% for fiscal year 2011, decreased to 10% for fiscal year 2012, best reflected the subject property's market.  See 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").
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.  On the other hand, the Board found that Mr. Bouchard's operating expenses of $7.75 per square foot for fiscal year 2011, increased to $7.85 per square foot for fiscal year 2012, were slightly excessive given the relevant market ranges.  Instead, the Board found that an operating expense of $7.50 per square foot best comported with the market for both fiscal years at issue.  "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).  Relying on the extracted capitalization rate derived from the sale of 300 Crown Colony, adjusted for various features including the subject property's architecturally better features, penthouse, age, and more modern look, the Board determined that capitalization rates of 7.6% and 7.5% for fiscal years 2011 and 2012, respectively, plus tax factors, were appropriate.  See Appraisal Institute, The Appraisal of Real Estate 301 (13th ed., 2008) ("[C]omparable sales analysis can provide information used in other approaches such as overall capitalization rates for the income capitalization approach.") 
Because the Board relied on an extracted capitalization rate derived from a sale which, as Mr. Bouchard noted, would typically account for tenant improvements, brokerage commissions, and replacement reserves, the Board did not find or include expense deductions for those three categories of costs in its methodology; rather, the Board found that they were accounted for in the higher capitalization rates which resulted from higher net incomes.  See Campanelli, Mass. ATB Findings of Fact and Reports 2014 at 112; see also The Appraisal of Real Estate at 503 2008)("[I]t is imperative that the appraiser analyze comparable sales and derive their capitalization rates in the same manner used to analyze the subject property and capitalize its income.").  "An overall capitalization rate provides compelling evidence of value when [among other conditions] income and expenses [are] estimated on the same basis for the subject property and all comparable properties."  Id.  The Board distinguished the findings in the present appeals from those in Analogic Corp. v. Assessors of Peabody, 45 Mass. App. Ct. 605 (1998), in which expenses for tenant improvements and leasing commissions were "accepted" by the Board but not subtracted from expenses and, therefore, "subsumed" in the capitalization rate.  Id. at 615.  Here, those expenses were not included in the expense deductions used by the appellant's real estate valuation expert, the assessors or the Board; instead, they were accounted for in the capitalization rate derived from a sale which, under the circumstances, represented "'the return on investment necessary to attract investment capital.'"  Id. (quoting Taunton Redevel. Assoc., 393 Mass. at 295.)
Finally, the Board rejected Mr. Bouchard's deduction of $296,000 in additional expense for the new roof, finding that these expenses did not properly constitute or warrant a below-the-line deduction.  Instead, the Board found that this expense is part of the replacement reserve which was accounted for in the higher capitalization rates.
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, even if its determinations fall outside ranges suggested by the parties or their experts.  New Boston Garden Corp., 383 Mass. at 466 (quoting Cohen v. Board of Registraion in Pharmacy, 350 Mass. 246, 253 (1966)) (finding that the Board's determination "must be made 'upon consideration of the entire record'").  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 $2,635,400 for fiscal year 2011 and by $2,043,500 for fiscal year 2012.  The Board thus ordered abatements to be paid to the appellant as follows:  $74,129.85, including a CPA surcharge, for fiscal year 2011, and $59,152.38, including a CPA surcharge, for fiscal year 2012.
  
   					    THE APPELLATE TAX BOARD


By: _______________________________
    Thomas W. Hammond, Jr. Chairman

A true copy,


Attest: ________________________
   Clerk of the Board

 This amount includes a $3,816.03 Community Preservation Act ("CPA") surcharge.

 This amount includes a CPA surcharge of $4,043.98.
  The appellant's abatement application was mailed in an envelope postmarked January 31, 2012, which was received by the assessors on February 2, 2012.  Where, as here, the assessors receive an abatement application after the due date, the date of postmark is deemed to be the date of filing.  See G.L. c. 59, § 59.  Accordingly, the Board found that the appellant's abatement application was timely filed on January 31, 2012.
 Mr. Bouchard included in his report a listing of sixteen sales that occurred between March, 2009, and January, 2011.  The properties ranged in size from 39,361 to 274,227 square feet with sale prices that ranged from $26.00 to $66.00 per square foot.  While Mr. Bouchard did not rely on these sales to arrive at his opinion of the subject property's fair cash value for the fiscal years at issue, he noted in his appraisal report that they were indicative of the decline in office building values. 
 Mr. Bouchard also included in his appraisal report an "Alternative Capitalization Model," which allowed deductions for tenant improvements, brokerage commissions and reserve for replacements.  The allowable amounts totaled $2.61 per square foot, or $308,828 in total, which resulted in a decreased net operating income ("NOI") for both fiscal years at issue.  Mr. Bouchard then adjusted his overall capitalization rates, by the same percentage decreases of the NOI for each fiscal year at issue.  Using this methodology, Mr. Bouchard ultimately arrived at the same opinions of value for the fiscal years at issue.
 In his appraisal report offered in the present appeals, Mr. Bouchard noted that expenses for tenant improvements, commissions, and reserves for replacement are typically accounted for in the extracted capitalization rate.  See also Campanelli Westfield LLC v. Assessors of Quincy, Mass. ATB Findings of Fact and Reports 2014-101, 112.

ATB 2014-795