HRS Trust #3, HRS Trust #5, Ralph Rose, Et Al. Trustee v. Board of Assessors of the Town of West Boylston (January 15, 2002)

COMMONWEALTH OF MASSACHUSETTS 

APPELLATE TAX BOARD


HRS TRUST #3, HRS TRUST #5,  v.   BOARD OF ASSESSORS OF 
RALPH ROSE, et al. TRUSTEE        THE TOWN OF WEST BOYLSTON


Docket Nos. F215502 		    Promulgated: 
  F215503			    January 15, 2002
       F215504	
	

	These are consolidated appeals under the formal procedure, pursuant to G.L. c. 59, §§ 64 and 65, from the refusal of the appellee to abate taxes on certain real estate located in the Town of West Boylston, owned by and assessed to the appellants under G.L. c. 59, § 38 for fiscal year 1994. 
	Commissioner Scharaffa heard these appeals and was joined in the decision for the appellee by Chairman Burns, former Chairman Gurge, former Commissioner Lomans and Commissioner Gorton. 
	These findings of fact and report are promulgated at the request of the appellant, pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
	
Arthur Goldstein, Esq., for the appellant.
James Swalec, Assessor, for the appellee.

FINDINGS OF FACT AND REPORT

	On January 1, 1993, HRS Trust #3, HRS Trust #5, and Ralph Rose, Sidney Rose and Haskell Gordon ("appellants") were the assessed owners of three contiguous parcels of real estate ("property," "subject property" or "parcels") comprised of 15.84 acres and located on West Boylston Street (Route 12) in the Town of West Boylston.  
The salient information regarding each parcel is contained in the following table:  

 Owner		  Parcel ID.     Acreage      Assessed     Commercial   Assessed
(Docket No.)	   Number			     Value       Tax Rate     Tax

HRS Trust #3	   Map 153/      9.00 acres   $3,822,800    $14.00     $53,519.20
(F215502)	    Lot 85

Ralph Rose      Map 158/      1.10 acres   $   87,700    $14.00     $ 1,227.80
(F215503)        Lot 12

HRS Trust #5    Map 153/      5.74 acres   $2,265,400    $14.00     $31,715.60
(F215504)        Lot 84

Total:						   $6,175,900               $86,522.60



The appellants timely paid the taxes due for each parcel, without incurring interest.
On October 28, 1993, the appellants seasonably filed their applications for abatement with the Board of Assessors of West Boylston ("Assessors").  Following the Assessors' denials on November 19, 1993, the appellants timely filed their petitions with the Appellate Tax Board ("Board") on January 7, 1994.  On the basis of the foregoing, the Board found that it had jurisdiction over these fiscal year 1994 appeals.   
During the relevant time period, the parcels' improvements included a one-story strip shopping plaza, a free-standing one-story masonry retail structure ("Fair Stores") and paved areas for customer parking.  There was also a 1.10 acre grassy buffer zone situated between the shopping center and the adjacent residential areas.   
Fair Stores contained a total of approximately 102,548 square feet, which included a merchandise area, checkout stands, a customer service area, a warehousing/loading area and toilet facilities.  The shopping plaza ("West Boylston Plaza"), situated on 5.74 acres, was approximately 53,545 square feet and was comprised of nine retail stores.  West Boylston Plaza's tenants included Café Santa Fe, Fair Floor Store, a W.C.I.S. bank, Radio Shack, Jennifer's Beauty Shop, Wallpaper, and J.C. Penney.  Two retail spaces, one approximately 26,000 square feet and the other approximately 4,500 square feet, were vacant.  Both Fair Stores and West Boylston Plaza had masonry foundations, concrete exterior walls with plate glass windows, composition roofs, reinforced concrete floors, forced hot air heating by gas, and centralized air conditioning. 
Situated near two interstate highways, the property was located in an area zoned for commercial use.  Its immediate neighborhood was comprised of various shopping facilities, including strip retail areas, individual retail establishments, motels, a gas station, an industrial improvement, pet shops, fast food restaurants and a post office facility, interspersed with some residential properties.  
The appellants previously petitioned this Board for abatements for the subject property for fiscal years 1992 and 1993.  In these earlier appeals, the Board used an income capitalization approach and found that the parcels' aggregate fair cash value was $4,353,000 for fiscal year 1993 and $4,337,000 for fiscal year 1992.  The Board's fiscal years 1992 and 1993 decision was admitted into evidence at the hearing of the instant appeals.    Accordingly, the Board found pursuant to G.L. c. 58A, § 12A that the Assessors had the burden of justifying the increase in the subject parcels' valuation from the Board's determination of $4,353,000 in fiscal year 1993 to the Assessors' valuation of $6,175,900 in these appeals.   
	In support of its assessment, the Assessors relied on the testimony of Assessor James Swalec.  Mr. Swalac introduced evidence of the subject's direct sale, by deed dated July 14, 1994, for an aggregate sales price of $7,100,010.   He testified that the subject was sold to S.R. Weiner, one of the larger mall developers of the region and a developer of Wal-Mart sites in the Northeast.  Mr. Swalec further testified that shortly before its sale and presumably to obtain Town permits, the subject property was improved with an underground sewerage system that cost approximately $750,000.  Mr. Swalec, however, provided no testimony as to the improvement's impact on the subject property's fair cash value.   Mr. Swalec also testified that property values in West Boylston in calendar years 1993 and 1994 were relatively stable, with annual appreciation in the commercial/industrial sector of three to five percent.   
Based on the documentary evidence and Mr. Swalec's testimony, the Board found that the Assessors presented persuasive evidence demonstrating that an increased valuation for fiscal year 1994 was warranted.  The Board further found that the direct sale of the subject property for $7,100,010, sufficiently proximate in time to the January 1, 1993 assessment date, supports the fiscal year 1994 assessment, even when the sales price is reduced to reflect an appreciating market and the full cost of the sewerage installation.  On this basis, the Board found that the Assessors introduced sufficient evidence to satisfy their burden under G.L. c. 58A, § 12A.  Accordingly, the Board found and ruled that the burden shifted to the appellants to prove that the subject parcels were overvalued for the fiscal year at issue.
In support of their overvaluation claim, the appellants relied on the testimony and appraisal report of Kathryn M. Rochford, an expert real estate appraiser.  Based on an income capitalization methodology, Ms. Rochford estimated the three parcels' fiscal year 1994 value, in aggregate, at $3,600,000.   
Using her income capitalization approach, Ms. Rochford first estimated the parcels' gross potential income.  She estimated the parcels' fair economic rent at $579,200.  Ms. Rochford testified that this dollar amount, provided to her by "management," represented the gross rents reported on IRS Form 8825.  Ms. Rochford, however, failed to identify the taxpayer filing the tax return and the specific tax year associated with the return.  She also failed to submit documentation into evidence verifying her gross rent figures.  Moreover, the Board found that Ms. Rochford failed to support her purportedly fair economic rent with any meaningful market data.   Consequently, the Board found that Ms. Rochford's potential gross income figure was more of a guesstimate than a reliable approximation.
Ms. Rochford did not apply a vacancy rate to her potential gross income because she opined that vacancies were implicit in the actual gross rental amount.  She then deducted operating expenses of $180,310 from her potential gross income figure.  Ms. Rochford again testified that this dollar amount, provided to her by "management," was based on what was reported on IRS Form 8825.  Ms. Rochford again failed to identify the taxpayer filing the tax return and the specific tax year associated with the return.  Also, she again failed to submit documentation into evidence verifying her expense figures.  Moreover, the Board further found that Ms. Rochford failed to verify her expenses with market data.  Accordingly, the Board found that Ms. Rochford's estimate of the subject property's net operating income was unsubstantiated and therefore unreliable.  
Ms. Rochford's average capitalization rate of 11.08 percent was determined by combining a basic rate of 9.68 percent (factoring in a mortgage rate of 8.5 percent, an equity return of 12 percent, and a 70 percent loan-to-value ratio) with a tax factor of 1.40 percent.  The Board found, however, that Ms. Rochford did not adequately support her recommended capitalization rate.  She failed to provide the Board with any corroboration or verification of her suggested prime rate, commercial mortgage lending rate, loan-to-value ratio, expected mortgage years or holding periods.  Further, she offered no explanation for amortizing a credit mortgage for the fiscal year at issue.  
On this basis, the Board found that the estimate of value for the subject property obtained by Ms. Rochford using her income capitalization methodology was without foundation and therefore without merit.  A summary of Ms. Rochford's income capitalization methodology is provided below: 
Income
   Reported Gross Income
	West Boylston Plaza:			$298,699
	Fair Stores:					$280,500

Effective Gross Income				$579,200

  Less Operating Expenses:		 
    Management (6%)  		  		$ 35,752
    Cleaning/Maintenance 	  		$ 45,866
    Insurance			    			$  7,842
    Legal Fees			   			$ 19,127
    Utilities			    			$  7,849
    Common area maintenance   		$ 64,876

  Total Operating Expenses: 			$180,310


Net Operating Income				$398,890

Capitalization Rate 
 = 0.1108
 (0.0968 basic rate +
	  0.0140 tax factor)

Estimated Market Value			    $3,600,090

Rounded Estimate of Value		    $3,600,000


	
In contrast, the Board found that the Assessors met their burden of justifying the increase in value of the subject property for fiscal year 1994 over the values found by the Board for fiscal years 1992 and 1993.  
Further, while the appellants' expert testified that she was aware of the July, 1994 sale of the subject property, she did not, in any manner, consider that sale in her fiscal year 1994 determination of value.  Moreover, the appellants' expert did not address, much less explain, why the sale should be ignored in a determination of fiscal year 1994 value.  
On this basis, the Board found that the appellants failed to demonstrate that their property was overvalued in fiscal year 1994.  Accordingly, 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). 
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely on 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, 843 (1989).  The validity of a final estimate of market value depends to a great extent on how well it can be supported by market data.  The Appraisal Institute, THE APPRAISAL OF REAL ESTATE 134 (12th Ed., 2001). 
	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).  Generally, 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.   Pursuant to G.L. c. 58A, § 12A,  however,

[I]f, at a hearing of an appeal relative to the assessed fair cash valuation of property brought within three years after a determination by the appellate tax board of the valuation thereof, it appears that the assessed fair cash valuation is greater than the valuation as so determined, the burden shall be upon the appellee to satisfy the board that the increased valuation was warranted . . . . 


In the present appeals, the fiscal year 1994 assessments at issue fall within the three-year statutory period of Section 12A.  Accordingly, the initial burden of justifying the increase in the subject property's valuation is on the appellee.  See generally, Beal v. Assessors of Boston, 389 Mass. 648 (1983); Brook Road Corporation v. Board of Assessors of the Town of Needham, 2001 ATB Adv. Sh. 648 (August 30, 2001); Meka v. Board of Assessors of the City of Beverly, 2001 ATB Adv. Sh. 28, 35 (January 23, 2001); Johnson v. Assessors of Lunenburg, 14 Mass. App. Tax Bd. Rep. 39, 42 (1992); Cressey Dockham & Co., Inc. v. Assessors of Andover, 11 Mass. App. Tax Bd. Rep. 41, 50 (1989); Ellis v. Assessors of Northborough, 3 Mass. App. Tax Bd. Rep. 152, 154-155 (1983). "Once a prior determination of the Board of the fair cash value of the same property has been placed in evidence [] the statute requires the appellee to produce evidence to 'satisfy the Board that the increased valuation was warranted.'"  Cressey Dockham, 11 Mass. App. Tax Bd. Rep. at 50. 
In the present appeals, the Assessors offered evidence that the subject parcels' actual July 14, 1994 sale, even after being adjusted downward for the cost of a capital improvement and appreciating market conditions over time, demonstrated that the value of the property for the fiscal year at issue exceeded the values that the Board found in the previous fiscal years 1992 and 1993 appeals.  Based on this evidence, the Board found that the Assessors were justified in increasing the valuation of the subject property in fiscal year 1994 over the value that the Board found in fiscal years 1992 and 1993.  
Fair cash value of property may be determined by recent sales of comparable properties in the market. Correia v. New Bedford Redevelopment Authority, 375 Mass. at 362.   Actual sales generally "furnish strong evidence of market value, provided they are arm's length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller."  Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982).  Actual sales of the subject "are very strong evidence of fair market value, for they represent what a buyer has been willing to pay to a seller for [the] particular property [under appeal]."  New Boston Garden Corporation v. Board of Assessors of Boston, 383 Mass. 456, 469 (1981), quoting First National Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560 (1971).  While the sale price recited in a deed is not conclusive evidence of fair cash value, Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. at 682-683, there is a rebuttable presumption that the price was freely established.  See Epstein v. Boston Housing Authority, 317 Mass. 297, 300-301 (1944).  Further, the Board will not ordinarily disregard evidence of an actual sale unless it has objectively adequate reasons for doing so.  See Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. At 449-450.  
Accordingly, the Board found that the July 14, 1994 sale of the subject property by the appellants was an arm's length transaction between two willing and knowledgeable parties.  The Board also ruled that the record failed to disclose any duress or compulsion on the part of the parties to the sale.  See The Westwood Group, Inc. v. Board of Assessors of Revere, 391 Mass. 1012, 1013 (1984), citing United-Carr, Inc. v. Cambridge Redevelopment Authority, 362 Mass. 597, 600 (1972).  The Board further found that the sale was reasonably proximate in time to the relevant assessment date.  The Board found and ruled, therefore, that the price associated with the sale of the subject property, with adjustments for appreciating market conditions and the cost of capital improvements, fairly represented the value of the subject property on the relevant assessment date.  Moreover, the appellants' expert did not address, much less explain, why this sale should be ignored in a determination of fiscal year 1994 value.  Accordingly, the Board found that the Assessors met their burden under G.L. c. 58A, § 12A of justifying an increased valuation in the present appeals.
 	Section 12A does not shift the appellants' burden of persuasion on the issue of fair cash value. Cressey Dockham, 11 Mass. App. Tax Bd. Rep. at 50, citing General Electric Co. v. Assessors of Lynn, 393 Mass. 591 (1984); Smith v. Hill, 232 Mass. 188 (1919); Liacos, Handbook of Massachusetts Evidence, 37-44 (5th Edition, 1981).  By introducing evidence of the Board's prior decision for fiscal years 1992 and 1993, the appellants met their initial burden of production and shifted to the Assessors the burden of producing evidence to justify the increase in value for fiscal year 1994.  See Cressey Dockham, supra at 50.  Once the Assessors concluded their presentation of evidence, the appellants could have rested and relied on the evidence of the Board's fiscal year 1992 and 1993 decision to satisfy its burden of proving that the parcels' assessed value for fiscal year 1994 exceeded their fair cash value.  The appellants, however, argued that the assessed value of its property for the fiscal year at issue was $737,000 less than the value found by the Board for the 1993 fiscal year and $753,000 less than the value found by the Board for the 1992 fiscal year.  
To support its claim of overvaluation, then, 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. v. Assessors of Lynn, 393 Mass. at 600, quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983).
	The income capitalization method, used by the appellants to support their claim of overvaluation, "is frequently applied with respect to income-producing property."  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In applying this method, the income stream used must reflect the property's earning capacity or economic rental value. Pepsi-Cola Bottling Co. v. Assessors of Boston, 393 Mass. at 451.  While actual rents from the subject property may be probative, they must reflect the subject's true earning capacity.  Id., at 451-452; Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. at 842. See also Carye v. Assessors of Chelmsford, 394 Mass. 1001, 1001 (1985)(affirming the Board's use of actual rents to determine gross income in an income capitalization approach because there was substantial evidence in the record to support the Board's conclusion that actual rents were an adequate measure of the earning capacity of the real estate at issue in that case); Fox Ridge Associates & Co. v. Assessors of Marshfield, 392 Mass. 652, 654 (1984); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. at 467 (1981).  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).  
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. at 610.  The expenses should also reflect the market.  Id.   The capitalization rate should consider the return necessary to attract investment capital.  Taunton Redevelopment Association v. Assessors of Taunton, 393 Mass. at 295. 
	In the present appeals, the Board found that the income capitalization methodology used by the appellants' expert real estate appraiser to value the subject property for the fiscal year at issue was seriously flawed because it was not based on specific, reliable market data.  Accordingly, the Board found and ruled that the appellants' expert's estimate of the subject property's value was without proper foundation and therefore without merit.   Moreover, the appellants' expert failed to consider, in any manner, the direct and sufficiently proximate-in-time sale of the subject property in her fiscal year 1994 determination of value.
	The opinion of an expert witness must be based on a proper foundation.  State Tax Commission v. Assessors of Springfield, 331 Mass. 677, 684 (1954).  To endow opinion evidence with probative value, it must be based on facts proven or assumed sufficient to enable the expert to form an intelligent opinion.  Giannasca v. Everett Aluminium, Inc.  13 Mass. App. Ct. 208, 211 (1982).
	Accordingly, the Board ruled that after the Assessors met their burden of justifying an increase in the fair cash value found by the Board for the same property within the preceding three years, the appellants failed to meet their burden of proving that the subject property was overvalued in fiscal year 1994. 

     The Board, therefore, issued a decision for the appellee in these appeals.


					    APPELLATE TAX BOARD

					By: ____________________________
					    Abigail A. Burns, Chairman




A true copy,

Attest: ______________________
	     Clerk of the Board

					

 The buffer zone is identified by the Assessors as Map 158, Parcel 12.
 This parcel is identified by the Assessors as Map 153, Parcel 85. 
 This parcel is identified by the Assessors as Map 153, parcel 84. 
 HRS Trust # 5, et al. v. Board of Assessors of the Town of West Boylston, 20 Mass. App. Tax Bd. Rep. 1 (1996).   
  As discussed in the Opinion that follows, G.L. c. 68A, § 12A, as then in effect, specifies that when an appeal relative to the fair cash value of property is brought within three years after the Board's previous determination of the property's fair cash value, the burden of persuasion is shifted to the Assessors to demonstrate than an increase in value was warranted.  Effective January 1, 1999, section 12A was modified by St. 1998, c. 485, § 2, which reduced the three fiscal year time period under G.L. c. 58A,  § 12A to a two fiscal year time period. 
 Neither party introduced evidence to even suggest that the sale was not at arm's length. 
 Federal IRS Form 8825 is designated for reporting "Rental Real Estate Income and Expenses of a Partnership or an S Corporation."
 See supra at footnote 5. 

ATB 2002-28