Main Street NA Parkdale LLC v. Board of Assessors of the City of North Adams (December 16, 2015)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


MAIN STREET NA PARKDALE LLC 	   v.	BOARD OF ASSESSORS OF   
								THE CITY OF NORTH ADAMS
					
	         
Docket Nos.: F319413,				Promulgated:
		   F325034				December 16, 2015


	These are appeals filed under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the City of North Adams ("appellee" or "assessors") to abate taxes on certain real estate in North Adams, owned by and assessed to Main Street NA Parkdale LLC ("Main Street Shopping Center" or "appellant") under G.L. c. 59, §§ 11 and 38, for fiscal years 2013 and 2014 ("fiscal years at issue").  
	Commissioner Good heard these appeals. Chairman Hammond and Commissioners Scharaffa, Rose and Chmielinski joined her in the decisions for the appellee.  
	These findings of fact and report are made pursuant to a request under G.L. c. 58A, § 13 and 831 CMR 1.32 of the appellant.  

	Dennis LaRochelle, Esq. for the appellant.
	
Ross Vivori, assessor for the appellee. 


Findings of Fact and Report

Introduction and Jurisdiction
On the basis of all of the evidence, including the testimony and documentary exhibits entered into the record, the Appellate Tax Board ("Board") found the following facts.  
On January 1, 2012 and January 1, 2013, the relevant assessment dates for the fiscal years at issue, the appellant was the assessed owner of a 7.11-acre parcel of land, identified by the appellee on assessor's map 151 as lot 49 and 50, located at 80 Rear Main Street in the City of North Adams (the "subject property").  The subject property is located in downtown North Adams and is improved with a strip mall, which is comprised of seven independent units of varying size and configuration ("strip mall") and one free-standing, 7,800-square-foot pad site operating as a Burger King fast-food restaurant ("pad site").  
For fiscal year 2013, the assessors valued the subject property at $5,224,700 and assessed a tax thereon, at the rate of $32.95 per thousand, in the total amount of $172,153.86.  The appellant paid the tax due without incurring interest.  In accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors, which they denied on February 28, 2013.  In accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed its petition with the Board on May 20, 2013.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2013.
For fiscal year 2014, the assessors valued the subject property at $5,224,700 and assessed a tax thereon, at the rate of $34.54 per thousand, in the total amount of $180,461.14.  The appellant paid the tax due without incurring interest.  On February 3, 2014, 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 3, 2014.  In accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed its petition with the Board on July 21, 2014.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2014. 
The appellant presented its case through the testimony of two witnesses, Malcolm Davis, the property manager for the subject property, and Caroline Murphy, a licensed appraiser, whom the Board qualified as an expert in the valuation of commercial real estate.  The appellee presented its case through the testimony of Ross Vivori, chief assessor for the City of North Adams.
The appellant's first witness was the property manager for the subject property, Malcolm Davis.  Mr. Davis testified that the subject property had experienced vacancy as well as litigation and collection issues with tenants.  He testified that, as of the relevant assessment dates, the subject property had two vacant spaces, totaling approximately 13,000 square feet of leasable space.  In addition, two spaces that had become vacant are now owner-occupied: the 26,060-square-foot movie theater and the 15,000-square-foot liquor store. 
 The appellant's next witness was its expert appraiser, Caroline Murphy.  Ms. Murphy testified that, in her opinion, there were not an adequate number of sufficiently comparable sales to perform a sales-comparison analysis.  She also rejected the cost approach because of the lack of meaningful data.  Therefore, Ms. Murphy used an income approach to value the subject property.  She did not prepare and present a formal written appraisal, but she prepared several charts, which the appellant offered into evidence.
Ms. Murphy began her analysis by gathering several leases, which she categorized by size, and from there formed her opinions of fair market rent for the various spaces.  All of Ms. Murphy's purportedly comparable leases were on a triple-net basis.  
For her "above average size tenants," which she defined as those with spaces greater than 15,000 square feet, Ms. Murphy investigated leases at four separate sites, three in Pittsfield and one in Great Barrington, Vermont.  Her nine leases ranged in size from 15,750 square feet to 64,540 square feet and in rental amounts from $7.00 per square foot to $20.30 per square foot.  Ms. Murphy determined that the subject property was inferior to all of her purportedly comparable properties, based primarily on its location in North Adams but also on the fact that the 15,000-square-foot liquor store was owner-occupied because the appellant was not able to lease the space.  Mr. Murphy selected $6.00 per square foot for the annual market rent for the two spaces that exceeded 15,000 square feet, for a total of 33,000 square feet of leasable space at the subject property.     
For her in-line tenant spaces, Ms. Murphy investigated leases at three separate sites in Pittsfield, Greenfield, and on Main Street in North Adams.  She used the thirteen leases for four separate leasing categories: (1) spaces ranging from 10,000 square feet to 14,999 square feet; (2) spaces ranging from 5,000 square feet to 9,999 square feet; (3) spaces ranging from 3,000 square feet to 4,999 square feet; and (4) spaces less than 3,000 square feet.  For the first category, the range of rents was between $4.13 and $9.00.  Ms. Murphy selected a fair market rent of $9.00, the top of the range for her purportedly comparable rents, for the subject property's 10,000 square feet of space in that size category.  For the second category, the range of rents was between $8.00 and $11.00.  Ms. Murphy selected a fair market rent of $7.00, below the range for her purportedly comparable rents, for the subject property's 9,230 square feet of space in that size category.  For the third category, the range of rents was between $10.00 and $14.00 per square foot.  Ms. Murphy selected a fair market rent of $11.00 per square foot for the subject property's 8,498 square feet of space in that category.  The subject property had no leasable space in the fourth size category.
For the subject property's cinema space, Ms. Murphy opined that there were not a sufficient number of similar leases in the Berkshire and Franklin County area, so she used a broader region of Massachusetts, Connecticut and upstate New York.  Ms. Murphy found rents for purportedly comparable cinema properties ranging from $4.33 per square foot to $29.70 per square foot.  Ms. Murphy testified that, in her valuation, she considered that two tenants in the cinema space had been evicted for inability to pay rent and that the cinema was currently owner-occupied.  Ms. Murphy assigned a fair market rent of $5.00 per square foot for the subject's 26,067-square-foot cinema space. 
On the basis of the above analysis, Ms. Murphy calculated gross income amounts, not including income from the pad site (which she analyzed separately as will be explained infra), as reproduced below:
Leasing category	Subject's leasable space 	Rent PSF	Annual rent	
> 15,000 sf	33,000 sf	$ 6.00	$198,000	
10,000 sf to 14,999 sf	10,000 sf	$ 9.00	$ 90,000	
5,000 sf to 9,999 sf	 9,230 sf	$ 7.00	$ 64,610	
3,000 sf to 4,999 sf	 8,498 sf	$11.00	$ 93,478	
Cinema space	26,067 sf	$ 5.00	$130,335	
Subtotal	86,795 sf		$576,423	

For vacancy and credit loss, Ms. Murphy testified to a range of between 5% and 20%.  Ms. Murphy considered the subject property's location and the history of vacancy and credit issues at the subject property, as testified to by the property manager, Mr. Davis.  On both relevant assessment dates, the subject property's actual vacancy rate was 32%.  Ms. Murphy thus selected 20% as the vacancy and credit loss factor for the subject property's leasable space, not including the pad site, for a total of $115,285.  Ms. Murphy explained that it was not proper to apply the vacancy and credit loss factor to the Burger King pad site, because pad sites are rarely vacant.  She thus calculated the rental figure for the pad site separately. 
For the pad site's gross potential income, Ms. Murphy testified that the fair market rent for pad sites is independent of the size of the building on the pad.  Based on her investigation of six pad site rentals in North Adams, Northampton, Springfield, Westfield and Chicopee, ranging in annual rents from $35,000 to $72,000, Ms. Murphy selected $45,000, a value at the lower end of her purportedly comparable properties' range, opining that the subject property was located in an inferior location. 
Combining her gross incomes from the strip mall and pad site and reducing that amount by the vacancy allowance for the strip mall, Ms. Murphy calculated an effective gross income ("EGI") of $506,138 for the subject property.
From her EGI, Ms. Murphy deducted the portion of the subject property's maintenance and insurance charges that the landlord would need to pay because of vacancies.   Ms. Murphy used what she testified was an industry standard deduction of $2.25 per square foot and applied this to 20% of the strip mall's leasable square footage for a deduction of $39,053.
Ms. Murphy further deducted the following figures from her projected EGI:  capital improvement reserves at 2% of EGI; and miscellaneous expenses at 1% of EGI.  Based on her deductions, Ms. Murphy calculated a net operating income of $451,896.
For her capitalization rate, Ms. Murphy analyzed sales data for seven shopping centers in Massachusetts and Connecticut.  These purportedly comparable sales yielded overall rates of return ranging from 6.96% to 10.0%.  From this range, Ms. Murphy selected a base capitalization rate for the subject property in the middle of this range, at 8.5%.  She testified that this was also within the range cited by PricewaterhouseCoopers, which showed a nationwide capitalization rate range from 5.50% to 9.5% for strip malls.  To this base capitalization rate, Ms. Murphy added a tax factor.  Originally, Ms. Murphy added the entire North Adams tax factors of 3.295% for fiscal year 2013 and 3.454% for fiscal year 2014.  However, as pointed out by the Presiding Commissioner, only a pro rata portion of the tax factor should have been used, because in a triple-net-lease arrangement, the landlord is responsible for the taxes only on the vacant portion of the property.  On the facts of this appeal, the appellant would also be responsible for the real estate taxes on the cinema and the liquor store spaces because they were owner-occupied.  In these appeals, Ms. Murphy determined a vacancy rate of 20% of the subject property's leasable in-line space.  Ms. Murphy did not appear to appreciate this issue fully, however, because she later selected the following tax factors -- 2.636% for fiscal year 2013 and 2.763% for fiscal year 2014 -- indicating that she had reduced the tax factors by 20%, rather than adding only 20% of the tax factors.  
Ms. Murphy's calculations, with her inaccurate corrections adopted after the hearing, are summarized below:





Fiscal year 2013
In-line space rental income						$  576,423
Vacancy and credit loss (@ 20%)				     ($  115,285)
Subtotal									$  461,138
Ground lease from pad site						$   45,000
EGI										$  506,138
Owner's costs for vacant space ($2.25/sf)			     ($   39,058)		
Capital improvement reserves (@ 2% of EGI)		     ($   10,123)
Miscellaneous expenses (@ 1% of EGI)			     ($    5,061)
Net operating income							$  451,896
Capitalization rate @ 8.5%
Plus tax factor @ 2.636%
Overall capitalization rate					/11.136%

Fair market value								$4,057,974
Rounded to									$4,050,000
Fiscal year 2014
In-line space rental income						$  576,423
Vacancy and credit loss (@ 20%)				     ($  115,285)
Subtotal									$  461,138
Ground lease from pad site						$   45,000
EGI										$  506,138
Owner's costs for vacant space ($2.25/sf)			     ($   39,058)		
Capital improvement reserves (@ 2% of EGI)		     ($   10,123)
Miscellaneous expenses (@ 1% of EGI)			     ($    5,061)
Net operating income							$  451,896
Capitalization rate @ 8.5%
Plus tax factor @ 2.763%
Overall capitalization rate					/11.263
Fair market value								$4,012,217
Rounded to									$4,000,000

The appellee presented its witness, Mr. Vivori, the chairman of the North Adams Board of Assessors.  Mr. Vivori testified that the subject property was valued for assessment purposing using mass appraisal guidelines and did not offer affirmative evidence of value.  Rather, he testified concerning the flaws in Ms. Murphy's valuation analysis.  First, Mr. Vivori cited the actual rents of the subject property and testified that many of these rents were actually within the ranges of purportedly comparable rents as determined by Ms. Murphy, and therefore, the actual rents were consistent with market rents and should have been considered in the analysis.  Mr. Vivori also noted that Ms. Murphy's market rental figure for the cinema space was lower than the range of market rents that she had derived from her purportedly comparable properties, because while the lowest lease within her range of comparable properties contains an annual increase clause of 3.5% each year and was in its ninth year, thus bringing that lease to $5.50.  He claimed, moreover, that Ms. Murphy's valuing of the subject property's pad site solely by using its ground lease "regardless of the Tenant building it themselves" was flawed because she "ignor[ed] between $300,000-$400,000 in value which should have been part of the overall final value."  
Finally, Mr. Vivori criticized Ms. Murphy's expenses as being overstated, because the subject property was triple net and therefore, "all of the expenses" were passed through to the tenant on a pro rata basis.
On the basis of the evidence of record, the Board ultimately found that the appellant did not meet its burden of proving a fair market value that was less than the assessed values for both fiscal years at issue.  Most importantly, Ms. Murphy's rent estimates were not supported by the purportedly comparable leases that she cited and she ignored the actual rents paid at the subject property without adequate explanation.  For example, with respect to leases for spaces greater than 15,000 square feet, Ms. Murphy's purportedly comparable lease ranged from $7.00 per square foot to $20.30 per square foot, yet she selected $6.00 per square foot, lower than the lowest of her range and significantly lower than the average.  Ms. Murphy's reasoning for selecting such a low figure was the subject property's inferior location vis-à-vis her comparables, but the appellant did not sufficiently establish this supposed inferiority.    
With respect to rents for the smaller in-line spaces from 5,000 square feet to 9,999 square feet, Ms. Murphy again selected a market rent -- $7.00 per square foot -- which was outside of the range that she cited with no supported reason for the disparity.  Moreover, Ms. Murphy's conclusions that the market rent for spaces ranging from 10,000 square feet to 14,999 square feet was $9.00 while the market rent for spaces ranging from 5,000 square feet to 9,999 square feet was $7.00, without further explanation, failed to reflect the well-established principle that smaller spaces will generally garner higher per-square-foot rents than larger spaces.  See Appraisal Institute, The Appraisal of Real Estate 212 (13th ed., 2008) ("Generally as size increases, unit prices decrease. Conversely, as size increases, unit prices decrease."). 
The Board also found that Ms. Murphy's market rent for the cinema was not reasonable or sufficiently supported.  Ms. Murphy's purportedly comparable movie theater properties ranged in rents from $4.33 to $29.70, and she selected a value, $5.00, that was toward the lowest end of this broad spectrum.  Moreover, many of Ms. Murphy's purportedly comparable properties were geographically remote from the subject property.  While the subject property is located at the corner of a tri-state area including western Massachusetts, eastern New York and southwestern Vermont, the Board found that the appellant failed to establish comparability between the subject cinema and one located many miles to the west in Rochester, New York.  Furthermore, the cinemas themselves, several of which were in the nature of "mega plexes" that were double the size of the subject 6-screen cinema, were not comparable to the subject cinema.
Finally, while the Board found the appellant's vacancy rate, expenses, and base capitalization rate to be reasonable, the Board found error in the appellant's calculation of the overall capitalization rate.  Adding the appropriate pro rata portion of the North Adams tax rate would have resulted in a lower overall capitalization rate, thus increasing the subject property's indicated value.  
Given the flaws in Ms. Murphy's rents and overall capitalization rates, the Board found that there was no reliable evidence of record on which to base a determination of fair cash value.  Accordingly, the Board found that the appellant failed to meet its burden of proving a fair market value for the subject property that was less than its assessed value for both fiscal years at issue.  
The Board, therefore, issued decisions in favor of the appellee in these appeals.

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 in a free and open market 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 petitioner to make out its right as [a] matter of law to [an] 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)).  "[T]he board is entitled to 'presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.'" General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245).  
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).  "In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted."  Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate 315-316 (12th ed., 2001)), aff'd, 62 Mass. App. Ct. 428 (2004).  In the instant appeals, the Board agreed with both parties' witnesses and found that the highest-and-best use of the subject property during the fiscal years at issue was its existing use as a commercial strip-style mall with a pad site.       
Generally, real estate valuation experts, the 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).  "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).  While arm's-length sales of comparable realty generally produce persuasive evidence of value (see Correia, 375 Mass. at 362), the use of the income-capitalization approach is appropriate when reliable market-sales data are not available. Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 810, 811 (1975); Assessors of Lynnfield v. New England Oyster House, 362 Mass. 696, 701-702 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  Furthermore, the income-capitalization method "is frequently applied with respect to income-producing property."  Taunton Redev. Assocs. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  
In the present appeals, both parties' witnesses agreed, and the Board found, that the income-capitalization approach provided the most accurate indication of the fair cash value of the subject property for the fiscal years at issue.     
"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. v. Assessors of Boston, 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., 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 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). 
In these appeals, the parties differed in their opinions of the various rental rates at the subject property.  The Board found that Ms. Murphy failed to present persuasive, credible evidence that her rental figures represented the fair market rents for the subject property.  First, she failed to consider the actual rents paid at the subject property.  Further, her rent estimates were not supported by her purportedly comparable leases.  She chose market rents at the lowest end of her ranges for her purportedly comparable properties, well below the averages, and even selected some rents below that range entirely.  Her reasoning -- that the subject property was inferior to her purportedly comparable properties -- was not sufficiently established by the record to support her selections.  Moreover, her need to make such drastic adjustments indicated that the purportedly comparable properties relied upon by Ms. Murphy were not sufficiently comparable to the subject property to provide an accurate estimation of its value.  Lane v. Assessors of Dover, Mass. ATB Findings of Fact and Reports 2014-1127, 1143.  Finally, because Ms. Murphy's cinema comparables were not even in the same geographic market of the subject property, the Board found and ruled that she failed to establish comparability of her purportedly comparable properties to the subject property.  See Claybourne Realty Trust v. Assessors of Bourne, Mass. ATB Findings of Fact and Reports 2014-649, 685-86 (finding rents in communities "geographically remote" from the subject property not to be sufficiently comparable evidence of value).  The appellant bears the burden of "establishing the comparability of . . . properties [used for comparison] to the subject propert[ies]."  Fleet Bank of Mass. v. Assessors of Manchester, Mass. ATB Findings of Fact and Reports 1998-546, 554.  Accord New Boston Garden Corp., 383 Mass. at 470.  Accordingly, the Board found and ruled that the appellant failed to present persuasive, credible evidence of the fair market rental values for the subject property.  "The credibility of witnesses, the weight of evidence, and the 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). 
Finally, the Board found a material error in the appellant's calculation of the appropriate capitalization rate.  While the Board found the appellant's base capitalization rate to be reasonable, the Board additionally found that the appellant added an erroneous pro rata portion of North Adams' tax factor.  In a calculation involving a triple-net lease, an appropriate pro rata portion of the tax factor takes into account the landlord's responsibility for paying taxes on the vacant portion of the subject property.  See Market Forge Industries, Inc. v. Assessors of Everett, Mass. ATB Findings of Fact and Reports 2014-186, 201.  Here, the appropriate pro rata portion that reflects the landlord's responsibility is roughly 20% (slightly less when taking into account that the ground lease was not considered in calculating the vacancy factor) plus the percentage represented by the owner-occupied space.  Ms. Murphy needed to be reminded by the Presiding Commissioner that the appellant was not entitled to a full tax factor in a triple-net leasing scenario, and then incorrectly amended her calculations to take 80% of the tax factor, rather than 20%, plus the owner-occupied space.  
Given the flaws in Ms. Murphy's development of market rent for the subject property and her error in applying a tax factor to her capitalization rate, the Board found and ruled that there was insufficient credible evidence of record on which the Board could rely to determine the fair cash value of the subject property for the fiscal years at issue.  Based on the evidence presented in this appeal, and the reasonable inferences drawn therefrom, the Board found and ruled that the appellant failed to meet its burden of proving a fair cash value of the subject property that was less than its assessed value for both fiscal years at issue. 





Accordingly, the Board entered decisions for the appellee in these appeals. 
				   THE APPELLATE TAX BOARD


				    By: ____________________________ ____
					   Thomas W. Hammond, Jr., Chairman





A true copy,

Attest:	____________________________
		Assistant Clerk of the Board

 Located across the parking lot from the subject property is another strip mall parcel that is owned by the appellant; that parcel is not included in the present appeals.

ATB 2015-645