Three Corners Realty Trust v. Board of Assessors of the City of Salem (February 7, 2002)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



THREE CORNERS REALTY TRUST	v.	BOARD OF ASSESSORS OF
THE CITY OF SALEM



Docket Nos. F240992, F248107		Promulgated:
  F250738,  F250739		February 7, 2002


	These are appeals filed under the formal procedure pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate real estate taxes assessed under G.L. c. 59, § 38, for fiscal years 1997 and 1998.
	Chairman Burns heard the appeals.  For fiscal year 1997, docket number F240992, a decision was entered for the appellee.  For fiscal year 1998, docket numbers F248107, F250738 and F250739, a decision was entered for the appellant.  Chairman Burns was joined in her decisions by former-Chairman Gurge and Commissioners Scharaffa and Gorton.
These findings of fact and report are issued pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
	Joseph F. Dalton, Esq., for the appellant.
	James F. Sullivan, Esq., for the appellee.

FINDINGS OF FACT AND REPORT
	On January 1, 1996 and January 1, 1997, Three Corners Realty Trust ("the appellant") was the assessed owner of three contiguous parcels of real estate situated in the City of Salem.  The subject parcels are located at 18 Washington Square West, 101 Essex Street and 103 Essex Street.  Combined they consist of approximately 1.03 acres of land improved with a six-story hotel and parking areas.
	For fiscal year 1997, the Board of Assessors of Salem ("Assessors") valued the three parcels, in total, at $2,656,100 and assessed a tax thereon at the rate of $35.03 per thousand in the amount of $93,043.18.  The taxes were timely paid without incurring interest.  On January 29, 1997, within thirty days of the December 31, 1996 mailing of the tax bills, the appellant filed an application for abatement with the Assessors.  On February 14, 1997, the Assessors granted the appellant a partial abatement in the amount of $203,900, reducing the assessed value to $2,452,200, and on May 14, 1997, the appellant timely filed an appeal with the Appellate Tax Board ("Board") seeking a further abatement.  
	For fiscal year 1998, the Assessors valued the subject parcels separately and assessed taxes as follows:

Docket Number	
Location	Assessed Value	Tax Rate	Assessed Tax
	
F248107	18 Washington Square West	$3,346,800	$34.67	$116,033.36	
F250738	103 Essex Street	$   62,000	$34.67	$  2,149.54	
F250739	101 Essex Street	$   70,500	$34.67	$  2,444.23	


The taxes for all three parcels were timely paid without incurring interest.  The applications for abatement were timely filed with the Assessors on April 21, 1998, on or before the last day for payment, without incurring interest, of the first installment of the actual tax bills.  The abatement applications were deemed denied on July 21, 1998.  On June 19, 1998, the appellant prematurely filed an appeal with the Board for the parcel located at 18 Washington Square West.  On September 21, 1998, the appellant seasonably filed appeals with this Board for the parcels located at 101 and 103 Essex Street.  On this basis, and despite the prematurity of one of the appeals, the Board found and ruled that it had jurisdiction over the fiscal  year  1997  appeal  and  all  three  of  the fiscal

year 1998 appeals.	
	At the hearing of these appeals, the appellant offered the testimony of three witnesses, Rodger Perry, a management consultant for the Hawthorne Hotel; Timothy Dunlap, a licensed engineer; and Stephen Gasperoni, a real estate appraiser.  The appellant also introduced into evidence both exterior and interior "Building Condition Surveys," which were prepared by Noblin & Associates, consulting engineers ("Noblin reports") and which were based on Mr. Dunlap's inspections of the hotel.  In addition, the appellant submitted an appraisal report prepared by Mr. Gasperoni.  
In support of the assessed value, the Assessors offered the testimony of two witnesses, William O'Neill, a civil engineer and Thomas Mulhern, a real estate appraiser.  The Assessors also submitted an appraisal report prepared by Mr. Mulhern. Based on the evidence presented, and reasonable inferences drawn therefrom, the Board made the following findings of fact.
	The subject property is located in historic downtown Salem and is within walking distance to many of the museums and historical sites.  Salem is located approximately sixteen miles north of Boston and is accessible via Routes 114, 1A and 107, all of which connect to Route 128.  The site is also improved with adjacent paved parking areas.
The Hawthorne Hotel is a six-story, full service hotel built circa 1920, with subsequent additions.  The hotel contains a total of 89 guest rooms, but on the relevant assessment dates, only 79 were "on line".  Also located in the building are two ballrooms, four conference/function rooms, general office rooms and an exercise room.  In addition, on the first floor, there is the "Tavern on the Green", which is a restaurant and bar, a small gift shop, a full service kitchen, an antique shop and Nathaniel's Restaurant.  The hotel also contains a full finished basement, which houses the hotel's operation facilities including the laundry, heating plant, maintenance area, corporate offices and supply storage.
The appellant's first witness was Rodger Perry, the hotel's management consultant.  At the time of the hearing, he testified that he had been in the hospitality business for approximately fifteen years, consulting to and operating unique hospitality properties.  During the years at issue, Mr. Perry's company provided consulting and accounting services to the Hawthorne Hotel and was responsible for supervising the hotel's overall accounting activities.  He noted that the Hawthorne Hotel is an independently owned and operated hotel with no national affiliation and could be classified as a "boutique" hotel, defined as an unaffiliated hospitality facility with less than one hundred rooms.  
According to Mr. Perry, room sales in the hotel industry usually generate a greater percentage of a hotel's income and have a higher margin of profit than the food and beverage sales.  He noted, however, that in the case of the Hawthorne Hotel, unlike the national chains, the reverse was true.  He testified that during the years at issue, the Hawthorne Hotel generated a majority of its revenue, approximately sixty percent, from its food and beverage sales.   
Timothy Dunlap, a licensed professional engineer with the firm of Noblin & Associates, L.C. also testified on behalf of the appellant.  Mr. Dunlap's testimony and reports, which were admitted into evidence, focused on the physical condition of the property and the repairs which he deemed necessary.  Mr. Dunlap first inspected the exterior of the subject property in the spring of 1997 and noted various problems with the masonry, the windows, the roof and the fire escape.  In this first report, Mr. Dunlap recommended that numerous repairs, costing approximately $1,500,000 in total, be undertaken immediately and simultaneously.  In his cost estimate, Mr. Dunlap included allowances for staging the building during the project and for general expenses such as storage, waste disposal and site protection.  
Subsequently, in the fall of 1998, Mr. Dunlap returned to the Hawthorne Hotel to inspect the interior of the building.  Again, after his inspection of the property, Mr. Dunlap prepared a second report in which he made various recommendations to address what he considered to be "noted deficiencies at the Hawthorne Hotel".  He also noted that structural changes needed to be instituted, both inside and outside the hotel, to bring the building into compliance with the Americans with Disabilities Act.  In his report, Mr. Dunlap presented a cost range for each of his recommendations.  In total, his estimated cost for interior repairs ranged from $1,144,500 to $1,399,500.
Lastly, to support its contention that the subject property was overvalued for the fiscal years at issue, the appellant offered the testimony and appraisal report of Stephen Gasperoni, a certified real estate appraisal expert.  In his report, Mr. Gasperoni classified the building as structurally sound but suffering from deferred maintenance, as outlined in the Noblin reports prepared by Mr. Dunlap.  Mr. Gasperoni estimated the integrated value of the subject property constituting all three parcels at $1,460,000 as of January 1, 1996, and $1,715,000 as of January 1, 1997.  
Mr. Gasperoni derived his estimate of value for each of the fiscal years at issue using an income-capitalization approach.  He based his calculations on the income and expense figures generated by the subject property during calendar years 1994, 1995, and 1996, as provided to him by the hotel management.  Although the reports that he relied upon were not verified by an accounting firm, Mr. Gasperoni testified that he "assumed that what was furnished to me [from the hotel management] was correct."  
In addition to the actual hotel expenses, Mr. Gasperoni deducted amounts attributable to "reserves for replacement" in his income capitalization methodology.  He defined these expenses as (1) "the amount set aside for replacement of furniture, fixtures, and equipment" ("FF&E") and (2) "the cost of capital [] associated with the ownership of personal property".  Mr. Gasperoni explained that FF&E have a "short useful life and must be replaced on an ongoing basis".  In his calculations, he accounted for the FF&E by calculating both a return of and a return on the personal property associated with the hotel operations.  
Mr. Gasperoni explained that the return of personal property was essentially a reserve account for the replacement of the hotel's personal property.  Based on conversations with hotel experts and reference to industry standards and trends published by Smith Travel Research, PFK Consulting and Equitable Real Estate and Real Estate Research Corporation, Mr. Gasperoni concluded that a reserve for replacement in the range of three- to five-percent of gross revenue is generally sufficient to provide for the timely replacement of FF&E for a typical hotel.  In the present appeals, however, Mr. Gasperoni concluded that the Hawthorne's FF&E was not "typical", based on: the unique character and small size of the hotel; the large amount of revenue generated from food and beverage sales; and, the fact that the hotel's furniture was acquired at the same time as the hotel, 1987.  Accordingly, Mr. Gasperoni opted to use a lesser reserve expense equivalent to only two and one-half percent of the annual gross revenue. 
Mr. Gasperoni also allowed an expense for return on FF&E.  He first determined that a value of $4,000 per room for personal property was appropriate, for a total annual valuation of $245,000 ($4,000 x 89 rooms).  He then applied an equity yield rate of thirteen-percent to calculate an annual expense of $46,280.  Mr. Gasperoni testified that, "in my opinion [a] typical investor in hotel property would demand the same return on personal property as they would [on] the entire investment, real and personal".
Lastly, Mr. Gasperoni allowed a deduction for "reserve for replacement", to cure the hotel's defects, despite his testimony that he did "not believe that a typical buyer would look to remedy all of the items contained in the Noblin report upon acquisition of the hotel".  However, because in his opinion some of the items did not need to be addressed immediately, and also because he found estimates contained in the Noblin reports to be "aggressive", Mr. Gasperoni calculated an annual expense allowance by first reducing the total cost to cure to $1,554,167 and then amortizing it over fifteen years and factoring in the cost of borrowing the money at ten percent, for an annual expense of $200,413.
Mr. Gasperoni determined his base capitalization rate of 0.101331 by using a mortgage equity method coupled with information gathered from discussions with area mortgage brokers, lenders, and real estate investors.  In addition, he testified that he reviewed related periodicals and published survey results.  After adding the relevant tax factor for each of the years at issue, Mr. Gasperoni arrived at an overall capitalization rate of 0.1364 and 0.1360 for fiscal years 1997 and 1998, respectively.  
Using this income-capitalization methodology, Mr. Gasperoni estimated the value of the subject property at $1,460,000 for fiscal year 1997 and $1,715,000 for fiscal year 1998.  His income-capitalization analysis as summarized in a table contained in his report is reproduced below.



	Fiscal
Year 1997		Fiscal
Year 1998		
Revenue					
  Guest Rooms	$1,979,754	45.2%	$2,203,542	43.5%	
  Food	$1,474,375	33.6%	$1,600,184	31.6%	
  Beverage	$  595,445	13.9%	$  647,044	12.8%	
  Other Banquets	$  239,516	 5.5%	$  224,929	 4.4%	
  Other	$   94,851	 2.2%	$  389,176	 7.7%	
Total Income	$4,383,941	100%	$5,064,875	100%	
					
Department Expenses					
  Guest Rooms	$  498,390	25.2%	$  479,967	21.8%	
  Food & Beverage	$1,801,499	87.0%	$1,903,821	84.7%	
  Minor Department	$   34,671	10.4%	$  412,465	67.2%	
 Total		$2,334,560	53.3%	$2,795,953	55.2%	
					
Total Dept. Profit	$2,049,381	46.7%	$2,268,922	44.8%	
					
Undistributed Operating Expenses					
  Administrative	$  484,290 	11.0%	$  570,392	11.3%	
  Marketing	$  337,888	7.7	$  384,059	7.6%	
  Franchise Fee					
  Energy Costs	$  191,194	4.4%	$  184,188	3.6%	
  Property Oper. & Maint.	$180,982	4.1%	$  196,74.	3.9%	
Total Undist. Oper. Expenses	$1,194,354	27.2%	$1,335,382	26.4%	
					
Income Before Fixed Charges	$855,027	19.5%	$  933,540	18.4%	
Gross Operating Profit					
  Management Fee	$  153,438	3.5%	$  177,271	3.5%	
Income Before Fixed Charges	$  701,589	16.0%	$  756,269	14.9%	
  Real Estate Taxes					
  Insurances	$  100,794	2.3%	$   89,893	1.8%	
  Lease Expense	$   45,450	1.0%	$   60,140	1.2%	
  Reserve for Replacement	$  200,413	4.6%	$  200,413	4.0%	
Total	$  346,657	7.9%	$  350,446	6.9%	
Net Operating Income Before
Reserves & Debt Service	            $  354,932	  8.1%	          $  405,823	  8.0%	
					
FF&E Replacement	$  109,599	2.5%	$  126,622	2.5%	
Return on Personalty	$   46,280	1.1%	$   46,280	0.9%	
NOI to Real Estate	$  199,054	4.5%	$  232,922	4.6%	
					
Capitalization Rate	  0.101331		  0.101331		
Tax Factor	  0.035030		  0.034670		
Composite Capitalization Rate	  0.1364		  0.1360		

Estimated Fair Market Value	    $1,460,000		 $1,715,000		

In support of the assessed value for the subject property the Assessors relied on the testimony and appraisal report of Thomas Mulhern, an expert real estate appraiser.  Mr. Mulhern used both sales-comparison and income-capitalization methodologies to value the subject property.
	To determine a value for the subject property using the sales-comparison methodology, Mr. Mulhern reviewed sales of hospitality properties in the surrounding area over a period of twenty-four months prior to and several months after the relevant dates of assessment.  In his analysis, he relied on six transactions that he deemed most comparable to the subject property and reviewed these sales in detail.  He determined that the best unit of analysis was the price paid per room.  The relevant information from his six purportedly comparable properties are summarized below.  

Sale #	
Location	# of Rooms	Date of Sale	Total Sale Price	Price Paid per Room	
1	Wellesley	 65	1/9/98	$ 2,126,000	$ 32,709	
2	Foxborough	 24	6/1/95	$   790,000	$ 32,917	
3	Lexington	164	2/2/96	$ 6,900,000	$ 42,073	
4	East Boston	351	 11/4/97	$27,000,000	$ 77,143	
5	Lexington	119	  9/97	$14,700,000	$123,529	
6	Newton	182	 10/97	$11,800,000	$ 64,836	

	In comparing these six properties to the subject property, Mr. Mulhern adjusted their unit sale prices for various factors including conditions of sale, change in market conditions, location, condition of the property, building size, and quality of construction.  He then calculated an "adjusted" price paid per room.  The following table summarizes his adjustments in this regard.  

Sale #	FY '97 Percentage Adjustment	Adjusted Price per Room FY '97	FY '98 Percentage Adjustment	Adjusted Price per Room FY '98	
1	+ 40%	$45,793	+ 45%	$47,428	
2	+ 45%	$47,730	+ 45%	$47,730	
3	+ 30%	$54,695	+ 30%	$54,965	
4	- 15%	$65,572	- 10%	$69,429	
5	- 45%	$67,941	- 40%	$74,117	
6	+  5%	$68,079	+ 10%	$71,319	

	Mr. Mulhern then concluded that the appropriate price per room for the subject property was $59,000 for fiscal year 1997 and $61,000 for fiscal year 1998.  Using these figures and multiplying them by the seventy-nine useable rooms, Mr. Mulhern estimated the subject property's value at $4,660,000 for fiscal year 1997 and at $4,820,000 for fiscal year 1998.
	Mr. Mulhern also valued the subject property using an income-capitalization approach.  According to his report, Mr. Mulhern based his income and expense figures on "historic income and expense statements, operating results of competing properties and data from Smith Travel Research's Host Report".  He calculated the property's gross income generated from room sales based on the subject's 1998 published room rates and a survey of the competition's rates for the years at issue.  On this basis, he used an average room rate of $100 for fiscal year 1997 and $105 for fiscal year 1998.  He applied these rates to the seventy-nine available rooms and then, based on his survey of the competition, to a stabilized occupancy rate of seventy-percent for both fiscal years.  In this way, he calculated gross revenue from rooms at $2,018,450 and $2,119,373, for the respective years.  In his computations, Mr. Mulhern also included income generated from food and beverage sales, which he calculated at twenty-percent of the annual room revenue, and also income generated from telephone service, calculated at 2.6 percent of the annual room revenue.  Mr. Mulhern testified that the percentages he used for these two income sources were based on his market research and industry trends. 
	Next, Mr. Mulhern deducted what he considered to be standard operating expenses attributable to the rooms, food and beverage, and telephone services.  Relying on industry trends and published reports such as Hotel Operating Statistics published by Smith Travel Research, Mr. Mulhern calculated all of the departmental expenses as a percentage of the corresponding revenue.  Mr. Mulhern also made what he considered to be standard expense deductions for "unallocated fixed charges" such as: administration, management, marketing, repairs and maintenance, and energy costs.  These figures were calculated as a percentage of total gross revenue and were based on historical expense data in published reports from what he considered similar properties.
	Mr. Mulhern's final deductions were the fixed charges.  He estimated the insurance expense at $300 per room for a total annual expense of $23,700.  Mr. Mulhern allowed an annual expense of $71,100 for the return of and the return on FF&E.  He calculated the return of FF&E, the reserve, by assuming a per-room FF&E value of $5,000 and a ten-year life expectancy for the FF&E.  These assumptions, using a straight-line approach, produced an annual reserve for FF&E of $39,500 ($5,000 x 79/10).  For the return on FF&E, Mr. Mulhern employed what he believed was a safe rate of return on the $5,000 per room FF&E investment of eight-percent, for an annual expense of $31,600 ($395,000 x .08).  Last, Mr. Mulhern included in this group of expenses a reserve for short-lived items pertaining to the real estate.  He determined this allowance should be six-percent of the annual effective gross income.
	Mr. Mulhern calculated his capitalization rates of 0.115 and 0.110 for fiscal years 1997 and 1998, respectively, using a mortgage equity method plus a review of the overall rates from the sales used in his sales comparison methodology.  After adding the relevant year's tax factor, he arrived at total capitalization rates of 0.1497 and 0.1450, respectively.
Using his income-capitalization methodology, Mr. Mulhern estimated the value of the subject property at $4,265,000 for fiscal year 1997 and $4,660,000 for fiscal year 1998.  His income-capitalization analysis is reproduced in the following table.
	Fiscal Year 1997		Fiscal Year 1998		
	Dollars	% of Total	Dollars	% of Total	
Revenue:					
  Room	$2,018,450		$2,119,373		
  Food	   403,690	20	  423,874	20	
  Beverage	Included above		Included above		
  Telephone	    52,480	2.6	   55,104	2.6	
Other Depts:					
  Parking	N/A		N/A		
  Mtg. Rooms	N/A		N/A		
  Retail Shop(s)	N/A		N/A		
  Restaurant, Pub, other Retail	N/A		N/A		
  F/B Other income	N/A		N/A		
Total Revenue:	$2,474,620	`	$2,598,351		

	Fiscal Year 1997		Fiscal Year 1998		
	Dollars	% of Total	Dollars	% of Total	
Expenses:					
  Room	$  593,909	24	$  623,604	24	
  Food and Beverage	   343,137	85	   360,293	85	
  Telephone	    36,736	70	    38,573	70	
  Misc. Expenses	N/A		N/A		
Total Expenses:	$  973,782		$1,022,470		
Unallocated:					
  Admin/General	($ 197,970)	8	($ 208,868)	8	
  Management Fee	   (74,239)	3	   (77,951)	3	
  Marketing	   (98,985)	4	  (103,934)	4	
  Repairs/Maint.	  (123,731)	5	  (129,918)	5	
  Energy	  (123,731)	5	  (129,918)	5	
Total Unallocated:	($ 618,656)		($ 649,589)		
Fixed Charges:					
  Insurance	($  23,700)		($  23,700)		
  Municipal charges.	N/A		N/A		
  FF&e +FF&E return	   (71,100)		   (71,100)		
  Reserves @ 6%	  (148,477)		  (155,901)		
Total Fixed:	($ 243,277)		($ 250,701)		
Other Charges:					
  Franchise Fee	N/A		N/A		
  Incentive Mngt.	N/A		N/A		
  Ground Rent	N/A		N/A		
  Other	N/A		N/A		
Total Other:	0		0		
Total Expenses:	($1,835,715)	74	($1,922,760)	74.18	
					
Net Operating
Income:	
$  683,905	
25.05	
$  675,591	
25.82	
Capitalization Rate:	14.50		14.97		
Stabilized Value:	$4,267,902		$4,659,248		
Rounded:	$4,265,000		$4,660,000		
	
In reconciling the estimates of value produced by his two valuation methodologies, Mr. Mulhern noted in his report that since the sales upon which he relied were only marginally comparable to the subject property and required numerous adjustments, the reliability of the estimate of value from his sales-comparison approach was somewhat compromised.  Accordingly, Mr. Mulhern placed primary reliance on his income-capitalization approach and the estimates of value derived therefrom.
The Assessors also offered the testimony of William O'Neill who has worked in the construction industry for over forty years, and who, for the eight to ten years preceding the hearing date, worked as an engineering consultant.  In preparation for the hearing, Mr. O'Neill reviewed the Noblin reports and visited the hotel.  He measured the footprint, estimated the height of the building, counted the windows and visually inspected the exterior.  Mr. O'Neill testified that, in his opinion, not all of the repairs contained in the Noblin reports were immediately necessary.  
Specifically, Mr. O'Neil disagreed with one of the report's suggestions that the roof needed to be immediately replaced.  While he noted that some of the areas of the roof were in disrepair, it was still covered under warranty.  Also, Mr. O'Neill questioned the accuracy of some of the estimates contained in the reports, suggesting that perhaps they exceeded even the higher end of the ranges.  Mr. O'Neill further testified that the reports failed to provide dimensions for many of the repairs, making it difficult to confirm the suggested cost estimates.
In deriving their estimates of value, both Mr. Gasperoni and Mr. Mulhern relied on the income capitalization approach.  The Board found that the income-capitalization approach was the best method to use to estimate the value of the subject property for the fiscal years at issue.  In determining appropriate income and expense categories and figures, the Board agreed with Mr. Gasperoni that the actual income and expense figures as reported by the hotel best reflected the market for hotels like the subject.  The Board found that the hotel's actual income and expense figures best reflected the market for a unique property such as the subject and certainly better reflected the market for this type of hotel than the published data for non-comparable hotels on which the Assessors' expert relied.  The Board, however, found that some of the figures used by Mr. Gasperoni did not correspond with the actual figures provided by the appellant in its answers to interrogatories, which were entered into evidence.  Accordingly, the Board changed some of Mr. Gasperoni's purported actual figures to the figures contained in the appellant's answers to interrogatories as better corresponding to the market for this type of hotel.  
The Board found that Mr. Gasperoni's expense allowance for return of FF&E, calculated as a percentage of gross income, was based on generally accepted valuation principles.  Hotels and Motels:  A Guide to Market Analysis, Investment Analysis and Valuations (The Appraisal Institute 1997) at 240 ("a reserve for replacement can be estimated . . . as a percentage of the gross revenue")(hereinafter "Hotels and Motels").  In addition, the Board found that Mr. Gasperoni's selection of 2.5 percent of gross income was appropriate in light of the hotel's size, unique character, and its large food and beverage revenue.  The Board further found, however, that Mr. Gasperoni's calculation of return on FF&E was flawed.  The Board did find that Mr. Gasperoni's more conservative per room value for FF&E of $4,000 was appropriate.  The Board further found, however, that Mr. Gasperoni's use of the equity yield rate was erroneous.    Instead, the Board found "the percentage rate of return on personal property should reflect the cost of the capital commonly used to purchase FF&E."  Hotels and Motels at 245.  Relying on Mr. Gasperoni's data, used in determining his capitalization rate, the Board found that ten-percent was an appropriate rate of return for FF&E.  
Moreover, the Board found that the underlying data and assumptions used in the development of Mr. Gasperoni's capitalization rate were reasonable under the circumstances.  Accordingly, the Board adopted his capitalization rate of 0.101331, for both fiscal years, plus the applicable tax factor for each year.  A summary of the Board's income-capitalization approach is contained in the following table.

	Fiscal Year 1997	Fiscal Year 1998	
Revenue			
  Guest Rooms	$1,979,754	$2,203,542	
  Food	$1,474,375	$1,600,184	
  Beverage	$  595,445	$  647,044	
  Banquet	$  239,516	$  223,751	
  Telephone	$   35,164	$   23,373	
  Other Income	$   46,980	$  343,514	
Total income	$4,371,234	$5,047,408	
			
Department Expenses			
  Guest Rooms	$  495,866	$  476,560	
  Food & Beverage	$1,800,105	$1,870,648	
  Minor Department	$   34,671	$  412,465	
Total Department Expense	$2,330,642	$2,759,673	
			
Total Department Profit	$2,040,592	$2,287,735	
			
Undistributed Expenses			
  Administrative & General	$  484,290	$  525,071	
  Management Fee	$   65,631	$   73,236	
  Marketing	$  337,888	$  372,893	
  Operating & Maintenance	$  180,032	$  193,622	
  Energy	$  191,194	$  184,188	
  Worker's Compensation	$   45,032	$   46,371	
  Total Operating Expenses	$1,304,067	$1,395,381	
			
Income Before Fixed Charges	$  736,525	$  892,354	
			
Fixed Charges & Reserves			
  Insurance	$   43,762	$   51,441	
  Lease Expense	$   45,450	$   72,697	
  Reserve Real Estate (4%)	$  174,849	$  201,896	
  Reserve FF&E (2.5%)	$  109,281	$  126,185	
  Return on FF&E 	$   31,600	$   31,600	
  Total Fixed Charges & Reserves	$  404,942	$  483,819	
			
Net Operating Income	$  331,583	$  408,535	
Overall Capitalization Rate	.1364	.1360	
Fair Cash Value	$2,400,000	$3,000,000	

On this basis, the Board found that on January 1, 1996, the fair cash value of the subject property was $2,400,000 and, accordingly, issued a decision for the Assessors (Docket No. F240992).  The Board further found that on January 1, 1997, the fair cash value of the subject property was $3,000,000 and, therefore, granted abatements (Docket Nos. F248107, F250738 and F250739).  The abatement granted in each appeal was based on the ratio of the parcel's assessed value to the total assessed value for all three parcels.


Docket No.	Assessed Value	Fair Cash Value	Over-Valuation	Abatement Granted	
F248107	$3,346,800	$2,880,000	$466,800	$16,183.96	
F250738	$   62,000	$   57,000	$  5,000	$   173.35	
F250739	$   70,500	$   63,000	$  7,500	$   260.03	


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 and the Massachusetts courts rely upon three approaches to determine fair cash value of property:  income capitalization, sales comparison, and cost reproduction.  Correia v. New Bedford Redevelopment, 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), but 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).  Moreover, use of the income capitalization method 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 (1942).  "The income capitalization method is also appropriate for valuing real estate improved with a hotel."  Analogic Corporation, 25 Mass. App. Tax Bd. Rep. 473, 485 (1999)(citation omitted).  See also Cambridge Hyatt Joint Venture v. Assessors of Cambridge, 12 Mass. App. Tax Bd. Rep. 153, 172 (1990).  Under the income capitalization approach, valuation is determined by dividing net operating income by a capitalization rate.  See Assessors of Brookline v. Buehler, 396 Mass. 520, 522-23 (1986).  Net operating income is obtained by subtracting expenses from gross income.  Id. at 523.  
In these appeals, the Board found and ruled that the capitalization of the net income of the hotel, an approach relied on by both the appellant and the Assessors, was the best method for determining the fair cash value of the subject property.  The income stream used in the capitalization of income method must reflect the property's earning capacity or market rental value.               Pepsi-Cola Bottling, 397 Mass. at 451.  In the instant appeals, the appellant's expert relied upon the property's actual income, whereas the Assessor's expert relied upon generalized market data and extrapolations, and an assumed occupancy rate.  Based on the unique characteristics of the Hawthorne Hotel and its large food and beverage sales, compared to industry trends, the Board found that the actual income, as reported in the appellant's answers to interrogatories, best reflected the property's earning capacity.  
With respect to the operating expenses, Mr. Gasperoni testified that he based his figures on those reported to him by the appellant.  Notably, the majority of the figures corresponded to the appellant's answers to interrogatories, with several exceptions.  Mr. Mulhern, on the other hand, based his figures on industry averages for larger national hotels, despite the size and unique character of the Hawthorne Hotel.  Based on the evidence presented, the Board again found that the figures used by the appellant's expert, with some minor changes to better correlate to the appellant's answers to the interrogatories, were the best indicators of market expenses.  Accordingly, the Board used the appellant's actual expenses as reported by Mr. Gasperoni or in the appellant's answers to interrogatories in its income capitalization methodology.
The Board also considered the methodologies used by both Mr. Gasperoni and Mr. Mulhern to calculate a return on the FF&E.  "The return on the FF&E reflects the owner's cost of capital and is used with the current market value of the FF&E in place."  Hotels and Motels at 240.  The Board found that in his calculations, Mr. Gasperoni erroneously used eighty-nine rooms, where only seventy-nine rooms were in use, and also found that he used an equity yield rate rather than the more appropriate direct capitalization rate.  The Board also found that in his calculations, Mr. Mulhern used an excessive per room value for FF&E of $5,000 and a "safe" rate of return of only eight-percent.  The Board instead found that the more conservation per room value for FF&E of $4,000 was appropriate, multiplied by seventy-nine rooms with a ten-percent rate of return.  In his development of a capitalization rate, Mr. Gasperoni indicated that the prevailing mortgage interest rates for the years at issue ranged from 9.5 percent to 11.5 percent.  Based on this data, Mr. Gasperoni used an interest rate of ten-percent for the years at issue.  In determining his capitalization rate, Mr. Mulhern used an interest rate of 10.25 percent for the years at issue.  Based on these reports, the Board found that ten-percent was an appropriate rate of return. According to Hotels and Motels, "the percentage rate of return on personal property should reflect the cost of the capital commonly used to purchase FF&E."  Hotels and Motels at 245.  The Board further found that Mr. Gasperoni's method for calculating an expense for the return of FF&E, a percentage of gross income, was appropriate.  The Board further found that his use of 2.5 percent, compared to the industry standards of three- to five-percent was appropriate in light of the hotel's small size and the large revenues generated from food and beverage sales.  See Hotels and Motels at 240 ("A reserve for replacement allowance can be estimated . . . as a percentage of the gross revenue.").
Finally, in determining what capitalization rate to use in its income-capitalization approach, the Board relied on the underlying data and information provided by the appellant's expert appraiser in his appraisal report.  The Board determined that the overall capitalization rates, including the applicable tax factor, used by Mr. Gasperoni in his appraisal report, .1364 for fiscal year 1997 and .1360 for fiscal year 1998, were the most appropriate to use in these appeals.  
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 Associates v. Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp. v. Assessors of Boston, 383  Mass. 456, 473 (1981); New England Oyster House, Inc., 362 Mass. at 701-702.  In evaluating the evidence before it, the Board selected among the various elements of value and formed its own independent judgment of fair cash value.  General Electric v. Assessors of Lynn, 393 Mass. 591, 605 (1984); 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 Consolidated Gas Co., 309 Mass. at 72.  "The credibility of witnesses, the weight of 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 an abatement of the tax.  Schlaiker v. Assessors of Great Barrington, 356 Mass. 243, 245 (1974).  In the present appeals, the Board ruled that the appellant failed to meet its burden of proving that the subject property was overvalued in fiscal year 1997.  The Board found that even by using the appellant's answers to the interrogatories together with his appellant's expert's methodology and many of his assumptions for FF&E, as well as his capitalization rates that the value of the subject property exceeded the assessment for fiscal year 1997.

     The Board further ruled that the appellant did meet its burden of proving that the subject property was overvalued for fiscal year 1998.  Based on the evidence, the Board found that the total value for all three parcels with improvements that comprised the hotel was $3,000,000, which was less than the assessment, therefore, the Board granted appropriate abatements for fiscal year 1998 in proportion to the parcels' assessed values.


                         
                          THE APPELLATE TAX BOARD



                       By:				_______ 
                          Abigail A. Burns, Chairman



A true copy,

Attest:					
    Clerk of the Board

 For fiscal year 1997, the appellant filed one appeal, docket number F240992, that incorporated all three parcels.  For fiscal year 1998, the appellant filed three separate appeals for each of the three parcels.
 The Supreme Judicial Court held in Becton, Dickinson & Co. v. State Tax Commission, 374 Mass. 230, 234 (1978), that prematurity in filing an appeal is not fatal to the Board's jurisdiction.  See also Coldwater Seafood Corp. v. Assessors of Everett, 23 Mass. App. Ct. 1102 (1986).  The Courts and this Board have applied this concept consistently to petitions filed prematurely.  Daniels v. Assessors of Everett, 12 Mass. App. Tax Bd. Rep. 80, 89 (1990); Field Corner Plate Glass Co. v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 157, 162 (1994); Iacaboni v. Commissioner of Revenue, 19 Mass. App. Tax Bd. Rep. 103, 104 (1996); Gaston v. Commissioner of Revenue, 21 Mass. App. Tax Bd. Rep. 103, 105 fn. 5 (1997); Healthrax Intern. v. Assessors of Hanover, 2001 ATB Adv. Sh. 366, 389 (2001). 
 According to the two Noblin reports, the cost of recommended exterior and interior repairs totaled between approximately $2.6 million and $2.9 million.
This figure includes $1,600,000 for planned capital costs.
  Mr. Mulhern does not explain how he arrived at his "% of Total" figures or their significance and the Board did not adopt or rely on these percentages.
 The Board computed the tax abatements using a tax rate of $34.67 per-thousand.

ATB 2002-58