F310688; F314780; F314783; F314782; F310689; F314781; F310690; F310691; F310692; F314784

Texto completo

COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD

PORTER SQUARE EQUITY PARTNERS 2, LLC; v. BOARD OF ASSESSORS OF
KSKIM PORTER UNIT 2 EQUITY PARTNERS, LLC; THE CITY OF CAMBRIDGE
and 5 KSKIM PORTER EQUITY PARTNERS, LLC

Docket Nos. F310688-92 (FY 2011)
F314780-84 (FY 2012) Promulgated:
June 8, 2016

These are appeals under the formal procedure pursuant to G.L. c. 58A, § 7, G.L. c. 59, §§ 64 and 65, and 831 CMR 1.03 and 1.04, from the refusal of the Board of Assessors of the City of Cambridge (the "assessors" or "appellee") to abate taxes on five commercial condominium units (the "subject units") which comprise the Porter Square Galleria located at 822 Somerville Avenue in the City of Cambridge (collectively, the "subject property") and are owned by and assessed to related parties named Porter Square Equity Partners 2, LLC, KSKIM Porter Unit 2 Equity Partners, LLC, and 5 KSKIM Porter Equity Partners, LLC (the "appellants") under G.L. c. 59, §§ 11 and 38 for fiscal years 2011 and 2012.
Commissioner Rose heard these appeals. Chairman Hammond and Commissioners Scharaffa and Good joined him in the decisions for the appellants in docket numbers F310688-92, F314780-81, and F314783-84, and the decision for the appellee in docket number F314782.
These findings of fact and report are made pursuant to the appellee's request under G.L. c. 58A, § 13 and 831 CMR 1.32.

Ellen M. Hutchinson, Esq., Henry G. Kara, Esq. and Andrew H. Kara, Esq. for the appellants.

Anthony M. Ambriano, Esq. for the appellee.

FINDINGS OF FACT AND REPORT
The appellants presented their case-in-chief through the subpoenaed testimony of Lillian Orchard, Cambridge's Commercial Review Appraiser, and the testimony of their real estate valuation expert, Emmet T. Logue, along with the introduction of various documents into evidence, including the assessors' fiscal year 2011 and 2012 income valuation cards for the subject property and units, floor plans for the subject property, an historical market vacancy rate chart, and Mr. Logue's appraisal report. The assessors' case-in-chief consisted of the testimony of their real estate valuation expert, Steven R. Foster, and the submission into evidence of several documents, including the requisite jurisdictional documents, excerpts from two appraisal reports, and Mr. Foster's appraisal reports and errata.
Based on this evidence, as well as its view of the subject property, the surrounding area, and several purportedly comparable properties, the Appellate Tax Board (the "Board") made the following findings of fact.
Introduction and Jurisdiction
On January 1, 2010 and January 1, 2011, the appellants were the assessed owners of the five subject units which comprised the property known as the Porter Square Galleria. This small shopping mall is located in the Porter Square area of northern Cambridge, across White Street from the Porter Square Shopping Center, opposite the MBTA Porter Square Red Line and Fitchburg Commuter Rail Station situated at the intersection of Massachusetts and Somerville Avenues, and near the Somerville city line. For assessment, real estate tax, and appeal purposes, the subject units are owned and identified as summarized in the following table.
Designation
Owner FY 2011 FY 2012 Parcel
Unit 1 Porter Square Equity Partners 2, LLC F310688 F314780 152-25-1
Unit 2 KSKIM Porter Unit 2 Equity Partners, LLC F310689 F314781 152-25-2
Unit 3 KSKIM Porter Equity Partners, LLC F310690 F314782 152-25-3
Unit 4 KSKIM Porter Equity Partners, LLC F310691 F314783 152-25-4
Unit 5 KSKIM Porter Equity Partners, LLC F310692 F314784 152-25-5

The site associated with the subject property contains approximately 50,719 square feet, and it has frontage along Somerville Avenue, White Street, and White Place. The parcel is improved with a two-story, tri-level building which has an attached parking structure and additional parking on an adjoining lot for a total of about 90 parking spaces. The building was constructed in 1988 and has been well maintained. It contains approximately 54,265 square feet of rentable space of which 16,500 square feet is in the lower level, 18,162 square feet is in the main level, and 19,603 square feet is in the upper level. The following table summarizes the subject units' area, location, number of variable-sized tenant spaces, and interest in the condominium during the relevant time period.

Designation

Area (SF) Location
By Level Number of Tenant Spaces Interest in Condominium
Unit 1 16,500 Lower 1 33%
Unit 2 9,175 Main 2 16%
Unit 3 6,813 Main & Upper 6 12%
Unit 4 6,238 Main & Upper 1 11%
Unit 5 15,539 Upper 5 28%
Total 54,265 15 100%

A three-story atrium is located in the center of the building. As of the relevant assessment dates, the building had some structural obsolescence, including poor illumination and lack of natural sunlight, as well as an ascending escalator from the main level to the upper level but no descending escalator, a small elevator located in the rear of the building accessing all three levels, and one central stairway plus a small one in the back of the building.
The real estate valuation experts agreed that the Porter Square neighborhood is a desirable commercial/retail district with a substantial population density which includes a high concentration of college students and young professionals. Moreover, during the relevant time period, despite some difficult economic times in other parts of the state, the supply and demand for retail/commercial property in Porter Square did not vary dramatically, and, therefore, rents and market values did not experience the same level of downward pressure as those in less desirable areas. Furthermore, the experts concurred that throughout the relevant time period, retail/commercial rents and market conditions remained stable in the Porter Square area.
For the fiscal years at issue, the assessors valued the subject units and assessed real estate taxes as summarized in the following table.
Desig-nation FY 2011
Assessment FY 2011
Tax Rate FY 2011
Taxes FY 2012 Assessment FY 2012 Tax Rate FY 2012 Taxes
Unit 1 $ 2,953,100 $19.90 $ 58,766.69 $ 2,953,100 $20.76 $ 61,306.36 Unit 2 $ 3,372,100 " $ 67,104.79 $ 3,372,100 " $ 70,004.80 Unit 3 $ 2,412,000 " $ 47,998.80 $ 2,412,000 " $ 50,073.12 Unit 4 $ 2,075,200 " $ 41,296.48 $ 1,976,400 " $ 41,030.06 Unit 5 $ 4,567,100 " $ 90,885.29 $ 4,567,100 " $ 94,813.00 Total $15,379,500 $19.90 $306,052.05 $15,280,700 $20.76 $317,227.34
In accordance with G.L. c. 59, § 57, the appellants timely paid these taxes without incurring interest. Based on that finding and on the jurisdictional information summarized in the following table, the Board found and ruled that, in accordance with G.L. c. 59, §§ 59, 64 and 65, it had jurisdiction to hear and decide these appeals.

Tax Bills
Mailed Abatement Applications Filed Abatement Applications Denied Petitions Filed

Fiscal Year 2011 10/22/2010 11/16/2010 01/07/2011 03/31/2011
Fiscal Year 2012 10/21/2011 11/16/2011 12/02/2011 02/07/2012

Methodology Employed By Appellant's Real Estate Valuation Expert
The Board qualified Emmet T. Logue as an expert in commercial real estate appraising. In his appraisal report and testimony, Mr. Logue described his inspection and investigation of the subject property, its surrounding area, and what he considered to be comparable properties; his review of the assessors' records, zoning by-laws and other land use controls, utilities and various publicly available and subscription databases; his conversations with the owners and representatives of the subject property, real estate brokers, and other individuals familiar with subject property, purportedly comparable properties, and the market; his analysis of the actual rental terms, income, occupancy, and expenses, and those of purportedly comparable properties; and his review of current economic and market conditions, as well as market trends affecting Cambridge and the local commercial real estate market for properties like the subject property.
To carry out his valuation assignment, Mr. Logue first analyzed the subject property's highest-and-best use, which he determined was how it had been historically operated - as a multi-tenanted retail/commercial building, which was operated as a single entity but owned as five commercial condominium units by related entities. To estimate the value of the subject property, Mr. Logue considered the three basic approaches to value and ultimately relied on an income-capitalization methodology because of the income-producing nature of the subject property and "the availability of sufficient market evidence upon which to base estimates of value." He eschewed sales-comparison and cost approaches because of a lack of market data for the former and the degree of speculation required for the latter.
Mr. Logue's income-capitalization methodology consisted of essentially four steps: (1) estimating the potential gross income (the "PGI"), vacancy, and effective gross income (the "EGI"); (2) estimating the fixed and variable operating expenses; (3) estimating the stabilized net income; and (4) selecting an appropriate capitalization method and technique and then capitalizing the estimated net-operating income at an appropriate rate to arrive at an estimate of value.
To estimate the subject property's potential gross income, consisting of market rent for the retail and commercial service space in the subject property as of the relevant valuation and assessment dates, Mr. Logue analyzed the subject property's rent rolls and leases, as well as those for what he considered to be comparable properties and spaces in Cambridge and Boston during the relevant time periods. He also engaged in discussions with knowledgeable brokers and property owners operating within the Cambridge market. Mr. Logue determined that retail space on the lower and second levels of the subject property would rent for approximately 50% and 20%-30% less than that on the main level, respectively, and the space toward the front of the building would rent for more than that toward the rear. He also identified a slightly inferior comparable space to determine a rent for the space in the subject property which was leased for the ATM. Based on this research, he estimated triple net market rents for the subject property as shown in the table below.
Designation Level Area (SF) Rent/SF

Unit 1 Lower 16,500 $16.00
Unit 2 Main 9,175 $32.00
Unit 3 Main (ex. ATM) 6,733 $30.00
Unit 3 Main ATM 80 $35,000
Unit 4 Main/Upper 6,238 $24.00
Unit 5 Upper 15,539 $21.00
Total 54,265

These rents produced a PGI of $1,270,621 for each of the fiscal years at issue.
For vacancy and rent loss, Mr. Logue analyzed the subject property's rent rolls, which revealed a 10% to 30% vacancy for the rentable area for the relevant time period, and industry survey reports, which indicated a direct vacancy rate of 4.8% to 5.5% in Cambridge for the relevant time period. Based upon his analysis of the retail market characteristics and trends in Cambridge during the relevant time period and considering the occupancy history of the subject property, Mr. Logue concluded that a realistic stabilized allowance for vacancy and credit loss for fiscal years 2011 and 2012 was 10%. Applying this allowance to his PGI resulted in an EGI of $1,143,599 for each of the fiscal years at issue.
To ascertain stabilized annual operating expenses for the subject property, Mr. Logue analyzed its and other area retail/commercial buildings' actual expenses for the relevant time period. Based on this information, he concluded that a realistic allowance for stabilized annual operating expenses, including a management fee, was $8.25 per square foot, which he only applied to the vacant space because of the triple-net leasing scenario under which the subject property operated. This estimate resulted in total operating expenses of $44,769 for each of the fiscal years at issue.
Mr. Logue calculated his brokerage commission estimate of $0.47 per square foot on an assumed 50% rollover to a new tenant on an 18% commission for a five-year lease, which he annualized and rounded to 2%. This estimate resulted in a total brokerage commission expense of $25,412 for each of the fiscal years at issue.
Mr. Logue's annualized $0.30 per-square-foot reserve for short-lived real estate items was premised on the building's average to good condition, an impending need to soon replace an older roof and HVAC unit, and deferred maintenance involving the parking structure and fire panel, as well as industry surveys reporting replacement reserves in the $0.10 to $0.30 per-square-foot range. This estimate resulted in a total reserve for replacement of short-lived real estate items of $16,280 for each of the fiscal years at issue.
By subtracting all of these categories of expenses which totaled $86,461 from his EGI of $1,143,559, Mr. Logue calculated a net-operating income (the "NOI") of $1,057,098 for each of the fiscal years at issue.
Mr. Logue estimated his capitalization rate using several sources. First, he synthesized rates of 8.7% for fiscal year 2011 and 8.1% for fiscal year 2012 using the Mortgage Equity Technique in which he assumed a 65% loan amortized over 20 years with a 5.5% and 5.25% nominal interest rate for fiscal years 2011 and 2012, respectively, and an equity yield rate of 15% and 14% for fiscal years 2011 and 2012, respectively, along with a 10-year holding period and 15% appreciation adjustment. Mr. Logue also reviewed the PwC Real Estate Investor Survey for institutional and non-institutional grade investment properties which reported the capitalization rates reflected below.

Quarter Average Institutional Average
Non-Institutional

First Quarter - 2010 8.49% 11.49%
First Quarter - 2011 7.40% 9.90%

Using his synthesized rates along with this industry data, and also drawing on his experience in appraising the fee simple interest of what he considered to be comparable retail/commercial buildings, Mr. Logue concluded that realistic capitalization rates for fiscal years 2011 and 2012 were 8.75% and 8.00%, respectively, to which he then added pro-rated tax factors of 0.199% and 0.208%, respectively. By dividing his capitalization rates into his NOIs, he estimated that the values of the subject property were $11,812,475 for fiscal year 2011, which he rounded to $11,800,000, and $12,879,506 for fiscal year 2012, which he rounded to $12,900,000. Mr. Logue's income-capitalization methodology for valuing the subject property for the fiscal years at issue is reproduced in the following table.

Mr. Logue's Income-Capitalization Methodology
for the Subject Property
for Fiscal Years 2011 and 2012

INCOME:

Square Footage ("SF")
($)/SF
Annual Rent ($)

Unit 1 - Lower Level 16,500 16.00 264,000
Unit 2 - Main Level 9,175 32.00 293,600
Unit 3 - Main Level 6,733 30.00 201,990
Unit 3 - ATM 80 35,000
Unit 4 - Main/Upper Level 6,238 24.00 149,712
Unit 5 - Upper Level 15,539 21.00 326,319
Total Square Footage 54,265

PGI 1,270,621

Vacancy & Credit Loss 10% (127,062)

EGI 1,143,559

EXPENSES:

Operating Expenses (applied only to vacant space) $8.25/SF (44,769)
Brokerage Commission 2.00% (25,412)
Reserves for Replacement $0.30/SF (16,280)

Total Expenses (86,461)

NET-OPERATING INCOME: 1,057,098

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 8.750%
Prorated Tax Factor 0.199%
Total Rate 8.95%

INDICATED VALUE: 11,812,475

ROUNDED VALUE: 11,800,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 8.000%
Prorated Tax Factor 0.208%
Total Rate 8.208%

INDICATED VALUE: 12,879,506

ROUNDED VALUE: 12,900,000

As of the valuation and assessment dates for the fiscal years at issue - January 1, 2010 and January 1, 2011 - the subject property was organized and assessed as five condominium units that were owned by three affiliated entities. Accordingly, Mr. Logue completed his assignment by valuing each of the subject units individually for each of the fiscal years at issue using essentially the same metrics, determinations, and conclusions upon which he relied in valuing the subject property as a single entity. His methodologies for valuing each of the subject units for each of the fiscal years at issue are summarized in the five tables which follow.

Mr. Logue's Income-Capitalization Methodology for Unit 1
for Fiscal Years 2011 and 2012

INCOME:

Square Footage ("SF")

($)/Square Foot

Annual Rent ($)

Unit 1 16,500 16.00 264,000

PGI 264,000

Vacancy and Credit Loss 15% (39,600)

EGI 224,400

EXPENSES:

Operating Expenses (applied only to vacant space) $8.25/SF (20,419)
Brokerage Commission 2.00% ( 5,280)
Reserves for Replacement $0.30/SF ( 4,950)

Total Expenses (30,649)

NET-OPERATING INCOME: 193,751

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 8.750%
Prorated Tax Factor 0.299%
Total Rate 9.049%

INDICATED VALUE: 2,141,253

ROUNDED VALUE: 2,140,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 8.000%
Prorated Tax Factor 0.311%
Total Rate 8.311%

INDICATED VALUE: 2,331,151

ROUNDED VALUE: 2,330,000

Mr. Logue's Income-Capitalization Methodology for Unit 2
for Fiscal Years 2011 and 2012

INCOME:

Square Footage ("SF")

($)/Square Foot

Annual Rent ($)

Unit 2 9,175 32.00 293,600

PGI 293,600

Vacancy and Credit Loss 8% (23,488)

EGI 270,112

EXPENSES:

Operating Expenses (applied only to vacant space) $8.25/SF (6,056)
Brokerage Commission 2.00% ( 5,872)
Reserves for Replacement $0.30/SF ( 2,753)

Total Expenses (14,680)

NET-OPERATING INCOME: 255,432

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 8.750%
Prorated Tax Factor 0.159%
Total Rate 8.909%

INDICATED VALUE: 2,867,059

ROUNDED VALUE: 2,870,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 8.000%
Prorated Tax Factor 0.166%
Total Rate 8.166%

INDICATED VALUE: 3,127,963

ROUNDED VALUE: 3,130,000

Mr. Logue's Income-Capitalization Methodology for Unit 3
for Fiscal Years 2011 and 2012

INCOME:

Square Footage ("SF")

($)/Square Foot

Annual Rent ($)

Unit 3 (excluding ATM) 6,733 30.00 201,990
ATM 80 35,000

PGI 236,990

Vacancy and Credit Loss 8% (18,959)

EGI 218,031

EXPENSES:

Operating Expenses (applied only to vacant space) $8.25/SF (4,497)
Brokerage Commission 2.00% ( 4,740)
Reserves for Replacement $0.30/SF ( 2,044)

Total Expenses (11,280)

NET-OPERATING INCOME: 206,751

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 8.750%
Prorated Tax Factor 0.159%
Total Rate 8.909%

INDICATED VALUE: 2,320,641

ROUNDED VALUE: 2,320,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 8.000%
Prorated Tax Factor 0.166%
Total Rate 8.166%

INDICATED VALUE: 2,531,821

ROUNDED VALUE: 2,530,000

Mr. Logue's Income-Capitalization Methodology for Unit 4
for Fiscal Years 2011 and 2012

INCOME:

Square Footage ("SF")

($)/Square Foot

Annual Rent ($)

Unit 4 6,238 24.00 149,712

PGI 149,712

Vacancy and Credit Loss 8% (11,977)

EGI 137,735

EXPENSES:

Operating Expenses (applied only to vacant space) $8.25/SF (4,117)
Brokerage Commission 2.00% ( 2,994)
Reserves for Replacement $0.30/SF ( 1,871)

Total Expenses (8,983)

NET-OPERATING INCOME: 128,752

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 8.750%
Prorated Tax Factor 0.159%
Total Rate 8.909%

INDICATED VALUE: 1,445,161

ROUNDED VALUE: 1,450,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 8.000%
Prorated Tax Factor 0.166%
Total Rate 8.166%

INDICATED VALUE: 1,576,672

ROUNDED VALUE: 1,580,000

Mr. Logue's Income-Capitalization Methodology for Unit 5
for Fiscal Years 2011 and 2012

INCOME:

Square Footage ("SF")

($)/Square Foot

Annual Rent ($)

Unit 5 15,539 21.00 326,319

PGI 326,319

Vacancy and Credit Loss 10% (32,632)

EGI 293,687

EXPENSES:

Operating Expenses (applied only to vacant space) $8.25/SF (12,820)
Brokerage Commission 2.00% ( 6,526)
Reserves for Replacement $0.30/SF ( 4,662)

Total Expenses (24,008)

NET-OPERATING INCOME: 269,679

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 8.750%
Prorated Tax Factor 0.199%
Total Rate 8.949%

INDICATED VALUE: 3,013,514

ROUNDED VALUE: 3,010,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 8.000%
Prorated Tax Factor 0.208%
Total Rate 8.208%

INDICATED VALUE: 3,285,727

ROUNDED VALUE: 3,290,000

Mr. Logue's valuations for the individual condominium units for the fiscal years at issue are summarized in the following table.
Designation
Rentable Area Fiscal Year 2011 Fiscal Year 2012
Unit 1 16,500 SF $ 2,140,000 $ 2,330,000
Unit 2 9,175 SF $ 2,870,000 $ 3,130,000
Unit 3 6,813 SF $ 2,320,000 $ 2,530,000
Unit 4 6,238 SF $ 1,450,000 $ 1,580,000
Unit 5 15,539 SF $ 3,010,000 $ 3,290,000
Total 54,265 SF $11,790,000 $12,860,000

Appellants' Other Witness
The appellants also called Lillian Orchard, the Commercial Review Appraiser for Cambridge, as a witness. She described her job as analyzing 38D submissions and sales of commercial and industrial properties within the city and, based on information gleaned from those, establishing economic trends, rents, vacancies, expenses, and capitalization rates for review by the assessors and implementation in city's mass appraisal system. In her testimony, she explained the derivation of the components on the subject condominium units' income valuation property record cards on which the assessments for the fiscal years at issue were founded. Essentially, she assigned each of the subject units a base triple-net rent of $34.00 which she had determined was typical of Porter Square commercial retail properties for the fiscal years at issue. She then adjusted that base rent to account for the particular subject unit's location within the subject property and relative quality or condition. The following table summarizes those rents.
Designation Fiscal Year 2011 Fiscal Year 2012
Unit 1 $16.58 $16.58
Unit 2 $37.40 $37.40
Unit 3 $37.40 $37.40
Unit 4 $35.70 $34.00
Unit 5 $29.92 $29.92

Ms. Orchard then assigned a vacancy rate of 5% and expenses of 11% to all of the subject units. The income valuation property record cards indicated that the capitalization rates were 0.0800 for Units 2, 3, 4, and 5, and 0.0864 for Unit 1, the only unit composed of lower-level or below-grade space.
Methodology Employed By Assessors' Real Estate Valuation Expert
The Board qualified the assessors' real estate valuation witness, Steven R. Foster, as an expert in commercial real estate valuation. Mr. Foster is a Senior Vice President of LPC Commercial Services, Inc., which does business under the name of Lincoln Property Company. To fulfill his assignment, Mr. Foster reported that he collected relevant public information about and inspected the subject property. He also received information from the assessors and the tenants in and owners of the subject property. He reported that he reviewed secondary sources for information on economic and real estate market trends at the national, regional, and local levels, and interviewed market participants and verified comparable sales and leasing data with parties and public records. To estimate the subject property's value for the fiscal years at issue, Mr. Foster, similar to Mr. Logue, first determined that the subject property's highest-and-best use was a "continuation of the current use with retail use." When he attempted to develop a value using a sales-comparison technique, he was stymied by a lack of relevant sales data and, therefore, abandoned that approach. He did not seriously consider using a cost approach because the subject property and subject units were not special purpose property, and the far more viable and appropriate technique for developing a value for this income-producing property was, in his opinion, an income-capitalization methodology. Consequently, Mr. Foster relied exclusively on an income-capitalization approach as his sole methodology for estimating values for the subject property and subject units for the fiscal years at issue.
In his income-capitalization methodology, Mr. Foster first determined what he considered to be appropriate market rents by analyzing the subject property's actual rents during and subsequent to the relevant valuation and assessment dates and those in two nearby similarly sized shopping centers and along Massachusetts Avenue, as well as in Harvard and Davis Square and in Arlington. Relying primarily on the subject property's actual leases, including the so-called Walgreen's lease which was consummated approximately 9 months after January 1, 2011, the valuation and assessment date for fiscal year 2012, the latest fiscal year at issue in these appeals, Mr. Foster arrived at suggested rents as reproduced in the following table.
Floor
Square Footage Fiscal Year 2011 Fiscal Year 2012
Basement 16,500 $17.00 $17.00
First 17,446 $37.50 $37.50
Second 20,239 $29.00 $29.00

For the 80-square-foot ATM space, Mr. Foster reported that he used the actual rent paid by Sovereign Bank, which equated to $220 per square foot. These rents produced a gross potential income of $1,539,256 for both fiscal years at issue.
Mr. Foster then applied a vacancy rate of 7.5%, which resulted in an effective gross income of $1,423,812. Mr. Foster chose this rate because, in his opinion, it more closely reflected area market rates, ranges published in industry surveys, such as the PWC/Korpacz survey, and the actual long-term stabilized rate for the subject property. Mr. Foster calculated his net-operating income of $1,369,547, by subtracting from his effective gross income non-recoverable expenses of $54,265 which he placed at $1.00 per square foot after completing an analysis of the subject property's operating expenses and reimbursements over a four-year period under its triple-net leasing scenario. Mr. Foster estimated reserves for replacement, leasing commissions, and tenant improvements at around $3.00 per square foot per year, but did not include them as specific deductions in his methodology. Rather, he reported that these expenses are subsumed in the capitalization rates that he selected - 7.25% for fiscal year 2011 and 6.75% for fiscal year 2012 - which he based on sales and ranges in the PWC Real Estate Investor Survey and subsequently checked with rates that he synthesized using band of investment and mortgage equity techniques. By dividing his capitalization rates into his net income amount, Mr. Foster calculated indicated values for the subject property of $18,890,301 for fiscal year 2011 and $20,289,582 for fiscal year 2012.
In valuing each of the subject units using income-capitalization methodologies, Mr. Foster relied on most of the underlying determinations that he had made in his income-capitalization methodology for estimating the value of the subject property. He did, however, use the square-foot measurements in the subject units' property record cards, as opposed to their rentable areas determined through the leases, which he had used in his income-capitalization methodology for the subject property. He adjusted the rents to account for this discrepancy. The indicated values that he developed for the subject units are summarized in the following table.

Designation Fiscal Year 2011 Fiscal Year 2012
Unit 1 $3,348,356 $3,596,383
Unit 2 $4,344,927 $4,666,773
Unit 3 $3,107,812 $3,338,020
Unit 4 $2,304,986 $2,475,726
Unit 5 $5,605,378 $6,020,591

Mr. Foster's income-capitalization methodologies for the subject property and for each of the subject units are reproduced in the tables below.
Mr. Foster's Income-Capitalization Methodology
for the Subject Property
for Fiscal Years 2011 and 2012

Fiscal Year 2011 Fiscal Year 2012
Market Rent
Basement 16,500 SF $17.00 $17.00
First Floor 17,446 SF $37.50 $37.50
Second Floor 20,239 SF $29.00 $29.00
ATM 80 SF $220.00 $220.00
54,265 SF

Vacancy & Collection Loss 7.50% 7.50%

Operating Cost PSF $1.00 $1.00

Capitalization Rate
Base Rate
Tax Factor
Loaded Rate
7.25%
0.00%
7.25%
6.75%
0.00%
6.75%

Gross Potential Income
Basement Level
Small Space
Walgreens
Sovereign ATM
Total Gross Income
$ 280,500
$ 654,225
$ 586,931
$ 17,600
$1,539,256
$ 280,500
$ 654,225
$ 586,931
$ 17,600
$1,539,256

Vacancy & Collection Loss minus $ 115,444 $ 115,444

Effective Gross Income $1,423,812 $1,423,812

Operating Cost minus $ 54,265 $ 54,265

Net Income Before RE Taxes $1,369,547 $1,369,547

Capitalization Rate 7.25% 6.75%

Indicated Value $18,890,301 $20,289,582
Mr. Foster's Income-Capitalization Methodology
for Unit 1
for Fiscal Years 2011 and 2012

Fiscal Year 2011 Fiscal Year 2012
Market Rent
Basement 18,201 SF $15.50 $15.50

Vacancy & Collection Loss 7.50% 7.50%

Operating Cost PSF $1.00 $1.00

Capitalization Rate
Base Rate
Tax Factor
Loaded Rate
7.25%
0.00%
7.25%
6.75%
0.00%
6.75%

Gross Potential Income
Base Rent
Other Income
Total Gross Income
$ 282,116
$ 0
$ 282,116
$ 282,116
$ 0
$ 282,116

Vacancy & Collection Loss minus $ 21,159 $ 21,159

Effective Gross Income $ 260,957 $ 260,957

Operating Cost minus $ 18,201 $ 18,201

Net Income Before RE Taxes $ 242,756 $ 242,756

Capitalization Rate 7.25% 6.75%

Indicated Value $3,348,356 $3,596,383

Mr. Foster's Income-Capitalization Methodology
for Unit 2
for Fiscal Years 2011 and 2012

Fiscal Year 2011 Fiscal Year 2012
Market Rent
First Floor 8,531 SF $41.00 $41.00

Vacancy & Collection Loss 7.50% 7.50%

Operating Cost PSF $1.00 $1.00

Capitalization Rate
Base Rate
Tax Factor
Loaded Rate
7.25%
0.00%
7.25%
6.75%
0.00%
6.75%

Gross Potential Income
Base Rent
Other Income
Total Gross Income
$ 349,771
$ 0
$ 349,771
$ 349,771
$ 0
$ 349,771

Vacancy & Collection Loss minus $ 26,233 $ 26,233

Effective Gross Income $ 323,538 $ 323,538

Operating Cost minus $ 8,531 $ 8,531

Net Income Before RE Taxes $ 315,007 $ 315,007

Capitalization Rate 7.25% 6.75%

Indicated Value $4,334,927 $4,666,773

Mr. Foster's Income-Capitalization Methodology
for Unit 3
for Fiscal Years 2011 and 2012

Fiscal Year 2011 Fiscal Year 2012
Market Rent
First Floor 6,102 SF $41.00 $41.00

Vacancy & Collection Loss 7.50% 7.50%

Operating Cost PSF $1.00 $1.00

Capitalization Rate
Base Rate
Tax Factor
Loaded Rate
7.25%
0.00%
7.25%
6.75%
0.00%
6.75%

Gross Potential Income
Base Rent
Other Income
Total Gross Income
$ 250,182
$ 0
$ 250,182
$ 250,182
$ 0
$ 250,182

Vacancy & Collection Loss minus $ 18,764 $ 18,764

Effective Gross Income $ 231,418 $ 231,418

Operating Cost minus $ 6,102 $ 6,102

Net Income Before RE Taxes $ 225,316 $ 225,316

Capitalization Rate 7.25% 6.75%

Indicated Value $3,107,812 $3,338,020

Mr. Foster's Income-Capitalization Methodology
for Unit 4
for Fiscal Years 2011 and 2012

Fiscal Year 2011 Fiscal Year 2012
Market Rent
First Floor 1,406 SF $41.00 $41.00
Second Floor 4,094 SF $31.50 $31.50
Total 5,500 SF

Vacancy & Collection Loss 7.50% 7.50%

Operating Cost PSF $1.00 $1.00

Capitalization Rate
Base Rate
Tax Factor
Loaded Rate
7.25%
0.00%
7.25%
6.75%
0.00%
6.75%

Gross Potential Income
Base Rent
Other Income
Total Gross Income
$ 186,607
$ 0
$ 186,607
$ 186,607
$ 0
$ 186,607

Vacancy & Collection Loss minus $ 13,996 $ 13,996

Effective Gross Income $ 172,611 $ 172,611

Operating Cost minus $ 5,500 $ 5,500

Net Income Before RE Taxes $ 167,111 $ 167,111

Capitalization Rate 7.25% 6.75%

Indicated Value $2,304,986 $2,475,726

Mr. Foster's Income-Capitalization Methodology
for Unit 5
for Fiscal Years 2011 and 2012

Fiscal Year 2011 Fiscal Year 2012
Market Rent
Second Floor 14,443 SF $31.50 $31.50

Vacancy & Collection Loss 7.50% 7.50%

Operating Cost PSF $1.00 $1.00

Capitalization Rate
Base Rate
Tax Factor
Loaded Rate
7.25%
0.00%
7.25%
6.75%
0.00%
6.75%

Gross Potential Income
Base Rent
Other Income
Total Gross Income
$ 454,955
$ 0
$ 454,955
$ 454,955
$ 0
$ 454,955

Vacancy & Collection Loss minus $ 34,122 $ 34,122

Effective Gross Income $ 420,833 $ 420,833

Operating Cost minus $ 14,443 $ 14,443

Net Income Before RE Taxes $ 406,390 $ 406,390

Capitalization Rate 7.25% 6.75%

Indicated Value $5,605,378 $6,020,591

Based on the indicated values which Mr. Foster derived using his income-capitalization methodologies for the subject property and the subject units, he recommended rounded values for the subject property of $18,900,000 for fiscal year 2011 and $20,300,000 for fiscal year 2012.
Conclusion
The Board agreed with the real estate valuation experts and the assessors that the highest-and-best use for the subject property, which was operated as a single entity but organized as a condominium with five units which were owned by related entities, was its existing use as a multi-tenanted retail/commercial building. The Board further agreed with the parties' real estate valuation experts that income-capitalization methodologies were the most appropriate methods to use for valuing the subject property and the subject units for the fiscal years at issue.
As for a lower-level rent, the Board agreed with both real estate valuation experts that there was scant comparable data for lower level or basement space in the Porter Square area, and therefore, like the assessors' real estate valuation expert, considered the actual $17.00 per square foot, triple-net rent paid by the subject property's tenant, Planet Fitness, to be the best indication of market rent for lower level. The appellants' real estate valuation expert recommended a rent only $1.00 less for this space.
As for main-level rents, the Board disagreed with the assessors' real estate valuation expert regarding the applicability of the rent associated with Walgreen's lease for the fiscal years at issue. The Board found that neither the lease nor the renovations were in effect or complete as of the relevant valuation and assessment dates and, therefore, did not represent the best evidence of rents for the existing space during the relevant time period. Rather, the Board agreed with the appellants' real estate valuation expert that the then existing $33.00 per square foot rent being paid by Pier 1 as a tenant at will was more instructive. Based on that plus other timely market rents in evidence, the Board adopted the appellants' real estate valuation expert's recommended rate of $32.00 per square foot for the space associated with Unit 2, which is oriented toward the front of the subject property facing Porter Square, and $30 per square foot for the space associated with Unit 3, which is oriented toward the rear, darker, and less desirable portion of the subject property. Unit 3 also contained the 80-square-foot ATM space for which the Board adopted the appellants' real estate expert's suggestion of using the actual annual rental amount of $35,000, which is greater than the amount recommended by the assessors' real estate valuation expert.
As for upper-level rents, the Board once again found that the space oriented toward the front of the subject property was superior to that oriented toward the rear. The Board further found that the rent associated with space occupied by nearby Nimah Market, which both real estate valuation experts used as a comparable property, was informative. The Board considered Nimah Market's inferior location without parking to be offset by Unit 4's and Unit's 5 upper-level location. Accordingly, the Board found that $27.00 per square foot was an appropriate rent for front-oriented Unit 4 and $25.00 per square foot for rear-oriented Unit 5.
For vacancy and credit loss, the Board agreed with both real estate valuation experts that the Cambridge retail/commercial market is highly desirable and somewhat recession proof, particularly in and around the Porter Square area. The Board found that the assessors' real estate valuation expert's 7.5% rate for the subject property was supported by market data, as well as the subject property's actual and historical performance. The Board, however, broke this rate down to reflect a more specific vacancy rate for each unit considering their respective locations and competition within the market. The Board also considered the extent to which the recommended rates for each of the units suggested by the appellants' real estate valuation expert varied. On this basis, the Board found that vacancy and credit loss rates of 11% for the lower-level space in Unit 1, 6% for the main-level and front upper-level space in Units 2, 3, and 4, and 7.5% for the rear upper-level space in Unit 5 represented a realistic breakdown of the 7.5% vacancy and credit loss rate for the subject property.
For expenses, the Board was persuaded by the data and rationale presented by the appellants' real estate valuation expert, as well as the subject property's historical performance and triple-net leasing scenario, in adopting his expenses of $8.25 per square foot applied to vacant space only, his 2% brokerage commission, and his $0.30 per square foot for reserves for replacement.
The Board also adopted the base capitalization rates - 8.75% for fiscal year 2011 and 8.00% for fiscal year 2012 - recommended by the appellants' real estate valuation expert because these rates were well supported by relevant sales of similar properties, rates synthesized by the appellants' real estate valuation expert using reasonable assumptions, and published industry surveys for properties similar to the subject property during the relevant time period. The Board found that these rates appropriately reflected the age, tenant mix, design and nature of the subject property. The Board further agreed with the approach utilized by the appellants' real estate valuation expert of adding to his base capitalization rate a pro-rated tax factor to account for real estate taxes paid by the owner because of vacancy and credit loss. The capitalization rates recommended by the assessors' real estate valuation expert were considerably lower - 7.25% for fiscal year 2011 and 6.75% for fiscal year 2012 - than those recommended by the appellant's real estate valuation expert and did not include a pro-rated tax factor. The Board found that these rates represented an overly optimistic view of the subject property's overall desirability and did not adequately consider its design, age, tenant mix, and nature.
The Board's income-capitalization methodologies for the subject property and the subject units are summarized in the following tables.
Board's Income-Capitalization Methodology
for the Subject Property for Fiscal Years 2011 & 2012

INCOME:

Square Footage

($)/Square Foot

Annual Rent ($)

Unit 1 16,500 17.00 280,500
Unit 2 9,175 32.00 293,600
Unit 3 6,733 30.00 201,990
Unit 3 ATM 80 35,000
Unit 4 6,238 27.00 168,426
Unit 5 15,539 25.00 388,475
Total Square Footage 54,265

PGI 1,367,991

Vacancy 7.5% (102,599)

EGI 1,265,392

EXPENSES:

Operating Expenses (applied only to vacant space) 8.25 (33,576)
Brokerage Commission 2.0% (27,360)
Reserves for Replacement 0.30 (16,280)

Total Expenses (77,216)

NET-OPERATING INCOME: 1,188,176

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 0.0875
Prorated Tax Factor 0.0014
Total Rate 0.0889 rounded to 0.0890

INDICATED VALUE: 13,350,292

ROUNDED VALUE: 13,350,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 0.0800
Prorated Tax Factor 0.0016
Total Rate 0.0816

INDICATED VALUE: 14,560,980

ROUNDED VALUE: 14,560,000

Board's Income-Capitalization Methodology
for Unit 1
for Fiscal Years 2011 & 2012

INCOME:

Square Footage

($)/Square Foot

Annual Rent ($)

Unit 1 16,500 17.00 280,500

PGI 280,500

Vacancy 11.00% (30,855)

EGI 249,645

EXPENSES:

Operating Expenses (applied only to vacant space) 8.25 (14,974)
Brokerage Commission 2.0% (5,610)
Reserves for Replacement 0.30 (4,950)

Total Expenses (25,534)

NET-OPERATING INCOME: 224,111

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 0.0875
Prorated Tax Factor 0.0022
Total Rate 0.0889 rounded to 0.0890

INDICATED VALUE: 2,518,101

ROUNDED VALUE: 2,500,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 0.0800
Prorated Tax Factor 0.0023
Total Rate 0.0823

INDICATED VALUE: 2,723,098

ROUNDED VALUE: 2,725,000

Board's Income-Capitalization Methodology
for Unit 2
for Fiscal Years 2011 & 2012

INCOME:

Square Footage

($)/Square Foot

Annual Rent ($)

Unit 2 9,175 32.00 293,600

PGI 293,600

Vacancy 6.00% (17,616)

EGI 275,984

EXPENSES:

Operating Expenses 8.25 (4,542)
Brokerage Commission 2.0% (5,872)
Reserves for Replacement 0.30 (2,753)

Total Expenses (13,167)

NET-OPERATING INCOME: 262,817

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 0.0875
Prorated Tax Factor 0.0012
Total Rate 0.0887

INDICATED VALUE: 2,962,988

ROUNDED VALUE: 2,965,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 0.0800
Prorated Tax Factor 0.0012
Total Rate 0.0812

INDICATED VALUE: 3,236,663

ROUNDED VALUE: 3,235,000

Board's Income-Capitalization Methodology
for Unit 3
for Fiscal Years 2011 & 2012

INCOME:

Square Footage

($)/Square Foot

Annual Rent ($)

Unit 3 6,733 30.00 201,990
ATM 80 35,000

PGI 236,900

Vacancy 6.00% (14,219)

EGI 222,771

EXPENSES:

Operating Expenses 8.25 (3,333)
Brokerage Commission 2.0% (4,740)
Reserves for Replacement 0.30 (2,044)

Total Expenses (10,117)

NET-OPERATING INCOME: 212,654

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 0.0875
Prorated Tax Factor 0.0012
Total Rate 0.0887

INDICATED VALUE: 2,397,452

ROUNDED VALUE: 2,400,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 0.0800
Prorated Tax Factor 0.0012
Total Rate 0.0812

INDICATED VALUE: 2,618,892

ROUNDED VALUE: 2,620,000

Board's Income-Capitalization Methodology
for Unit 4
for Fiscal Years 2011 & 2012

INCOME:

Square Footage

($)/Square Foot

Annual Rent ($)

Unit 4 6,238 27.00 168,426

PGI 168,426

Vacancy 6.00% (10,106)

EGI 158,320

EXPENSES:

Operating Expenses 8.25 (3,088)
Brokerage Commission 2.0% (3,369)
Reserves for Replacement 0.30 (1,871)

Total Expenses (8,328)

NET-OPERATING INCOME: 149,992

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 0.0875
Prorated Tax Factor 0.0012
Total Rate 0.0887

INDICATED VALUE: 1,691,003

ROUNDED VALUE: 1,690,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 0.0800
Prorated Tax Factor 0.0012
Total Rate 0.0812

INDICATED VALUE: 1,847,192

ROUNDED VALUE: 1,850,000

Board's Income-Capitalization Methodology
for Unit 5
for Fiscal Years 2011 & 2012

INCOME:

Square Footage

($)/Square Foot

Annual Rent ($)

Unit 5 15,539 25.00 388,475

PGI 388,475

Vacancy 7.5% (29,136)

EGI 359,339

EXPENSES:

Operating Expenses 8.25 (9,615)
Brokerage Commission 2.0% (7,770)
Reserves for Replacement 0.30 (4,662)

Total Expenses (22,047)

NET-OPERATING INCOME: 337,292

Fiscal Year 2011

CAPITALIZATION RATE:

Overall Rate 0.0875
Prorated Tax Factor 0.0015
Total Rate 0.0890

INDICATED VALUE: 3,789,798

ROUNDED VALUE: 3,790,000

Fiscal Year 2012

CAPITALIZATION RATE:

Overall Rate 0.0800
Prorated Tax Factor 0.0016
Total Rate 0.0816

INDICATED VALUE: 4,133,480

ROUNDED VALUE: 4,135,000

Based on all of the evidence and the foregoing findings, the Board ultimately found that the appellants met their burden of proving that the assessments for fiscal years 2011 and 2012 exceeded the fair cash value of the subject property and the subject units. The Board further found that the fair cash value of the subject property was $13,350,000 for fiscal year 2011 and $14,560,000 for fiscal year 2012 and the fair cash values of the subject units for those fiscal years were as summarized in the following table.
Designation
Fiscal Year 2011 Fiscal Year 2012
Unit 1 $ 2,500,000 $ 2,725,000
Unit 2 $ 2,965,000 $ 3,235,000
Unit 3 $ 2,400,000 $ 2,620,000
Unit 4 $ 1,690,000 $ 1,850,000
Unit 5 $ 3,790,000 $ 4,135,000
Total $13,345,000 $14,565,000

Accordingly, the Board concluded that, with the exception of Unit 3 for fiscal year 2012, the subject units were overvalued for the fiscal years at issue and, therefore, decided these appeals for the appellants and granted tax abatements as summarized in the following two tables.
Fiscal Year 2011

Designation
Assessed Value
Fair Cash Value
Over-Valuation Tax Abatement
@ $19.90/$1,000

Unit 1 S2,953,100 $2,500,000 $453,100 $ 9,287.19
Unit 2 $3,372,100 $2,965,000 $407,100 $ 8,344.33
Unit 3 $2,412,000 $2,400,000 $ 12,000 $ 245.96
Unit 4 $2,075,200 $1,690,000 $385,200 $ 7,895.44
Unit 5 $4,567,100 $3,790,000 $777,100 $15,928.22

Fiscal Year 2012

Designation
Assessed Value
Fair Cash Value
Over-Valuation Tax Abatement
@ $20.76/$1,000

Unit 1 $2,953,100 $2,725,000 $228,100 $4,877.42
Unit 2 $3,372,100 $3,235,000 $137,100 $2,931.58
Unit 3 $2,412,000 $2,620,000 - -
Unit 4 $1,976,400 $1,850,000 $126,400 $2,702.79
Unit 5 $4,567,100 $4,135,000 $432,100 $9,239.51

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). In determining fair market value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered. Newton Girl Scout Council, Inc. v. Massachusetts Turnpike Authy., 335 Mass. 189, 193 (1956); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989). The idea 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). On this basis, the Board found and ruled that the highest-and-best use for the subject property, which was operated as a single entity but organized as a condominium with five units which were owned by related entities, was its existing use as a multi-tenanted retail/commercial building. The parties' real estate valuation experts also valued the subject property and the subject units on this premise.
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. Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). "The [B]oard is not required to adopt any particular method of valuation." Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).
In these appeals, the Board found and ruled that the sales-comparison approach was not an appropriate methodology to use to estimate the value of the subject property because there was not enough market data or relevant evidence of comparable sales upon which to rely to develop a value using this approach. The parties' real estate valuation experts also recognized the lack of information in this regard and did not develop values using this technique.
The Board further found and ruled that "[t]he introduction of evidence concerning the value based on [cost] computations has been limited to special situations in which data cannot be reliably computed under the other two methods." Correia, 375 Mass. at 362. The Board found that no such "special situations" existed here, and, even if they did, there was not enough evidence in the record on which to base a value using a cost approach. Neither party's real estate valuation expert chose this method to estimate the value of the subject property, nor did the parties introduce any direct evidence supporting this technique. Accordingly, the Board found and ruled that this method was not appropriate for valuing the subject property or the subject units for the fiscal years at issue.
The appellants' real estate valuation expert relied on an income-capitalization methodology to estimate the value of the subject property. The assessors' real estate valuation expert also employed an income-capitalization technique. 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 Consol. Gas Co., 309 Mass. 60, 67 (1941). It is also an appropriate technique to use for valuing income-producing property. Id. at 64-65. In these appeals, the Board relied exclusively on the value determined from the income-capitalization methodology because the other approaches were not appropriate, and the method that the Board adopted is how it has historically valued multi-tenanted retail/commercial property or shopping centers. See, e.g., Georgetown Shopping Ctr., LLC v. Assessors of Georgetown, Mass. ATB Findings of Fact and Reports 2015-612, 638-39; 1776 Plaza Ltd. Partnership v. Assessors of Sudbury, Mass. ATB Findings of Fact and Reports 2014-331, 350; Holyoke Shopping Ctr., LLC v. Assessors of Holyoke, Mass. ATB Findings of Fact and Reports 2009-1185, 1195-96, 1199; Three Shopping Ctr., Assocs. v. Assessors of Swansea, Mass. ATB Findings of Fact and Reports 2003-213, 241.
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); Avco Manufacturing Corp. v. Assessors of Wilmington, Mass. ATB Findings of Fact and Reports 1990-142, 166. After accounting for vacancy and rent losses, the net-operating income is obtained by deducting appropriate expenses. Pepsi-Cola Bottling Co., 397 Mass. at 452-53. "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).
As for a lower-level rent, with insufficient comparable data available for lower level or basement space in the Porter Square area, the Board, like the parties' real estate valuation experts, considered the actual rent to be the best indication of market rent for Unit 1. As for main-level rents, the Board found that the Walgreen's lease did not represent the best evidence of rents for that main-level space during the relevant time period because the lease had not been signed and was not in effect during the relevant time period and the renovations had not yet been performed. Rather, the Board found that the rent being paid by the then-existing tenant was more instructive. Based on that plus other timely market rents in evidence, the Board adopted the appellants' real estate valuation expert's recommended rate for the space associated with Unit 2, which is oriented toward the front of the subject property facing Porter Square, and a slightly lower rent for the space associated with Unit 3, which is located in a less desirable portion of the subject property. Unit 3 also contained the 80-square-foot ATM space for which the Board adopted the appellants' real estate expert's suggestion of using the actual annual rental amount of $35,000. As for upper-level rents for Units 4 and 5, the Board once again found that the space oriented toward the front of the subject property was superior to that oriented toward the rear and relied primarily on the rent associated with a nearby comparable property which both real estate valuation experts had used in their analyses.
For vacancy and credit loss, the Board found that the rate proposed by the assessors' real estate valuation expert was supported by market data, as well as the subject property's actual and historical performance. The Board, however, broke this rate down to reflect a more specific vacancy rate for each unit having taken into account their respective locations and competition within the market. The Board also considered the extent to which the recommended rates for each of the units suggested by the appellants' real estate valuation expert varied. For expenses, the Board was swayed by the data and rationale presented by the appellants' real estate valuation expert, as well as the subject property's historical performance and triple-net leasing scenario.
The Board also adopted the base capitalization rates recommended by the appellants' real estate valuation expert because these rates were well supported by relevant sales of similar properties, rates synthesized by the appellants' real estate valuation expert using reasonable assumptions, and published industry surveys for properties similar to the subject property during the relevant time period. They also appropriately reflected a rate necessary to attract investment capital for this type of real estate. See Taunton Redev. Assocs. v. Assessors of Taunton, 393 Mass. 293, 295 (1984). The Board further agreed with the approach utilized by the appellants' real estate valuation expert of adding to his base capitalization rate a pro-rated tax factor to account for real estate taxes paid by the owner because of vacancy and credit loss. See Assessors of Lynn v. Shop-Lease Co., Inc., 364 Mass. 569, 573 (1974).
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 Assocs. v. Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp., 383 Mass. 456, 473 (1981); New England Oyster House, Inc., 362 Mass. 696, 702 (1972). Moreover, "[i]n making its determination of fair cash value, the Board may take its view of the premises into account." Harbor Dreams, LLC v. Assessors of Hingham, Mass. ATB Findings of Fact and Reports 2004-56, 97 (citing Westport v. County Commissioners of Bristol, 246 Mass. 556, 563 (1923)). In evaluating the evidence before it, the Board formed its own independent judgment of fair cash value. General Electric Co. 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 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 [appellants] to make out [their] 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 appellants must show that they have complied with the statutory prerequisites to their appeal, Cohen v. Assessors of Boston, 344 Mass. 268, 271 (1962), and that the assessed valuation of their property was improper. See Foxboro Associates, 385 Mass. at 691. The assessment is presumed valid until the taxpayers sustain their burden of proving otherwise. Schlaiker, 365 Mass. at 245.
The Board found and ruled here that the appellants met their burden of proving that the subject property was overvalued for both fiscal years at issue in these appeals, and the Board therefore decided all but one of these appeals for the appellants. Accordingly, the Board concluded that, with the exception of Unit 3 for fiscal year 2012, the subject units were overvalued for the fiscal years at issue and granted tax abatements as summarized in the following two tables.

Fiscal Year 2011

Designation
Assessed Value
Fair Cash Value
Over-Valuation Tax Abatement
@ $19.90/$1,000

Unit 1 $2,953,100 $2,500,000 $453,100 $ 9,287.19
Unit 2 $3,372,100 $2,965,000 $407,100 $ 8,344.33
Unit 3 $2,412,000 $2,400,000 $ 12,000 $ 245.96
Unit 4 $2,075,200 $1,690,000 $385,200 $ 7,895.44
Unit 5 $4,567,100 $3,790,000 $777,100 $15,928.22

Fiscal Year 2012

Designation
Assessed Value
Fair Cash Value
Over-Valuation Tax Abatement
@ $20.76/$1,000

APPELLATE TAX BOARD

By: ________________________________
Thomas W. Hammond, Jr., Chairman

A true copy,
Attest: _________________________
Clerk of the Board

 The subject units' property record cards placed the area for Units 1 through 5 at 18,201, 8,531, 6,102, 5,500, and 14,443 square feet, respectively, for a total area of 52,777 square feet.  The Board adopted the rentable areas used by the appellants' real estate valuation expert because he relied on the actual rent rolls and leases, as well as discussions with the subject property's management personnel.  The assessors' real estate valuation expert used both measurements in his methodology but adjusted the rent per square foot to equate the potential gross incomes associated with either measurement.   
 The taxes listed do not include the 3% Community Preservation Act (the "CPA") surcharge.
 The triple-net rent for the ATM space is carved out and presented on an annual basis.
 The Board noted several minor mathematical errors in each of following tables, which had no effect on Mr. Logue's rounded estimates of the subject units' values for the fiscal years at issue.
 The tax abatements include the 3% surcharge authorized under the CPA.
 The tax abatements include the 3% surcharge authorized under the CPA.

ATB 2016-207

Porter Square Equity Partners 2, LLC; KSKIM Porter Unit 2 Equity Partners, LLC; and 5 KSKIM Porter Equity Partners, LLC v. Board of Assessors of the City of Cambridge (June 8, 2016)

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