125 Hartwell Trust Lexington Mgmt., Inc. v. Board of Assessors of the Town of Lexington (March 20, 2015)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


125 HARTWELL TRUST LEXINGTON		v.	BOARD OF ASSESSORS OF THE 
MGMT., INC.						TOWN OF LEXINGTON


Docket Nos. F315207, F319040			Promulgated: 
   								March 20, 2015


	These are appeals filed under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the Town of Lexington ("appellee" or "assessors") to abate taxes on certain real estate in the Town of Lexington owned by and assessed to 125 Hartwell Trust Lexington Mgmt., Inc. ("appellant") under G.L. c. 59, §§ 11 and 38, for fiscal years 2012 and 2013 ("fiscal years at issue").  
	Commissioner Good heard these appeals.  Chairman Hammond and Commissioners Scharaffa, Rose, and Chmielinski joined her in the revised decision for the appellant in Docket Number F315207 and in the decision for the appellee in Docket Number F319040.	 
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.

	Matthew A. Luz, Esq. for the appellant.
	Anthony M. Ambriano, Esq. for the appellee.   
FINDINGS OF FACT AND REPORT
At the hearing of these appeals, the appellant presented its case-in-chief through the testimony and appraisal report of Eric Wolff, whom the Board qualified as an expert in the area of commercial real estate valuation.  In defense of their assessments, the assessors relied primarily on their cross-examination of Mr. Wolff; however, they also presented the testimony of Robert Lent, Director of Assessing for Lexington, and introduced several exhibits, including: the requisite jurisdictional documentation; the actual lease for the subject property executed by Synta Pharmaceutical Corp. ("Synta") in 2011; and a copy of the 2012 market expenses for the suburban Boston market compiled by the Building Owners and Managers Association ("BOMA").  On the basis of the exhibits and testimony admitted into evidence during the hearing of these appeals, as well as reasonable inferences drawn therefrom, the Appellate Tax Board ("Board") made the following findings of fact.  
On January 1, 2011 and January 1, 2012, the relevant assessment dates for the fiscal years at issue, the appellant was the assessed owner of a 4.02-acre parcel of real estate improved with a 38,400 square-foot office building located at 125 Hartwell Avenue in the Town of Lexington ("subject property").  For assessment purposes, the subject property is identified as Map 74, Parcel 10.  
For fiscal year 2012, the assessors valued the subject property at $4,593,000 and assessed a tax thereon, at the rate of $28.45 per thousand, in the total amount of $130,670.85.  On December 30, 2011 Lexington's Collector of Taxes ("Collector") sent out the town's actual real estate tax bills for fiscal year 2012.  In accordance with G.L. c. 59, § 57C, the appellant timely paid the tax due without incurring interest.  On January 19, 2012, in accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on April 19, 2012.  On April 24, 2012, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed an appeal with the Board. On the basis of the preceding facts, the Board found and ruled that it had jurisdiction over the appeal for fiscal year 2012.
 For fiscal year 2013, the assessors valued the subject property at $4,338,000 and assessed a tax thereon, at the rate of $28.97 per thousand, in the total amount of $125,671.86.  On December 31, 2012 the Collector sent out the town's actual real estate tax bills for fiscal year 2013.  In accordance with G.L. c. 59, § 57C, the appellant timely paid the tax due without incurring interest.  On January 10, 2013, in accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors, which was deemed denied on April 10, 2013.  On April 25, 2013, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed an appeal with the Board.  On the basis of the preceding facts, the Board found and ruled that it had jurisdiction over the appeal for fiscal year 2013.
The subject property is located on Hartwell Avenue situated in the northwestern section of Lexington near the Bedford municipal border.  Hartwell Avenue is a moderately traveled roadway improved with a mix of commercial and industrial uses.  The immediate area is bordered by Routes 4/225 to the north, Route 128/Interstate 95 to the east, and Route 2A to the south.  As a result, the subject property is considered to have a good location for its current office use. 
The subject property consists of a 4.02-acre parcel of real estate improved with a two-story, office building.  The subject building, which was built in 1979, has a masonry frame structure with a concrete slab foundation, a flat roof with a rubber membrane covering, and a brick exterior.  The subject building's interior finishes included a mix of carpet, ceramic and vinyl tile floors, painted plaster and exposed brick walls, as well as suspended acoustic tiles with florescent panel and recessed lighting fixtures.  The subject building, which was built as a multi-tenant building, contains reception areas, administrative office areas, large open office bullpen areas with temporary office cubicles, private offices, conference rooms, lab areas, employee break areas and four lavatories.  Access to the second floor of the building is provided by a passenger elevator and two enclosed stairways.
To develop a value for the subject property for the fiscal years at issue, Mr. Wolff first examined the subject property's highest-and-best use and concluded that it was the subject property's existing use as an office building.  The assessors' valuation cards evidence the same highest-and-best use determination.  Mr. Wolff then considered the three usual methods for estimating the value of the subject property for the fiscal years at issue.  However, Mr. Wolff rejected both the cost and sales-comparison approaches and instead used the income-capitalization approach to estimate the fair cash value of the subject property for the fiscal years at issue.
To determine the most appropriate office rent to use in his income-capitalization methodology for the fiscal years at issue, Mr. Wolff obtained the subject property's rent roll and also investigated market rental rates by surveying what he regarded to be similar office space in Lexington.  The subject property's rent roll indicated that as of January 1, 2011, the subject property was occupied by two tenants, Synta and IBS America, Inc., with gross rents of $27.40 and $25.71 per square foot, respectively.  As of January 1, 2012, Synta occupied the entire building at a rental rate of $22.00 per square foot, plus utilities and cleaning.  Mr. Wolff also conducted a survey of twelve purportedly comparable office spaces located in Lexington.  Of these twelve, four properties rented on a gross leasing scenario with rents ranging from $17.48 to $24.50 per square foot, and eight rented under modified gross leases ranging from $18.00 to $23.00 per square foot.  Based on the subject property's reported rents and also his review of market rents, Mr. Wolff selected a rent of $23.00 per square foot on a gross-plus-electric basis for both fiscal years at issue.  Applying this rate to the 37,800 square feet reported to him by the appellant as the subject property's net rentable area, Mr. Wolff obtained a gross rental revenue of $869,400 for both fiscal years at issue.
The next step in Mr. Wolff's income-capitalization analysis was the determination of a vacancy rate.  Mr. Wolff testified that he consulted with local real estate brokers who reported that vacancy rates in Lexington during the fiscal years at issue ranged between 10% and 20% for this type of property.  He further testified that a market survey conducted by CoStar indicated that the vacancy rate for office space in the Lexington area was estimated between 14.3% and 15.7%.  Mr. Wolff selected 10% as the vacancy and collection loss deduction for the subject property for both fiscal years at issue, testifying that this rate was justified because of the subject property's location, relative size, and current physical condition.  This allowance resulted in an effective gross income figure of $782,460 for both fiscal years at issue. 
With respect to operating expenses, Mr. Wolff reported that the subject property's average per-square-foot operating expenses for the fiscal years at issue, as reported by the owner, was $7.56 per square foot, including electric.  He compared this figure to the operating expenses of four other purportedly comparable properties, two located in Lexington and two located in Belmont, which ranged from $7.29 to $8.62 per square foot, which also included electric.  In addition, Mr. Wolff testified that a survey conducted by the Institute of Real Estate Management ("IREM") indicated that the average total operating expenses for suburban office buildings was $8.95 per square foot in 2010 and $8.32 per square foot in 2011.  Based on this data, Mr. Wolff selected an operating expense of $7.50 per square foot.  Mr. Wolff adopted a management fee at 5% of effective gross income and also a replacement reserve allowance at 2% of potential gross income, which he testified were typical in the market.  
Finally, Mr. Wolff determined the capitalization rate for each of the years at issue, which he developed using the band-of-investment technique.  For fiscal year 2012, Mr. Wolff assumed an interest lending rate of 5.75% and an equity yield rate of 11% to determine a capitalization rate of 8.5%.  He also consulted the rates published by national surveys, including: First Quarter 2011 Korpacz Report for "non-institutional" grade office properties, which ranged from 6.75% to 12.5% with an average of 8.549%; CB Richard Ellis Cap Rate Survey First Quarter 2011 for Class B/C office properties in the Boston area, which ranged from 7.5% to 11.0%; and Real Estate Research Corporation First Quarter 2011 East Regional Investment Criteria for east region office properties, which ranged from 4% to 10.9% with an average of 7.1%.  Mr. Wolff opined that the capitalization rate of 8.5% that he derived was in keeping with the above rates published in these publications.  Mr. Wolff then added the fiscal year 2012 tax factor of 2.845% to produce an overall capitalization rate of 11.345% for fiscal year 2012. 
For fiscal year 2013, Mr. Wolff assumed an interest lending rate of 4.5% and an equity yield rate of 12% in deriving a capitalization rate of 8%.  He also consulted the rates published by national surveys, including: Fourth Quarter 2011 Korpacz Report for "non-institutional" grade office properties in the Boston area, which ranged from 5.6% to 12.5% with an average of 8.072%; CB Richard Ellis Cap Rate Survey First Quarter 2012 for Class B/C office properties in the Boston area, which ranged from 6.5% to 11.0%; and Real Estate Research Corporation First Quarter 2011 East Regional Investment Criteria for east region office properties, which ranged from 4% to 10.9% with an average of 7.1%.  Mr. Wolff opined that the capitalization rate of 8% which he derived was consistent with the above rates published in these publications.  Mr. Wolff then added the fiscal year 2013 tax factor of 2.897% to produce an overall capitalization rate of 10.897% for fiscal year 2013.
Mr. Wolff's income-capitalization analyses are reproduced in the following table.

Mr. Wolff's Income-Capitalization Approach

INCOME                             
Office Space                                                  37,800 
  @ $23.00 psf          
Potential Gross Income:                                            $  869,400	
Vacancy & Collection Allowance (10%)                                  -86,940        	
Effective Gross Income:                                            $  782,460	
	
EXPENSES
	
  Management Fee         $ 39,123  @ $5% of EGI
  Replacement Reserves   $ 17,388  @ $2% of PGI
  Operating Expenses     $285,165  @ $7.50/sq. ft.  

Total Expenses:                                                   ($  341,676) 	
  	
Net-Operating Income:                                              $  440,784	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 11.345%	
	
Indicated Value for Fiscal Year 2012                               $3,885,271	
Rounded Value for Fiscal Year 2012                                 $3,885,000	
	
Divide by: Total Capitalization Rate for Fiscal Year 2013 - 10.897%	
	
Indicated Value for Fiscal Year 2013                               $4,045,003	
Rounded Value for Fiscal Year 2013                                 $4,045,000	

Based on all of the evidence, the Board found that the appellant met its burden of proving that the subject property was overvalued for fiscal year 2012, but not for fiscal year 2013.  The Board determined that the highest-and-best use of the subject property was its continued use as an office building and that the preferred method for ascertaining the fair cash value of the subject property for both fiscal years was through an income-capitalization methodology.  The Board further found that the subject property's leasable space was the 38,400 net rentable space recited in the lease signed by Synta in 2011.
Based on the subject property's existing lease and also the market leases offered into evidence by Mr. Wolff, the Board agreed with Mr. Wolff that $23.00 per square foot on a gross plus electric basis was the appropriate rent for the fiscal years at issue.  The Board also adopted Mr. Wolff's vacancy rate of 10%.
With respect to the operating expenses, the assessors suggested a rate as low as $4.97 per square foot, while the rates reported in BOMA ranged from $5.93 to 9.62 per square foot.  Mr. Wolff, relying on the subject property's actual operating expenses used a rate of $7.50 per square, including electric.  Based on evidence contained in the record, and the gross-plus-electric leasing scenario, adopted by the Board, in which the tenant and not the landlord pays that expense, the Board found that the best indication of operating expenses was $7.00 per square foot for both fiscal years at issue.  The Board further found that Mr. Wolff's management fee of 5%, at the higher end of his suggested range, was not warranted.  The Board noted that the subject property is a typical office building located in an average industrial park and that during the fiscal years at issue there were no more than two tenants.  Therefore, the Board found that a management fee of 3%, at the lower end of the range, was more appropriate.   
As for the capitalization rates, the Board found that Mr. Wolff's pre-tax factor capitalization rates of 8.5% and 8.0% for fiscal years 2012 and 2013, respectively, were too high.  Based on the subject property's overall condition, its history of no vacancy, and its excellent location near route 128, the Board found that a downward adjustment of 0.5% for both fiscal years was warranted resulting in pre-tax factor capitalization rates of 8.0% and 7.5% for fiscal years 2012 and 2013, respectively.  These rates were supported by the ranges contained in the various industry publications introduced into the record.  As a final step in the Board's determination of capitalization rates, the applicable tax factor was added to the base capitalization rates resulting in overall capitalization rates of 10.845% and 10.397%, for fiscal years 2012 and 2013, respectively.









The Board's analyses are contained in the following table.
The Board's Income-Capitalization Analysis

Income
Building Square foot area                     38,400 square feet
Market Rent                                      $23.00            
Potential Gross Income:                                            $  883,200	

Less: Vacancy & Collection Allowance - Retail @ 10%
           ($   88,320


	
Effective Gross Income:                                            $  794,880	
	
EXPENSES
	
  Management Fee         $ 23,846 @ 3% of EGI
  Replacement Reserves   $ 17,664 @ 2% of PGI
  Operating Expenses     $268,880 @ 7.00/sq. ft.  

Total Expenses:                                                   ($  310,390) 	
  	
Net-Operating Income:                                              $  484,490	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 10.845%	
	
Indicated Value for Fiscal Year 2010                               $4,467,404
Rounded Value for Fiscal Year 2010                                 $4,470,000	


 Divide by: Total Capitalization Rate for Fiscal Year 2013 - 10.397%



Indicated Value for Fiscal Year 2011                               $4,659,902
Rounded Value for Fiscal Year 2011                                 $4,660,000



	

	On this basis, the Board found that the subject property was overvalued by $123,000 for fiscal year 2012 and it therefore issued a revised decision for the appellant and ordered an abatement in the amount of $3,499.35 in Docket No. F315207.  The Board further found that the subject property was not overvalued for fiscal year 2013 and therefore issued a decision for the appellee in Docket No. F319040.
 

OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion.  Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  
The appellant has the burden of proving that the property has a lower value than that assessed. "'The burden of proof is upon the [appellant] to make out its right as a matter of law to abatement of the tax.'"  Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)).  "[T]he board is entitled to 'presume that the valuation made by the assessors [is] valid unless the taxpayer[] . . . prove[s] the contrary.'"  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245). 
In appeals before this Board, a taxpayer "'may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors' method of valuation, or by introducing affirmative evidence of value which undermines the assessors' valuation.'"  General Electric Co., 393 Mass. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  In the present appeals, the appellant demonstrated that the subject property was overvalued for fiscal year 2012 "'by introducing affirmative evidence of value which undermined the assessors' valuation.'"  Id.
"'Prior to valuing the subject property, its highest and best use must be ascertained.'"  Tsissa, Inc. v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2011-198, 216 (quoting Tennessee Gas Pipeline Co. v. Assessors of Agawam, Mass. ATB Findings of Fact and Reports 2000-859, 874).  The goal is to ascertain the maximum value of the property for any legitimate and reasonable use.  Id.  If the property is particularly well-suited for a certain use that is not prohibited, then that use may be reflected in an estimate of its fair market value.  Colonial Acres, Inc. v. Assessors of North Reading, 3 Mass. App. Ct. 384, 386 (1975).  "In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted."  Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate 315-316 (12th ed. 2001)), aff'd, 62 Mass. App. Ct. 428 (2004).  On this basis, the Board agreed with the appellant's real estate valuation expert and ruled that the subject property's highest-and-best use during the fiscal years at issue was its existing use as an office building.
Generally, real estate valuation experts, Massachusetts courts, and this Board rely upon three approaches to ascertain the fair cash value of property: income capitalization; sales comparison; and cost of reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  The 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, 701-02 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  It is also recognized as an appropriate technique to use for valuing income-producing property.  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In the present appeals, the Board agreed with the appellant's real estate valuation expert that the income-capitalization approach was the most appropriate method to value the subject property.  
"The direct capitalization of income method analyzes the property's capacity to generate income over a one-year period and converts that capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved."  Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 239 (1998).  "It is the net income that a property should be earning, not necessarily what it actually earns, that is the figure that should be capitalized."  Peterson v. Assessors of Boston, 62 Mass. App. Ct. 428, 436 (2008) (emphasis in original).  Accordingly, the income stream used in the income-capitalization method must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co., 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Auth., 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Auth., 9 Mass. App. Ct. 877, 878 (1980)(rescript).  
In these appeals, the Board found that the subject property's leasable space was the square footage cited in the Synta lease.  The Board further found that the most appropriate rent to use for the subject property was $23.00 per square foot on a gross-plus-electric basis for both fiscal years at issue.  The Board found that this rental figure best comported with the evidence that was introduced into the record.  See Fox Ridge Assoc. v. Assessors of Marshfield, 393 Mass. 652, 654 (1984) ("Choosing an appropriate gross income figure for establishing an income stream was within the board's discretion and expertise.").  Next, the Board agreed with Mr. Wolff that the vacancy allowance should be 10% for both fiscal years at issue, finding this rate to be reasonable and well supported.  
After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co., 393 Mass. at 610 (1984).  The expenses should also reflect the market.  Id.  The Board found that Mr. Wolff's expenses were too high because they included electric costs paid by the tenants not the landlord under the leasing scenario adopted by both the appellant's real estate valuation expert and the Board.  Accordingly and based on the evidence of record the Board reduced the operating expenses to $7.00 per square foot for both fiscal years.  The Board further found, given the subject property's overall condition, location near a major highway, limited number of tenants, and also its historical full occupancy, that the management expense should be reduced to 3% of effective gross income for both fiscal years at issue.  "The issue of what expenses may be considered in any particular piece of property is for the board." Alstores Realty Corp. v. Assessors of Peabody, 391 Mass. 60, 65 (1984).  
Lastly, the capitalization rate selected should consider the return necessary to attract investment capital.  Taunton Redevelopment Auth. 393 Mass. at 295.  The "tax factor" is a percentage added to the capitalization rate "to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula."  Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  The Board found, for the same reasons that Mr. Wolff's management fee was excessive - the subject property's overall condition, its location near a major highway, and also its historical occupancy - that his suggested capitalization rates of 8.5% for fiscal year 2012 and 8% for fiscal year 2013 were too high.  Instead, the Board determined that each of these rates should be reduced by 0.5% resulting in base capitalization rates of 8% and 7.5% for fiscal years 2012 and 2013, respectively.  These rates were supported by the ranges contained in the various industry publications placed into evidence.    
The Board is not required to believe the testimony of any particular witness or to adopt any particular method of valuation that an expert witness suggested.  Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight, Foxboro Assoc., 385 Mass. at 683; New Boston Garden Corp., 383 Mass. at 473; New England Oyster House, Inc., 362 Mass. at 702, even if its determinations are different than those suggested by an expert.  New Boston Garden Corp., 383 Mass. at 466 (quoting Cohen v. Board of Registraion in Pharmacy, 350 Mass. 246, 253 (1966)) (finding that the Board's determination "must be made 'upon consideration of the entire record'").  In evaluating the evidence before it, the Board selected among the various elements of value and appropriately formed its own independent judgment of fair cash value.  General Electric Co., 393 Mass. at 605; North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984).
On the basis of the Board's subsidiary findings and calculations, the Board found that and ruled that the subject property was overvalued by $123,000 for fiscal year 2012 and therefore issued a revised decision for the appellant and granted abatement in the amount of $3,499.35 in Docket No. F315207.  The Board further found that the subject property was not overvalued for fiscal year 2013 and therefore issued a decision for the appellee in Docket No. F319040. 

				    		THE APPELLATE TAX BOARD


By: _______________________________
    Thomas W. Hammond, Jr. Chairman

A true copy,

Attest: _________________________
   Clerk of the Board

 The appellant's real estate valuation expert used 38,022 square feet as the building's gross building area and 37,800 square feet for the building's net rentable area.  However, the actual lease for the subject property recites a rentable area of 38,400 square feet.  The Board found that the square footage reported in the actual lease was the most reliable.
 While Mr. Wolff included in his appraisal report a sales-comparison analysis for each of the fiscal years at issue, he did not testify about this method, except to say that he rejected the sales-comparison approach and the values derived from it. The Board, therefore, gave no weight to Mr. Wolff's sales-comparison approach or to the estimates of value obtained from it.

ATB 2015-94