Clarence W. Peterson, Jr. v. Board of Assessors of the City of Boston (November 12, 2002)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD





CLARENCE W. PETERSON, JR.	v.	THE BOARD OF ASSESSORS
OF THE CITY OF BOSTON

Docket Nos.: F244808 (FY 1997)
		   F247274 (FY 1998)
		   F254828 (FY 1999)
		   F258107 (FY 2000)	Promulgated:
		   F259074 (FY 2001)	November 12, 2002




	These are appeals under the formal procedure pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate taxes on certain real estate in the City of Boston assessed under G.L. c. 59, § 38 for fiscal years 1997 through 2001, inclusive.  
	Chairman Burns heard these appeals.  Commissioners Scharaffa, Gorton, and Egan joined her in the decisions for the appellee in fiscal years 1997, 1998, and 2001, and the decisions for the appellant in fiscal years 1999 and 2000.  Commissioner Rose took no part in the deliberations or decisions relating to these appeals.  

	These findings of fact and report are made pursuant to requests by both parties pursuant to G.L. c. 58A, § 13 and 8.31 CMR 1.32.  

	Philip Burling, Esq. and Kevin Conroy, Esq. for the appellant.

	Richard L. Wulsin, Esq. and Jeffrey Austin, Esq. for the appellee. 

FINDINGS OF FACT AND REPORT
	On January 1, 1996, 1997, 1998, 1999, and 2000, the appellant, Clarence W. Peterson, Jr., was the assessed owner of the property located at One Federal Street in the Financial District in the City of Boston, which is the subject of these appeals.  The subject site is nearly rectangular with a total area of 56,801 square feet.     One Federal Street occupies an entire city block bounded by Federal, Milk, Devonshire, and Franklin Streets.  It is improved with a thirty-eight story, steel frame and pre-cast panel office building that was built in 1975 and contains 1,105,498 square feet of rentable space, excluding the basement and garage.  One Federal Street is served by all necessary utilities.  It was built by and for the Shawmut Bank as its institutional headquarters and is a so-called first generation tower.  It has very large floor plates from floors 1 through 8 that are conducive to single tenant occupancy per floor.    
A major renovation was undertaken in 1992 and completed in 1997.  From 1991 to 2000, over $21,500,000 was spent by the appellant in general capital improvements.  Tenant improvements from 1989 to 2000 amounted to over $39,000,000.  During the fiscal years at issue, two major occupants, Shawmut, later Fleet, and Fidelity, leased and used over seventy percent of the building.
	One Federal Street is accessed along Federal Street, Devonshire Street, and Franklin Street.  It contains twenty-five passenger elevators, two freight elevators, and two garage elevators, along with three stairwells.  Several tenants also have interior stairways.  There is one loading dock with four bays (and three load levelers).  Typical office area interior finishes include commercial grade carpet or custom coverings, painted or vinyl wall coverings, acoustical ceiling tile and parabolic fluorescent light fixtures.  Typical public corridor finishes vary depending upon location and include plaster ceilings, carpeted or customized flooring and various wall coverings including painted sheetrock and wood veneers.  The renovated lobby includes granite flooring and marble walls with cherry millwork.  There are planters situated throughout the lobby area and a security/information desk.  Twenty-four-hour card-access entry is available for all tenants.  The building is 100% sprinklered, and the garage is heated and wet sprinklered.  The interior of the building is in good condition.  The Harvard Club, a private dining club open to tenants and members, occupies most of the 38th floor.  Some of the amenities include 24-hour security, two-levels of below-grade parking for about    240 vehicles, concierge service, a roof garden, and retail services including a full-service bank located in the lobby.  
	For each of the fiscal years at issue, the Board of Assessors of the City of Boston ("assessors") valued the property and assessed taxes at the rates specified in the following table.  
	Assessed Value	Tax Rate
per $1,000	Tax
Assessed	

FY 1997	
$145,174,000	
$41.50	
$6,024,721.00	
FY 1998	$166,173,500	$38.45	$6,389,371.08	
FY 1999	$205,414,500	$37.04	$7,608,553.08	
FY 2000	$262,745,500	$34.21	$8,988,523.56	
FY 2001	$317,776,488	$30.17	$9,587,316.64	

For all of the fiscal years at issue, the appellant timely paid the requisite amount of taxes due.  The appellant also timely filed applications for abatement with the assessors and, following their denials, seasonably filed appeals with the Appellate Tax Board ("Board").  A summary of the pertinent jurisdictional information is contained in the following table.  
	Actual Tax Bills Mailed	Application for Abatement Filed	Application for Abatement Denied or 
Deemed Denied	Petition Filed with Board	

FY 1997	
12/31/96	
01/29/97	
04/29/97	
07/23/97	
FY 1998	12/31/97	01/29/98	02/24/98	05/22/98	
FY 1999	12/31/98	01/28/99	04/28/99	07/27/99	
FY 2000	12/30/99	01/21/00	04/21/00	07/21/00	
FY 2001	12/29/00	01/22/01	03/14/01	04/05/01	

On the basis of these facts, the Board found that it had jurisdiction over all five of these appeals.  
	The appellant contested the assessments in these appeals through the testimony of two witnesses, including Charles Kenny, a real estate valuation expert, and    Ronald Rakow, Boston's Commissioner for Assessing.  The appellant also submitted several exhibits into evidence, including Mr. Kenny's appraisal report.  In support of the assessments, the assessors relied on the testimony and appraisal report of their real estate valuation expert, Pamela S. McKinney, and numerous exhibits, including her appraisal report.  The assessors also called          Harris E. Collins to testify about any assistance that he may have rendered to Mr. Kenny in performing his appraisal of One Federal Street for these appeals.  In addition, the parties submitted a "Stipulation Regarding the Jurisdictional Facts," as well as post-trial and reply briefs.  The Hearing Officer took a view of the subject property.    
	Charles Kenny, whom the Board qualified as an expert in commercial real estate appraisal, was the appellant's first witness.  Mr. Kenny described the Boston office rental market as "bumping along the bottom" in 1992 following a downward spiral that began in 1990.  By the second-half of 1993, the first signs of a recovery appeared.  Through 1994, the market continued to stabilize until it turned around in 1995 and continued to rise thereafter.  
Relying on this economic backdrop, Mr. Kenny testified that he considered all three of the traditional methods of value, but decided that neither the cost nor the sales approach was an appropriate technique for valuing        One Federal Street during the fiscal years at issue.  With respect to the cost approach, he determined that the age of the building and the lack of comparable land sales militated against the use of this method.  With respect to the sales comparison approach, Mr. Kenny found that there were several sales of properties that were reasonably comparable to the subject, including the 2001 sale of the subject itself for $360,000,000, but most of these sales, including the subject's, were sales of leased-fee interests, which he believed were not suitable for this fee-simple appraisal.  Mr. Kenny also regarded the mid-2001 sale of the subject property as too remote from the relevant assessment dates.  Because the subject is income-producing property that a prospective purchaser would value through an analysis of its revenue potential and expenses, he ultimately determined that the income capitalization approach was the most appropriate methodology to apply to estimate the value of One Federal Street for the fiscal years at issue.     
	Based on his analysis of the subject property's legally permissible, physically possible, financially feasible, and maximally profitable uses both vacant and as improved, Mr. Kenny concluded that its existing use as a commercial office tower was its highest and best use for all of the fiscal years at issue.  He discovered no other uses of the property that would produce a higher net income or value than the current one.  
	In his direct income capitalization methodology,    Mr. Kenny first estimated the property's revenue potential for the fiscal years at issue.  To do this, he studied eighty-seven leases from tower-type properties, primarily first generation office towers like One Federal Street.  He also analyzed both the Fleet and Fidelity leases and ascertained the most appropriate tiering for the subject.  During the fiscal years at issue, Fleet and Fidelity were large block tenants who, combined, leased 811,648 square feet of office space, which constituted approximately 73% of the building's rentable office area.  They occupied twenty-four of the thirty-eight floors while six other tenants each leased whole floors.  Only five floors were configured for multi-tenant occupancy, and the 12th floor is a mechanical floor.  Mr. Kenny considered the 1st floor to be combined office and retail space while The Harvard Club occupied most of the 38th floor.  
Mr. Kenny testified that parts of the basement of the building were originally used as currency counting rooms.  This approximately 17,578-square-foot space has been vacant since Fleet acquired Shawmut in 1996.  Because this space was not designed for storage and, during the fiscal years at issue, was not well adapted for it, Mr. Kenny ascribed no value to the basement in his income capitalization methodology.  He acknowledged, however, that, according to figures listed on the owner's rent rolls for the fiscal years at issue, Fleet paid in a range of $4.08 to $10.00 per square foot for the space.          
Considering the building's physical attributes, limitations, and surroundings, Mr. Kenny divided the building into four tiers for rental purposes: floors 1-8 or the low-rise level with 383,104 square feet of office space; floors 9-18 or the lower mid-rise level with  216,966 square feet of office space; floors 19-29 or the mid-rise level with 269,965 square feet of office space; and floors 30-38 or the high-rise level with 204,332 square feet of office space.  He also measured another       18,390 square feet of retail and bank space on the 1st floor and 12,307 square feet of club space for The Harvard Club on the 38th floor.  
The following table contains the square footage of Mr. Kenny's office, retail, bank, and club space measurements per corresponding floor.  
Floor	Office	Retail	Floor	Office	Club
	
1	 7,770	18,390	20	24,135		
2	42,787		21	24,135		
3	53,321		22	24,695		
4	54,973		23	24,695		
5	56,437		24	24,695		
6	56,439		25	24,695		
7	56,521		26	24,695		
8	54,856		27	24,695		
9	23,612		28	24,695		
10	23,612		29	24,695		
11	23,612		30	24,272		
12	Mechanical		31	24,272		
13	24,355		32	25,244		
14	24,355		33	25,244		
15	24,355		34	25,244		
16	24,355		35	25,244		
17	24,355		36	25,244		
18	24,355		37	25,244		
19	24,135		38	 4,324	12,307	

Relying on all of this data and information, as well as his recognition of what he termed "large-block" leases for major office portions of One Federal Street, Mr. Kenny determined per-square-foot market rents for the office, the retail, The Harvard Club, and the parking spaces.  He testified that his economic office rents reflected an average between larger-space and small-space rentals because in his opinion, the lower floors, or approximately 34%, as well as other floors, of One Federal Street were configured for and historically contained large-block renters.  Mr. Kenny also considered The Harvard Club an amenity of One Federal Street, and he, therefore, ascribed a club, as opposed to an office, rent to that portion of the property.  He believed that the presence of The Harvard Club on the top floor of One Federal Street enhanced the property's office rents.  A summary of this rental information is contained in the following four tables.  

Office Rents
Fiscal
Year	Low
Rise	Lower
Mid-Rise	Mid
Rise	High
Rise
	
1997	$24.25	$26.50	$28.50	$31.00	
1998	$27.25	$29.25	$31.50	$34.50	
1999	$31.50	$33.50	$35.75	$38.50	
2000	$36.50	$38.50	$40.75	$45.50	
2001	$42.50	$45.00	$47.25	$53.00	

Retail Rents
Fiscal Year	Lobby Retail	Branch Bank
	
1997	$40.00	$30.00	
1998	$45.00	$31.00	
1999	$45.00	$35.00	
2000	$50.00	$45.00	
2001	$55.00	$50.00	

The Harvard Club
Fair Rental Value (all fiscal years)	$20.00 - $25.00	

Parking Rents
Fiscal Year	Rent Per Vehicle/Month
	
1997	$250.00	
1998	$250.00	
1999	$275.00	
2000	$300.00	
2001	$325.00	

By combining his per-square-foot office rents with each tier's rentable office area and then adding the rent attributable to the retail space, The Harvard Club, and parking, Mr. Kenny calculated gross potential incomes of $30,622,175 for fiscal year 1997, $33,926,060 for fiscal year 1998, $38,572,128 for fiscal year 1999, $44,697,476 for fiscal year 2000, and $51,812,092 for fiscal year 2001.  
Mr. Kenny derived his vacancy/credit loss allowance of 6% per year for the first four fiscal years at issue and 5% for the fifth, by reviewing the subject property's actual history, by analyzing the market, and by discussing the issue with investors and brokers active in the market.  His vacancy/credit loss calculations for fiscal years 1997 through 2001 are $1,837,330, $2,035,564, $2,314,328, $2,681,849, and $2,590,610, respectively.  
Mr. Kenny determined the operating expenses by reviewing One Federal Street's actual history on both an accrual and cash basis and by analyzing expenses from comparable properties in the subject's market and those contained in the Building Owners and Managers Association (BOMA) Survey.  He concluded that One Federal Street's actual expenses were at the lower to middle market range and, therefore, were appropriate to include in his methodology.  The types of expenses that Mr. Kenny incorporated in his operating expense category include general and administrative costs, property management fees, security costs, repairs and maintenance expenses, cleaning expenses, utilities, insurance costs, and non-reimbursable expenses.  Mr. Kenny decided to exclude expenses for tenant electricity because, in his experience, these expenses were usually offset by the income from reimbursements.  His expenses were $6.50 per square foot for fiscal year 1997, $7.00 per square foot for fiscal year 1998, and $7.50 per square foot for fiscal years 1999, 2000, and 2001.  For parking, he used expenses of 30% of imputed market rent, which he believed compared favorably with those from the next-door parking garage that he considered equivalent.  The following table summarizes his total operating and garage expenses that he deducted from effective gross income for each of the fiscal years at issue. 
Operating and Garage Expenses
	FY 1997	FY 1998	FY 1999	FY 2000	FY 2001
	
Operating 	$7,182,916	$7,735,448	$8,287,980	$8,287,980	$8,287,980
	
Garage	$216,000	$216,000	$237,600	$259,200	$280,800
	
	
Mr. Kenny also established a sinking fund for renovating the lobby within twenty years.  He relied on the actual expenses incurred from the recent rehabilitation of the lobby as the best predictor of this future cost.  Accordingly, he deducted $300,749 from the effective gross incomes for each of the fiscal years at issue.  Mr. Kenny calculated tenant improvements at $1.77 per square foot by taking the actual tenant improvement expense paid over a twelve-year period from 1989 through 2000 and amortizing 50% over a twenty-year period at 7.75% interest.  Accordingly, he deducted $1,952,481 from effective gross income for an annual tenant improvement allowance for each of the fiscal years at issue.  For leasing commission costs, Mr. Kenny determined that the actual expenses from 1995 through 1999 were $7.41 per square foot of leased space.  On a ten-year average lease term, that came to an annual cost of $0.74 per square foot.  Mr. Kenny then decided to use a more conservative figure of $0.60 per square foot for leasing commissions, which amounted to a total deduction from effective gross income of $663,038 for each of the fiscal years at issue.  
Mr. Kenny based his reserves for replacements on the actual capital expenditures incurred from 1989 through 2000.  He first added the total amount of the general improvements, $21,649,832, to the total amount of tenant expenses, $39,063,399, and the total estimate of needed capital improvements identified by One Federal Street's chief engineer, $10,650,000, for a sum of $71,363,231.  From this total, he deducted tenant improvements, $39,063,399, and the $13,387,606 spent on renovating the lobby.  He then amortized the remaining balance of $18,912,226 over a twenty-year term at 7.75%, thereby estimating and deducting from effective gross income a reserve of $1,890,556 for each of the fiscal years at issue.  
After deducting what Mr. Kenny termed operating expenses, garage expenses, lobby amortization, tenant improvements, leasing commissions, and reserves for replacements from effective gross income, he calculated net income amounts of $16,579,105, $19,132,225, $22,925,397, $28,661,624, and $35,845,879 for fiscal years 1997, 1998, 1999, 2000, and 2001, respectively.  
Mr. Kenny determined his capitalization rate by reconciling rates from the debt-coverage-ratio method, the band-of-investment approach, and his own company's national surveys.  He also considered the age and condition of the property at issue.  Based on these factors, he decided to add 0.25% to a rate of 9.00% for a base rate of 9.25% to which he added a tax factor for all of the fiscal years at issue.  His total capitalization rates were 13.40%, 13.10%, 12.95%, 12.67%, and 12.27% for fiscal years 1997 through 2001, respectively.  By dividing his net income amounts by his total capitalization rates, Mr. Kenny estimated the value of One Federal Street at $123,724,664, which he rounded to $123,725,000 for fiscal year 1997, $146,047,519, which he rounded to $146,050,000 for fiscal year 1998, $177,030,092, which he rounded to $177,030,000 for fiscal year 1999, $226,216,448, which he rounded to $226,220,000 for fiscal year 2000, and $292,142,453, which he rounded to $292,140,000 for fiscal year 2001.  A summary of         Mr. Kenny's income capitalization methodology is contained in the following table. 


	FY 1997
($)	FY 1998
($)	FY 1999
($)	FY 2000
($)	FY 2001
($)	
Gross Income 						
Retail	587,870	620,728	679,820	845,635	937,585	
1st - 8th 	9,290,272	10,439,584	12,067,776	13,983,296	16,281,920	
9th - 18th 	5,749,599	6,346,256	7,268,361	8,353,191	9,763,470	
19th - 29th 	7,694,002	8,503,898	9,651,249	11,001,073	12,755,846	
30th - 38th 	6,334,292	7,049,454	7,866,782	9,342,606	10,829,596	
Harvard Club	246,140	246,140	246,140	307,675	307,675	
Parking	720,000	720,000	792,000	864,000	936,000	
Gross Potent. Inc.	30,622,175	33,926,060	38,572,128	44,697,476	51,812,092	
						
Vacancy/Credit Loss	-1,837,330	-2,035,564	-2,314,328	-2,681,849	-2,590,610	
						
Effective Gross Inc.	28,784,845	31,890,496	36,257,800	42,015,627	49,221,482
	
Expenses
Operating Expenses	
7,182,916	
7,735,448	
8,287,980	
8,287,980	
8,287,980	
Garage Expenses	216,000	216,000	237,600	259,200	280,800	
Lobby Amortization	300,749	300,749	300,749	300,749	300,749	
Tenant Improvements	1,952,481	1,952,481	1,952,481	1,952,481	1,952,481	
Leasing Commissions	663,038	663,038	663,038	663,038	663,038	
Reserve for Replace.	1,890,556	1,890,556	1,890,556	1,890,556	1,890,556	
						
Net Income	16,579,105	19,132,225	22,925,397	28,661,624	35,845,879	
						
Capitalization Rate						
Base	9.25%	9.25%	9.25%	9.25%	9.25%	
Tax Factor	4.15%	3.85%	3.70%	3.42%	3.02%	
Total	13.40%	13.10%	12.95%	12.67%	12.27%	
						
Estimate of Value	123,724,664	146,047,519	177,030,092	226,216,448	292,142,453	
						
Rounded	123,725,000	146,050,000	177,030,000	226,220,000	292,140,000	

The appellant's second witness was Ronald Rakow, the Commissioner of Assessing for the City of Boston.        Mr. Rakow described how the Boston assessors valued commercial office towers using a CAMA system that was designed to incorporate tenant appeal or desirability ratings for the fiscal years at issue.  He also discussed situations when the assessors might override the CAMA system or certain components of it.  In addition, he explained the information contained on the subject's property record cards as well as other documents that the assessors used for valuation purposes for the fiscal years at issue.  
In defense of the assessments, the assessors called Pamela S. McKinney as their commercial real estate valuation expert.  Ms. McKinney's depiction of the Boston office market, experiencing a downturn between 1988 and 1992 and then expanding thereafter, was essentially the same as Mr. Kenny's description of the market.  Like     Mr. Kenny, Ms. McKinney also determined that One Federal Street's highest and best use was its continued use as a commercial office tower with associated retail and garage uses.    
Ms. McKinney considered all three of the traditional methods of value for valuing the subject property, but relied primarily on the income capitalization approach.  She used the cost approach to establish an upper limit on value for all of the fiscal years at issue, but did not use it to form an independent estimate of value, even though in her view investors do rely on it, because the depreciation associated with One Federal Street was difficult to reliably quantify and therefore compromised the viability of a cost approach.  On the appellant's motion, the Board struck Ms. McKinney's cost approach because she is neither an engineer nor an architect and the subject property is neither special purpose nor newly constructed.           Ms. McKinney used a sales comparison approach for all of the fiscal years at issue, but because of a paucity of comparable sales data, limited its application for the first three fiscal years to a check on the value that she developed using an income capitalization approach.  She relied on the values developed from her sales comparison approach for the latter two fiscal years only as a floor because her underlying data was obtained from leased-fee sales.  The Board observed that Ms. McKinney did not use the 2001 sale of the subject property in her sales comparison analyses and did not adjust any of the leased-fee sales that she did use for time or physical, locational or functional factors.          
In developing her direct income capitalization methodology for One Federal Street for the fiscal years at issue, Ms. McKinney reviewed the appellant's business plans, quarterly reports, and historical operating statements, as well as the owner's value estimates and market forecasts for the relevant years.  She also analyzed historical market data for office rents and vacancies during the relevant time period and corresponding data from properties that she considered comparable to the subject.  Her analysis incorporated all classes of Boston and Financial District office space including class A office space.  
To estimate the subject property's gross potential income, Ms. McKinney studied leasing activity at the subject and rental rates obtained from other competitive buildings in the Financial District during the relevant time period.  She grouped the subject and competitors' office rental rates into three categories, low-rise, mid-rise, and high-rise; the desirability and cost of which increased with height.  Her low-rise category corresponded to floors 2-12; the mid-rise category corresponded to floors 13-29; and the high-rise category corresponded to floors 30 and above.  
Ms. McKinney's analysis of comparable properties, the subject property, and the subject property's owner's business plan, revealed that the overall rent for low-rise floors ranged from $24.50 to $28.50 per rentable square foot for fiscal year 1997, from $23.25 to $35.00 per rentable square foot for fiscal year 1998, from $23.25 to $40.00 per rentable square foot for fiscal year 1999, from $25.27 to $41.00 per rentable square foot for fiscal year 2000, and from $41.00 to $47.00 per rentable square foot for fiscal year 2001.  Ms. McKinney recognized that the average square footage of floors 2-8 of One Federal Street is oversized compared to the market, contains some vault space, and lacks some amount of window perimeter.  Accordingly, she purportedly reflected these and other building idiosyncrasies in assigning to the subject's 446,170 square feet of low-rise floor area, average market rents of $24.00, $26.00, $30.00, $35.00, and $38.00 per square foot for fiscal years 1997 through 2001, respectively.  
Ms. McKinney's analysis also revealed that the overall rent for mid-rise floors ranged from $23.50 to $38.00 per square foot for fiscal year 1997, from $25.00 to $38.00 per square foot for fiscal year 1998, from $29.00 to $58.25 per square foot for fiscal year 1999, from $38.00 to $62.50 per square foot for fiscal year 2000, and from $52.00 to $60.43 per square foot for fiscal year 2001.  Considering       One Federal Street's good views and window lines,        Ms. McKinney selected, for the subject's 416,095 square feet of mid-rise floor area, average rents of $32.00, $33.00, $38.00, $48.00, and $52.00 per square foot for fiscal years 1997 through 2001, respectively.  
Ms. McKinney's analysis further revealed that the overall rent for high-rise floors ranged from $26.25 to $34.25 per square foot for fiscal year 1997, from $26.25 to $38.00 per square foot for fiscal year 1998, from $37.00 to $45.00 per square foot for fiscal year 1999, from $41.20 to $62.00 per square foot for fiscal year 2000, and from $50.00 to $62.00 per square foot for fiscal year 2001.  Based on her analysis, she selected for the subject's 216,639 square feet of high-rise floor area an average rate of $34.00, $35.00, $40.00, $50.00, and $55.00 per square foot for fiscal years 1997 through 2001, respectively.  The following tables summarize the per-square-foot rent and total income that she attributed to these office tiers for each of the fiscal years at issue. 
Per-Square-Foot Rent
	Area/SF	FY
1997	FY
1998	FY
1999	FY
2000	FY
2001
	
Office Floor 2-11	446,170	$24.00	$26.00	$30.00	$35.00	$38.00	
Office Floor 13-29	416,095	$32.00	$33.00	$38.00	$48.00	$52.00	
Office Floor 30-38	216,639	$34.00	$35.00	$40.00	$50.00	$55.00	

Total Income
	FY
1997	FY
1998	FY
1999	FY
2000	FY
2001
	
Office Floor 2-11	$10,708,080	$11,600,420	$13,385,100	$15,615,950	$16,954,460	
Office Floor 13-29	$13,315,040	$13,731,135	$15,811,610	$19,972,560	$21,636,940	
Office Floor 30-38	 $7,365,726	 $7,582,365	 $8,665,560	$10,831,950	$11,915,145	

In addition to income from the rental of office space, Ms. McKinney included in her income capitalization approach potential revenue from leasing 3,784 square feet of lobby retail space, 15,040 square feet of street front retail space, and 7,770 square feet of mezzanine retail space; potential revenue from leasing 17,578 square feet of basement storage space; and potential revenue from renting the 67,037 square foot garage area.  To ascertain market rents for these areas, she examined leases and data from comparable properties as well as the subject property.  The following tables summarize the per-square-foot rent and total income that she attributed to these other areas for each of the fiscal years at issue.  
Per-Square-Foot Rent
	FY 1997	FY 1998	FY1999	FY2000	FY2001
	
Lobby Retail	$40.00	$45.00	$50.00	$52.00	$55.00	
Street Front Retail	$30.00	$35.00	$40.00	$42.00	$45.00	
Mezzanine Retail	$35.00	$40.00	$45.00	$47.00	$50.00	
Basement	$15.00	$15.00	$15.00	$15.00	$15.00	
Garage	$12.24	$13.53	$14.92	$17.53	$19.77	

Total Income

	FY 1997	FY 1998	FY1999	FY2000	FY2001
	
Lobby Retail	$151,360	$170,280	$189,200	$196,768	$208,120	
Street Front Retail	$451,200	$526,400	$601,600	$631,680	$676,800	
Mezzanine Retail	$271,950	$310,800	$349,650	$365,190	$388,500	
Basement	$263,670	$263,670	$263,670	$263,670	$263,670	
Garage	$820,800	$907,200	$1,000,000	$1,175,000	$1,325,000	

	As her final revenue components, Ms. McKinney also included utility reimbursements, service income, and miscellaneous income in her income capitalization methodology.  She based these calculations on both market statistics and actual data from the subject property.  The amounts that she attributed to these categories for each of the fiscal years at issue are summarized in the following table.  
	FY 
1997	FY
1998	FY
1999	FY
2000	FY
2001
	
Utility Reimbursements	$1,105,498	$1,105,498	$1,105,498	$1,105,498	$1,381,873	
Service Income (20¢/SF)	$221,100	$221,100	$221,100	$221,100	$221,100	
Misc. Income (20¢/SF)	$221,100	$221,100	$221,100	$221,100	$221,100	

	Ms. McKinney estimated a 5% vacancy and credit loss allowance for all of the fiscal years at issue.  She based this estimate on prevailing "market conditions and subject attributes."  
	To estimate stabilized operating expenses,          Ms. McKinney reviewed BOMA statistics and the actual operating expenses for the subject itself and several competing office towers in the Financial District.  She relied primarily on the subject property's actual operating expenses because the BOMA data was limited and heterogeneous, and the information available from competing properties was sparse.  Consequently, she assigned operating expenses of $7.12, $7.85, $8.08, $8.15, and $8.40 per square foot for fiscal years 1997 through 2001, respectively.
	For leasing expenses, Ms. McKinney applied a stabilized commission cost of $0.47 per square foot of rentable area for all of the fiscal years at issue.  She calculated this figure by estimating a leasing cost of $6.00 per rentable square foot for new leases and $3.00 per square foot for renewals, adjusted to $3.75 per square foot to reflect a 75% renewal probability.  She then amortized this cost over a ten-year investment holding term assuming 25% of the leases roll over in five years and the balance in ten.  Ms. McKinney's estimate in this regard compared favorably with One Federal Street's un-amortized leasing costs.  
	For tenant improvements, Ms. McKinney estimated an allowance of $40.00 per square foot for new tenants and $5.00 per square foot for renewing occupants.  She then adjusted these estimates for a 75% renewal probability and a mix of five- and ten-year lease agreements to produce a stabilized annualized allowance of $1.72 per square foot for all of the fiscal years at issue.  Once again, her estimate very closely approximated the subject's un-amortized cost of tenant improvements.  
	Ms. McKinney estimated a general replacement reserve allowance at one percent of effective gross income for each of the fiscal years at issue.  She described her general replacement reserve as an annual allowance for anticipated future costs associated with short-lived items.  She compared her allowance for a general replacement reserve with the actual experience at the subject and discovered that her allowances were higher.  Her review of leases in the subject as well as comparable towers in the Financial District revealed that the cost of replacement items was often passed through to the tenants.  She believed that this pass-through clause in leases was a market condition applicable to One Federal Street and comparable office towers that justified a one-percent-of-effective-gross-income reserve for replacement of short-lived items.  
	Ms. McKinney derived her capitalization rates for the fiscal years at issue from sales of commercial office buildings in the Financial District and national investor surveys, including the Korpacz Real Estate Investor Survey quarterly reports and the National Real Estate Index as published by CB/Richard Ellis.  Based on data gleaned from these sources considered in conjunction with One Federal Street's competitive positioning and core Financial District location, as well as the relative strength of Boston's market, Ms. McKinney determined that a stabilized capitalization rate of 8.5% plus a tax factor was appropriate for the subject property for all of the fiscal years at issue.  She conducted a band-of-investment analysis as a check on this rate.  
	To estimate the fair cash value of One Federal Street, Ms. McKinney deducted the expenses from the effective gross income and then divided the net income by the 8.5% capitalization rate plus a tax factor.  She then considered but rejected deductions from the resulting value for extraordinary capital expenses because, in her opinion, there were not any anticipated extraordinary expenses unaccounted for in her analysis.  Her income capitalization methodology is summarized in the following table.  


	FY
1997	FY
1998	FY
1999	FY
2000	FY
2001	
ANNUAL INCOME						
Basement Storage	$263,670	$263,670	$263,670	$263,670	$263,670	
Street Front Retail	$451,200	$526,400	$601,600	$631,680	$676,800	
Mezzanine Retail	$271,950	$310,800	$349,650	$365,190	$388,500	
Lobby Retail	$151,360	$170,280	$189,200	$196,768	$208,120	
Office Floor 2-11	$10,708,080	$11,600,420	$13,385,100	$15,615,950	$16,954,460	
Office Floor 13-29	$13,315,040	$13,731,135	$15,811,610	$19,972,560	$21,636,940	
Office Floor 30-38	$7,365,726	$7,582,365	$8,665,560	$10,831,950	$11,915,145	
Rent Subtotal	$32,527,026	$34,185,070	$39,266,390	$47,877,768	$52,043,635	
						
Garage Rent	$820,800	$907,200	$1,000,000	$1,175,000	$1,325,000	
Utility Reimburse.	$1,105,498	$1,105,498	$1,105,498	$1,105,498	$1,381,873	
Service Income	$221,100	$221,100	$221,100	$221,100	$221,100	
Misc. Income	$221,100	$221,100	$221,100	$221,100	$221,100	
Other Income Subtot.	$2,368,497	$2,454,897	$2,547,697	$2,722,697	$3,149,072	
						
Potent. Gross Inc.	$34,895,523	$36,639,967	$41,814,087	$50,600,465	$55,192,707	
						
Vacancy	-$1,744,776	-$1,831,998	-$2,090,704	-$2,530,023	-$2,759,635	
						
Effect. Gross Inc.	$33,150,747	$34,807,969	$39,723,383	$50,600,465	$52,433,071	
						
ANNUAL COSTS						
Operating	-$7,867,310	-$8,683,128	-$8,940,184	-$9,007,568	-$9,284,523	
Tenant Improvements	-$1,900,075	-$1,900,075	-$1,900,075	-$1,900,075	-$1,900,075	
Commissions	-$518,202	-$518,202	-$518,202	-$518,202	-$518,202	
Reserves 	-$331,507	-$348,080	-$397,234	-$480,704	-$524,331	
Total Expenses	-$10,617,094	-$11,449,485	-$11,755,695	-$11,906,549	-$12,227,131	
						
Net Income	$22,533,653	$23,358,484	$27,967,688	$36,163,893	$40,205,941	
						
Capitalization Rate	8.500%	8.500%	8.500%	8.500%	8.500%	
Tax Factor	4.150%	3.845%	3.704%	3.421%	3.017%	
Combined Cap. Rate	12.650%	12.345%	12.204%	11.921%	11.517%	
						
Stabilized Value	$178,131,642	$189,214,129	$229,168,208	$303,362,911	$349,100,814	
Call	$178,100,000	$189,200,000	$229,200,000	$303,400,000	$349,100,000	
						
EXTRAORDINARY ITEMS	$0	$0	$0	$0	$0	
						
FCV (rounded)	$178,100,000	$189,200,000	$229,200,000	$303,400,000	$349,100,000	

The assessors' final witness was Harris E. Collins, a professional appraiser who worked with Mr. Kenny during the relevant time period at CB Ellis/Whittier Partners.      Mr. Collins testified that he did not directly assist    Mr. Kenny in the preparation of his expert appraisal report on One Federal Street, but rather, contributed to a central data base on which the appraisers in their office rely when preparing appraisal reports.  Mr. Collins testified that he completed his own leased-fee appraisal report on One Federal Street for its owners in 2001.  In completing his report, he did not consult with Mr. Kenny, and Mr. Kenny did not consult with him when Mr. Kenny completed his fee-simple report for these appeals.  Mr. Collins further testified that in his leased-fee appraisal, he conducted a sales comparison approach, but he apparently relied primarily on an income capitalization methodology.  He also testified that in his income capitalization methodology, he considered the mezzanine area above the first floor as office space and the Harvard Club area as club space, and he did not incorporate a sinking fund to replace the lobby in his reserves.  In addition, he derived his capitalization rate from the market and did not include a 25-basis-point addition to account for, what Mr. Kenny may have considered, the aged condition of the subject property.              
On the basis of all of the evidence, the Board found that Mr. Kenny's depiction of the relevant economic environment, which was essentially the same as           Ms. McKinney's, was an accurate reflection of the market during the applicable time period.  In addition, the Board agreed with the parties' valuation experts and found that the highest and best use of One Federal Street was its continued use as a class A commercial office tower.  The Board also concurred with the parties' valuation experts in finding that the income capitalization approach was the most appropriate technique to use in estimating the value of this income-producing property.  The Board found that the cost approach was not an appropriate methodology to use to estimate the value of One Federal Street because of the difficulty in determining the building's physical depreciation and obsolescence and the fact that this class A office tower was not special purpose or newly constructed property.  At any rate, the evidence did not contain sufficient information from appropriate experts to allow the use of this valuation technique.  
The Board further found that Ms. McKinney's sales comparison approach was just a half-hearted attempt to establish the value of the subject property by setting a value within an array of unadjusted sales prices.        Ms. McKinney increased the subject's value for each of the fiscal years at issue without adjusting her purportedly comparable sales for time or any other physical, functional, or locational factors.  Her purportedly comparable sales were all sales of leased-fee interests, which, the Board found, may not be equivalent to fee-simple interests.  Accordingly, the Board found that her sales-comparison analysis was without the necessary foundation and, therefore, was without merit.  The Board, however, did agree with Ms. McKinney in finding that One Federal Street contained 1,105,498 square feet of rentable space excluding the basement and garage.  Mr. Kenny's measurements of the subject property's rentable space closely corresponded to Ms. McKinney's.    
In deciding what types and amounts of rent to assign to the various parts of the subject building, the Board recognized that both bricks and mortar and real property rights must be considered when performing fee-simple valuations.  While actual rentals are not always considered unless the market supports them, the real estate, that is, what is actually physically there, is considered.  Therefore, if part of the building is configured for large blocks or bulk occupancy, and the time and costs associated with reconfiguring that space for a different class of occupancy is not shown to be time and cost effective, or is otherwise inappropriate, then the imputed rent for that bulk space should be drawn from market data for that type of bulk occupancy when using an income capitalization approach to estimate the value of the property.            
With respect to the subject property, its physical layout and characteristics for the fiscal years at issue were configured for two tenants who, combined, occupied approximately 73% of the total leasable space.  Their occupancies encompassed twenty-four out of thirty-six floors reserved for office rentals, while six other tenants each leased whole floors.  Under the circumstances present in these appeals, the Board recognized that large block occupancies constitute a discernable market phenomenon, which should be considered in the process of estimating the fair market rent for the subject property for the fiscal years at issue.  Mr. Kenny recited certain market data regarding bulk occupancies, which formed a market-based indicator for such tenancies.  He also divided the subject property's thirty-eight floors into four rental tiers and assigned market rents that reasonably accounted for the building's configuration, physical attributes, limitations, and surroundings.  Ms. McKinney, on the other hand, did not as convincingly address the building's configuration, physical attributes, limitations, or surroundings in her tiering or market rental estimates.  She did not provide adequate time and cost analyses to support reconfiguring existing large or bulk occupancy space in One Federal Street to multi-tenant occupancies.  Moreover, she did admit that at least One Federal Street's lower floors have "a market that is to some degree determined by the physical character of the space."  For these reasons, the Board found that it was appropriate, under the circumstances, to adopt Mr. Kenny's office rental and office-tiering analyses for the building's floors 2-38.                
The Board agreed with Ms. McKinney's observation that the basement space was rentable.  She referenced market data supporting a net rent of up to $15.00 per square foot for basement storage.  However, the Board noted that in her income capitalization methodology, if her expenses were deducted from her gross low-rise office rent, the resulting net rent for the office space would approximate the   $15.00 net rent that she imputed to this basement space.  Accordingly, the Board found that her assignment of rent for the basement area was excessive.   
Mr. Kenny cited the building's basement rental experience of $4.08 to $10.00 per square foot as shown on the owner's rent roll for the relevant time period.  In his income capitalization methodology, however, Mr. Kenny did not impute any income for basement occupancies.  Based on the building's actual experience and the market, as well as evidence that the basement was not ideal storage space, the Board found that rentals should be assigned to the    17,578 square foot basement area and concluded that a rent of $7.00 per square foot, central to the range described by Mr. Kenny, was appropriate under the circumstances present in these appeals.  
	The Board also found that the retail space in       One Federal Street consisted of 15,040 square feet of street front, 7,770 square feet of mezzanine, and 3,784 square feet of lobby.  In making this finding, the Board again relied on the building's actual and continuous experience and fundamentally agreed with Ms. McKinney's characterizations of One Federal Street's retail space as well as her estimates of retail rents.  The Board rejected Mr. Kenny's imputation of office rent to the mezzanine retail space because it totally ignored the building's actual and continuous experience.  The Board assigned rents for this retail space for fiscal years 1997 through 2001 as summarized in the following table.  
	FY 1997	FY 1998	FY 1999	FY 2000	FY 2001
	
Street Front	$30.00/SF	$35.00/SF	$40.00/SF	$42.00/SF	$45.00/SF	
Mezzanine	$35.00/SF	$40.00/SF	$45.00/SF	$47.00/SF	$50.00/SF	
Lobby	$40.00/SF	$45.00/SF	$50.00/SF	$52.00/SF	$55.00/SF	

With respect to the space occupied by the Harvard Club on the 38th floor, the Board agreed with Mr. Kenney that it was an amenity, which logically contributed, at least in a general way, to higher office rents throughout the building.  Mr. Kenny also discussed several comparable office towers, which contained equivalent facilities that similarly functioned as amenities.  The Board adopted    Mr. Kenny's rentals for this space, which were based on the building's experience that the Board determined was reflective of the market.  The Board was not persuaded by Ms. McKinney's observation that this space was better used for offices because she did not consider the time and costs associated with reconfiguring this space and simply imputed high-rise office rents without adequate analysis.   
In assigning rent to the 67,037 square-foot parking area, the Board relied on Ms. McKinney's garage rental survey and garage income analysis as well as the actual contractual arrangement with the garage operator at the subject property.  The Board found that the revenue experience based on the subject property owner's contract with an established, well-recognized, and experienced operator reliably reflected the market and, therefore, was instructive in ascertaining the amount of income to attribute to the parking area.  Mr. Kenny's justification for his imputation of rents was basically anecdotal and did not bear a reasonable relationship to the contractual experience within the building itself.  Accordingly, the Board granted his parking analysis little weight.   
	Finally, in its consideration of the appropriate amount of income to ascribe to the subject property for the fiscal years at issue, the Board did not include utility reimbursements, service income, or miscellaneous income as suggested by Ms. McKinney.  With respect to these three categories, the Board found that any income attributable to them was essentially offset by the concomitant cost.  Accordingly, the Board chose not to separately account for them.  Mr. Kenny employed a similar technique in his income capitalization methodology in which he attempted to examine the basic operating costs of the building without, what he termed, these extraneous expenses that are essentially a wash with any related income.  
	For vacancy and credit loss rates, Mr. Kenny used 6% for all of the fiscal years at issue except fiscal year 2001 where he used 5%.  He derived his rates from his years of experience as an appraiser of commercial office towers and the subject's cleaning records.  Ms. McKinney relied on the subject's actual vacancy rates at the relevant assessment dates, verified by market data.  The Board adopted Ms. McKinney's rates of 5% for all of the fiscal years at issue as the more reliable under the circumstances.  
	For operating expenses, the Board accepted those developed by Mr. Kenny as the more appropriate ones to use under the circumstances.  These expenses reflected the actual experience at the subject property during the relevant fiscal years and were verified by the market.  They also properly excluded costs related to tenant reimbursements and service and miscellaneous income, which neither Mr. Kenny nor the Board included in their income analyses.  Accordingly, the Board included operating expenses of $6.50 per square foot for fiscal year 1997, $7.00 per square foot for fiscal year 1998, and $7.50 per square foot for the remaining three fiscal years at issue.  
	For tenant improvement costs, the parties' valuation experts were in near agreement despite using very different methods for determining this expense.  Mr. Kenny amortized a percentage of twelve years of purportedly actual tenant improvement costs over a period of twenty years at 7.75% interest in calculating a $1.77 per square foot cost for this expense.  The Board found, however, that Mr. Kenney's technique for determining tenant improvement costs was flawed because he included non-tenant improvement expenses in his arbitrary selection of twelve years of purportedly actual tenant improvement costs, he incorporated unsubstantiated assumptions, and he used faulty funding methodology.  In her analysis, Ms. McKinney estimated a $40.00 per square foot allowance for new tenants and a $5.00 allowance for renewals.  She then adjusted these estimates for a 75% renewal possibility coupled with a 25% and 75% mix of five- and ten-year leases, respectively.  Her approach produced a stabilized annual tenant improvement expense of $1.72 per square foot.  The Board adopted Ms. McKinney's estimate in this regard because she used appropriate market data coupled with the building's experience, as well as reasonable assumptions.   
	Using a similar methodology to the one that she used for estimating tenant improvements costs, Ms. McKinney calculated a stabilized annual commission allowance of $0.47 per square foot.  She estimated a $6.00 per square foot commission for new tenants and $3.00 for renewal occupants.  She then used the same 75% renewal possibility coupled with a 25% and 75% mix of five- and ten-year leases, respectively.  Mr. Kenny's approach for determining leasing commissions did not contain the reasonable detail or market component that Ms. McKinney's did, and was, consequently, less persuasive.  Once again, the Board adopted Ms. McKinney's estimate for tenant improvements because she based her data and technique on information obtained from the market and the subject, and she also incorporated reasonable assumptions into her approach.  
	The Board also adopted Ms. McKinney's 1% allowance for reserves.  In developing her rate, she considered the subject's actual experience for short-lived real estate items.  She also considered the lease terms for tenants in both the subject and comparable office towers, which passed at least part of the cost of replacement items through to the tenants.  The Board found that her reserve for replacement properly accounted for the building's condition, relevant market leases, and capital plans.  
On the other hand, the Board found that Mr. Kenny's allowance was unsupported by underlying data and failed to consider the building's or market's lease terms regarding pass-through costs.  Furthermore, his failure to use a sinking fund helped to create an inflated deduction that exceeded reserve-for-replacement averages reported in national surveys by 600%.  Moreover, the Board noted that his reserve for replacement included possible capital expenditures beyond short-lived items and was well over 6% of effective gross income, which the Board found excessive.  Accordingly, the Board adopted Ms. McKinney's estimate for reserves of 1% of effective gross income as reasonable in this context.  
	Finally, the Board included in its total expenses an allowance for lobby renovation.  The Board recognized that the lobby of a class A office tower in the Financial District, like One Federal Street, requires periodic rehabilitation.  The building's experience supported this allowance.  Mr. Kenny considered periodic lobby renovations a necessity for maintaining the building's competitiveness in the market.  Accordingly, the Board adopted Mr. Kenny's recommendation in this regard, which calculated a sinking fund that would accumulate enough to renovate the lobby at present-day cost in twenty years.  Ms. McKinney did not include an expense item for what the Board determined was a probable expenditure.  
	While the parties' valuation experts agreed on adding a tax factor to the capitalization rate, they differed on the rate itself.  Mr. Kenny developed a rate of 9.25% while Ms. McKinney derived a rate of 8.50%.  Mr. Kenny's rate included an extra 0.25% to account, for what he considered, the aged condition of the building.  The Board rejected this addition as unnecessary under the circumstances and duplicative of certain operating expenses and reserves.  After analyzing each expert's underlying data, the Board determined that a capitalization rate of 9.00% plus a tax factor was appropriate for all of the fiscal years at issue.  
The Board then divided each fiscal year's net operating income by the total capitalization rate it developed for that year to reach its estimates of the value of One Federal Street for the fiscal years at issue.  The Board compared its values to the corresponding assessments and determined that the subject property was over-valued for fiscal years 1999 and 2000, but not for the other three fiscal years at issue.  A summary of the Board's income capitalization methodology is contained in the following two-page table. 



 		FY
1997	FY
1998	FY
1999	
Income
					
Basement	17,578SF	$7.00	$123,046	$7.00	$123,046	$7.00	$123,046	
St. Front Retail	15,040SF	$30.00	$451,200	$35.00	$526,400	$40.00	$601,600	
Mezzanine Retail	7,770SF	$35.00	$271,950	$40.00	$310,800	$45.00	$349,650	
Lobby Retail	3,784SF	$40.00	$151,360	$45.00	$170,280	$50.00	$189,200	
Floors 2-8	375,334SF	$24.25	$9,101,850	$27.25	$10,227,851	$31.50	$11,823,021	
Floors 9-18	216,966SF	$26.50	$5,749,599	$29.25	$6,346,256	$33.50	$7,268,361	
Floors 19-29	269,965SF	$28.50	$7,694,003	$31.50	$8,503,898	$35.75	$9,651,249	
Floors 30-38	204,332SF	$31.00	$6,334,292	$34.50	$7,049,454	$38.50	$7,866,782	
Harvard Club	12,307SF	$20.00	$246,140	$20.00	$246,140	$20.00	$246,140	
Garage (240 sp.)	67,037SF	$12.24	$820,533	$13.53	$907,011	$14.92	$1,000,192	
								
Pot. Gross Inc.			$30,943,973		$34,411,136		$39,119,241	
								
Less: Vacancy		5% PGI	$1,547,199		$1,720,557		$1,955,962	
								
Eff. Gross Inc.			$29,396,774		$32,690,579		$37,163,279	
								
Expenses								
								
Oper. Expenses	1,105,498SF	$6.50	$7,185,737	$7.00	$7,738,486	$7.50	$8,291,235	
Tenant Improve.	1,105,498SF	$1.72	$1,901,457	$1.72	$1,901,457	$1.72	$1,901,457	
Commissions	1,105,498SF	$0.47	$519,584	$0.47	$519,584	$0.47	$519,584	
Reserves % EGI		1.00%	$293,968	1.00%	$326,906	1.00%	$371,633	
Lobby (sinking fund)			$300,749		$300,749		$300,749	
Less: Tot. Exp.			$10,201,495		$10,787,182		$11,384,658	
								
Net Opera. Inc.			$19,195,278		$21,903,398		$25,778,621	
								
Cap. Rate			9.000%		9.000%		9.000%	
Tax Factor			4.150%		3.845%		3.704%	
Tot. Cap. Rate			( 13.15%		( 12.85%		( 12.70%	
								
Indicated Value			$145,971,696		$170,454,459		$202,981,268	
								
Rounded Value			$146,000,000		$170,500,000		$203,000,000	
								
Assessed Value			$145,174,000		$166,173,000		$205,414,500	
Overvaluation							$2,414,500	
Tax Rate /$1,000			$41.50		$38.45		x $37.04	
Abatement							$89,433.08	



	  		FY
2000	FY
2001	
Income
				
Basement	17,578SF	$7.00	$123,046	$7.00	$123,046	
St. Front Retail	15,040SF	$42.00	$631,680	$45.00	$676,800	
Mezzanine Retail	7,770SF	$47.00	$365,190	$50.00	$388,500	
Lobby Retail	3,784SF	$52.00	$196,768	$55.00	$208,120	
Floors 2-8	375,334SF	$36.50	$13,699,691	$42.50	$15,951,695	
Floors 9-18	216,966SF	$38.50	$8,353,191	$45.00	$9,763,470	
Floors 19-29	269,965SF	$40.75	$11,001,073	$47.25	$12,755,846	
Floors 30-38	204,332SF	$45.50	$9,297,106	$53.00	$10,829,596	
Harvard Club	12,307SF	$25.00	$307,675	$25.00	$307,675	
Garage (240 sp.)	67,037SF	$17.53	$1,175,159	$19.77	$1,325,321	
						
Pot. Gross Inc.			$45,150,579		$52,330,069	
						
Less: Vacancy		5% PGI	$2,257,529		$2,616,503	
						
Eff. Gross Inc.			$42,893,050		$49,713,566	
						
Expenses						
						
Oper. Expenses	1,105,498SF	$7.50	$8,291,235	$7.50	$8,291,235	
Tenant Improve.	1,105,498SF	$1.72	$1,901,457	$1.72	$1,901,457	
Commissions	1,105,498SF	$0.47	$519,584	$0.47	$519,584	
Reserves % EGI		1.00%	$428,931	1.00%	$497,136	
Lobby (sinking fund)			$300,749		$300,749	
Less: Tot. Exp.			$11,441,956		$11,510,161	
						
Net Opera. Inc.			$31,451,094		$38,203,405	
						
Cap. Rate			9.000%		9.000%	
Tax Factor			3.421%		3.017%	
Tot. Cap. Rate 			( 12.42%		( 12.02%	
						
Indicated Value			$253,229,420		$317,831,988	
						
Rounded Value			$253,300,000		$318,000,000	
						
Assessed Value			$262,745,500		$317,776,488	
Overvaluation			$9,445,500			
Tax Rate /$1,000			x $34.21		$30.17	
Abatement			$323,130.56			

	On this basis, the Board decided the fiscal year 1997, 1998, and 2001 appeals for the appellee and the fiscal year 1999 and 2000 appeals for the appellant.  The Board granted abatements in the amount of $89,433.08 and $323,130.56 for the fiscal year 1999 and 2000 appeals, respectively.    
 	          
OPINION
	The principal issue in these appeals is whether the subject real estate was overvalued in fiscal years 1997 through 2001, inclusive.  To make that determination, the Board found and ruled that large or bulk occupancies by single tenants are a recognizable, definable market phenomenon, which should be considered, when reliable evidence is presented, in the process of estimating fair market rents when an income capitalization methodology is used to estimate the value of real estate like One Federal Street.  The Board further found and ruled that the physical characteristics of such large occupancies' finish and layout are also considerations in determining the rent that is warranted, as are the time and costs associated with changing such space from bulk occupancy to multi-tenant occupancy.  The Board relied upon the following principles in deciding these appeals for the assessors.      
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).  Accordingly, fair cash value means its fair market value.  Id.  
"Prior to valuing the subject property, its highest and best use must be ascertained, which has been defined as the use for which the property would bring the most."  Tennessee Gas Pipeline Co. v. Assessors of Agawam, 26 Mass. App. Tax Bd. Rep. 226, 234 (citing Conness v. Commonwealth, 184 Mass. 541, 542-43 (1903)); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989) and the cases cited therein.  A property's highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.  Appraisal Institute, The Appraisal of Real Estate at 305-308 (12th ed., 2001).  See also Skyline Homes, Inc. v. Commonwealth,    362 Mass. 684, 87 (1972); DiBiase v. Town of Rowley,      33 Mass. App. Ct. 928 (1992).  In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted.  Appraisal Institute, The Appraisal of Real Estate at 315-16 (12th ed., 2001); Tennessee Gas Pipeline Co., supra at 235.  In the present appeals, both parties' valuation experts and this Board found that the continuation of the subject property's existing use as a class A commercial office tower with associated retail and parking constituted its highest and best use.  Accordingly, the Board ruled that the subject property's highest and best use was its continued existing use.  The Board also found and ruled that Mr. Kenny's depiction of the relevant economic environment, which was essentially the same as           Ms. McKinney's, was an accurate reflection of the market during the applicable time period.     
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 reproductions.  See Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  "The board is not required to adopt any particular method of valuation," Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986), 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).  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 (1941).  In the present appeals, the appellant's valuation expert considered, but did not use, a sales comparison approach because of a lack of comparable sales.  The assessors' valuation expert attempted to use one, at least as a check or floor on values derived from an income capitalization methodology, but the Board found that her sales comparison approach was wholly inadequate because she used sales of leased-fee interests and failed to adjust them or demonstrate their applicability to the present appeals.  The relationship, if any, between fee-simple and leased-fee interests "must be derived by performing a series of evaluations and computations on the one to reach the other."  Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 248 (1998).   The Board found that Ms. McKinney did not perform these necessary evaluations and computations thereby rendering the values derived from her sales comparison methodology without merit.  Under the circumstances, the Board found and ruled that the sales comparison approach was not an appropriate technique to use to value One Federal Street for the fiscal years at issue.  
"[T]he introduction of evidence concerning value based on [cost] computations has been limited to special situations in which data cannot be reliably computed under the other two methods."  Correria, 375 Mass. at 362.  The appellant's valuation expert did not use a cost approach because of the subject building's age and condition and because of a lack of comparable land sales.  The assessors' valuation expert, who was neither an engineer nor architect, used a cost approach but only to set upper limits on value.  On the appellant's motion, the Board struck her cost approach.  In relying on costs, an engineer or architect ordinarily must be utilized because the generally qualified valuation expert is not competent to testify to construction costs.  See Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. at 698; Tigar v. Mystic River Bridge Auth., 329 Mass. 514, 519-20 (1952).  On this basis, the Board found and ruled that the cost approach was not an appropriate technique to use to value One Federal Street for the fiscal years at issue.   
The income capitalization method is appropriate for valuing real estate that is improved with a class A commercial office tower.  See, e.g., Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. at 238.  Both parties' valuation experts used a direct income capitalization methodology to estimate the value of the subject real estate.  The Board found and ruled that a direct income capitalization methodology was the most appropriate approach for estimating the value of         One Federal Street for the fiscal years at issue.  "Direct capitalization is widely used when properties are already operating on a stabilized basis and there is an ample supply of comparable [rentals] with similar risk levels, incomes, expenses, physical and locational characteristics, and future expectations." Appraisal Institute, The Appraisal of Real Estate at 529 (12th ed., 2001).  The Board found that there were an adequate number of comparable rentals to support the use of a direct income capitalization methodology to estimate the value of One Federal Street for the years at issue.  Under this approach, the property's capacity to generate income over a one-year period is analyzed and converted 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. at 239.  Net operating income is obtained by subtracting expenses from gross income.  Assessors of Brookline v. Buehler, 396 Mass. 520, 523 (1986).  The capitalization rate should reflect the return on investment necessary to attract investment capital.  Taunton Redevelopment Associates v. Assessors of Taunton, 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).           
In the present appeals, the Board adopted Mr. Kenny's office tiering and rentals for floors two through thirty-eight.  The Board found and ruled that his consideration of the building's large or bulk occupancies and the building's configuration, physical attributes, limitations, and surroundings was persuasive under the circumstances.  The Board also agreed with and adopted his characterization of the Harvard Club as an amenity and his rental attributed to it. The Board concurred with Ms. McKinney's characterizations, measurements, and rentals for the retail space on the first floor including the mezzanine area.  The Board also adopted her per-square-foot rentals for the garage, but did not round off its calculations as she had done.  The Board determined the income attributable to the basement by using data from the owner's rent rolls, which the Board found was indicative of the market for this space.  Finally, the Board decided not to separately account for the income and expenses attributable to utility reimbursements, service income, or miscellaneous income as suggested by Ms. McKinney because they were essentially a wash.  
For vacancy and credit loss, the Board accepted     Ms. McKinney's recommendations as the more persuasive ones.  For operating expenses, however, the Board adopted       Mr. Kenny's estimates as appropriate under the circumstances.  For tenant improvements, commissions, and reserves for replacement, the Board used Ms. McKinney's values because it found her methodology and underlying data more reasonable under the circumstances.  Finally, the Board also included an allowance for lobby renovation, as suggested by Mr. Kenny, because the building's experience and the marketplace supported it.  "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).    
After analyzing each expert's underlying data and methodology, the Board developed its own capitalization rate, which was essentially the same as Mr. Kenny's without the 25 basis points that he added purportedly to account for the building's age and condition.  The Board found that these factors were already accounted for in several of the expense categories in its income capitalization methodology.             
The mere qualification of a person as an expert does not endow his testimony with any magic qualities.  Boston Gas Co. v. Assessors of Boston, 334 Mass. at 579. "The board [is] not required to believe the testimony of any particular witness but it [can] accept such portions of the evidence as appear to have the more convincing weight. The market value of the property [can] not be proved with mathematical certainty and must ultimately rest in the realm of opinion, estimate, and judgment . . . (citations omitted).  The board [can] select the various elements of value as shown by the record and from them form . . . its own independent judgment."  Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. at 72.  See also North American Philips Lighting Corp. v. Assessors of Lynn,    392 Mass. 296, 300 (1984); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981); Jordan Marsh Co. v. Assessors of Malden, 359 Mass. 106, 110 (1971).  In these appeals, the Board was persuaded from a consideration of all of the evidence that One Federal Street was overvalued for fiscal years 1999 and 2000, but was not overvalued for fiscal years 1997, 1998, and 2001.     
In making its determination of fair cash value, the Board may take its view of the premises into account. Westport v. Bristol County Commissioners, 246 Mass. 556, 563 (1923); Avco Manufacturing Corp. v. Assessors of Wilmington, 12 Mass. App. Tax Bd. Rep. 132, 143 (1990); Arthur D. Little, Inc. v. Assessors of Cambridge, 2 Mass. App. Tax Bd. Rep. 22, 28 (1982).  
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, 365 Mass. 243, 245 (1974).  "By holding that the assessment is entitled to a presumption of validity, we are only restating that the taxpayer bears the burden of persuasion of every material fact necessary to prove that its property has been overvalued."  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 599 (1984).  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."        Id. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  
The Board found and ruled here that, upon consideration of all of the evidence, the appellant failed to meet its burden of proving that the property was overvalued in fiscal years 1997, 1998, and 2001.  The Board also found and ruled that the appellant met its burden in proving that the property was overvalued for fiscal years 1999 and 2000.  
Therefore, the Board decided the 1997, 1998, and 2001 fiscal year appeals for the assessors and the 1999 and 2000 fiscal year appeals for the appellant.  
						APPELLATE TAX BOARD

 By:	_____________________________
						Abigail A. Burns, Chairman
A true copy,


Attest:_________________________
Clerk of the Board
	

 The appellee's valuation expert used this 1,105,498 square-foot measurement, while the appellant's valuation expert used 1,105,064 square feet.  The appellant acknowledged in his brief, and the Board found, that the 434 square foot difference is "de minimis" and without any "material effect on the value" of One Federal Street in the context of these appeals.
 During direct examination, Mr. Kenny pointed out that this amount is overstated by $45,500 because of a computational error.  Consequently, some other derivative figures in his income capitalization methodology for fiscal year 2000 are also affected causing his estimate of value for this fiscal year to be overstated by $320,000.      
 See footnote 2 above and footnote 7 below.
 See footnote 2 above.  
 See footnote 2 above and footnote 7 below.  
 This amount should be $9,297,106.    
 See footnote 2 above.  The gross potential income amount for FY 2000 should be $44,651,976.  As a result of this $45,500 discrepancy, the vacancy and credit loss, the effective gross income, and the net income are all affected, culminating in an estimate of value that is $320,000 higher than intended.    

ATB 2002-626