F223228; F228530; F234078; F241800; F247657

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COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

EJR REAL ESTATE TRUST v. BOARD OF ASSESSORS OF
THE CITY OF WORCESTER

Docket Nos. F223228 (FY 94) Promulgated:
F228530 (FY 95) January 30, 2002
F234078 (FY 96)
F241800 (FY 97)
F247657 (FY 98)

These are consolidated 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 located in the City of Worcester, owned by and assessed to the appellant under G.L. c. 59, § 38 for fiscal years 1994 through 1998.
Chairman Burns heard these appeals and was joined in the decision for the appellee by former Chairman Gurge, former Commissioner Lomans and Commissioner Gorton.
These findings of fact and report are promulgated at the request of the appellant, pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

Arthur Goldstein, Esq., for the appellant.
John F. O'Day, Esq., for the appellee.
FINDINGS OF FACT AND REPORT

On January 1, 1993, January 1, 1994, January 1, 1995, January 1, 1996 and January 1, 1997, EJR Real Estate Trust ("appellant") was the assessed owner of a parcel of real estate ("property" or "subject") located at 33 Millbrook Street in the City of Worcester. The property is identified by the Board of Assessors of Worcester ("Assessors") as Map 13, Block 25A, Lot 5.
For the fiscal years at issue, the Assessors valued the property and assessed taxes thereon, as follows:
Docket Fiscal Assessed Commercial Assessed Number Year Value Tax Rate Tax______

F223228 1994 $519,400 $33.36 $17,451.84

F228530 1995 $550,700 $34.50 $18,999.15

F234078 1996 $524,000 $35.93 $18,827.32

F241800 1997 $524,000 $35.69 $18,701.56

F247657 1998 $524,000 $37.63 $19,718.12

For each fiscal year at issue, the appellant timely paid the taxes due without incurring interest.
The appellant seasonably filed its applications for abatement and subsequent petitions to the Appellate Tax Board ("Board"). The relevant jurisdictional information for these appeals is summarized as follows:
Fiscal Docket Abatement Abatement Petition Filed
Year Number Application Denied or at Board
Deemed Denied _________________

1994 F223228 1/25/94 4/25/94 9/02/94

1995 F228530 1/20/95 4/20/95 6/27/95

1996 F234078 1/24/96 4/24/96 5/09/96

1997 F241800 1/27/97 3/20/97 6/06/97

1998 F247657 1/30/98 4/10/98 6/04/98

On the basis of the foregoing, the Board found that it had jurisdiction over these appeals.
The property is composed of approximately 38,000 square feet on an irregularly shaped parcel of land. The site is level and at street grade along Millbrook Street, on which it has approximately 203.73 square feet of frontage. Millbrook Street is situated between West Boylston Street and Gold Star Boulevard (Route 12). Gold Star Boulevard extends northerly to access ramps of Interstate 190 and Interstate 290. The subject site is served by all public services and utilities.
The property is improved by a 9,500 square foot one-story concrete block office building built in 1955. During the fiscal years at issue, the building was used
by the appellant for its automobile dealership offices. There is a grassy area in front of the building. The remainder of the parcel is paved and used for parking. There is a gasoline/diesel pumping station located on the eastern side of the site, with four single pumps that are reportedly fed by three underground tanks. In addition, there is a concrete-block car wash constructed partially on the subject property and partially on the property of an abutter. The property is also abutted by a car-dealership.
Located approximately one mile north of the central business district of Worcester, the property is situated in an industrial and commercial area. Surrounding uses during the period at issue included a retail shopping plaza, restaurants, an enclosed shopping mall, medical services, a wholesale warehouse, branch banks, office buildings and automobile sales and services.
In support of its overvaluation claim, the appellant relied on the testimony and appraisal report of Martin Segel, a real estate appraiser whom the Board qualified as an expert witness. He used both an income capitalization methodology and a sales comparison methodology to estimate the value of the property during the fiscal years at issue. In reconciling the values obtained from these two approaches, Mr. Segel relied primarily on the values derived from his income capitalization methodology. Mr. Segel asserted that the highest and best use of the subject property was its current use.
Using an income capitalization approach, Mr. Segel estimated the fair market value of the property at $292,000 for fiscal year 1994, $288,500 for fiscal year 1995, and $254,000 for fiscal years 1996, 1997 and 1998. In determining these values, he first estimated the property's gross potential income. He relied on calendar years 1992, 1993 and 1994 lease information from four multi-tenanted properties used as office buildings, three of which were located proximate to the subject and one with both office and retail use. Per square foot rents for these properties ranged from $6.50 to $9.25. Mr. Segel then selected a lower-end fair economic rent of $7.50 per square foot for all fiscal years at issue, opining that a lower per square foot economic rent was warranted by the subject's single tenancy status and purportedly inferior parking.
The Board found, however, that the appellant's expert failed to support his per square foot rental rate with meaningful market data. From the outset, his reliance on rental information from four multi-tenanted properties as his basis for market data made his determination of the single-user, owner-occupied subject's economic rent inherently suspect. Moreover, the appellant's expert failed to address differences between these four properties and the subject in size, building configuration and amenities. Furthermore, he made no adjustments for varying market conditions over the relevant time period. While he made negative adjustments for the subject's "inferior parking" and single-tenancy status, these adjustments were also not substantiated with market data.
The Board, therefore, found that the appellant's expert failed to sufficiently analyze and establish the subject's comparability to the other four properties upon which he relied for rental data. Consequently, the Board found that the appellant failed to show that the gross potential income figures that its expert derived from his income capitalization methodology reflected the subject's market rental value. Accordingly, the Board found that for each of the fiscal years at issue, Mr. Segel's potential gross income figures were unsubstantiated and therefore unreliable.
Mr. Segel next applied a twenty percent combined vacancy/rent loss rate to his potential gross income to find the subject's effective gross income. The Board found that this rate was not verified with market data. He next applied a thirty-five percent operating expense rate to his effective gross income. He opined, without substantiation, that expenses typically ranged from thirty to forty percent. The Board found that by using percentages of what it had already found to be unreliable gross income figures, the appellant's expert appraiser carried this lack of reliability to his vacancy/rent loss and operating expense factors. Moreover, he offered no data to substantiate his suggested vacancy/rent loss rate and operating expense rate. Accordingly, the Board found that Mr. Segel's estimates of the subject property's net operating income were unreliable for all fiscal years at issue.
Finally, the Board found that Mr. Segel did not adequately support his recommended capitalization rates. He failed to provide the Board with any corroboration or verification of his suggested prime rates, commercial mortgage lending rates, loan-to-value ratios, expected mortgage years or holding periods. Further, he offered no explanation for amortizing a credit mortgage for each fiscal year at issue. Moreover, because the subject is a single user, owner-occupied property, comparable leases for the subject property would be on a triple-net basis with the tenant responsible for taxes, among other expenses. Accordingly, the Board found that the appellant's expert erroneously applied a tax factor in calculating his capitalization rate.
On this basis, the Board found that the estimates of value for the subject property obtained by Mr. Segel using his income capitalization methodology were without foundation and, therefore, without merit. A summary of Mr. Segel's income capitalization methodology is provided below:

1994 1995 1996 1997 1998__

Income
Potential Gross Income
(9,500 sf @ $7.50 sf) $71,250 $71,250 $71,250 $71,250 $71,250
Less Vacancy/Rent
Loss (20%) ($14,250) ($14,250) ($14,250) ($14,250) ($14,250)

Effective
Gross Income $57,000 $57,000 $57,000 $57,000 $57,000
Less Operating
Expenses (35%) (19,950) (19,950) (19,950) (19,950) (19,950)

Net Operating Income $37,050 $37,050 $37,050 $37,050 $37,050

Capitalization Rate 0.1270 0.1285 0.1460 0.1457 0.1456

Rounded Estimate of
Value $292,000 $288,500 $254,000 $254,000 $254,000

In his sales comparison approach for fiscal years 1994, 1995 and 1996 only, Mr. Segel relied on four purportedly comparable sales of commercial property. Using this methodology, he estimated the property's fair cash value at $24.00 per square foot or $228,000 for fiscal years 1994, 1995 and 1996.
The Board found, however, that all four of the appellant's expert's sale properties were distinctly dissimilar to the subject. All were configured for multi-tenant occupancy. The first sale was of two parcels improved by a two-story office building and a single-story office building. The second sale was of a three-story office building. While located in proximity to the subject, the Board found that neither the first nor second sale had land-to-building ratios or buildings comparable to the subject. The third sale was located in downtown Worcester in a completely different neighborhood from the subject. The fourth sale was of retail property that was only partially tenanted at the time of sale.
For these reasons, the Board found that the four sales that the appellant's expert relied upon in his sales comparison approach were not truly comparable to the subject property. The Board further found that to the extent that these sales may have been comparable, the appellant's expert did not adequately adjust for their differences with the subject. Accordingly, the Board determined that the appellant's expert's estimate of value based on his sales comparison methodology was not a reliable estimate of the subject's fair cash value for fiscal years 1994, 1995 and 1996.
In further support of its overvaluation claim and in an attempt to expose flaws and errors in the Assessors' method of valuation, the appellant called Paul Leary, an Assessor for the City of Worcester, to testify at the hearing on its behalf. Relying on the subject's property record card and utilizing an income capitalization methodology, Mr. Leary explained how the Assessors valued the subject for fiscal year 1994. Rather than expose any errors or flaws in the Assessors' valuation, the Board found that Mr. Leary's testimony supported the subject's assessed value for fiscal year 1994.
The Board found that because the property was income-producing, the income capitalization approach was an appropriate method for determining fair market value. The Board found, however, that the income capitalization methodology used by the appellant's expert was flawed and therefore of little probative value. The Board also found that the appellant's expert's sales comparison approach, used to support his estimates of value derived through his income capitalization methodology, was also flawed and therefore not a reliable estimate of value. Finally, the Board found that the appellant was unable to expose any flaws or errors in the Assessors' valuation methodology for fiscal year 1994.
On this basis, the Board found that the appellant failed to demonstrate that its property was overvalued in fiscal years 1994, 1995, 1996, 1997 or 1998. Accordingly, the Board decided these appeals for the appellee.

OPINION
The assessors are required to assess real estate at its "fair cash value." G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
Generally, real estate valuation experts, the 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 Board is not required to adopt any particular method of valuation." Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986). Regardless of which method is employed to determine fair cash value, the Board must determine the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market. Irving Saunders Trust v. Board of Assessors of Boston, 26 Mass. App. Ct. 838, 845 (1989). The validity of a final estimate of market value depends to a great extent on how well it can be supported by market data. The Appraisal Institute, THE APPRAISAL OF REAL ESTATE 134 (12th Ed., 2001).
The income capitalization method, used by both parties in these appeals, "is frequently applied with respect to income producing property." Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984). In applying this method, the income stream used 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 Authority, 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Authority, 9 Mass. App. Ct. 877, 878 (1980) (rescript); AVCO Manufacturing Corporation v. Assessors of Wilmington, 12 Mass. App. Tax Bd. Rep. 132, 143 (1990). It is the earning capacity of real estate, rather than its actual income, which is probative of fair market value. Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 64 (1941). Vacancy rates must also be market-based when determining fair cash value. Donovan v. City of Haverhill, 247 Mass. 69, 71 (1923). After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses. General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984). The expenses should also reflect the market. Id.
The capitalization rate should consider the return necessary to attract investment capital. Taunton Redevelopment Association, 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). Because the tenant pays the real estate taxes under a single-tenant premise, it is not appropriate to add a tax factor to the capitalization rate unless the tenant's payment of real estate tax to the owner is included in the owner's income to be capitalized. Alstores Realty Corp. v. Assessors of Peabody, 391 Mass. 60, 69-70 (1984). Generally, it is appropriate to add a tax factor to the capitalization rate in most multiple tenancy scenarios because the landlord is assumed to be responsible for paying the real estate taxes, and the tenant's contribution toward the real estate tax is included in the landlord's gross income. Taunton Redevelopment Association, 393 Mass. at 295-296. See also General Electric Co., 393 Mass. at 610.
The fair cash value of property may also be determined by recent sales of comparable properties in the market. Correia, 375 Mass. at 362. Actual sales generally "furnish strong evidence of market value, provided they are arm's length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller." Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); First National Stores, Inc. v. Assessors of Boston, 358 Mass. 554, 560 (1971).
The Board is entitled to presume that the assessment is valid until the taxpayer sustains his or her burden of proving otherwise. Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974). Accordingly, the burden of proof is upon the taxpayer to make out his or her right as a matter of law to an abatement of the tax. Id. The taxpayer must demonstrate that the assessed valuation of his or her property was improper. See Foxboro Associates, 385 Mass. at 691.
In appeals before this Board, therefore, 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 Board found that both the sales comparison and income capitalization methodologies used by the appellant's expert real estate appraiser to value the subject property for the fiscal years at issue were seriously flawed because they were not based on specific, reliable market data. In his income capitalization approach, the Board found that the appellant's expert real estate appraiser failed to sufficiently analyze and establish the subject's comparability to the other properties upon which he relied for rental data. Consequently, the Board found that the appellant failed to show that the gross potential income figures that its expert derived from his income capitalization methodology reflected the subject's market rental values. The Board also found that the appellant's rates for vacancy/rent loss and operating expenses were not verified with market data. The lack of reliability of the expert's net operating income figures was further compounded by the fact that the vacancy/rent loss and operating expense rates were based on a percentage of what the Board found to be unreliable gross income figures. In addition, the Board found that the expert did not provide any verification of the component parts of his recommended capitalization rate, offered no explanation for amortizing a credit mortgage for each fiscal year at issue, and erroneously applied a tax factor to his capitalization rate. Regarding the appellant's sales comparison approach, the Board found that the appellant's expert failed to sufficiently establish the comparability between the subject property and the sales on which he relied.
Accordingly, the Board found and ruled that the appellant's expert's estimates of the subject property's value, utilizing both methodologies, were without proper foundation and therefore without merit. Finally, the Board found that rather than expose any errors or flaws in the Assessors' valuation method, the testimony of Assessor Paul Leary lent support to the Assessors' fiscal year 1994 valuation of the subject.
The opinion of an expert witness must be based on a proper foundation. State Tax Commission v. Assessors of Springfield, 331 Mass. 677, 684 (1954). To endow opinion evidence with probative value, it must be based on facts proven or assumed sufficient to enable the expert to form an intelligent opinion. Giannasca v. Everett Aluminum, Inc. 13 Mass. App. Ct. 208, 211 (1982); HRS Trust #3, HRS Trust #5, Ralph Rose, et al. Trustee v. Board of Assessors of the Town of West Boylston, 2002 ATB Adv. Sh. 10, 27; Benjamin Electric Supply Company, Inc. v. Board of Assessors of the City of Worcester, 2001 ATB Adv. Sh. 788, 804. "Thus, an expert must have some knowledge of the particular facts to enable him to bring his expertise to bear." General Electric Company v. Board of Assessors of Lynn, 393 Mass. 591, 601 (1984), quoting P.J. Liacos, MASSACHUSETTS EVIDENCE 110 (5th ed. 1981).
Accordingly, because the appellant failed to present persuasive evidence that the Assessors had overvalued the subject property and failed to demonstrate errors or flaws in the Assessors' valuation method for fiscal year 1994, the Board ruled that the appellant failed to meet its burden of proving that the subject property was overvalued in fiscal years 1994, 1995, 1996, 1997 or 1998.
The Board, therefore, issued a decision for the appellee in these appeals.
APPELLATE TAX BOARD

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

Attest: ___________________
Clerk of the Board

 Written notice of deemed denial was dated May 6, 1994, more than ten days beyond the deemed denial date. 
 The appellant seasonably petitioned the Board for an order for late entry pursuant to G. L. c. 59, § 62C, which the Board allowed. 
 The Assessors did not present a case in chief.

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ATB 2002-46

EJR Real Estate Trust v. Board of Assessors of the City of Worcester (January 30, 2002)

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