F272349; F277463•SLT Realty Limited Partnership v. Board of Assessors of the Town of Barnstable (July 27, 2009)
SLT Realty Limited Partnership v. Board of Assessors of the Town of Barnstable (July 27, 2009)
F272349; F277463Masstaxbd
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COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
SLT REALTY v. BOARD OF ASSESSORS OF
LIMITED PARTNERSHIP THE TOWN OF BARNSTABLE
Docket Nos. F272349
F277463 Promulgated:
July 27, 2009
These are appeals under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee to abate taxes on certain real estate in the Town of Barnstable owned by and assessed to the appellant under G.L. c. 59, §§ 11 and 38 for fiscal years 2004 and 2005 ("fiscal years at issue").
Commissioner Rose heard these appeals. Chairman Hammond and Commissioners Scharaffa, and Egan joined him in the decisions for the appellant. Commissioner Mulhern took no part in the deliberations or decision of these appeals.
These findings of fact and report are made pursuant to requests by the appellant and appellee under G.L. c. 58A, § 13 and 8.31 CMR 1.32.
Kenneth W. Gurge, Esq. for the appellant.
James F. Sullivan, Esq. and Robert D. Smith, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of the testimony and exhibits offered into evidence at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.
On January 1, 2003 and January 1, 2004, the assessment dates for the years at issue, SLT Realty Limited Partnership ("SLT" or "appellant") was the assessed owner of a 54.54-acre parcel of land, improved with a 224-room, full-service resort hotel, known as the Sheraton Hyannis Resort ("subject property" or "subject hotel"). The subject property is located at 35 Scudder Avenue in the Hyannis Village section of the Town of Barnstable on Cape Cod. For fiscal year 2004, the Board of Assessors of Barnstable ("assessors" or "appellee") valued the subject property at $14,387,000, and assessed a real estate tax, at the commercial rate of $8.64 per thousand, along with a 3% Land Bank Tax and District Tax, in the total amount of $127,159.27. For fiscal year 2005, the assessors valued the subject property at $16,821,000, and assessed a real estate tax, at the commercial rate of $8.44 per thousand, along with a 3% Land Bank Tax and District Tax, in the total amount of $145,022.25.
On October 20, 2003, Barnstable sent out the fiscal year 2004 actual tax bills. The appellant timely paid the tax due without incurring interest. In accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors on November 13, 2003. The assessors denied the appellant's Application for Abatement on February 3, 2004 and sent notice of their action on the same day. The appellant timely filed its Petition Under Formal Procedure with the Board on May 3, 2004.
On October 22, 2004, Barnstable sent out its fiscal year 2005 actual tax bills. The appellant timely paid the tax due without incurring interest. In accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors on November 22, 2004. The assessors denied the appellant's Application for Abatement on January 11, 2005 and sent notice of their action on the same day. On April 5, 2005, the appellant timely filed its Petition Under Formal Procedure with the Board. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
The appellant presented its case-in-chief primarily through the testimony of its expert real estate appraiser, James G. Bragg, Jr. and the introduction of his appraisal report for the subject property. Mr. Bragg is a certified general appraiser with nearly 40 years of experience in real estate valuation and has appraised hundreds of hotels in the course of his career. Based on his background and experience, the Board qualified Mr. Bragg as a valuation expert, with no objection from the appellee. The appellant also called as a witness James Cook, who is the general manager of the subject property, and in addition introduced into evidence several other exhibits, including, among others, the subject property's Form of List for both of the fiscal years at issue and copies of a hotel sale deed and a lease agreement.
In defense of the assessments, the assessors presented the testimony of Paul Matheson, the Director of Assessing for Barnstable. The assessors also introduced into evidence numerous exhibits, including, among others, various jurisdictional documents, an aerial photo of the subject property, aerial photos of purportedly comparable hotels, property record cards and income and expense statements for each of the fiscal years at issue, and various land sales' deeds.
The subject hotel was constructed in the 1960s and is an irregularly shaped building with multiple wings. It is a two-story structure with additional functional space below-grade. It has approximately 180,000 square feet of building area above-grade and approximately 24,000 additional square feet in the basement.
The main section of the subject hotel contains the lobby, a gift/golf shop, several food and beverage outlets, several meeting rooms, and a health club and spa facility. One wing of the building houses a conference center, an indoor pool, and executive offices. Additional wings contain most of the guestrooms, which are clustered in interconnecting buildings surrounding a central courtyard. The subject property also features an outdoor pool and tennis courts. It has paved parking for 290 automobiles.
The subject hotel is surrounded by a 30-acre, par three golf course. Aerial photographs of the subject property show the course's pastoral green acres surrounding the subject hotel. According to Mr. Bragg's appraisal report, the golf course, with its "tree-lined fairways," was designed by noted golf-course architect Geoffrey Cornish.
The subject hotel houses four separate food and beverage outlets. Silvershell is the main restaurant at the hotel, with a 78-seat capacity. The Oyster Bar is a cocktail lounge with a 40-seat capacity. The Yacht Club is a night-club style lounge with a 70-seat capacity. It also has a dance floor, bar and disc jockey booth. The Yacht Club is used only for private functions and does not operate as a restaurant or lounge. Schooners is a poolside bar that serves beverages, snacks and light meals. The Oyster Bar is the only restaurant in the subject hotel which operates on a year-round basis; the others operate on only a seasonal basis.
The subject hotel is a mix of steel and wood frame construction. The exterior is a mix of brick, plywood siding, wood siding and barn-board siding. It has a rubber membrane roof with mostly asphalt shingles, but certain sections of the roof are shingled with cedar shingles. The first floor guest rooms have patios while the second floor guestrooms have balconies.
Interior finishes in the guestrooms include carpeted and tile floors, vinyl covered walls and painted ceilings. Each guestroom features a 27-inch color television with cable access and remote control, two telephones, a coffee maker, an ironing board and a hair dryer. The televisions, drapes, beds, bedspreads, and pillows in each guestroom were replaced in 2003. But for those renovations, the furniture and decor of the guestrooms date back to the 1980s, when the subject hotel underwent its most recent renovation.
Of the 224 guestrooms, 182 are equipped with two double beds, 39 are equipped with a single king-sized bed, and three rooms are equipped with a queen-sized bed and are handicapped-accessible. Not included in the 224-room count are eight additional "Parlor Rooms," which are double rooms featuring a conference table, kitchenette, and casual seating area with a television.
The subject hotel's corridors were re-carpeted in 2003. There are vending areas with soda and ice machines in each corridor. There are no passenger elevators in the subject hotel.
The subject hotel is located at 35 Scudder Avenue, in Hyannis. Access to the subject property is good. There are three curb cuts for ingress and egress to the subject property. The primary access to the neighborhood is along Main Street and West Main Street, which are busy local thoroughfares, with more major routes such as Route 28 and Route 6 in close proximity. The area is also served by regional buses and local shuttle buses.
The subject hotel lies within the Hyannis Central Business District and the immediate neighborhood contains a mix of commercial interests, such as banks, offices, retail shops and restaurants. A major local entertainment venue, the Cape Cod Melody Tent, is located across the street from the subject hotel. Although the subject property lies in a residential zoning district, its current use as a resort hotel and golf course is a legally existing, non-conforming use.
James Cook, the general manager of the subject hotel, testified regarding the operation and condition of the subject hotel, and the Board found his testimony to be credible. Mr. Cook testified that he has been employed in the hotel industry since 1988 and that he became the general manager of the subject hotel in 2002. He stated that the subject hotel was considered to be in "distressed" condition when he arrived and that he was specifically assigned to the subject hotel by its parent company, Starwood Hotels ("Starwood"), because he had experience in rehabilitating distressed hotels.
Mr. Cook testified that the subject hotel had not had a major renovation for nearly twenty-five years, in comparison to the industry standard, which calls for a complete renovation every five to ten years. Mr. Cook further testified that guests expecting the Sheraton experience were often disappointed with their stay at the subject hotel, and as a result, the subject hotel was losing market share.
According to Mr. Cook, the outdated layout of the subject hotel created serious operational inefficiencies. For example, Mr. Cook testified that the lack of elevators impeded efficient housekeeping practices because the cleaning staff could not roll the cleaning carts up and down the stairs between the first and second stories. Moreover, the physical layout of the subject hotel was not in compliance with the requirements of the Americans with Disabilities Act ("ADA"). Shortly after Mr. Cook's arrival at the subject hotel, an evaluation was performed for the purposes of ascertaining the investment of money necessary to bring the subject hotel in line with contemporary Sheraton standards. According to Mr. Cook, it was concluded that an investment of approximately $8 million was necessary.
Complicating the potential renovation of the subject property was the fact that an asbestos audit conducted in 2002 revealed that the subject property had substantial asbestos contamination. Any renovations undertaken to the subject property would likely involve significant asbestos remediation costs, and those costs were not included in the $8 million renovation estimate. Mr. Cook stated that Starwood declined to make the renovations necessary to bring the subject hotel in line with Sheraton standards, and instead downgraded the subject hotel to a Sheraton Four Points.
In addition to the testimony of Mr. Cook, the appellant presented the testimony of its expert witness, James Bragg. Mr. Bragg is a certified general appraiser whom the Board qualified as an expert in real estate valuation. The Board found his testimony to be credible.
In preparation for his appraisal, Mr. Bragg inspected the subject hotel on February 14, 2005. Mr. Bragg also reviewed the subject hotel's financial statements and various industry publications on the financial performance, occupancy rates, and average daily rates of hotels nationwide, including Smith Travel Research and Korpacz Real Estate Investor Survey ("Korpacz Survey"). He also interviewed the subject hotel's manager as well as managers from other hotels and motels. Based on the information culled from these sources, Mr. Bragg was able to identify several industry trends.
According to Mr. Bragg, room occupancy rates peaked nationally in 1995, with moderate annual declines thereafter. The economic recession in 2001, coupled with the events of September 11, 2001, resulted in a precipitous drop in room occupancy rates nationally. According to information compiled in Smith Travel Research, the decline in room occupancy rates experienced by New England as a region and by Massachusetts in particular between 2002 and 2003 exceeded the national average. At the same time, as Mr. Bragg noted in his appraisal report, the New England region saw the greatest increase in new room supply. Mr. Bragg therefore concluded that recovery in the New England area would be slower than in the rest of the country.
However, information regarding room occupancy excise gathered by the Massachusetts Department of Revenue and cited by Mr. Bragg in his appraisal report revealed that the decline in room occupancy in Barnstable was less dramatic than in Massachusetts as a whole. In fact, Barnstable saw an increase in room occupancy rates of 1.4% in 2002 and 6.1% in 2003, while Massachusetts as a whole saw declines of greater than 16% in each of those years. Moreover, Mr. Bragg stated that, after years of steady decline, "2003 may have been the turning point for the industry." Further, he noted that despite declines over the last few years, "the market was anticipating improved performance in 2004."
Based on information gathered from Smith Travel Research, Mr. Bragg identified six local hotels as properties "competitive" with the subject hotel. Mr. Bragg analyzed the performance of the subject hotel against the performance of those hotels, referred to collectively as "the competitive set." His analysis revealed that while all of the hotels experienced declining occupancy rates during that same period, the subject hotel experienced a sharper decline in occupancy rates than the hotels in the competitive set. Further, Mr. Bragg's analysis revealed that, between 2000 and 2003, the hotels in the "competitive set" were able to increase their average room rates by greater percentages than the subject hotel. Mr. Bragg opined that because the subject hotel had not been renovated, as had the others, it was forced to compete with the other hotels by offering comparatively lower rates. Based on this information, Mr. Bragg concluded that the subject hotel was losing market share to the hotels in the competitive set.
When contemplating the subject property's highest and best use, Mr. Bragg considered the property both as currently improved and as vacant. In his initial appraisal report, dated March 1, 2005, Mr. Bragg concluded that the highest and best use of the subject property was its continued use as a "flagged," full-service hotel. Subsequently, upon further consideration, Mr. Bragg realized that many of the hotels used in his analyses were independently operated. He realized that if the subject hotel were not a Sheraton, it would not have to incur costly renovations to maintain Sheraton brand standards. Moreover, although the subject hotel was not paying franchise fees, Mr. Bragg noted that this was atypical and that most flagged hotels do pay considerable franchise fees. Therefore, in a revised appraisal report dated October 12, 2005, Mr. Bragg concluded that the subject property's highest and best use was its operation as a non-flagged hotel.
In selecting the most appropriate valuation methodology, Mr. Bragg considered all three of the usual valuation approaches. He ruled out the cost approach because of the subject property's age and the difficulty of determining functional obsolescence. Although Mr. Bragg conducted a sales-comparison approach, he opined that the sales-comparison approach was not an optimal method to determine the fair market value of the subject property for numerous reasons. First, Mr. Bragg stated that the sales- comparison approach is less suitable for hotels because of the limited number of sales of hotels that occur each year and the great variation in the location and physical qualities of the hotels. Moreover, Mr. Bragg stated that hotels are usually sold as "going concerns," and the sales prices, as such, are not reliable estimates of the value of the real property alone. Mr. Bragg therefore utilized the sales-comparison approach as a "check" on the reasonableness of the value he derived through his income-capitalization approach, which he concluded was the most reliable method of valuing the subject property because it is the preferred method for valuing income-producing properties.
Mr. Bragg began his income-capitalization analysis by reviewing the subject hotel's historical income and expense data from fiscal years 2000 through 2003. He then compared that data with data gathered from such industry publications as The Host Study 2003 and The Host Study 2004, which are published by Smith Travel Research, as well as the Korpacz Survey. He also utilized comparative data from the competitive set as well as information gathered through interviews with various regional hotel/motel owners and developers.
In comparing the subject hotel's historical income and expense data with the comparative data, Mr. Bragg observed that the subject hotel had a lower than average percentage of revenue from room rentals because of its substantial amount of function space. According to Mr. Bragg, because room rentals generate the most profit for hotels, the substantial amount of restaurant and function space in the subject hotel served to decrease its overall profitability.
Further, Mr. Bragg noted that the subject hotel's inefficient, two-story, winged layout resulted in higher than average expenses in several areas. For example, the cavernous ballroom, which was originally designed as an indoor tennis court, was inefficient to heat and contributed to higher than average utility costs. In addition, as Mr. Cook had previously testified, the subject hotel's two-story layout and lack of elevators created inefficiencies in housekeeping services, and as a result, the subject hotel had higher than average operating and maintenance expenses.
According to the comparative data compiled by Mr. Bragg, the subject hotel had expenses on par with industry averages in several areas, such as administrative and general expenses, while it had lower than average expenses for such items as insurance because its parent company, Starwood, had centralized buying power for its vast portfolio of hotels. Mr. Bragg further noted that the subject hotel did not pay franchise fees for its Sheraton affiliation because Starwood owns the Sheraton brand.
Mr. Bragg concluded that a buyer looking to purchase a hotel on or about January 1, 2003 would give the greatest weight to its financial performance during the year preceding the sale. Therefore, Mr. Bragg's stabilized forecast of operating income for fiscal year 2004 was based on the subject hotel's 2002 actual revenue levels. For fiscal year 2005, Mr. Bragg stabilized the net operating income ("NOI") using the subject hotel's actual occupancy rates for 2002 and its actual average rates for 2003. The calculation of Mr. Bragg's stabilized NOI is summarized in the following tables:
Mr. Bragg's NOI Calculation for FY 2004
Revenues
Rooms ($119.72/room @ 48.7% occupancy) $4,763,000
Food $1,712,000
Beverage $369,000
Other Food & Beverage $893,000
Telephone $102,000
Recreation $272,000
Rentals & Other Income $134,000
Total Revenue $8,245,000
Departmental Expenses
Rooms ($1,327,000)
Food & Beverage ($2,206,000)
Telephone ($59,000)
Recreation ($320,000)
Total Departmental Expenses ($3,912,000)
Departmental Income ($4,333,000)
Undistributed Expenses
General & Administrative ($785,000)
Marketing ($625,000)
Franchise Fees $0
Property Operations & Maintenance ($586,000)
Utility Costs ($594,000)
Total Undistributed Expenses ($2,590,000)
Gross Operating Profit $1,743,000
Management Fee ($247,000)
Income Before Fixed Charges $1,496,000
Fixed Expenses
Property Tax $0
Insurance ($101,000)
Total Fixed Expenses ($101,000)
Reserves for Replacement $330,000
NOI $1,065,000
Mr. Bragg's NOI Calculation for FY 2005
Revenues
Rooms ($121.10/room @ 48.7% occupancy) $4,818,000
Food $1,699,000
Beverage $378,000
Other Food & Beverage $895,000
Telephone $70,000
Recreation $277,000
Rentals & Other Income $122,000
Total Revenue $8,259,000
Departmental Expenses
Rooms ($1,349,000)
Food & Beverage ($2,199,000)
Telephone ($75,000)
Recreation ($307,000)
Total Departmental Expenses ($3,930,000)
Departmental Income $4,329,000
Undistributed Expenses
General & Administrative ($775,000)
Marketing ($596,000)
Franchise Fees $0
Property Operations & Maintenance ($591,000)
Utility Costs ($627,000)
Total Undistributed Expenses ($2,589,000)
Gross Operating Profit $1,740,000
Management Fee ($248,000)
Income Before Fixed Charges $1,492,000
Fixed Expenses
Property Tax $0
Insurance ($119,000)
Total Fixed Expenses ($119,000)
Reserves for Replacement $330,000
NOI $1,043,000
After determining the NOI for each fiscal year, the next step in Mr. Bragg's analysis was to determine an appropriate capitalization rate. In this case, he used the direct capitalization method after interviewing several hotel buyers in the New England area and ascertaining that the direct capitalization method is almost always used for the purposes of hotel financing. Mr. Bragg employed two methods for developing his capitalization rate: reference to the Korpacz Survey and the band-of-investment technique.
The Korpacz Survey indicated that, for the first quarter of 2003, full-service hotels had capitalization rates ranging from 8% to 13%, with an average rate of 10.64%. For the first quarter of 2004, the Korpacz Survey indicated capitalization rates ranging from 7.5% to 12% for full-service hotels, with an average rate of 10.28%.
Mr. Bragg next employed the band-of-investment technique. Industry data compiled by Mr. Bragg indicated that loan interest rates for hotels as of January 1, 2003 ranged from 5% to 6.5%, with an average rate of 5.82%. He therefore selected an interest rate of 5.8%. Mr. Bragg utilized a loan-to-value ratio of 75% and also a 20-year amortization period because those were the most common in the hotel industry. Finally, Mr. Bragg selected an equity dividend rate by consulting with hotel buyers and brokers, who indicated that typical equity dividend rates ranged from 12% to 20%, but that older hotels may have rates as high as 18% to 25%. Based on this information, and because he concluded that the subject hotel had higher than average risk factors, Mr. Bragg determined that an equity dividend rate of 20% was warranted. Using all of these factors in his band-of-investment analysis, Mr. Bragg calculated a capitalization rate of 11.3%, rounded, for fiscal year 2004. For fiscal year 2005, Mr. Bragg noted that interest rates had increased and therefore used an interest rate of 6.1%. Mr. Bragg also adjusted his equity dividend rate downward to 18% because increased demand for hotel investments resulted in lower overall equity dividend rates. Using these factors in his band of investment analysis, Mr. Bragg calculated a capitalization rate of 11%, rounded, for fiscal year 2005.
Though the Korpacz Survey indicated an average capitalization rate of 10.64% for fiscal year 2004 and 10.28% for fiscal year 2005 and his band-of-investment analyses yielded capitalization rates of 11.3% for fiscal year 2004 and 11% for fiscal year 2005, Mr. Bragg ultimately used lower capitalization rates than those derived by either method because the data relied upon in arriving at those rates related to "going concern" interests, which include both the real and personal property components of an operating business. Mr. Bragg further decreased the rates to account for the fact that only the real property interests of the subject hotel were being valued. Ultimately, Mr. Bragg selected capitalization rates of 10.5% for fiscal year 2004 and 10.25% for fiscal year 2005.
After determining his capitalization rates, the last step in Mr. Bragg's analysis was to estimate the amount of NOI attributable to non-realty assets such as furniture, fixtures and equipment ("FF&E") and cash and inventories. These assets require a deduction from income that provides both a return of and a return on investment. In the case of FF&E, the return of investment is provided for by allowing a reserve for replacements, as Mr. Bragg did. He estimated that 4% of total revenue was an appropriate deduction for an FF&E reserve, an estimate which he based on industry publications which indicated that typical percentages for FF&E reserves ranged from 3.5% to 4.6% of total revenue between 2001 and 2003.
To provide for a return on the FF&E, Mr. Bragg first calculated the value of the FF&E and then selected an appropriate rate of return. To value the FF&E, Mr. Bragg reviewed the subject property's fixed asset schedules, computed the cost of the FF&E as new, and then calculated the depreciated value of the assets. For fiscal year 2004, Mr. Bragg valued the subject hotel's FF&E at $1,140,000. For fiscal year 2005, he valued the FF&E at $1,220,000.
After consulting the Korpacz Survey, Mr. Bragg determined that yield requirements for full-service hotels ranged from 11.5% to 15%, with an average rate of 13.5%. For fiscal year 2004, Mr. Bragg selected the highest end of that range because, in his opinion, the subject hotel represented an above-average level of risk. For fiscal year 2005, Mr. Bragg selected a rate of 14.5%, to account for declining yield rates during 2003. Accordingly, Mr. Bragg deducted from the NOI $171,000 for fiscal year 2004 and $177,000 for fiscal year 2005 to account for the income attributable to the FF&E.
To account for the net income attributable to the remaining non-realty assets, Mr. Bragg first placed a value on them. To value the inventories, Mr. Bragg used the actual inventories reported by the subject hotel, which, for both fiscal years at issue, was $150,277. Further, for both of the fiscal years at issue, Mr. Bragg valued the cash and cash equivalents at $500 per guestroom, for a total of $112,000. Mr. Bragg based this valuation on a review of balance sheets from other full-service hotels. To these values, Mr. Bragg applied his previously selected capitalization rates for both of the fiscal years at issue because he found no market evidence to support either a greater or lower risk associated with these assets than the risk associated with the subject real property. Accordingly, Mr. Bragg deducted $28,000 from the NOI for fiscal year 2004 and $27,000 from the NOI for fiscal year 2005 to account for income attributable to non-realty assets other than FF&E.
After making these adjustments, Mr. Bragg arrived at an NOI of $866,000 for fiscal year 2004. After adding the applicable tax factor to his chosen capitalization rate of 10.5% for a combined rate of 11.38%, Mr. Bragg applied the combined rate to his stabilized NOI, which resulted in a value of $7,607,000. Mr. Bragg then rounded that figure down for an indicated value of $7,600,000 as of January 1, 2003.
For fiscal year 2005, after making the adjustments to account for income attributable to FF&E and other non-realty assets, Mr. Bragg arrived at an NOI of $839,000. After adding the applicable tax factor to his chosen capitalization rate of 10.25% for a combined rate of 11.11%, Mr. Bragg applied the combined rate to his stabilized NOI, which resulted in a value of $7,550,000. Mr. Bragg then rounded that figure up for an indicated value of $7,600,000 as of January 1, 2004.
The appellee presented its case primarily through the testimony of Paul Matheson, Director of Assessing for Barnstable. Mr. Matheson testified that for each of the fiscal years at issue, the assessors used an income- capitalization approach to value the hotel component of the subject property and a cost approach to value the land attributable to the golf course. Mr. Matheson testified that, for the purposes of their income-capitalization approach, the assessors input data compiled from numerous other area hotels into their mass appraisal computer application. Further, Mr. Matheson testified that the assessors used the cost approach for the golf course component of the subject property because they did not believe that its highest and best use was as a golf course, but instead considered the highest and best use of that portion of the subject property to be for residential development of single-family dwellings.
At the hearing of these appeals and in their post-hearing brief, the assessors contended that the fair cash values asserted by the appellant's expert did not take into account the poor management of the subject hotel. The assessors argued that proper appraisal practices for the valuation of a hotel require the assumption that the hotel is under competent management. If a hotel is not being properly managed, an appraiser is "justified in projecting improved operating results based on competent management." Hotels And Motels: A Guide To Market Analysis, Investment Analysis And Valuations (The Appraisal Institute 1997) 215 ("Hotels And Motels"). The assessors argued that the lackluster economic performance of the subject hotel was due to poor management and that the appellant's appraiser improperly failed to adjust his estimates of value to reflect competent management.
However, the Board found that there was no evidence in the record to support a finding that the subject hotel was poorly managed during the relevant time periods. Further, the evidence pointed to by the appellee as proof of incompetent management did not support that assertion. For example, the appellee contended that the appellant's decision not to invest the $8 million necessary to bring the subject property in line with Sheraton brand standards contributed to its loss of market share. In addition, the appellee contended that the appellant's decision to sell the Cape Codder hotel, which formerly functioned as the subject's sister hotel, only to have it become a major competitor, was a poor management decision which contributed to the subject hotel's decreased market share. The Board found that these facts did not support the finding that the hotel was poorly managed on a day-to-day basis during the relevant time periods.
In fact, the Board found that a third example pointed to by the appellee as evidence of the subject hotel's lack of proper management supported exactly the opposite conclusion. James Cook, the subject hotel's current manager, testified that he was brought in to manage the subject hotel in part because of his prior experience in managing "distressed hotels." The appellee pointed to this testimony as evidence of the fact that the subject hotel was under incompetent management. On the contrary, the Board found the fact that the appellant installed an appropriate manager with knowledge of and experience in managing distressed hotels, such as the subject hotel, to be evidence that it was under competent management during the fiscal years at issue. As there was no evidence in the record to support the finding that the subject hotel was poorly managed, the Board rejected the appellee's argument.
The appellee further contended that the appellant's expert failed to properly account for the value of the golf course component of the subject property. Mr. Bragg's valuation for the fiscal years at issue did not separately value the land component of the subject property comprising the golf course. Rather, Mr. Bragg accounted for the subject hotel's golf course by including the relevant income and expenses in the recreational income and expense line items in the calculation of his stabilized NOI. In other words, he treated the golf course as just another departmental item. Because the golf course operated at a loss in each of the fiscal years at issue, this treatment essentially resulted in a negative value for the land dedicated to the golf course.
Mr. Matheson testified that the assessors used the cost approach to value that portion of the subject property, because they did not believe that its highest and best use was as a golf course. Rather, Mr. Matheson testified that the highest and best use of the golf course acreage was as a residential development of single-family homes.
On the basis of all of the evidence, the Board found that Mr. Bragg's valuation of the golf course was erroneous. Because his valuation of the golf course was merely a function of its income and expenses, the Board found that Mr. Bragg failed to capture the value of the golf course as an amenity of the subject hotel. Mr. Bragg's consideration of only the business value of the golf course ignored the inherent value of its sprawling, landscaped acres as an enhancement to the subject hotel. Further, because the golf course operated at a loss in each of the fiscal years at issue, Mr. Bragg's approach essentially resulted in a negative value for the golf course. There was no support in the record, or legal or appraisal precedent, for a finding that 30 acres of property located in Hyannis were worthless, and the Board rejected Mr. Bragg's valuation approach with respect to the land component of the subject property.
However, the Board did not accept the assessors' valuation of the land component of the subject property either. The assessors concluded that the highest and best use of the golf course was for the residential development of single family homes. However, they offered no evidence which indicated how many homes could be developed or any other information as to the feasibility of a residential development on the property. The Board therefore found the assessors' assertion to be far too speculative to provide probative evidence of the fair market value of the golf course. For this reason, the Board employed its own methodology to value the golf course component of the subject property.
Based on the evidence of record, the Board found that the subject property's golf course was an enhancement to the overall ambience and aesthetic appeal of the subject property, rather than a discreet business enterprise. Using the values shown on the property record cards, the Board computed the value of the golf course by applying the average per-acre value of the hotel and golf course to the 30 acres of land comprising the golf course, which better reflected its value as an amenity to the subject hotel.
The assessors valued the 48.83 acres of the subject property comprising the hotel and golf course at $5,461,100, for an average per-acre value of $112,762.75. Applying that per-acre rate to the 30 acres of land comprising the golf course, the Board found that the appropriate valuation for that portion of the subject property was $3,382,883. Further, the Board found that the best evidence of the values of the subject property's 5.87 acres of residual land and 0.24 acres of wetlands were the values contained on the property record cards, and the Board therefore adopted those values, which were $513,000 and $7,400, respectively.
After considering all of the evidence, the Board found that the appellant demonstrated that the subject property was overvalued by the assessors for both of the fiscal years at issue. With the exception of the golf course component, and, as will be discussed further below, the occupancy rates, the Board found that Mr. Bragg's valuation presentation was credible and amply supported with both actual and market data. Further, the Board agreed with Mr. Bragg's conclusion and found that the income-capitalization approach was the most reliable method of determining the fair cash value of the subject property. It therefore, for the most part, adopted the valuation methodology utilized by Mr. Bragg.
With respect to the occupancy rates, the Board found that those used by Mr. Bragg were not supported by the market for the fiscal years at issue. For both of the fiscal years at issue, Mr. Bragg stabilized the occupancy rates at the subject hotel's actual 2002 levels. However, it was undisputed that occupancy rates both nationally and regionally had plummeted during 2002. Further, data collected by the Massachusetts Department of Revenue showed a significant increase in room occupancy rates in the Barnstable area between 2002 and 2003. Moreover, in his appraisal report, Mr. Bragg acknowledged that the hotel industry expected improving performance in 2004. The Board found that Mr. Bragg's use of the subject hotel's actual 2002 occupancy rates failed to account for improving local occupancy rates for fiscal year 2004 and improving hotel economics for fiscal year 2005. Accordingly, the Board found that Mr. Bragg's occupancy rates did not provide reliable evidence of the occupancy rates of the subject hotel during the fiscal years at issue.
The Board therefore stabilized the occupancy rates over a three-year period beginning with calendar year 2001 and ending with calendar year 2003 to better reflect the improving occupancy rates in the Barnstable area. The Board's income-capitalization calculation for each of the fiscal years at issue is summarized in the following tables:
Board's Income-Capitalization Methodology for FY 2004
Departmental Revenues
Rooms ($119.73/room @ 50.5% occupancy) $4,943,508
Food $1,778,979
Beverage $384,875
Other Food & Beverage $923,700
Telephone $102,633
Rentals & Other Income $136,845
Recreation $282,242
Total Revenue $8,552,782
DepartmentalExpenses
Rooms ($1,379,239)
Food & Beverage ($2,290,965)
Telephone ($59,322)
Recreation ($331,916)
Total Expenses ($4,061,442)
Departmental Income $4,491,340
Undistributed Expenses
General & Administrative ($812,514)
Marketing ($650,011)
Franchise Fees $0
Property Operations & Maintenance ($607,248)
Utility Costs ($615,800)
Total Undistributed Expenses ($2,685,573)
Gross Operating Profit $1,805,767
Management Fee ($256,583)
Income Before Fixed Charges $1,549,184
Fixed Expenses
Property Tax $0
Insurance ($101,000)
Reserve for Replacement ($342,111)
NOI $1,106,072
Income Attributable to FF&E ($153,900)
Income Attributable to Other Non-Realty Assets ($27,539)
Total Income Attributable to Real Property $924,633
Overall Cap Rate 0.11384
Rounded Indicated Value (w/o land) $8,100,000
Land
Golf Course $3,382,882
Residual Land $513,000
Wetland $7,400
Land Total $3,903,282
Final Rounded Indicated Value $12,000,000
Board's Income-Capitalization Methodology for FY 2005
Departmental Revenues
Rooms ($121.11/room @ 50.5% occupancy) $5,000,487
Food $1,766,896
Beverage $394,550
Other Food & Beverage $926,334
Telephone $68,617
Rentals & Other Income $128,657
Recreation $291,624
Total Revenue $8,577,165
Departmental Expenses
Rooms ($1,400,136)
Food & Beverage ($2,284,956)
Telephone ($73,489)
Recreation ($323,119)
Total Expenses ($4,081,700)
Departmental Income $4,495,465
Undistributed Expenses
General & Administrative ($806,253)
Marketing ($617,556)
Franchise Fees $0
Property Operations & Maintenance ($617,556)
Utility Costs ($651,864)
Total Undistributed Expenses ($2,693,229)
Gross Operating Profit $1,802,236
Management Fee $(257,315)
Income Before Fixed Charges $1,544,921
Fixed Expenses Property Tax $0
Insurance ($101,000)
Reserve for Replacement ($343,087)
NOI $1,100,834
Income Attributable to FF&E ($164,700)
Income Attributable to Other Non-Realty Assets ($26,883)
Total Income Attributable to Real Property $909,251
Overall Cap Rate 0.11112
Rounded Indicated Value (w/o land) $8,200,000
Land
Golf Course $3,382,882
Residual Land $513,000
Wetland $7,400
Land Total $3,903,282
Final Rounded Indicated Value $12,100,000
On the basis of these findings, the Board found that the appellant met its burden of proving that the subject property was overvalued for fiscal years 2004 and 2005. The Board determined that the fair cash value of the subject property was $12,000,000 for fiscal year 2004 and $12,100,000 for fiscal year 2005. Accordingly, the Board decided this appeal for the appellant and granted abatements of $21,099.67 for fiscal year 2004 and $40,702.10 for fiscal year 2005.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956). Generally, real estate valuation experts and the Massachusetts courts rely upon three approaches to determine fair cash value of property: income-capitalization, sales comparison, and cost reproduction. Correia v. New Bedford Redevelopment, 375 Mass. 360, 362 (1978).
"The board is not required to adopt any particular method of valuation," Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986), but the income- capitalization method is "frequently applied with respect to income-producing property." Taunton Redev. Assocs. v. Assessors of Taunton, 393 Mass. 293, 295 (1984). Moreover, use of the income-capitalization method is appropriate when reliable market-sales data are not available, and is especially appropriate for valuing real estate improved with a hotel. 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); Sanmar, Inc. v. Assessors of North Adams, Mass. ATB Findings of Fact and Reports, 2005-81, 100, 107; Cambridge Hyatt Joint Venture v. Assessors of Cambridge, Mass. ATB Findings of Fact and Reports 1990-2003, 209, 217-18.
In these appeals, the Board found and ruled that the income-capitalization approach was the best method for determining the fair cash value of the subject property. It is the approach most often used to value income-producing properties like hotels and motels. Because of the age of the subject property, the cost approach was not a reliable valuation method. Moreover, because of the paucity of truly comparable sales of hotels within the relevant time periods, the Board found that the sales- comparison approach was not the best method for determining the fair cash value of the subject property. The Board therefore used the income-capitalization approach to determine the fair cash value of the subject property for both of the fiscal years at issue.
The income stream used in the income-capitalization method must reflect the property's earning capacity or market rental value. Pepsi-Cola Bottling Co., 397 Mass. at 451. In the instant appeals, Mr. Bragg relied upon the subject property's actual income as depicted in the subject hotel's relevant financial statements, which he stabilized for the most part at 2002 levels, and for some purposes, at 2003 levels. He also relied on relevant market data. The Board found and ruled that Mr. Bragg's estimates of the subject hotel's income closely reflected the subject hotel's earning capacity and approximated the market. See, e.g., Three Corners Realty Trust, Mass. ATB Findings of Fact and Reports 2002-47, 71; Cambridge Hyatt Joint Venture, Mass. ATB Findings of Fact and Reports at 1990-209.
With respect to the departmental and undistributed expenses and fixed costs, the Board found and ruled that Mr. Bragg's figures were reasonable. Mr. Bragg based his figures on the subject hotel's financial statements as well as relevant and appropriate market data. Moreover, his expenses and cost categories were consistent with those allowed in other appeals. See, e.g., Three Corners Realty Trust, Mass. ATB Findings of Fact and Reports at 2002-76, G.F. Springfield Mgmt., Inc. v. Assessors of West Springfield, Mass. ATB Findings of Fact and Reports 2000-228, 247-48; Cambridge Hyatt Joint Venture, Mass. ATB Findings of Fact and Reports at 1990-209. On the basis of all of the evidence, the Board found and ruled that the expense and cost figures used by Mr. Bragg were, on the whole, reasonable indicators of market expenses and costs for the subject property. Therefore, for the most part, the Board adopted the methodology employed by Mr. Bragg.
Mr. Bragg stabilized the subject hotel's income and expenses at 2002 levels, and for certain purposes, at 2003 levels. For both of the fiscal years at issue, he used the subject hotel's actual 2002 occupancy rates. However, according to Mr. Bragg's own appraisal report, hotel occupancy rates, both nationally and locally, plummeted following the events of September 11, 2001 and the economic recession in 2001, with the decline bottoming out during 2003. Further, according to Mr. Bragg's appraisal report, occupancy rates were expected to improve in 2004. Moreover, the Board has recognized, in a recent appeal, the improvement in hotel economics between calendar years 2003 and 2004. See, e.g., Zuckerman, et al. v. Board of Assessors of the City of Cambridge. Mass. ATB Findings of Fact and Reports, 2008-567, 597. In addition, evidence entered into the record showed that occupancy rates in the Town of Barnstable increased between 2002 and 2003. For these reasons, the Board found that the occupancy rates used by Mr. Bragg did not reflect the market and "failed to account for improving hotel economics" during the fiscal years at issue. Id. The Board therefore determined the appropriate occupancy rates by stabilizing the subject hotel's occupancy rates over a three-year period to better reflect the local market and the improving economic climate in the hotel industry.
In addition, the Board rejected the approach used by both parties to value the golf course component of the subject property. Mr. Bragg's approach, which was to calculate the value of the golf course as merely a function of its income and expenses, failed to capture the value that the course's rolling, landscaped acres contributed to the resort-like setting of the subject hotel. Moreover, his valuation resulted in a negative value for the golf course, and there was no evidence in the record, nor enunciated legal principles, to support a finding that 30 acres of land in Hyannis were worthless. The Board therefore rejected Mr. Bragg's analysis with respect to the golf course.
Similarly, although the assessors asserted that the highest and best use of the golf course was residential development of single family homes, they presented no evidence whatsoever as to the feasibility of the residential development of the golf course, how many homes could be constructed, or the like. "[F]our criteria... govern determination of highest and best use - legal permissibility, physical possibility, financial feasibility, and maximum productivity." Cosenzi v. Board of Assessors of the City of Springfield, Mass. ATB Findings of Fact and Reports 2008-1299, 1321. "As a general rule, the highest and best use statement should . . . follow the sequence of the four [criteria]. A logically structured review of the four [criteria] forms the foundation for the opinion of value." Id. at 1321-22 (quoting The Appraisal Institute, The Appraisal Of Real Estate 319 (12th ed. 2001)). In the present appeals, the assessors offered no evidence in support of their asserted highest and best use for the golf course. For this reason, the Board rejected the assessors' valuation methodology and applied its own methodology.
Further, the assessors' defense of the assessments at issue relied heavily on their assertion that the subject hotel was poorly managed during the fiscal years at issue and that the appellant's expert real estate appraiser failed to adjust his estimates of value to account for competent management. While it is true that proper appraisal practices for the valuation of a hotel require the assumption that the hotel is under competent management, and, if the hotel is not being properly managed, an appraiser is "justified in projecting improved operating results based on competent management," Hotels And Motels at 215, the evidence of record did not establish that the subject hotel was under incompetent management during the fiscal years at issue. Accordingly, the Board rejected the assessors' assertion and found and ruled that they overvalued the subject property during the fiscal years at issue.
In reaching its opinion of fair cash value in this appeal, the Board was not required to believe the testimony of any particular witness or to adopt any particular method of valuation that an expert witness suggested. Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight. Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp. v. Board of Assessors, 383 Mass. 456, 473 (1981); New England Oyster House, Inc., 362 Mass. at 701-702. In evaluating the evidence before it, the Board selected from the various elements of value and formed its own independent judgment of fair cash value. General Electric v. Assessors of Lynn, 393 Mass. 591, 605 (1984); North American Phillips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984).
The fair cash value of property cannot be proven with "mathematical certainty and must ultimately rest in the realm of opinion, estimate and judgment." Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 72 (1941). "The credibility of witnesses, the weight of evidence, and inferences to be drawn from the evidence are matters for the board." Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977). Accordingly, the Board was not required to adopt the figures suggested by the only independent real estate valuation expert to testify in this appeal, but could base its determination on other evidence of record and its own expertise. See Boston Consolidated Gas Co., 309 Mass. at 72.
The burden of proof is upon the appellant to make out its right as a matter of law to an abatement of the tax. Schlaiker v. Assessors of Great Barrington, 356 Mass. 243, 245 (1974). In the present appeals, the Board ruled that the appellant met its burden of proving that the subject property was overvalued for both of the fiscal years at issue. The Board found that the value of the subject property for fiscal year 2004 was $12,000,000. The Board found that the value of the subject property for fiscal year 2005 was $12,100,000.
Accordingly, the Board decided these appeals for the appellant and granted abatements in the amount of $21,099.67 for fiscal year 2004 and $40,702.10 for fiscal year 2005.
APPELLATE TAX BOARD
By: __________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: _______________________________
Clerk of the Board
There was a slight discrepancy in the record as to the size of the subject property. The appellant's expert witness lists the total acreage of the subject property as 54.48 acres, while the assessors list the total acreage as 54.54. The Board found that the property record cards presented the best evidence of the size of the subject property, and therefore, adopted the acreage used by the assessors. Following the years at issue, the subject hotel was downgraded from its status as a Sheraton to a Sheraton Four Points, which is a less prestigious hotel brand owned by the same parent corporation. The fiscal year 2005 actual tax bill was mailed on October 22, 2004. The appellant's corresponding Application for Abatement was filed on November 22, 2004, thirty-one days later. Although Applications for Abatement must be filed within thirty days of the mailing of the actual tax bill, when the last day of a filing period falls on a Sunday, the filing is still considered timely if it is made on the following business day. G.L. c. 4, § 9 (providing, in pertinent part, that "when the day or the last day for the performance of any act . . . falls on Sunday or a legal holiday, the act may . . . be performed on the next succeeding business day."). Accordingly, the Board found and ruled that SLT Realty Trust timely filed its fiscal year 2005 Application for Abatement on Monday, November 22, 2004. There was a discrepancy in the record as to the actual acreage of the subject property's golf course. In his appraisal report, the appellant's expert witness attributed 44 acres to the golf course. On the property record cards, however, the assessors list the golf course as having 30 acres. The Board found that the property record cards presented the most reliable evidence of the size of the golf course, and accordingly considered the golf course to have 30 acres. A "flagged" hotel is one that belongs to a nationwide franchise. Mr. Bragg's recreation line-items included the income and expenses for the subject property's golf course. The Board adopted a capitalization rate of 13.5% to apply to the FF&E, which was the average capitalization rate during the relevant time periods. The abatement amounts include a 3% Land Bank Tax and District Tax.
ATB 2009-684
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