Davis Realty Trust, Howard Davis, Trustee v. Board of Assessors of the Town of Avon (June 21, 2013)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



DAVIS REALTY TRUST		 	  v.			BOARD OF ASSESSORS OF 
HOWARD DAVIS, TRUSTEE					THE TOWN OF AVON

Docket Nos.: F310982 (FY 2011)			Promulgated: 
		   F315002 (FY 2012)			June 21, 2013 



	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 Board of Assessors of the Town of Avon (the "appellee" or the "assessors") to abate taxes on certain real estate located at 145 Bodwell Street in the Town of Avon (the "subject property") owned by and assessed to Davis Realty Trust, Howard Davis, Trustee (the "appellant") under G.L. c. 59, §§ 11 and 38 for fiscal years 2011 and 2012 (the "fiscal years at issue").  
	Commissioner Mulhern heard these appeals.  Chairman Hammond and Commissioners Scharaffa, Rose, and Chmielinski joined him in the decisions for the appellants for both fiscal year 2011 and fiscal year 2012.    
	These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
	Matthew A. Luz, Esq. for the appellant.

	Ellen M. Hutchinson, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
	On January 1, 2010 and January 1, 2011, the relevant assessment dates for the fiscal years at issue in these appeals, Davis Realty Trust, Howard Davis, Trustee was the assessed owner of the subject property.  At all relevant times, the subject property was composed of a 5.94-acre parcel improved with two freestanding industrial buildings containing a combined total of 58,416 square feet of gross floor area.  For assessment and real estate tax purposes, the subject property is identified as "Parcel ID OB6002006."  
	For fiscal years 2011 and 2012, the town's Collector of Taxes mailed the real estate tax bills on or about December 29, 2010 and December 30, 2011, respectively.  The assessors initially valued the subject property at $3,094,000 for fiscal year 2011 and at $3,056,000 for fiscal year 2012 and assessed taxes thereon, at the corresponding commercial rates of $25.96 and $28.82 per thousand, in the amounts of $80,320.24 and $88,073.92, respectively.  In accordance with G.L. c. 59, § 57C, the appellants timely paid the real estate taxes without incurring interest.  
On January 11, 2011, in accordance with G.L. c. 59, § 59, the appellant timely filed its abatement application for fiscal year 2011 with the assessors.  On January 6, 2012, in accordance with G.L. c. 59, § 59, the appellant timely filed its abatement application for fiscal year 2012 with the assessors.  On April 13, 2011, the assessors granted the appellant a partial abatement of $986.48 for fiscal year 2011 by lowering the subject property's assessed value by $38,000 to $3,056,000.  On March 12, 2012, the assessors denied the appellant's request for abatement for fiscal year 2012.  On May 2, 2011 and March 22, 2012, respectively, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed its corresponding Petitions Under Formal Procedure with the Appellate Tax Board (the "Board").  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
At the hearing of these appeals, in support of its requests for abatement, the appellant presented one witness, Eric Wolff, whom the Board qualified as a real estate valuation expert, and two exhibits -- Mr. Wolff's written appraisal report and a series of deeds relating to the sales of certain industrial properties in the area.  In support of the assessment, the assessors did not offer any witnesses but did introduce, without objection from the appellant, the requisite jurisdictional documents and the subject property's relevant property record cards and income valuation card.  The assessors' attorney also cross-examined the appellant's real estate valuation expert.  Based on this evidence, the Board made the following findings of fact.  
Avon consists of 4.57 square miles and had a population of 4,356 in 2010.  It is located approximately 17 miles southwest of Boston and about 27 miles northeast of Providence.  Avon is bordered by Randolph to the northeast, Holbrook to the east, Brockton to the south, and Stoughton to the west and northwest.  
Avon is a predominantly residential community with a mix of commercial and industrial properties.  Its most important commercial area is located in the northwestern quadrant of town where the Avon Industrial Park and several large retailers, including IKEA, Costco, Jordan's Furniture, Staples, Home Depot, Christmas Tree Shops, and NTB, are established.  This area has excellent highway access and visibility along State Route 24, which is a six-lane state highway that provides access to Route 128, approximately 7 miles to the north and I-495, approximately 8 miles to the south.
The subject property is situated within the Avon Industrial Park, only ¼-mile from Pond Street and Harrison Boulevard, which provide quick and easy access to State Route 24.  The park is comprised of older industrial buildings which were mostly built in the 1960s and 1970s.  The buildings in the park consist of a variety of industrial uses, including warehouse, light manufacturing, and research and development.  The buildings range in size from 15,000 to 300,000 square feet with the majority in the 30,000 to 75,000 square foot range.  The majority of the buildings are owner occupied, but there are some multi-tenanted buildings.             
The subject property, which has a favorable location within the park, is a mostly rectangular-shaped parcel containing 5.94 acres of land improved with two freestanding industrial buildings ("Building 1" and "Building 2").  Access to the site is available via curb cuts along Bodwell Street.  There is an asphalt paved area situated in the front, along the right side and to the rear of Building 1, which is located in the front section of the site.  This paved asphalt area provides parking and access to the overhead doors located at the rear of this building.  There is a long asphalt paved driveway that provides access from Bodwell Street to another asphalt area situated along the front and the right side of Building 2, which is located in the rear section of the site.  This paved asphalt area provides parking and access to overhead doors located along the front of this building.  In addition, there is an asphalt paved driveway that traverses along the left side of Building 1 and to the rear of Building 2.  The paved asphalt parking areas provide parking for 117 vehicles.  All utilities are available at the site, including municipal water, gas, electric, and telephone.  The site is served by private on-site septic disposal systems.  The subject property's current use is allowed within the Industrial zoning district which permits religious, agricultural, office, and a variety of industrial uses.  In addition, the subject property appears to conform to all current dimensional requirements within this zoning classification.  
Building 1 and Building 2 contain a combined total of 58,416 square feet of gross floor area.  Building 1 contains 9,796 square feet of gross floor area and was built in 1972.  It is a masonry frame structure constructed with a concrete slab foundation, a flat roof with a rubber membrane covering, and a brick and concrete block exterior.  It has a gas-fired HVAC system in the office area and gas-fired suspended space heaters in the industrial area.  The building is 100% sprinklered.  
The interior of Building 1 has painted plaster or pine wood walls in the office areas and concrete block in the industrial area.  The ceilings are suspended acoustic tiles in the office area and exposed insulation panels in the industrial area.  The floors are carpet and vinyl tile in the office area and concrete in the industrial area.  Fluorescent panel lighting fixtures provide illumination in the office area while fluorescent strip lighting fixtures provide light in the industrial area.  The building contains a total of 4 lavatories.
Building 1 was designed as a flexible industrial office and warehouse building for use by multiple tenants and was, at the time of the hearing, divided into 2 rentable units which were 100% occupied by 2 tenants, the owner and one tenant.  The office space occupied by the owner consists of a reception area, 5 private offices, a conference room, an open office area, a mezzanine office area with 7 private offices, and 2 lavatories.  The space occupied by the tenant, Terascala, contains mezzanine office space, consisting of a reception area, 6 private offices, a conference room, 2 open office areas, a kitchenette area, and 2 lavatories.  Open industrial space with clearance height ranging from 8 feet to 18 feet is situated within the rear portion of the building.  There is 1 overhead metal door with drive-in access and 1 overhead metal door with tailboard access located along the rear of the building.  The overall interior and exterior of the building was in average physical condition.         
Building 2 contains 48,620 square feet of gross floor area and was also built in 1972 with an addition completed in 2005.  It is a steel and masonry frame structure constructed with a concrete slab foundation, a partially flat roof with a rubber membrane covering, a partially pitched roof with a metal covering, and a decorative concrete block, Dryvit, metal and concrete block exterior.  It has a gas-fired HVAC system in the office areas and gas-fired suspended space heaters in the industrial area.  The building is 100% sprinklered.  
The interior of Building 2 has painted plaster walls in the office areas and concrete block, plywood, exposed insulation, or sheetrock in the industrial areas.  The ceilings are suspended acoustic tiles in the office areas and exposed metal or insulation panels in the industrial areas.  The floors are carpet and vinyl tile in the office areas and concrete or vinyl tile in the industrial areas.  Fluorescent panel lighting fixtures provide illumination in the office area while High Bay lamps and fluorescent strip lighting fixtures provide light in the industrial areas.  The building contains a total of 15 lavatories.
Building 2 was designed as an industrial office and warehouse building for use by multiple tenants.  At the time of the hearing, the building was occupied by 8 tenants.  All of the tenants use a combination of office and industrial space.  There are 9 overhead metal doors with drive-in access and 14 overhead metal doors with tailboard access located along the front and rear of the building.  The open industrial areas have clearance heights of about 18 feet.  The overall interior and exterior of the building was in average physical condition.  
	In discussing his methodology for ascertaining the fair cash value of the subject property for the fiscal years at issue, Mr. Wolff reported and testified that he first inspected the subject property and reviewed relevant zoning regulations.  He then conducted a thorough examination of the Avon area real estate market, emphasizing the industrial building submarket.  Mr. Wolff further reported and testified that he researched the terms and conditions associated with transfers of similar properties and examined sales, offerings and lease data from competitive market area participants.  In addition, he reviewed vacancy levels and development trends and inspected any comparables used in his analysis.  Some of the sources and publications that he used in his analysis include the Warren Group, the CoStar Group, the Norfolk County Registry of Deeds, the Avon Zoning Ordinance, and Avon's Assessor's, Tax Collector's and Building Department's relevant records. 
After considering information, statistics, and data obtained from all sources, along with the recognized criteria for formulating a property's highest-and-best use, Mr. Wolff determined that the subject property's highest-and-best use was its existing use as an industrial property.   
	To estimate the fair cash value of the subject property for fiscal years 2011 and 2012, Mr. Wolff developed his values using an income-capitalization methodology.  He considered but rejected using a cost approach because the sales-comparison and income-capitalization approaches were better alternatives.  Even though he developed a value for the subject property for each of the fiscal years at issue using a sales-comparison approach, he ultimately did not rely on these values because "this approach provides a less reliable indicator of market value" of an income-producing property like the subject property.  He also testified that most of the sale properties that he used in his sales-comparison method possessed limited comparability to the subject property notwithstanding adjustments.  Because of its reliability for valuing income-producing property like the subject property, Mr. Wolff opted for an income-capitalization methodology.  Mr. Wolff considered his direct income-capitalization approach to be the most viable methodology to use to estimate the fair cash value of the subject property for the fiscal years at issue.   
	To determine the most appropriate office rents to use in his income-capitalization methodology for the fiscal years at issue, Mr. Wolff obtained the subject property's rent rolls and also investigated market rental rates by surveying what he regarded as similar space in properties located in the communities which he considered part of the relevant marketplace -- Avon, Brockton, Canton, Easton, Holbrook, Randolph, and Stoughton.  The subject property's rent rolls indicated an average modified gross rent of $7.89 per square foot as of January 1, 2010 and an average modified gross rent of $6.33 per square foot as of January 1, 2011.  The table in Mr. Wolff's Summary Appraisal Report condensing the pertinent rental data from his 13 comparable properties from the marketplace is reproduced below. 
Comp. #	Location	Tenant	Area (SF)	Date Term	$/SF
Type*	Comment**		1	208 Bodwell St. Avon	Polar Beverages	11,000	9/10
2 Yrs.	5.50
NNN	Constructed 1980
Ave. Condition		2	254 Bodwell St.
Avon	Confidential	11,300	6/10
5 Yrs.	6.50
NNN	Constructed 1979
Ave. Condition		3	40 Robbie Rd.
Avon	Urban Express	19,098	1/09
3 Yrs.	5.75
NNN	Constructed 2000
Good Condition		4	40 Robbie Road
Avon	Urban Express	8,700	7/10
3 Yrs.	4.95
NNN	Constructed 2000
Ave. Condition		5	101 Wales Ave.
Avon	Cuming Corporation	10,000	5/09
3 Yrs.	5.75
NNN	Constructed 1968
Ave. Condition		6	57 Littlefield St.
Avon	Walsh Movers	130,000	8/10
3 Yrs.	4.25
NNN	Constructed 1974
Ave. Condition		7	57 Littlefield St.
Avon	Yello-O-Glow	122,858	10/10
3 Yrs.	4.25
NNN	Constructed 1974
Ave. Condition		8	40 Murphy Dr.
Avon	Confidential	4,110	1/11
3 Yrs.	6.00
NNN	Constructed 1975
Ave. Condition		9	20 Strafello Dr.
Avon	Work N Gear	17,385	8/10
5 Yrs.	5.00
MG	Constructed 1980
Ave. Condition		10	20 Strafello Dr.
Avon	Vesta Foods	2,000	2/10
3 Yrs.	7.20
MG	Constructed 1980
Ave. Condition		11	20 Strafello Dr.
Avon	Boston Lyrics	10,000	7/10
5 Yrs.	6.25
MG	Constructed 1980
Ave. Condition		12	421 Page St.
Stoughton	Lappen's Garage Equipment	6,720	7/09
10 Yrs.	5.75
NNN	[No date given]
Ave. Condition		13	150 Maple St.
Stoughton	Confidential	18,000	1/10
5 Yrs.	5.25
NNN	Constructed 1983
Ave. Condition		
*The acronyms "NNN" and "MG" stand for triple net lease terms and modified gross lease terms, respectively.
**All of these comparable properties are multi-tenant buildings with office and warehouse space except for comparable #12 which is a multi-tenant manufacturing building with 10% office space.

Mr. Wolff's comparable rents ranged from $4.25 to $6.50 per square foot on a triple-net basis and from $5.00 to $7.20 per square foot on a modified gross basis.  The actual rents at the subject property ranged from $4.00 to $13.17 per square foot as of January 1, 2010 and from $4.00 to $9.20 per square foot as of January 1, 2011.  Assuming operating expenses of $3.00 per square foot, Mr. Wolff adjusted downward the modified gross rents by $3.00 per square foot to equate them with triple-net rents.  In this way, he selected $5.00 per square foot on a triple-net basis to be his market rents for the subject property for both of the fiscal years at issue.  Accordingly, he multiplied this rent by the subject property's rentable area of 58,416 square feet to achieve his potential gross income of $292,080 which he incorporated into his methodology for both fiscal years 2011 and 2012.          
Mr. Wolff based his 10% vacancy and collection loss rates for fiscal years 2011 and 2012 on his conversations with local brokers and "the vacancy range for industrial space in the Avon area," which he gleaned from market survey reports published by the CoStar Group.  He also concluded that his 10% "rate appears to be justified because of the subject's location, relative size, and current physical condition."  Application of this market vacancy rate of 10% to his potential gross income for fiscal years 2011 and 2012 resulted in effective gross incomes of $262,872 for both fiscal years.     
For his expenses, Mr. Wolff observed that in a triple-net leasing scenario, tenants are responsible for most operating expenses.  Accordingly, he deducted only those expenses that he reported and testified remained the landlord's responsibility -- management fees, leasing commissions, and replacement reserves.  Relying on current leasing activity within the subject property's market area, Mr. Wolff selected a management fee equal to 5% of the effective gross income, a replacement reserve allowance equal to 3% of potential gross income, and a leasing commission cost equal to 1% of the potential gross income.  These expenses totaled $13,144 or $0.23 per square foot, $8,762 or $0.15 per square foot, and $2,921 or $0.05 per square foot, respectively, for each of the fiscal years at issue.  
To determine his net-operating incomes for fiscal years 2011 and 2012, Mr. Wolff subtracted the costs associated with these three expense categories from the corresponding fiscal year's effective gross income.  These calculations yielded net-operating incomes of $238,045 for both fiscal years 2011 and 2012.            
	In determining capitalization rates for the subject property for the fiscal years at issue, Mr. Wolff utilized both band-of-investment techniques and industry sources.  His band-of-investment techniques for each fiscal year, assuming no appreciation or depreciation, is summarized below.

Band of Investment Technique - Fiscal Year 2011
Capital Structure	Portion	Rate	Weighted Rate	
Mortgage	     0.75     x	    0.0810   =	0.0608	
Equity	     0.25     x	    0.1500   =	0.0375	
Total Weighted Rate			0.0983	
				
Less: Credit for Equity Build-up		(SFF* x Equity Gain x L-to-V**	
		0.0598 x 0.2365 x 0.75 =	 (0.0083)	
		Rate	 0.0900	
		SAY	 9.0%	
*"SFF" is an acronym for sinking fund factor.
**"L-to-V" is an acronym for loan-to-value ratio.

Band of Investment Technique - Fiscal Year 2012
Capital Structure	Portion	Rate	Weighted Rate	
Mortgage	     0.70     x	    0.0773   =	0.0580	
Equity	     0.30     x	    0.1450   =	0.0362	
Total Weighted Rate			0.0942	
				
Less: Credit for Equity Build-up		(SFF x Equity Gain x L-to-V		
		0.0505 x 0.2365 x 0.70*** =	 (0.0084)	
		Rate	 0.0858	
		SAY	 8.5%	
***Mr. Wolff incorrectly used 0.75 in his calculation, which the Board corrected.

Mr. Wolff determined that capitalization rates of 9.0% for fiscal year 2011 and 8.5% for fiscal year 2012 were consistent with rates published by national surveys, such as the First Quarter 2010 and 2011 Korpacz Report for "non-institutional" grade industrial warehouse properties, CB Richard Ellis (CBRE) Cap Rate Survey Year End 2009 and 2010 for Class B/C industrial warehouse properties in the Boston area, and Real Estate Research Corporation (RERC) Fourth Quarter 2009 and 2010 East Regional Investment Criteria for east region industrial warehouse properties.  Mr. Wolff then added tax factors of 2.596% for fiscal year 2011 and 2.882% for fiscal year 2012 to his corresponding capitalization rates to account for real estate taxes.  Accordingly, his total capitalization rates for fiscal years 2011 and 2012 were 11.596% and 11.382%, respectively. 
Mr. Wolff estimated the value of the subject property for the fiscal years at issue by dividing his net-operating incomes by his corresponding capitalization rates. His indicated values for fiscal years 2011 and 2012 were $2,052,820 and $2,091,416, respectively, which he then rounded to $2,050,000 for fiscal year 2011 and $2,090,000 for fiscal year 2012.  Summaries of his income-capitalization methodologies for fiscal years 2011 and 2012 are contained in the following table. 

Summaries of Mr. Wolff's Income-Capitalization Methodologies
for Fiscal Years 2011 and 2012


INCOME                               Size(SF)   Rate/SF

Industrial Use Space                  58,416     $5.00             $  292,080

Potential Gross Income:                                            $  292,080	

Less: Vacancy & Collection Allowance - 10.0%
             ($   29,208)


	
Effective Gross Income:                                            $  262,872	
	
EXPENSES
	
  Management Fee         $13,144 @ $0.23/sq. ft.
  Replacement Reserves   $ 8,762 @ $0.15/sq. ft.
  Leasing Commissions    $ 2,921 @ $0.05/sq. ft.  

Total Expenses:          $24,827                                  ($   24,827) 	
  	
Net-Operating Income:                                              $  238,045	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2011 - 11.596%	
	
Indicated Value for Fiscal Year 2011                               $2,052,820
Rounded Value for Fiscal Year 2011                                 $2,050,000	


 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 11.382%



Indicated Value for Fiscal Year 2012                               $2,091,416
Rounded Value for Fiscal Year 2012                                 $2,090,000

	

In support of the assessments, the assessors' attorney cross-examined Mr. Wolff, introduced various exhibits, without objection, and submitted a post-hearing brief.  One of the assessors' exhibits was entitled an "income valuation" card which captured the income-capitalization methodology that the assessors used to value the subject property.  It is clear from this evidence that the assessors also considered the subject property's highest-and-best use to be its continued use as an industrial warehouse building with some office space.  Unlike Mr. Wolff, however, they employed different rents in their income-capitalization methodology for the different uses within the buildings.  The assessors used a rent of $10.08 per square foot for 12,792 square feet of office space, $6.37 per square foot for 31,360 square feet of industrial space, and $6.18 for 18,400 square feet of warehouse space.  They estimated the subject property's total rentable area at 62,552 square feet which is 4,136 square feet more than the area relied upon by Mr. Wolff in his analysis.  These per-square-foot rental estimates and area measurements produced a potential gross income of $442,418.  The assessors next adopted a vacancy and credit allowance of $28,315, or approximately 6% of potential gross income, which resulted in an effective gross income of $414,103.  The assessors then applied an all-inclusive expense estimate of $79,366, or approximately 19% of effective gross income, resulting in a net-operating-income estimate of $334,737.  The assessors' expense amount was not itemized. 
To estimate the value of the subject property, the assessors then divided their net-operating income by their capitalization rate of 0.1130.  The record is devoid of any explanation of how the assessors derived their rents, square footage estimates, vacancy and expense allowances, or capitalization rate.  Their income-capitalization analysis is summarized below.
Assessors' Income-Capitalization Methodology
Income:			
  Office	12,792 SF  x  $10.08 = $128,943		
  Industrial	31,360 SF  x  $ 6.37 = $199,763		
  Warehouse	18,400 SF  x  $ 6.18 = $113,712		
Gross Income		            $  442,418	
Vacancy Allowance	≈ 6%	           ($   28,315)	
Effective Gross Income		            $  414,103	
Expense Allowance	≈ 19%	           ($   79,366)	
Net Income		            $  334,737	
Capitalization Rate	0.1130		
Total Income Value		            $2,962,300	

Based on all of the evidence, the Board agreed with Mr. Wolff that the highest-and-best use of the subject property for the fiscal years at issue was its existing use as an industrial building and that an income-capitalization methodology was the best approach to use to estimate the value of this income-producing property.  The record contained little useful or reliable evidence to support the application of a cost approach, and the Board therefore declined to use one.  The Board did not rely on a sales-comparison approach because the evidence did not establish that the sales in Mr. Wolff's analysis were comparable to the subject property or that the adjustments, or lack of them, resulted in reliable values.  Moreover, it is not clear to what extent Mr. Wolff's sales were leased fee as opposed to fee simple sales, and even Mr. Wolff, who offered them, did not rely on the values that his analysis produced.  
The Board further agreed with Mr. Wolff that the subject buildings were best utilized as multi-tenanted facilities with triple-net leases.  In addition, the Board accepted his estimate of the subject property's rentable area because he had recently inspected the subject property and his estimate matched the square footage that the assessors listed on the subject property's property record cards as "living space."  Mr. Wolff's estimate was less, by almost 4,150 square feet, than the area utilized by the assessors on their income valuation card, for which there was no foundation.
	The Board found that the most appropriate rents to use for the subject property for the fiscal years at issue were $6.25 per square foot for the space associated with Building 1 and $5.25 per square foot for the space associated with Building 2.  The Board found that the rentable area in Building 1 was more flexible space and better suited to office-type uses.  The Board based its selection of a rent of $6.25 for this space on the actual rent in place during the relevant time period -- $9.20 per square foot on a modified gross basis -- and the rents for similar space contained in Mr. Wolff's comparable properties that were located within the Avon Industrial Park.  Similarly, the Board based its selection of a rent of $5.25 for the rentable space in Building 2 on actual rents in place during the relevant time period as well as rents for similar space contained in Mr. Wolff's analysis.  In addition, both the actual rents and those of the comparable properties indicate that the smaller spaces generate a higher per unit rent than the larger ones.  As stated in the Appraisal Institute, The Appraisal of Real Estate (13th ed., 2008): "Generally as size increases, unit prices decrease.  Conversely, as size increases, unit prices decrease."  Ibid. at 212.  Accordingly, it was appropriate for the Board to use a higher rent for the rentable space in Building 1 than that in Building 2.    
	For its vacancy and credit allowance, the Board used 10% of potential gross income for both of the fiscal years at issue, just as Mr. Wolff had done in his income-capitalization approach.  The Board based its adoption of this figure on Mr. Wolff's recommendation which was supported by the actual vacancies, his reported conversations with brokers, and industry surveys.  
	For expenses, the Board adopted the categories recommended by Mr. Wolff -- management fees, replacement reserves, and leasing commissions.  The Board also adopted the corresponding percentage or unit amounts proposed by Mr. Wolff, which he based on his studies of similar properties in the Avon area and which the Board noted were consistent with his use of triple-net leases in his methodology.  Accordingly, the Board used 5% of effective gross income for its management fee, $0.15 per square foot for its replacement reserves, and $0.05 per square foot for its leasing commissions.      
	Lastly, the Board adopted Mr. Wolff's base capitalization rates for both of the fiscal years at issue.  The Board found that they were well-supported and premised on appropriate market data.  However, the Board did not apply a full tax factor to its capitalization rates, as Mr. Wolff had done, because the Board found that it was inappropriate to use a full tax factor in conjunction with the triple-net leasing scenario adopted by the Board.  Instead, the Board applied only a partial tax factor to account for the expenses associated with the 10% vacancy rate.   
Summaries of the Board's income-capitalization methodologies for fiscal years 2010 and 2011 are contained in the following table.                      

Summaries of the Board's Income-Capitalization Methodologies
for Fiscal Year 2011 and Fiscal Year 2012 


INCOME                               Size(SF)   Rate/SF

Building 1                             9,796     $6.25             $   61,225
Building 2                            48,620     $5.25             $  255,255

Potential Gross Income:                                            $  316,480	

Less: Vacancy & Collection Allowance - 10.0%
             ($   31,648)


	
Effective Gross Income:                                            $  284,832	
	
EXPENSES
	
  Management Fee         $14,242 @ 5% of EGI
  Replacement Reserves   $ 8,762 @ $0.15/sq. ft.
  Leasing Commissions    $ 2,921 @ $0.05/sq. ft.  

Total Expenses:          $25,925                                  ($   25,925) 	
  	
Net-Operating Income:                                              $  258,907	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2011
               9.00% + (0.10 x 2.596%) = 9.2596%	
	
Indicated Value for Fiscal Year 2011                               $2,796,093
Rounded Value for Fiscal Year 2011                                 $2,796,000	


 Divide by: Total Capitalization Rate for Fiscal Year 2012
               8.50% + (0.10 x 2.882%) = 8.7882%



Indicated Value for Fiscal Year 2012                               $2,946,075
Rounded Value for Fiscal Year 2012                                 $2,946,000

	

	On this basis, the Board decided the fiscal year 2011 appeal and the fiscal year 2012 appeal for the appellant.  The Board lowered the subject property's assessed value for fiscal year 2011 by $260,000 -- from $3,056,000, as abated, to $2,796,000 -- and granted a tax abatement in the amount of $6,749.60.  The Board lowered the subject property's assessed value for fiscal year 2012 by $110,000 -- from $3,056,000 to $2,946,000 -- and granted a tax abatement in the amount of $3,170.20.    

OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion.  Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  
In determining fair cash value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The goal is to ascertain the maximum value of the property for any legitimate and reasonable use.  Id.  If the property is particularly well-suited for a certain use that is not prohibited, then that use may be reflected in an estimate of its fair market value.  Colonial Acres, Inc. v. North Reading, 3 Mass. App. Ct. 384, 386 (1975).  "In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted."  Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate at 315-16 (12th ed., 2001)), aff'd, 62 Mass. App. Ct. 428 (2004).   On this basis, the Board ruled that the highest-and-best use of the subject property during the fiscal years at issue was, as the appellant's real estate valuation witness recommended, its existing use as an industrial building.  In making this ruling, the Board considered, among other factors, the subject property's history, size, location, and layout, as well as the uses of properties similar to the subject property and located in its market area.  The assessors also valued the subject property as an industrial warehouse building with some office space.            
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 reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  "The [B]oard is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  In these appeals, the Board ruled that neither sales-comparison nor cost approaches were appropriate under the circumstances.  The appellant's real estate valuation expert reached the same conclusion.  In valuing the subject property, the assessors also relied primarily on an income-capitalization methodology.  The Board accepted the premise advanced by the appellant's real estate valuation expert that there were not enough fee-simple market sales of reasonably comparable properties to meaningfully estimate the value of the  subject property using a sales-comparison technique. See Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 247 (1998)("The assessors must determine a fair cash value for the property as a fee simple estate, which is to say, they must value an ownership interest in the land and the building as if no leases were in effect.").  
Furthermore, the Board ruled that "[t]he introduction of evidence concerning the value based on [cost] computations has been limited to special situations in which data cannot be reliably computed under the other two methods." Correia, 375 Mass. at 362.  The Board found here that no such "special situations" existed, and, even if they did, there was no substantiated evidence on which to base a reliable value using a cost approach.  Accordingly, the Board ruled that this method of valuation was not an appropriate technique to use for valuing the subject property for the fiscal years at issue.  
The use of the income-capitalization approach is appropriate when reliable market-sales data are not available.  Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 810, 811 (1975); Assessors of Lynnfield v. New England Oyster House, 362 Mass. 696, 701-02 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  It is also an appropriate technique to use for valuing income-producing property.  Id. at 64-65.  In these appeals, the Board relied exclusively on the values determined from the income-capitalization approach because the other methods were not suitable under the circumstances, and the approach that the Board used was equivalent to the one that the appellant's real estate valuation expert and the assessors preferred.  
"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 499 (13th ed., 2008).  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 the subject property for the fiscal years at issue.  "The direct capitalization of income method analyzes the property's capacity to generate income over a one-year period and converts the capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved."  Olympia & York State Street Co., 428 Mass. at 239.  "It is the net income that a property should be earning, not necessarily what it actually earns, that is the figure that should be capitalized."  Peterson v. Assessors of Boston, 62 Mass. App. Ct. 428, 436 (2008)(emphasis in original).  Accordingly, the income stream used in the income-capitalization method must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co., 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Auth., 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Auth., 9 Mass. App. Ct. 877, 878 (1980) (rescript).  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.; see Olympia & York State Street Co., 428 Mass. at 239, 245.
The rentable area that the Board adopted for the fiscal years at issue was equivalent to the area suggested by the appellant's real estate valuation expert and the area described as "living area" on the subject property's property record cards.  The Board found that the most appropriate rents to use for the subject property for the fiscal years at issue were $6.25 per square foot for Building 1 and $5.25 per square foot for Building 2.  The Board found that the rentable area in Building 1 was more flexible space and better suited to office-type uses.  The Board based its selection of a rent of $6.25 for this space on the actual rent in place during the relevant time period -- $9.20 per square foot on a modified gross basis -- and the rents for similar space contained in Mr. Wolff's comparable properties that were located within the Avon Industrial Park.  Similarly, the Board based its selection of a rent of $5.25 for the rentable space in Building 2 on actual rents in place during the relevant time period as well as rents for similar space contained in Mr. Wolff's analysis of comparable properties.  In addition, both the actual rents and those of the comparable properties indicate that the smaller spaces generate a higher per unit rent than the larger ones.  "Generally as size increases, unit prices decrease.  Conversely, as size increases, unit prices decrease."  The Appraisal of Real Estate at 212 (13th ed., 2008).  Accordingly, it was proper for the Board to use a higher rent for the rentable space in Building 1 than that in Building 2.  "Choosing an appropriate gross income figure for establishing an income stream was within the board's discretion and expertise."  Fox Ridge Assoc. v. Assessors of Marshfield, 393 Mass. 652, 654 (1984).    
 	For its vacancy and credit allowance, the Board used 10% of potential gross income for both of the fiscal years at issue just as Mr. Wolff did in his income-capitalization approach.  The Board based its adoption of this figure on Mr. Wolff's recommendation which was supported by the actual vacancies, his reported conversations with brokers, and industry surveys.  
	For expenses, the Board adopted the categories recommended by Mr. Wolff -- management fees, replacement reserves, and leasing commissions.  The Board also adopted the corresponding percentage or unit amounts proposed by Mr. Wolff, which he based on his studies of similar properties in the Avon area and which the Board observed were consistent with his use of triple-net leases in his methodology.  Accordingly, the Board used 5% of effective gross income for its management fee, $0.15 per square foot for its replacement reserves, and $0.05 per square foot for its leasing commissions.  "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).        
The capitalization rate selected should consider the return necessary to attract investment capital.  Taunton Redevelopment Assoc. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  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).  It is not always appropriate to add a tax factor under a triple-net lease because the tenant is assumed to be paying the tax.  See The Appraisal of Real Estate at 451 (13th ed., 2008)("a triple net lease [is one] in which the tenant pays utilities, taxes, insurance, and maintenance and the landlord pays for structural repairs only."); Cf. General Electric Co., 393 Mass. at 609.  Relying on these principles and its findings, the Board selected base capitalization rates of 9.00% and 8.50% for fiscal years 2011 and 2012, respectively.  These rates are the ones recommended by the appellant's real estate valuation expert and are also consistent with the supporting data contained in his appraisal report.  In the Board's view, these capitalization rates also appropriately incorporate the risks associated with the subject property's highest-and-best use.  However, the Board did not apply a full tax factor to its capitalization rates, as suggested by the appellant's real estate valuation expert, because the Board found that it was inappropriate to use a full tax factor in conjunction with the triple-net leasing scenario adopted by the Board.  Instead, the Board applied only a partial tax factor to account for the 10% vacancy and credit loss.  When a tenant or tenants pay a portion of the real estate taxes, the tax factor applied when capitalizing net-operating income must be reduced to reflect those tax payments, or the tax payments must be included as additional income received by the landlord.  Alstores Realty Corp., 391 Mass. at 69-70; General Electric Co., 393 Mass. at 609-11; Irving Saunders Trust, 26 Mass. App. Ct. at 846.  In the income-capitalization methodology adopted by the Board for the instant appeals, the tenants paid approximately 90% of the real estate taxes and tax payments from tenants were not included as additional income to the landlord.       
In reaching its opinion of fair cash value in these appeals, the Board was not required to believe the testimony of any particular witness or to adopt any particular method of valuation that an expert witness suggested.  Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight.  Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981); New England Oyster House, Inc., 362 Mass. at 702.  In evaluating the evidence before it, the Board selected among the various elements of value and appropriately formed its own independent judgment of fair cash value.  General Electric Co., 393 Mass. at 605; North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass 296, 300 (1984).  "The essential requirement is that the board exercise judgment."  New Boston Garden Corp., 383 Mass. at 473.    
The Board need not specify the exact manner in which it arrived at its valuation.  Jordan Marsh v. Assessors of Malden, 359 Mass. 106, 110 (1971).  The fair cash value of property cannot be proven with "mathematical certainty and must ultimately rest in the realm of opinion, estimate and judgment."  Boston Consol. Gas Co., 309 Mass. at 72.  "The credibility of witnesses, the weight of the evidence, and inferences to be drawn from the evidence are matters for the [B]oard."   Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977).  
 "'The burden of proof is upon the [appellant] to make out its right as a matter of law to abatement of the tax.'"  Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974)(quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)).  The appellant must show that it has complied with the statutory prerequisites to its appeal, Cohen v. Assessors of Boston, 344 Mass. 268, 271 (1962), and that the assessed valuation of its property was improper.  See Foxboro Assoc., 385 Mass. at 691.  The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise.  Schlaiker, 365 Mass. at 245.  The Board ruled here that the appellant met its burden of proving that the subject property was overvalued for fiscal years 2011 and 2012.
The Board applied these principles in reaching its opinion of the fair cash value of the subject property for the fiscal years at issue.  On this basis, the Board determined that the subject property was overvalued by $260,000 for fiscal year 2011 and by $110,000 for fiscal year 2012.
The Board, therefore, decided the fiscal year 2011 and 2012 appeals for the appellant, granting tax abatements in the amount of $6,749.60 and $3,170.20, respectively. 
 
   						 THE APPELLATE TAX BOARD


By: _______________________________
    Thomas W. Hammond, Jr. Chairman


A true copy,



Attest: _________________________
      Clerk of the Board

 The assessors' income valuation card uses 62,552 square feet as the subject property's "total leaseable [sic.] area."  The Board adopted the area that the appellant's real estate valuation expert used because he had recently inspected the subject property and this area is consistent with the total square footage listed in the subject property's property record cards as "living area."  

ATB 2013-698