Benjamin Electric Supply Company, Inc. v. Board of Assessors of the City of Worcester (October 19, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


BENJAMIN ELECTRIC SUPPLY   	v.	BOARD OF ASSESSORS OF 
COMPANY, INC.				               THE CITY OF WORCESTER

Docket Nos. F229599	(FY 95)		Promulgated:
 		  F233909 (FY 96) 		October 19, 2001
  F240677 (FY 97)	 					 

	

	These are consolidated appeals under the formal procedure, pursuant to G.L. c. 59, §§ 64 and 65, from the refusal of the appellee to abate taxes on certain real estate located in the City of Worcester, owned by and assessed to the appellant under G.L. c. 59, § 38 for fiscal years 1995, 1996 and 1997.  
	Former Commissioner Lomans heard these appeals and was joined in the decisions for the appellee by Chairman Burns, former Chairman Gurge and Commissioners Scharaffa and Gorton. 
	These findings of fact and report are promulgated at the request of the appellant, pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	Arthur Goldstein, Esq., for the appellant.
John F. O'Day, Esq., for the appellee.

FINDINGS OF FACT AND REPORT

On January 1, 1994, January 1, 1995 and January 1, 1996, Benjamin Electric Supply Company, Inc. ("appellant") was the assessed owner of an irregularly shaped parcel of real estate ("property") located on Milton Street in the City of Worcester.  With a post office address of 30 Glennie Street, the property is identified by the Board of Assessors of Worcester ("Assessors") as Map 13, Block 37, Lot 1.  
	For the fiscal years at issue, the Assessors valued the property and assessed taxes thereon, as follows:
 
 Docket	   Fiscal		Assessed	   Commercial	Assessed
 Number	    Year		  Value	    Tax Rate	   Tax____

F229599	   1995		$413,400	    $34.50	     $14,262.30

F233909	   1996		$421,800	    $35.93	     $15,155.27

F240677	   1997		$421,800	    $35.69	     $15,054.64


For each fiscal year at issue, the appellant timely paid the taxes due without incurring interest.
	The appellant seasonably filed its applications for abatement and subsequent petitions to the Appellate Tax Board ("Board").  The relevant jurisdictional information for each of the appeals is summarized as follows:

Fiscal 	Docket	 Abatement	     Abatement	   Petition Filed
 Year		Number	Application	      Denial		at Board___

1995		F229599	 1/23/95		4/23/95		7/11/95	

1996		F233909	 1/24/96		3/20/96		5/03/96

F240677	 1/27/97		3/20/97		5/01/97



On the basis of the foregoing, the Board found that it had jurisdiction over these appeals. 
The property is located in North Worcester, one mile north of the central business district of Worcester in a heavily concentrated commercial and industrial neighborhood.  It is situated within one-half mile of access to Interstate 90 and Interstate 290.  Located in an area zoned for general manufacturing, it is within the "Marshall Pond project," a landfill area developed by the Worcester Business Development Corporation.  Current users of the Marshall Pond area include medical offices, furniture retailers, an appliance retailer, a casket distributor, auto dealerships, a Sherwin-Williams retailer, a sheet metal fabrication shop, multi-tenant office buildings, a Golds' Gym, an auto body shop, Westinghouse Electric, and a restaurant.  Use of the subject property during the relevant time period was in conformance with zoning by-laws and with the original deed restrictions imposed by the Marshall Pond project.
The property has 539 feet of frontage along Milton Street, a two-lane unpaved road and 606.14 feet of frontage along Glennie Street.  Access and egress to the property is from Glennie Street only.  The property is bound at the rear (easterly) by Milton Street, westerly by Glennie Street, southerly by land improved and used for industrial purposes and northerly by land improved for retail and warehousing.  The site from Milton Street drops steeply, approximately thirty feet, before sloping to Glennie Street. There is also a 12,900 square foot slope and construction easement traversing the site.  The easement has no impact on the utility of the site. 
Approximately eighty percent of Glennie Street is improved with structures used for industrial purposes, including a small industrial park with various tenants.  The remaining parcels are vacant with natural growth.  Other improvements on Glennie Street include a health club facility and an auto body facility.  Glennie Street generally parallels Gold Star Boulevard, a one-way thoroughfare with traffic flowing from south to north.
	The property is composed of a 102,251 square foot parcel of land improved with a 17,392 square foot one-story commercial warehouse.  The well-maintained warehouse structure, built in 1969, has a concrete foundation, flat roof with mixed roof coverings, and masonry and metal exterior walls.  The building has centralized air conditioning, heating and ventilation.  It is used exclusively for the appellant's wholesale and retail electrical supply business, and includes a showroom, office and warehouse.  The area used for retail sales, approximately 3,055 square feet, has acoustical tile ceilings, fluorescent lighting and carpet over concrete flooring.  The area used for private and administrative offices, approximately 2,510 square feet, has acoustical tile ceilings, fluorescent lighting, wallboard partitioning, and tile over concrete flooring.  The warehouse area, approximately 11,827 square feet, is finished only in the counter area reserved for contractors.  Lighting in the warehouse area is a mix of industrial fluorescent and sodium vapor fixtures.  In addition to the warehouse facility, the site is improved with twenty-three parking spaces located near the front of the building and ten spaces located at the rear of the building.  At the rear of the building are two loading docks with overhead doors.
	 In support of its overvaluation claim, the appellant relied on the testimony and appraisal report of Kathryn Rochford, an expert real estate appraiser.  Ms. Rochford estimated the fair market value of the property for all fiscal years at issue at $323,400.00, using her income capitalization methodology. 
In support of her opinion of value, but without providing any evidence of specific comparable market rents, Ms. Rochford estimated the property's fair economic rent for all fiscal years at issue at $3.15 per square foot.  She applied a fifteen percent combined vacancy/rent loss and operating expense rate to her determined potential gross income.  She opined that this fifteen percent rate was reasonable for owner-occupied property, but offered no market data to support her claim.  She determined an average capitalization rate of 14.40 percent for all three fiscal years by combining a basic rate of 10.9 percent (factoring in a mortgage rate of 10.50 percent, an equity return of 12 percent, and a 70 percent loan-to-value ratio) with a tax factor of .03450 for fiscal year 1995, .03593 for fiscal year 1996 and .03569 for fiscal year 1997.  Again, Ms. Rochford provided no evidence of market data to support her capitalization rate.  A summary of her income capitalization methodology is as follows:
					
Income
Potential Gross Income (17,392 sf 
  @ $3.15/sf) 	 	 				 $54,785
  		Less Vacancy/Rent Loss and 
        Operating expenses  (15%)		     		($ 8,220)
  			
Effective Gross Income					 	 $46,565

	
Net Operating Income						$ 46,565
Average Overall Capitalization Rate	
   	= 0.1440
0.1090 basic rate + tax factor
 	[.03450 (FY 95); .03593 (FY 96);
  	.03369 (FY 97))]

Estimated Market Value						$323,368
Rounded Estimate of Value					$323,400

In defense of their assessment, the Assessors relied on the testimony and appraisal report of Assistant Assessor James Dillon.  Mr. Dillon estimated the fair market value of the property for each fiscal year at issue at $564,000 based on his income capitalization approach, supported by a sales comparison approach. 
Under his income capitalization analysis, Mr. Dillon reviewed similar rents in Worcester, and chose four triple net leases for his analysis as those most comparable to the subject property.  He then used a rent adjustment grid to calculate a range of comparable rents from $5.25 to $6.00 per square foot.  His grid adjusted for such factors as location, land-to-building ratio, size, on-site parking and condition.  Based on his analysis, he concluded that the lowest figure in his range, $5.25 per square foot, was a fair economic rent for the subject property during the fiscal years at issue.  
In continuing with his income capitalization approach, he used a 10 percent vacancy and uncollectible rate and deducted $18,261.00 for expenses that included management fees, leasing commissions, and a reserve for replacement and carrying cost per-square-foot vacancy.  He applied a 10.63 percent capitalization rate, developed using a band of investment technique, which consisted of a mortgage rate of 10 percent, an equity return of 12 percent, and a 70 percent loan-to-value ratio. On this basis, he estimated the value of the subject property at $564,000.  Mr. Dillon's income capitalization approach is as follows:

Income
  		Potential Gross Income (16,552 sf @ $5.25/sf) 	 $86,898
  		Less Vacancy/Uncollectibles (10%)			($ 8,690)
  			Effective Gross Income				 $78,208

Expenses
  		Utilities					Tenant
  		Building Insurance			Tenant 
  		Maintenance					Tenant
  		Snow & Rubbish Removal			Tenant
  		Common Area Expense			Tenant
  		Management (6%)						($4,692)
  		Leasing Commissions (5%)				($3,910)
  		Reserve for Replacement (6%)				($4,692)
  		Carrying Cost per sf Vacancy 
		  @ $3.00/sf						($4,966)

			Total Expenses 				     ($18,261)

Net Operating Income						 $59,947
Capitalization Rate				(0.10630)
Estimated Market Value						$563,936
Rounded Estimate of Value					$564,000

Mr. Dillon used sales comparison methodology to support the estimate of value derived from his income capitalization analysis.  Mr. Dillon compared five recent sales of property located within several hundred yards of the subject.  These comparable sales had per square foot sales prices that ranged from $36.88 per square foot to $44.58 per square foot.  Sale One was a distribution building located across the street from the subject property.  Sales Two and Five were retail buildings with some warehouse exposure.  Sales Three and Four had more industrial and warehouse space.  Mr. Dillon gave primary weight to Sale One, located across the street from the subject property, with a sale price of $37.50 per square foot.  Based on his sales comparison analysis, Mr. Dillon estimated the value of the property at $621,000 for each fiscal year at issue. 
The Board found that because the property was income-producing, the income capitalization approach was an appropriate method for determining fair market value.  The Board found, however, that the income capitalization methodology used by the appellant's expert was significantly flawed and therefore of little probative value.  The Board found that the appellant's expert did not support her per square foot rental rate with any specific, comparable market rentals, but instead relied on general, unsubstantiated knowledge of rentals to determine the per square foot rental rate utilized.  The appellant's expert's imputation of gross annual potential income, therefore, had insufficient support.  The Board also found that the appellant's expert provided no market data to support her expense, vacancy and capitalization rates.  In addition, because the subject is a single user, owner-occupied property, comparable leases for the subject property would be, as the Assessors' witness concluded, on a triple-net basis with the tenant responsible for taxes, among other expenses.  Accordingly, the Board found that the appellant's expert erroneously applied a tax factor in calculating her capitalization rate.  The Board found that without the inclusion of a tax factor, the appellant's expert's methodology actually supported the assessments.  On this basis, the Board found that the appellant's expert's estimate of value was without foundation, and therefore without merit.
In contrast, the Board found that the Assessors supported their per square foot rental rate and expenses with specific, comparable market data.  The Board, therefore, concluded that the Assessors' estimate of value supported the assessed values.  
	 On the basis of all the evidence, the Board found that the appellant failed to demonstrate that its property was overvalued in fiscal years 1995, 1996 or 1997.   Accordingly, the Board decided these appeals for the appellee.
OPINION
	The assessors are required to assess real estate at its "fair cash value."  G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion.  Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely on 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 Board is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  Regardless of which method is employed to determine fair cash value, the Board must determine the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market.  Sanders Trust v. Board of Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The validity of a final estimate of market value depends to a great extent on how well it can be supported by market data.  The Appraisal Institute, THE APPRAISAL OF REAL ESTATE 134 (12th Ed., 2001). 
The income capitalization method, used by both parties in these appeals, "is frequently applied with respect to income-producing property."  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In applying this method, the income stream used must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Authority, 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Authority, 9 Mass. App. Ct. 877, 878 (1980) (rescript); AVCO Manufacturing Corp. v. Assessors of Wilmington, 12 Mass. App. Tax Bd. Rep. 132, 143 (1990).  It is the earning capacity of real estate, rather than its actual income, which is probative of fair market value.  Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 64 (1941).  After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984).  The expenses should also reflect the market.  Id. 
The capitalization rate should consider the return necessary to attract investment capital.  Taunton Redevelopment Association v. Assessors of Taunton, 393 Mass. at 295.  The "tax factor" is a percentage added to the capitalization rate "to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula."  Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  Because the tenant pays the real estate taxes under a single-tenant premise, it is not appropriate to add a tax factor to the capitalization rate unless the tenant's payment of real estate tax to the owner is included in the owner's income to be capitalized. Alstores Realty Corp. v. Assessors of Peabody, 391 Mass. 60, 69-70 (1984).  (Generally, it is appropriate to add a tax factor to the capitalization rate in most multiple tenancy scenarios because the landlord is assumed to be responsible for paying the real estate taxes. Taunton Redevelopment Association v. Assessors of Taunton, 393 Mass. at 295-296.) See also General Electric Co. v. Assessors of Lynn, 393 Mass. at 610.
	The Board is entitled to presume that the assessment is valid until the taxpayer sustains his or her burden of proving otherwise.  Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974).  Accordingly, the burden of proof is upon the taxpayer to make out his or her right as a matter of law to an abatement of the tax.  Id. The taxpayer must demonstrate that the assessed valuation of his or her property was improper.  See Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 691 (1982).  
In appeals before this Board, therefore, a taxpayer "may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors' method of valuation, or by introducing affirmative evidence of value which undermines the assessors' valuation."  General Electric Co. v. Assessors of Lynn, 393 Mass. at 600, quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855.  When the taxpayer has concluded his or her presentation of evidence in an appeal before the Board, the Assessors may either rest and argue that the taxpayer has failed to meet his burden of proof, or they may choose to put on their own evidence in support of the subject assessment.  See General Electric Co. v. Assessors of Lynn, 393 Mass. at 599.   Once the Assessors choose to put on their own evidence, the Board is then required to decide whether, upon consideration of all of the evidence, the taxpayer has met his or her burden of proving that the subject property was overvalued.  Id.  
	In the present appeals, the Board found that the methodology used by the appellant's expert real estate appraiser to value the subject property for the fiscal years at issue was seriously flawed because it was not based on specific, reliable market data.  The Board found, further, that the appellant's expert incorrectly applied a tax factor to her capitalization rate.  Accordingly, the Board found and ruled that the appellant's expert's estimate of the subject property's value was without proper foundation and therefore without merit.  In contrast, the Assessors' estimate of value was supported by comparable market data, and was therefore persuasive.  Further, the Board found that the appellant's own expert's opinion of value, without the inclusion of a tax factor in her capitalization rate, supported the assessments.  
	The opinion of an expert witness must be based on a proper foundation.  State Tax Commission v. Assessors of Springfield, 331 Mass. 677, 684 (1954).  To endow opinion evidence with probative value, it must be based on facts proven or assumed sufficient to enable the expert to form an intelligent opinion.  Giannasca v. Everett Aluminium, Inc.  13 Mass. App. Ct. 208, 211 (1982). 
	Accordingly, because the appellant failed to present persuasive evidence that the Assessors had overvalued the subject property and failed to demonstrate errors in the Assessors' valuation methods and because the Assessors demonstrated the validity of their assessments, the Board ruled that the appellant failed to meet its burden of proving that the subject property was overvalued in fiscal years 1995, 1996 or 1997.  
The Board, therefore, issued decisions for the appellee in these appeals.
						APPELLATE TAX BOARD

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

Attest: ___________________
	   Clerk of the Board
  

 While the date of deemed denial was April 23, 1995, the Assessors informed the appellant of the "deemed denial" of its abatement application by written notice dated April 14, 1995. 

 The original Marshall Pond project deed restrictions limited use to manufacturing, assembly, processing, packaging, warehousing, distributing and other industrial or industrial supply operations, without restricting secondary office use, retail sales and research and development.  These restrictions were due to expire approximately three years from the date of the hearing of these appeals.
 The Assessor's appraisal report indicated that the square footage of the commercial warehouse was 16,552 square feet.  The Assessor's Property Data and Value Listings for the fiscal years at issue, however, document that the "gross building" or "total rent" area is 17,392 square feet.  The assessments for each fiscal year at issue were also based on a gross building area of 17,392 square feet.  The appellant's expert real estate appraiser adopted 17,392 square feet as the building's rentable area as well.  Based on the weight of the evidence, the Board found that 17,392 square feet was the accurate measure of the property's improvement.
 In each of these rents, the occupant was responsible for all operating expenses associated with the building.
 The Board, as discussed above, found that the improvement's square footage was 17,392, rather than 16,552.  Using this larger area, obviously, results in a higher potential gross income and a higher estimate of value of the property.
  If Ms. Rochford's net operating income of $46,565 is divided by her basic capitalization rate of 0.1090, her estimated market value is $427,720.  

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