Fleet Bank v. Board of Assessors of the City of New Bedford (January 27, 2003)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



FLEET BANK			 v.		BOARD OF ASSESSORS OF 
THE CITY OF NEW BEDFORD

Docket No. F260291				Promulgated: 
							January 27, 2003



This is an appeal under the formal procedure pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate taxes on certain real estate in the City of New Bedford owned by and assessed to the appellant under G.L. c. 59, § 38, for fiscal year 2001.  
	Commissioner Rose heard this appeal. Chairman Burns and Commissioners Scharaffa and Gorton joined him in the revised decision for the appellant.  
	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 and are promulgated simultaneously with the revised decision.

	Bruce J. Stavitsky, Esq. for the appellant.  
	Burton Peltz, Esq. for the appellee.    

FINDINGS OF FACT AND REPORT
	On January 1, 2000, the appellant, Fleet Bank, was the assessed owner of an approximately 39,338 square foot parcel of land in the City of New Bedford located at     700 Pleasant Street.  At all relevant times, the parcel, which is identified in the records of the Board of Assessors of New Bedford ("assessors") as Plot 52, Lot 101, was improved with a five-story steel and masonry office building, which was constructed in 1988.  The building's gross area is approximately 89,762 square feet with a net leasable area of about 76,633 square feet.  The property is used as a branch bank and multi-tenanted office building that conforms to the mixed-use business district zoning.  All public utilities including electric, water, sewer, telephone and gas are available and connected.  There is a loading dock on the east side of the property and five parking spaces in the back.  The building also contains a drive-through teller area.  Three adjacent lots, which are not part of this appeal, are used for additional parking.     
The subject property is located on the easterly side of Pleasant Street between Elm and Middle Streets and on the westerly side of Purchase Street in the New Bedford central business district.  The area is primarily composed of commercial uses and is readily accessible by U.S.   Route 6 or state Route 18. 
There are two elevators and stairwells, which service all five floors of the property and its basement.  There is vinyl flooring in the lobby area, carpeting in the offices, and a stone-tile floor in the teller area.  The walls are finished in sheetrock, and the ceilings are drop acoustical tile with recessed strip fluorescent lighting.  There is a mechanical area on the roof that houses the elevator equipment room and the hot water heater.  The two compressors for the HVAC system are mounted on the roof as well.  The roof structure is a steel deck covered in rubber membrane.  The building is wet sprinklered and contains two sets of restrooms with seven fixtures on floors two through five.  The basement contains four restrooms with two fixtures each.  The building is in good condition.         
	On January 1, 2000, the assessors valued the subject property at $4,343,200 and assessed a tax at the rate of $35.11 per thousand, in the amount of $152,489.75.  The appellant timely paid the real estate taxes without incurring interest.  On January 8, 2001, Fleet Bank timely applied for abatement of its real estate tax.  On   February 15, 2001, the assessors denied its request for abatement, and on May 9, 2001, Fleet Bank seasonably filed its petition appealing the assessors' denial with the Appellate Tax Board ("Board").  On the basis of these facts, the Board found that it had jurisdiction over this appeal.  
	Fleet Bank's first witness was its valuation expert, William J. Carroll.  Mr. Carroll had prepared an appraisal report that was introduced into evidence.  In estimating the fair cash value of the subject property, he used both income capitalization and sales comparison approaches.  He ruled out the cost approach because of the lack of vacant land sales in New Bedford's business district and the difficulty in measuring the depreciation associated with the building.  Mr. Carroll determined that the subject's highest and best use was its continued use as a branch bank and multi-tenanted office building.  
	In applying his income capitalization methodology,  Mr. Carroll first determined that the actual gross rents for the subject property ranged from $11.50 to $14.00 per square foot.  He compared these rents to net rents from what he considered reasonably comparable properties in Rhode Island, having been unable to locate comparable properties in the New Bedford area of Massachusetts.  Mr. Carroll adjusted his comparable properties' net rents to gross rents by adding back "all real estate related expenses," and, after doing this adjustment, calculated a gross rent range of $14.00 to $16.00.  Based on the subject property's actual rents, his comparable properties' adjusted rents, and his conversations with the broker who was at that time leasing the subject property, Mr. Carroll estimated the subject property's gross market rent at $14.00 per square foot for either office or branch bank space.  He multiplied this figure by the property's net rentable area to calculate the subject's gross potential income of $1,072,862.  
	Mr. Carroll then subtracted a ten-percent vacancy/rent loss factor to reach an effective gross potential income of $965,576.  He calculated operating expenses, which totaled $419,456, by stabilizing three years of actual expenses for management, brokerage commissions, electric, water and sewer, maintenance, cleaning, electrical maintenance, elevator maintenance, landscaping, and trash removal.    Mr. Carroll explained that excessive electricity costs of approximately $200,000 were the result of an inefficient HVAC system.  He estimated fixed expenses for hazard insurance at $12,567, using information published in building owner and management and industrial and commercial realtor professional manuals.  He also subtracted reserve expenses of 1.5% or $14,483 to arrive at a net operating income of $519,070.
	After discussing the financing of comparable properties with individuals whom he considered active and knowledgeable investors and lenders, Mr. Carroll applied a mortgage and equity band-of-investment technique to determine a capitalization rate.  In calculating his capitalization rate, he assumed a mortgage interest rate of 7.25% over twenty years with a thirty-percent equity position.  He calculated a composite capitalization rate of 13.20% after adding a tax factor to his overall rate and then rounding. 
	Mr. Carroll divided the net operating income by the composite capitalization rate to reach his estimate of the value of the subject property ($3,932,348), which he then rounded to $4,000,000.  Finally, because parking for the subject building's tenants was on three other parcels that were assessed for a total of $768,500, Mr. Carroll subtracted another $768,500 to account for the off-site parking associated with the subject property.  His final indicated value for the subject property using the income approach was $3,231,500, which he rounded to $3,200,000.  
	Mr. Carroll also employed a sales comparison approach to estimate the value of the subject property for fiscal year 2001.  In applying this technique, he relied on four sales of what he considered comparable properties in Rhode Island.  These properties were sold in 1994, 1995, 1998, and 2000.  They sold for from $26.63 to $55.64 per square foot.  Mr. Carroll adjusted the sales prices downward from twenty to almost thirty percent to account for differences with the subject property in market conditions, location, and physical characteristics.  After adjustments, the average indicated sale price for the four sales was $27.43 per square foot with a range of $18.17 to $33.59.        Mr. Carroll selected a mid-range value of $33.00 per square foot as the most probable selling price for the subject property.  Multiplying that figure by the 89,762 square feet that comprised the subject's total building area produced an indicated value for the subject property for fiscal year 2001 of $2,962,146, which Mr. Carroll rounded to $3,000,000.  Finally, after reconciling the values that he derived for the subject property using both the income capitalization and sales comparison approaches, he concluded that the fair market value of the subject property for fiscal year 2001 was $3,200,000.  
	The appellant's second and final witness was Noble Hamaker.  Mr. Hamaker had been educated and trained as a mechanical engineer and, at the time of the hearing, worked for CB/Richard Ellis, which managed the subject property for Fleet Bank.  Mr. Hamaker testified that an inefficient HVAC system caused the subject property's excessive electricity costs.   
	The assessors' sole witness was their in-house commercial assessor, Carlos Amado.  Mr. Amado testified that he was responsible for setting the assessed values for all commercial real estate in the City, including the subject property.  At the hearing, he relied on an income capitalization approach to initially value the subject property at $4,600,000.  He then reduced this value by $300,000, the approximate assessment on one of Fleet Bank's adjacent parcels that contained seventy-seven parking spaces, to reach his $4,300,000 estimate of the property's fair cash value for fiscal year 2001.  Mr. Amado maintained that seventy-seven parking spaces were an adequate number to serve the subject under the circumstances.  
	More specifically, Mr. Amado assigned a rent of $22.50 per square foot for the 10,926 square feet of bank area on the first floor.  He assigned a rent of $14.00 per square foot for the building's office areas, including the remaining 3,906 square feet on the first floor that is not used for banking.  He did not attribute any income to the basement area.  Mr. Amado's potential gross income for the subject property totaled $1,128,311.  
	Like the appellant's valuation expert, Mr. Amado also allowed ten percent for vacancy and credit loss for an effective gross income of $1,015,479.90.  He then subtracted a six-percent management and brokerage commission fee and most of the subject property's actual expenses plus 1.5 percent for reserves.  He relied on the subject property's operating expense summary report for 1999 for the actual expenses, even though it reflected only one year's expenses.  He believed that these expenses accurately represented the subject property's inherent inefficiencies.  However, Mr. Amado did not include several categories of expenses that were included in the report such as "other occupancy expenses" as well as snow plowing expenses.  He excluded these costs because, with respect to the former, they were not in any way explained, and with respect to the later, they could have related to the other parking lots, which he did not include in his analysis.  The expenses totaled $401,671, resulting in a net operating income of $613,808.  
Like the appellant's valuation expert, he also used a capitalization rate, including a tax factor, of 13.3 percent, which when divided into the net operating income, resulted in an indicated value of $4,615,000.  After deducting $300,000 for the seventy-seven space parking lot, he testified to an opinion of value of $4,300,000 for the subject property for fiscal year 2001.  
	Mr. Amado justified his $22.50 per square foot rent attributed to the subject property's bank area by using information regarding four branch banks in New Bedford whose rents ranged from $16.00 to $34.75 per square foot.  Mr. Amado did not use a sales comparison approach because of the uniqueness of the subject property in the New Bedford area and, therefore, the lack of any comparable sales.   
	On the basis of all the evidence and reasonable inferences drawn therefrom, the Board found that the appellant's valuation analyses were flawed.  The income capitalization approach used by the appellant's valuation expert failed to demonstrate that the rent attributable to branch bank space should be equivalent to that attributable to office space.  The testimony of the assessors' commercial assessor, Mr. Amado, contradicted Mr. Carroll's assertion in this regard, and, in the Board's opinion, was more credible, particularly where Mr. Amado based his suggested branch bank rent on information relating to other branch banks located in New Bedford.  In addition, the Board found that Mr. Carroll did not demonstrate that all three parking lots were a necessary adjunct for leasing the office space in the subject property's building at the suggested rent.  Only a limited number of the subject's actual leases contained provisions requiring parking, and Mr. Carroll did not otherwise show that it was necessary to provide parking to successfully lease the majority of the office space in the building.  Moreover, the Board found that Mr. Amado's contention, that only one of the lots containing approximately seventy-seventy spaces was necessary to fulfill the property's parking needs, was more credible than Mr. Carroll's three-lot requirement under the circumstances.  
Furthermore, with respect to the sales comparison approach used by Mr. Carroll, the Board found that the purportedly comparable sales were not comparable to the subject property.  All four of his sales were located not just outside New Bedford, but outside Massachusetts.  Two of the sales were approximately five years removed from the relevant assessment date, and the other two sales included buildings whose physical characteristics were substantially different from the subject's.  The Board was not swayed by Mr. Carroll's adjustments and found that these purported comparable sales could not be adequately adjusted to account for these significant dissimilarities. 
	However, the Board also found that Mr. Amado, the assessor who was responsible for determining the $4,343,200 assessment for the subject property, testified that his opinion of the subject property's fair cash value was $4,300,000 for fiscal year 2001.  In other words, he conceded that the original assessment over-valued the subject property by $43,200.  Mr. Amado was not an independent fee appraiser.  He was employed by and for the assessors and was their in-house commercial assessor who was responsible for valuing all commercial property, including the subject, in New Bedford.  On the basis of the assessors' concession, the Board found that the fair cash value of the subject property should be reduced from its original assessment of $4,343,200 to $4,300,000.                    
Therefore, the Board found that while the appellant's valuation expert's valuation methodologies were flawed and unreliable, on the basis of all of the evidence, the Board still decided this appeal for the appellant because of the assessors' concession that they had over-valued the subject property for fiscal year 2001 by $43,200.  Accordingly, the Board abated $1,516.75 in real estate taxes.        

OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion.  Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to 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 this appeal, the Board ruled that the cost approach was not appropriate.  The parties' valuation experts also eschewed the cost approach.  "The 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 v. New Bedford Redevelopment Authority, 375 Mass. at 362.  The Board also ruled that the sales comparison approach was not appropriate under the circumstances present in these appeals because there were no comparable sales that could be reasonably adjusted to estimate the fair market value of the subject property for the fiscal year at issue.  Sales of property generally "furnish strong evidence of market value, provided they are arm's-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller."  Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); First National Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560 (1971).  However, when reliable market data are not available and when the subject is income-producing property, the use of the income capitalization approach is appropriate.  Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 807, 881 (1975); Assessors of Lynnfield v. New England Oyster House, 362 Mass. 696, 701-702 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  Accordingly, because the Board found that reliable market data to support a sales comparison approach was not available, the Board ruled that the income capitalization approach was the most appropriate valuation technique to use to estimate the value of the subject property for the fiscal year at issue.    
The income stream used in the income-capitalization method must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. at 451.  In this appeal, the Board found and ruled that the appellant's valuation expert did not sufficiently demonstrate that the rent attributable to bank space should necessarily be equivalent to the rent attributable to office space.  The Board found that the evidence submitted by the assessors suggested that bank space rented at a significantly higher rate than office space.  Moreover, in this property, the considerable amount of space in the basement was apparently included in the space available to the bank for no specific added charge.  The offices did not have any such additional room.  Mr. Carroll failed to address the basement space or its potential effect on the branch bank rental or the property's value.  Under the circumstances, the Board found and ruled that the appropriate rents for branch bank and office spaces were probably not equivalent.     
In addition, to account for the parking needs associated with the subject property, the appellant's valuation expert subtracted from the value derived for the subject property the assessed values assigned to three other lots.  In doing so, the appellant failed to show what the property's actual parking needs were or for what the parking lots were used.  The majority of the subject property's leases did not account for parking.  Third parties could park on the lots for a fee.  The assessors' commercial appraiser opined that only one lot was necessary to meet the property's parking demands.  Accordingly, the Board found and ruled that the appellant failed to adequately demonstrate the necessity of subtracting the assessed values of all of the parking lots from the initial indicated value derived for the subject property using the income capitalization approach to reach the final indicated value for the subject property.  On the basis of these findings and rulings, the Board determined that the appellant's valuation expert's income capitalization methodology was flawed and unreliable.    
For these reasons, the Board determined that the appellant's valuation expert's valuation methodologies were flawed.  However, the Board also found that the assessors' in-house commercial assessor who was responsible for valuing all commercial property in New Bedford now valued the subject property at $4,300,000 for fiscal year 2001, $43,200 lower than the original assessment. Because the property's original assessment for fiscal year 2001 was $4,343,200 and the assessors' in-house commercial assessor, who had set that original assessment, now conceded that its value was $4,300,000, the Board found and ruled that the property was over-valued by $43,200.  While the Board recognized that opinion evidence from an independent appraiser is not ordinarily binding, see Turners Falls Limited Partnership v. Assessors of Montague, 54 Mass. App. Ct. 732, 738 (2002), the circumstances here, where the assessor concedes at the hearing that the fair cash value of the property is less than the amended value, are plainly inapposite.  The Board's "determination must be made 'upon consideration of the entire record.' New Boston Garden Corp. v. Assessors of Boston, 383 Mass. at 466 (quoting Cohen v. Board of Registration in Pharmacy, 350 Mass. 246, 253 (1966), quoting from G.L. c 30A, § 14 (8) (State Administrative Procedure Act))."  Accordingly, on the basis of all of the evidence, the Board found and ruled that the assessors' original assessment over-valued the subject property by $43,200.                  
In deciding 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. Board of Assessors of Foxborough, 385 Mass. at 683; New Boston Garden Corp. v. Assessors of Boston, 383 Mass. at 473; Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. at 701-702.  "The credibility of witnesses, the weight of evidence, the 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).    
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. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974).  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 Associates v. Board of Assessors of Foxborough, 385 Mass. at 691.  The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise.  Schlaiker, 365 Mass. at 245.  On the basis of all of the evidence, the Board ruled here that the subject property was originally over-valued by the assessors by $43,200.
The Board applied these principles in deciding this appeal for the appellant and abating $1,516.75 in real estate taxes.

    						THE APPELLATE TAX BOARD



 By:_____________________________
     Abigail A. Burns, Chairman




A true copy,



Attest: ______________________
		Clerk of the Board
	

 These estimates of the building's gross and net rentable areas were adopted from the measurements contained in the appellant's valuation expert's appraisal report.  The property record card lists a gross area of 94,312 square feet that includes the building's canopy and a finished area of 86,256 square feet.  The assessors' in-house commercial appraiser used a "gross floor area" of 73,960 square feet in his income capitalization analysis.  
 Fleet Bank first filed this appeal under the informal procedure.  The assessors timely removed it to the formal docket.  See G.L. c. 58A,    § 7A.     
 The appellant's valuation expert used a composite capitalization rate of 13.2%.  

ATB 2003-43