Belmont Plaza Westboro LP v. Board of Assessors of the Town of Westborough (June 25, 2014)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

BELMONT PLAZA WESTBORO LP   	  v.    	BOARD OF ASSESSORS OF 
	     					 	THE TOWN OF WESTBOROUGH

Docket Nos. F310469 (FY 2011)			Promulgated:
            F315035 (FY 2012)			June 25, 2014
								

	These are appeals under the formal procedure, pursuant to G.L. 58A, § 7, G.L. c. 59, §§ 64 and 65, and 831 CMR 1.03 and 1.04, from the refusal of the Board of Assessors of the Town of Westborough (the "assessors" or "appellee") to abate taxes on a parcel of real estate in the Town of Westborough owned by and assessed to Belmont Plaza Westboro LP (the "appellant") under G.L. c. 59, §§ 11 and 38 for fiscal years 2011 and 2012.
	Former Commissioner Mulhern heard these appeals.  Chairman Hammond and Commissioners Scharaffa and Chmielinski joined him in the decisions 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.

	Matthew A. Luz, Esq. for the appellant.

	Kenneth W. Gurge, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
Introduction
	On January 1, 2010 and January 1, 2011, the valuation and assessment dates for fiscal years 2011 and 2012, respectively, the appellant was the assessed owner of an approximately 7.27-acre parcel of land located at 276 Turnpike Road (Route 9) in Westborough, which the assessors identified as map 26, block 26, lot 0.  The subject parcel is improved with a two-story, multi-tenanted office and retail building containing 59,400 square feet of rentable area (the "subject property").  The site also contains surface parking for 268 vehicles and typical landscaping. 
Westborough is located in eastern Worcester County, in east central Massachusetts, approximately 30 miles west of Boston and 12 miles east of Worcester.  Westborough abuts the towns of Shrewsbury and Northborough on the west and north, Southborough on the east, Hopkinton and Upton on the south, and Grafton on the southwest.  The subject property is located on the south side of Route 9 between Otis and Milk Streets in north Westborough.  Route 9 extends east to west between Boston and Worcester and intersects with I-95, I-90 (the Massachusetts Turnpike), I-495, and I-290 within 15 miles of the town.  Access to the subject property is via the eastbound lane of Route 9 or a U-turn from the westbound lane just west of the subject property.  
The sections of Route 9 immediately to the east and west of the subject property are improved primarily with retail uses, including Speedway Plaza, Wendy's, Bank of America, Herb Chambers automobile dealerships, Wal-Mart, Friendly's, McDonald's, Bernie & Phyl's, Lowe's Home Improvement center, as well as other plazas and big-box stores.  Also located nearby are an apartment complex, several office buildings, and Indianhead Meadows Golf Club.  Overall, the subject property is located in an area heavily developed with a mix of big-box retail users, regional and national chain tenants, as well as local non-credit tenants.  The subject property is situated within Westborough's Highway Business ("BA") zoning district and benefits from its location along heavily traveled Route 9 and its ready access to and from nearby residential areas and highways.  The BA zoning district allows religious, educational, and municipal uses, as well as display and sale of product, public utility, and research laboratory uses.  Commercial uses, such as office space and retail services, are allowed by special permit.  By a special permit and an amendment issued in 1989, the Westborough Planning Board allowed the subject property's retail and office uses, but specifically prohibited restaurant-related uses.   
The subject property consists of a rectangular, approximately 7.27-acre lot with about 478 feet of frontage along Turnpike Road.  The building footprint occupies approximately 10% of the site, and the remaining area consists primarily of asphalt paved parking and travel ways, landscaping, and mature trees.  The front half of the site is improved with a two-story retail and office building, asphalt paved parking and driveway areas, and a free-standing two-sided sign.  The rear of the site is primarily wooded and includes areas of wetland.  About 60% of the site supports the building improvements and parking area.  Available utilities include town water and sewer, as well as natural gas, electricity, and telephone and cable service.
The subject property's retail and office building was constructed in 1990, and it contains a total rentable area of 59,400 square feet, of which approximately 50% is first-floor retail and 50% is second-floor office space.  The building has a steel frame and concrete block frame and sits on a concrete slab foundation.  Its exterior walls are concrete block and brick with some stone façade detail and columns.  The roof is flat with a rubber membrane covering and interior drains.  The first floor windows are thermo-pane, and the second floor windows are fixed or casement wood sash thermo-pane.  There are two entrance lobbies with stairways to the second floor.  The main lobby has an elevator.  The first-floor retail units have glass doors at the front and steel fire doors at the rear, with one unit having an eight-foot steel overhead door.  
The nine retail units on the first floor are generally rectangular in shape and range in size from 1,350 square feet to 6,724 square feet of rentable area.  These units also have washrooms and small partitioned storage or break rooms in the rear, and some contain small kitchenettes with single stainless steel sinks.  The office spaces on the second floor range in size from 1,062 to 6,163 square feet, and fit-outs generally include reception areas, private offices, open work stations, and conference rooms.  Some of these units include small kitchenettes with sinks.  The office spaces are arranged off common hallways.  There are common men's and women's restrooms off the hallways, as well.
The floors for the first-floor units are mostly vinyl tile with some carpeted and painted concrete areas.  The lobby floors are marble tile and carpet.  The second-floor hallways and office spaces are all carpeted.  The interior walls for all spaces are painted gypsum board while the retail spaces on the first floor have glass fronts.  The ceilings are primarily acoustic tile with skylights above the lobbies.  The heating, cooling, plumbing, electrical, security, and fire protection systems are all adequate and appropriate for this building.  The roof was replaced in 2009 and the chiller in 2012.
The first-floor retail spaces and the lobbies are in good condition while the second-floor office spaces and hallways are in average to good condition.  The office finishes are typical for Class B office space in this market.     
Jurisdiction    
For fiscal years 2011 and 2012, the assessors valued the subject property at $6,012,800, and assessed taxes thereon at the rates of $18.24 and $19.21, respectively, in the corresponding amounts of $109,673.47 and $115,505.89.  For both fiscal years at issue, the appellant timely paid the taxes due without incurring interest.  The appellant also seasonably filed its abatement applications and the petitions appealing their denials.  The dates corresponding to these filings are listed in the following table.

Fiscal Year	Date Tax Bill Mailed	Date Application for Abatement ("AA") Filed	Date AA
Denied	Date Petition Filed at Board	
2011	12/27/2010	      01/10/2011	02/03/2011	02/16/2011	
2012	12/30/2011	      01/18/2012 	03/22/2012	03/30/2012	

On this basis, the Appellate Tax Board (the "Board") found and ruled that it had jurisdiction over these appeals.
 The Evidence 
	The appellant presented its case-in-chief through the testimony of its real estate valuation expert, Eric Wolff, and his summary appraisal report.  In defense of the assessments, the assessors presented their case-in-chief through the testimony of their real estate valuation expert, Emmet T. Logue, and his self-contained appraisal report.  Based on their experience, certifications, and other credentials, the Board qualified both witnesses, without objection, as expert real estate appraisers.  The assessors also introduced into evidence the requisite jurisdictional documents, a depiction of the subject building's measurements, and the subject property's relevant property record and income valuation card.
Appellant's Case-in-Chief
	After concluding that the subject property's highest-and-best use was its continued existing use as a mixed-use retail and office property, Mr. Wolff considered the three usual methods for estimating the value of the subject property for the fiscal years at issue.  He rejected the cost approach and valued the subject property using what he considered to be more appropriate sales-comparison and income-capitalization methodologies.  But, Mr. Wolff did not rely on the values developed using his sales-comparison approach, and he did not testify about this method, except to say that he rejected the sales-comparison approach and the values derived from it.  The Board, therefore, gave no weight to Mr. Wolff's sales-comparison approach or to the estimates of value obtained from it.     
	To value the subject property for the fiscal years at issue using an income-capitalization approach, Mr. Wolff first determined the total rentable area by examining the leases then in effect.  This approach led to his failure to include a significant amount -- approximately 6,000 square feet -- of then vacant space in his analysis.  Mr. Wolff next sought to ascertain appropriate market rents.  He initially examined the actual contract rents at the subject property.  These rents, as well as some of the applicable lease terms, are reproduced in the following table, just as they appear in Mr. Wolff's summary appraisal report.

Tenant
	Type of Space	Lease Expires	Square Feet (SF)	Annual Rent ($)	Rent/SF	Lease
Type		Ace-Cosmo	Retail	05/31/2016	 2,325	 51,300	22.06	Gross		Advantage Home Medical	Retail	05/31/2014	 2,608	 75,756	29.05	Gross		Bare Tanning	Retail	04/30/2015	 2,325	 30,000	12.90	Gross		Bombay Bazaar	Retail	05/31/2015	 1,350	 32,400	24.00	Gross		Cushing & Dolan	Office	TAW	 1,103	 12,000	10.88	Gross		Family Dentistry	Office	09/30/2013	 1,200	 28,304	23.59	Gross		Flooring America	Retail	06/30/2012	 6,724	 90,000	13.38	Gross		Global Vision	Office	12/31/2011	 2,469	 35,796	14.50	Gross		Greenpark Mortgage	Office	TAW	 6,163	 41,436	 6.72	Gross		Hair Cuttery	Retail	10/31/2012	 2,325	 27,000	11.61	Gross		Hennessy Law Office	Office	04/30/2014	 1,294	 21,108	16.31	Gross		Keller Williams	Office	TAW	 5,075	 54,000	10.64	Gross		Landry Cycle	Retail	05/31/2016	 6,283	121,608	19.36	Gross		Mortgage Master	Office	07/31/2014	 4,474	 47,100	10.53	Gross		Reliant Mortgage	Office	TAW	 1,062	 28,848	27.16	Gross		The Whiz	Retail	08/31/2011	 4,650	 54,000	11.61	Gross		Winsor Northrop	Office	05/31/2013	 1,300	 18,288	14.06	Gross		Totals - Retail Space			28,590	482,064	16.86			Totals - Office Space			24,140	286,884	11.88			
	In addition to the actual contract rents, Mr. Wolff reported that he also researched retail market rents in Westborough, as well as in Shrewsbury and Southborough.  His selected retail rents ranged from $7.42 to $16.00 per square foot on a gross, net-of-electric, basis, and between $9.75 to $18.00 on a triple-net basis, which he equated with $12.75 to $21.00 on a gross, net-of-electric, basis, premised on an operating expense of $3.00 per square foot.  In consideration of these retail market rents and the existing rents at the subject property, Mr. Wolff selected $18.00 per square foot, on a gross, net-of-electric, basis as a reasonable rent for the subject property's retail space for both fiscal years at issue.  For office market rents, Mr. Wolff examined the rents affiliated with 12 office spaces in Westborough.  Those rents ranged from $11.23 to $17.00 per square foot on a gross, net-of-electric, basis.  In consideration of the actual contract and market rents, Mr. Wolff determined that a reasonable rent for the subject property's office space for both fiscal years at issue was $14.00 per square foot on a gross, net-of-electric, basis.  These proposed retail and office rents resulted in a potential gross income ("PGI") of $852,580 for both fiscal years at issue.  
	For vacancy and credit loss, Mr. Wolff reported that he spoke with local brokers who suggested a range of 10% to 15% for both retail and office space.  In addition, Mr. Wolff testified that he examined market surveys for the Westborough market area conducted by the CoStar Group, which reported ranges of 8.8% to 13.8% for office space and 16.2% to 17.2% for retail space.  Based on these ranges plus the subject property's location, relative size, and current physical conditions, Mr. Wolff chose a vacancy and credit loss rate of 15.0% for the subject property for both fiscal years at issue, which resulted in an effective gross income ("EGI") of $724,693.  
	According to Mr. Wolff's summary appraisal report, leasing activity within the subject property's competitive market area indicated that, at all relevant times, the landlord was responsible for all operating expenses associated with the property.  Based on four purportedly comparable mixed-use properties, located in the Westborough area, Mr. Wolff reported that these expenses ranged from $1.29 to $5.04 per square foot, while the subject property's actual expenses reported by the appellant were $2.32 per square foot.  Based on this data, Mr. Wolff selected expenses of $2.00 per square foot, plus a management fee of 6% of EGI and a replacement reserve equal to 2% of PGI for both fiscal years at issue.   These selections generated total expenses in the amount of $187,859 which produced a net-operating income of $536,834 for both fiscal years at issue.  
	Mr. Wolff testified that he developed his 8.5% capitalization rate for both fiscal years at issue utilizing a band-of-investment technique after obtaining from industry sources important underlying data, such as a mortgage-to-equity ratio of 75% to 25%, mortgage interest and equity rates of 8.48% and 12.50%, respectively, and a 0.89% credit for equity build-up.  Mr. Wolff then confirmed his 8.5% capitalization rate with ranges and averages from various industry sources, including Korpacz Reports, CB Richard Ellis Cap Rate Surveys, and Real Estate Research Corporation East Regional Investment Criteria.  Mr. Wolff also added a tax factor of 1.824% for fiscal year 2011 and a tax factor of 1.921% for fiscal year 2012 to the capitalization rate that he had developed using the band-of-investment technique.  Accordingly, the loaded capitalization rates that he used in his methodology for fiscal years 2011 and 2012 were 10.324% and 10.421%, respectively. 
	By dividing each fiscal year's capitalization rate into its corresponding net-operating income, Mr. Wolff was able to estimate values for the subject property of $5,199,865, which he rounded to $5,200,000 for fiscal year 2011 and $5,151,464, which he rounded to $5,150,000 for fiscal year 2012.  A summary of his income-capitalization methodology is contained in the following table.




Mr. Wolff's Income-Capitalization Methodology
for Fiscal Years 2011 and 2012



INCOME                               Size(SF)   Rate/SF

Retail Space                          28,590    $18.00             $  514,620
Office Space                          24,140    $14.00             $  337,960

Potential Gross Income ("PGI"):                                    $  852,580	


Less: Vacancy & Collection Allowance - 15.0%
            
            ($  127,887)


	
Effective Gross Income ("EGI"):                                    $  724,693	
	
EXPENSES
	
  Management Fee - 6.00% of EGI = $43,482
  Replacement Reserves - 3.00% of PGI = $25,577
  Operating Expenses - $2.00/SF = $118,800       
  
Total Expenses:                                                   ($  187,859) 	
  	
Net-Operating Income:                                              $  536,834	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2011 - 10.324%	
	
Indicated Value for Fiscal Year 2011                               $5,199,865
Rounded Value for Fiscal Year 2011                                 $5,200,000	


 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 10.421%



Indicated Value for Fiscal Year 2012                               $5,151,464
Rounded Value for Fiscal Year 2012                                 $5,150,000

	
  	
Assessors' Case-in-Chief
In defense of the assessments, Emmet T. Logue testified for the assessors and explained the information and valuation analyses contained in his summary appraisal report.  At the outset, he agreed with Mr. Wolff that the subject property's highest-and-best use was its continued mixed office and retail use.  He also agreed with Mr. Wolff that the cost approach was not an appropriate valuation methodology to use to value the subject property because depreciation deductions for the subject building would be speculative and likely result in an inaccurate value estimate, and potential investors would not rely on a cost approach.  Mr. Logue rejected the sales-comparison approach because of the difficulty in converting leased-fee sale prices into fee-simple values. 
	Like Mr. Wolff, Mr. Logue found that the income-capitalization approach was the appropriate methodology to use to estimate the value of the subject property for the fiscal years at issue.  In applying this method, he first determined, using the subject property's rent rolls and his own measurements, that the subject building's rentable area contained 29,940 square feet of retail space and 29,460 square feet of office space.  Mr. Logue next reviewed and analyzed leasing activity at the subject property during the relevant time periods and performed a market rental analysis, which led to his market rent estimates.  
Mr. Logue observed that two retail leases at the subject property were renewed or extended in 2010, while another was commenced that year.  A fourth retail lease was renewed or extended in January, 2011.  These leases evidenced a retail rent range of $12.26 to $22.06 per square foot, with an average of $16.77 per square foot, on a gross, net-of-electric, basis for the fiscal years at issue.  Additionally, two office leases at the subject property were renewed or extended in 2009, while another was extended in 2010.  These leases evidenced an office rent range of $10.53 to $27.16 per square foot, also on a gross, net-of-electric, basis for the fiscal years at issue.  
Mr. Logue's market rental analysis for retail space included seven leases from five purportedly comparable properties in Westborough or neighboring Shrewsbury.  The most comparable locations and spaces suggested a rent range of $16.83 to $17.10 on a gross, net-of-electric, basis after Mr. Logue adjusted the triple-net leases by $5.00 to $6.00 to account for operating expenses and real estate taxes.  Mr. Logue's market rental analysis for office space included nine leases from five purportedly comparable properties in Westborough, Shrewsbury or Northborough.  The most comparable locations and spaces suggested a rent range of $14.85 to $15.45 on a gross, net-of-electric, basis after Mr. Logue again adjusted the triple-net leases by $5.00 to $6.00 to account for operating expenses and real estate taxes.  He also assumed a tenant improvement ("TI") allowance of $5.00 per square foot.     
Based on his analysis of the actual leases executed for space within the subject property during the relevant time period, as well as lease transactions in competing properties and his discussions with brokers and property owners operating within the Westborough market area, Mr. Logue concluded that a realistic market rent for the subject property for the fiscal years at issue was $17.50 per square foot on a gross, net-of-electric, basis for retail space and $15.25 per square foot on a gross, net-of-electric, basis for office space, assuming a TI allowance of $5.00 per square foot.  These conclusions resulted in a PGI of $973,215 for both fiscal years at issue.  
Mr. Logue based his vacancy and rent loss allowance on his analyses of the office and retail market characteristics and trends in Westborough and surrounding communities during the relevant time period and also on the historical occupancy at the subject property during the relevant time period.  He concluded that realistic stabilized allowances for vacancy and rent loss were 7% for retail space and 12% for office space for fiscal year 2011 and 8% and 13%, respectively for fiscal year 2012.  These allowances resulted in an EGI of $882,627 for fiscal year 2011 and $872,895 for fiscal year 2012.  
To estimate stabilized annual expenses for the subject property, Mr. Logue reviewed and analyzed the actual expenses incurred at the subject property during the relevant time period, as well as those reportedly incurred at several other office and retail buildings in Westborough and the surrounding area.  The subject property's actual operating expenses, which included costs for insurance, utilities, repairs and maintenance, roads and grounds, snow and trash removal, pest control, security, professional, legal and accounting, management fees, and telephone and office, totaled $3.08 per square foot in 2009 and $2.94 per square foot in 2010.  Based on a review of this information, as well as operating expense data from similar type buildings in the Westborough market area, and after considering the annual fluctuations in certain expense categories, Mr. Logue concluded that a realistic stabilized annual operating expense was $3.00 per square foot for both fiscal years at issue.  
The subject property's brokerage commission costs were $10,480 in 2009 and $8,140 in 2010.  In his analysis, Mr. Logue estimated average brokerage commission costs for office space at $1.00 per square foot for three- to five-year leases, assuming a one-third tenant rollover probability and commission payments on new leases but not renewals.  Accordingly, he estimated annual leasing costs at $0.35 per square foot for office space for both fiscal years at issue.  For retail space, Mr. Logue estimated brokerage commissions at 2% of EGI for both fiscal years at issue in keeping with his experience and industry standards.
Mr. Logue also included an expense category for reserves for the replacement of short-lived real estate items.  Recognizing that the roof was replaced in 2009 and the rooftop chiller needed replacement during the relevant time period, and considering other likely similar capital improvements over the ownership term for the subject property, Mr. Logue estimated an annual cost of $0.25 per square foot for his reserves for replacement.
Mr. Logue's last expense category was his TI allowance.  Consistent with his income analysis for office space, he estimated an average TI allowance of $5.00 per square foot for three- to five-year leases for office space and assumed a one-third rollover ratio to new tenants.  These estimates and assumptions resulted in an average annual TI allowance of approximately $0.50 per square foot, which he applied to office space only.  All of these expense estimates totaled $228,570 in costs which resulted in a net-operating income of $654,057 for fiscal year 2011 and $644,325 for fiscal year 2012.               
Mr. Logue reported that he developed his capitalization rates using a mortgage-equity technique after verifying his underlying assumptions with various industry surveys.  For his analyses, Mr. Logue assumed a 65% loan amortized over 20 years, interest rates of 5.75% and 5.50% for fiscal years 2011 and 2012, respectively, an investment holding period of 10 years, equity yield rates of 16% and 15% for fiscal years 2011 and 2012, respectively, and a 20% increase in the subject property's value over a 10-year holding period.  These assumptions resulted in capitalization rates of 9.0% for fiscal year 2011 and 8.5% for fiscal year 2012.  Mr. Logue also reviewed the Korpacz/PWC Real Estate Investor Survey for national suburban office and strip shopping centers for the first quarters of 2010 and 2011.  The national suburban office averages for institutional grade investments were 8.79% and 8.04%, respectively, and for non-institutional grade investments were 10.20% and 9.58%, respectively.  The national shopping center averages for institutional grade investments were 8.49% and 7.40%, respectively, and for non-institutional grade investments were 11.49% and 9.90%, respectively.  Based on his mortgage-equity and national survey analyses, and recognizing that the subject property had both institutional and non-institutional grade characteristics, Mr. Logue concluded that realistic capitalization rates for the subject property were 9.5% for fiscal year 2011 and 8.5% for fiscal year 2012.   After adding the corresponding tax factors of 1.824% and 1.921%, respectively, to these estimated capitalization rates, his loaded overall capitalization rates were 11.324% for fiscal year 2011 and 10.421% for fiscal year 2012.  
To estimate the value of the subject property for the fiscal years at issue, Mr. Logue divided each fiscal year's loaded overall capitalization rate into the corresponding net-operating income.  These calculations produced indicated values for the subject property of $5,775,845 for fiscal year 2011 and $6,182,944 for fiscal year 2012, which he then rounded to $5,800,000 and $6,200,000, respectively.     
A summary of his methodology for both fiscal years is represented in the table below.

Mr. Logue's Income-Capitalization Methodology
for Fiscal Years 2011 and 2012

	Fiscal Year 2011	Fiscal Year 2012	
Income
			
Retail Space	29,940 SF x $17.50     $523,950	29,940 SF x $17.50     $523,950	
Office Space	29,460 SF x $15.25     $449,265	29,460 SF x $15.25     $449,265	

PGI 	                      
                       $973,215	                      
                       $973,215	
			
Vacancy/Rent Loss
			
Retail Space	        7%            ($36,677)	        8%            ($41,916)	
Office Space	       12%            ($53,912)	       13%            ($58,404)	
			
EGI	                      $882,627	                       $872,895	

Expenses
	
	
	
Operating Expenses	    $3.00/SF         ($178,200)	    $3.00/SF         ($178,200)	
Brokerage Commissions:			
  Retail	    2.00% of PGI      ($10,479)	    2.00% of PGI      ($10,479)	
  Office	    $0.35/SF          ($10,311)	    $0.35/SF          ($10,311)	
Replacement Reserves	 $0.25/SF          ($14,850)	   $0.25/SF          ($14,850)	
TI	    $0.50/SF          ($14,730)	    $0.50/SF          ($14,730)	

Total Operating Costs	
                  ($228,570)	
                     ($228,570)	

Net-Operating Income	
                    $654,057	
                       $644,325	
			
Capitalization Rate	9.500% + 1.824% = 11.324%	8.500% = 1.921% = 10.421%	
			
Indicated Value	$5,775,845	$6,182,944	
			
Rounded Value	$5,800,000	$6,200,000	
     





The Board's Findings
	Consistent with both real estate valuation experts' determinations, the Board found that the highest-and-best use of the subject property for both fiscal years at issue was its then-current mixed-use as a first-floor retail and second-floor office complex and that the preferred method for ascertaining the fair cash value of the subject property for both fiscal years at issue was through the application of an income-capitalization methodology.  The Board further found that the subject property's rentable space was equal to the area used by the assessor's real estate valuation expert, Mr. Logue.  The evidence revealed that Mr. Logue measured the subject property and compared it to the rent rolls, while Mr. Wolff simply relied on the then-existing leases which did not include vacant space.
	As for rents, the Board adopted both real estate valuation experts' approach of assigning specific rents to the two rental categories -- retail and office -- and their gross, net-of-electric, leasing scenario. Further, the Board adopted Mr. Logue's proposed rents for both categories because his rental survey was more detailed, complete, and credible than Mr. Wolff's, and it reflected a more localized market area.
	For vacancy and credit loss, Mr. Wolff recommended a combined rate of 15% for the entire building, while Mr. Logue recommended separate rates of 7% and 8% for the retail area and 12% and 13% for the office area for fiscal years 2011 and 2012, respectively.  The Board found that Mr. Logue's rates were more specific and better comported with the immediate Westborough market and also with the subject property's rentable space.  Accordingly, the Board adopted Mr. Logue's separate vacancy and credit loss rates for the retail and office spaces for the fiscal years at issue.
	For expenses, the Board once again adopted Mr. Logue's recommendations, including: his operating expenses, which included, among other items, management fees; his replacement reserves; his brokerage or leasing commissions; and his TI.  Mr. Wolff's expenses were not as inclusive, detailed, or well-researched as Mr. Logue's and were, therefore, less credible.  Given the leasing scenario and the underlying data in the record, the Board found that Mr. Logue's expenses best reflected the market for the subject property for the fiscal years at issue.  
As for capitalization rates, the Board found that Mr. Logue's suggested rate of 9.5% for fiscal year 2011 was the better supported and developed of the two recommended by the parties' real estate valuation experts.  The Board further found that it also comported with the underlying data and industry survey ranges in evidence.  For fiscal year 2012, however, the Board found that both real estate valuation experts' recommended rate of 8.5% was too low.  The underlying evidence established that the subject property's retail space could not be leased to restaurants thereby diminishing its competiveness.  In the Board's view, this lower rate did not reflect this limitation.   In addition, the industry surveys in the record report that the capitalization rates for non-institutional retail and office spaces averaged 9.90% and 9.58%, respectively.  The Board found that a capitalization rate of 8.5% did not appropriately factor in the subject property's likely tenant mix of primarily non-institutional renters.  Accordingly, the Board determined that 9.25%, a reduction of 0.25% from fiscal year 2011, better comported with industry survey averages and the Board's other market and rental concerns for fiscal year 2012.  The Board then added to these capitalization rates the corresponding tax factors, resulting in loaded overall capitalization rates of 11.324 for fiscal year 2011 and 11.1710 for fiscal year 2012.
By dividing each fiscal year's loaded overall capitalization rate into the corresponding net-operating income, the Board was able to estimate the value of the subject property for each year at issue.  These calculations produced indicated values for the subject property of $5,775,848 for fiscal year 2011 and $5,767,836 for fiscal year 2012, each of which the Board rounded to $5,800,000.    
The following table summarizes the Board's income- capitalization methodology for the subject property for both fiscal years at issue.
The Board's Income-Capitalization Methodology
for Fiscal Years 2011 and 2012

	Fiscal Year 2011	Fiscal Year 2012	
Income
			
Retail Space	29,940 SF x $17.50     $523,950	29,940 SF x $17.50     $523,950	
Office Space	29,460 SF x $15.25     $449,265	29,460 SF x $15.25     $449,265	

PGI 	                      
                       $973,215	                      
                       $973,215	
			
Vacancy/Rent Loss
			
Retail Space	        7%            ($36,677)	        8%            ($41,916)	
Office Space	       12%            ($53,912)	       13%            ($58,404)	
			
EGI	                      $882,627	                       $872,895	

Expenses
	
	
	
Operating Expenses	    $3.00/SF         ($178,200)	    $3.00/SF         ($178,200)	
Brokerage Commissions:			
  Retail	    2.00% of PGI      ($10,479)	    2.00% of PGI      ($10,479)	
  Office	    $0.35/SF          ($10,311)	    $0.35/SF          ($10,311)	
Replacement Reserves	 $0.25/SF          ($14,850)	   $0.25/SF          ($14,850)	
TI	    $0.50/SF          ($14,730)	    $0.50/SF          ($14,730)	

Total Operating Costs	
                  ($228,570)	
                     ($228,570)	

Net-Operating Income	
                    $654,057	
                       $644,325	
			
Capitalization Rate	9.500% + 1.824% = 11.324%	9.250% = 1.921% = 11.1710%	
			
Indicated Value	$5,775,848	$5,767,836	
			
Rounded Value	$5,800,000	$5,800,000	

	Based on these rounded fair cash values, the Board decided both appeals for the appellant and ordered abatements in the amounts calculated in the following table.
Fiscal Year	Assessment 	Fair Cash Value	Over-Valuation	Tax Rate per $1,000	Tax Abatement	
2011	$6,012,800	$5,800,000	$212,800	$18.24	$3,881.47	
2012	$6,012,800	$5,800,000	$212,800	$19.21	$4,087.89	
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 market value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Newton Girl Scout Council, Inc. v. Massachusetts Turnpike Authy., 335 Mass. 189, 193 (1956); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The idea 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).  On this basis, the Board ruled that the highest-and-best use of the subject property during the fiscal years at issue in these appeals was its continued use as a multi-tenanted, retail and office complex.  Both the assessors' and the appellant's real estate valuation experts also valued the subject property on this premise.         
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.  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 the sales-comparison approach was not an appropriate methodology to use to estimate the value of the subject property under the circumstances.  The Board found that there were not enough market sales of reasonably comparable properties or enough evidence on converting leased-fee sale prices to fee-simple ones in the record to meaningfully estimate the value of the subject property using a sales-comparison technique.  In addition, neither real estate valuation expert relied on this approach to estimate the value of the subject property even though the appellant's real estate valuation expert examined and analyzed some sales of similar properties.  
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 not enough evidence in the record on which to base a value using a cost approach.  Neither real estate valuation expert chose this method to estimate the value of the subject property, nor did they introduce any direct evidence supporting this technique.  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 in these appeals. 
The appellant's real estate valuation expert relied on an income-capitalization methodology to estimate the value of the subject property.  The assessors' real estate valuation expert also employed an income-capitalization technique.  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, 701-702 (1972); Assessors of Quincy v. Boston Consol. 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 value determined from its income-capitalization methodology because the other approaches were not appropriate, and the method that the Board used was equivalent to what buyers and sellers in the marketplace would have used under similar circumstances.   See New Boston Garden Corp., 383 Mass. 456, 469 (1981); New England Oyster House, Inc., 362 Mass. at 701-702.
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); Avco Manufacturing Corp. v. Assessors of Wilmington, Mass. ATB Findings of Fact and Reports 1990-142, 166.  After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  Pepsi-Cola Bottling Co., 397 Mass. at 452-53.  Generally, the selection of expenses is for the Board.  Id.  
The Board's calculation of its gross-income figures here was based on the rentable area that was measured and confirmed through rent rolls and occupancy analyses by Mr. Logue and the market rents suggested by his underlying data which he obtained from the subject property and other reasonably comparable retail and office properties and spaces in the subject property's market area.  The Board found that the weight of the evidence supported both real estate valuation experts' supposition that the subject property's retail and office spaces rented on a gross, net-of-electric, basis.  The Board adopted the vacancy and credit loss rates recommended by Mr. Logue because they were specific to retail and office space and were based on the best available data, as well as the subject building's correct rentable areas for retail and office space.  Mr. Wolff's combined retail and office rate for both fiscal years at issue was less specific than Mr. Logue's rates and were based on faulty building measurements.  
	For expenses, the Board once again adopted Mr. Logue's recommendations, including: his operating expenses, which included, among other items, management fees; his replacement reserves; his brokerage or leasing commissions; and his TI.  Mr. Wolff's expenses were not as inclusive, detailed, or well-researched as Mr. Logue's and were therefore less credible.  Given the leasing scenario adopted and the underlying data in the record, the Board found that Mr. Logue's expenses best reflected the market for the subject property for the fiscal years at issue.  "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 Board found and ruled that the income and expense figures which it selected were reasonable and appropriate under the circumstances. 	 
The capitalization rate chosen should consider the return necessary to attract investment capital.  Taunton Redevelopment Assoc. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  Use of the "tax factor" is appropriate when the rental income reflects the assumption that the landlord pays the taxes without any reimbursement from the tenants.  See General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 609 (1984).  "In the multiple tenancy situation, the landlord rather than the tenant generally pays the real estate taxes.  When employing the capitalization of income approach to valuing property under the multiple tenancy model, it is appropriate to use a tax factor when capitalizing the stream of rents from the tenants."  Id.  Relying on these principles, the underlying data, the market, and Mr. Logue's recommendations, which were better supported and developed than Mr. Wolff's, the Board adopted Mr. Logue's suggested capitalization rate for fiscal year 2011 but determined that his capitalization rate for fiscal year 2012 should be increased by 0.75% to better coincide with industry survey averages, the state of the market as of January 1, 2011, and the applicable special permit's prohibition against leasing to restaurants.  The Board further found that both real estate valuation experts handled the tax factor appropriately given the gross, net-of-electric, leasing scenario that they adopted, and the Board accepted their approach because it had adopted the same leasing scenario.  The Board, therefore, used loaded capitalization rates for both fiscal years at issue to divide into the corresponding net-operating incomes.  "The property is valued by first calculating gross rents from the tenants to the landlord, then deducting any expenses to the landlord to determine net income from the property, and finally applying a capitalization rate and a tax factor."  Id.     
	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. Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp., 383 Mass. at 473; 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 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 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 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 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 Associates, 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 found and ruled here that the appellant met its burden of proving that the subject property was overvalued for both fiscal years at issue in these appeals.
On these bases, the Board found and ruled that the fair cash value of the subject property for fiscal years 2011 and 2012 was $5,800,000.  Accordingly, the Board decided that the subject property was overvalued in the amount of $212,800 for both fiscal years at issue.
The Board, therefore, granted the appellant abatements for fiscal years 2011 and 2012 in the respective amounts of $3,881.47 and $4,087.89.

   					  THE APPELLATE TAX BOARD



  By: ________________________________________
 Thomas W. Hammond., Jr., Chairman



A true copy,



Attest: ________________________
Clerk of the Board

 "TAW" is an acronym for tenant at will.
  The subject property's 2010 operating expenses provided to Mr. Logue did not include management fees.  Mr. Logue assumed that this omission was an oversight and, therefore, adjusted the 2010 expenses upward to include a management fee equivalent to the previous year's costs.  

ATB 2014-444