New England Telephone & Telegraph Company v. Board of Assessors of the City of Cambridge (August 11, 2000)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

NEW ENGLAND TELEPHONE		v.	   BOARD OF ASSESSORS OF 
& TELEGRAPH COMPANY				   THE CITY OF CAMBRIDGE

Docket Nos.:	F196855 (FY 1992)
			F205086 (FY 1993)
			F215808 (FY 1994)	Promulgated:
							August 11, 2000

	These are appeals under the formal procedure pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate real estate taxes assessed under      G.L. c. 59, § 38 for fiscal years 1992, 1993, and 1994.
	Chairman Burns, former Chairman Gurge, and Commissioners Scharaffa and Gorton, all joined in the decisions for the appellant in fiscal years 1992 and 1993, and the decision for the appellee in fiscal year 1994.
	These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 8.31 CMR 1.32.

	Philip Burling, Esq. and Bradford Gram Swing, Esq.  for the appellant.

	Joseph F. Dalton, Esq. and Ellen M. Hutchinson, Esq. for the appellee.

FINDINGS OF FACT AND REPORT
	On January 1, 1991, January 1, 1992, and January 1, 1993, the appellant, New England Telephone & Telegraph Company ("NET"), was the assessed owner of approximately 1.65 acres (71,881 square feet) of land in Cambridge that is comprised of three irregularly shaped lots, which together create a rectangular parcel.  The site is improved with a specially constructed, steel-frame and concrete, six-story, telephone switching and central-office building that contains a gross floor area of 141,437 square feet.  The building, which was built in 1972, has a brick façade and is virtually windowless.  There are two radio towers on the roof.  The site also contains an asphalt parking lot with 111 available spaces.  There is exterior lighting and chain link fencing on the parking-area side of the site. The subject property is situated at the corner of Fifth and Bent Streets in East Cambridge and is numbered 194 Fifth Street (or, alternatively, 210 Bent Street).  The site has about 350 feet of frontage along Bent Street, 111 feet along Fifth Street, and 265 feet on Rogers Street, which is essentially an alley.
	The property is located in an established            B1 industrial zone.  The B1 industrial zone allows business, professional, and general offices, printing or publishing establishments, wholesale showrooms, warehousing, research and development, and light manufacturing.  This is an older industrial neighborhood that does not possess good highway access or the planned layout of newer industrial and office parks.  The age and appearance of some of the buildings in the area indicate that this section of Cambridge had experienced, and was continuing to experience, some decline.  All public utilities are available to the site including electric, telephone, sanitary sewer, water, and gas.      
	In fiscal year 1992, the Board of Assessors of Cambridge ("Assessors") valued the subject property at $13,834,500 and assessed a tax, at a rate of $22.90 per $1,000, in the amount of $316,810.05.  In fiscal year 1993, the Assessors valued the property at $11,798,130 and assessed a tax, at a rate of $28.40 per $1,000, in the amount of $335,066.89.  In fiscal year 1994, the Assessors valued the subject at $10,618,302 and assessed a tax, at a rate of $32.78 per $1,000, in the amount of $348,067.94.  The appellant timely paid its real estate taxes in all of the fiscal years at issue in these appeals.
	The appellant also seasonably filed its applications for abatement with the Assessors and petitions to this Board, as summarized in the following table.


Fiscal Year	Date Tax Bill Mailed	Date Application for Abatement ("AA") Filed	Date AA Denied or Deemed Denied	Date Petition Filed at Board	
1992	10/15/91	11/04/91	02/04/92	05/04/92	
1993	10/14/92	11/09/92	11/16/92	12/16/92	
1994	10/08/93	11/03/93	11/10/93	02/10/94	

On this basis, the Board found that it had jurisdiction to hear and decide these appeals.
	The appellant presented its case in chief through the testimony of Robert Gurney, a former construction manager and, at the time of the hearing, a property manager for NET, and through the testimony and appraisal report of Robert K. McDonald, a certified real estate appraiser with Coopers & Lybrand.  In defense of the assessed values on the subject property, the Assessors presented the testimony of Leonard G. Campo, a licensed builder, project manager, and estimator, and the testimony and appraisal report of Donald Reenstierna, a certified real estate appraiser.  In rebuttal, the appellant also presented the testimony of Paul D. Messina, a senior vice president in Spaulding & Slye's Advisory Services Group.  Mr. Messina is a specialist in the rental and development of biotechnology space in Cambridge.  In addition, the appellant recalled Mr. Gurney to refute some of Messrs. Reenstierna's and Campo's measurements and cost estimates.  Both parties submitted numerous exhibits, post-hearing requests for findings and rulings, and post-hearing briefs and reply briefs.
	 At all relevant times, Mr. Gurney was familiar with the subject property and several other nearly identical NET switching and central-office buildings, which were located in northern New England and referred to as "4A buildings" or "4As."  These properties were named for the            4A electromechanical switches that they housed.  The 4As were essentially telephone exchange hubs where NET employees manually performed the cross wiring necessary for comprehensive telephone service.   
To fulfill the subject property's unique purpose,   Mr. Gurney testified that it, like other 4As, was specially constructed in the early 1970s with many distinct features.  For example, the subject contained a large main central section with high ceilings and floor-load capacities that were designed to accommodate heavy and bulky switching and power equipment.  This warehouse-like shell space had little or no heating, super-adequate cooling, dual large-capacity AC and DC electrical systems, a fire alarm system, and  utility  slots built into the floors to hold extensive 

inter-floor cabling.  The massive foundations and columns that support the building were designed to bear the anticipated addition of four floors.  The roof was also specially constructed to accommodate more floors.  
In addition, there was a thin section off to one side of the main section for a freight elevator and a stair tower.  There was another thin section on the other end of the switching space with facilities to accommodate NET's workers.  This space contained two passenger elevators, rest rooms, offices, conference rooms, and a small cafeteria.
Mr. Gurney also related that, in 1984, about 36,000 square feet of the subject property's central space, originally allocated to switching equipment, was converted into an environment suitable for computer and office use.  This conversion entailed, among other things, doubling the cooling capacity of the space with a new raised-floor duct system and adding an uninterrupted supply of electricity.  A new fire alarm system, heating system, and other changes were also incorporated into this new computer space.     Mr. Gurney further testified that, by the early 1990s, if not before, NET no longer built 4As because the switching equipment that they housed became obsolete.  NET could perform the same functions with much smaller and more automated devices.  
In addition, Mr. Gurney testified that NET experienced a great deal of difficulty and delay when it tried to sell its 4As or central-office buildings in northern          New England.  One such building located in New Bedford, Massachusetts took over two years, after being cleaned out, to finally sell in 1990, despite its location in the heart of the city's historic district.  Another such building in Portland, Maine was vacant for over a year before it was sold to a photographer in 1994.  A third building in Nashua, New Hampshire also took two years to sell in the early 1990s.  
Mr. Gurney related that NET never attempted to convert an entire 4A or central-office building to a different use, although some partial conversions were undertaken like the subject's 36,000-square-foot alteration in 1984.  He quantified the two phases required for the subject property's partial conversion to a computer environment at $101.30 per square foot for the first phase and $74.47 per square foot for the second.  The first phase included the removal of some of the switching equipment and interior construction coupled with the installation of an uninterruptable power supply and other electrical alterations.  The second phase involved the finish work from a shell state to completion.
Mr. Gurney observed that other NET switching and central-office buildings were not converted to office use because they were not usually located in good office locations, and the structure of the buildings did not lend itself to a cost-effective office conversion.  4A buildings were nearly windowless and were not wired, plumbed or sprinklered for office use.  Their central elevator and heating systems were inadequate for office use.  They lacked insulation and virtually all office-type finish work and amenities.
Mr. Gurney also discussed the income and expenses associated with the two radio towers located on the roof of the subject property.  He estimated that four cellular sites could be installed onto the two towers generating a total gross income of approximately $160,000 per year.  He placed management expenses in a range between thirty-five and fifty percent of gross income.  
 Mr. Gurney testified  that there were two underground 
fuel storage tanks located at the property during the fiscal years at issue.  One tank's capacity was 30,000 gallons for kerosene while the other tank's capacity was 3,000 gallons for fuel oil.  NET was required by law to remove and/or replace them with leak-proof tanks.        Mr. Gurney testified that NET spent approximately $230,000 to remove both tanks, de-contaminate the soil, and replace and rebury the larger tank.  NET then spent another $40,000 converting the heating system to gas.
Mr. Gurney was later recalled, near the end of the hearing, as a rebuttal witness for the appellant.  He calculated and testified that the subject property's construction area, interior space, and rentable area were 147,893, 141,743, and 131,194 square feet, respectively.  His figures contradicted those of the Assessor's expert appraiser, Mr. Reenstierna, who estimated the subject property's purported rentable area at 141,778 square feet.  Mr. Gurney also criticized the cost that Mr. Reenstierna assigned for converting the subject property to a shell.  Mr. Gurney believed that Mr. Reenstierna did not adequately account for costs associated with, among other things, upgrading existing systems, replacing the roof membrane, refurbishing the entrance, and adding exterior windows and some landscaping.  For example, Mr. Gurney's cost for adding an appropriate number of windows for office use was $2,466,000 compared to an estimated cost of $375,000 that was the basis of Mr. Reenstierna's approximation in this regard.  Accordingly, Mr. Gurney's overall estimate for converting the property to wholly office and wet laboratory space, which, according to Mr. Reenstierna, was the property's highest and best use during the relevant period, was significantly greater than Mr. Reenstierna's estimate. 
Also testifying for the appellant was its expert real estate appraiser, Robert K. McDonald.  The Board qualified Mr. McDonald as an expert witness without any objection from the Assessors.  Mr. McDonald first examined the highest and best use of the property during the fiscal years at issue.  After analyzing the building's features and area market and after performing a discounted-cash-flow analysis, he determined that it was not financially feasible to convert the subject property to office space.  The building's physical layout, structure, and systems were not suited for office use; the renovation costs were exorbitant; and an office use would result in a negative cash flow for the property.  Moreover, the available parking did not comply with the zoning requirements for a one-hundred-percent office use.  Mr. McDonald's additional examination of potential residential uses produced a similar negative result.  
Mr. McDonald found that the most cost-effective solution for fully utilizing the subject involved combining the existing computer/office space with warehouse/storage space.  Consequently, he concluded that the property was best suited for a mixed use of computer/office and  warehouse/storage space.  He quantified that mix at seventy-percent warehouse/storage space coupled with thirty-percent computer/office.  These percentages corresponded with the existing computer/office and open space configuration already contained within the subject.  In addition, Mr. McDonald determined that this mixed use did not necessitate disproportionate transformation expenditures.
In valuing the subject property for the fiscal years at issue, Mr. McDonald considered all three of the usual approaches, income-capitalization, sales-comparison, and reproduction or replacement cost.  However, he never fully developed a cost analysis because of the building's super adequacies with respect to its structure and certain systems, its extreme functional obsolescence, and miniaturization developments in telephone switching technology, as well as a lack of comparable and timely land sales in Cambridge.  Under the circumstances, Mr. McDonald concluded that a cost approach was not an appropriate technique to use to estimate the value of the subject property.  Rather, Mr. McDonald focused his attention on income-capitalization and sales-comparison methodologies.
In his income-capitalization approach, Mr. McDonald first determined the gross rental income that the subject property could generate if vacant and ready to lease.  To reach this figure, he first divided the subject into 42,800 square feet of computer/office gross floor space and 98,637 square feet of warehouse/storage gross floor space.      Mr. McDonald then studied five contemporary warehouse and five contemporary office leases from what he considered to be relatively comparable properties in East Cambridge.  He physically inspected most of these properties.  Based on his study, Mr. McDonald concluded that up to 20,000 square foot users of warehouse space were paying $3.00 to $7.00 per square foot over a three- to five-year lease term.  He further found that office users were paying $10.00 to $18.00 per square foot.  Because of the subject property's size and height, lack of windows, and potential costs of tenant improvements, Mr. McDonald estimated that the subject's warehouse/storage space would rent at the high end of the scale, but the subject's computer/office space would be at the lower end of that range.  On this basis, he estimated that, during the fiscal years at issue, the subject property's warehouse/storage space would rent for $6.50 per square foot, and its computer/office space would rent for $11.00 per square foot.  He also included $160,000 per year in potential income from four probable cellular sites that could be placed on the two radio towers on the roof.  These estimates produced an annual gross income for the subject property during the fiscal years at issue of $1,271,941.
Mr. McDonald relied on both published information and the subject's actual experience in selecting appropriate vacancy rates for his income-capitalization approach during the fiscal years at issue.  The published data showed vacancy rates for industrial and office property at two and ten to twelve percent, respectively.  Mr. McDonald observed that NET used 91.1% of the subject property during the years at issue.  Based on this data, Mr. McDonald chose a ten-percent vacancy rate for the subject during the relevant fiscal years.  He did not apply a vacancy factor to the tower rentals.  
For operating expenses, Mr. McDonald recognized that the subject's warehouse/storage space would rent under a triple net arrangement, but believed that its computer/office space would be under a gross lease.  Consequently, the warehouse/storage tenant would pay for most of the expenses, except management fees, reserves for replacements, and a small amount of non-reimbursed expenses.  On the other hand, any tenants leasing the computer/office space would not pay for most expenses, including management fees, reserves for replacements, and a larger amount of non-reimbursed expenses.  
To estimate the expenses to include in his income-capitalization approach for the warehouse/storage space, Mr. McDonald determined that the subject's actual expenses for water and sewer, fuel, and electricity were $6.68 per square foot.  He estimated the expenses associated with the computer/office space by researching the expenses during the relevant time period for office buildings in the Metropolitan Boston area as published by the Institute of Real Estate Management.  Those published expenses ranged from $4.47 to $5.90 per square foot.  To account for the subject's extraordinarily high electricity expense,      Mr. McDonald chose to lower this expense figure to approximately $3.60 per square foot for the computer/office portion of the subject property.  For the warehouse/storage portion of the property, Mr. McDonald estimated non-reimbursable expenses at only $0.25 per square foot.  He then added another $69,000 to his expense figure to account for the costs related to the towers on the roof.  
In addition, Mr. McDonald factored into his income-capitalization approach a management fee of four percent of the effective gross income and a replacement reserve of $32,900 or approximately $0.23 per square foot.          Mr. McDonald verified his management fee with brokers, managers, and owners in the area.  For replacement reserves, he used a straight-line approach coupled with a local multiplier to account for the replacement costs and life expectancies associated with capital expenditures for such items as roofing, parking surface, heating and air conditioning systems, elevators, and underground tanks.
Finally, Mr. McDonald developed his capitalization rates for the fiscal years at issue using the mortgage-equity technique, also known as the Akerson Method.  He also relied on investment parameters found in the "Appraiser News" for January 1, 1991, January 1, 1992, and January 1, 1993 and, additionally, attempted to extract overall rates from the sale of properties in the area.  On this basis, he calculated overall capitalization rates of 10.51% for fiscal year 1992, 10.01% for fiscal year 1993, and 10.13% for fiscal year 1994.  He then added effective tax rates of 2.29%, 2.89%, and 3.28%, respectively, to his corresponding overall capitalization rates to obtain total overall rates of 12.80% for fiscal year 1992, 12.99% for fiscal year 1993, and 13.41% for fiscal year 1994.  A summary of his income-capitalization approach, which produced estimates of value for fiscal years 1992, 1993, and 1994 in the amounts of $6,563,000, $6,467,000, and $6,265,000, respectively, is contained in the following table.

	Jan. 1, 1991	Jan. 1, 1992	Jan. 1, 1993	
INCOME				
				
Tower	 $  160,000	 $  160,000	 $  160,000	
Warehouse/Storage	 $  641,141	 $  641,141	 $  641,141	
Computer/Office	 $  470,800	 $  470,800	 $  470,800	
				
GROSS INCOME	 $1,271,941	 $1,271,941	 $1,271,941	
				
Vacancy @ 10%	($  111,194)	($  111,194)	($  111,194)	
				
EFFECTIVE GROSS INCOME	 $1,160,746	 $1,160,746	 $1,160,746	
				
OPERATING EXPENSES				
				
Management @ 04%	($   40,030)	($   40,030)	($   40,030)	
Non-Reimbursed-Wrhse	($   24,659)	($   24,659)	($   24,659)	
Non-Reimbursed-Office	($  154,080)	($  154,080)	($  154,080)	
Replacement Reserve	($   32,900)	($   32,900)	($   32,900)	
Tower Maint & Mngmnt	($   69,000)	($   69,000)	($   69,000)	
				
TOTAL EXPENSES	($  320,669)	($  320,669)	($  320,669)	
				
NET OPERATING INCOME	 $  840,077	 $  840,077	 $  840,077	


				
CAP RATE				
				
Overall Rate	10.51%	10.10%	10.13%	
Effective Tax Rate	 2.29%	 2.89%	 3.28%	
				
TOTAL CAP RATE	12.80%	12.99%	13.41%	
				
INDICATED VALUE	 $6,563,104	 $6,467,108	 $6,264,559	
				
ROUNDED VALUE	 $6,563,000	 $6,467,000	 $6,265,000	

	Mr. McDonald also employed a sales-comparison approach to estimate values for the subject property for the fiscal years at issue.  In applying this technique, he analyzed a wide variety of warehouse, office, and laboratory properties in Cambridge that sold during 1990 through 1992.  His analysis produced unadjusted mean and median square foot values of $31.36 and $26.44, respectively, for warehouse buildings, $67.83 and $73.62, respectively, for office buildings, and $106.90 for both mean and median square foot values for laboratory buildings.  Mr. McDonald verified his warehouse and office figures with two sales of NET's central office properties in New Hampshire and Maine.  
Mr. McDonald then focused on five sales in the Cambridge area that he found particularly comparable to the subject property and adjusted their square-foot values, for such factors as age, condition, location, size, and other features, to a range of $30.41 to $50.00 per square foot.  Considering this range and the subject property's seventy-percent to thirty-percent warehouse to office split,     Mr. McDonald selected an overall square foot value of $41.00 for the fiscal years at issue.  He computed his estimate of the subject's fair market value by multiplying the subject's 141,743 square feet by $41.00.  He then rounded his $5,811,077 value to $5,811,000 for all of the fiscal years at issue in these appeals. 
Finally, Mr. McDonald reconciled the estimates of value that he achieved using his income-capitalization and sales-comparison approaches.  He gave the most weight to the values produced by his income-capitalization technique because, in his opinion, they best reflected the market in the subject's neighborhood.  His reconciled estimates of value for each of the fiscal years at issue are summarized in the following table.
Fiscal Year 1992	Fiscal Year 1993	Fiscal Year 1994	
$6,300,000	$6,200,000	$6,100,000	

	The Assessors presented the testimony and appraisal report of their expert real estate appraiser, Donald H. Reenstierna, in support of their assessments for the fiscal years at issue in these appeals.  Mr. Reenstierna first determined the subject property's highest and best use.  According to him, the contemporary zoning and use restrictions allowed both general office and lab uses.  He testified that there was demand for this type of space in the area.  In his opinion, the building could be modified to accommodate these uses.  Accordingly, he decided that the subject property's highest and best use was as office or office/research and development, particularly wet laboratory, space.
	In estimating values for the subject property for the fiscal years at issue, Mr. Reenstierna relied entirely on his income-capitalization approach.  He did not use the cost approach because of the difficulty and subjectivity involved in the estimation of the accrued depreciation affecting the property.  He considered but dismissed the comparative-sales approach because of a lack of comparable sales and because he believed that this approach is used primarily by owners who intend to occupy the building.  
	In applying his income-capitalization methodology,  Mr. Reenstierna first analyzed rental data from competing facilities in the area to ascertain the subject property's market rent.  He focused on six triple-net leases that indicated a range for rents of $21.00 to $30.00 per square foot.  After considering the cost for the comparable properties' and the subject's tenant improvements,       Mr. Reenstierna determined that $26.00 per square foot for 121,524 square feet in fiscal year 1992 and $25.00 per square foot for 125,046 square feet in fiscal years 1993 and 1994 were the most appropriate rental rates and areas for the subject under the circumstances.  He also concluded that 20,254 square feet of space in the basement could be leased at five dollars per square foot during all three fiscal years at issue.
	Mr. Reenstierna reported that the vacancy rate for wet laboratory space during the fiscal years at issue was at five percent or lower "with many area companies growing at a tremendous rate."  However, in 1990 and the beginning of 1991, wet laboratory vacancies were slightly higher than in subsequent years.  Mr. Reenstierna further reported that the vacancy rate for office and dry laboratory space during this same time period ranged from five to ten percent.  Accordingly, he assigned to the subject property vacancy rates of six percent in fiscal year 1992 and five percent in fiscal years 1993 and 1994.  
	Despite being leased on a triple net basis,         Mr. Reenstierna incorporated, what he termed, "expenses during vacancy" into his income-capitalization approach.  These expenses represented costs incurred by the landlord during periods of vacancy.  Mr. Reenstierna relied on several industry publications and actual expenses from similar buildings in estimating a $0.25 to $0.30 per-square-foot cost in this regard.  He also used industry surveys to establish a $0.75 per-square-foot expense for building maintenance and repair costs.  He set his reserves for replacement at $0.25 per square foot and his management fee at 3.6% of effective gross income.  Ordinarily, a management fee of six percent would be appropriate, but  Mr. Reenstierna applied that percentage to only sixty percent of the effective gross income (6.00% x 0.6 = 3.6%) to eliminate tenant improvement costs from the equation.  Similarly, he estimated the brokerage commission at 23% over a ten-year lease or 2.3% annually that he then reduced to 1.38% to account for the build-out costs (2.3% annually x 0.6 = 1.38%).  Mr. Reenstierna's calculated the "build-out and tenant finishes" expenses for the subject property's upper floors at $85.00 per square foot, amortized over a ten-year period at market interest rates of 10.0% in fiscal year 1992, 9.0% in fiscal year 1993, and 8.5% in fiscal year 1994.  He relied on actual costs from similar buildings and discussions with industry specialists in estimating the costs associated with tenant finishes and structural alterations necessary to accommodate wet laboratory and research and development uses.  Finally,  Mr. Reenstierna included a deduction of 0.5% of effective gross income to account for miscellaneous expenses connected  to  such  items as legal costs, appraisals, pest 

control, and interior decorating.	
Mr. Reenstierna turned to certain industry publications and discussions with brokers to estimate his overall capitalization rates for the fiscal years at issue.  He then confirmed his selection of 9.0% for fiscal year 1992 and 9.5% for both fiscal years 1993 and 1994 with rates calculated using the mortgage-equity method.  In this way, Mr. Reenstierna determined that the value of the subject property using an income-capitalization approach for fiscal years 1992, 1993, and 1994 at $11,800,000, $11,100,000, and $11,500,000, respectively.  A summary of his approach is contained in the following table.
	 Jan. 1, 1991	 Jan. 1, 1992	 Jan. 1, 1993	
INCOME				
				
Upper Floors	 $ 3,159,624	 $ 3,038,100	 $ 3,038,100	
Basement	 $   101,270	 $   101,270	 $   101,270	
				
TOTAL INCOME	 $ 3,260,894	 $ 3,139,370	 $ 3,139,370	
				
Vacancy & Rent Loss	($   195,654)	($   156,969)	($   156,969)	
				
EFFECTIVE GROSS INCOME	 $ 3,065,240	 $ 2,982,402	 $ 2,982,402	
				
EXPENSES				
				
Expenses During Vacancy	($    36,547)	($    31,294)	($    32,231)	
Maintenance & Repairs	($    91,143)	($    91,143)	($    91,143)	
Reserves for Replacement	($    30,381)	($    30,381)	($    30,381)	
Management	($   110,349)	($   107,366)	($   107,366)	
Commissions	($    42,300)	($    41,157)	($    41,157)	
Tenant Fit-out Costs	($ 1,681,085)	($ 1,609,550)	($ 1,574,301)	
Other Expenses	($    15,326)	($    14,912)	($    14,912)	
				
TOTAL EXPENSES	($ 2,007,131)	($ 1,925,804)	($ 1,891,492)	
				
NET OPERATING INCOME	 $ 1,058,109	 $ 1,056,598	 $ 1,090,910	
				
CAPITALIZATION RATE	9.00%	9.50%	9.50%	
				
INDICATED VALUE	 $11,756,769	 $11,122,083	 $11,483,262	
				
ROUNDED VALUE	 $11,800,000	 $11,100,000	 $11,500,000	

	The Assessors also called Leonard G. Campo to testify.  Mr. Campo was a licensed builder, project manager, and estimator.  The Board qualified him as an expert cost estimator, without objection from the appellant.  Mr. Campo estimated the cost for installing ninety windows in the façade of the subject property at $341,473 and the cost for some landscaping in the parking lot at $20,000.
	In addition to recalling Mr. Gurney, the appellant called Paul D. Messina as a rebuttal witness.  Mr. Messina was a Senior Vice President in Spaulding & Slye's Advisory Services Group.  He was experienced in leasing and rehabbing space for biotech and wet lab companies in the Cambridge area.  He testified that wet lab and biotech space was very expensive to build and maintain, and generally required many windows.  He further testified that, during the years at issue, wet lab space was not built on speculation because of the cost and the conservative lending policies of banks at that time.          
On the basis of all of the evidence, including testimony, exhibits, and reasonable inferences drawn therefrom, the Board found that the highest and best use of the subject property during the fiscal years at issue in these appeals was, as suggested by the appellant's expert, a mixed use of primarily warehouse/storage space coupled with some computer/office space.  The Board found that this use comported with the area's zoning and economic and rental climate, as well as the building's features and reasonable conversion costs.  Mr. Reenstierna's contention that the property could be converted, cost effectively, into wet lab or biotech space during these years, was effectively rebutted by the appellant.  
The Board also found that the income-capitalization approach was the most appropriate technique to use to estimate the value of the subject property during the fiscal years at issue.  Consistent with the recommendation of both parties' expert appraisers, the Board found that the subject property did not lend itself to a cost analysis.  The Board agreed with Mr. Reenstierna and further found that there were not enough sales of comparable properties during the relevant time period to support the use of a sales-comparison approach.  Accordingly, like the parties' experts, the Board relied on an income-capitalization approach to estimate the value of the subject property on January 1, 1991, 1992, and 1993.  
In determining the subject property's gross income for the fiscal years at issue, the Board adopted Mr. McDonald's figures.  The Board found that his calculations of the property's gross floor area, his approximation of the property's computer/office to warehouse/storage space, his selection of market rents, his use of triple net leases for the warehouse/storage space, and his assignment of rents to the towers on the roof, were all well-supported by the evidence.  The Board further found that the rents that he used in his computer/office rental analysis were based on a mix of both gross and triple net leases.  His selection of a market rent of $11.00 per square foot for computer/office space, without any real analysis, was, in the Board's opinion, more reflective of a triple net than a gross lease.  Accordingly, while the Board adopted his suggested $11.00-per-square-foot income figure for the computer/office space, it did so under a triple net and not a  gross  leasing  scenario.   Therefore, the  Board  found 
that the gross income for each of the three fiscal years at issue was $1,271,941, assuming that tenants rented their space under triple net leases.  
The Board further found that the most appropriate vacancy rate for each of the years at issue was five percent of gross income or $63,597.  This rate represented the lower part of the range suggested by Mr. Reenstierna for at least office space and was around the average of the industrial and office rates relied on by Mr. McDonald, considering the subject's seventy- to thirty-percent allocation of warehouse/storage to computer/office space.  On this basis, the Board found the subject's effective gross income for each of the fiscal years at issue was $1,208,344.
With respect to expenses, the Board found that, under a triple net lease, the tenant is responsible for most expenses, including its own fit-out costs.  However, as both parties' expert appraisers recognized, the landlord still incurs some costs for management, replacement reserves, and other miscellaneous expenses.   Accordingly, the Board found that a management fee of four-percent of effective gross income from the rental of both the building and roof, or, in these appeals, $48,334, was the most appropriate cost to include in its income-capitalization approach for these types of expenses.  The Board did not include the $69,000 additional management fee suggested by Mr. McDonald for the radio towers on the roof in its expenses because that fee was not adequately supported by market data or the appellant's own internal records.  The Board relied on a combination of the information and opinions provided by the parties' experts in selecting a management fee of four percent for both the building and the roof.  
Moreover, the Board agreed with and adopted         Mr. McDonald's calculation of $32,900, or approximately $0.23 per square foot, for replacement reserves.  The Board found that his methodology was well reasoned and supported.  It was also within $2,500 of the amount suggested by      Mr. Reenstierna.  Finally, the Board included a two-percent miscellaneous expense category to account for such expenditures as insurance and audit costs.  The Board's inclusion of this category comported with both           Mr. Reenstierna and Mr. McDonald's methodology.  The Board's selection of two percent of effective gross income for this cost fell between Mr. McDonald's non-reimbursed expenses under a triple net leasing scenario and Mr. Reenstierna's "other" category of expenses.  The Board did not include additional expenses for tenant improvements because the Board found that those costs were subsumed in the lower rents that the Board adopted.  The net operating expenses selected by the Board in its income-capitalization approach were equivalent to 8.7% of effective gross income.  After subtracting these expenses from its effective gross income, the Board used a net operating income of $1,102,943 in its income-capitalization approach for each of the fiscal years at issue in these appeals. 
For capitalization rates, the Board agreed with and adopted Mr. McDonald's methodology and recommendations of 10.51% and 10.10% for fiscal years 1992 and 1993, respectively.  However, the Board lowered his suggested 10.13% rate for fiscal year 1994 to 10.00% to reflect a lower prime rate than the two previous years.  The Board disagreed with Mr. McDonald's inclusion of a tax factor in his overall capitalization rate, which he applied to the net operating income derived from both triple net rent (warehouse/storage) and gross rent (computer/storage).  Instead, the Board found that it was inappropriate to include a tax factor in a triple net leasing situation where the tenant was responsible for paying the real estate tax.  Mr. Reenstierna's methodology comports with the Board's in this regard.  The capitalization rates that he used also closely approximate those chosen by the Board.   
Applying its income-capitalization approach, the Board estimated the value of the subject property at $10,494,224 for fiscal year 1992, at $10,920,227 for fiscal year 1993, and at $11,029,430 for fiscal year 1994.  The Board then rounded these amounts to $10,500,000, $10,900,000, and $11,000,000, respectively.  A summary of the Board's income-capitalization approach is contained in the following table.


	 Jan. 1, 1991	 Jan. 1, 1992	 Jan. 1, 1994	
INCOME				
				
Towers	 $   160,000	 $   160,000	 $   160,000	
Warehouse/Storage	 $   641,141	 $   641,141	 $   641,141	
Computer/Office	 $   470,800	 $   470,800	 $   470,800	
				
GROSS INCOME	 $ 1,271,941	 $ 1,271,941	 $ 1,271,941	
				
Vacancy @ 5%	($    63,597)   	($    63,597)   	($    63,597)   	
				
EFFECTIVE GROSS INCOME	 $ 1,208,344	 $ 1,208,344	 $ 1,208,344	
				
EXPENSES				
				
Management-Building & Roof	($    48,334)	($    48,334)	($    48,334)	
Replacement Reserve	($    32,900)	($    32,900)	($    32,900)	
Miscellaneous	($    24,167)	($    24,167)	($    24,167)	
				
TOTAL EXPENSES	($   105,401)	($   105,401)	($   105,401)	
				
NET OPERATING INCOME	 $ 1,102,943	 $ 1,102,943	 $ 1,102,943	
				
CAPITALIZATION RATE	10.51%	10.10%	10.00%	
				
FAIR CASH VALUE (FCV)	 $10,494,224	 $10,920,227	 $11,029,430	
				
ROUNDED FCV	 $10,500,000	 $10,900,000	 $11,000,000	

Therefore, the Board decided the fiscal year 1992 and 1993 appeals for the appellant and granted abatements in the amounts of $76,360.05 and $25,506.89, respectively.  Because the $11,000,000 fair cash value found by the Board for fiscal year 1994 exceeded the $10,618,300 assessed value, the Board decided the fiscal year 1994 appeal for the appellee.  The basis of the Board's computation of abatements for fiscal years 1992 and 1993 are contained in the following table.
Docket Number	Fiscal Year	Location	Assessed Value	Tax Assessed	Fair Cash Value	Over-
Valuation	
196855	1992	194 Fifth St.	$13,834,500	$316,810.05	$10,500,000	$3,334,500	
205086	1993	194 Fifth St.	$11,798,130	$335,066.89	$10,900,000	$  898,130	

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.  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 the sales-comparison or cost approaches were appropriate under the circumstances.  The Assessors' expert appraiser agreed.  NET's expert appraiser also ruled out cost approaches but did rely to some extent on his sales-comparison analysis.  The Board found that there were not enough market sales of reasonably comparable properties to meaningfully estimate the value of the subject property using a sales-comparison technique.  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 v. New Bedford Redevelopment Authority, 375 Mass. at 362.  The Board found here that no such "special situations" existed, and, even if they did, there was no evidence on which to base a 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 during the fiscal years at issue in these appeals.  
The use of the income-capitalization approach is appropriate when reliable market 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 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 value determined from the income-capitalization approach because the other methods were not appropriate, and the approach that the Board used was equivalent to what buyers and sellers in the marketplace would have used under the circumstances.   See New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. at 701-702.
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 as both warehouse/storage and computer/office space.  Although the use of the entire building as a telephone exchange was no longer its highest and best use, exorbitant conversion costs limited alternative uses.  The Board found that seventy percent of the building was suited for warehouse/storage space, while thirty percent had already been converted to computer/office space.  Accordingly, the Board agreed with the appellant's expert real estate appraiser's mixed-use designation.         
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.  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, 12 Mass. App. Tax Bd. Rep. 132, 143 (1990).  After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. at 452-453.  Generally, the selection of expenses is for the Board.  Id.  
The Board's selection of its gross-income figures was consistent with those suggested by the appellant's expert appraiser, Mr. McDonald, and was supported by the evidence.  The Board's vacancy and credit loss rates were based on the rates selected by both parties' expert appraisers, and their testimony and data contained in their appraisal reports concerning the relevant market.  The Board's expense deductions were also based on both parties' expert appraisers' testimony and information contained in their appraisal reports regarding the market.  The Board allowed deductions for management fees, replacement reserves, and miscellaneous expenses.  "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 these income and expense figures were reasonable and appropriate under the circumstances. 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).  Use of the "tax factor" is unnecessary under the single tenant premise because the net rental income reflects the assumption that the tenant pays the taxes.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984).  Relying on these principles, the Board adopted Mr. McDonald's recommendations for fiscal years 1992 and 1993, but lowered his recommended rate for fiscal year 1994 to reflect a lower prime rate than the previous two years.  The Board did not use a tax factor here because it assumed that a single or only a few tenants would lease the subject property, under a triple net leasing scenario.   
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.     at 473; Assessors of Lynnfield v. 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 v. Assessors of Lynn, 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."  Assessors of Quincy v. 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. Board of 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 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 v. Board of Assessors of Great Barrington, 365 Mass. at 245.  The Board ruled that the appellant met its burden of proving that the subject property was overvalued in all of the fiscal years at issue in these appeals.
The Board applied these principles in estimating the fair cash value of the subject property during the fiscal years at issue in these appeals.  On this basis, the Board decided that the subject property was overvalued in the amounts of $3,334,500 and $898,130 in fiscal years 1992 and 1993, respectively, but was not overvalued in fiscal year 1994.
  





Therefore, the Board granted the appellant abatements for fiscal years 1992 and 1993 in the respective amounts of $76,360.05, and $25,506.89.

   						   THE APPELLATE TAX BOARD


   By: _________________________________
	  Abigail A. Burns, Chairman




A true copy,



Attest: ________________________
Clerk of the Board

 These are older and more cumbersome types of telephone switching equipment that are outmoded.
 Mr. Gurney noted that NET's costs in this regard were probably thirty-five percent higher than a non-telephone company's costs would have been because of added expenses incurred by NET to protect its remaining switching equipment from construction dust and insure a continuous and predictable supply of electricity.
 The Board noted several minor mathematical errors in Mr. McDonald's calculations.  For example, his effective gross income for each of the fiscal years at issue should have been $1,160,747; his net operating income for each of the fiscal years at issue should have been $840,078; and his indicated values for fiscal years 1992, 1993, and 1994 should have been $6,563,109, $6,467,113, and $6,264,563, respectively.  None of these errors would have changed his rounded estimates of value.  The Board did not correct his figures summarized in the table.   
 For unexplained reasons, Mr. Reenstierna did not include basement space in his calculations of costs for expenses during vacancy, maintenance and repairs, and reserves for replacement.  He also committed several minor mathematical transpositions or errors in his calculations.  For example, in his fiscal year 1992 income capitalization analysis, his expenses during vacancy should have been $36,457 (not $36,547).  Accordingly, his total expenses, net operating income, and indicated value were also affected slightly.  The Board noted several other minor addition or subtraction errors that would not have affected his rounded estimates of value.  The Board did not correct his figures summarized in the table.

 Mr. Reenstierna relied exclusively on the income-capitalization approach, while Mr. McDonald relied primarily on it. 

ATB 2000-605