Robert Kaufman, TS v. Board of Assessors of the City of Boston (February 3, 2016)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


ROBERT KAUFMAN, TS	 	  	 v.		   BOARD OF ASSESSORS OF   
								   THE CITY OF BOSTON
					
	         
Docket Nos.: F315053-F315055			   Promulgated:
		   F319797-F319799			   February 3, 2016


	These are appeals filed under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the City of Boston ("appellee" or "assessors") to abate taxes on certain real estate in Boston, owned by and assessed to Robert Kaufman, TS ("Mr. Kaufman" or "appellant") under G.L. c. 59, §§ 11 and 38, for fiscal years 2012 and 2013 ("fiscal years at issue").  
	Commissioner Good heard these appeals. Chairman Hammond and Commissioners Scharaffa, Rose and Chmielinski joined her in the decisions for the appellee.  
	These findings of fact and report are made pursuant to a request under G.L. c. 58A, § 13 and 831 CMR 1.32 of the appellant.  

	David G. Saliba, Esq. for the appellant.
	
Laura Caltenco, Esq. for the appellee. 




Findings of Fact and Report

Introduction and Jurisdiction
On the basis of all of the evidence, including the testimony and documentary exhibits entered into the record, the Appellate Tax Board ("Board") found the following.  
On January 1, 2011 and January 1, 2012, the relevant assessment dates for the fiscal years at issue, the appellant was the assessed owner of three parcels of land, totaling 19,984 square feet, situated in Boston as follows:  (1) a 7,998-square-foot parcel of land, identified by the appellee on assessor's map 4 as parcel 01702-000, located at 327 Huntington Avenue (#327); (2) a 6,006-square-foot parcel of land, identified by the appellee on assessor's map 4 as parcel 01703-000, located at 331 Huntington Avenue ("#331"); and (3) a 5,980-square-foot parcel of land, identified by the appellee on assessor's map 4 as parcel 01704-000, located at 335 Huntington Avenue ("#335") (collectively the "subject property").  The subject property is located in the Fenway Neighborhood District.  This zoning district provides for uses that include a variety of retail and commercial services, as well as residential uses.  For a single building, it allows for mixed uses, with commercial uses in a building's basement and first floor and multi-family residential uses on floors two and above.  The subject property is improved with this type of a multi-use building, as described below.
For fiscal year 2012, the assessors valued the subject property as follows:  #327 at $4,963,500; #331 at $4,028,500; and #335 at $3,828,000.  The appellee assessed taxes upon the subject property, at the rate of $13.04 per thousand for its residential space and $31.92 per thousand for its commercial space, in the total amounts as follows:  #327 for $87,214.65; #331 for $69,264.42; and #335 for $61,480.74.  The appellant paid the taxes due without incurring interest.  On January 31, 2012, in accordance with G.L. c. 59, § 59, the appellant timely filed with the assessors three separate Applications for Abatement, one for each parcel, which the assessors denied on March 19, 2012.  In accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed three separate petitions with the Board on April 3, 2012.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the three appeals for fiscal year 2012.
For fiscal year 2013, the assessors valued the subject property as follows:  #327 at $5,094,500; #331 at $4,150,000; and #335 at $3,999,500.  The appellee assessed taxes upon the subject property, at the rate of $13.14 per thousand for its residential space and $31.96 per thousand for its commercial space, in the total amounts as follows: #327 for $89,952.56; #331 for $71,713.66; and #335 for $65,202.37.  The appellant paid the taxes due without incurring interest.  On January 31, 2013, in accordance with G.L. c. 59, § 59, the appellant timely filed with the assessors three separate Applications for Abatement, one for each parcel, which the assessors denied on April 26, 2013.  In accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed three separate petitions with the Board on June 10, 2013.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the three appeals for fiscal year 2013.
The appellant presented its case through the testimony and appraisal report of Richard Stewart.  Mr. Stewart has been appraising properties for approximately 40 years.  He has also managed, owned and sold numerous properties, including large apartment buildings like the subject property.  The Board qualified Mr. Stewart as an expert in the valuation of real estate.  The appellee submitted a valuation report prepared by Heriberto Morales, the supervisor of assistant assessors, and other supporting evidence, including jurisdictional documents, but did not present any testimony.
The subject property is located on Huntington Avenue, a major local highway which begins in Copley Square in Back Bay and runs westerly through Newton, Framingham, and past Worcester.  It has various names along the way but is commonly known as Route 9.  The subject property is situated on the northerly side of Huntington Avenue, in an area dominated by institutional uses, primarily Northeastern University.  The subject property is directly across the street from the Boston YMCA, one block west of Symphony Hall, and two blocks east of the Museum of Fine Arts.  Also in the immediate area are the New England Conservatory of Music, the Boston Conservatory of Music, and Forsyth Institute, while not far distant are other institutions of higher education, including Simmons and Emmanuel Colleges and Wentworth Institute, as well as the Longwood Medical Area.  Aside from these institutional uses, the area is largely built up with structures similar to the subject -- brick, mid-rise apartment buildings dating from the early decades of the twentieth century.  The area is predominantly settled by renting students.  
Access to downtown Boston is very good in the subject property's vicinity, with an MBTA Green Line stop (the Northeastern stop) located almost directly in front of the building.  This section of Huntington Avenue has many commercial establishments.  
The subject property is improved with a five-story, flat-roofed, brick building with a basement ("subject building").  The subject building was built in three sections and could be considered three buildings -- with two nearly identical halves at #331 and #335 and a slightly larger section at #327 -- but it shares a common heating system and has historically operated as one economic unit.  For purposes of this appeal, the Board considered the three sections to constitute one cohesive structure, the subject building.   
The subject building was built in 1911 and contains a total gross building area of 85,776 square feet including the basement area.  It is a mixed-use building and is comprised of 108 residential units as well as four commercial units.  Two of the residential units are owner-occupied and are used as an onsite office and a superintendent unit.  The commercial units are in the basement area, a few steps down from sidewalk level; there is no retail space in the first floor.  The unit occupied by Savin Foods was occupied as of the date of the appraisal report but Mr. Stewart reports that it had been vacant for almost a year prior.  The four commercial spaces total 12,727 square feet.  The subject property also receives additional revenue from four off-street parking spaces for rent and coin-operated washers and dryers that are located in a room in #331.
The subject building is a brick structure with stone sills and lintels, re-pointed and repaired masonry, anodized aluminum dual pane sash units, all in very good condition, with a black rubber membrane roof that is in excellent condition.  The three separate entrances are constructed of stone and have matching ornamental parapet extending several feet above the roof.  Each entrance also has a handsome wood doorway and an attractive vestibule with a mosaic tile floor.  There is a well-maintained elevator in each of the three sections.  The subject building's heating system consists of two boilers -- a smaller oil-fired Weil McLean boiler provides hot water for the heat exchanger used to supply hot water in the summer, and a larger Burnham steam boiler, capable of operating on either oil or natural gas (currently operating on natural gas) provides both heat and hot water via the heat exchanger during the winter.  Each unit has cast-iron radiators.  
A fire in 1995 did considerable damage to the two westerly sections of the subject property -- #331 and #335 -- and these portions of the subject building were substantially upgraded as part of the repair.  These sections have modern intercom-buzzer systems and their units are entirely electric, with apartment-sized electric ranges, and are fully equipped with sprinklers.  The repaired units also have new kitchens with cabinets instead of shelves and ceramic floors, and bathrooms with ceramic tile floors and ceramic tile tub enclosures.  With respect to #327, the basement commercial units are equipped with sprinklers, and twenty of its forty apartments have been upgraded with modernized kitchens and new bathrooms.  Mr. Stewart reported that, after half of the units in #327 were upgraded, the subject building's electrical service reached its full capacity and thus the remaining units did not receive an electric range or other upgrades.  These units still have tubs on legs and shelves in the kitchens instead of cabinets.  
The subject building has hardwood floors in all of the apartments and throughout the hallways, except for the entrance vestibules, which have tile floors and a decorative wood-like wainscoting dating from the early twentieth-century period when the subject building was built.  Mr. Stewart's appraisal report, while describing these details, included no pictures of the subject building's interior to demonstrate the quality or condition of its finishes.
The residential portions of the subject building contain studio, one-bedroom and two-bedroom units.  The breakdown of units is as follows:
Apartment type	#327	#331	#335	Totals	
Studio	15	14	14	 43	
One bedroom	15	16	15	 46	
Two bedroom	10	 4	 5	 19	
Totals	40	34	34	108	

Mr. Stewart's report states that "[t]he units are functional and attractive but with the units with windows on Huntington Avenue being the most desirable as they are brighter."  Moreover, there is a series of bay windows that crosses the front of the subject building, which makes these units particularly desirable.  However, Mr. Stewart does not specify how many units face Huntington Avenue or which enjoy the bay windows.
With respect to the four commercial tenants, Mr. Stewart notes that the space now occupied by Savin Foods had been vacant for over a year following the departure of its tenant in April of 2010, and that Campus Tanning had informed the owner that it planned to vacate its space by June of 2014.  Mr. Stewart opined that, while the subject property's location is excellent for student traffic and convenient to public transportation, the fact that the commercial spaces are a few steps down from sidewalk level means that they do not command prime retail rates.  Moreover, parking -- both street and off-street -- is limited in the area.  However, Mr. Stewart's appraisal nonetheless states, "[w]ith over one hundred apartments and a substantial commercial tenancy, this is a very desirable property."
Mr. Stewart considered the three approaches to value --sales comparison, income capitalization and replacement cost.  He opined that the replacement-cost approach was of only limited usefulness in valuing multi-use properties like the subject property, and there were not a sufficient number of sales of comparable realty for a meaningful sales-comparison analysis.  Therefore, Mr. Stewart developed and relied solely upon an income-capitalization approach.  However, on cross-examination, the assessors produced deeds and property record cards for two sales of large apartment buildings located in the vicinity of the subject building, which had sold at arm's length and within the relevant time period of the subject assessments.  Mr. Stewart did not seem to be aware of the sales and he did not consider them, or the leases in these buildings, in reaching his opinion of value in these appeals. 
Mr. Stewart did not provide an analysis of the highest and best use for the subject property.  When asked on cross-examination what his opinion was, he stated that the highest and best use of the subject property would be its current use.  When asked why he did not provide an analysis of this issue, Mr. Stewart replied that he "must have forgot[ten]" to do so.
Mr. Stewart began his income-capitalization analysis with an evaluation of the capitalization rate.  He began with the rate of return on the 10-year Treasury bond and then added a factor for the risk of this investment as compared with government obligations.  For this factor, Mr. Stewart considered that, while the subject property is well-maintained and in a good location, it is an older style with older systems and only half of #327 had been modernized.  He thus assigned a risk factor of 3%.  He also added a factor for the non-liquidity of a real estate investment.  While recognizing that a 1% factor is standard, Mr. Stewart stated that he applied a 3% factor, "to recognize the condition of the subject building" as not fully renovated.  Mr. Stewart then took into account depreciation at 0.5%.  He arrived at an overall capitalization rate of 9.06%. 
Mr. Stewart then performed separate income analyses for the residential and commercial portions of the subject property.  For his income figure, Mr. Stewart used the actual rent roll from the subject property from 2011 for both fiscal years, and projected backwards a rental for the basement retail space that had been vacant for over a year since April of 2010.  Mr. Stewart admitted in his appraisal report that six of the units at #327 "appear to be rented at below market rents," given the age of the tenancies, including some that dated back over 30 years.  He did not make an adjustment for these rents, justifying his decision to use actual rents on the additional costs involved in replacing a long-term tenant.  Mr. Stewart also used the actual laundry and parking income figures for both years.  
Mr. Stewart selected a vacancy rate of 5%, which he applied to both the residential and commercial portions of rental income.  
With respect to operating expenses, for the residential portion of the subject property, Mr. Stewart projected a management fee of 7% for the gross rental income and then used actual expense figures from the residential tenancies.  When asked by the Presiding Commissioner why he selected 7% for the management figure, noting that it was higher than the 3% to 5% range generally advanced by valuation experts testifying at the Board, Mr. Stewart simply replied that this percentage was the rate he typically employed, and that he had seen management fees as high as 10%, but he offered no specifics to support this generalized statement.  
For commercial expenses at the subject property, Mr. Stewart projected 25% of gross income as the expense figure, which he stated he had based on "his experience" but again with no further explanation or market evidence.  
Mr. Stewart further assumed that the leases at the subject property were gross leases, in which the tenants pay only electric and water.  However, on cross-examination, the appellee proffered copies of leases to establish that Mr. Stewart's assumption was incorrect, as tenants were required to pay additional expenses, including snow and trash removal, as well as gas and other expenses.  The appellee further demonstrated additional discrepancies between Mr. Stewart's appraisal report and the actual leases for other items, including square footage of leasable space.
While it submitted, without objection by the appellant, the valuation analysis prepared by the assistant assessor, Mr. Morales, the appellee did not offer any testimony or other evidence.
On the basis of the evidence presented, the Board found that the appellant failed to present to the Board credible and persuasive evidence sufficient to undermine the subject assessments.  As a basic preliminary observation, the Board noted that the subject property was encumbered by several long-term residential tenancies, including three that were over thirty years old.  The Board thus found that Mr. Stewart erred by not adjusting several of the subject's residential leases, which he admitted were not at market rental rates.  Mr. Stewart's failure to remedy this basic flaw called his appraisal into question.  
Mr. Stewart's testimony and appraisal contained several additional errors and shortcomings, including, but not limited to:  failure to include a basic analysis of the highest and best use of the subject property; failure to offer any images of the subject property's interior; failure to analyze or address two timely sales of nearby, large apartment buildings or the leases for space in these buildings; his use of actual rents even while admitting that several of the rents were below market rate and further admitting that an undisclosed number of units were highly desirable based on their light view and/or bay windows; his use of vacancy and expense figures based not on market data but instead on unexplained assumptions for which he presented no concrete evidence; his mistaken assumption that the leases were on a gross basis while the evidence suggested at least some tenant reimbursement; and finally, discrepancies between his report and the actual leases for various factors, including square footage.  Because the appellant's evidence was so fundamentally flawed, the Board found that it lacked sufficient probative value.  As a result, the Board found that the appellant failed to meet its burden of proving a value for the subject property that was less than its assessed value for either fiscal year at issue.  
Accordingly the Board issued decisions for the appellee in the instant appeals.

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 in a free and open market 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).
The appellant has the burden of proving that the property has a lower value than that assessed.  "'The burden of proof is upon the petitioner to make out its right as [a] matter of law to [an] 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)).  "[T]he board is entitled to 'presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.'" General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245). 
In determining fair cash value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered.  Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989).  The goal is to ascertain the maximum value of the property for any legitimate and reasonable use.  Id.  "In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted."  Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate 315-316 (12th ed., 2001)), aff'd, 62 Mass. App. Ct. 428 (2004).  In the instant appeals, the appellant offered no analysis whatsoever of the subject property's highest and best use.  This failure called into question the probative value of the appraisal report and of the expert witness' testimony.       
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978).  "The board is not required to adopt any particular method of valuation."  Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).  
The fair cash value of property may often best be determined by recent sales of comparable properties in the market.  See Correia, 375 Mass. at 362; McCabe v. City of Chelsea, 265 Mass. 494, 496 (1929).  Actual sales generally "furnish strong evidence of market value, provided they are arm's-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller."  Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 682 (1982); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); First National Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560 (1971).  
In the instant appeals, the appellant's expert witness claimed that there were no timely sales upon which he could base a sales-comparison analysis for the subject property.  However, on cross-examination, the appellee presented him with deeds and property record cards of two timely sales, located very close to the subject property, which the appellee claimed could have been used for an analysis.  The appellant's expert seemed unaware of these sales.  The fact that the appellant was not even aware of the sales or the leases in the buildings, let alone that he could not speak to their comparability with the subject property or why he did not consider them, demonstrated to the Board that the appraiser was not sufficiently aware of the relevant market.
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 Consolidated Gas Co., 309 Mass. 60, 67 (1941).  The income-capitalization method "is frequently applied with respect to income-producing property."  Taunton Redev. Assocs. v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  
"The direct capitalization of income method analyzes the property's capacity to generate income over a one-year period and converts the capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved."  Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 239 (1998).  "It is the net income that a property should be earning, not necessarily what it actually earns, that is the figure that should be capitalized."  Peterson v. Assessors of Boston, 62 Mass. App. Ct. 428, 436 (2008) (emphasis in original).  Accordingly, the income stream used in the income-capitalization method must reflect the property's earning capacity or economic rental value.  Pepsi-Cola Bottling Co., 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Auth., 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Auth., 9 Mass. App. Ct. 877, 878 (1980)(rescript).  
In the instant appeals, several of the subject property's rents were long-term, a few of which were over thirty years old, and thus were not indicative of market value, as the appellant's expert witness himself admitted.  Moreover, Mr. Stewart further admitted that a number of units would be in high demand because they had a desirable light view and/or bay windows.  Therefore, Mr. Stewart's rental-income figure was not reflective of the subject property's earning capacity or true economic rental value.  By using the actual rents for the long-term leases that admittedly were not at market value and failing to take into account the earning potential of the undisclosed number of more desirable units, Mr. Stewart's analysis presented merely what the subject property actually earned and not what it could or should be earning.  Accordingly, the Board ruled that Mr. Stewart's rental income figure was not probative evidence of the subject property's fair market value.
After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co., 393 Mass. at 610.  The expenses should also reflect the market.  Id.; see Olympia & York State Street Co., 428 Mass. at 239, 245.  In the present appeals, however, the appellant's expert failed to demonstrate that his expenses reflected the market.  He failed to explain why he chose the percentages of expenses that he did or provide the market data on which he relied in selecting the percentages, and thus his opinion of expenses for the subject building was unpersuasive. 
Finally, the appellee noted the existence of several discrepancies between information contained in the leases and the appraisal report for certain items including square footage of leasable space, calling into further question the accuracy, and thus the reliability, of the appellant's proffered valuation evidence.
Because Mr. Stewart's valuation analysis was so fundamentally flawed, the Board found that the appellant's evidence carried little weight.  The burden of proving a value that is lower than the assessed value is firmly on the appellant.  The Board thus found and ruled that the appellant failed to meet his burden of proving a value for the subject property that was less than its assessed value for both fiscal years at issue. 
Accordingly, the Board issued decisions for the appellee in these appeals.

THE APPELLATE TAX BOARD



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





A true copy,

Attest: _______________________________
	     Assistant Clerk of the Board

	

ATB 2016-20