Columbia Electric Corp. v. Board of Assessors of the Town of Framingham (June 26, 2006)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD




COLUMBIA ELECTRIC CORP.		v.	BOARD OF ASSESSORS OF
							THE TOWN OF FRAMINGHAM

Docket Nos. F268356, F273200		Promulgated:
							June 26, 2006



	These are appeals filed under the formal procedure pursuant to G.L. c. 59, §§ 64 and 65 from the refusal of the appellee to abate taxes on real estate located in the Town of Framingham, owned by and assessed to the appellant under G.L. c. 59, §§ 11 and 38, for fiscal years 2003 and 2004.
	Commissioner Scharaffa heard these appeals.  He was joined in the decisions for the appellee by Commissioners Gorton, Egan, and Rose.  
	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.
	James Sullivan, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
On January 1, 2002 and January 1, 2003, the relevant dates of assessment for fiscal years 2003 and 2004 ("fiscal years at issue"), Columbia Electric Corp. ("appellant") was the assessed owner of a 4.71 acre parcel of real estate located at 10 California Avenue in the Town of Framingham ("subject property").  
For fiscal year 2003, the Board of Assessors of the Town of Framingham ("assessors") valued the subject property at $3,929,400 and assessed a tax, at the rate of $29.20 per thousand, in the amount of $114,738.48, which the appellant paid without incurring interest.  The appellant timely filed its application for abatement with the assessors on January 7, 2003.  The application was deemed denied on April 7, 2003, and, on May 29, 2003, the appellant timely filed an appeal with the Appellate Tax Board ("Board").  For fiscal year 2004, the assessors valued the subject property at $4,020,100 and assessed a tax, at the rate of $29.68 per thousand, in the amount of $119,316.57, which the appellant paid without incurring interest.  The appellant timely filed its application for abatement with the assessors on January 6, 2004.  The application was deemed denied on April 6, 2004, and, on June 1, 2004, the appellant timely filed an appeal with the Board.  On the basis of these facts, the Board found that it had jurisdiction over these appeals.
The subject property abuts a railroad track and is situated in a manufacturing and office industrial park easily accessible to Routes 9, 30, I-90 and I-495.  The property is improved with a single-story brick/sheet metal industrial building built in 1960.  The front side of the building is brick faced and contains approximately 19,000 square feet of "manufacturing office quality space."  The remainder of the building is clad primarily with sheet metal siding and is commonly described as industrial warehouse space.  For the fiscal years at issue, 4,800 square feet of space were occupied by the appellant and the remainder was leased to multiple tenants.
 At the hearing of these appeals, the appellant presented its case through the testimony and report of Michael Antino, appellant's sole shareholder and president.  The assessors did not present a case in chief.  On the basis of the evidence presented, the Board made the following findings of fact.
Mr. Antino used both the income-capitalization and the sales-comparison methodologies to estimate the value of the subject property during the fiscal years at issue.  Using an income capitalization approach, Mr. Antino estimated the subject property's fair market value at $2,600,000.  According to his report, Mr. Antino reviewed eighteen triple net leases from properties used as industrial/warehouse, R&D, and office space, or a combination thereof.  Based on this information, Mr. Antino chose a market rent of $5.25 per square foot for 43,000 square feet of industrial/warehouse space, and $9.50 per square foot for 19,000 square feet of office space, arriving at a potential gross income for the subject property of $406,250. 
The Board found, however, that Mr. Antino failed to support his chosen per-square-foot rental rates.  The Board found that Mr. Antino failed to sufficiently analyze and establish comparability between the subject property and the purportedly comparable properties used to establish the rental rates used.  The Board also found that Mr. Antino failed to explain and to adjust for existing differences between the chosen comparables and the subject property.  Moreover, the Board found that the "Building Operating Income and Expenses," contained within Mr. Antino's report, listed an actual income figure of $487,409 for calendar year 2001, and that the Form 38D Income & Expenses report ("Form 38D"), submitted to the assessors by the appellant as required by G.L. c. 59, § 38D, reported rental income for the same period of $722,848.  The appellant failed to explain this discrepancy.  
On cross-examination, when asked about this inconsistency, Mr. Antino answered that he would not explain the high income number reported on the Form 38D, noting only that it was part of the "dirty laundry."  Consequently, the Board found that the appellant failed to show that the potential gross income figure derived from Mr. Antino's income capitalization methodology reflected the subject property's market rental value.  Accordingly, the Board found that for the fiscal years at issue, Mr. Antino's potential gross income figure was unsubstantiated and therefore unreliable.  
Mr. Antino then applied a fifteen percent combined vacancy/collection loss to the potential gross income to arrive at the subject property's effective gross income.  To calculate the subject property's net-operating income, Mr. Antino allowed a six-percent adjustment for management fee, a seven-percent adjustment for building expenses, and, a six-percent adjustment for replacement allowances.  The Board found that Mr. Antino failed to verify that the rates used for the vacancy and expenses were indicative of the market.  Furthermore, the Board found that by using percentages of potential gross income and, subsequently, effective gross income to calculate these amounts, figures determined by the Board to be unreliable, Mr. Antino carried over unreliable assumptions to his vacancy/collection loss and also the building's operating expenses.  
To arrive at his estimate of fair market value, Mr. Antino divided the subject property's net-operating income by an overall capitalization rate of 12.92 which included a tax factor.  The Board found that Mr. Antino failed to provide the Board with any corroboration or verification to support his chosen capitalization rate.
	In his sales-comparison analysis, Mr. Antino relied on four purportedly comparable sales of commercial properties located in Milford, Marlborough (2), and Hudson, which took place between May 17, 2000 and June 24, 2003.  After adjusting for factors such as date of sale, building age, excess land, location, and quality of construction, Mr. Antino determined that the comparable properties' sale prices ranged from $23.91 to $44.96 per square foot.  He applied the adjusted per-square-foot sales prices to the subject property's 62,000 square feet of building space and estimated the subject property's fair market value at $2,200,000.  The Board found that Mr. Antino did not adequately support his subjective adjustments with any objective data.  Further, even though two of the so-called comparables had more than twenty-five percent less building area than the subject property, and one so-called comparable had nearly thirty-percent more building area than the subject property, Mr. Antino made no adjustments for the differences in building size.
Based on these facts, the Board found that Mr. Antino failed to establish comparability between the subject property and his purported comparables.  The Board further found that to the extent that these sales may have been comparable, Mr. Antino failed to adequately explain and justify the adjustments made for differences between the subject property and the cited comparables.
The Board found that the income-capitalization approach was the most appropriate way to value the subject property.  The Board further found that the sales-comparison approach employed by Mr. Antino was not appropriate as a primary valuation tool in these appeals because the comparable-sale properties necessitated large subjective adjustments, which tended to compromise their reliability and usefulness.  Further, Mr. Antino used this methodology only to support his estimate of value derived through his income capitalization methodology.  
Even though the Board was in agreement with Mr. Antino that the income capitalization was the more appropriate valuation method to use in the present appeals, the Board found that the income capitalization methodology used by Mr. Antino was flawed and, therefore, of little probative value. Moreover, the Board found that Mr. Antino's sales comparison approach was flawed and therefore not a reliable estimate of value.  Finally, the Board found that the appellant failed to expose any flaws or errors in the assessors' valuation methodology for the fiscal years at issue.
On this basis, the Board found that the appellant failed to demonstrate that the subject property was overvalued in fiscal years 2003 and 2004.  Accordingly, the Board decided these appeals for the appellee.
 
OPINION
The assessors are required to assess real estate at its "fair cash value." G.L. c. 59, § 38.  Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to ascertain the fair cash value of property: income capitalization; sales comparison; and cost of reproduction.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978) ("Correia").  "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) ("Pepsi-Cola Bottling").  Regardless of which method is employed to determine fair cash value, the Board must determine the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market.  Irving Saunders Trust v. Board of Assessors of Boston, 26 Mass. App. Ct. 838, 845 (1989).  The validity of a final estimate of market value depends to a great extent on how well it can be supported by market data.  The Appraisal Institute, THE APPRAISAL OF REAL ESTATE 134 (12th Ed., 2001). 
	The income capitalization method "is frequently applied with respect to income producing property."  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984) ("Taunton Redevelopment").  In applying this method, the income stream used must reflect the property's earning capacity or market rental value.  Pepsi-Cola Bottling, 397 Mass. at 451.  Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject property's earning capacity.  See Correia v. New Bedford Redevelopment Authority, 5 Mass. App. Ct. 289, 293-94 (1977), rev'd on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Authority, 9 Mass. App. Ct. 877, 878 (1980) (rescript); AVCO Manufacturing Corporation v. Assessors of Wilmington, ATB Findings of Fact and Reports 1990-142.  It is the earning capacity of real estate, rather than its actual income, which is probative of fair market value.  Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 64 (1941).  Vacancy rates must also be market based when determining fair cash value.  Donovan v. City of Haverhill, 247 Mass. 69, 71 (1923).  After accounting for vacancy and rent losses, the net-operating income is obtained by deducting the landlord's appropriate expenses.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984) ("General Electric Co.").  The expenses should also reflect the market.  Id.  
The capitalization rate should consider the return necessary to attract investment capital.  Taunton Redevelopment, 393 Mass. at 295.  The "tax factor" is a percentage added to the capitalization rate "to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula."  Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974).  Generally, it is appropriate to add a tax factor to the capitalization rate in most multiple tenancy scenarios because the landlord is assumed to be responsible for paying the real estate taxes, and the tenant's contribution toward the real estate tax is included in the landlord's gross income.  Taunton Redevelopment, 393 Mass. at 295-296; see also General Electric Co., 393 Mass. at 610. 
The fair cash value of property may also be determined by recent sales of comparable properties in the market. Correia, 375 Mass. at 362.  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. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982) ("Foxboro Associates"); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); First National Stores, Inc. v. Assessors of Boston, 358 Mass. 554, 560 (1971). 
The Board is entitled to presume that the assessment is valid until the taxpayer sustains his or her burden of proving otherwise.  Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974).  Accordingly, the burden of proof is upon the taxpayer to make out his or her right as a matter of law to an abatement of the tax.  Id. The taxpayer must demonstrate that the assessed valuation of his or her property was improper.  See Foxboro Associates, 385 Mass. at 691.  In appeals before this Board, a taxpayer "may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors' method of valuation, or by introducing affirmative evidence of value which undermines the assessors' valuation."  General Electric Co., 393 Mass. at 600, (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  
In the present appeals, the Board found that both the sales comparison and income capitalization methodologies used by the appellant to value the subject property for the fiscal years at issue were seriously flawed because they were not based on reliable market data.  The Board found that in his income capitalization approach, Mr. Antino failed to sufficiently analyze and establish comparability between the subject property and the purportedly comparable properties used to establish the rental rates used.  Further, the Board found that Mr. Antino failed to adequately explain why the gross income figure reported on the "Building's Operating Income & Expenses," included in Mr. Antino's report differed so drastically from the gross income figure reported on the appellant's Form 38D submitted to the assessors.  Consequently, the Board found that the appellant failed to prove that the potential gross income figure used by Mr. Antino reflected the subject property's market rental values.  
The Board also found that Mr. Antino's rates for vacancy/rent loss and operating expenses were not verified with market data.  The lack of reliability of Mr. Antino's net-operating income figure was further compounded by the fact that the vacancy/rent loss and operating expense rates were based on a percentage of what the Board found to be an unreliable potential gross income figure.   In addition, the Board found that the appellant did not sufficiently analyze and explain his chosen capitalization rate.  Regarding the appellant's sales comparison approach, the Board found that the appellant failed to sufficiently establish the comparability between the subject property and the chosen comparables.  Therefore, the Board found and ruled that Mr. Antino's opinion of the subject property's value, utilizing both methodologies, was without proper foundation and therefore without merit.  
Accordingly, because the appellant failed to present persuasive evidence that the assessors had overvalued the subject property and failed to demonstrate errors or flaws in the assessors' valuation method for the fiscal years at issue, the Board ruled that the appellant failed to meet its burden of proving that the subject property was overvalued for fiscal years 2003 and 2004.  
The Board, therefore, issued a decision for the appellee in these appeals.

					APPELLATE TAX BOARD

				By:	___________________________________
					Frank J. Scharaffa, Commissioner


					___________________________________
					Donald E. Gorton, III, Commissioner


					___________________________________
					Nancy T. Egan, Commissioner


					___________________________________
					James D. Rose, Commissioner

A true copy,

Attest:	____________________________
		Assistant Clerk of the Board

ATB 2006-435