4 Preston Court, LLC, 6-8 Preston Court, LLC v. Board of Assessors of the Town of Bedford (January 13, 2006)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



4 PRESTON COURT, LLC		v.	BOARD OF ASSESSORS OF
6-8 PRESTON COURT, LLC			THE TOWN OF BEDFORD


Docket Nos. F270496 			Promulgated:
	       F270497				January 13, 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 assessed on real estate located in the Town of Bedford owned by and assessed to 4 Preston Court, LLC and 6-8 Preston Court, LLC (collectively "the appellants") under G.L. c. 59, §§ 11 and 38 for fiscal years 2003 and 2004.
	Commissioner Gorton heard the appeals and was joined in decisions for the appellee by Commissioners Scharaffa, Egan, and Rose.  
	These findings of fact and report are promulgated at the requests of the appellants pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	Matthew Luz, Esq. for the appellants.

	Lela Rhodes, assistant assessor, for the appellee.


FINDINGS OF FACT AND REPORT
Based on testimony and exhibits offered into evidence in these appeals, the Appellate Tax Board ("Board") made the following findings of fact.
The Town of Bedford is located fifteen miles northwest of Boston bordered to the north by Billerica, to the east by Burlington and Lexington, to the west by Carlisle and Concord, and to the south by Lincoln.  Interstate 95/Route 128 is located one mile to the east, Route 2 is six miles to the south, and Route 3 is four miles to the north.  Commuter rail service is available to Boston via the Massachusetts Bay Transportation Authority's Lowell-Woburn Line.  
The town offers a mix of business and industry, including Middlesex College, the Veterans Administration Hospital and Hanscom Air Base.  The properties at issue in these appeals are located in a neighborhood zoned for industrial uses and are situated in a small office park subdivision in a cul-de-sac setting in the southeastern quadrant of the town.  
The appellants presented their case through the testimony of Mr. Frederick Keefe, principal of the appellants.  In addition, Mr. Keefe has spent nearly twenty years in real property management and has managed the properties at issue in these appeals since their acquisitions.  The Board of Assessors of the Town of Bedford ("assessors") presented their case through the testimony of the Assistant Town Assessor, Lela Rhodes, and her written presentation.

4 Preston Court
On January 1, 2002, and January 1, 2003, 4 Preston Court, LLC was the assessed owner of a parcel of real estate located at 4 Preston Court in the Town of Bedford.  The parcel contains 60,055 square feet of land and is improved with a two-story masonry building with 24,360 square feet of office/R&D space, commonly referred to as "flex space."  4 Preston Court, LLC purchased this property on July 29, 1999, for $1,625,000.
For fiscal years 2003 and 2004 the assessors valued this property at $1,517,800 and assessed taxes at the rates of $25.13 and $26.38, per thousand, in the amounts of $38,142.31 and $40,039.56, respectively.  4 Preston Court, LLC paid the taxes due without incurring interest and filed abatement applications and appeals as follows:


Docket No.	
Fiscal Year	Abatement Application Filed	Abatement Application Denied	Appeal Filed	
F270497	2003	01/29/2003	04/15/2003	06/27/2003	
F272758	2004	01/12/2004	03/30/2004	05/19/2004	
Based on these facts, the Board found that it had jurisdiction over these appeals.
	Mr. Keefe used two approaches to value 4 Preston Court for fiscal year 2003, a sales comparison approach and an income-capitalization method.  For his sales comparison analysis, Mr. Keefe relied upon three sales of properties located in Avon, Woburn and Bedford.  The properties have land sizes of 2.889 acres, 3 acres and 10.05 acres, respectively, with corresponding building areas of 32,400 square feet, 40,000 square feet and 50,000 square feet.  The only adjustment made by Mr. Keefe was a $700,000 downward adjustment to the Bedford comparable sale property to account for its excess land.  He concluded that no other adjustments were warranted.  Mr. Keefe's adjusted sale prices for his comparables were $43.52, $60.00 and $50.00, per square foot, respectively.  These prices per square foot, applied to 4 Preston Court's approximate 24,000 square feet of building area, resulted in indicated values of $1,044,444, $1,440,000 and $1,200,000, respectively.  He then averaged the values to arrive at an estimated fair market value for 4 Preston Court of $1,228,148, which he rounded to $1,200,000.
The Board found that Mr. Keefe failed to establish comparability between 4 Preston Court and his purported comparables.  The Board further found that, to the extent that comparability existed, Mr. Keefe failed to adjust for differences between the property and the purported comparables.  For example, even though the Avon comparable sale property is located thirty-two miles away from 4 Preston Court, Mr. Keefe failed to establish comparability between the purported comparable's location and 4 Preston Court's location.  To the extent that the two locations were comparable, Mr. Keefe failed to adjust for the locations' differences.  Accordingly, the Board determined that Mr. Keefe's estimate of value based on his sales comparison methodology was not a reliable indication of 4 Preston Court's fair cash value for fiscal years 2003 and 2004.
Using the income-capitalization methodology, Mr. Keefe valued 4 Preston Court at $1,100,000.  Mr. Keefe testified that he gave little weight to the property's current leases.  He testified that since the dates the leases were executed, the real estate market had taken a "decided downturn," and, therefore, the existing leases were not, in his opinion, representative of 4 Preston Court's actual income potential.  Instead, Mr. Keefe relied on the rents of five purportedly comparable properties located in Bedford, Burlington and Billerica.  The rents for the comparables ranged from $9.95 to $10.50 per square foot.  However, Mr. Keefe ultimately selected a lower market rent of $8.00 per square foot for 4 Preston Court.  Applying this estimated rent to the property's square footage, he arrived at a potential gross income for 4 Preston Court of $192,000. 
The Board found that Mr. Keefe failed to establish comparability between 4 Preston Court and the five purportedly comparable properties used to establish the rental rate used.  The Board further found that Mr. Keefe failed to explain and to adjust for existing differences between the chosen comparables and 4 Preston Court.  Moreover, Mr. Keefe failed to adequately explain why he used a lower rental rate of $8.00 per square foot when his chosen rentals had an average note of $10.00 per square foot.  Consequently, the Board found that Mr. Keefe's potential gross income figure was unsubstantiated and therefore unreliable.  
Next, Mr. Keefe applied a vacancy rate of 12% to reach an effective gross income of $168,960.  To calculate the property's net-operating income, Mr. Keefe allowed a six-percent deduction for operating expenses, a six-percent deduction for management fee, and a five-percent deduction for reserve replacement allowance.  The Board found that Mr. Keefe 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 effective gross income to calculate these expenses, a figure determined by the Board to be unreliable, Mr. Keefe carried over unreliable assumptions to his vacancy loss and operating expense factors.  
 To arrive at his estimate of fair market value for 4 Preston Court, Mr. Keefe divided the property's net-operating income by the total capitalization rate.  He calculated his ten-percent capitalization rate by purportedly "considering the appropriate loan-to-value ratio, mortgage constant, and dividend rates."  He then added the fiscal year 2003 tax factor to reach his total capitalization rate of 12.5130%.  The Board found that Mr. Keefe did not adequately support his recommended capitalization rate.  He failed to provide the Board with any corroboration or verification of his loan-to-value ratio, mortgage constant, or dividend rate figures.
Although he testified that the market worsened in fiscal year 2004, Mr. Keefe made no adjustments to either the rental or vacancy rates used in his calculations for 4 Preston Court.  Moreover, even though the tax factors were different for fiscal years 2003 and 2004, Mr. Keefe made no adjustment to the capitalization rates used to determine 4 Preston Court's fair market value for fiscal year 2004.  Instead, Mr. Keefe merely based his opinions of value for fiscal year 2004 on his fiscal year 2003 analysis.
For the foregoing reasons, the Board found that Mr. Keefe's income-capitalization method was not a reliable indicator of fair cash value for fiscal years 2003 and 2004.

6-8 Preston Court 
On January 1, 2002, and January 1, 2003, 6-8 Preston Court, LLC was the assessed owner of a parcel of real estate located at 6-8 Preston Court in Bedford.  The parcel contains 4.93 acres of land and is improved with an L-shaped one-story masonry and glass building with approximately 44,500 square feet of office/R&D space.  6-8 Preston Court, LLC purchased this property on September 24, 1998, for $2,800,000.
For fiscal years 2003 and 2004, the assessors valued the property at $4,159,000 and assessed a tax at the rates of $25.13 and $26.38 per thousand, in the amounts of $104,515.67, and $109,714.42, respectively.  6-8 Preston Court, LLC paid all taxes due without incurring interest and filed abatement applications and appeals as follows:


Docket No.	
Fiscal Year	Abatement Application Filed	Abatement Application Denied	Appeal Filed	
F270496	2003	01/29/2003	04/15/2003	06/27/2003	
F272757	2004	01/12/2004	03/30/2004	05/19/2004	

Based on these facts, the Board found that it had jurisdiction over these appeals.
	To determine the fair market value of 6-8 Preston Court, using the sales comparison approach, Mr. Keefe relied upon four sales of properties located in Woburn, Billerica, Burlington, and Wilmington.  Mr. Keefe's analysis listed adjustments for time, excess land, and quality of construction.  His adjusted sale prices yielded values of $60.00, $55.92, $60.40, and $55.28, per square foot.  Applying these estimates to 6-8 Preston Court's 44,500 square feet of building area, Mr. Keefe calculated values of $2,670,000, $2,488,440, $2,687,800, and $2,459,923.  He then averaged the values to arrive at an estimated fair market value for 6-8 Preston Court of $2,576,541, which he rounded to $2,600,000.
The Board found that Mr. Keefe failed to sufficiently explain how he arrived at the dollar adjustments used to calculate the purported comparables' adjusted selling prices.  The Board further found that Mr. Keefe's adjustment made to the Wilmington comparable property was not consistent with the comparable's property information as recited in the property's deed and reported in Mr. Keefe's analysis.  For example, although the Wilmington comparable property is reported as having 15.77 acres, Mr. Keefe made an adjustment for only "1 excess acre."  Accordingly, the Board found Mr. Keefe's sales comparison methodology unreliable because the methodology was arbitrary and lacked substantiation.  
Mr. Keefe also used the income-capitalization approach to estimate a value for 6-8 Preston Court.  Mr. Keefe testified that he gave little weight to the property's current leases which began on February 25, 1999, June 1, 1999, and July 17, 2000.  He testified that since the dates the leases were executed, the real estate market had taken a "decided downturn," and, therefore, the existing leases were not, in his opinion, representative of 6-8 Preston Court's actual income potential.  Instead, Mr. Keefe relied on the rents of five purportedly comparable properties located in Bedford, Burlington and Billerica.  The rents for the comparables ranged from $9.95 to $10.50 per square foot.  
Mr. Keefe testified that he compared the physical characteristics and locations of the comparable properties to those of 6-8 Preston Court and concluded that a rental rate of $10.00 per square foot was appropriate.  However, Mr. Keefe failed to offer any evidence of the comparisons and adjustments made.  Accordingly, the Board found that the potential gross income figure used was unsubstantiated and therefore unreliable.
Next, Mr. Keefe applied a vacancy rate of twelve percent to arrive at an effective gross income of $391,600.  Mr. Keefe testified that although the property's reported operating expenses were $163,942, he used a much lower number in his analysis.  Operating expenses were calculated at six percent of effective gross income.  The management fee was also calculated at six percent, and reserve for replacement was calculated at a five percent of effective gross income.  The figure resulting after estimated expenses were deducted was offered as the property's net-operating income.
The Board found that Mr. Keefe failed to prove that the percentage rates used for his expenses were indicative of the market.  Moreover, the Board found that by using percentages of effective gross income to calculate these expenses, a figure determined by the Board to be unreliable, Mr. Keefe carried the lack of reliability over to his vacancy loss and operating expense factors which compounded the unreliability of his income-capitalization approach.  
To reach a final estimate of the fair market value of 6-8 Preston Court, Mr. Keefe divided the property's net-operating income by his total capitalization rate.  He calculated his ten-percent capitalization rate by "considering the appropriate loan-to-value ratio, mortgage constant, and dividend rates."  He then added the fiscal year 2003 tax factor to reach his total capitalization rate of 12.5130%.  The Board found that Mr. Keefe did not adequately substantiate his recommended capitalization rate.  He failed to provide the Board with any corroboration or verification of the numbers he used for his loan-to-value ratio, mortgage constant, or dividend rates.
Although he testified that the market worsened in fiscal year 2004, Mr. Keefe made no adjustments to either the rental or vacancy rates used in his calculations for  6-8 Preston Court.  Moreover, even though the tax factors were different for fiscal years 2003 and 2004, Mr. Keefe made no adjustment to the capitalization rates used to determine 6-8 Preston Court's fair market values for fiscal year 2004.  Instead, Mr. Keefe merely based his opinions of value for fiscal year 2004 on his fiscal year 2003 analysis.
In defense of the subject properties' assessments, the assessors offered the testimony of Lela Rhodes, Assistant Assessor for the Town of Bedford.  Ms. Rhodes testified that the assessors also used the income-capitalization approach to arrive at the subject properties' fair market values.  She testified that each calendar year the assessors request income and expense information from property owners/managers.  This information was analyzed by the assessors and used to develop rental rates, vacancy allowances, and expense ratios for use in the assessment of commercial properties throughout Bedford.  Based on their review of the market rental rates, allowances and ratios, including the income and expense information supplied by the appellants, the assessors determined that the property located at 4 Preston Court had a fair market value of $1,517,000 for the fiscal years at issue, and that the property located at 6-8 Preston Court had a fair market value of $4,159,000 for the fiscal years at issue.  The Board found that the assessors' estimates of value, derived from existing market data, supported the assessed values for fiscal years 2003 and 2004.
In conclusion, the Board found that the income-capitalization and the sales comparison approaches used by Mr. Keefe were flawed and not reliable estimates of value.  The Board further found that the appellants failed to expose any flaws or errors in the assessors' methodology.  On this basis, the Board found that the appellants failed to demonstrate that the subject properties were 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). 
	"[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)("General Electric Co.") (quoting Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974)).  The burden of proof is upon the petitioner to make out his right as matter of law to abatement of the tax.  Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922).
	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 591 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).   In the present appeals, the Board found that the appellants did not meet their burden of proving that the subject properties were overvalued for fiscal years 2003 and 2004.
To determine the fair cash value of real property, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches: income-capitalization, sales comparison, and depreciated reproduction cost.  Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978)("Correia").    
The fair cash value of property may be determined by recent sales of comparable properties in the market.  Correia, 375 Mass. at 362.  When comparable sales are used, however, allowance must be made for various factors which would otherwise cause disparities in the comparable prices. See Pembroke Industrial Park Co., Inc. v. Board of Assessors of the Town of Pembroke, ATB Findings of Fact and Reports 1998-1072, 1082.   "Adjustments for differences are made to the price of each comparable property to make the comparable equal to the subject on the effective date of the value estimate." APPRAISAL INSTITUTE, THE APPRAISAL OF REAL ESTATE 403 (12th ed. 2001).  In the present appeals, the Board found that Mr. Keefe failed to establish comparability between the subject properties and their respective purported comparables and failed to sufficiently explain adjustments made for existing differences.  Accordingly, the Board ruled that Mr. Keefe's sales comparison methodologies were unreliable because the methodologies were flawed and lacked substantiation.  
The income-capitalization approach is useful for determining the value of income-producing property when the sales comparison method is unavailable or less probative.  See Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. 696, 698-701 (1972).  In the present appeals, the Board found that Mr. Keefe failed to
sufficiently analyze and establish the subject properties' comparability to the other properties upon which he relied for rental data.  Consequently, the Board ruled that Mr. Keefe failed to show that the gross potential income figures that he derived for his income-capitalization methodologies were probative of the subject properties' market rental values.  
The Board also found that Mr. Keefe failed to prove that the rates used for vacancy/rent loss and operating expenses were reflective of relevant market conditions.  Furthermore, the unreliability of the net operating income figures was compounded by the fact that the vacancy/rent loss and expense rates were based on percentages of what the Board found to be unsound gross income estimates.   In addition, the Board found that Mr. Keefe did not provide verification of the component parts of his recommended capitalization rate.  Consequently, the Board ruled that Mr. Keefe's suggested income approaches were not reliable means for estimating the value of the subject properties for the fiscal years at issue.



On the basis of the evidence presented, the Board found and ruled that the appellants failed to meet their burden of proving that the subject properties were overvalued for fiscal years 2003 and 2004.  The Board, therefore, decided these appeals for the appellee.	
				
  
THE 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 2006-1