Fort Hill Associates and Fort Hill Phase 2 Associates v. Board of Assessors of the City of Boston (December 11, 2008)

F271006; F281888; F281886; F281887Masstaxbd

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COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



FORT HILL ASSOCIATES and      v.      BOARD OF ASSESSORS OF 
FORT HILL PHASE 2 ASSOCIATES          THE CITY OF BOSTON

Docket Nos. F271006 (FY03)
  F281888 (FY05)
		  F281886 (FY05)
		  F281887 (FY05)		   Promulgated:
							   December 11, 2008
							


	These are appeals under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee to abate taxes on certain real estate in the City of Boston owned by and assessed to the appellants under G.L. c. 59, §§ 11 and 38, for fiscal years 2003 and 2005.  
	Commissioner Rose heard these appeals.  Chairman Hammond and Commissioners Scharaffa, Egan, and Mulhern joined him in the decisions for the appellee.  
	These findings of fact and report are made pursuant to requests by the appellants under G.L. c. 58A, § 13 and   831 CMR 1.32.

	Richard L. Wulsin, Esq. and Mark F. Murphy, Esq. for the appellants.

	Anthony M. Ambriano, Esq. for the appellee.
 

FINDINGS OF FACT AND REPORT
	On January 1, 2002 and January 1, 2004, appellant, Fort Hill Associates, was the assessed owner of property located in the City of Boston at 55 Purchase Street, which is commonly referred to as One International Place ("1-IP").  On January 1, 2004, appellant, Fort Hill Phase 2 Associates, was the assessed owner of adjoining property located in Boston at Oliver and Purchase Streets, along High Street, which is commonly referred to as Two International Place ("2-IP").  The subject properties are part of a phased development project and are situated in the so-called Financial District of Boston.  For assessing purposes, the parcel that comprises 1-IP is identified as parcel 03-04075-000, and it contains a 43,194-square-foot lot, with 303.54 feet of frontage on Oliver Street and 262.87 feet of frontage on Purchase Street, and is improved with an office tower.  The two parcels that comprise 2-IP are identified as parcels 03-04071-000 and 03-04060-000 and contain 53,177 square feet and 14,038 square feet, respectively, and are also improved with an office tower.  2-IP's parcels have a combined 207.61 feet of frontage on Purchase Street and 450.1 feet of frontage on High Street.  The parcels abut on Purchase and Oliver Streets and through the interior courtyard/atrium/lobby ("lobby") and garage structures.  
	For fiscal years 2003 and 2005, the Board of Assessors of Boston ("assessors") valued 1-IP at $358,722,000 and $315,912,500, respectively, and assessed real estate taxes at the commercial rate of $31.49 per thousand for fiscal year 2003 and $32.68 per thousand for fiscal year 2005.  The total real estate taxes assessed on 1-IP for fiscal years 2003 and 2005 amounted to $11,296,156 and $10,324,021, respectively.  For fiscal year 2005, the assessors valued the two parcels that comprise 2-IP together at $222,962,500 and assessed a real estate tax, at the commercial rate of $32.68.  The total real estate tax assessed on 2-IP for fiscal year 2005 amounted to $7,286,415.  In accordance with G.L. c. 59, § 57C, the appellants timely paid the taxes due without incurring interest.    
	In accordance with G.L. c. 59, § 59, the appellant Fort Hill Associates and the appellant Fort Hill Phase 2 Associates timely filed their Applications for Abatement with the assessors for fiscal years 2003 and 2005 and fiscal year 2005, respectively.  The assessors denied appellant Fort Hill Associates' application for fiscal year 2003 and failed to act on the appellants' applications for fiscal year 2005 within three months of their filing.  Under G.L. c. 58A, § 6 and G.L. c. 59, §§ 64 and 65, the applications, upon which the assessors failed to act, were deemed denied by operation of law.  In accordance with  G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, the appellants seasonably appealed the denial and deemed denials of their applications by filing Petitions Under Formal Procedure with the Appellate Tax Board ("Board").  A summary of the pertinent jurisdictional dates is contained in the following table.

Event
	1-IP
Fiscal Year 2003	1-IP & 2-IP
Fiscal Year 2005	
Tax Bill Mailed	12/31/2002	12/30/2004	
Application for Abatement Filed	01/22/2003	01/28/2005	
Application Denied or Deemed Denied	04/22/2003	04/28/2005	
Petition Filed with Board	07/16/2003	07/27/2005	

On the basis of these facts, the Board found and ruled that it had jurisdiction over these appeals.
	The appellants presented their case-in-chief primarily through the testimony of Randell L. Harwood, whom the Board qualified as a real estate valuation expert, and the introduction of his self-contained appraisal reports.  The appellants also examined Ronald J. Rakow, the Commissioner of the Boston Assessing Department, and introduced several additional exhibits, including, among others: floor plans; vacancy rate charts; schedule of miscellaneous income; Korpacz Real Estate Investor Survey ("Korpacz survey") for the First Quarter of 2004; excerpts from Korpacz surveys; compilations of building area; property record cards; identification of retail spaces; derivation of net rentable office space; USPAP Statement on Appraisal Standard No. 3; and print-outs of on-line assessing histories.  
	In defense of the assessments, the assessors presented two witnesses: Theodore Oatis, co-founder of The Chiofaro Company, and Pamela McKinney, whom the Board qualified as a real estate valuation expert.  The assessors also entered into evidence numerous exhibits including, among others: Ms. McKinney's self-contained appraisal report; various jurisdictional documents; completed Forms 38D; lease abstracts and summaries; stacking charts; pages from the Prospectus for 1-IP and 2-IP; excerpts from a number of Korpacz surveys; and a May 2004 appraisal report for 1-IP and 2-IP prepared by Mr. Harwood for certain bankruptcy proceedings.
	On the basis of this evidence, the Board made the following findings of fact.
	1-IP and 2-IP share a prime location at the intersection of High, Oliver, and Purchase Streets, which is within the Financial District of Boston's central business area.  Various means of public transportation, including water shuttle, bus, subway, and commuter rail, are all within a five-to-ten minute walk from the properties.  1-IP and 2-IP are also within a short walk of Downtown Crossing, Quincy Market, the Federal Courthouse, and waterfront amenities offered by Rowes, Long, and Central Wharves.  All necessary utilities are available at the site, including private telephone, electricity, cable, and gas services, as well as public water and sewer services.  There are no easements or deed restrictions that adversely impact the marketability or value of the subject properties.  The applicable zoning is B-10, which permits retail, office, and service establishments.  
	The improvements to 1-IP and 2-IP are built above a five-level, below-grade garage, which contains 470 parking spaces that are allocated to 1-IP and 357 parking spaces that are allocated to 2-IP.  The above-grade improvements to 1-IP include a 46-story tower and two annex structures of 19 and 27 stories, respectively.  The above-grade improvements to 2-IP include a 35-story tower and a      12-story annex structure.  The elevator zones for 1-IP are defined as low rise (floors 3-12), mid-low rise (floors 13-23), mid-high rise (floors 24-32), high rise (floors 33-44), and penthouse (floors 45-46).  The elevator zones for 2-IP are defined as low rise (floors 3-11), mid-rise (floors 12-20), and high rise (floors 21-35).   1-IP and  2-IP share lobby and shipping/receiving space.  Building amenities for both properties include, among others, secure parking with 24-hour access, full-time on-site security, food service, catering service, daycare, copy service, auto detailer, rental car agency, fitness center, hairstylist, shoeshine/repair services, newsstand, full-service branch bank, mail and package delivery drop boxes, dry cleaners, telephone/data services, gift shop and florist, and function space at the lobby level.
	The foundations for 1-IP and 2-IP are reinforced concrete with spread footings and concrete encased steel columns.  The main tower cores are on concrete mat supported on soil and have structural steel super structures.  The office floors are concrete slab on steel decking.   The exterior walls are primarily granite panels.  The east elevation of 1-IP and the north elevation of 2-IP consist of aluminum framed walls with reflective and spandrel glass.  The windows are punched, single-pane, aluminum frame units that are fixed in-place.  Lobby entrance doors are typically fully glazed revolving- and hinged-type doors, while service and utility doors and frames are metal.  The tower and annex roofs are rubberized asphalt sheet waterproof membrane over concrete slab topped with insulation and paving stones for the towers and decorative paving stones for the annexes.  The annex roofs are extensively landscaped and contain seating.  They are accessible for exclusive use by adjacent tenant spaces.  The shared lobby has marble and granite floors and walls along with architectural lighting, mill work and a central atrium with dramatic water features.  
	Standard building interior finishes include a combination of commercial-grade carpet, ceramic tile and VCT flooring.  Marble flooring is common in main lobby areas.  Ceilings are a combination of 2-foot-by-2-foot and 1-foot-by-1-foot acoustical tiles.  Parabolic lighting fixtures are standard.  Demising walls are typically gypsum board partitions on metal stud framing.  Entrance doors are fire-rated stained wood or full-height glass; interior doors are stained wood with painted metal frames.  Interior stairs, elevators, HVAC, plumbing, electrical and safety features are appropriate for first-class office towers.          
	The appellants' real estate valuation expert,       Mr. Harwood, valued the subject properties using an income-capitalization approach.  He did not use a sales-comparison or a cost approach because of, in the first instance, the unreliability of converting leased-fee sale prices into fee-simple values and, in the second instance, the difficulty in quantifying the subject buildings' depreciation and in valuing the subject parcels without comparable vacant land sales, which were not available.  The values, which Mr. Harwood derived using his income-capitalization approach for 1-IP for fiscal years 2003 and 2005 and for 2-IP for fiscal year 2005 are $342,966,000, $256,135,000, and $189,356,000, respectively.   
	Like Mr. Harwood, the assessors' real estate valuation expert, Ms. McKinney, also valued the subject properties using an income-capitalization approach.  Unlike         Mr. Harwood, however, she did perform a sales-comparison approach, but ultimately did not rely on it, except as a check and to help develop capitalization rates, because she considered it to be a trailing market indicator and was concerned about the limited availability of relevant sales data.  For similar reasons to Mr. Harwood's, Ms. McKinney eschewed the cost approach.  The values, which Ms. McKinney derived using her income-capitalization approach for 1-IP for fiscal years 2003 and 2005 and for 2-IP for fiscal year 2005 are $429,200,000, $367,500,000, and $262,700,000, respectively.   
	The Board agreed with the parties' real estate valuation experts and found that the best approach for valuing the subject properties for the fiscal years at issue was the income-capitalization approach and not either the cost or sales approaches, although the sales approach was useful as a check and was also helpful for determining capitalization rates.  The Board also agreed with the real estate valuation experts' determination that the highest and best use of the subject properties was their existing use as high rise or multi-tenanted office tower buildings.  
	The parties' real estate valuation experts essentially agreed on the total rentable area for 2-IP, but disagreed on how it broke down.  Mr. Harwood calculated a total rentable area of 787,610 square feet for 2-IP, while     Ms. McKinney calculated a slightly lower rentable area of 786,704 square feet.  Most significantly, Ms. McKinney included the mezzanine space in her low rise office space while Mr. Harwood analyzed and treated it separately.  With the exception of her treatment of the mezzanine space, the Board adopted Ms. McKinney's breakdown of 2-IP's rentable space as well as her total rentable area because they were based on what the Board considered to be more reliable information, which included the actual leases in place and the owner's reports to the assessors regarding vacancies as of the relevant valuation dates.  Mr. Harwood relied primarily on rent rolls, which he did not include in his self-contained valuation report.  The Board agreed, however, with Mr. Harwood's treatment of the mezzanine space as a separate rental area, distinct from low rise office space, because the mezzanine in the subject properties was actually segregated from other low rise office space and was not similarly accessible.  The following table summarizes the Board's findings in this regard. 
2-IP Rentable Space
(in square feet)

Floor	Space Type	January 1, 2004
	
Basement	Storage	 13,241	
			
Basement/01	Retail	  8,437	
			
02	Mezzanine	 12,545	
			
03	Low Rise Office	 29,280	
04	Low Rise Office	 31,875	
05	Low Rise Office	 32,154	
06	Low Rise Office	 32,154	
07	Low Rise Office	 32,347	
08	Low Rise Office	 32,347	
09	Low Rise Office	 32,347	
10	Low Rise Office	 32,347	
11	Low Rise Office	 32,347	
Subtotal	Low Rise Office	287,198	


Floor	Space Type	January 1, 2004
	
12	Mid-Rise Office	 31,590	
13	Mid-Rise Office	 17,708	
14	Mid-Rise Office	 18,537	
15	Mid-Rise Office	 18,537	
16	Mid-Rise Office	 18,537	
17	Mid-Rise Office	 18,537	
18	Mid-Rise Office	 18,454	
19	Mid-Rise Office	 18,692	
20	Mid-Rise Office	 18,917	
Subtotal	Mid-Rise Office	179,509	
			
21	High Rise Office	 18,661	
22	High Rise Office	 18,215	
23	High Rise Office	 19,004	
24	High Rise Office	 19,586	
25	High Rise Office	 19,085	
26	High Rise Office	 19,177	
27	High Rise Office	 19,132	
28	High Rise Office	 19,085	
29	High Rise Office	 19,085	
30	High Rise Office	 19,085	
31	High Rise Office	 19,085	
32	High Rise Office	 19,085	
33	High Rise Office	 19,085	
34	High Rise Office	 19,085	
35	High Rise Office	 19,319	
Subtotal	High Rise Office	285,774	
			
Total Rentable Area		786,704	

In his initial valuation reports, Mr. Harwood attributed 1,028,345 square feet of rentable office, retail, and storage space to 1-IP, primarily relying on rent rolls provided to him by the owner, but not included in his self-contained valuation reports.  During cross-examination and after his further consultation with representatives of    1-IP's owner, he increased his original estimate to 1,063,357 square feet.  Mr. Harwood had failed in his original investigation to account for certain mezzanine and retail spaces.  Ms. McKinney determined a rentable area for 1-IP of 1,068,738 for fiscal year 2003 and 1,068,730 for fiscal year 2005.  She calculated these amounts by totaling the amount of space described in each of the actual leases in place as of the relevant valuation dates and then adding to those totals the actual amount of vacant space as of those same valuation dates reported to the assessors by the owner.  The Board found that Ms. McKinney's method of determining the amount of 1-IP's rentable space was the more reliable one under the circumstances and, therefore, adopted her calculations and breakdowns in this regard, with one exception.  As with 2-IP, and for the same reasons, the Board again agreed with Mr. Harwood's treatment of the mezzanine space as a separate rental area, distinct from low rise office space.  The following table summarizes the Board's findings in this regard.

1-IP Rentable Space
(in square feet)



Floor	
Space Type	January 1, 2002	January 1, 2004	
				
Basement	Storage	  6,810	  6,810	
				
Basement/01	Retail	 14,927	 14,927	

02	
Mezzanine	  
  9,325	 
 9,325	
				
03	Low Rise Office	 25,226	 25,060	
04	Low Rise Office	 30,634	 30,634	
05	Low Rise Office	 31,407	 31,407	
06	Low Rise Office	 31,407	 31,407	
07	Low Rise Office	 32,189	 32,189	
08	Low Rise Office	 31,821	 31,821	
09	Low Rise Office	 31,407	 31,407	
10	Low Rise Office	 31,407	 31,407	
11	Low Rise Office	 32,336	 32,336	
12	Low Rise Office	 32,306	 32,306	
Subtotal	Low Rise Office	310,140	309,974	
				
13	Mid-Rise Office	 33,205	 33,205	
14	Mid-Rise Office	 31,822	 31,790	
15	Mid-Rise Office	 31,402	 31,402	
16	Mid-Rise Office	 31,757	 31,757	
17	Mid-Rise Office	 31,924	 31,924	
18	Mid-Rise Office	 34,690	 34,690	
19	Mid-Rise Office	 32,056	 32,246	
20	Mid-Rise Office	 24,159	 24,159	
21	Mid-Rise Office	 23,432	 23,432	
22	Mid-Rise Office	 23,190	 23,190	
23	Mid-Rise Office	 23,968	 23,968	
24	Mid-Rise Office	 23,602	 23,602	
25	Mid-Rise Office	 23,228	 23,228	
26	Mid-Rise Office	 23,126	 23,126	
27	Mid-Rise Office	 23,714	 23,714	
28	Mid-Rise Office	 16,806	 16,806	
29	Mid-Rise Office	 16,918	 16,918	
30	Mid-Rise Office	 17,517	 17,517	
31	Mid-Rise Office	 16,789	 16,789	
32	Mid-Rise Office	 16,805	 16,805	
Subtotal	Mid-Rise Office	500,110	500,268	
				




Floor
	
Space Type	January 1, 2002	January 1, 2004	
33	High Rise Office	 16,785	 16,785	
34	High Rise Office	 16,785	 16,785	
35	High Rise Office	 16,872	 16,872	
36	High Rise Office	 16,829	 16,829	
37	High Rise Office	 17,131	 17,131	
38	High Rise Office	 17,131	 17,131	
39	High Rise Office	 17,131	 17,131	
40	High Rise Office	 17,131	 17,131	
41	High Rise Office	 17,131	 17,131	
42	High Rise Office	 16,653	 16,653	
43	High Rise Office	 16,964	 16,964	
44	High Rise Office	 16,797	 16,797	
Subtotal	High Rise Office	203,340	203,340	
				
45	Penthouse Office	 14,056	 14,056	
46	Penthouse Office	 10,030	 10,030	
Subtotal	Penthouse Office	 24,086	 24,086	
				
Total Rentable Area		
1,068,738	
1,068,730	

	In determining their economic rents for the subject properties' office space, Mr. Harwood and Ms. McKinney relied on leases from both the subject and purportedly comparable properties.  The Board found, however, that   Ms. McKinney's analysis better accounted for the subject properties' premier position in the market as of the relevant valuation dates than Mr. Harwood's study did.  Accordingly, after rounding, the Board adopted the rents which Ms. McKinney suggested for the subject properties' storage, low rise, mid-rise, and high rise space.  With respect to the mezzanine space, the Board primarily considered the actual lease to Bank of Boston in assigning a $35.00 per square foot rent to the mezzanine space for fiscal year 2003.  For fiscal year 2005, the Board reduced that rent to $32.00 per square foot in keeping with its finding of declining rents generally and Mr. Harwood's recommended rent for 2-IP's mezzanine space for fiscal year 2005.  With respect to both above- and below-grade retail space, the Board followed Ms. McKinney's approach and treated them as nearly equivalent and also adopted for all retail space her suggested declining rents of $45 per square foot for fiscal year 2003 and $35 per square foot for fiscal year 2005, which the Board found to be more accurately based on and more reflective of the market than Mr. Harwood's suggested retail rents.    
	For garage revenue, the Board considered market and actual parking rates and applied a parking rate of $400 per month to the number of spaces allocated to each of the subject properties.  Following 9/11, management adopted a policy limiting the use of the garage to tenants and their guests, thereby reducing revenues from transient parking.  The Board rejected Ms. McKinney's recommended use of projected future revenues for this category.  The Board found that Mr. Harwood's approach of plugging the actual garage revenues directly into his income-capitalization methodology resulted in double counting vacancies.  Accordingly, and recognizing from the evidence that garage parking rates remained relatively constant from January 1, 2002 to January 1, 2004, the Board applied $400 per month per space to the spaces allocated to the subject properties for the fiscal years at issue for each.  
	For both utility and tenant reimbursements, the Board again found that Mr. Harwood's approach of plugging the actual reimbursement amounts directly into his income capitalization methodology resulted in double counting vacancies.  Ms. McKinney developed her suggested reimbursements using actual, projected, and market data.  The Board checked Mr. Harwood's and Ms. McKinney's recommendations by adjusting the actual amounts of these reimbursements for the actual vacancies and then determining a per-square-foot value.  Based on all of this information, the Board found that appropriate utility and tenant reimbursement revenues for 2-IP for fiscal year 2005 were $1.96 and $1.45 per square foot, respectively.  For  1-IP the Board found that appropriate utility reimbursements for fiscal years 2003 and 2005 were $1.43 and $1.71 per square foot, respectively, while appropriate tenant reimbursement revenues were $1.14 and $0.97 per square foot, respectively.  
	Mr. Harwood also included in his methodology a category for actual miscellaneous revenues and one for actual revenues for a marketing fund.  Ms. McKinney included in her methodology an "other" category, which was similar to Mr. Harwood's miscellaneous revenues, to capture revenues from items such as roof-top antennae, function space, and vending contracts.  The Board found that revenues for a marketing fund were essentially reimbursements for advertisements promoting the subject properties' retail space.  The advertisements and reimbursements were sporadic, relatively small, and did not necessarily occur annually.  Consequently, the Board found that they were not part of an ongoing revenue stream and therefore did not include them in its income-capitalization methodology.  As for other or miscellaneous revenues, the Board adopted Ms. McKinney's recommendations of $0.01 per square foot for 2-IP and $0.05 per square foot for 1-IP for the fiscal years at issue for each because her recommendations were based on actual and credible market data as well as conservative projections.
	A summary of the components of the Board's potential gross income for the subject properties for the fiscal years at issue for each is contained in the following table.
Components of the Board's Potential Gross Income ("PGI")

Components	2-IP
FY 2005 ($)	1-IP
FY 2003 ($)	1-IP
FY 2005 ($)	
				
Storage	16/ft2         211,856	16/ft2         108,960	16/ft2         108,960	
Retail	35/ft2       295,295	45/ft2         671,715	35/ft2         522,445	
Mezzanine	32/ft2       401,440	35/ft2         326,375	32/ft2         298,400	
Low Rise	43/ft2    12,349,514	50/ft2      15,507,000	43/ft2      13,328,882	
Mid-Rise	45/ft2     8,077,905	59/ft2      29,506,490	46/ft2      23,012,328	
High Rise	46/ft2    13,145,604	63/ft2      14,327,838	50/ft2      11,371,300	
Total	          34,481,614	            60,448,378	            48,642,315	
				
Garage	400/mo/sp  1,713,600	400/mo/sp    2,256,000	400/mo/sp    2,256,000	
Utility Reimb	1.96/ft2   1,541,940	1.43/ft2     1,528,295	1.71/ft2     1,827,528	
Tenant Reimb	1.45/ft2   1,141,770	1.14/ft2     1,218,361	0.97/ft2     1,036,668	
Other Income	0.01/ft2       7,867	0.05/ft2        53,437	0.05/ft2        53,437	
				
PGI	          38,886,791	            65,504,471	            53,815,948	

	Both Mr. Harwood and Ms. McKinney used a vacancy and credit loss rate of 5%.  Based on their research of market conditions and the subject properties' attributes, the Board was satisfied that this rate was representative of the market for the subject properties for the fiscal years at issue for each.  Accordingly, the Board also adopted 5% as its vacancy and credit loss rate.  The following table summarizes the vacancy and credit loss amounts and the effective gross income ("EGI") used by the Board in its income-capitalization methodology for the subject properties for the fiscal years at issue for each.
The Board's Vacancy and Credit Loss & EGI Amounts
	2-IP
FY 2005 ($)	1-IP
FY 2003 ($)	1-IP
FY 2005 ($)	

Vacancy & Credit Loss	
 1,944,340	
 3,275,223	
 2,690,797	
EGI	36,942,451	62,229,248	51,125,151	

	For operating expenses, both real estate valuation experts included virtually the same categories of expenses.  For all but management fees, Mr. Harwood used the actual expenses incurred at the subject properties during the calendar years preceding the valuation dates for the fiscal years at issue.  Ms. McKinney's higher recommended stabilized operating expenses were based on historical and credible market data, as well as projections.  The Board found her expenses more credible than Mr. Harwood's expenses.  Accordingly, the Board adopted Ms. McKinney's operating expense recommendations for the subject properties for the fiscal years at issue for each for its income-capitalization methodology.   
	With respect to tenant improvements, Mr. Harwood used $40 per square foot for new leases, while Ms. McKinney used $45 per square foot for fiscal year 2003 and $50 per square foot for fiscal year 2005.  For renewals, Mr. Harwood, relying on information from the manager of the subject properties, used $10 per square foot, while Ms. McKinney used $22.50 per square foot for fiscal year 2003 and $25 for fiscal year 2005.  They both assumed a 75% renewal rate, but differed in their breakdowns of the length of leases.  Ms. McKinney presumed an even split between 5- and 10-year leases; Mr. Harwood presumed a 1-to-2 split, which, in the Board's view, better reflected the subject properties' position in the market as premier rental properties.  The Board also found Mr. Harwood's other figures in this regard credible.  As a result, the Board adopted Mr. Harwood's tenant improvement calculation of $2.34 per square foot for the subject properties for the fiscal years at issue for each.   For similar reasons, the Board also adopted Mr. Harwood's suggested leasing commission of $0.62 per square foot for both of the subject properties for the fiscal years at issue for each.       Mr. Harwood and Ms. McKinney agreed, and the Board found, that capital reserves, set at 1% of EGI, were appropriate for properties such as the subject properties.  The following table summarizes the expenses used by the Board in its income-capitalization methodology for the subject properties for the fiscal years at issue for each.  
The Board's Expense Categories

Components	2-IP
FY 2005 ($)	1-IP
FY 2003 ($)	1-IP
FY 2005 ($)	
				
Operating
 Expenses	
13/ft2   10,227,152	
12/ft2    12,824,856	
12.5/ft2  13,359,125	
Tenant
 Improvements	
2.34/ft2  1,840,887	
2.34/ft2   2,500,847	 
2.34/ft2   2,500,828	
Leasing
 Commissions	
0.62/ft2    487,756	
0.62/ft2     662,618	 
0.62/ft2     662,612	
Capital
 Reserves	
1% EGI      369,425	
1% EGI       622,292	 
1% EGI        511,252	
Total	          12,925,220	          16,610,613	          17,033,817	

After subtracting its expenses from its effective gross incomes, the Board's net-operating incomes are as follows:
	2-IP
FY 2005 ($)	1-IP
FY 2003 ($)	1-IP
FY 2005 ($)	
Net-Operating Income	24,017,231	45,618,635	34,091,334	

In developing his overall capitalization rates,     Mr. Harwood employed a band-of-investment approach relying on conversations with market participants, his professional judgment, and industry surveys and tables.  For fiscal year 2003, he selected a 7.16% interest rate from the Korpacz Survey's national charts, a 25-year amortization period, a mortgage constant of 8.60%, a mortgage-to-equity ratio of 3-to-1, and an equity dividend rate of 12%.  For fiscal year 2005, relying on the same sources, Mr. Harwood lowered his base interest rate to 5.87% and his mortgage constant to 8.51%, and changed his amortization period to 20 years.  Mr. Harwood then added a tax factor of 3.149% to his overall capitalization rate of 9.450% for fiscal year 2003 and a tax factor of 3.268% to his overall capitalization rate of 9.383% for fiscal year 2005 to arrive at, what he termed, overall tax adjusted rates for fiscal years 2003 and 2005 of 12.599% and 12.651%, respectively.  
	In developing her overall capitalization rates,     Ms. McKinney first looked to recent leased-fee sales of Class A and trophy office properties in Boston and compared rates derived from those sales to the ones in the Korpacz Survey.  She additionally considered the subject properties' prestige, their favorable location in the heart of Boston's Financial District and position in the market, and, for fiscal year 2003, the uncertainty associated with and the after-effects of 9/11.  Like Mr. Harwood, she also used a band-of-investment approach to establish a range of rates and ultimately derived, what she considered to be, "loaded" overall capitalization rates of 8.5% for fiscal year 2003 and 7% for fiscal year 2005, which she then adjusted to 7.198% and 5.361%, respectively, to, at least in her view, account for the inclusion of deductions for tenant improvements, leasing commissions, and capital reserves as expenses in her income-capitalization methodology.   After adding tax factors to her overall rates, she recommended, what she termed, combined capitalization rates of 10.347% for fiscal year 2003 and 8.584% for fiscal year 2005.  
	The Board found that Mr. Harwood's equity dividend rate was higher than it should have been under the circumstances and his 25-year amortization rate for fiscal year 2003 should not have been changed to 20 years for fiscal year 2005.  Similar to Ms. McKinney's approach, the Board also adjusted for potentially "loaded" overall capitalization rates, recognized the positive attributes of the subject properties and their location, and compared more locally derived rates to the Korpacz Survey's national rates.  Moreover, the Board was sensitive to the distinction between leased-fee and fee-simple rates.  Accordingly, the Board considered both real estate valuation experts' concerns, factors, and capitalization-rate recommendations, which for fiscal years 2003 and 2005 ranged from 7.198% to 9.450% and from 5.361% to 9.383%, respectively, as well as underlying data in the record, in developing its own overall capitalization rates of 8.0% for fiscal year 2003 and 7.5% for fiscal year 2005.  Like    Mr. Harwood and Ms. McKinney, the Board also added tax factors of 3.149% and 3.268% to its respective overall capitalization rates for fiscal years 2003 and 2005.
	By dividing its net incomes by its total capitalization rates, the Board found that the fair cash value of 2-IP for fiscal year 2005 was $223,000,000 and the fair cash values of 1-IP for fiscal years 2003 and 2005 were $409,170,000 and $316,600,000, respectively.  
Lastly, Ms. McKinney also suggested below-the-line deductions for 1-IP of $1.5 million and over $2 million for fiscal years 2003 and 2005, respectively, for "extraordinary capital items" relating to structural garage repairs.  She also suggested a below-the-line deduction in the amount of $476,649 for 2-IP for fiscal year 2005.  The Board found that these deductions were not adequately explained or addressed in the record.  Moreover, Mr. Harwood, the appellants' real estate valuation expert, did not include them in his analyses.  Accordingly, the Board disregarded them in its analyses.  A summary of the Board's income-capitalization methodology for 2-IP is contained in the following table.  



2-IP for Fiscal Year 2005
Income				
				
Storage	 13,241 ft2	$16/ft2	$   211,856	
Retail	  8,437 ft2	$35/ft2	$   295,295	
Mezzanine	 12,545 ft2	$32/ft2	$   401,440	
Low Rise	287,198 ft2	$43/ft2	$12,349,514	
Mid-Rise	179,509 ft2	$45/ft2	$ 8,077,905	
High Rise	285,774 ft2	$46/ft2	$13,145,604	
Total	786,704 ft2		$34,481,614	
				
Garage	357 spaces	$400/mo/space	$ 1,713,600	
Utility Reimbursement	786,704 ft2	$1.96/ft2	$ 1,541,940	
Tenant Reimbursement	786,704 ft2	$1.45/ft2	$ 1,141,770	
Other Income	786,704 ft2	$0.01/ft2	$     7,867 	
				
Potential Gross Income			$38,886,791	
				
Vacancy & Credit Loss		5%	($ 1,944,340)	
				
Effect Gross Inc (EGI)			$36,942,451	
				
Expenses				
				
Operating Expenses	786,704 ft2	$13/ft2	($10,227,152)	
Tenant Improvements	786,704 ft2	$2.34/ft2	($ 1,840,887)	
Leasing Commissions	786,704 ft2	$0.62/ft2	($   487,756)	
Reserves		1% of EGI	($   369,425)	
				
Total Expenses			($12,925,220)	
				
Net Operating Income			$24,017,231	
				
Capitalization Rate		0.07500		
Tax Factor		0.03268		
Total Cap Rate		0.10768		
				
Indicated Value			$223,042,636	
Rounded Fair Cash Value			$223,000,000	
	

Summaries of the Board's income capitalization methodologies for 1-IP for fiscal years 2003 and 2005 are contained in the following two tables.




1-IP for Fiscal Year 2003
Income				
				
Storage	    6,810 ft2	$16/ft2	$   108,960	
Retail	   14,927 ft2	$45/ft2	$   671,715	
Mezzanine	    9,325 ft2	$35/ft2	$   326,375	
Low Rise	  310,140 ft2	$50/ft2	$15,507,000	
Mid-Rise	  500,110 ft2	$59/ft2	$29,506,490	
High Rise	  227,426 ft2	$63/ft2	$14,327,838	
Total	1,068,738 ft2		$60,448,378	
				
Garage	470 spaces	$400/mo/space	$ 2,256,000	
Utility Reimbursement	1,068,738 ft2	$1.43/ft2	$ 1,528,295	
Tenant Reimbursement	1,068,738 ft2	$1.14/ft2	$ 1,218,361	
Other Income	1,068,738 ft2	$0.05/ft2	$    53,437 	
				
Potential Gross Income			$65,504,471	
				
Vacancy & Credit Loss		5%	($ 3,275,223)	
				
Effect Gross Inc (EGI)			$62,229,248	
				
Expenses				
				
Operating Expenses	1,068,738 ft2	$12/ft2	($12,824,856)	
Tenant Improvements	1,068,738 ft2	$2.34/ft2	($ 2,500,847)	
Leasing Commissions	1,068,738 ft2	$0.62/ft2	($   662,618)	
Reserves		1% of EGI	($   622,292)	
				
Total Expenses			($16,610,613)	
				
Net Operating Income			$45,618,635	
Capitalization Rate		0.08000		
Tax Factor		0.03149		
Total Cap Rate		0.11149		
				
Indicated Value			$409,172,437	
Rounded Fair Cash Value			$409,170,000	



1-IP for Fiscal Year 2005
Income				
				
Storage	    6,810 ft2	$16/ft2	$   108,960	
Retail	   14,927 ft2	$35/ft2	$   522,445	
Mezzanine	    9,325 ft2	$32/ft2	$   298,400	
Low Rise	  309,974 ft2	$43/ft2	$13,328,882	
Mid-Rise	  500,268 ft2	$46/ft2	$23,012,328	
High Rise	  227,426 ft2	$50/ft2	$11,371,300	
Total	1,068,730 ft2		$48,642,315	
				
Garage	470 spaces	$400/mo/space	$ 2,256,000	
Utility Reimbursement	1,068,730 ft2	$1.71/ft2	$ 1,827,528	
Tenant Reimbursement	1,068,730 ft2	$0.97/ft2	$ 1,036,668	
Other Income	1,068,730 ft2	$0.05/ft2	$    53,437 	
				
Potential Gross Income			$53,815,948	
				
Vacancy & Credit Loss		5%	($ 2,690,797)	
				
Effect Gross Inc (EGI)			$51,125,151	
				
Expenses				
				
Operating Expenses	1,068,730 ft2	$12.50/ft2	($13,359,125)	
Tenant Improvements	1,068,730 ft2	$2.34/ft2	($ 2,500,828)	
Leasing Commissions	1,068,730 ft2	$0.62/ft2	($   662,612)	
Reserves		1% of EGI	($   511,252)	
				
Total Expenses			($17,033,817)	
				
Net Operating Income			$34,091,334	
				
Capitalization Rate		0.07500		
Tax Factor		0.03268		
Total Cap Rate		0.10768		
				
Indicated Value			$316,598,569	
Rounded Fair Cash Value			$316,600,000	
				

	On this basis, the Board found that the fair cash values of 2-IP for fiscal year 2005 and 1-IP for fiscal years 2003 and 2005 exceeded their related assessments.  A summary of the subject properties' relevant assessed values and fair cash values are contained in the following table.
Subject Property	FY 2003 Assessed Value	FY 2003 
Fair Cash Value	FY 2005 Assessed Value	FY 2005 
Fair Cash Value	
					
2-IP	n/a	n/a	222,962,500	223,000,000	
1-IP	358,722,000	409,170,000	315,912,500	316,600,000	

Accordingly, the Board decided these appeals for the appellee.  

OPINION
	The Board relied upon the following principles in deciding these appeals for the assessors.
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 are fully informed and under no compulsion.  Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).  Accordingly, fair cash value means fair market value.  Id.
"Prior to valuing the subject property, its highest and best use must be ascertained, which has been defined as the use for which the property would bring the most." Tennessee Gas Pipeline Co. v. Assessors of Agawam, Mass. ATB Findings of Facts and Reports 2000-859, 874-75 (citing Conness v. Commonwealth, 184 Mass. 541, 542-43 (1903); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989), and the cases cited therein).  A property's highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.  Appraisal Institute, The Appraisal of Real Estate 277-81 (13th ed., 2008).  See also Skyline Homes, Inc. v. Commonwealth, 362 Mass. 684, 687 (1972); DiBiase v. Town of Rowley, 33 Mass. App. Ct. 928 (1992) (rescript).  In determining the property's highest and best use, consideration should be given to the purpose for which the property is adapted.  The Appraisal of Real Estate at 288; Tennessee Gas Pipeline Co., Mass ATB Findings of Fact and Reports at 2000-275. In the present appeals, both real estate valuation experts and this Board found that the continuation of the subject properties' existing use as class A commercial office towers with associated retail and parking constituted their highest and best use.  Accordingly, the Board ruled that the subject properties' highest and best use was their continued existing use.  
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.  See Correia v. New Bedford Redev. Auth.,  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), but 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).  Use of the income-capitalization method is appropriate when reliable market sales data are not available.  Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 807 (1975) (rescript);  Assessors of Lynnfield v. New England Oyster House,      363 Mass. 696, 701-702 (1972); Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 67 (1941).  
In the present appeals, the appellants' real estate valuation expert considered, but did not use, a sales-comparison approach because of a lack of comparable fee-simple sales.  The assessors' real estate valuation expert did use one, but only as a check on values derived from her income-capitalization methodology and to assist in her selection of an appropriate capitalization rate to use in her income-capitalization methodology.  In making her recommendations regarding the subject properties' fair cash values as of the relevant assessment dates for each, she relied on her income-capitalization methodology.
"The introduction of evidence concerning value based on [cost] computations has been limited to special situations in which data cannot be reliably computed under the other two methods."  Correia, 375 Mass. at 362.  In the present appeals, the parties' real estate valuation experts were not engineers or architects, and neither of them used a cost approach because they both determined that it was inappropriate under the circumstances.  On this basis, the Board found and ruled that a cost approach was not an appropriate technique to use to value 1-IP or 2-IP for the fiscal years at issue for each.
The income-capitalization method is appropriate for valuing real estate that is improved with a class A commercial office tower. See, e.g., Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 238-39 (1998).  Both parties' real estate valuation experts used an income-capitalization methodology to estimate the value of the subject properties.  The Board found and ruled that an income-capitalization methodology was the most appropriate approach for estimating the value of the subject properties for the fiscal years at issue for each.  "Direct capitalization is widely used when properties are already operating on a stabilized basis and there is an ample supply of comparable [rentals] with similar risk levels, incomes, expenses, physical and locational characteristics, and future expectations."  The Appraisal of Real Estate at 499.  The Board found that there were an adequate number of comparable rentals to support the use of an income-capitalization methodology to estimate the value of the subject properties for the fiscal years at issue for each.  Under this approach, each property's capacity to generate income over a one-year period is analyzed and converted into an indication of fair cash value by capitalizing the net-operating income at a rate determined to be appropriate for the investment risk involved.  Olympia & York State Street Co., 428 Mass. at 239.  
The income stream used in the income-capitalization method must reflect the subject properties' earning capacity or economic rental value.  Pepsi-Cola Bottling Co., 397 Mass. at 451.  Imputing rental income to the subject properties based on fair market rentals from comparable properties is evidence of value if, once adjusted, they are indicative of the subject properties' earning capacities.  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 Redev. Auth., 9 Mass. App. Ct. 877, 879 (1980)(rescript).  Actual rents from the subject properties are also probative in this regard if they reflect the subject properties' true earning capacity.   Pepsi Cola Bottling Co., 397 Mass. at 451; Irving Saunders Trust, 26 Mass. App. Ct. at 842.  
After accounting for vacancy and rent losses, which also must be market based, see Olympia & York State Street Co., 428 Mass. at 239, 241-42, the net-operating income is obtained by deducting the landlords' appropriate expenses.  General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984).  Costs for tenant improvements, leasing commissions, and reserves for replacement are proper items to consider and deduct from effective gross income in an income-capitalization methodology.  See, e.g., Olympia & York State Street Co., 428 Mass. at 243; see also   Analogic Corporation v. Assessors of Peabody, 45 Mass. App. Ct. 605, 615 (1998); OCP Limited Partnership v. Assessors of Framingham, Mass. ATB Findings of Fact and Reports 2005-115, 129-30; Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 623.  The expenses should also reflect the market.  Id.; see Olympia & York State Street Co., 428 Mass. at 239, 243.
The capitalization rate should reflect the return on investment necessary to attract investment capital.  Taunton Redev. Assocs., 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).  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.  General Electric Co., 393 Mass. at 610.  
In the present appeals, the Board adopted most of   Ms. McKinney's measurements, tierings, and rentals.  The principal exception was the Board's separation of the mezzanine space from her low rise office tier.  For garage revenue, the Board considered market and actual parking rates and applied a parking rate of $400 per month to the number of spaces allocated to each of the subject properties.  The Board adopted Ms. McKinney's recommendation for revenue attributable to storage, as well as her suggested revenue for the retail space located in the subject properties.  The Board relied on both        Mr. Harwood's and Ms. McKinney's data and suggestions, as well as its own determinations in ascertaining the most suitable amounts of utility and tenant reimbursement revenue to include in the its income-capitalization methodology.  Lastly, for revenues, the Board did not include a revenue category for a marketing fund in its methodology because it was not a consistent and ongoing revenue stream, but the Board did include an other or miscellaneous category of revenue to account for items such as roof-top antennae, function space, and vending contracts.  The Board adopted Ms. McKinney's credible recommendations for this type of revenue.     
For vacancy and credit loss, the Board used 5%, which was the percentage of gross income suggested by both real estate valuation experts.  For operating expenses, the Board found Ms. McKinney's higher stabilized expenses credible and adopted them.  For tenant improvements and leasing commissions, the Board adopted Mr. Harwood's values because it found his methodology and underlying data more reasonable under the circumstances.  For capital reserves, the Board used 1% of effective gross income, which both real estate valuation experts recommended.  "The issue of what expenses may be considered in any particular piece of property is for the [B]oard."  Alstores Realty Corp. v. Assessors of Peabody, 391 Mass. 60, 65 (1984).    
After analyzing each real estate valuation expert's concerns, factors, and capitalization-rate recommendations, as well as underlying data in the record, the Board developed its own overall capitalization rates.  The Board may apply its specialized knowledge in selecting relevant capitalization rates.  Olympia & York State Street Co.,  428 Mass. at 242.  In developing its own rates, the Board adjusted for potentially "loaded" overall capitalization rates; see, e.g., Cambridge Park 125 Realty Corp.,     Mass. ATB Findings of Facts and Reports 2008-746, 793;   see also The Appraisal of Real Estate at 501; the Board considered, in addition to other factors, the subject properties' premier position in the market and rates derived from local sales compared to the Korpacz Survey's national rates; and the Board remained mindful of the distinction between leased-fee and fee-simple rates and values.  See Olympia & York State Street Co., 428 Mass.   at 242.  ("The relationship of the leased value of the taxpayer's interest in [the tower at issue in that case] to the fee simple value of the property is not a simple sum.").  Like both real estate valuation experts, the Board used appropriate tax factors.  See Shop-Lease Co.,       393 Mass. at 610.  "The derivation of a rate of capitalization takes into account a large number of factors, and the calculation calls for the use of a broad variety of data and a considerable measure of professional judgment."  Olympia & York State Street Co., 428 Mass.    at 243.      
The mere qualification of a person as an expert does not endow his testimony with any magic qualities.     Boston Gas Co., 334 Mass. at 579.  "The [B]oard [is] not required to believe the testimony of any particular witness but it [can] accept such portions of the evidence as appear[] to have the more convincing weight.  The market value of the property [can] not be proved with mathematical certainty and must ultimately rest in the realm of opinion, estimate, and judgment . . . (citations omitted).  The [B]oard [can] select the various elements of value as shown by the record and from them form . . . its own independent judgment."  Boston Consolidated Gas Co., 309 Mass. at 72. See also North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981);    Jordan Marsh Co. v. Assessors of Malden, 359 Mass. 106,  110 (1971). The Board need not specify the exact manner in which it arrived at its valuation.  New England Oyster House, 362 Mass. at 700 (citing Jordan Marsh Co., 359 Mass. at 110).    
In these appeals, the Board considered all of the evidence and determined that the fair cash value of 2-IP for fiscal year 2005 was $223,000,000 and it therefore was not overvalued for fiscal year 2005.  The Board further determined that the fair cash values of 1-IP for fiscal years 2003 and 2005 were $409,170,000 and $316,600,000, respectively, and it therefore was not overvalued for either of the fiscal years at issue for it.
The burden of proof is upon the appellants to make out their right as a matter of law to an abatement of the tax.  Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974).  "By holding that the assessment is entitled to a presumption of validity, we are only restating that the taxpayer[s] bear[] the burden of persuasion of every material fact necessary to prove that [their] property has been overvalued."  General Electric Co., 393 Mass. at 599.  In appeals before this Board, taxpayers "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."  Id. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848,         855 (1983)).  
The Board found and ruled here that, upon consideration of all of the evidence, the appellants failed to meet their burden of proving that 2-IP was overvalued for fiscal year 2005 or that 1-IP was overvalued for fiscal years 2003 or 2005.
Therefore, the Board decided these appeals for the appellee.  

						THE APPELLATE TAX BOARD


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




A true copy,

Attest: ________________________________
         Clerk of the Board
						

 One petition (Docket No. F281887) refers to this appellant as "Fort Hill Square Phase 2 Assoc.," while the other petition relating to this appellant (Docket No. F281886) refers to this appellant as Fort Hill Phase 2 Assoc. GP."  Other filings and evidence refer to this appellant as "Fort Hill Phase 2 Associates" and "Fort Hill Phase 2 Associates, LP."  For purposes of these appeals, the Board refers to this appellant as "Fort Hill Phase 2 Associates."    
 Appellant Fort Hill Associates and appellant Fort Hill Phase 2 Associates are sometimes referred to herein, collectively, as "appellants."
 Capitalization rates are considered to be "loaded" when rates, which do not reflect net-operating incomes that are reduced by deductions, such as tenant improvements, replacement reserves, and leasing commissions, are used in an income-capitalization methodology in which the net-operating incomes have been reduced by these deductions.  The use of "loaded" capitalization rates with net-operating incomes that have already been reduced by tenant improvements, replacement reserves, and leasing commissions results in the double-counting of these deductions.  See Cambridge Park 125 Realty Corp. v. Assessors of Cambridge, Mass. ATB Findings of Facts and Reports 2008-746, 779-81 and 792-93.  "Consequently, a rate derived from a sale with an expense estimate that does not provide for [certain allowances and/or deductions] should not be applied to an income estimate for a subject property that includes such [allowances and/or deductions] without an adjustment that reflects the difference."  Appraisal Institute, The Appraisal of Real Estate 492 (13th ed., 2008).            

ATB 2008-1455


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