Main Street Property, Inc. v. Board of Assessors of the Town of Wayland (February 21, 2014)

 COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



MAIN STREET PROPERTY, INC.		   BOARD OF ASSESSORS OF
							   THE TOWN OF WAYLAND

Docket Nos. F305226, F311602		   Promulgated:
		  F315506				   February 21, 2014


	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 Town of Wayland ("appellee" or "assessors") to abate taxes on certain real estate in Wayland owned by and assessed to Main Street Property, Inc. ("appellant") under G.L. c. 59, §§ 11 and 38, for fiscal years 2010, 2011 and 2012 ("fiscal years at issue").
	Commissioner Chmielinski heard these appeals. Chairman Hammond and Commissioners Scharaffa, Rose and Mulhern joined him in the decision for the appellee. 
	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.
	Mark J. Lanza, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
	On the basis of testimony and evidence offered into the record at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.
At all relevant times, the appellant was the assessed owner of a 4.925-acre parcel of real estate improved with two multi-tenant, mixed-use, retail and office buildings located at 35 Main Street in the Town of Wayland ("subject property").
For fiscal year 2010, the assessors valued the subject property at $4,702,300 and assessed a tax thereon, at the rate of $17.78 per thousand, in the total amount of $84,860.99.  The appellant timely paid the tax due without incurring interest.  On January 7, 2010, the appellant timely filed an Application for Abatement with the assessors, which they denied on April 2, 2010.  On March 18, 2010, the appellant seasonably filed an appeal with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2010.
For fiscal year 2011, the assessors valued the subject property at $4,618,800 and assessed a tax thereon, at the rate of $19.35 per thousand, in the total amount of $90,714.39.  The appellant timely paid the tax due without incurring interest.  On January 27, 2011, the appellant timely filed an Application for Abatement with the assessors, which they denied on April 25, 2011.  On May 17, 2011, the appellant seasonably filed an appeal with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2011.
For fiscal year 2012, the assessors valued the subject property at $4,654,500 and assessed a tax thereon, at the rate of $19.01 per thousand, in the total amount of $89,809.28.  The appellant timely paid the tax due without incurring interest.  On January 20, 2012, the appellant timely filed an Application for Abatement with the assessors, which they denied on April 2, 2012.  On May 9, 2012, the appellant seasonably filed an appeal with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2012.
Wayland is a residential suburb located in Middlesex County and is situated approximately 17 miles west of Boston.  Wayland is served by a network of local highways including Routes 20, 27, 30 and 126, which also provide access to Routes 9, I-90 (the Massachusetts Turnpike) and I-95 (State Route 128).  The subject property is located in the southwestern section of Wayland, known as Cochituate, at the intersection of Main Street (Route 27) and Commonwealth Road (Route 30) near the Natick and Framingham municipal borders.  Located across Main Street from the subject property is a multi-tenant retail building.  Located across Commonwealth Road are a bank branch office building, a bridal shop, and an animal hospital.  A gas station abuts the front of the subject property along Main Street and a professional office building and undeveloped land abut to the rear of the subject property along Commonwealth Road.  Other properties in the immediate area include another bank branch, an office building, a post office, professional office buildings, retail buildings, and single family homes.  As a result of its location, the subject property is considered to have an active and desirable location for commercial uses.
The subject property consists of a 4.925-acre parcel of property improved with two multi-tenant, mixed-use, retail and office buildings.  The subject property is identified by the assessors as Parcel 21 on Map 51D, and is located in the Business A and Business B zoning districts. The subject property's current retail and office uses are allowed within the Business A and Business B zoning districts.  However, the subject property's restaurant use does not meet the current zoning requirements but, because it was constructed prior to the existing zoning regulations, it therefore is considered a legal nonconforming use.  There is access to the site via curb cuts on both Main Street and Commonwealth Road.  There is about 274.31 feet of frontage along the easterly side of Main Street, 485.06 feet of frontage along the southerly side of Commonwealth Road, and 47.70 feet at the corner of Main Street and Commonwealth Road.  The site is reported to be level at grade with Commonwealth Road and above the grade of Main Street in its northwest corner.  The site slopes downward in the area that fronts along Main Street.  The existing structures occupy about 18.6% of the parcel's total area.  The remainder of the site is asphalt-paved to provide parking for approximately 274 vehicles.  Utilities available include municipal water, gas, and telephone, and there is an on-site septic system.  
The two multi-tenant, mixed-use, retail and office buildings located on the parcel were constructed in stages during 1960, 1968, and 1986.  The buildings are wood and masonry frame over a concrete foundation.  The roofs are partially flat with rubber membrane and partially pitched with an asphalt shingle cover.  The exteriors are a mix of façades which include brick, concrete panel, stone, and vinyl siding.  The interior finishes include suspended acoustical tile ceilings, carpet or ceramic tile floor covers, and sheetrock walls with plaster and paint, with some walls covered with wallpaper.  The lighting throughout is fluorescent panel, fluorescent strip, and recessed lighting fixtures.  Heating is gas-fired, forced hot-air, with each rentable unit separately zoned.  All buildings are served by a wet sprinkler system.  According to the subject property's property record cards for the fiscal years at issue, the subject property has a combined gross area of 47,834 square feet.   
Building 1 contains two retail units on the first floor with rentable sizes of 1,415 and 16,400 square feet.  The larger retail space is occupied by Donelan's Supermarket ("Donelan's"), the anchor tenant for this building.  Also located on the first floor is 800 square feet of leasable office space occupied by a chiropractor.  The second floor is accessed from two interior staircases and is subdivided into nine office suites which range in size from 350 to 1,850 square feet.  There are two lavatories in the common area of the first floor, two lavatories in the common area of the second floor, and also three lavatories in the space occupied by Donelan's Supermarket.  
Building 2 is a smaller multi-tenant, mixed-use, retail and office building with a layout similar to that of Building 1.  The first floor has four retail units and one office unit ranging in size from 800 to 6,000 square feet of leasable space.  The anchor tenant, utilizing the 6,000 square-foot space, is RiteAid Pharmacy.  Other retail users include a barber shop, J.J. McKay's Restaurant, and a Bank of America bank branch with a drive-up window teller and a separate space for the automated teller machine.  The second floor is subdivided into eight office suites, ranging in size from 300 to 1,000 square feet.  There are two lavatories in the ground floor common area, two lavatories in the second level common area, and two lavatories in the first floor retail space occupied by RiteAid Pharmacy.  The subject property has a combined net leasable area of 43,655 square feet.   
The appellant presented its case-in-chief through the testimony of Eric Wolff, whom the Board qualified as an expert in the area of real estate valuation and the submission of Mr. Wolff's appraisal report, and also copies of the Board's Decision and Findings of Fact and Report for fiscal years 2007, 2008 and 2009.  See Main Street Property, Inc. v. Assessors of Wayland, Mass. ATB Findings of Fact and Reports 2011-97 ("Main Street I").
Mr. Wolff considered the three usual approaches to valuation but declined to use the cost approach because of the age and use of the subject property.  To estimate the subject property's fair cash value for the fiscal years at issue, Mr. Wolff developed both a sales-comparison and an income-capitalization approach.  However, he did not rely on the values derived from his sales-comparison analyses because he had to "go way out of the area" to gather sales information, thereby limiting the comparability of his chosen properties, and also because "this approach provides a less reliable indicator of market value" of an income-producing property like the subject property.  Instead, Mr. Wolff considered his direct income-capitalization approach to be the most viable methodology to use to estimate the fair cash value of the subject property for the fiscal years at issue.
To begin his income-capitalization approach, Mr. Wolff reviewed the subject property's rent rolls provided by the owner of the subject property.  Based on the information provided, Mr. Wolff determined that:  the subject property's retail rents, excluding Donelan's, ranged from $17.00 to $26.50 per square foot, with an average of $20.31 per square foot; the Donelan's space rented for $10.47 per square foot; and, the office rents ranged from $11.00 to $30.57 per square foot, with an average of $23.40 per square foot.  All rents were on a gross basis.  
To determine if the subject property's rents were consistent with market rental rates, Mr. Wolff researched rents of similar retail and office space in the Wayland area.  Mr. Wolff testified that, due to the limited supply of retail and office space within the Town of Wayland, he had to expand his search to include the surrounding towns of Sudbury, Natick, and Framingham.  Mr. Wolff's comparable rentals are reproduced in the following two tables.
Retail Rents
Comp.	Address	Tenant	Date
Term	SF*	$/SF - Type**	
1.	130 E. Commonwealth Street
Wayland	Confidential	4/10
5 Years	 2,400	$18.00 - NNN	
2.	15 E. Plain Street
Wayland	Get In Shape For Women	10/10
10 Years	 1,700	$17.00 - NNN	
3.	15 E. Plain Street
Wayland	Viva Mexican Grill	2/10
5 Years	 4,500	$16.00 - NNN	
4.	345 Boston Post Road
Sudbury	Sudbury Wedding Consignment Shop	3/09
3 Years	   510	$15.88 - NNN	
5.	365 Boston Post Road
Sudbury	Confidential	6/10
3 Years	 1,500	$13.03 - NNN	
6.	615 Boston Post Road
Sudbury	Hair Salon	12/09
5 Years	 1,595	$22.00 - NNN	
7.	615 Boston Post Road
Sudbury	Victory Cigar Bar & Grill	7/09
5 Years	 1,000	$18.00 - NNN	
8.	410 Boston Post Road
Sudbury	Tesini & Associates PC	3/07
N/A***	 2,000	$22.00 - Gross plus electric	
9.	736 Boston Post Road
Sudbury	Invidia	4/08
10 Years	 7,180	$13.25 - NNN	
10.	1400 Worcester Sreet
Natick	Confidential	7/10
3 Years	 7,500	$18.50 - NNN	
11.	4-6 South Avenue
Natick	FT Fitness	1/07
N/A	 2,508	$18.00 - NNN	
12.	36-46 Concord Street
Framingham	Crown Fried Chicken	2/10
3 Years	 3,300	$12.00 - NNN	
13.	60-62 Hollis Street
Framingham	Confidential	7/10
3 Years	 1,000	$13.20 - Modified Gross	
14.	536-538 Waverly Street
Framingham	St. Elmo's Creole
Cuisine	12/09
5 Years	 1,000	$13.20 - Gross	
15.	248 Worcester Road
Framingham	Creative Fitness	10/10
N/A	 3,348	$17.05 - NNN	
16.	255 Worcester Road	Get in Shape for Women	10/09
N/A	 1,253	$16.00 - NNN	
17.	600 Worcester Road
Framingham	Confidential	11/10
5 Years	10,000	$12.00 - NNN	
18.	855 Worcester Road
Framingham	Vineyard Church	10/10
5 Years	 4,300 
	$17.00 - NNN	
19.	1 - 55 Nicholas Road
Framingham	Confidential	12/09
3 Years	 3,000	$18.00 - NNN	

*"SF" is an acronym for square feet.
**"NNN" is an acronym for triple net lease terms.
***"N/A" is an acronym for not available.



Office Rents
Comp	Address	Tenant	Date
Term	SF	$/SF	
1.	241 Boston Post Road
Wayland	Wayland Oral	2/10
10 Years	3,000	$27.50 - Gross + utilities	
2.	185 Commonwealth Road
Wayland	Confidential	12/09
3 Years	1,200	$18.00 - Gross + utilities	
3.	321 Commonwealth Road
Wayland	R.W. Homes Realty Co.	5/07
3 Years	5,000	$21.00 - Gross + taxes + utilities	
4.	111 Boston Post Road
Sudbury	Confidential	11/10
3 Years	1,315	$15.00 - Gross + utilities	
5.	345 Boston Post Road
Sudbury	Mike Grandinetti	5/09
N/A	  530	$19.24  -   Gross	
6.	410 Boston Post Road
Sudbury	Alpha Mortgage Corp.	3/07
N/A	  460	$13.00 - Gross + utilities	
7.	615 Boston Post Road
Sudbury	Interspective Healthcare	4/08
N/A	1,000	$12.00 - Gross + utilities	
8.	182 W. Central Street
Natick	Ellis Insurance Group	5/09
5 Years	1,560	$13.00 - Gross + utilities	
9.	182 W. Central Street
Natick	Employees' Advocacy Group	4/09
5 Years	1,660	$16.50 - Gross + utilities	
10.	182 W. Central Street
Natick	Dr. Craig MacDonald, DMD	12/08
10 Years	2,600	$16.50 - Gross + utilities	
11.	190 N. Main Street
Natick	Gemini Group	10/09
8 Years	1,560	$16.50 - Gross + utilities	
12.	190 N. Main Street
Natick	GB Mortgage	12/08
2 Years	1,760	$19.00 - Gross + utilities	
13.	214 N. Main Street
Natick	Confidential	12/09
3 Years	  551	$16.50 - Gross + utilities	
14.	971 Concord Street
Framingham	Confidential	3/10
3 Years	1,000	$18.00 - Modified Gross	
15.	5 Edgell Road
Framingham	Confidential	2/10
3 Years	1,639	$19.25 - Gross + utilities	
16.	60 Nicholas Road
Framingham	Shredding Services of MA	1/09
1 Year	  420	$20.29  -   Gross	
17.	495 Old Connecticut Path
Framingham	Glia Med, Inc.	2/09
3 Years	1,777	$24.00 - Gross + utilities	
18.	40 Speen Street
Framingham	401 Associates	9/09
5 Years	1,365	$19.00 - Gross + electric	
19.	600 Worcester Road
Framingham	Dianne L. Burke	5/10
5 Years	1,755	$20.95 - Gross + taxes + electric	
20.	600 Worcester Road
Framingham	Advanced Homecare
Services	2/10
N/A	3,000	$20.94 - Gross + taxes + electric	

Mr. Wolff's comparable retail rents ranged from $12.00 to $22.00 per square foot predominantly on a triple-net basis, with the tenant paying most of the expenses.  Notably, only three of these leases were located in Natick.  According to Mr. Wolff, the actual retail rents at the subject property, excluding Donelan's, ranged from $17.00 to $26.50, on a gross basis.  Assuming operating expenses of $5.00 per square foot, Mr. Wolff adjusted upward the triple-net leases to equate them with the subject property's gross rents.  Based on this information, Mr. Wolff then estimated a stabilized retail rent, excluding Donelan's, of $20.00 per square foot for the fiscal years at issue.  Given the larger size of Donelan's space, its location at the rear of the subject property, and also the reported actual rent of $10.47, Mr. Wolff determined that the appropriate market rent for Donelan's was $11.00 per square-foot for the fiscal years at issue.  
Mr. Wolff's comparable office rents ranged from $12.00 to $27.50 per square foot.  Only three of these leases were located in Wayland and a majority of these leases were on a modified gross basis, with the tenant bearing the responsibility for only some of the expenses, or on a gross plus utilities basis.  Mr. Wolff reported that the subject property's actual office rents ranged from $11.00 to $30.57 per square foot, on a gross basis, requiring the landlord to pay all expenses.  Based on this information, Mr. Wolff selected a rent of $23.00 per square foot to be his market rent for the subject property's 12,140 square feet of office space.  
Mr. Wolff then multiplied the rentable retail space, excluding Donelan's, of 15,115 square feet by his $20.00 per-square-foot rental rate, multiplied the 16,400 square feet occupied by Donelan's by his $11.00 per-square-foot rental rate, and finally, multiplied the subject property's rentable office space of 12,140 square feet by his $23.00 per-square-foot rental rate, to arrive at a total potential gross income ("PGI") of $761,920 for each of the fiscal years at issue. 
Mr. Wolff's appraisal report states that his vacancy rates of 5% for retail space and 10% for office space were based on conversations with local brokers and also survey reports prepared by CoStar Group, Inc.  Application of Mr. Wolff's vacancy rates resulted in an effective gross income ("EGI") of $709,863 for each of the fiscal years at issue. On direct examination, however, Mr. Wolff testified that vacancy rates in Wayland during the fiscal years at issue were only about 2%, which he attributed to the limited supply of leasable retail space.  Further, Mr. Wolff conceded that during the fiscal years at issue the subject property's actual vacancy was approximately 2%.  
For his expenses, Mr. Wolff reviewed the expense data from four local properties that he appraised in the recent past, which revealed that expenses, excluding taxes, ranged from $1.29 to $5.00 per square foot.  Mr. Wolff also examined the subject property's expenses for the period 2006 to 2011, which he testified ranged from $4.23 to $5.23 per square foot.  Based on this evidence, Mr. Wolff determined that the appropriate operating expense was $4.00 per square foot for each of the fiscal years at issue.  In addition, Mr. Wolff deducted a management fee equal to 5% of EGI and a replacement reserve allowance equal to 2% of PGI, to derive a stabilized net operating income ("NOI") for the fiscal years at issue.
The next step in Mr. Wolff's income-capitalization analysis was the selection of a capitalization rate.  Mr. Wolff developed his capitalization rates using a band-of-investment technique.  In his analyses, Mr. Wolff assumed interest lending rates ranging from 8.48% to 9.48% and equity yield rates ranging from 12.5% to 14.5%.  Mr. Wolf's band-of-investment techniques, assuming no appreciation or depreciation, are summarized below.
Band of Investment Technique - Fiscal Year 2010
Capital Structure	Portion	Rate	Weighted Rate	
Mortgage	     0.75     x	    0.0948   =	0.0711	
Equity	     0.25     x	    0.1450   =	0.0363	
Total Weighted Rate			0.1074	
				
Less: Credit for Equity Build-up		(SFF* x Equity Gain x L-to-V**	
		0.0543 x 0.3268 x 0.75 =	 (0.0124)	
		Rate	 0.0950	
		SAY	 9.5%	
*"SFF" is an acronym for sinking fund factor.
**"L-to-V" is an acronym for loan-to-value ratio.

Band of Investment Technique - Fiscal Year 2011
Capital Structure	Portion	Rate	Weighted Rate	
Mortgage	     0.70     x	    0.0848   =	0.0636	
Equity	     0.30     x	0.1400	0.0350	
Total Weighted Rate			0.9860	
				
Less: Credit for Equity Build-up		(SFF x Equity Gain x L-to-V		
		0.0517 x 0.2137 x 0.75 =	 (0.0083)	
		Rate	 0.0903	
		SAY	 9.0%	
Band of Investment Technique - Fiscal Year 2012
Capital Structure	Portion	Rate	Weighted Rate	
Mortgage	     0.75     x	0.0848	0.0636	
Equity	     0.25     x	0.1250	0.0312	
Total Weighted Rate			0.0948	
				
Less: Credit for Equity Build-up		(SFF x Equity Gain x L-to-V	
		0.0556 x 0.237 x 0.75 =	 (0.0089)	
		Rate	 0.0859	
		SAY	 8.5%	

Mr. Wolff determined that capitalization rates of 9.5% for fiscal year 2010, 9.0% for fiscal year 2011, and 8.5% for fiscal year 2012 were consistent with rates published by national surveys, such as the First Quarter 2010 and 2011 Korpacz Report for "non-institutional" grade retail and office properties, CB Richard Ellis (CBRE) Cap Rate Survey Year End 2009 and First Quarter 2011 for Class B/C retail and office properties in the Boston area, and Real Estate Research Corporation (RERC) Fourth Quarter 2009 and First Quarter 2011 East Regional Investment Criteria for east region office and retail properties.  As a final step in his determination of capitalization rates, Mr. Wolff added to his base capitalization rates the applicable tax factor to derive his overall capitalization rates of 11.278%, 10.935%, and 10.401%, for fiscal years 2010, 2011, and 2012, respectively.
Lastly, Mr. Wolff divided his net operating incomes by the corresponding capitalization rates to obtain his estimates of the subject property's values for the fiscal years at issue, which he then rounded.
Mr. Wolff's income-capitalization analyses are reproduced in the following table.

INCOME                               Size(SF)   Rate/SF

Retail Space (Donelan's)              16,400     $11.00            $  180,400
Retail Space                          15,115     $20.00            $  302,300
Office Space                          12,140     $23.00            $  279,220
Potential Gross Income:                                            $  761,920	

Less: Vacancy & Collection Allowance - Retail @ 5%
      Vacancy & Collection Allowance - Office @ 10%
           ($   24,135)
           ($   27,922)


	
Effective Gross Income:                                            $  467,795	
	
EXPENSES
	
  Management Fee         $ 35,493 @ $5% of EGI
  Replacement Reserves   $ 15,238 @ $2% of PGI
  Operating Expenses     $191,336 @ $4.00/sq. ft.  

Total Expenses:                                                   ($  242,068) 	
  	
Net-Operating Income:                                              $  467,795	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2010 - 11.278%	
	
Indicated Value for Fiscal Year 2010                               $4,147,858
Rounded Value for Fiscal Year 2010                                 $4,150,000	


 Divide by: Total Capitalization Rate for Fiscal Year 2011 - 10.935%



Indicated Value for Fiscal Year 2011                               $4,277,965
Rounded Value for Fiscal Year 2011                                 $4,280,000



 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 10.401%

Indicated Value for Fiscal Year 2012                               $4,497,601

Rounded Value for Fiscal Year 2012                                 $4,500,000

	

	In support of their assessments, the assessors relied on the testimony of Ellen Brideau, Director of Assessing, and the introduction of several exhibits, including the requisite jurisdictional documentation, the subject property's property record cards for the fiscal years at issue, and the assessors' income valuation card for fiscal year 2012 only.  Ms. Brideau testified that for fiscal years 2010 and 2011, the only information provided to the assessors by the appellant was the subject property's rent rolls.  For fiscal year 2012, the assessors received more detailed information which indicated that 70% of the subject property was leased on a triple net basis and the remainder was leased on a gross basis. 
	Ms. Brideau also testified about the commercial property located at 297 Boston Post Road in Wayland, which is a multi-tenant, retail complex, built circa 1961, that contains approximately 30,646 square feet of retail space.  One of the tenants at this property is Whole Foods Supermarket ("Whole Foods"), which occupies 18,087 square feet.  Ms. Brideau further testified that, according to information received by the assessors from the owner of that property during the fiscal years at issue, the Whole Foods retail space rented at $15.50 per square foot on a gross basis.   
Based on the evidence presented, the Board found that the subject property's highest and best use was its continued use as a multi-tenant, mixed-use, retail and office space. The Board further found that the income capitalization approach was the most appropriate method to use in valuing the subject property for the fiscal years at issue.  The Board found, however, that Mr. Wolff's income-capitalization analyses for the fiscal years at issue were flawed in several important respects and, therefore, generated unreliable estimates of value. 
Based on the subject property's actual rents and also Mr. Wolff's comparable rental rates located in Wayland, the Board found that the most appropriate retail, excluding Donelan's, and office rents to use for the subject property for the fiscal years at issue were $21.00 per square foot for the retail space and $23.00 per square foot for the office space.  With regard to Donelan's retail space, the Board found that Mr. Wolff's reported rental rate and the assessors' reported rental rate for the Whole Foods, justified a rental rate of $13.00 per square foot for the retail space occupied by Donelan's.
Given the subject property's actual vacancy rate of about 2% and the fact that vacancy rates in Wayland were approximately 2% during the fiscal years at issue, the Board found that Mr. Wolff's vacancy rates of 5% for retail space and 10% for office space were overstated, which resulted in an understatement of the subject property's EGI for each of the fiscal years at issue.  The Board therefore adopted vacancy rates of 3% for retail space and 5% for office space.  
With respect to expenses, the Board adopted Mr. Wolff's management fee of 5%.  With respect to his operating expense, the Board found that although his allowance of $4.00 per square foot was appropriate, he erroneously applied it to the subject property's gross area thereby inflating expenses.  The Board further found that Mr. Wolff's calculation for replacement reserves was also incorrect.  The Board found that his 3% multiplier for reserves should have been applied to the subject property's EGI, as is customary in appraisal practice, as opposed to its PGI, as Mr. Wolff had done. See, e.g., appraisal institute, the appraisal of real estate 496, 498 (13th ed. 2008) (referencing replacement allowances and expenses as percentages of effective gross income).  These errors resulted in an overstatement of expenses and a corresponding understatement of net operating income.  Finally, the Board found credible, and adopted, Mr. Wolff's capitalization rate analyses, which had substantial underpinnings based on viable market data.
A summary of the Board's income-capitalization analyses is contained in the following table.








INCOME                               Size(SF)   Rate/SF

Retail Space (Donelan's)              16,400     $13.00            $  213,200
Retail Space                          15,115     $21.00            $  317,415
Office Space                          12,140     $23.00            $  279,220
Potential Gross Income:                                            $  809,835	

Less: Vacancy & Collection Allowance - Retail @ 3%
      Vacancy & Collection Allowance - Office @ 5%
           ($   13,961)
           ($   15,918)

	
Effective Gross Income:                                            $  779,956	
	
EXPENSES
	
  Management Fee         $ 38,998 @ 5% of EGI
  Operating Expenses     $174,620 @ $4.00/sq. ft.  
     Subtotal            $213,618

  Replacement Reserves   $ 15,387 @ 2% of EGI

Total Expenses:                                                   ($  237,016) 	
  	
Net-Operating Income:                                              $  542,940	
	
 Divide by: Total Capitalization Rate for Fiscal Year 2010 - 11.278%	
	
Indicated Value for Fiscal Year 2010                               $4,814,151
Rounded Value for Fiscal Year 2010                                 $4,800,000	


 Divide by: Total Capitalization Rate for Fiscal Year 2011 - 10.935%



Indicated Value for Fiscal Year 2011                               $4,965,158
Rounded Value for Fiscal Year 2011                                 $4,950,000



 Divide by: Total Capitalization Rate for Fiscal Year 2012 - 10.401%

Indicated Value for Fiscal Year 2012                               $5,220,075

Rounded Value for Fiscal Year 2012                                 $5,200,000

	

On this basis, the Board found that the fair cash values of the subject property did not exceed its assessments of $4,702,300, $4,618,800, and $4,654,500 for the fiscal years 2010, 2011, and 2012, respectively.  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 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)), aff'd 63 Mass. App. Ct. 1116 (2005). 
The appellant has the burden of proving that the subject property has a lower value than that assessed. "'The burden of proof is upon the [appellant] to make out its right as a matter of law to abatement of the tax.'"  Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)).  In appeals before the 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. v. Assessors of Lynn, 393 Mass. 591, 600 (1984) (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).  However, "the board is entitled to 'presume that the valuation made by the assessors [is] valid unless the taxpayer[]  . . . prove[s] the contrary.'"  General Electric Co., 393 Mass. at 598 (quoting Schlaiker, 365 Mass. at 245). 
"'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.'"  Tsissa, Inc. v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2011-198, 216 (quoting Tennessee Gas Pipeline Co. v. Assessors of Agawam, Mass. ATB Findings of Fact and Reports 2000-859, 874).  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 134 (13th ed. 2008).  In the present appeals, the Board found and ruled that the subject property's highest and best use during the fiscal years at issue was, as the evidence suggested, its existing use as multi-tenant, retail and office buildings.  
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).  "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).  In these appeals, the Board ruled that neither the sales-comparison nor cost approaches were appropriate under the circumstances.  The Board agreed with the determination of the appellant's real estate valuation expert that there were not enough fee-simple market sales of reasonably comparable properties to meaningfully estimate the value of the subject property using a sales-comparison technique. See Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 247 (1998)("The assessors must determine a fair cash value for the property as a fee simple estate, which is to say, they must value an ownership interest in the land and the building as if no leases were in effect.").  Furthermore, "[t]he introduction of evidence concerning the value based on [cost] computations has been limited to special situations in which data cannot be reliably computed under the other two methods."  Correia, 375 Mass. at 362.  The Board found here that no such "special situations" existed, because Mr. Wolff was able to find and the Board was able to adopt enough suitable data to support an income-capitalization approach.  Accordingly, the Board ruled that a cost method of valuation was not an appropriate technique to use for valuing the subject property for the fiscal years at issue.    
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, 701-02 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941).  It is also recognized as an appropriate technique to use for valuing income-producing property.  Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984).  In the present appeals, the Board determined that the income-capitalization approach was the most appropriate method to value the subject property.  
Under the income-capitalization approach, a valuation figure is determined by dividing net operating income by a capitalization rate.  Assessors of Brookline v. Buehler, 396 Mass. 520, 522-23 (1986).  The net income figure is computed by deducting operating expenses from gross rental income.  General Electric Co., 393 Mass. at 609.  "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).  
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 reflect the market.  Id.; see Olympia & York State Street Co., 428 Mass. at 239, 245.  Real estate taxes are not considered operating expenses for purposes of determining net operating income.  Alstores Realty Corporation v. Assessors of Peabody, 391 Mass. 60, 70 (1984).  "The expense of local taxation turns on the very point in dispute, the fair cash value of the property.  Logically, therefore, income should be capitalized before taxes."  New England Oyster House, Inc., 362 Mass. at 700 n.2. See also, Assessors of Lynn v. Shop-Lease Co., Inc., 364 Mass. 569, 572 (1974) (stating that a property's net operating income is determined before real estate taxes).  Real estate taxes are accounted for by use of an effective "tax factor" in the capitalization rate.  Taunton Redevelopment Auth., 393 Mass. at 295.  
The capitalization rate selected should consider the return necessary to attract investment capital.  Id.  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."  Shop-Lease Co., 364 Mass. 569 at (1974).  Generally, in multiple-tenancy properties like the subject property, it is appropriate to add a "tax factor" to the capitalization rate 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.  Columbia Electric Corp. v. Assessors of Framingham, Mass. ATB Findings of Fact and Reports 2006-435, 446. 
In the present appeals, based on the subject property's actual rents and also the rental rates for properties located in Wayland, the Board opted to use a retail rental rate of $21.00 per square foot, an office rental rate of $23.00 per square foot, and a rental rate of $13.00 per square foot for Donelan's space.  "Choosing an appropriate gross income figure for establishing an income stream [is] within the Board's discretion and expertise."  Fox Ridge Assoc. v. Assessors of Marshfield, 393 Mass. 652, 654 (1984).  The Board also found that given the subject property's actual vacancy as well as Mr. Wolff's testimony about vacancy rates in Wayland during the years at issue, his chosen vacancy rates were excessive.  The Board therefore adopted rates more in keeping with the Wayland market.
With respect to expenses, the Board found that although Mr. Wolff's management fee of 5% of EGI was appropriate, his calculations for operating expenses and replacement reserves were flawed and erroneously overstated the subject property's total expenses and correspondingly understated the subject property's net operating income.  The Board therefore corrected his calculations for expenses and reserves to correspond to the appropriate appraisal practices.  Finally, the Board found credible, and adopted, Mr. Wolff's capitalization rate analyses.
"The board [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 . . . .  The board [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., 383 Mass. at 473; Jordan Marsh Co. v. Assessors of Malden, 359 Mass. 106, 110 (1971).  
Based on the evidence presented in these appeals, and the reasonable inferences drawn therefrom, the Board found and ruled that the fair cash value of the subject property, for the fiscal years at issue, exceeded the subject property's corresponding assessments.  
Accordingly, the Board entered decisions for the appellee in these appeals.

					   	    THE APPELLATE TAX BOARD


						By: _____________________________ __
						    Thomas W. Hammond, Jr., Chairman


A true copy,

Attest:	_________________________
		    Clerk of the Board




 


 

 This amount includes a $1,254.10 Community Preservation Act ("CPA") surcharge.
 Although the appellant's abatement application had not yet been denied, premature filing of a petition is not fatal to the Board's jurisdiction. Becton, Dickinson & Co. v. State Tax Commission, 374 Mass. 230, 234 (1978).
 This amount includes a CPA surcharge of $1,340.61.
 This amount includes a CPA surcharge of $1,327.23.
  While Mr. Wolff did perform a sales-comparison analysis, he relied solely on his income-capitalization analyses as his method of valuation.

ATB 2014-65