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Appellate Tax Board Update
A periodic report for property owners, appraisers, assessors and attorneys
January 1998
| | 1997 IN REVIEW The Appellate Tax Board issued 22 formal opinions technically "findings of fact and report") in 1997 and 15 of those warrant some mention in this annual survey. Among the more significant topics were qualification for the charitable exemption; omitted assessment procedures, the depreciated reproduction cost method of valuation; and valuation of municipal land leased to third parties. Other decisions dealt with valuation of a fish processing plant, a gas pipeline facility, a nursing home and substantial Boston Office buildings. CHARITABLE EXEMPTION Four 1997 cases dealt with a property owner's right to an exemption from local taxes pursuant to G.L. c. 59, §5(3). The ATB articulated and reaffirmed well-established principles controlling the right to the charitable exemption in a case involving elderly housing on Martha's Vineyard (Island Elderly Housing, Inc. v. Tisbury Assessors; February 19, 1997). IEH was established to provide affordable housing and related services to low and moderate income elderly and handicapped persons. It was organized as a non-profit corporation under G.L. c. 180 and held exemptions from both federal and state income taxes. In 1989, the Tisbury Assessors, for the first time, assessed real estate taxes on the two IEH facilities, claiming there was a mere landlord/tenant relationship between IEH and the residents and that IEH did not occupy the property as required by the statute in order to maintain the exemption. The ATB found that the services available from IEH made IEH much more than a landlord. The residents were provided, for example, with educational, medical and social programs, including budget planning, family counseling, job placement, nutrition education and blood pressure clinics. The ATB found that, given the scope of resident services, IEH did in fact occupy the property in furtherance of its charitable purposes. Similarly, the ATB applied these standards in another nursing home case (Fairview Extended Care Services, Inc. v. Danvers Assessors; July 11, 1997) where the exemption was upheld since the taxpayer occupied the property in furtherance of its charitable purpose to "establish, maintain and operate an extended health care facility and render related services" to the elderly. The taxpayer was less fortunate in Finnish American Club of Saima, Inc. v. Fitchburg Assessors (Oct. 17, 1997). FACS is a national organizational with about 650 members, with membership open to anyone over 18 who pays annual dues of $10. The corporate purposes of the group included preservation and promotion of Finnish culture and development of friendship between Finnish Americans and others with similar interests. The group owned a 30 acre parcel of land (Saima Park) on which a dining hall, pavilion and clubhouse as well as athletic facilities were located. The group had obtained tax exempt status under the Internal Revenue Code. FACS not only used Saima Park for its own purposes but also rented it to outsiders. The park was actually used for scheduled activities for only 117 days in 1996 but was rented out to private groups for 34 of those days. The ATB concluded that for only about half the time that Saima Park was open to the public was it being used "to promote, develop and strengthen the friendship between Finnish Americans and others." In addition, the ATB concluded that for about two-thirds of the year when there was no structured event at Saima Park, it was left open to the public to use as open recreational land without any indication of a link between the park and Finnish culture. Based on all of these facts, the ATB concluded that although FACS was a charitable organization it did not occupy Saima Park primarily for its charitable purposes and was not entitled to the exemption. The ATB also found that the charitable organization was not occupying the property in Sturdy Memorial Foundation, Inc. v. North Attleborough Assessors (November 17, 1997). The Foundation's primary function was raising funds for Sturdy Memorial Hospital and its affiliates. There was no issue that the Foundation qualified as a charitable organization for purposes of G.L. c. 59, § 5(3). Eighty-two percent of the property (a small office building) was occupied by Sturdy Memorial Associates, a separate corporation consisting of six physicians on the staff at Sturdy Memorial (there was no dispute that the remaining 18% was non-exempt). The ATB denied the exemption, finding that Associates amounted to a group of physicians who had entered into a turn-key private medical practice operation. Notwithstanding the affiliation of the group with the hospital, the ATB found that the physicians were allowed to choose how many and which patients were to be seen; provided "free care" valued at less than one percent of its income; and conducted no medical education or research. On the issue of eligibility for a charitable exemption, 1997 saw the Appeals Court uphold an ATB decision allowing the exemption (H-C Health Services, Inc. v. South Hadley Assessors, 42 Mass. App. Ct. 596). The case was unusual in that the actual owner of the property was organized under the business corporation law (G.L. c. 156B) although the sole stockholder was organized under the charitable corporation law (G.L. c. 180). The assessors held that the corporate form of the owner precluded the exemption. The ATB disagreed as did the Appeals Court which pointed out that under G.L. c. 59, §5(3) the exemption was available for a "charitable organization," a term which did not require the entity to be organized under Chapter 180. Under the "functional test" required by the Appeals Court the mere form of the owner was not determinative, instead, it was "how the organization describes itself, and what in fact it does." Here the sole stockholder - corporation in the property owner was tax exempt under the Internal Revenue Code and was organized to, and did, provide residential and day - care facilities and services for elderly or infirm persons, most of whom were Medicaid recipients. OMITTED ASSESSMENTS Certain technical requirements for imposing omitted assessments by local assessors were clarified by the ATB in New England Deaconess Association v. Concord Assessors (October 24, 1997). The parcel in question (called Newbury Court and part of a larger complex) was variously described as a retirement community, independent living units, assisted living facility or nursing home which opened in late 1994. Through Fiscal Year 1995, the assessors found that the entire complex was entitled to a charitable exemption. At the time of the commitment for the Fiscal Year 1996 taxes in November or December of 1995) the assessors again exempted the complex and did not commit it for taxation. In the Spring of 1996, however, the town appraiser read an article in an assessors' newsletter which suggested that facilities such as Newbury Court should not be exempt from taxation. The assessors then undertook the procedure for an omitted assessment (G.L. c. 59, § 75) for the Newbury Court portion of the property. The assessors sent a tax bill for $316,710 to Deaconess which then made a timely payment in full and filed an abatement application. On the omitted assessment issue the ATB emphasized that Section 75 requires that the property in question have been "unintentionally" omitted from the annual assessment of taxes "due to clerical or data processing error or other good faith reason." Although the ATB found that the assessors acted in good faith, it nevertheless concluded that the omission of the property from taxation was intentional and the result of a deliberate decision by the assessors in the first instance not to impose a tax on the property. The subsequent attempt to impose the tax resulted simply because the assessors "changed their minds." The ATB therefore concluded that there was no valid and legal assessment of Newbury Court for Fiscal Year 1996. Two other issues added spice to the decision. First, the assessors claimed that Deaconess was barred from further relief because it had deposited a refund check, for a partial abatement, thereby accepting the partial payment in full settlement. The assessors relied on G.L. c. 58A, § 6 and c. 59, § 64 which state that after an application is deemed denied the assessors can take no further action during the next three months except by agreement with the taxpayer "in full and final settlement of the application." It was during this three month period that the assessors granted a partial abatement, a unilateral step which the ATB said they should not have taken. The depositing of the partial abatement check, the ATB held, could not convert the unlawful granting of the partial abatement into an "agreement" which would foreclose any further relief, including the appeal to the ATB. Second, the assessors claimed that the taxpayer should be denied relief because it admittedly filed Form 3ABC on March 3, 1997, two days beyond the statutory deadline to qualify for a charitable exemption. On this issue, the ATB held that the underlying assessment was totally invalid because of the assessors' improper reliance in the omitted assessment statute. Quite simply, the assessors had not relied in the first instance on a late-filed Form 3ABC in denying relief; rather the assessors effectively granted the exemption by not initially assessing the parcel. Since the ATB held that there was no valid or legal assessment in the first place, there was no need to reach the question of the impact of the late-filing of Form 3ABC. DEPRECIATED REPRODUCTION COST The rarely-seen depreciated reproduction cost method of valuation was the focus of Fairview Group Investments v. Boston Assessors (February 14, 1997) where the ATB discussed the unusual circumstances which must be present for this technique to be appropriate. The property consisted of about a half- acre of land and a 21,000 square foot structure which was originally built in the 1920's. The building had been empty since 1966 and was said to be in "deplorable condition" and in a neighborhood with numerous abandoned and deteriorating buildings; in fact there was evidence that there were only two viable retail buildings in the entire area. In 1988 the Massachusetts Trial Court approached the owner about converting the building into a courthouse annex for the Dorchester District Court. An agreement was reached whereby the owner would undertake a $1 Million capital investment to renovate the building shell and the Commonwealth would lease the structure on terms that would enable the owners to recapture their investment over a five year period. The owner testified that the project was risky because the rent was subject to annual appropriation by the legislature. Even so, he viewed conversion of the building to a courthouse as his only reasonable option. A cost estimator also testified for the owner as to the depreciated reproduction cost for the years in question. The owner's final witness was an expert real estate appraiser who testified that he was unable to find sales or rentals which would help valuing the premises using either the comparable sales or income capitalization approaches. He further testified that the property had become special purpose property of the sort not commonly bought or sold or even leased in the real estate market. This witness also concluded that it was not economically feasible to convert the building into an office building during the fiscal years at issue (1990 through 1993) and that the highest and best use of the property was its present use as a courthouse. This witness also felt that the property had to be further depreciated (by factors ranging from 20% to 110% over five years) to account for functional and external obsolescence of special purpose improvements (such as holding cells) which would have little contributory value to the property as a whole at the end of the lease. The only witness for the assessors testified that the building was not a special purpose property and that there was comparable income data to use a capitalization of income methodology. He concluded that the property was worth slightly below its assessed value which ranged from $1.6 Million to $1.1 Million for the years in question. The ATB concluded that the DRC method was appropriate in these circumstances, agreeing that the building was a special purpose property and that its highest and best use was as a courthouse. The ATB also concluded that there was a "complete dearth" of comparable sales or income data. The ATB concluded that valuations ranging from $920,000 to $768,000 were appropriate. next column | TOWN-OWNED PROPERTY Although rarely seen in ATB decisions, a Massachusetts statute (G.L. c. 59, § 2B) directly addresses valuation of property owned by a municipality but leased to third parties for non-public purposes. A "test case" by one of 100 similarly-situated taxpayers specifically called on the ATB to decide how Section 2B should be applied to land owned by the town but leased to individuals who owned the actual summer cottages on the individual parcels (Sisk v. Essex Assessors; June 3, 1997). Mr. and Mrs. Sisk leased a parcel of land on Conomo Point in Essex pursuant to a 10-year lease with a 10-year option to extend. All the tenants agreed that the ATB decision in the Sisk case would decide the tax status of the other leased parcels. Each of the tenants paid rent to the town and were permitted to occupy their respective dwellings from April 15 to October 15. The key language in Section 2B provides that publicly owned land, leased or occupied for non-public purposes, shall be assessed to the lessee or occupant "in the same manner and to the same extent as if such user, lessee or occupant were the owner thereof in fee." Relying on this authority, the assessors valued the land in the Sisk case at $177,500 and the building at $80,900. Interestingly, the parties entered into an "all or nothing" stipulation with respect to value. In other words, the parties agreed that if the Sisk land/building were owned in fee simple its assessed value constituted fair cash value. On the other hand, the parties agreed that if the property were to be valued after recognizing that it was subject to a lease, then the fair cash value was only $130,000. The parties further stipulated that the $130,000 value was based on the sales of comparable Conomo Point properties which were subject to the same type of lease as the Sisks'. The ATB agreed with the assessors. First, the ATB found that the Sisks' argument was contrary to the plain meaning of Section 2B; when the statute said that the land must be assessed just as if the Sisks were the owners in fee, the statute meant exactly that and the Sisks' mere leasehold interest in the land was beside the point. Furthermore, even though a willing buyer of the Sisks' interest in the property would be influenced by the lease, the ATB said it would be "inappropriate to consider the lease" when valuing the property since to do so "would result in a valuation of less than the entire estate subject to tax." FISH PROCESSING PLANT Anyone involved in a case calling for the valuation of a fish processing plant would do well to read George Pappas v. Ipswich Assessors (June 11, 1997) which includes a number of lessons for the unwary, both on the side of property owners and on the side of assessors. As lesson number one, a property owner should be advised that if he owns a fish processing plant, his expert witness should value the property as a fish processing plant. In this case the owner's counsel instructed one expert to ignore the presence of refrigeration and cooling equipment in the buildings and to value the property as industrial warehouse space. Counsel also advised the expert that she should consider the refrigeration equipment which was attached to the real estate as being exempt from taxation, with the result that the expert placed no value on one of the buildings used as a freezer facility. Both the owner's appraisers then went on to use an income approach and suggested capitalization rates (exclusive of a tax factor) of 11.89% for Fiscal Year l992 and ll.68% for l993 through l996. The member of the Ipswich Board of Assessors who testified, on the other hand, considered the highest and best use of the property to be its present use and used the comparable sales approach to value. The ATB agreed with the assessors as to the highest and best use of the property and further determined that the refrigeration and cooling equipment was affixed to the real estate and therefore was realty not personalty and therefore not tax exempt pursuant to G.L. c. 59, § 5(16). The ATB further found that the owner had failed to introduce reliable evidence as to the value of the equipment and that the owner's experts' valuation approach was "seriously flawed in several respects." The ATB found that although the market for fish processing plants was "somewhat limited" there still had been sales of similar properties in the general area as well as the presence of other fish processing establishments in Ipswich. The ATB was particularly troubled that one of the owner's experts had simply followed the instructions of the owner's counsel by ignoring the refrigeration and cooling equipment and by considering the property only as industrial warehouse space. This adherence to counsel's suggestions, the ATB found, "had the unfortunate consequence of compromising [the appraiser's] independent judgment and undermining her opinion of the highest and best use of the subject parcels." Even if the refrigeration and cooling equipment were personality, and therefore exempt, the ATB concluded that in this case the proper approach would be to value the property as a fish processing facility and then reduce that value by the value of any exempt property which had been included in the overall value. It appears that considerable energy was spent in the proceedings on the matter of the signing of the abatement applications by the taxpayer's agent who, after the abatement applications were denied, also signed the petitions under informal procedure with the ATB. It is unclear why the assessors made such an issue over the signing of the abatement applications since, once the case got to the ATB, the assessors stipulated that the taxpayer's agent (who also was the owner's primary valuation witness) was authorized by the taxpayer to act as its agent for purposes of the abatement applications. The assessors' objections to the agent's execution of the ATB petitions (as contrasted with the abatement applications) had more substance although the ATB again disagreed with the assessors. In denying the assessors' request to have the case dismissed, the ATB found that the agent's role was limited to her completing, signing and filing the standard form of petition under informal procedure. After the petition was filed, and removed to formal procedure by the assessors, an attorney filed an appearance for the taxpayer and the agent's role in the procedural aspects of the case terminated. The ATB contrasted the informal procedure with the formal procedure where ATB Rule 3 states that the petition "shall be signed by the appellant or his attorney." The ATB specifically saved for another day the question of whether an agent may sign a petition under formal procedure or what further actions an agent may take, under either procedure, beyond signing an informal petition. OTHER DECISIONS OF NOTE Guidrey v. Wayland Assessors (June 16, 1997). Although the case set no new precedent, it nevertheless provides a helpful review of the appropriate valuation approach for a 40-bed nursing home. Both sides and the ATB agreed that the income approach was appropriate. The ATB agreed that the taxpayer's annual reports to the Massachusetts Rate Setting Commission (Form RSC-1) were an appropriate source for income and expense information. The ATB allowed a vacancy rate of 3%; found that operating expenses in the range of 79-82% were appropriate; allowed the taxpayer an "entrepreneurship return" of 10% of net gross income (potential gross income less vacancy); allowed a personal property reserve of $450 per bed and a reserve for short-lived real estate items (doors, mechanical and electrical equipment, etc.) of 5.5%. The ATB adopted the taxpayer's capitalization rate (prior to a tax factor) of 10% for the three fiscal years, 1991, 1992 and 1993. Born v. Cambridge Assessors (May 22, 1997). The appellant was a shareholder in a cooperative apartment building and first claimed that she was entitled to a residential exemption under G.L. c. 59, § 5C. The ATB upheld the assessors' denial of the exemption since Section 5C applies only to the principal residence of a taxpayer. Here the appellant was not a taxpayer, she was the owner of shares in the cooperative corporation which owned the record title and which was the assessed owner. There was no wrongful discrimination in favor of condominium owners, the ATB held, since Section 5C specifically provided that a condominium was eligible for the residential exemption; no such provision was made for shareholders in a cooperative building. One Cambridge Center Trust v. Cambridge Assessors (April 8, 1997). The decision set no new precedents but is worthy of mention if only because of its length (73 pages) and because it involved the multi-building Cambridge Center property, assessed at about $120 Million. The ATB rose to the occasion and produced an extended opinion which not only provides textbook guidance for valuing an office complex but also presented a worthwhile analysis of market conditions for real estate in the Boston/Cambridge area from the late 1970's through the early 1990's. The decision is also notable for the breadth of the ATB's criticism of the assessors' expert witness who, for example, focused on leases for very small space in contrast with the huge size of the office complex; failed to make adjustments for time, physical characteristics and location of "comparable" rentals; and revealed similar deficiencies which prompted the ATB to give "little weight" to the assessors' expert and to rely primarily on than taxpayer's analysis. Olympia & York State Street Company v. Boston Assessors (November 24, 1997). This was the big-ticket case of the year involving the 40-story Exchange Place office tower, assessed at about $184 Million in 1996. The decision is a fine case study on valuation methodology for a substantial project, including discussion of the competitive market, fair market rent, vacancy and credit loss, operating expenses and other deductions and, of course, capitalization rate, where the ATB agreed with the assessors for three of the five years, with the rate diminishing from 9.5% for 1992 to 9% for 1996. The reduction in valuation found by the ATB ranged from $37 Million in 1992 to $13 Million in 1985; no abatement was allowed in 1996. Union Congregational Church Homes, Inc. v. Weymouth Assessors (November 20, 1997). The case involved the valuation of apartment buildings for purposes of the excise tax under G.L. c. 12 1 A, § 10 in lieu of local property taxes. The taxpayers' expert witness used a discounted cash flow analysis, combining the present value of the annual cash flows from the properties with the value of the reversion at the end of the holding period. The ATB found that the witness' DCF analysis was flawed by, for example, not basing the annual cash flows on actual operating income and expenses of the properties but rather on the amount of equity dividend which the taxpayers were allowed by contract to extract from the projects each year. The ATB was particularly concerned that the witness chose not to utilize the capitalization of income approach which has been recognized by the ATB as the "appropriate method" for valuing subsidized housing projects. The assessors rested on the presumption of validity of the assessed values and introduced no further evidence. The ATB upheld the assessors except for one of the three properties which they acknowledged was assessed at more than its fair cash value. In last year's Update we reported Brown vs. Brookline Assessors, a case where 144 taxpayers tried to prove that the assessors imposed a discriminatory assessment scheme on owners of rent- controlled apartment as contrasted with valuation of single-family homes. The ATB denied relief and the taxpayers appealed to the Massachusetts Appeals Court which, in 1997 (43 Mass. App. Ct. 327), also denied relief. As to one of the three years in question the Appeals Court did find that the property owners had made a prima facie case of disappropriate assessment although they could still not prevail since there was no "intentional scheme" of disproportionate assessment, as the ATB had also found.
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| 2000 CAPITALIZATION RATE SURVEY | | CASE | TYPE OF PROPERTY | YEAR | ATB % RATE | | Olympia and York v. Boston | office tower | 1992-1994 | 9.5 | | | | 1995 | 9.25 | | | | 1996 | 9 | | Guidrey v. Wayland | nursing home | 1991-1993 | 10 | | 1 Cambridge Center v. Cambridge | office/retail | 1993 | 10.5 | | | | 1994 | 10.25 | | Travelers Insurance v. Cambridge | office | 1993 | 10.5 | | Ring and Hangartner Trust v. Peabody | office | 1993-1994 | 10.5 | | Brattle Square v. Cambridge | retail/office | 1992 | 10 | | | | 1993-1994 | 10.5 | | Southview Coop Housing v. Cambridge | apartments | 1990 | 11.5 | | | | 1991 | 11.1 | | | | 1992 | 11.45 | | | | 1993 | 11.25 |
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