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Appellate Tax Board Update
A periodic report for property owners, appraisers, assessors and attorneys
February 1999
| | 1998 IN REVIEW The Appellate Tax Board issued 35 formal opinions (technically "findings of fact and report") in 1998, a significant increase from the 22 formal opinions issued in 1997. Single family homes and office buildings represented the largest categories of properties which were discussed, although other decisions focused on branch banks, real estate owned by non-profit corporations, personal property, gas stations, subsidized housing, land subject to taxation under Chapter 61B and even a flour mill. Ten cases have been selected for review in this report. CONTAMINATED PROPERTY The ATB decided three cases which dealt with the proper approach to value real estate which is subject to environmental contamination. The owner obtained a measure of relief in James M. Lyman, et al, Trustees v. Cambridge Assessors (April 1, 1998). There the subject property consisted of about 2.5 acres of land on which there was situated a 60,000 square foot, single story, cement-block industrial building. In connection with the proposed sale of the property, an environmental site assessment revealed "relatively high levels" of volatile organic compounds. Although the Department of Environmental Protection initially gave the property the DEP's highest priority, this ranking was subsequently downgraded to non-priority. The owner's expert, in using the market approach to value, deducted the full amount of the anticipated remaining cleanup costs ($849,000). In using the income approach, this expert brought into play the "stigma" associated with contaminated property. He added three percent to the amount of expenses to take into account the added cost of maintaining contaminated property and then increased the capitalization rate from 12% to 12.63% to take into account the added risk of owning contaminated property. The Assessors' expert, on the other hand, made no adjustments for the impact of the contamination, arguing that stigma was not a valid concept when applied to industrial property and was applicable only in the context of residential property. Moreover, the Assessors' expert maintained that a typical buyer received indemnification from the seller for future environmental claims. The ATB concluded that the income approach was appropriate for the primary parcel but concluded that the "costs to cure" should not be considered in utilizing this approach. Although the ATB agreed with the owner that there were substantial remaining costs associated with the cleanup and monitoring, the ATB also found that the owner "has not adequately demonstrated [these costs'] effect on value or how they should be properly considered in an income approach to valuation." A tenant on the property may be liable to the owner, the ATB found, and no timetable had been established for the remediation. It was questionable whether remediation was necessary during the years in question or would be necessary in the foreseeable future. Since the contamination had a slow migration period it would be many years before the pollution would pose a threat to the environment. Accordingly, the ATB found that "the adverse effect of the proposed cleanup costs on value is too nebulous to successfully quantify." At the same time, the ATB recognized that any knowledgeable buyer or lender would be aware of the pollution problem. The uncertainty and risk associated with the property would diminish its value due to considerations such as the cleanup costs, liability to third parties for migrating pollution, the property's impaired mortgageability and marketability and costs for monitoring and sampling. The ATB concluded that these concerns would be sufficiently recognized by increasing the capitalization rate for clean property by one point, from 11% to 12%. This approach utilizes the methodology first articulated by the ATB in Woburn Services, Inc. v. Woburn Assessors, (19 Mass. App. Tax Bd. Rep. 170)(1996)). The owner was even less fortunate in Morris Realty Trust v. Randolph Assessors (September 1, 1998) and Morris Realty Trust v. Seekonk Assessors (December 7, 1998). These cases both involved gasoline service stations and followed essentially similar fact patterns. Both locations were contaminated by leaking gasoline storage tanks on which the owner had expended considerable funds for clean-up costs. In both cases the owner testified that the properties should have zero value since the remaining remediation expenses exceeded the assessed valuations. In neither case did the owner present expert valuation testimony. The ATB concluded that in neither case had the owner carried its burden of proving overvaluation. Reducing the assessed value, dollar for dollar, by the purported clean-up costs was simply "inappropriate." Moreover, the lists of cleanup costs were "ambiguous", failing to distinguish between actual remediation expenses and capital improvements. Finally, despite the contamination, both locations were successfully operating as income-producing properties, evidenced by the owner's willingness to commit substantial funds to the environmental problems. ARM's LENGTH SALE When a lender forecloses on real estate and then sells it for substantially less than its assessed value, the question quickly arises as to whether the sale was arm's length, i.e., was the lender in too much of hurry to unload the property. Frequently, the property in question is one of several holdings which have been foreclosed on by the lender and which are being disposed of at the same time. This was the scenario faced by the ATB in O'Brien and Hurley v. Cambridge Assessors (1998). The case involved a 100 year-old manufacturing facility which had been totally renovated for office use in 1982-1983. The property included about two acres of land and a two-four story, 116,000 square foot Class B to C brick office building. The Travelers Company foreclosed its mortgage in April 1993 and then undertook a significant marketing campaign through direct mail, newspaper advertisements, contacts with brokers, and similar measures. The assessed value for Fiscal Year 1993 was $11.4 Million and for Fiscal Year 1994, $9.3 Million. The property was one of seven then being sold by Travelers and was offered at $7.5 Million. It was ultimately sold after negotiations in May 1994 for $5 Million. The owner's expert appraiser had researched "many aspects of the sale" and concluded that it was an arm's length transaction and that the $5 Million price was "a strong indication" of value on both assessment dates. He also used the income capitalization approach and, not surprisingly, arrived at a $5 Million value using that methodology. The Assessors' expert, on the other hand, primarily relied on the income approach, using his sales approach only as a check on the value. The Assessors' expert did not rely on the actual sale of the property because the price per square foot was significantly lower than the price for a much larger but "reasonably comparable" building in Cambridge which sold for $25 Million which, he acknowledged, may have been overpriced. The ATB found that the $5 Million sale price was a "reasonable indication" of the value on the two dates in question, that the sale was the result of an "arm's length transaction negotiated by knowledgeable parties" and that it was not consummated as a result of "duress or compulsion." LATE PAYMENT The need to rescue a late payment situation brings out the creativity in property owners and a good example from 1998 was State Street Bank v. Boston Assessors (April 10, 1998). This case involved the Prudential Center in Boston which, until 1996, was taxed as a single parcel, including the Sheraton Hotel. State Street Bank purchased the hotel in December 1994, less than one month before the assessment date for FY 1996. State Street admitted that it failed to pay the full amount of the tax but argued that it salvaged the situation by having paid more than the average tax assessed for the prior three years. State Street pointed out that, although a single tax bill was issued, the Assessors did in fact calculate the value of each component of the entire complex, including the hotel, and added these values to arrive at the total assessed value. The ATB agreed with the Assessors that the hotel did not exist as a separate parcel in any of the three years before FY 1996. Therefore State Street was required to pay the full amount of the separate tax bill on the hotel in order for the ATB to have jurisdiction. PERSONAL PROPERTY TAX The stakes werent exactly high - $266.64 in personal property taxes -- but an interesting principle controlled the outcome in Pal's Cafe, Inc. v. Westfield Assessors (June 10, 1998). The Appellant ran a bar which was the location for a jukebox and several video-game machines which were owned by a third party. The Assessors didn't dispute ownership of the devices but argued that the Appellant was not entitled to relief because it had failed to file its form of personal property list under General Laws, Chapter 59, Section 29. The ATB also acknowledged that the taxpayer didn't own the equipment but did find that on the relevant assessment date (January 1, 1993) and throughout Fiscal Year 1994 the taxpayer, under Chapter 59, Section 18, was the person in possession of the equipment which was situated at the bar for an extended length of time both before and after the assessment date. Thus the ownership issue was not determinative and the Assessors appropriately assessed a personal property tax based on the value which the bar owner conceded was appropriate. The ATB also noted in a footnote that the failure to file a form of list was not fatal to the ATB's jurisdiction although it did limit recovery to the "excess over fifty percent" of the amount which should have been assessed, all as set out in Chapter 59, Section 64. FLOUR MILLING PLANT It's not often that the issue is the value of a flour milling facility but if such a case arises, it would be well to review New England Milling Co., Inc. v. Ayer Assessors (June 19, 1998), a case in which the experts on both sides had "rough days at the office." The property had been used as a flour mill since its construction in the mid-1980's and consisted of multiple components, including a seven-story reinforced concrete building and, importantly, several reinforced concrete silos and a number of other ancillary structures. The owner's expert appraiser, on instructions from the owner's counsel, disregarded the existence of the silos on the theory that they were personal property and therefore exempt. As a result, the owner's expert valued the property as office and warehouse space, not a flour mill. He then used the capitalization of income approach, assuming that the owner would rent the property on a triple net basis, and then used five industrial warehouse properties as his sources of comparable rents. The Assessors' expert selected the depreciated reproduction cost approach since he felt that the subject was "one of a kind" and built for a special purpose. Unfortunately, this expert was neither an engineer nor an architect and, on motion by the owner, essentially all of the expert's report and testimony were stricken. Notwithstanding the Assessors' lack of expert testimony on value, the ATB found that the owner's approach was "seriously flawed in several respects" and held that the owner had not sustained its burden of proving overvaluation. next column | In the first place, the ATB found that the silos were so substantial and immovable that they were real property improvements, not personalty or machinery and should have been included in valuing the entire facility. Furthermore, by following the requirements from the owner's counsel, the expert had compromised his independent judgement and therefore undermined his opinion of the highest and best use of the property. [Recall that the owner's expert witness had the same unfortunate outcome for following instructions from counsel in George Pappas v. Ipswich Assessors (June 11, 1997) summarized in last year's Update.] Even if the silos were exempt, the proper approach, according to the ATB, would have been to arrive at a value of the entire facility as a flour milling plant and then reduce that amount by the value of the exempt property. Finally, even assuming that rental of the facility for warehouse and office space was its highest and best use, the properties selected to establish market rents were not comparable since, among other things, none was a milling facility, they were smaller and older than the subject and since they were all one-story, not multi-story, structures. As a result, even though the Assessors could offer no expert opinion of value, judgment was entered in their favor. SUBSIDIZED HOUSING The complexities of valuing an apartment complex with mortgage subsidies and "Section 8" contracts were evident in Hampton Associates v. Northampton Assessors (August 11, 1998). The project consisted of 26 two-story buildings with 207 apartments. The project was financed by a HUD-insured mortgage and the developer, in exchange for rental restrictions on the property, had 6% of the 7% interest rate paid by HUD directly to the lender, leaving the owner responsible for only 1% of the mortgage interest. In addition, 169 of the 207 units were rented to poor or low-income families who paid 30% of the basic rent, with HUD paying the remaining rent to to the owner. Although the owner's expert estimated that effective gross income was approximately $1.1 Million, he capitalized only $31,979 which was the maximum equity dividend permitted by HUD regulations. Using a 10% capitalization rate, the expert arrived at a value of $319,790 for the equity position in the property to which he added the mortgage principal balance, arriving at a total value of $4.4 Million, as contrasted with assessed value of $7.9 to $7.1 Million for FY 1991, 1992 and 1993. The owner's expert appeared to have misinterpreted legislation which gave owners an opportunity to withdraw up to 70% of the equity in these projects. In fact, this owner had taken steps to withdraw equity and in connection with that procedure the same expert submitted an appraisal with a value for the project of about $8 Million. The ATB found that the owner's approach was "unreliable" and failed to follow "sound valuation principles". The expert's approach of adding the indicated equity value to the principal balance of the mortgage would result in a steady decline in the value of the property as the principal balance of the loan was reduced, the ATB pointed out. In addition, the ATB said that the capitalization rate failed to take into account the special financing arrangements with HUD and did not take into account the possible conversion of the property to market-rate housing. The ATB was much more impressed with the Assessors' expert who made a diligent effort to take the federal restrictions into account at the same time that he considered the benefits under the HUD agreement, arriving at a capitalization rate of approximately 2.7% which took the extremely favorable loan terms into account. Although the ATB did not endorse the Assessors' approach entirely, it found that the owner had failed to prove that the assessed value exceeded fair cash value and entered a decision for the Assessors. OTHER CASES OF NOTE Sarah D. Schear, et al v. Barnstable Assessors (June 12, 1998). The case primarily involved two beachfront lots which lacked adequate frontage to be built on but which were located across the street from dwellings owned by the two lot-owners. The owners' expert appraised the lots independently of the added value for accessory uses (such as a swimming pool, tennis court, dock, etc.) which the lots brought to the dwellings across the street. The owners claimed the lots were worth only $50,000 each as compared with their assessed values of about $400,000 to about $650,000. The ATB concluded that the lots would likely be marketed with the residential parcels to achieve the highest price for the combined parcels. Even using this methodology, however, the ATB valued the lots at $300,000 and $350,000. Lanster Corporation v. Lancaster Assessors (June 30, 1998). The case involved valuation of that part of the Sterling Country Club which was located in Lancaster. The Assessors classified the entire tract as recreational land under General Laws, Chapter 61B. The Assessors then separately valued the tees and greens at full value and concluded that these were not appropriately classified as recreational land since they were "improvements". For openers, the ATB concluded that this approach valued the tees and greens twice. More importantly, however, the ATB found that there was "no statutory or other legal basis for carving the tees and greens out of the Chapter 61B classification." The ATB therefore concluded that the entire property should have been classified as recreational land and valued and taxed accordingly. Philip R. Guidrey v. Wayland Assessors (October 9, 1998). This appeal covered Fiscal Years 1994 through 1997 and involved the same nursing home which was the subject of last year's decision in Guidrey I which covered Fiscal Years 1991 through 1993. Once the decision from Guidrey I was introduced into evidence by the Appellant the burden shifted (pursuant to General Laws, Chapter 58A, Section 12A) to the Assessors to show that the increased valuation for the three years after Fiscal Year 1993 was warranted. The ATB found that the Assessors met their burden of introducing sufficient evidence to meet their burden, thereby shifting the burden back to the owner to prove that the property was overvalued. The testimony from the manager, treasurer/clerk and chief financial officer (Mrs. Guidrey) came up short for three of the four years at issue. She claimed, for example, that the nursing home actually had a negative value for three years and therefore urged that the appropriate value for all four years should be the same as that in the one year where the property had a positive value. This wide disparity rendered Mrs. Guidrey's opinion "implausible and unreliable" and the ATB accordingly found for the Assessors. Marshfield Rod and Gun Club v. Marshfield Assessors (November 20, 1998). The ATB applied established principles in finding that the Rod and Gun Club offered only a limited number of educational programs for gun safety, aimed virtually no publicity at the general public about facilities at the club and, in short, that "the primary purpose of the club was to offer a place for its members to go and shoot." Although the Gun Club did have a Section 501(c)(3) exemption from the IRS, the ATB concluded that occupation of the premises for the Club's charitable purposes was "merely incidental." ON HIGHER AUTHORITY Five Appellate Tax Board decisions on real estate valuation received full review from the Appeals Court or Supreme Judicial Court during the year. Neither side was happy with the outcome at the ATB in Analogic Corporation v. Board of Assessors of Peabody, decided by the ATB in 1996. The property was a 400,000 square foot manufacturing facility linked (for development reasons) to a 257-room full service hotel. The Assessors felt the ATB was too generous in granting total abatements of about $1.5 Million for six years. The owner felt the reductions would have been even greater if the ATB hadn't made a number of mistakes in its methodology. First, the Appeals Court (45 Mass. App. Ct.605) found no basis for the Assessors' claim that the owner's expert's testimony should have been excluded because it relied on data provided by the operator of the hotel. Such a consideration went to the credibility and weight of the evidence, not to its admissibility. Second, contrary to the Assessors' contention, the ATB did give adequate consideration to comparable sales but simply concluded that this approach was "less persuasive" than capitalization of income. The Appeals Court did find that the owner had raised a number of valid defects in the ATB's decision which warranted remand for further consideration. First, the Appeals Court said the ATB erred by rejecting evidence as to the appropriateness of deductions for start-up inventories, hotel opening expenses and working capital. These and related non-realty expenses should have been taken into account, the Appeals Court said. The Appeals Court also faulted the ATB for deviating from the record in arriving at a three percent vacancy rate for the six years in question. Finally, the ATB was wrong by failing to allow the owner to deduct expenses for tenant improvements and leasing commissions. The Supreme Judicial Court (428 Mass. 261) overturned the ATB's decision in Tennessee Gas Pipeline Company v. Agawam Assessors (reported in last year's Update) involving valuation of gas transmission facilities. The ATB had upheld the assessed valuation after discrediting the owner's valuation methodology. The SJC concluded that the ATB "erred by disregarding relevant evidence of fair cash value without a legally supportable justification." For one thing, the SJC said the ATB failed to adequately consider the impact of governmental regulations, particularly with respect to net book value of the facility as the usual price when real estate of a regulated utility is sold. Since the Assessors failed to produce evidence of why a buyer would pay more than net book value, the SJC said the ATB was wrong in disregarding the owner's evidence. The case was remanded to the ATB for a redetermination of fair cash value. The ATB fared better in the other three appeals. In Olympia & Yorke State Street Company v. Boston Assessors (428 Mass. 236) (reported in last year's Update as the "big ticket case of the year") the SJC held that the ATB made the right decision when it ordered about $4 Million in abatements on the Exchange Place office tower. The case is worth reading for coverage of a range of issues, including experience required of expert witnesses; availability under G.L. Ch. 59, sec. 52B of information gathered by assessors from taxpayers; and the appropriateness of the ATB's declining to receive evidence profferred by the Assessors of the owner's prior valuation of its "leased-fee" interest as contrasted with the fee simple interest. The SJC also upheld the ATB's decisions in Born v. Cambridge Assessors (427 Mass. 790) and Sisk v. Essex Assessors (426 Mass. 651), both of which were discussed in last year's Update. Born involved the right of a shareholder in a cooperative apartment building to claim a residential exemption under G.L. Ch. 59. sec. 5C. The SJC upheld the ATB's conclusion that the exemption was not available. Sisk involved valuation of land with a summer cottage owned by the town but leased to the taxpayer. The ATB and the Assessors were correct, the SJC said, by disregarding the lease when valuing the property pursuant to G.L. Ch. 59, sec. 2B.
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| 1998 CAPITALIZATION RATE SURVEY | | CASE | TYPE OF PROPERTY | YEAR | ATB % RATE | | Codex v. Mansfield | multi-purpose | 1992-95 | 9 | | Lilarn Properties v. North Adams | strip shopping center | 1994 | 10.25 | | | | 1995 | 10 | | Red Lion Realty Trust v. Lenox | country house hotel | 1993-94 | 10 | | Fleet Bank v. Northampton (1 King Street) | branch bank | 1993 | 10.2 | | Fleet Bank v. Northampton (109 Main Street) | branch bank | 1993 | 10.2 | | | | 1994 | 10.25 | | Holyoke Mutual v. Salem | office building | 1993 | 10.25 | | | | 1994-95 | 10 | | Fleet Bank v. Greenfield | branch bank | 1995 | 10.5 | | Lyman Trust v. Cambridge | light industrial | 1991-94 | 11* |
* Increased to 12% for contaminated property
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