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Appellate Tax Board Update
A periodic report for property owners, appraisers, assessors and attorneys
January 2001
| | 2000 IN REVIEW The Year 2000 saw the Appellate Tax Board issue 46 Findings of Fact and Reports, half of which involved real estate. Unlike other recent years, relatively few of those cases involved single family homes, clearing the way for decision-making on matters such as the charitable exemption, arm's length sales, government-owned land, and assessors' information requests. Fourteen of these cases have been selected for comment in this annual review. LESSONS IN CHARITY Continuing a recent trend, four cases called on the ATB to decide whether taxpayers qualified for charitable exemptions from local property tax under Chapter 59, Section 5, Clause 3. The first case, Animal Rescue League of Boston, Inc. v. Pembroke Assessors (February 25, 2000), specifically dealt with property purchased by a charitable organization with the purpose of "removal" of the property to its charitable purposes. Under Clause 3, however, the exemption lasts for only two years after the purchase unless the property has been converted to charitable use. Although the Rescue League had purchased the property with an intent to build an animal shelter, it had taken no steps to do so by the two year deadline. What's more, the organization did not conduct any educational programs at the property and in fact the public was not invited to use the land at all, with signs indicating that "trespassers will be prosecuted." In addition, the structure on the property was occupied by the organization's director of operations and his family and was not used for general charitable purposes. Accordingly, the ATB upheld the assessors' denial of a charitable exemption. The taxpayer was similarly unsuccessful in Nature Preserve, Inc. v. Pembroke Assessors (September 25, 2000). Nature Preserve, which owned about 70 acres of land, was formed to conserve open space, protect wildlife, provide religious meditation areas and conduct educational programs. On the ground, however, these purposes translated only to about two miles of "nature" trails along which there were a few benches and small statues. The main entrance was cordoned off with a chain and the perimeter of the property was posted with signs warning the public about entering without a permit. The ATB found that while there may be an incidental educational benefit from the nature trails, the organization did not offer any educational programs nor did it occupy the property for its stated charitable purposes. Accordingly, the assessors' denial of the exemption was upheld. Equally unsuccessful was the organization in Harvard Student Agencies, Inc. v. Cambridge Assessors (November 17, 2000) where the ATB provided a charitable exemption primer in what was basically a straightforward failure of the property owner to qualify for a charitable exemption. HSA only sought the exemption for the 30% of its building which it claimed to occupy for its charitable purposes, the other 70% being occupied by its for-profit subsidiary and various retail tenants. HSA was a separate corporation although it did have close ties to Harvard University. The ATB declined, however, to ascribe Harvard's charitable and educational purposes to HSA on the mere basis of this relationship. According to the ATB, HSA's dominant purposes included "creating and administering businesses that employ Harvard students" and, as the evidence showed, these students were employed regardless of financial need and without making sure that they used their earnings to fund educational expenses. Aside from the experience of participating in work activity, there was no educational component to employment at HSA. The right to a charitable exemption arose in a slightly different context in a case which underscored the prohibition on assessors' simply changing their minds during the year (Mt. Auburn Hospital v. Watertown Assessors (June 30, 2000)). The first year at issue was Fiscal Year 1993, for which the assessors initially determined that about 85% of the property (a full-service hospital) was tax exempt. After the original bill was issued, however, the membership on the Board of Assessors changed and the new membership decided that the property should only be 50% tax exempt and issued a revised bill. In overturning the assessors' change of heart, the ATB applied Chapter 59, Section 76 which allows a change in valuation or classification if a property has been unintentionally valued or classified incorrectly "due to clerical or data processing area or other good faith reason." None of these factors was present, the ATB said, since the action "resulted from a decision on the part of the Assessors to change the extent of the subject property's tax exemption mid-way through a fiscal year." For the next fiscal year (1994), the assessors concluded that none of the property was exempt. The hospital had purchased the property in September 1991 for about $9.5 Million to provide expansion for new facilities. After considerable study, the hospital adopted a short-term strategy of moving part of its out-patient services to the property and either demolishing, mothballing, or leasing the remaining portion. In terms of actual use, the hospital used about 18% of the building for medical record storage, 1% for weekly meetings and 75% of the parking spaces for hospital personnel. July 1, 1993 was the measuring date for entitlement to the charitable exemption and as of that date, although there was limited actual use of the property by the hospital, the hospital was planning to use a portion of the building for relocation of out-patient services. Since this date was within two years of the hospital's purchase of the property and since as of that date the hospital actually used or intended to use half the property for its charitable endeavors, then half the property was entitled to the charitable exemption. The ATB found that the remaining half was subject to taxation since the hospital was considering commercial, non-exempt uses and that its future use was unsettled as of the key July 1, 1993 date. GRAY MATTER One of the grayest areas in which assessors must wander involves the decision on whether certain property is taxable as "real property" under Chapter 59, Section 2A(a) which renders taxable all land and "all buildings and other things thereon or affixed thereto." In 2000 the ATB applied this section to a so-called "self storage facility" in Hasco Associates v. Wareham Assessors (March 24, 2000). Given the proliferation of these facilities, the decision should be of more than academic interest, although on a academic level the decision is a real treat. In this case the storage units were made of metal, with wooden floors and aluminum roofs, most of them about eight feet wide and 40 feet long, formerly used as shipping containers. There were 49 of these structures on the parcel of real estate and the assessors taxed the value of all of them. Predictably, the owner argued that the structures were portable, neither affixed to or erected on the land and therefore were personal property of a business corporation exempt from local taxation under Chapter 59, Section 5, Clause 16. The structures were brought to the site by flatbed truck, did not have foundations and were not permanently attached to the ground; rather, they were arranged in rows and elevated on wooden blocks so they could be moved, if necessary, by trailer truck or forklift. The ATB found that the units, with walls, floors and roofs and leased to customers as shelters for storage of personal property, were "in the nature of real estate rather than personal property in both purpose and function." The ATB quite correctly pointed out that Section 2A(a) provides two ways for subjecting "buildings and other things" to local tax: first, if these items are "affixed" to the land and, second, if they are simply on the land. The ATB found that the storage sheds fell into the second category and therefore were taxable. ANOTHER TOUCH OF GRAY Yet another gray area is the determination of when a sale is truly arm's length. This was the primary concern in G.F. Springfield Management vs. West Springfield Assessors (April 5, 2000). The property consisted of about nine acres of land on which a Ramada Inn hotel was located. There was evidence it would cost from $1.5 Million to $3.1 Million to renovate the 28 year-old facility. In April 1993, a bank acquired the property through a deed in lieu of foreclosure and hired a management company to operate the facility which nevertheless continued to experience its "long-term trend of declining revenues." In August 1994 the property was sold for $2,125,000. The owner's expert valued the property at the sale price because, in his view, the sale was arm's length since the parties were knowledgeable and disinterested, were not related and the property had been on the market for over a year. Although the owner's expert arrived at a $1.4 Million value using the income approach, he felt that the sale price was the more appropriate value. In the eyes of the ATB, the sale price represented the floor for its value on the January 1, 1993 assessment date but not its actual fair cash value. The ATB found little evidence describing how extensively the hotel had been marketed and found no direct evidence from the bank itself regarding its compulsion, or lack thereof, to sell. The ATB observed, however, that "banks are not in the business of owning hotels" and concluded that the bank simply "wanted out of a losing proposition in which it had no expertise." The bank, the ATB said, "acted more like an owner who was anxious to sell, than one who wanted to maximize its return." All of this didn't mean, however, that the property had been properly assessed at $10 Million. To arrive at a value of $3.3 Million the ATB basically followed the owner's expert's income approach to value but lowered his capitalization rate from 12% to 11.75% and reduced certain expenses. WEAPON IN THE CLOSET It's been about 20 years since the ATB reminded assessors of a key tool for making taxpayers behave, specifically making them respond to requests for information pursuant to Chapter 59, Section 38D. This section requires a property owner to provide the assessors, within 60 days, with information "reasonably required" to determine fair cash value of the property. A key provision makes failure to comply with the request a bar to an appeal of the valuation. In Marketplace Center II, L.P. v. Boston Assessors (April 12, 2000) the taxpayer did not reply to the request, distinguishing itself as the only one of 40 owners of office towers in Boston who failed to respond. The assessors denied the abatement applications for Fiscal Years 1994 through 1998 and the taxpayer appealed to the ATB where the assessors moved to dismiss the appeals on the grounds of non-compliance with the Section 38D requests. In the ATB, Marketplace conceded that it did not specifically respond to the Section 38D requests but, as part of the abatement process, Marketplace did provide income and expense information pursuant to Chapter 59, Section 61A. Compliance with the Section 61A request, the ATB pointed out, did not satisfy the Section 38D request because of a "fundamental distinction" between the two information provisions which are utilized "at different points, and serve different purposes, in the assessment and appeal process." A Section 38D request seeks income and expense information for the calendar year immediately preceding the relevant valuation date for the fiscal year for which the assessors seek to value the property and assess the tax. The information from a Section 61A request, on the other hand, is older information and relates to the calendar year immediately preceding the valuation date for the fiscal year for which the taxpayer filed an abatement application. The ATB brushed aside the taxpayer's argument that the Section 38D information could have been obtained from third parties and that the Section 61A responses could have met the assessors' needs. For one thing, the ATB noted that the more recent (i.e., Section 38D) income and expense information from the subject property, and from comparable other properties, helped the assessors determine whether the subject's income and expenses are in fact market income and expenses for purposes of valuing the property on the assessment date. The year-old information through the Section 61A responses doesn't satisfy the need for current data. The taxpayer's only justification for non-compliance was "administrative oversight and error" which the ATB said hardly constituted "reasons beyond the control" of the taxpayer contemplated as an excuse under Section 38D. Finally, without holding that it was necessary for the assessors to prove they were prejudiced by the taxpayer's non-compliance, the ATB went on to state that the lack of the Section 38D information did in fact inhibit the assessors' ability to determine the fair cash value of the properties. The assessors' motions to dismiss for all five fiscal years were therefore granted. next column | GOVERNMENT OWNED FACILITIES Two cases provided important guidance on the application of Chapter 59, Section 2B which states that real estate owned by the United States, the Commonwealth or a city or town which would otherwise be exempt is subject to tax to the "user, lessee or occupant" if the land is "used in connection with a business conducted for profit or leased or occupied for other than public purposes." The first case, MCC Management Group, Inc. v. New Bedford Assessors (November 2, 2000), involved the Hetland Arena, an indoor skating facility located on 4.64 acres of land with substantial parking spaces and grassed areas with picnic tables. The Commonwealth owned the facility and placed it under the oversight and control of the Department of Environmental Management which in turn hired MCC, a private, for-profit corporation, to operate the rink. For the right to operate the rink, MCC paid the Commonwealth a percentage of gross revenues. The vast majority of users were either non-profit youth programs or municipal groups, such as local high school hockey teams. Even where such a facility is operated by a for-profit corporation, if such use is "reasonably necessary to the public purpose of a...park...available to the use of the general public...." it can escape taxation. The ATB urged a broad interpretation of the word "park" and found that the public nature of the rink facility put it outside New Bedford's reach. The other case, Ogden Entertainment Services v. Hadley Assessors (December 12, 2000), involved the Mullins Center at the University of Massachusetts at Amherst, a multi-purpose arena and convocation center located partially in the town of Hadley and partially in the town of Amherst. The Mullins Center is home of the UMass Minutemen basketball team but is also the venue for performances by luminaries such as David Copperfield, the Boston Pops and Phish. For purposes of operating the Mullins Center, the University of Massachusetts Building Authority ("UMBA"), as owner, entered into a management agreement with Ogden, a private, for-profit entity in the business of managing public entertainment facilities. Ogden provided soup to nuts management from concert scheduling to marketing to maintenance to security and was paid a fee for these services. The ATB noted that UMBA retained title and physical possession of the Mullins Center, that there was never a lease between UMBA and Ogden and that UMBA reserved the right to approve the events, ticket and concession prices along with the right to approve Ogden's annual budget. The ATB concluded that Chapter 59, Section 2B did not permit the assessment against Ogden because it neither "used" the Mullins Center in connection with the operation of a business nor "leased or occupied" it for "other than public purposes." The ATB found that Ogden was "merely providing contractual management services" for a facility both owned and controlled by UMass which received any profits and incurred any losses resulting from operating of the facility. OVERBUILDING THE COOLER It sometimes happens that when the owner of a building decides to upgrade the facility he just goes too far and winds up with the proverbial "white elephant." It is then left to the owner, hat in hand, to convince the assessors that, no matter how grand the facility, it just isn't worth what the assessors say it is. This scenario unfolded in O'Brien v. Berlin Assessors (March 28, 2000) involving an antique colonial house, an attached barn and an apple storage facility, all known as "Berlin Orchards". With special permits from the zoning board of appeals, the owners converted the house to a farm store, offices, kitchen and sales space; converted part of the barn to an agricultural store; and, most importantly, built a new "controlled atmosphere apple storage facility" at a cost of $300,000. The owners' expert, backed by testimony from the owner-manager, concluded that the highest and best use was as residential property, given the consistent financial losses that the business had incurred. The ATB ruled that there was really no disagreement between the parties on the valuation of the main house and the attached barn, thereby shifting the battle to valuation of the storage facility which the ATB said was "special purpose property" with the amount shown on the building permit as the best estimate of construction costs. The ATB agreed with the owner that the storage facility was overbuilt and was essentially a "financial albatross." It therefore arrived at fair cash value by reducing the $300,000 construction cost by 30% to reflect "incurable functional and external obsolescence," resulting in assessed value of $210,000. STIGMA, THE VALUE OF COMMUNICATION AND OTHER CASES OF NOTE 23 West Bacon Corporation vs. Plainville Assessors(September 12, 2000). The concept of "stigma" and other factors in the valuation of contaminated property again surfaced in this case involving a century-old manufacturing facility which had used lagoons for disposal of hazardous waste from its metal plating, polishing and lacquering operations. Using the income approach, the owner's expert first valued the property as clean, applying an 11% capitalization rate (plus a tax factor). To adjust this value for the property as contaminated, he added 3% to the capitalization rate to account for the added risk before cleanup, 1% to account for the "stigma" to the property even after cleanup and yet another 1% for the illiquidity or inability to mortgage the property. He increased expenses by the annual monitoring and engineering costs and then suggested the establishment of a sinking fund to pay for the cleanup, the amount of which he deducted from his value. All of these calculations resulted in a valuation of $315,000, in contrast to the $2.4 Million assessment. At the other extreme was the assessors' expert who admitted that neither he nor the assessors themselves even considered the possibility of contamination and its impact on value. The ATB found a middle ground, accepting the 10.5% capitalization rate recommended by the assessors' expert, stabilizing annual monitoring costs at $10,000 and then adding only 1% to the capitalization rate to reflect the increased risk connected to ownership of and possible future costs associated with the contaminated property. The ATB did not increase the capitalization rate for stigma and illiquidity because neither of these elements were "proven adequately" at the hearing. In short, the ATB concluded that "the subject was a viable income-producing property despite the known presence of contamination" and arrived at a value of $1,450,000. Lahane v. Saugus Assessors (June 29, 2000). The underlying case (involving a single-family dwelling) wasn't particularly exciting but a footnote, dealing with a fine point of notice of action to the taxpayer, is worth reading. The assessors met and, apparently, voted on May 24th to grant a partial abatement. The letter to the taxpayer giving notice of this action, however, was dated May 26th and made no reference to the date of action by the assessors. Under Chapter 59, Section 63, this notice must include the date of the assessors' action for purposes of computing the appeal period. In the absence of any other date being shown, the ATB held that May 26th was the date of action and that the appeal to the ATB on May 25th was timely and not a day late. Kinney System of Sudbury Street v. Boston Assessors (November 30, 2000). It may have been simply a failure to communicate but the result was dire for the taxpayer. The subject was 50 New Sudbury Street, home of the Government Center parking garage and some office space. Richard Rubin, Trustee, owned the entire building (valued at about $66 million) with Kinney as lessee of the garage portion (valued at $32 million). The lease obligated Kinney to pay all taxes on the garage and obligated the owner, on Kinney's written request, to join in any valuation contest. Kinney paid the entire tax on the garage for fiscal year 1996 and both Kinney and the owner applied for abatements, both of which were deemed denied. Only Kinney, however, appealed to the ATB. Unfortunately, Kinney never gave a written request to the owner to contest the valuation and Kinney never sought to continue to prosecute the owner's appeal in the ATB. The assessors filed a motion to dismiss on the theory that Kinney had not paid more than half of the tax on the whole building as required by Chapter 59, Section 59. Although Kinney came close (nearly 49%), the ATB had no choice but to allow the assessors' motion. Boylston v. Commissioner of Revenue (April 14, 2000). Although only the Town of Boylston was directly involved, the case should also be of interest in the 29 other communities that comprise the Quabbin, Ware River, Wachusett and Sudbury water- sheds. Under General Laws, Chapter 59, Section 5G, those communities are entitled to payments in lieu of taxes from the Massachusetts Water Resources Authority for the value of the watershed land, thereby creating an exception to the usual rule that under Chapter 59, Section 5, Clause 2 land of the Commonwealth is exempt from tax. Under Section 5G, the Commissioner of Revenue values the watershed land in each affected community and the MWRA reimburses the community for the taxes lost because of the Commonwealth's ownership. The case includes extended discussion of, and the ATB's approval of, the methodology used by the Commissioner in valuing large tracts of undeveloped land. Also of note is the ATB's statutory interpretation that Section 5G is not intended to provide for a PILOT payment for the land actually under a reservoir since such land is not within a watershed.
ONE MORE TIME It was previously reported (1999 Update) that the Supreme Judicial Court overturned the ATB's decision in Tennessee Gas Pipeline Company v. Agawam Assessors. The ATB had upheld the assessed valuation but the SJC faulted the ATB for, among other things, failing to adequately consider the impact of governmental regulations on valuation of the facility. The SJC remanded the matter to the ATB which issued its decision on October 19, 2000. The property was part of a nationwide gas transportation system and specifically included a compressor station, underground pipeline, offices and a warehouse. On remand, the ATB felt it most appropriate to value the facility by giving equal consideration to its net book cost along with its value derived from a "unit approach" whereby the value of the Agawam facility as part of the entire pipeline was determined. To be sure, these are complex determinations and, in the absence of evidence to the contrary from the Assessors, the ATB essentially adopted the methodology and values advanced by the pipeline's expert, resulting in overvaluation of about $1.6 Million in one year (against assessed value of about $2 Million) and about $744,000 in the next. ON HIGHER AUTHORITY During 2000, the Appeals Court upheld, with full opinions, two decisions of the ATB which had been issued in 1998, both of which involved the assessment and taxation of condominium development rights (Spinnaker Island and Yacht Club Holding Trust vs. Hull Assessors, 49 Mass. App. Ct. 20, and First Main Street Corporation v. Acton Assessors, 49 Mass. App. Ct. 25). Both cases involved land on which the developer reserved future development rights. The question to be decided in each instance was whether this land or the rights should be separately taxable or treated as part of the condominium common areas and therefore exempt from separate taxation under Chapter 183A, Section 14. In both of these cases the Appeals Court upheld the ATB's determination (overruling the assessors) that the parcels reserved for future development were not subject to separate taxation. It found (in Spinnaker Island) that Section 14 was "unambiguous" in requiring that they be treated as common areas and (in First Main Street) that the development rights were not severable from the underlying fee interest in the land and were not separately taxable. During the year the Appeals Court also summarily (without full written opinion) upheld the ATB's decisions in New England Milling Co. v. Ayer Assessors and Morris Realty Trust vs. Seekonk Assessors, both of which were previously noted in the Update.
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