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Appellate Tax Board Update
A periodic report for property owners, appraisers, assessors and attorneys
February 2003
| | THE YEAR 2002 IN REVIEW In terms of real estate tax cases, it wasn't a terribly exciting year at the Appellate Tax Board. A total of 25 real estate cases were decided but there was no drama involving abatement applications being dropped over the transom in the assessors' office, dire consequences for failure to respond to requests for information or landlord-tenant tussles over who was to pay the taxes. About a quarter of the cases involved attempts to gain tax exemptions and there was the usual sampler of homeowners' attempts to lower their assessments. At the same time, there were decisions that involved a major Boston office tower, a boutique hotel in Salem, and an undeveloped industrial park. Of the 25 decisions, a whopping 17 came down in favor of the assessors, five granted some relief to the taxpayer, and three gave something to each. GIVE ME RELIEF Of the six exemption cases, three involved senior citizen residential facilities and of these perhaps the most significant was Jewish Geriatric Services v. Longmeadow Assessors (July 18). We reported this case in last year's edition as being in the "pipeline" since the ATB had issued its decision for the assessors but hadn't yet issued its Findings of Fact and Report. The facility was known as Ruth's House and was strictly an "assisted living" residence, with no independent living units nor skilled nursing facility sometimes found in these complexes. Of the 64 apartments, 22 were for Alzheimer's patients. All residents required assistance in at least two so-called "activities of daily living." There was no question that Ruth's House was owned and operated by tax-exempt organizations. The ATB first concluded, however, that the charitable entity did not "occupy" Ruth's House as required for an exemption under Chapter 59, Section 5, Clause Third. The units all had locks on the doors and a "resident agreement" gave staff members limited rights to enter. The ATB found that the residents had "eviction protection" not only under the resident agreement but also under the terms of General Laws, Chapter 19D, the statutory charter for assisted living facilities. The ATB also found that the residents themselves "enjoyed the full range of rights and protections associated with legal tenancy" and it was therefore the residents, not the charitable entity, which occupied the facility. The ATB further found that Ruth's House did not qualify as a charitable organization under Clause Third since it did not draw its residents from a sufficiently broad range of people. The fee structure was such that Ruth's House was beyond the reach of a large segment of the population. Moreover, the ATB concluded that a subsidy program was inadequate to significantly increase the potential clientele. Nor was there evidence, the ATB said, that residents of Ruth's House would be public charges in nursing homes were it not for the availability of the facility. The case is now pending in the Appeals Court. (In the interests of full disclosure, the Longmeadow assessors were represented by your editor.) In Pond Home Community, Inc. v. Wrentham Assessors (September 30) on the other hand, the retirement community, also owned by a non-profit corporation, consisted solely of 66 independent living units. A deed restriction insured that 80% of the units would be "affordable" for "low income" households under the definition from the federal Department of Housing and Urban Development. A prospective resident needed to make a $9,000 deposit, execute a residency and membership agreement and, most significantly, pay the balance of a "construction fee" which ranged from about $138,000 to $211,000. Ninety-Five percent of the construction fee was refundable, either five months after the residency ceased or, if sooner, when the unit was resold. Under the residency agreement, a specific unit was available for exclusive occupancy and the resident paid most expenses related to it, including utilities, personal property insurance and interior repairs. The ATB found that all these factors essentially created a landlord-tenant relationship between the resident and Pond Home. While the monthly carrying charges for 80% of the units may in fact be "affordable", the ATB found that the "substantial construction fee" could hardly be thought of as being within the range for low income seniors. The combination of the residency arrangements and entrance charges effectively took away Pond Home's qualification for an exemption. This case has also been appealed to the Appeals Court. Interestingly, another senior citizen housing case did not involve an attempt by a non-profit corporation to have its facility exempted. Instead, the issue in The Willows at Westborough v. Westborough Assessors (October 16) involved valuation, not exemption. This facility had 172 independent living units and 30 assisted living units and required residents of the ILU's to pay a one-time, 90% refundable entrance fee which ranged from $110,000 to $269,000. The case turned on the impact on the value of the facility from the accumulated entrance fees held by the owner. The ATB sided with the assessors in concluding that the entrance fees were part of the property's income stream and that the owner "had virtually perpetual and unencumbered use of these deposits." If a six percent rate of return were imputed to the accumulated fees, the result was additional income of about $1.2 Million per year, driving the valuation well above its assessed value. The ATB concluded that the income stream for the property should properly include interest that "reasonably and safely could be earned" on the refundable portion of the entrance fees prior to the time they needed to be refunded. This is yet another case now pending in the Appeals Court. A non-residential (and unsuccessful) attempt at exemption was presented in Acushnet River Safe Boating Club v. Fairhaven Assessors (July 30). This was a modestly-valued ($40,000) facility, operated by an acknowledged non-profit and tax exempt organization which owned a headquarters building and boat mooring facility. The club claimed that it offered classes in subjects such as weather and search and rescue but the ATB found that it failed to support this claim with sufficient evidence. Similarly, the club failed to show that its boat inspections were done for the general public and not simply for its limited membership. The ATB concluded that the club had "failed to demonstrate that it occupied the subject property in furtherance of a charitable purpose...." The Appeals Court will have the last word on this one also. In Nantucket Islands Land Bank Commission v. Nantucket Assessors (December 4) the issue was not the right to an exemption under Chapter 59, Section 5 but rather the owner's right to an exemption under the enabling statute which created it. In this case, the Land Bank Commission was "a body politic and corporate" created by Chapter 669 of the Acts of 1983 "for the purposes of acquiring, holding and managing" land in Nantucket County. The property in question was the land and building which contained administrative offices of the Land Bank and two apartments which the Land Bank leased to third parties, all of which was valued at about $562,000. The assessors granted an abatement for the administrative offices part of the building but taxed that part containing the apartments. The ATB initially decided the case for the assessors but revisited the question after the Land Bank filed a motion for reconsideration. Courageously, the ATB changed its position and held that the property was totally exempt. A 1987 amendment (the original act was passed in 1983) provided that real estate owned by the Land Bank "shall be exempt from property taxes." In the face of that apparently-clear language, however, the assessors relied on a letter from Harry Grossman, then chief of the Department of Revenue's Property Tax Bureau. Mr. Grossman concluded that the 1987 exemption of all real estate owned by the Land Bank did not negate an earlier 1984 amendment requiring that the property be "used solely by the Land Bank in furtherance of its public purposes." In deciding the case for the Land Bank, the ATB said that the 1987 amendment "could not have been more clear." If more was needed, the ATB ruled that the Land Bank's ability to generate income by leasing some of its real estate was "consistent with the purposes of the Land Bank Act." So chalk one up for the owner. THE BIG ONE The big ticket case of the year involved Boston's One Federal Street office tower -- occupying a full city block, 38 stories high, 1.1 million square feet of rental space and with no less than the Harvard Club on the top floor. (Peterson v. Boston Assessors (November 12)). Five years (1997 through 2001) were at issue during which the assessed value ranged from $145 Million to $318 Million. Although the numbers are larger, the valuations by the two sides showed that you value a big building in much the same way you value a small one: establish the gross potential income, take out the expenses and capitalize what's left. There are, of course, some unusual considerations, such as whether it's appropriate to use a sinking fund for future renovations of the lobby area (the ATB said that it was). Then there was the issue of the impact of the Harvard Club on value. The owner argued (and the ATB agreed) that the Harvard Club was an "amenity" to the building and enhanced the office rents; the assessors claimed the Club would best be used as office space. The ATB preferred the owner's expert's approach of "tiering" the floors into four groups (floors 1 to 8; 9-18; 19-29; and 30-38). The assessors' expert used only three tiers. The rents suggested by the owner ranged from $24.25 to $53 per foot during the five years; the assessor's range was $24 to $55. The ATB did emphasize that 73% of the space was occupied by two tenants (Fleet and Fidelity) and this bulk space for major occupants needed to be priced appropriately. On the all-important capitalization rate, the owner suggested a base rate of 9% plus .25% for each year because of the building's age; the assessors suggested 8.5% for all five years. The ATB concluded 9% was appropriate. When all was said and done the ATB granted relief to the owner for two years: 1999 (with an overvaluation of $2.4 Million) and 2000 (with an overvaluation of $9.4 Million). For the other three years the ATB upheld the assessed valuation which ranged from about $145 Million to about $318 Million. Those numbers certainly say something about the recovery in the value of prime Boston real estate. The building was sold for $360 Million in 2001, but neither expert primarily relied on the sales approach to value. (A footnote to the piece is the way the owner lived life on the edge in terms of filing for relief with the ATB. Notwithstanding the magnitude of the case, the owner waited until the last day to file in two of the years and the second to last day in a third year.) next column | DEVELOPMENT APPROACH A novel approach to valuing an industrial park was the grist for the decision in Cnossen, Trustees v. Uxbridge Assessors (December 5). The subject was a vacant industrial parcel subdivided into 19 lots, all of which were unimproved. The total parcel was valued at $957,000 for fiscal year 1995 and $972,100 for 1996. The lots ranged in size from one to about five acres. Only one of the three roads in the subdivision had been completed; construction on the other two roads had not begun. The owner's expert testified that the highest and best use was an "interim use" which would be "held in reserve for future development," as the ATB described it. The cost and income approaches were rejected as not being appropriate as was the sales comparison approach because of a claimed lack of contemporaneous sales. The "development approach" contained seven steps, including estimating the retail value of each potential lot, calculating hard and soft costs associated with the development, determining the ultimate yield on the sale of the lots and then bringing that amount to a present value, which the expert testified was $295,000. The ATB rejected this approach because many of its ingredients were "speculative and unsubstantiated." For example, the expert estimated the value of each lot, "regardless of its size and character," at $100,000 which the ATB said "strained credulity." The ATB also found it "at best speculative" to forecast that it would take 15 years to sell all 19 lots. In addition, eight of the lots were adjacent to the completed road and were "essentially saleable and ready for improvements". The expert's creative attempt was rejected in full and the ATB upheld the assessors' determination of value. A BOUTIQUE HOTEL In case you were wondering, a "boutique" hotel is a hospitality facility unaffiliated with any national chain and with less than 100 rooms. In this case, Three Corners Realty Trust v. Salem Assessors (February 7), the subject was the Hawthorne Hotel, a six story building on an acre of land with parking, built in 1920 in historic downtown Salem, valued at about $2.5 Million for 1997 and about $3.5 Million for 1998. The experts on both sides used the capitalization of income approach but used two different analyses to determine the income. The owner's expert used actual income figures provided by the owner. The assessors' expert, on the other hand, used industry data to determine the average price which should be paid per room for each of the 79 rooms which were "on-line" for the two years in question and then deducted expenses as a percentage of the corresponding revenue. Two experts for the owner also testified that the cost of necessary interior repairs would be well in excess of $1 Million. One of these experts took the total cost to cure of about $1.5 Million, amortized it over 15 years, factored in a 10% cost of borrowing the money, arriving at an annual expense of about $200,000. The owner's valuation expert used two concepts to deal with furniture, fixtures and equipment ("FFE") at the hotel. He first determined a "return of" the FFE by essentially establishing a reserve for a replacement account equal to 2½% of annual gross revenue. He also allowed as an expense a "return on" FFE by determining the total value of the personal property, applied an equity yield of 13% on that total value and arrived at an annual expense of about $46,000. He used a 10% capitalization rate for each of the two years. In addition to his income capitalization analysis, the assessors' expert used the sales approach based on the sale price on a per room basis for six comparable properties. His valuation for the personal property was similar to that used by the owner's expert although they were only about half as great. The assessors' witness, using capitalization rates of 11.5% and 11% for 1997 and 1998, arrived at values of about $4.3 million and $4.7 million for the two years (his values were slightly higher using the sales approach). Relying primarily on the owner's analysis, including his 10% capitalization rate, but not allowing any deduction for the cost of repairs, the ATB concluded that values of $2.4 million for 1997 and $3 million for 1998 were appropriate. RETURN OF STURDY Be it remembered that back in 1998 we reported Sturdy Memorial Foundation, Inc. v. North Attleborough Assessors which involved a small office building, most of which was occupied by a group of physicians on the staff at Sturdy Memorial Hospital. The owner argued that since the offices were necessary to secure physicians to service the hospital, the office building should be exempt from taxation. The owners sought further review and in a 1999 decision (47 Mass. App. Ct. 519), which we also reported, the Appeals Court found that the ATB's ultimate findings were not supported by its subsidiary findings and therefore remanded the matter to the ATB for further findings. In 2002 not only did the ATB issue its revised findings of fact for fiscal years 1996 and 1997 but also issued a decision on the exemption question for fiscal years 1998, 1999 and 2000, years which were not covered by the prior case. It was a bad day for the Foundation on all counts. On the remanded case, the ATB issued additional findings of fact and also refused to find certain facts which had been requested by the Foundation. When all was said and done, the ATB concluded that the Foundation had failed to meet its burden of proving a right to an exemption; in other words the physicians' offices were a private facility and not entitled to an exemption. As for the new case (covering 1998-2000), in an extended, thorough opinion, the ATB again concluded that this was a private medical practice which occupied the space rather than the admittedly charitable Foundation. An exemption under Chapter 59, Section 5, Clause Third was therefore not warranted. Both 2002 ATB decisions are in the Appeals Court once again. SHIFTING THE BURDEN Two cases showed the real-world application of Chapter 58A, Section 12A. This law now provides that if an appeal is brought within two years after the ATB's determination of fair cash value, the burden of persuasion is shifted to the assessors to demonstrate that an increase in value was warranted. In the first case, HRS Trust #3, Et Al v. West Bolyston Assessors (January 15), the property was a 100,000 square foot shopping plaza which had been the subject of ATB hearings for Fiscal Years 1992 and 1993 when the ATB found that the fair cash value was about $4.3 Million. The present case involved Fiscal Year 1994 when the assessors increased the value to about $6.2 Million. In light of the prior cases, under Section 12A the assessors had the burden of justifying the increase in value and carried this burden primarily by showing the sale of the property in July 1994 for $7.1 Million. The ATB found that this sale was "sufficiently proximate" to the January 1, 1993 assessment date (the opinion doesn't discuss exactly how the assessors justified the doubling in value based on a sale that didn't take place until about nine months after the bills were sent). The owner clearly came up short in proving overvaluation once the burden of proof shifted back. The ATB found that the owners' expert failed to sufficiently document gross income, failed to submit documentation regarding expenses and failed to adequately support her recommended capitalization rates. The ATB was particularly hard on the expert for not considering the 1994 sale of the property. The other Section 12A case, Ligor v. Wellesley Assessors (June 10), involved two residential properties. The ATB had valued the property on Beach Road at $232,000 in Fiscal Year 2000 and the assessors increased the value to $293,000 for Fiscal Year 2001. The assessors presented four sales that occurred between May and December, 1999 (after the assessment date for the previous ATB case). These sales justified some increase over the ATB's prior value but not enough to justify the increase to $293,000, which the ATB reduced to $278,350. Another parcel, on Russell Road, had been valued by the ATB at $238,000 for Fiscal Year 2000 and the assessors increased this to $281,000 for 2001. Based on the assessors' sales, which took place between June 1999 and May 2000, the ATB agreed that the increase in the assessed value was justified. ON HIGHER AUTHORITY Two ATB decisions received the full treatment from the Massachusetts Appeals Court in 2002. The ATB fared well in Mt. Auburn Hospital v. Watertown Assessors (55 Mass. App. Ct. 611) which we covered in our 2000 edition. The Appeals Court upheld the ATB's conclusion that the assessors did not have the authority to revise a tax bill simply because a change in membership on the board of assessors made the board want to have a second look. The Appeals Court also upheld the ATB's conclusion that an exemption was only appropriate for that portion of the property which was intended to be used for charitable purposes within the two-year period after acquisition. The ATB didn't come out as well in the other Appeals Court decision, Turners Falls Limited Partnership v. Montague Assessors (54 Mass. App. Ct. 732), which we reported in our 1999 edition. In this case, the ATB concluded that the owner of a steam generation/electric power plant had failed to prove overvaluation. The ATB went on to conclude, however, that the assessors were bound by the testimony of their own expert witness, who testified that fair cash value was about $21 Million, as contrasted with the assessed value of $26 Million. In the Appeals Court's words, there was an "enigmatic quality" to the ATB's decision: the ATB ruled that the taxpayer had failed to meet its burden of persuasion that the plant was overvalued but, at the same time, the ATB ordered reductions in valuation of over $5 Million for each year in question. It was therefore obvious that the ATB had convinced itself that the property was overvalued, but the Appeals Court said it was up to the ATB to "articulate a rational reason for abatement." Since this ingredient was missing from the ATB's decision (which had relied solely on the admission of value from the assessors' witness), the Appeals Court remanded the matter to the ATB to either reconsider the case on the basis of the existing record or to receive additional evidence. So stay tuned. In four other cases which we previously reported, the ATB's decisions were upheld without full opinions: Animal Rescue League of Boston, Inc. v. Pembroke Assessors; Nature Preserve, Inc. v. Pembroke Assessors; Healthtrax International, Inc. v. Hanover Assessors; and Market Place II LP v. Boston Assessors, where the Supreme Judicial Court also denied further review.
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| 2002 CAPITALIZATION RATE SURVEY | | CASE | TYPE OF PROPERTY | YEAR | ATB % RATE | | Three Corners Realty Trust v. Salem | Hotel | 1997-1998 | 10.1 | | | | | | Willows at Westborough v. Westborough | Elderly Housing | 1999-2001 | 9.5 | | | | | | Peterson v. Boston | Office Tower | 1997-2001 | 9 | | Arthur D. Little v. Cambridge | R&D/Office | 1993 | 10.5 | | | 1994 | 10.25 |
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