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    • Appellate Tax Board Update

    A periodic report for property owners, appraisers, assessors and attorneys

    March 2005

    THE YEAR 2004 IN REVIEW

    2004 wasn't a particularly exciting year for property owners and assessors at the Appellate Tax Board which decided 23 cases involving real estate and two more involving automobile excise taxes. About half of these cases were nothing-special decisions involving single family homes. Of more interest were decisions to be covered in this Update involving a couple of dream houses, misuse of the omitted assessment remedy and valuation of a psychiatric hospital, a major shopping center and a large duplex housing project.

    NICE DIGS

    There were at least two things in common for the houses in Harbor Dreams LLC v. Hingham Assessors (February 10) and Lyons v. Wilbraham Assessors (November 18): both were lavish and both were over-assessed. The house in Hingham, built at a cost of $3.7 Million on a $509,000 lot, featured 9,600 square feet of living area with a built-in saltwater aquarium and climate-controlled wine cellar. The house in Wilbraham cost about $2.7 Million to build and included over 9,000 square feet of living area, with a 3,000 square-foot gymnasium and, over the garage, a "gentleman's club" outfitted with a bar, billiards area, card table and large projection-screen television.

    The primary dispute was between the Assessors' view in each case that the value of these new homes should be based on construction cost and the owners' claim that a comparable sales analysis was appropriate. In both cases the owners successfully argued that the dwellings were in fact "over-improvements" for their respective sites and that the owners could not recapture their construction costs if the properties were put on the market. Very simply, if a buyer could afford a house like one of these he would be more inclined to build his own rather than buy someone else's fantasy. In Hingham this meant that the house which cost $4.2 Million (land and building) had a fair cash value of $3.3 Million, not the $5.5 Million assessed value. In Wilbraham the $3 Million cost (land and building) translated to a fair cash value of $1.5 Million.

    PIECES OF THE WHOLE

    The housing project in Mason v. Winchester Assessors (February 27) was a bit unusual in that it consisted of 50 separately-assessed parcels, each with a duplex housing unit, which together formed a garden-apartment complex. The Assessors valued the complex at about $18.6 Million for 2002 and $20.2 Million for 2003. The Assessors claimed that each duplex apartment could have been sold individually or converted to a condominium. The owner countered that it would be "impractical and financially unattractive" to sell the duplexes individually. He pointed out, for example, that the units were small (about 1,000 square feet), shared certain utility systems and in certain instances were "oriented sideways to the street" which made them more akin to being pieces in a complex rather than private residences.

    The owner first arrived at a per-square-foot value based on sales of other two-family properties and duplexes and sales of other apartment complexes. He also used an income capitalization approach to value the entire complex. He reconciled his two approaches to arrive at a value of $11.8 Million for 2002 (which the ATB increased to $12.2 Million) and $13.2 Million for 2003 (which the ATB increased to $13.5 Million). The ATB concluded that the appropriate capitalization rate was 9%, a slight reduction from the 9.25% suggested by the owner's expert. In a rarely-seen procedural move, the ATB ordered the parties under ATB Rule 33 to allocate the total fair cash value among the 50 separate parcels. The owner responded but the Assessors chose not to and the ATB therefore adopted the "well-reasoned" proposal from the owner. The ATB's decision has been appealed to the Appeals Court.

    NOT SO FAST

    There were several bends in the road en route to victory for the owner in United Orthodox Services, Inc. v. Brookline Assessors (December 6). There was no dispute that United Orthodox was a non-profit corporation as the owner of the single family home which it purchased on October 16, 2001. The house was used as the residence for the owner's president and his family although the owner claimed the house played a broader, non-residential role in the group's charitable functions. The Assessors claimed the dominant use was residential. The owner timely filed Form 3ABC on March 1, 2002; in fact, the form was personally delivered to the Chairman of the Board of Assessors who happened to be working at the front desk on this busy day. The Chairman promptly wrote "exempt" with his initials in the top left corner of the form. Taking her signal from the Chairman, the Assessors' clerk processed the paperwork on the assumption that the Chairman had determined the exempt status of the property. Despite the supposed exempt status, preliminary tax bills were sent out for Fiscal Year 2003. The President of United Orthodox then went to the Assessors' office with the Chairman's notation on Form 3ABC and, as result, the Assessors granted an exemption and abated the tax.

    The plot thickened when a neighbor subsequently challenged the exemption and the Assessors re-examined their prior decision. The Assessors concluded that since United Orthodox was "neither a temple nor a synagogue" and that since the group's president was not a rabbi the property ought not to be exempt. The Assessors then denied the exemption and gave the owner notice of their intention to issue an omitted tax bill, triggering an abatement application, inaction by the Assessors, and an appeal to the ATB after paying the tax. The ATB concluded that the assessment was invalid because of the Assessors' failure to comply with the omitted assessment procedure prescribed by General Laws Chapter 59, Section 75; the ATB never decided the merits of the exemption. Omitted assessments are for special situations, the ATB pointed out, designed to enable the Assessors to correct "unintentional" omissions "due to clerical, data processing or other good faith reason." In this case, the Chairman of the Assessors, the ATB said, "made a conscious and, presumably, considered decision" before making the "exempt" notation on Form 3ABC. This deliberate action was made a second time when the President brought the tax bill to the Assessors and asked for relief.

    The purpose of Section 75, the ATB stated, was to correct "unintentional errors of a clerical or data entry nature." The purpose of the law "was not to provide local assessors with an opportunity to reconsider and change their own assessment decisions." The facts in this case did not support the Assessors' claim that their actions were unintentional or inadvertent. The Assessors also came up short on a further procedural requirement in Section 75 that they submit a statement of omitted assessments to the Commissioner of Revenue by June 30.

    FOR-PROFIT, PSYCHIATRIC HOSPITAL

    A former estate on about 12 acres of land with six structures and now used as the Bournewood private psychiatric hospital was the grist for Kahn and Zarsky, Trustees v. Brookline Assessors (November 19). The complex was valued at about $8.5 Million in Fiscal Year 2000 and $8.9 Million in 2002 (there was no 2001 appeal).

    A curious twist to the case involved the Appellants' calling the Assessors' real estate valuation expert as a witness. This witness had prepared two reports, one concluding that the highest and best use of the property was as a residential condominium development with a value in the $15 to $20 Million range. This witness' second report found that the highest and best use for the property was its existing use as a psychiatric hospital (valued at $7.3 Million) for 2000 but as a residential subdivision (valued at $9.9 Million) for 2002. Those inconsistencies did little to enhance the credibility of the witness.

    The Appellants then called on their own healthcare facility valuation specialist to determine the gross income generated by the facility that was attributable only to the real estate and then called on their real estate valuation expert to use that income figure to calculate the value of the real estate. For purposes of determining the gross income, the first expert started with stabilized gross receipts, deducted salary and non-salary expenses and also deducted an "entrepreneurial return" of 7% of operating revenues to represent what a purchaser or third-party owner would expect to receive as a reward for undertaking the risk of owning the facility. Next, the Appellants' real estate valuation expert started with the gross income attributable to the real estate arrived at by the health care facility expert and then made deductions for vacancies, structural maintenance, liability insurance, management, reserves and miscellaneous items in the total amount of 8% and then applied a capitalization rate of 10% plus a tax factor.

    The ATB rejected the development approach suggested by the Assessors' witness and concluded that the income approach was most appropriate. The ATB concurred with the Appellants' determination of gross income from the real estate and specifically agreed with the 7% deduction for an entrepreneurial return. The primary difference between the ATB's determination of value and that used by the Appellants was in the category of gross income. The ATB used a significantly higher bed occupancy rate, resulting in income attributable to the real estate of $935,000 as contrasted with $609,000 suggested by the Appellants' expert. The ATB concluded that Bournewood Hospital had a value of $6.9 Million for 2000 and $7.1 Million for 2002, contrasted with assessed values of $8.5 Million and $8.9 Million for those same two years.

    KNOW WHEN TO HOLD 'EM

    At the end of the day, the ATB found four basic flaws in the owner's expert's testimony to the extent that it was totally disregarded. First, the expert erroneously selected a $3.25 per foot rate as the fair market rate for the Macy's anchor space which ignored the actual rent of $4.02 per foot. The rents selected for other areas of the mall were also "unnecessarily depressed" by the expert, according to the ATB. Second, the ATB found that the owner's expert "failed to properly consider the actual vacancy rates," when he proposed a substantially higher rate. Third, the ATB held that the owner should not have made a deduction of $0.50 per square foot for certain reserves (such as for roof and parking lot repairs and replacements) since these were actually paid by the tenants. Finally, the ATB disagreed with the owner's experts proposed capitalization rates which ranged from 9.25% to 10%. The assessed values were upheld for all seven years. The ATB's decision is now under appeal in the Appeals Court.

    CHAPTER LAND

    For folks who follow developments under General Laws Chapter 61A on an "inside baseball" level the ATB presented an interesting analysis in White v. Williamstown Assessors (August 17). Chapter 61A, Section 2 has three alternative routes to qualification for "horticultural use" classification. The second alternative (the first alternative wasn't pertinent to the case) qualifies land when it is "primarily and directly used in raising forest products under a program certified by the state forester...." The third alternative qualifies land "when primarily and directly used in a related manner which is incidental thereto and represents a customary and necessary use [in raising/preparing forest products]...." In denying the classification application the Assessors raised a technicality that the land was not being used for agricultural or horticultural purposes during the two years immediately preceding the year in question, as required by Chapter 61A, Section 4. The Appellants did not own the land during the two prior years but the ATB found that the prior owners "made every effort to properly manage their property, so as to promote the future health and viability of their timber crop" even though it was not clear from the record whether the prior owners had sought Chapter 61A classification or official certification of their forest management plan. The ATB concluded that the Assessors' position was unduly restrictive and that a forest management plan was not necessary when an owner sought classification under the third alternative in Section 2 that the use of the land represented a customary and necessary use in raising and preparing forest products. According to the ATB, the absence of a state-certified forest management plan should not have precluded the owners from obtaining the favorable classification.

    next column

    ON HIGHER AUTHORITY

    Last year the Appeals Court issued five significant decisions dealing with real estate valuation and taxation. Four of these were previously covered in the Update at the Appellate Tax Board level.

    Assisted Living Facility

    Last year's Update reported that the Appeals Court had under advisement a significant case involving the tax exempt status of an assisted living facility operated by a non-profit corporation. In that case the Appellate Tax Board had agreed with the Longmeadow Assessors that the facility, known as Ruth's House, was not entitled to an exemption under General Laws Chapter 59, Section 5, Clause Third. In its 2004 decision, the Appeals Court agreed with the ATB. (Jewish Geriatric Services, Inc. v. Longmeadow Assessors, 61 Mass. App. Ct. 73).

    The Appeals Court, like the ATB, concluded that Ruth's House was not operated as a charitable endeavor in that it did not benefit a sufficiently inclusive section of the community. In reaching that conclusion the Appeals Court focused on the range of monthly fees, from $1,890 to $5,280, for residency at Ruth's House. The magnitude of these fees, plus the requirement that a resident obtain a third-party guarantor, acted to limit the range of the population at large who could afford to live there. As the Appeals Court put it, Ruth's House "serves only a financially independent segment of our population," a conclusion which defeated Ruth's House claim that it served a charitable purpose. The Appeals Court also concluded that Ruth's House did not relieve any burden of government, i.e. it did not show that its residents would require public assistance were it not for Ruth's House.

    A reading of the Appeals Court decision makes it clear that the court was guided in significant measure by the Supreme Judicial Court's decision in Western Mass Lifecare v. Springfield Assessors, 434 Mass. 96 (2001), which dealt with a continuing care retirement community which included an assisted living component. The SJC denied an exemption from local real estate taxes in that case. (In the interest of full disclosure, the editors of the Update represented the Longmeadow Assessors before the ATB and Appeals Court.)

    Still Sturdy after all these Years

    The Year 2004 marked the second trip to the Appeals Court after two trips to the Appellate Tax Board on the part of Sturdy Memorial Foundation to obtain a real estate tax exemption for the facility which it owned and which was used as a medical clinic by the tenant, Sturdy Memorial Associates (Sturdy Memorial Foundation v. North Attleborough Assessors, 60 Mass. App. Ct. 573).

    For Fiscal Years 1996-1997, the ATB upheld the Assessors' denial of the exemption application. Sturdy appealed this decision to the Appeals Court which remanded the case to the ATB to make additional factual findings. The ATB again upheld the denial of the exemption on the grounds that the clinic was not operated as charity but rather existed primarily for the benefit of its physician members and not the community at large. Sturdy then appealed that second ATB decision to the Appeals Court which then upheld the ATB.

    In another decision, dealing with 1998-2000, the ATB also denied the exemption and Sturdy again appealed. In deciding the Foundation's appeal of the ATB decision for these three years, the Appeals Court found that the compensation package, particularly the payment of bonuses, for physicians at the clinic amounted to a distribution of income to these private physicians and was not an expenditure to further the charitable purposes of the clinic. In addition, the Appeals Court upheld the ATB's finding that the group medical practice was not operated as a public charity, for reasons such as its limited clientele, even though the Foundation and the clinic were undeniably organized as tax exempt entities.

    Back to the Board

    The 2003 Update characterized Peterson v. Boston Assessors as the "big ticket" case of the year, involving as it did the One Federal Street office tower assessed for up to $318 Million. For Fiscal Years 1997, 1998 and 2001 the ATB had upheld the assessed valuations while for Fiscal Years 1999 and 2000 the ATB ruled that there had been an overvaluation. Both the owner and the Assessors appealed to the Appeals Court which issued its decision in November 2004 (62 Mass. App. Ct. 428).

    There were five specific issues to be decided on appeal. First, the Appeals Court held that the ATB had reached the correct result when it declined to allow the Assessors' motion to exclude the testimony of the taxpayer's expert witness. Second, the Appeals Court found that there was substantial evidence to support the ATB's determination of operating expenses for the building. Third, the Appeals Court upheld the ATB's determination that the establishment of a "sinking fund" was the appropriate way to deal with the future need to refurbish the lobby of the building. Fourth, the Appeals Court found that the ATB was correct that a one percent reserve for replacements, and not the higher figure urged by the owner, was appropriate. On the final appellate issue, however, the Appeals Court concluded that there was no substantial evidence to support the ATB's finding that net "service income" should not be included in the building's revenue stream. "Service income" is income received by the owner for providing additional services requested by tenants, such as off-hours use of the premises and special cleaning and security services. Accordingly, the Appeals Court remanded the matter to the ATB for further evidence on the "service income" issue for Fiscal Years 1999 and 2000. As a result, the Assessors prevailed in the Appeals Court for three of the five years; the abatements which the ATB granted for the other two years could be at risk in the further proceedings. Stay tuned.

    Martha's Vineyard and Beyond

    In Martha's Vineyard Land Bank Commission v. West Tisbury Assessors, 62 Mass. App. Ct. 25, the Appeals Court dealt with a statute of limited impact to Martha's Vineyard but applied rules of statutory interpretation which have broader importance. The case dealt with the enabling legislation for the Commission (Chapter 736 of the Acts of 1985, as amended by Chapter 673, Section 9 of the Acts of 1987). The special acts provide an exemption from taxation for property owned by the Commission "used solely...in furtherance of its public purposes" and that the Commission "shall not be required to pay any tax, excise or assessment to or for the commonwealth or any of its political subdivisions."

    On January 1, 2001, the land in question was owned by a private party who made the first two preliminary tax payments for Fiscal Year 2002 before selling the property to the Commission on October 30, 2001. The Commission declined to pay the third and fourth quarter bills on the grounds that the exemption in the enabling act was applicable. The Appellate Tax Board (without explanatory findings) had upheld the denial of relief by the Assessors. The Appeals Court overturned the ATB and found that the enabling legislation contained "plain, clear and unambiguous language that puts an end to the controversy."

    In the first place, the Appeals Court found, property used in furtherance of the Commission's public purpose was entitled to a general exemption and there was no dispute that the property in question was used for such purposes after it was acquired by the Commission. Furthermore, the Appeals Court pointed to additional language in the statute which exempted the Commission from paying any state or local tax on its property even it was used for some non-public purpose. The Assessors had erroneously relied on language in similar enabling legislation for the Nantucket Island Land Bank which held that real estate taxes were to be prorated for the period of time when the real estate was actually owned by the exempt entity. This theory was rejected out of hand by the Appeals Court which found that the Commission was "protected by the sword, shield and buckler" of several clear provisions in its enabling act and therefore entitled to an abatement.

    "Unpublished" Decisions

    In four "unpublished" decisions the Appeals Court upheld the Appellate Tax Board decisions in the following cases previously reported in the Update.

    Acushnet River Safe Boating Club, Inc. v. Fairhaven Assessors (denial of tax exemption where taxpayer failed to show it occupied the property in furtherance of a charitable purpose). Wings Neck Conservation Foundation, Inc. v. Bourne Assessors (denial of tax exemption where ATB concluded that the Foundation's property principally benefited a limited class of people and, only incidentally, the general public). Mann v. Plymouth Assessors (denial of abatement in cranberry bog valuation case where the taxpayer failed to carry his burden of proof). Willows at Westborough v.Westborough Assessors (in valuing a continuing care retirement community, it was appropriate for the ATB to include interest on refundable entrance fees in the facility's income stream.)

    Telephone and Telegraph Company

    Just a few days into 2005, the Supreme Judicial Court issued its long-awaited decision in RCN -- BECOM, LLC v. Commissioner of Revenue, 443 Mass. 198. RCN not only provided telephone services in the manner of a "classic telephone and telegraph" company but also cable television and internet services, giving RCN the "bundled service provider" label. RCN wanted the Commissioner of Revenue to centrally value its property rather than have to deal with local assessors in each community. The COR declined to perform the central valuation because he didn't feel RCN was a "telephone and telegraph company" within the meaning of General Laws Chapter 59, Section 39 because of its extracurricular cable and Internet services. The ATB disagreed and concluded that it was enough that RCN was substantially involved in the telephone business, notwithstanding its cable television and Internet activities. The SJC agreed with the "extensive, careful and measured" supporting findings in the ATB decision. As for the valuation of RCN's property, both the ATB and SJC agreed that any of RCN's "statutory property" (machinery, poles, wires and underground conduits and pipes) was entitled to central valuation if it was used to deliver telephone service even if that same property also supported cable television or Internet service. The remaining dedicated cable and Internet property is to be valued locally. This conclusion couldn't have pleased the COR or the Newton Assessors (who had intervened in the case) since they argued that if RCN was in fact a telephone company then only the property that exclusively supports telephone service should be centrally valued. Whenever a door closes, however, a window opens. The Appeals Court also affirmed that because of RCN's limited liability company form, it was not entitled to an exemption of a good portion of its property under General Laws Chapter 59, Section 5, Clause 16th. The SJC agreed with the ATB that an LLC does not a corporation make for purposes of this statute.

    2004 CAPITALIZATION RATE SURVEY
    CASETYPE OF PROPERTYYEARATB % RATE
    Khan/Zarsky v. BrooklinePsychiatric Hospital2000 and 200210.00
    Mason v. WinchesterApartment Complex2000 and 20039



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