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Appellate Tax Board Update
A periodic report for property owners, appraisers, assessors and attorneys
January 2006
| THE YEAR 2005 IN REVIEW During 2005, the Appellate Tax Board handed down 35 full written decisions and of these 18 involved real estate and one involved automobile excise taxes. Only about a half dozen cases involved single family homes, a break from recent history, but there was once again an unsuccessful attempt at a charitable exemption, a dream house at the beach and a major office complex with environmental contamination. AUTO EXCISE TAX An attempt by an auto leasing corporation to escape local excise taxes was rebuffed by the Appellate Tax Board in Shaw Auto Leasing, Inc. v. Rockland Assessors, (January 31). At issue in the case were four vehicles owned by Shaw, a private for-profit corporation, which leased the vehicles to North River Collaborative. North River was formed by a number of school committees pursuant to Chapter 40, Section 4E which allows pooling of resources for educational programs and services. North River was tax exempt for federal income tax purposes pursuant to Section 501(c)(3) of the Internal Revenue Code. Under Section 4E an educational collaborative is deemed to be a "public entity." Shaw sought an excise tax abatement on the grounds that the vehicles were leased to a tax-exempt public entity. The ATB agreed with the assessors that no exemption was available. First, the ATB found that North River was not a charitable corporation or trust and therefore could not be a charitable organization as that term is defined in Chapter 59, Section 5, Clause Third, the basic charitable exemption law. Second, the ATB found that the vehicles were not owned by and registered to a political subdivision but were in fact owned by Shaw, a private for-profit corporation.KEEP TRYING In Fiscal Year 2001 Russell Seelig obtained a decision from the ATB that his single family home in Springfield had a fair cash value of $135,000. Undaunted, the Springfield Assessors jacked up the valuation to $175,000 in Fiscal Year 2002 and then $195,500 in Fiscal Year 2003. Justifiably unhappy with this treatment, Mr. Seelig appealed to the ATB and the result is found in Seelig v. Springfield Assessors (April 8).The 2001 ATB decision triggered Chapter 58A, Section 12A which shifts the burden to the assessors to show that the assessed value is warranted in the two fiscal years following the year of the ATB decision. In their attempt to carry this burden, the assessors used an expert who admitted he had not inspected any of the properties he considered comparable; even this witness found that the property was worth moderately less than its assessment in each year. For his part, Mr. Seelig first picked apart the assessors' property record card for his home. The assessors assigned a construction grade of "A" to his house even though Mr. Seelig showed, to the satisfaction of the ATB, that its construction grade more closely resembled a "C." This difference in grade would result in a reduction in value of $37,000 for 2002 and $46,800 for 2003. Although the ATB credited the assessors' expert with showing that property values in Springfield were in fact increasing, that trend did not support the drastic increases in value imposed by the assessors on the Seelig house. As a result, the ATB reduced the assessed value from $175,000 to $143,100 for 2002 and from $195,500 to $152,000 for 2003. RICH FOLKS In 2005 the Appellate Tax Board almost gleefully ruled on the valuation of a glorious dream house, crammed full of amenities but, in the eyes of the owners (as is so often the case), assessed far above its fair cash value. The 2005 installment of this familiar story was entitled Warren and Tiina Smith vs. Marion Assessors (April 25). Marion is located on Buzzards Bay and, in the words of the ATB, is a "desirable community on the South coast of Massachusetts" where the Smiths' spread was apparently located on one of the primest spots in town. The house sat on a 3.45 acre parcel with a guest house and lap pool to the rear. The house had seven zones for air conditioning and all 22 rooms had a view of the water. There were 10 full baths and a half bath; all but two of the bedrooms had their own bath. The total living area was about 13,404 square feet. The Smiths purchased the property in 1997 for about $1.6 Million and then spent about $5 Million on expansion and renovation. The assessed value for Fiscal Year 2003 was just a shade above $5 Million.For their part, the Smiths called an expert witness who used what he felt were five comparable sales to arrive at a fair market value of $3.2 Million. The ATB took this witness to task on several fronts. First, he didn't take into account the fact that the Smiths' house had a boat dock although two of his "comparables" did not. Similarly, the expert made no adjustment for the Smiths' pool and the lack of a pool at his comparables. The expert acknowledged that he failed to include the 1,700 square foot living area in the guest house. Furthermore, the range of adjustments for the comparables ranged from negative 75% to negative 25%. The extent of these adjustments, in the eyes of the ATB, "negated any finding of comparability." Given the $1.6 Million purchase price in 2003 and $5 Million in improvements, the ATB all but said that the $5 Million assessed value was a pretty good deal as it entered a finding for the assessors. STILL LOADED The 2001 Update referred to General Laws Chapter 59, Section 38D as a "weapon in the closet" which assessors ought not to forget to lock and load. Two cases decided late in the year pointed out that the weapon can still do some damage. Section 38D allows assessors to require property owners to provide, under penalties of perjury, information which is "reasonably required" to determine fair cash value. A property owner ignores this request at his peril since failure to reply can result in forfeiture of any appellate rights. In 2005, two property owners paid the ultimate price for their failure to respond. The cases are Forty-Four -- 46 Winter Street, LLC and Herman Banquer Trust v. Boston Assessors (both decided on December 9). In both cases the assessors sent out information requests which were ignored by the property owners who nevertheless went ahead and filed abatement applications. After denials by the assessors, the property owners appealed to the ATB. The property owners did not deny the lack of a response but raised some super-technical objections to the form which the assessors used to seek the information. In allowing the assessors' motion to dismiss, the ATB first found that the information sought by the assessors was in fact reasonably required to help them determine fair cash value. In addition, the ATB said the assessors were prejudiced in the valuation process by the lack of information. Section 38D left the ATB with no alternative but to send the owners home empty-handed. STIGMATIZED AGAIN The impact of highly publicized contamination on valuation of real estate was again the focus of an ATB decision in 2005. The case was Wayland Business Center Holdings, LLC v. Wayland Assessors (September 26). The property was a 56.7 acre parcel of land improved with a two-story main building with about 400,000 square of space used as an office/research and development facility. From about the mid-1950's to about 1996 the property was occupied by Raytheon Company as a research, development and testing facility. During Raytheon's occupancy, there were various oil and chemical spills and discharges which resulted in environmental assessments by the Department of Environmental Protection which classified the property as a Tier 1B site. This status brought with it requirements for site assessment, remedial response action and public involvement under DEP supervision. Ultimately, in June 2000, the DEP imposed on the site the unenviable status of a "Public Involvement Plan" which required Raytheon to publicize all investigative and remedial actions on the property. In short, the awareness of contamination at the property was, in the ATB's words, "wide-spread and notorious." Although there were a number of issues involved in the ATB decision, of particular interest was the need to deal with the "stigma" which the contamination imposed on the property. There was testimony at the hearing that this reputation had an adverse impact on the ability of the project to attract tenants, to the point that there were no new tenants during 2002 and 2003 "despite professional and competent marketing." The Appellant's expert used the income approach to value and selected an overall capitalization rate of 10.5%. He added an additional 1% as an "environmental risk factor" to reflect the stigma. The expert then used conventional methodology to arrive at a value of about $26 Million for Fiscal Year 2003. He then took the unusual step of making several "below-the-line" adjustments to reflect the extraordinary actual vacancy rates of 42% in 2003 and 75% in 2004 (since he had only used a 20% vacancy rate in his initial calculations). These adjustments reduced his estimated value to $23.5 Million for Fiscal Year 2003 and about $13.8 Million for 2004. The assessors' expert relied primarily on the sales comparison approach and made no adjustment for environmental stigma although ultimately even his values were $8 Million and $12 Million below the assessed values for the two years. The ATB sided with the owner's expert but used 10% rather than the expert's 10.5% as an initial capitalization rate. The ATB also agreed that an additional 1% to reflect the stigma was appropriate. At the same time, however, the ATB rejected the expert's "below-the-line" deductions. Such deductions were not appropriate, the ATB concluded, because they smacked of a leased fee analysis and not a fee simple valuation. At the end of the day, the ATB concluded the property was worth about $26.9 Million in 2003 and $20.5 Million in 2004, contrasted with the assessed value of about $39 Million in each year. ASSESSMENTS NOT SALES A decent spread in Brookline, valued at about $3.3 Million (before a residential exemption) with 10 rooms, including six bedrooms, provided the setting for a bad day at the office for the assessors in Mason v. Brookline Assessors (May 4). The owners had no comparable sales to offer but they could show two houses in the immediate neighborhood (including one right across the street) which were strikingly similar to their own house but assessed for about $700,000 less. The assessors came forward with a number of sales but the two that were deemed most comparable sold 6 and 14 months after the January 1, 2002 assessment date. In the absence of comparable sales to contradict the Appellant's evidence of comparable assessments, in an unusual turn, the ATB (like the Appellant) also relied on assessments "as the most persuasive indicia of value." The ATB also noted that the two nearby comparable assessments did have smaller lot sizes than the Appellant's but both had considerably more living area, making the disparity in assessment with the Appellant's home particularly troublesome. At the same time, the ATB found that the assessors had failed to establish comparability between the sales they relied on and the Appellant's home. The ATB also found that the assessors came up short in accounting for and analyzing the differences between the assessors' sales and the Appellant's home and the effects of the sales on the valuation of the Appellant's home. After it was all over, the ATB held that the fair cash value of the property was $2.9 Million, about $400,000 less than its assessment.REMOVE THE NON-REALTY It's always a challenge, when using the income approach to value real estate used in a business, to remove from the calculations those items which do not relate to valuation of the real estate itself. A laboratory example of this process was found in Sanmar, Inc. v. North Adams Assessors (March 15) which involved valuation of a hotel. The point of the exercise is to make sure assessors only assess the real estate and not what is sometimes referred to as the "business component" or "entrepreneurial value" of the operation. In Sanmar, the owner's expert first extracted management and franchise fees (about 10% of the hotel's gross operating income) since these reflected the "income attributable to the business component of the hotel enterprise." The owner's expert next made a downward adjustment in operating income to account for amounts attributable to the hotel's furniture, fixtures and equipment, i.e. its personal property. The expert opined that a reserve of 3.5% of effective gross income was appropriate to allow for replacement of the FF&E. A further deduction from net operating income was necessary, the expert said, to take into account a return on the capital which the owner had invested in the FF&E. After arriving at a value for the FF&E, the owner concluded that a 13.5% return on this investment should be deducted from net operating income. In a final adjustment, the expert determined that 1.5% of effective gross income should be deducted to recognize a reserve for replacement of building components, such as HVAC and roofing, which wear out more quickly than the building itself. On the other hand, the only adjustment suggested by the assessors was an overall 2% downward adjustment to gross income. The ATB agreed in all respects with the methodology used by the owner's expert and concluded that a fair cash value of $2.9 Million was appropriate for both 2003 and 2004 as contrasted with assessed values of $4.4 Million and $4.2 Million.next column | BACK TO SCHOOL The 2005 ATB decisions featured only one attempt, unsuccessful at that, for a charitable exemption from real estate taxes. Last year's effort is reported in Lasell Village v. Newton Assessors (March 9). Lasell Village is a retirement community comprised of 14 buildings containing 162 independent living units and a 44-bed skilled nursing facility, all located on 13.24 acres of land owned by Lasell College. The attempt at a charitable exemption by Lasell Village was novel and creative. Apparently conceding that only the wealthy could afford to live there (the entrance fees ranged from $197,000 to $790,000 and monthly service fees from $1,773 to $4,751), Lasell Village conjured up an "educational purpose" by imposing a requirement that each resident get 450 hours of "education" each year. The faculty included, to use the ATB's description, "itinerant speakers of unknown credentials" and the courses included such challenges as "walking", "reading newspapers" and "watching television news." The rules of the Village provided that intentional failure to participate in the course work could lead to expulsion from the community although, as of the time of the ATB hearing, no one had failed. The ATB, with some literary flourishes of its own, upheld the assessors' denial of the exemption. This was a high stakes case since the Village was assessed for more than $40 Million and paid real estate taxes in excess of $400,000. The matter is now on appeal to the Appeals Court. ARM'S LENGTH In two cases, the nature of an arm's length sale was an issue. The concept arose in an unusual way in American House, LLC v. Greenfield Assessors (March 4) which involved the last department store in downtown Greenfield. At one point the property was held in a trust of which Shawmut Bank (later Fleet Bank) was trustee. In 2000 the property was sold to American House, a limited liability company, in which Fleet was a member, i.e. part owner. Thus Fleet was on both sides of the transaction. The sale price was $425,000 while the assessed valuation, after a partial abatement, was $753,300. The ATB found that Fleet, as trustee-seller, was motivated in the sale "to avoid a prolonged delay" in the conveyance. Keys to the ATB's decision were the bank's involvement on both sides of the sale and lack of sufficient evidence "that the property was exposed to the market for a sufficient period to maximize the number of potential buyers." The ATB therefore disregarded the $425,000 sale price. The arm's length concept arose in a more conventional way in Braintree Real Estate Management Co. v. Braintree Assessors (August 18). That case involved an office park which was acquired by a bank through foreclosure and which was included among the bank's assets as "other real estate owned" (a/k/a "OREO" property). An officer testified that the bank was eager to dispose of the property and ultimately sold it for $1 Million in March 2001. This sale occurred shortly after the January 1 Fiscal Year 2002 assessment date when it was valued at about $2.8 Million. The ATB offered a number of reasons for upholding the assessed value (including some blatant deficiencies in the testimony of the owner's expert) but disregarded the sale price by the bank. In the eyes of the ATB, the bank acted more like an owner "under compulsion to rid itself of unwanted properties" rather than as a seller which wanted to maximize the sale price. The case is now pending before the Appeals Court. BIG TICKET The most valuable piece of real estate involved in a 2005 decision was the Liberty Tree Mall in Danvers, the subject of Mayflower Liberty Tree, LLC v. Danvers Assessors (June 13). The assessors valued the property for Fiscal Year 2001 at about $64.2 Million. The ATB's scholarly decision included the usual review of physical information, tenant mix, income and expenses. The ATB essentially adopted the methodology used by the owner's expert. A couple facets of this expert's report and their treatment by the ATB serve to highlight the arcane world of shopping mall valuation. The ATB agreed with the expert not to include a modest amount (less than 1% of total revenues) of "overage rent" in the income stream. Overage rent, which kicks in when a tenant achieves certain sales volume, is volatile and highly susceptible to changing economic conditions. The ATB agreed that it therefore did not warrant consideration in valuation of the property. On the other hand, the expert did include in income what he called "specialty leasing" revenue which represented income generated from leasing pushcart space and temporarily leasing conventional space on a month-to-month basis. He also included "miscellaneous revenue" from automated teller machines. The ATB agreed with inclusion of these income categories.The ATB did not agree with the owner's expert's inclusion of two expense categories: "common area reserves" and "non-subject reserves." The ATB felt that the general reserves which the witness had established already accounted for most common area expenses, thereby obviating the need for a specific common area reserve. The expert suggested a modest $25,000 for "non-subject reserves" which were, according to the ATB, "for the purported cost of dealing with properties that are not part of the subject property but are nonetheless neighbors and part of the mall." On its face, this concept is a challenge to comprehend and the ATB chose not to recognize it. The ATB also noted the expert's failure to cite "any precedent in the appraisal literature or provide sufficient logical or factual support" for this expense category. As for the big picture, the ATB concluded that the property was worth about $58 Million, about $10 Million more than the owner's expert's proposed value but still about $6 Million less than the assessment. THREE EASY PIECES There were three separately-assessed parcels involved in 472 Main Street Realty Trust v. Wakefield Assessors (March 28). The assessors, obviously, argued that the parcels should be individually valued. The owner claimed they were "interconnected and interdependent." The ATB agreed with the assessors on that question and in the process, almost as a footnote, set aside the owner's back-door attempt at unification. The owner had filed three separate abatement applications but only one petition (covering all three parcels) to the ATB. Chapter 58A, Sections 7 and 7A require a separate petition for each parcel of real estate "except were the Board shall specifically permit otherwise." The ATB did in fact allow the owner to go forward with a single petition. The owner saw this favorable exercise of discretion on the ATB's part as the basis for an argument that by, allowing the single petition, the ATB was really treating the three parcels as one. "Joinder of parcels on a single petition has no impact on the issue of valuation," the ATB opined. The case is now pending before the Appeals Court. IN THE PIPELINE A literal reading of General Laws Chapter 59, Section 5, Clause Third led to the dismissal in 2005 of two cases in which nursing homes sought exemptions from real estate tax. The cases are CFM Buckley/North, LLC v. Greenfield Assessors and Longmeadow of Taunton, LLC v. Taunton Assessors. In both cases the property was owned by Delaware limited liability companies in which the sole member was a non-profit corporation which was tax-exempt under Section 501(c)(3) of the Internal Revenue Code. Clause Third, the statutory foundation for the charitable exemption, states that the term "charitable organization" includes "a literary, charitable or scientific institution or temperance society incorporated...." The fact that the owners in both cases were limited liability companies, the ATB held, deprived them of the right to the exemption because they were not "incorporated." Thus far, the ATB has only issued its usual one-sentence decision allowing the motions to dismiss in each case. The owner in both cases has requested a full "findings of fact and report" which has not yet been issued but which will have a complete analysis of the ATB's reasoning. [In the interest of full disclosure, the editors of the Update represented the successful assessors in Greenfield and Taunton in these two cases.]ON HIGHER AUTHORITY In 2005, the Massachusetts Appeals Court upheld decisions of the Appellate Tax Board in the following cases previously reported in the Update: Mason v. Board of Assessors of Winchester; Northshore Mall, LTD v. Peabody Assessors; and Salem and Beverly Water Supply Board v. Danvers Assessors. The latter case was the only one that warranted a full Appeals Court decision. The higher court agreed with the ATB that it was proper for the assessors to apply the Class 3 "commercial" classification to land used for a joint water supply system. STILL RINGING In the wake of RCN -- BECO COMM, LLC v. Commissioner of Revenue, 443 Mass. 198 (2005) (reported in last year's Update), the Appellate Tax Board has before it a group of consolidated cases involving the taxpayer Bell Atlantic Mobile of Massachusetts Corporation, Ltd. d/b/a Verizon Wireless or "BAMM." The litigation has been bifurcated into non-valuation issues which have been briefed and valuation issues which will be reached if necessary. The first non-valuation issue is a technical point that has sprung directly from the RCN ruling that an entity must be a corporation to enjoy an exemption from local taxation. The question is, did BAMM convert from an LLC to a corporation in time to qualify for exemption when it became a corporation after the January 1 valuation date, but before the due date of the return? The next non-valuation question is whether a wireless/cellular company can qualify as a "telephone and telegraph company." Hopefully, 2006 will see the answers to these questions. | 2005 CAPITALIZATION RATE SURVEY | | | CASE | TYPE OF PROPERTY | YEAR | ATB % RATE | | | OCP Ltd Partnership v. Framingham | Office Building | 2003-04 | 9.75% | | | Mayflower v. Danvers | Shopping Mall | 2001 | 9.5 | | | Sanmar v. No. Adams | Hotel | 2003-04 | 9.5 | | | Wayland Business Center v. Wayland | Office Building | 2003-04 | 10¹ | | | ¹Plus 1% for environmental "stigma" |
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Appellate Tax Board Updates:2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997
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