Digital 60 & 80 Merritt, LLC v. Bd. of Assessment Appeals of the Town of Trumbull

Decision Date05 April 2022
Docket NumberAC 44296
Citation211 Conn.App. 559,274 A.3d 952
Parties DIGITAL 60 & 80 MERRITT, LLC v. BOARD OF ASSESSMENT APPEALS OF the TOWN OF TRUMBULL et al.
CourtConnecticut Court of Appeals

Mario F. Coppola, Westport, with whom were Matthew L. Studer, Milford, and, on the brief, Gregory S. Kimmel, Westport, for the defendants (appellants).

Charles D. Ray, Hartford, with whom were Shawn S. Smith, Hartford, and, on the brief, Angela M. Healey, Hartford, for the plaintiff (appellee).

Alvord, Prescott and DiPentima, Js.

DiPENTIMA, J.

In this joint real estate tax appeal, the defendants, the Board of Assessment Appeals of the Town of Trumbull (board) and the town of Trumbull (town), appeal from the judgments of the trial court sustaining the appeals1 brought by the plaintiff, Digital 60 & 80 Merritt, LLC,2 and ordering the reduction of the defendants’ tax assessment levied against the plaintiff's property located at 60 Merritt Boulevard in Trumbull (property). On appeal, the defendants challenge the court's determination of the fair market value of the property, which they claim is based on certain clearly erroneous factual findings made by the court. Specifically, the defendants claim that the court erred in (1) failing to impute income to Suite 220 of the property, (2) valuing Suite 210 of the property at the suite's wholesale rate, (3) applying a capitalization rate of 8 percent, and (4) disregarding the plaintiff's internal valuations. We affirm the judgments of the trial court.

We begin by setting forth the following relevant facts, as found by the trial court, in addition to the relevant procedural history.3 The property includes five acres of land on which a building of approximately 200,000 square feet4 sits (building). The building is connected to a building on another property, located at 80 Merritt Boulevard in Trumbull, which is a separate tax parcel not subject to this appeal. The buildings share a common entrance, security station, and parking lot.

The property was originally the site of a printing company facility, developed in the late 1960s. NASDAQ Stock Market, Inc. (NASDAQ), bought the property in 1996, demolished the printing facility, and, in 1997, constructed the building, a corporate data center, on the site. NASDAQ connected the building to the building located at 80 Merritt Boulevard, which it also owned at the time. In August, 2006, NASDAQ sold both the property and 80 Merritt Boulevard to Sentinel Properties-Trumbull, LLC (Sentinel). Sentinel then began converting the property into a multi-tenant data center facility. In 2010, the plaintiff bought both the property and 80 Merritt Boulevard. The plaintiff undertook an expansion of the property, constructing a 70,000 square foot addition to the building, which was completed in late 2012 or early 2013.

A "data center" is a building, or a portion thereof, that various organizations use to house and secure electronic data. Data is stored on computers, often stacked several shelves high in storage racks. These racks sit on a " ‘raised floor’ " that is constructed of perforated tile, sitting approximately three feet above the actual floor. Between the raised floor and the actual floor, power and cooling is installed to supply the computers. Cooling is a vital feature of a data center, as it prevents overheating, which can be caused by the large amount of power supplied to the computers. Another imperative characteristic of a data center is " ‘redundancy.’ " Redundancy refers to the inclusion of a second source of power, or backup power, to run the computers and cooling systems in the event that the primary source of power fails. In other words, components of the electrical system are duplicated to prevent the computers from going off-line.

A data center can be designed with individual rooms referred to as data suites. The data center located at the property is organized into individual data center suites. An individual data suite within a data center may have different occupancy arrangements, such as "wholesale" or "colocation." A wholesale suite is occupied by a single user that provides its own computers and racks, while the building owner supplies the space, raised floor, power, cooling, internet connectivity, security, and redundancy. A colocation suite, on the other hand, is occupied by multiple users. Colocation customers may provide their own computers and racks, or lease them from the building owner. Like wholesale customers, colocation customers rely on the building owner to supply the space, raised floor, power, cooling, internet connectivity, security, and redundancy.

Space within a data center can also be leased as "powered shell space," which is a data suite that is not fully "built out." Rather, the space is a data suite " ‘with exterior construction completed, available power and connectivity, but with the interior left as raw space to be finished by the customer.’ " The plaintiff has trademarked this type of space as "powered base building" (PBB) space. When a customer leases PBB space, it builds out the space to its own specifications while the building owner provides internet connectivity, power, security, and redundancy.

Sometime before 2010, the plaintiff privately approached Sentinel about purchasing its New England operations, despite the fact that none of Sentinel's properties was for sale on the open market at the time. In 2010, the plaintiff and Sentinel entered into a contract whereby the plaintiff agreed to pay Sentinel $375 million for two data center properties in Massachusetts in addition to both the property and 80 Merritt Boulevard in Trumbull. The sales price included the plaintiff's purchase of the leases at each property, the workforce in place, rights of expansion, a time limited noncompete agreement with Sentinel, and goodwill.

Although the plaintiff believed at the time of purchase that the property had full redundancy—the capacity to continue to provide power and cooling if there was a power outage impairing the primary source of power— an off-site explosion in early 2010 revealed that this belief was misguided. The redundancy system did not perform as anticipated, leaving the property without power for a short time. The plaintiff hired a third party to evaluate its electrical system, at which point the plaintiff learned that the system was undersized and was incapable of providing the amount of power that the plaintiff was contractually obligated to provide to existing customers and that was necessary to operate the facility safely. Following the third-party evaluation, the plaintiff learned that the system did not offer any redundancy. This posed a serious problem for the plaintiff. The lack of redundancy violated lease commitments and subjected the plaintiff to rent credits, reputational harm, and the possibility of lost customers.5 The plaintiff decided to replace the existing electrical system with its own system, referred to as a Turnkey Data system. The plaintiff originally estimated that the project would cost approximately $20,250,000.

The budget was subsequently increased to $33,521,442 to account for higher than expected engineering and construction costs and for costs paid to the utility company to complete off-site work.

In 2011, the plaintiff also decided to build a 70,000 square foot expansion to the property that would contain three data suites—one on the first floor (Suite 110) and two on the second floor (Suites 210 and 220). The original budget for the expansion was $27,687,500. An internal memorandum describing the expansion stated that the new space would " ‘be positioned to attract financial tenants from Fairfield County " and noted that a current tenant in the original building was considering moving into the expansion space once it was built and occupying two suites therein. The memorandum also provided that the plaintiff projected " ‘an average return on incremental cost of approximately 20 percent’ " from the expansion, which would " [help] increase the overall building returns which [would] be diluted by 18 percent because of the [electrical] remediation project. By building the expansion, [the plaintiff] [would] strive to increase the building [return on investment] over time to what it is today, roughly 10 percent.’ " The expansion budget was also later increased to $52,962,157. The electrical remediation and the building expansion were completed by late 2012 or early 2013.

The plaintiff projected that one data suite in the expansion space would be occupied in the first year after construction was completed and would produce additional annual net operating income of more than $2 million annually. The plaintiff also projected that two other data suites in the expansion would be occupied by the end of the second year after construction was completed, resulting in additional annual net operating income of $6 million beyond that received from the original building. As the trial court noted, "[t]hese rosy projections, however, proved unfounded." One tenant did move from the original building to the first suite in the expansion space, Suite 110, in 2013 but did not occupy two suites as the plaintiff had hoped. Additionally, the plaintiff was unable to find a wholesale tenant to lease the second built out suite in the expansion space, Suite 210. By mid-2013, the plaintiff began leasing Suite 210 to colocation tenants. The third data suite within the expansion space was never completely built out, having only unfinished concrete floors, walls, and a ceiling in place.

The court explained: "These disappointed expectations, including the need to rent the second expansion suite as colocation space to gain tenants, led [the plaintiff] to include [the] property in a 2014 review of ‘potentially underperforming’ properties in its portfolio." As part of this internal review, the plaintiff completed a " ‘dynamic valuation’ " of both the property and 80 Merritt...

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