Olympia & York State Street Co. v. Board of Assessors of Boston

• Decision Date: 16 October 1998
• Citation: 700 N.E.2d 533,428 Mass. 236
• Parties: OLYMPIA & YORK STATE STREET COMPANY v. BOARD OF ASSESSORS OF BOSTON.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 533

700 N.E.2d 533

428 Mass. 236

OLYMPIA & YORK STATE STREET COMPANY v. BOARD OF ASSESSORS OF BOSTON.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Sept. 2, 1998.

Decided Oct. 16, 1998.

John C. Plotkin, Boston (Seni M. Adio, with him), for plaintiff.

Philip Burling, Boston (Barbara A. Fiacco, with him), for defendant.

Before WILKINS, C.J., and ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL and IRELAND, JJ.

GREANEY, Justice.

We granted an application for direct appellate review to consider cross appeals brought by Olympia & York State Street Company (taxpayer), ¹ and the board of assessors of Boston (assessors) from a decision by the Appellate Tax Board (board) concerning the fair cash value of the taxpayer's office tower located at 53 State Street, a building which is commonly referred to as "Exchange Place" (property). At issue was the valuation of the property for fiscal years 1992 through 1996. The board found that the assessors had overvalued the property in fiscal years 1992 through 1995 and granted abatements for those years. The board also decided that the property had not been overvalued for fiscal year 1996.

The taxpayer contends that the board erred by (1) basing its decision on the existence of a "Class A+" office tower "sub-market" in Boston; (2) making findings concerning vacancy rate, credit loss, capitalization of income rate, tenant improvements, and leasing commissions which were not based on substantial evidence; and (3) refusing to admit responses made under G.L. c. 59, §§ 38D and 61A, by other building owners which the taxpayer claims were relevant to the fair cash value of its property and would have disclosed the absence of any "Class A+" sub-market of office towers. In their appeal, the assessors assert that the board erred by (1) denying a motion to dismiss the taxpayer's appeals because the taxpayer failed to comply with an order to produce a representative of the owner who could testify knowledgeably about the fair cash value placed on the property during the fiscal years in issue; and (2) concluding that the assessors could not obtain, or admit in evidence, the taxpayer's estimates of value of its leased-fee interest in the property. We discern no error by the board on any of the claims just described. Accordingly, we affirm the board's decision.

The board held sixteen days of hearings, and, in addition to the testimony of the witnesses, considered 177 exhibits. The board's decision contained findings of fact and a report pursuant to G.L. c. 58A, § 13. The board found the fair cash value of the fee simple estate of the property to be $168,000,000 for fiscal year 1992, $156,000,000 for fiscal year 1993, $157,000,000 for fiscal year 1994, and $169,000,000 for fiscal year 1995, and based on overvaluations ordered appropriate abatement of the real estate taxes for each of those years. ² The board concluded that the assessed value of $184,417,000 for fiscal year 1996 was consistent with the fair cash value of the property.

The property is located in the heart of Boston's central business district, on a lot containing approximately 50,000 square feet of land. The property is bounded on the north by State Street, on the east by Kilby Street, on the south by Exchange Place, and on the west by Congress Street. The property consists of a forty-story office tower constructed in 1984 connected by means of a seven-story atrium to the eleven-story Exchange Building, a fully rehabilitated structure built in 1889. The Exchange Building is designated as a landmark by the Boston Landmarks Commission as the site of the original Boston Stock Exchange. Exchange Place has 1,120,162 square feet of rentable floor area, including first floor and basement level retail and office spaces. The property also has three levels of parking with a total of 129 possible parking spaces.

Both parties introduced expert evidence of the fair cash value of the property. The taxpayer presented two real estate appraisers, Charles Kenny and Martin J. Coleman, and the assessors introduced the testimony of their real estate appraiser, Charles B. Akerson. All these experts agreed that the direct capitalization of income approach was the best method by which to determine the property's fair cash value. The taxpayer's experts considered, but declined to apply, the sales approach and the cost approach, asserting that there was insufficient data to support the sales approach, and that the cost approach was inappropriate, unreliable, and not used by market participants. The assessors' expert considered and applied these approaches, but did not utilize the derived numbers in his final opinion of fair cash value.

The board agreed that the direct capitalization of income approach was the best method to apply in the appraisal of the property. The direct capitalization of income method analyzes the property's capacity to generate income over a one-year period and converts the capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved. In reaching a fair cash value for the property by means of the direct capitalization of income method, appraisers analyze competitive facilities and determine market rents, market vacancy and credit loss rates, market expenses, market capitalization rates, and general market conditions.

The experts reached different conclusions regarding some of the factors. In particular, the assessors' expert, Akerson, concluded that in deriving the appropriate market figures, the property should be compared to an exclusive class of office towers, which he called "super-class" or "Class A+" buildings, based in part on the property's age, high occupancy rates, and rental rate performance. The taxpayer's experts, Coleman and Kenny, concluded that the property should be compared to a broader market of Boston properties. This fundamental difference in the defined relevant market, as well as differing interpretations as to the actions of the market, caused the appraisers to derive differing numbers for the various components of the direct capitalization of income approach.

The board concurred with the appraisers that the highest and best use of the property was its existing use as an office building, with limited retail uses and a parking facility. The board also concurred with the appraisers that the period in question, the early 1990's, was one of "the most depressed economic periods in recent memory." The board agreed with Kenny's division of the property into three tiers for the purpose of determining fair market rents, and applied fair market rental rates within the range supplied by all three appraisers. The board adopted Kenny's figures for parking and tenant electricity income, but used Coleman's figures for miscellaneous income, which were based on actual charges to lessees for additional requested services. The board agreed with Akerson's characterization of Exchange Place as a "Class A+" building, based on its location, age, construction quality, design, historical significance, tenant finish, superior tenant financial rating, lease terms, and rents. Accordingly, the board adopted Akerson's vacancy and credit loss rates, which were lower than the figures used by the taxpayer's appraisers, because they were based on the rates experienced by the "Class A+" buildings rather than the more depressed larger market. The board adopted operating expenses and other costs based primarily on those actually incurred at the property, supported by figures for the other buildings in the central business district as reported by Coleman. The tenant improvement allowance figure used by the board was based on Akerson's figure, actual figures, and the five-year average tenant improvement estimate reported by the Building Owners and Managers Association (BOMA). Similarly, the leasing commission deduction figure adopted by the board was based on actual figures and the five-year average reported by BOMA. Finally, the board adopted capitalization rates most consistent with those presented by Akerson, which focus on the lower risk associated with ownership of a highly desirable building in an excellent location.

1. The core of the taxpayer's appeal is that the board erred by finding and concluding that a "Class A+" office tower sub-market existed in Boston. The taxpayer asserts that this aspect of the board's decision "runs afoul of the two cardinal principles long established by this Court," namely, the finding of the existence of a "Class A+" office tower sub-market is not supported by substantial evidence, because the assessors' expert's (Akerson's) "sub-market [conclusion] was not based upon first hand knowledge and has no independent support in the record in this case." We reject these contentions.

We inquire whether, as matter of law, the evidence is sufficient to support the board's findings. See Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39, 43, 686 N.E.2d 436 (1997), cert. denied, --- U.S. ----, 118 S.Ct. 1386, 140 L.Ed.2d 646 (1998). Our review of the sufficiency of the evidence is limited to "whether a contrary conclusion is not merely a possible but a necessary inference from the findings." Id., quoting Commissioner of Revenue v. Houghton Mifflin Co., 423 Mass. 42, 43, 666 N.E.2d 491 (1996).

The taxpayer claims that Akerson lacked the requisite personal familiarity with the market to substantiate his designation of the so-called "A+" sub-market. In addition to having personally viewed many of the comparison properties, Akerson, with nearly forty years of experience as an appraiser, and having performed appraisals and undertaken review appraisals of office towers in Boston, has both familiarity with the market and a trustworthy source of market data, namely, the staff at the firm with which he is associated. As noted in General Elec. Co. v. Assessors of Lynn, 393 Mass. 591, 601, 472 N.E.2d 1329 (1984...