Pepsi-Cola Bottling Co. v. Board of Assessors of Boston

• Decision Date: 29 April 1986
• Docket Number: PEPSI-COLA
• Citation: 491 N.E.2d 1071,397 Mass. 447
• Parties: BOTTLING COMPANY v. BOARD OF ASSESSORS OF BOSTON.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1071

491 N.E.2d 1071

397 Mass. 447

PEPSI-COLA BOTTLING COMPANY v. BOARD OF ASSESSORS OF BOSTON.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Jan. 6, 1986.

Decided April 29, 1986.

Nathan T. Wolk, Boston, for taxpayer.

Jan L. Rosker, Sp. Asst. Corp. Counsel (Marie T. Lee, Sp. Asst. Corp. Counsel, Boston, with her), for Bd. of Assessors of Boston.

Before HENNESSEY, C.J., and LIACOS, ABRAMS, LYNCH and O'CONNOR, JJ.

ABRAMS, Justice.

This is an appeal by Pepsi-Cola Bottling Company (company) which challenges a decision of the Appellate Tax Board (board) granting the company partial abatements of real estate taxes for fiscal years 1982, 1983, and 1984. On appeal, the company argues error in the use of the capitalization of income method of valuation rather than the 1983 actual sale price of the property, error in the use of the economic, not actual rent, and error in the use of actual expenses in determination of the net income to be capitalized. We affirm the decision of the board.

We summarize the facts as found by the board. The property in question is an industrially-zoned parcel of 89,330 square feet located in the Allston section of Boston on Storrow Drive and the Massachusetts Turnpike. There is a one-story masonry brick building on the property, consisting of 45,998 square feet, which was constructed in 1957. The building is used as a warehouse distribution center with offices. There is a substantial garage area within the building as well as truck loading and parking areas outside.

The company owned the property in 1957 and then sold it to the United States Steel and Carnegie Pension Fund (Fund) on November 29, 1957, with a lease-back arrangement. That arrangement provided for a twenty-five year lease with four five-year options. The annual rent was $66,082.63, or approximately $1.44 per square foot during the original term, decreasing to $28,941.30, or approximately sixty-three cents per square foot during the option periods. The company as lessee is responsible for the payment of all taxes and assessments, fire and liability insurance premiums, utility charges, ordinary repairs, and maintenance and structural repairs. The original term expired on December 1, 1982. At that time, the company exercised the first option. The property was sold on February 10, 1983, by the Fund in an arm's-length transaction to State Street Bank and Trust Company as trustee (bank) for $310,000.

The assessors valued the property at $385,000 for fiscal year 1982 and assessed a tax at the rate of $230.90 per $1,000 in the amount of $88,896.50. For fiscal year 1983 the property was valued at $1,150,000 and assessed a tax at the rate of $40.30 in the amount of $46,345. For fiscal year 1984, the valuation was $1,253,000, the rate was $32.54, and the tax was $40,788.89. The company timely filed applications for abatement during each of the three years. After each request for abatement was deemed denied by the assessors, the company appealed to the board. The board found the fair cash value of the property for each of the fiscal years in question to be $991,800, and granted partial abatements. ¹

1. The fair market value of the property. In its decision, the board gave little weight to the company's contention that the 1983 sale price of $310,000 was the fair market value of the property. The board reasoned that the sale price was affected adversely by an uneconomic lease. The board also rejected the comparable sales approach favored by the assessors' expert because all of the properties used as comparables differed materially from the subject property in one or more respects. ² Because of the unreliability of these other methods, ³ the board concluded that the capitalization of income approach was the appropriate method by which to value the property.

The company asserts that the recent arm's-length sale of the property is the "best indicator" of the fair market value in that it represents what a buyer has been willing to pay to a seller. See First Nat'l Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560-561, 265 N.E.2d 848 (1971); Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 63, 34 N.E.2d 623 (1941). It contends that the board erred in "ignoring" this "best" evidence of value. We do not agree.

The board is not required to adopt any particular method of valuation and "the rejection by the board of the evidence of [an actual sale] does not, by itself, constitute error." New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469, 420 N.E.2d 298 (1981). The board found that the sale price did not reflect the total value of the property due to the uneconomic lease. ⁴ Relying on Donovan v. Haverhill, 247 Mass. 69, 141 N.E. 564 (1923), the board ruled that it must value the property as though it were unencumbered by a lease because the length of the term and the annual rent were "highly unfavorable to the lessor." In Donovan, we said that "a deduction of the surrender value of a long term lease from the market value of the estate, ascertained by a sale of the land free of the lease, in many instances would seriously impair the taxable valuation of the estate considered as a whole." Donovan v. Haverhill, supra at 72, 141 N.E. 564.

The company seeks to distinguish Donovan because in Donovan there was no actual sale. That distinction is immaterial. Donovan focuses on the nature of what is taxed, not on the method of valuation, noting that the real estate tax is a "tax upon the whole land and not merely on the interest of the person taxed." Therefore, the assessment must be "on the entire estate and not upon any interest therein." Donovan v. Haverhill, supra at 71, 72, 141 N.E. 564.

In this case, the sale price admittedly reflected the value of the property encumbered by an uneconomic lease. The company did not "seek to demonstrate the objective reasonableness of the [sale price] by any other method. In these circumstances, the board had objectively adequate reasons for disregarding the opinion of value offered by the taxpayer as evidence 'substantially lacking in probative force' " (citations omitted). Foxboro Assocs. v. Assessors of Foxborough, 385 Mass. 679, 683, 433 N.E.2d 890 (1982), quoting New Boston Garden Corp. v. Assessors of Boston, supra, 383 Mass. at 468, 420 N.E.2d 298. We conclude that "the board was entitled to disregard such evidence and to accept the values generated under the capitalization of income valuation method as the best evidence of the fair cash value of the propert[y]." Assessors of Brookline v. Buehler, 396 Mass. 520, 531, 487 N.E.2d 493 (1986).

2. The capitalization of income method. The assessors' expert used a capitalization of income method to determine fair market value. The assessors' expert did not use actual rents but used comparable rentals. The board also determined that actual rents should not be used in computing a gross income figure. The company claims this conclusion by the board was erroneous. We do not agree.

In establishing an income stream, the board rejected the actual rents of either the original or option terms, concluding that "neither figure remotely approximates fair market rent" even considering the expenses for which the company was responsible under the lease. Instead, the board gave "substantial consideration" to two of the comparable rentals relied upon by the assessors' expert. The properties, located in Medford and Cambridge, leased respectively at $2.80 and $3 per square foot with the lessor assuming responsibility for fire insurance, structural repairs, and maintenance. The board, after making an upward adjustment for the location of the...