FAWCETT STREET ASSOCIATES v. BOARD OF ASSESSORS OF
THE CITY OF CAMBRIDGE Docket Nos. F277493, F282971
June 30, 2008
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the appellee Board of Assessors of the City of Cambridge (“appellee” or “assessors”) to abate taxes on real estate located in the City of Cambridge, assessed under G.L. c. 59, §§ 11 and 38 to New Boston Seventy Limited Partnership for fiscal year 2005, and to the 70 Fawcett Nominee Trust for fiscal year 2006. These appeals are being prosecuted by Fawcett Street Associates (“appellant”) under G.L. c. 59, § 59 as a tenant paying rent and under an obligation to pay more than one-half of the taxes assessed.
Commissioner Mulhern heard these appeals, and was joined by Chairman Hammond and Commissioners Scharaffa, Egan, and Rose in the decisions for the appellant. These findings of fact and report are made at the request of the
appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
John M. Lynch, Esq. and Stephen W. DeCourcey, Esq., for the appellant.
Anthony M. Ambriano, Esq., for the appellee.
FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits offered at the hearing of these appeals, the Board made the following findings of fact. On January 1, 2004, New Boston Seventy Limited Partnership was the assessed owner of a parcel of real estate located at 86 Fawcett Street in the City of Cambridge (“the subject property”).1 On January 1, 2005, The 70 Fawcett Nominee Trust, Jerome Rappaport and Janet Aserkoff, Trustees, was the assessed owner of the subject property.2 On both January 1, 2004 and January 1, 2005, appellant was the lessee in possession of the subject property.
Five witnesses testified at the trial of these matters. The witnesses included Robert Reardon, Director of Assessment for the City of Cambridge; Lillian Orchard, the commercial review appraiser for the Cambridge Assessing Department; Mr. Michael Norris, controller for New Boston Fund, Inc.; Mr. Emmet Logue, President of Hunneman Appraisal & Consulting, Inc. and a licensed appraiser; and Mark Reenstierna, a licensed appraiser with T.H. Reenstierna LLC. Moreover, the Appellate Tax Board (the “Board”) took a view of the subject property to assist the fact-finding process.
The subject property consists of an irregularly shaped parcel of real estate 4.892 acres in size, improved with an office building and attached garage. The parcel is situated on the easterly side of Fawcett Street roughly 500 feet north of Concord Avenue, in the Alewife neighborhood of West Cambridge. The site is approximately ¼ mile west of Routes 2 and 16. The subject property has 775.97 feet of frontage on Fawcett Street, and is accessible through two curb cuts at opposite ends of the structure.
The building was originally constructed circa 1920 as a single-story industrial building with a small two-story office section at the southerly end. The building is steel-framed and has an exterior of masonry over concrete blocks. The foundation is a reinforced poured concrete slab situated on concrete pilings. The roof has a rubber membrane and is stone ballasted in part, and part polyvinyl chloride (PVC) on metal decking. The footprint of the building is relatively long and narrow, running in a southerly to northerly direction. The facility was converted to class-B office space circa 1980-81, with the addition of a partial mezzanine level.
The gross floor area of the building was 140,252 square feet in size, with a rentable area of 127,249 square feet. The property was of average construction. When the building was converted to office use, the former warehouse section became a parking garage of 43,594 square feet. There were a total of 247 parking spaces registered with the City: 114 asphalt paved surface parking spaces, and approximately 133 enclosed garage parking spaces. There was evidence that the actual number of parking spaces was 225. The parking ratio was 1.94 spaces per 1,000 square feet of rentable area if the 247 count is used, or 1.77 spaces per 1,000 square feet of rentable area if the 225 count is considered. The parking garage was in need of substantial improvements, including a reconfiguration of parking spaces, repairs to areas of the paved surface which were cracked, and possibly, demolition and rebuilding.
The office building includes a two-story office structure at the southerly end, and a converted single-story and mezzanine office section, which accounts for the bulk of the rentable area. The first floor includes approximately 230 offices and three two-story lobbies running east to west, each with its own entrance off Fawcett Street. The first floor also includes a 200-seat cafeteria with a commercial-grade kitchen and walk-in cooler/freezer. There is a tiered auditorium with seating for 174, which was designed to accommodate audio and visual presentations. Partitioned offices span the inside perimeter of the first floor. A fully built-out central core also has partitioned offices off a grid of exterior halls. There are three sets of men’s and women’s rest rooms on the first floor, one in each of the lobbies, and an additional lavatory next to the kitchen and elevator. The lobbies include minor partitioning for kitchenette units and security personnel.
The office mezzanine level is roughly 5 feet below the second floor of the two-story office section at the southerly end of the building. The mezzanine contains 25,183 square feet of rentable area. The mezzanine includes perimeter offices, interior core office partitioning, and cubicle areas. There are a total of approximately 109 offices. The mezzanine includes a board room with superior accoutrements. The mezzanine level has no rest rooms. The mezzanine has no elevator access except at the southerly end of the building in the two-story section. Windows at the mezzanine level are above eye-level, limiting views to the outside.
The second floor of the two-story section at the southerly end of the building includes perimeter offices and open cubicle areas, a fitness area, and men’s and women’s locker rooms with sink, toilet, and shower facilities. There is also a small lavatory on the second floor.
The interior flooring is primarily carpeted, with tile in sections of the lobbies, kitchen, and utility areas. The interior walls are painted sheetrock, with exposed brick or concrete block in the shipping/receiving area and the parking garage. The interior ceilings are painted sheetrock and suspended acoustical tile.
There is one hydraulic elevator which stops on the first floor, the mezzanine, and the second floor, in the two-story section at the southerly end of the building. Most of the mezzanine level must be accessed through stairways. The garage and cafeteria are located at opposite ends of the building. If the building were rented to more than one tenant, occupants would most likely have to exit the building to reach the garage or cafeteria, which would detract from the building’s desirability. Another detriment to the subject property is the 25-year-old roof, near the end of its economic life. There was evidence of roof leakage, with numerous water stains and crumbling ceiling tiles. Carpeting in the common areas was in good condition, but carpets in private office areas and the fitness center appeared worn. Some of the tiles in the lobby flooring and ceilings also needed replacement.
Ownership and Jurisdiction
In January 20, 1981, the owner, Bolt Beranek and Newman (“BBN”), entered into a 65-year ground lease with appellant Fawcett Street Associates, a partnership, for the subject property. After the conversion to office space was completed, appellant then subleased the subject property back to BBN. Genuity, BBN’s successor, occupied the subject property through the end of the initial sub-lease term on December 31, 2001. Genuity then exercised an option to stay on from January 1, 2002 through December 31, 2006. However, Genuity declared bankruptcy in November, 2002. Genuity conveyed the leased-fee interest, as encumbered by the ground lease, to Level 3 Communications, Inc. for the nominal sum of $10 in February, 2003. Genuity rejected the sub-lease in May, 2003 and ceased paying rent to Fawcett Street Associates.
On May 28, 2003, Level 3 Communications conveyed the leased-fee interest in the subject property to New Boston Seventy Limited Partnership for $1,500,000 (“New Boston Seventy”), which in turn conveyed the leased-fee interest to a related party, 70 Fawcett Nominee Trust (“Trust”) for $100. Fawcett Street Associates conveyed the leasehold interest in the property to New Boston Fund, Inc., also a related party, on December 14, 2005 for $6,500,000.
As of the time of trial, the premises had been unoccupied since Genuity vacated the subject property in May, 2003. Fawcett Street Associates brought the instant appeal as a tenant paying rent and under obligation to pay more than one-half of the property taxes.3
For both fiscal years at issue, the assessors valued the subject property at $18,899,000. For fiscal year 2005, a tax was imposed at the rate of $18.28 per thousand in the amount of $345,473.72. For fiscal year 2006, a tax was imposed at the rate of $17.86 per thousand in the amount of $337,536.14. Taxes were timely paid. Further jurisdictional information appears as follows:
The foregoing facts establish the Board’s jurisdiction over the instant appeals.
Appellant’s Valuation Evidence
The appellant subpoenaed Lillian Orchard of the Cambridge Assessing Department to appear and testify.4 Ms. Orchard prepared the mass appraisal valuation analysis on which the assessors relied in assessing the subject property. She indicated that the assessors had used the income approach to value, treating the subject as an office property. An average base rent of $34 per square foot was used for the Alewife area, which came to $22.93 per square foot for the subject property after adjustments. A flat vacancy rate of 5% was used across the City of Cambridge, for both years at issue. An expense ratio of 29-30% (of effective gross income after vacancy) was used for office properties, a percentage which was “relatively the same” citywide. This expense estimate was said to include an allowance for reserves. The office portion of the building was rated as being in “good” condition, while the garage was described as being in “average” condition.5
The appellant relied principally on the testimony of real estate appraiser Emmet Logue, whom the Board qualified as an expert witness, in an attempt to demonstrate that the subject property was overvalued. At the time of trial, Mr. Logue had approximately 37 years of experience as an appraiser. A Member and Senior Residential Appraiser of the Appraisal Institute, and also a Member of the Counselors of Real Estate, Mr. Logue was the President of Hunneman Appraisal and Consulting Company. Mr. Logue had experience in appraising several office towers in Boston, and had recently appraised two office buildings in the Alewife area of Cambridge. He testified that he had appraised a total of approximately thirty office properties in Cambridge on a fee-simple basis. His appraisal experience also encompassed valuation of industrial and research and development properties, particularly in the Cambridge real estate market, including the former Arthur D. Little building in the Alewife area.
Mr. Logue, assisted by Christopher Walsh, inspected the subject property on September 16, 2006. He conducted interior measurements, reviewed building plans, and consulted an architect with knowledge of the property in arriving at his estimate of the amount of rentable space in the subject property. They investigated the Alewife area of Cambridge including the “quadrangle” section where the subject property was located. They reviewed details of the assessments and zoning requirements, and a planning study conducted by the City of Cambridge. Deeds and leases pertaining to the subject property were considered, and the Alewife area was studied carefully to gather information on comparable rentals and availability of office space. Spaulding and Slye (now Jones, Lang, LaSalle), which had previously managed the subject building, was consulted, as well as the owners of the leasehold interest.
Mr. Logue deemed the subject property to be between Classes B and C (or the lower end of class B) as office space, given that the building was converted from an original industrial use and needs improvements. Mr. Logue determined that the highest and best use of the subject property was continuation of the present use as office space. He opined that, with capital improvements, the subject property would be competitive with other office use properties in the Alewife area. He noted that the Alewife office sub-market was generally less desirable than the East Cambridge, Kendall Square, and Harvard Square areas, and more susceptible to market declines. Mr. Logue rejected a highest and best use for multi-family residential development as being too speculative.6
Mr. Logue considered the three basic approaches to value. He rejected the cost approach because of the lapse of time since the office refit in 1980-81, and the need for major upgrading or replacement of mechanical, electrical, and roof systems and a reconfiguration of the property. In his opinion, deductions for external obsolescence and accrued physical deterioration would have been difficult to estimate. Mr. Logue also rejected the sales comparison approach to value, after investigating sales of properties in the relevant marketplace during the time frame of the valuation dates. The sales he identified were of properties encumbered by leases, and thus involved the transfer of leased-fee interests. He concluded that rents in many of these properties were above-market at the time of sale,
such that the sales of the leased-fee interests were not representative of fee-simple values for office properties in Cambridge on the assessment dates at issue.7
Mr. Logue utilized the income-capitalization approach to derive indicated values for the subject property. He determined after investigation that office rents in Cambridge declined substantially through 2002 and 2003, began to stabilize in 2004, and leveled off in 2005. In the Alewife/West Cambridge market, rents decreased approximately 20% in 2002 and 2003, and 5% during 2004. Mr. Logue studied leasing information from a variety of office properties, all in Cambridge, to derive comparable rental information. He also relied on published information including the Spaulding & Slye survey and the Hunneman commercial report.
According to Mr. Logue’s testimony, his investigations suggested that in the prevailing market environment, the subject property would most likely be occupied by up to three tenants. Most of the office properties in the area were multi-tenanted, while the high vacancy rate meant that larger tenants looking for a single occupancy had better quality options.
The table below provides summary information about Mr. Logue’s selected comparable office properties.
Mr. Logue noted that rents were time-adjusted to reflect the respective valuation dates. Rents commencing before January 1, 2004 (fiscal year 2005) were adjusted downward to account for the declining market. No similar adjustments were applied to comparable leases commencing after January 1, 2005 (fiscal year 2006), since the market had by then stabilized. Time-adjusted rents were net of tenant electricity (“lights and plugs”) only; other operating expenses were assigned to the landlord. Such lease terms are referred to as “modified gross rents”. See THE APPRAISAL OF REAL ESTATE at page 477 (12th ed. 2001). Moreover, most of the comparable office properties were rented with a tenant-improvement allowance provided by the landlord.
Mr. Logue described the comparable properties as all being in superior condition to the subject property in “as is” condition. All the properties had more parking spaces per 1,000 square feet of rentable area than the subject, while none of the properties chosen for comparable rentals required repairs to the HVAC systems or roof as extensive as those needed for the subject property. All of the comparable properties were originally constructed as Class A or Class B office buildings. Given the structural issues at the subject property, Mr. Logue testified that it had “gravitated towards a C building or perhaps a low B building” since the office refit in the early 1980’s. In his opinion, leasing the subject building in “as is” condition would exert downward pressure on rents.
Based on this analysis, Mr. Logue arrived at a fair market rental value for the subject property of $18 per square foot (net of tenant electricity) for fiscal year 2005. Noting the 5% decline in rents over calendar year 2004, he selected a rental value of $17.10 per square foot for fiscal year 2006. Mr. Logue’s rental values assumed a tenant-improvement allowance of $15 per square foot as an inducement to prospective renters, given the prevalence of such concessions in the immediate market area.10 This amount would be amortized over the lease term at 6% annual interest, and discounted by a 35-50% possibility of tenant rollover. He projected an annualized amount of $1.25 to $1.75 per square foot for tenant improvements and selected an allowance at the low end of that range or $1.25 per square foot.
Mr. Logue observed that the office vacancy rate in the Alewife area stood at less than 10% before January 1, 2001, then spiked to the 20-30% range before dropping to 16% by mid-2005. Given the wide variability in vacancy levels over relatively short time periods, Mr. Logue selected a stabilized vacancy rate of 15% for both years at issue.
Operating expense data were not available from the prior occupancy of the subject property, since Genuity, which is now out of business, bore responsibility for all expenses under the existing “triple-net” lease.11 Mr. Logue drew upon operating expense information from surrounding office properties to project allowances for insurance, cleaning, waste removal, maintenance and security, water and sewer, electricity and other utilities, general and administrative expenses, and management.12 Mr. Logue’s expense allowances assumed multi-tenant occupancy and professional management. He opined that operating expenses at surrounding office properties from 2003-2005 ran from $5.50 to $7.50 per square foot, with variability attributable to electricity costs, heating, and maintenance and security. He arrived at an estimate of $6.50 per square foot, net of tenant electricity for lights and plugs. He applied this figure to both fiscal years at issue.
In his expense analysis Mr. Logue also provided for reserves for replacement for short-lived systems such as the roof and heating. He noted that he had factored the condition of the roof and HVAC equipment and the need for interior renovations and the addition of elevators and rest rooms into his rental estimates. He concluded that $0.50 per square foot of rentable area would be adequate for reserves for replacement -— an estimate he used for both fiscal years at issue. Mr. Logue also projected an allowance for brokerage commissions. He cited a range of $0.70 to $1.60 per square foot in actual brokerage commissions paid for leases in surrounding buildings in the area between 2002 and 2005, with most commissions between $1.00 and $1.50 per square foot. Mr. Logue estimated a brokerage commission based on $1.25 square foot per year for 5-year leases, and assumed a 35-50% likelihood of tenant rollover. His stabilized annual allowance for
brokerage commissions came to $0.50 per square foot for both fiscal years.13
In developing a capitalization rate, Mr. Logue utilized the Mortgage Equity Technique and considered published sources of information like the Korpacz Real Estate Investor Survey. In his mortgage-equity analysis, he assumed a 65% first mortgage at 6% interest over a 20-year term. He projected a holding period of 10 years and estimated that a yield rate of 15% would be necessary to attract equity investors. He assumed, based on his stabilized income projections and trends in the office rental market in Alewife, that the subject property would appreciate 20% in value from January, 2004 over a 10-year holding period. The overall rate indicated by the Mortgage Equity Technique would be 8.7% for fiscal year 2005.
Mr. Logue placed the subject property in the non-institutional grade category given its location in a neighborhood which had lost a number of large companies in recent years and had lower occupancy and rent levels than the Harvard Square and East Cambridge areas. The Korpacz survey gave a range of 8.5% to 12.75% for capitalization rates on non-institutional grade office properties in the Boston market area.14 For fiscal year 2005, he selected a capitalization rate near the low end of the Korpacz range for non-institutional grade properties at 8.75%, taking into consideration the downward trend in capitalization rates from 2003 and 2004 and a slightly improving outlook for the office rental market in Cambridge in 2004. Given the commercial tax rate of $18.28 per thousand in Cambridge for fiscal year 2005, he added a tax factor of 1.828% to yield a final capitalization rate of 10.578% to be applied to net operating income. Mr. Logue’s resulting indicated value for the subject property for fiscal year 2005 was $7,900,000 as rounded.
For fiscal year 2006, Mr. Logue noted downward trends in the rates given in the Korpacz report, and capitalization rates for Eastern Massachusetts commercial properties in general between January 1, 2004 and January 1, 2005. His selected capitalization rate for fiscal year 2006 was 8.5%. Adding in the commercial property tax rate of $17.86 per thousand for fiscal year 2006, Mr. Logue selected a final capitalization rate of 10.286%. Mr. Logue’s indicated value for the subject property for fiscal year 2006 was $7,200,000 as rounded.
The pro forma income and expense analyses offered by Mr. Logue are presented in the following tables: