Opinion
C. A. PC-2012-2330 PC-2013-5306 PC-2014-3704 PM-2015-4304
11-09-2020
PROVIDENCE JOURNAL COMPANY Plaintiff, v. DAVID QUINN, in his capacity as Tax Assessor of the City of Providence Defendant.
For Plaintiff: Michael T. Eskey, Esq. For Defendant: Lisa Fries, Esq.; Nicholas P. Poulos, Esq.; John R. Mahoney, Esq.
For Plaintiff: Michael T. Eskey, Esq.
For Defendant: Lisa Fries, Esq.; Nicholas P. Poulos, Esq.; John R. Mahoney, Esq.
DECISION
LICHT, J.
The Providence Journal Company (Plaintiff) has challenged the tax assessments by the City of Providence (Defendant) on its former headquarters and office building at 75 Fountain Street in Providence (75 Fountain Street or the Property) for the assessment dates December 31, 2010, 2011, 2012, and 2013 for the respective tax years 2011-2014. The case was tried without a jury on August 25 and 26, 2020.
The parties submitted stipulated facts which will be discussed below.
The Plaintiff presented two witnesses. First, the parties stipulated that Peter M. Scotti, MAI, was an expert in appraising real estate. Mr. Scotti produced an appraisal report dated June 15, 2019 valuing the Property as of December 31, 2010, 2011, 2012 and 2013, drawing value conclusions for tax years 2011-2014 as stipulated below (Pl.'s Ex. 2-A or The Journal Report). Several pages were gleaned from his report and introduced as separate exhibits. Plaintiff's other witness was Alden M. Anderson, Jr., a real estate salesperson for CBRE/New England, who testified about his efforts to sell the Property for the Plaintiff from 2010 to 2015. Through him, Plaintiff introduced into evidence marketing materials, offers, and counteroffers related to such efforts. (Pl.'s Exs. 14-36.)
Defendant presented the testimony of Corey Gustafson, MAI, who the parties stipulated was a real estate expert. Mr. Gustafson testified about his appraisal reports dated February 21, 2020 (the Gustafson City Report) (Def.'s Exs. E-H) valuing the Property as of December 31, 2010, 2011, 2012, and 2013, indicating fair market value for the subject property for tax years 2011-2014 as stipulated below. Plaintiff introduced Mr. Gustafson's notes as Plaintiff's Exhibit 38.
For purposes of impeachment and substantive evidence, Defendant also presented a previous appraisal report prepared by Mr. Scotti dated December 15, 2011 (Def.'s Ex. B or the Scotti 2011 City Report) in which Mr. Scotti valued the Property as an expert for Defendant in previous related tax matters concerning the Property. The Defendant also cross-examined Mr. Scotti about statements he had made in his deposition in the previous litigation as well as an email he had sent vigorously defending the valuation in the Scotti 2011 City Report.
The parties each submitted comprehensive post-trial memoranda and each waived oral argument.
Pursuant to Rule 52(a) of the Superior Court Rules of Civil Procedure, the Court makes the following findings of fact and conclusions of law. First, the Court incorporates into its Decision the following stipulated facts.
"1. At all times relevant to this action, the Providence Journal Company ("Journal") owned an office building located at 75 Fountain Street further described as Tax Assessor's Plat 25, Lot 236 (the "Property").
"2. The City of Providence's ("City") assessments on each of the four challenged assessment dates and corresponding tax are as follows:
Parcel ID
Tax Year
Assessment
Rate
Tax Imposed
025-0236-0000
2011
$13,832,200.00
36.75
$508,333.36
025-0236-0000
2012
$13,832,200.00
36.75
$508,333.36
025-0236-0000
2013
$10,409,400.00
36.75
$382,545.48
025-0236-0000
2014
$10,409,400.00
36.75
$382,545.48
"3. The City developed both the Sales Comparison and Income Approach to arrive at a fair market value conclusion.
"4. The City's expert's opinions of the fair market value of the Property as of each of the four challenged assessments dates is as follows:
Tax Year
Value
2011
$14,100,000.00
2012
$12,800,000.00
2013
$12,400,000.00
2014
$12,200,000.00
"5. The City's expert developed both the Sales Comparison and Income approach to arrive at a fair market value conclusion.
"6. The Journal's expert's opinions of the fair market value of the Property as of each of the four challenged assessments dates are as follows:
Tax Year
Value
2011
$6,040,000.00
2012
$6,220,000.00
2013
$6,360,000.00
2014
$6,360,000.00
"7. The Journal's expert utilized the Sales Comparison approach to arrive at a fair market value conclusion.
"8. The parties stipulated that Journal's expert and the City's expert were qualified to testify at trial as experts in appraisal of commercial real property.
"9. All procedural prerequisites to challenging the assessments on each of the four challenged assessment dates have been satisfied: appropriate accounts concerning the Property were timely filed; appeals were timely submitted to the Tax Assessor; appeals were timely submitted to the Board of Tax Assessment Review; and the instant actions were timely filed. Therefore, the Journal has exhausted its administrative remedies and may bring these actions in Court.
"10. The only question before the Court is whether the City assessed the Property at its full and fair cash value on each of the four challenged assessment dates."
The Supreme Court of Rhode Island has held that "a trier of facts can accept the valuation of property of one set of experts and reject that of another set of experts, particularly when he gives good reasons for doing so." Kargman v. Jacobs, 113 R.I. 696, 702, 325 A.2d 543, 546 (1974) (citing Socony-Vacuum Oil Co. v. French, 88 R.I. 6, 11-12, 143 A.2d 318, 321 (1958)). "Just as a trial justice may pick and choose among evidence presented by laypersons, he or she may do the same when dealing with evidence of experts." Ferland Corp. v. Bouchard, 626 A.2d 210, 216 (R.I. 1993). Moreover, a trial justice may reject both parties' experts' opinions and devise his own method for determining fair market value of the property, if specific facts and expert testimony support the trial justice's ultimate valuation. See Whittemore v. Thompson, 139 A.3d 530, 541 (R.I. 2016) (holding that defendant's claim that the trial justice erred when she rejected all expert assessments and appraisals and instead applied her own methodology failed because there was more than sufficient evidence to support the rejection of the comparable sales data considered by each of the experts as well as of the utility of the two appraisals in assessing the subject property's value, and that the trial justice's methodology was sufficiently supported by the record).
The challenge for the Court, therefore, is to review and analyze the work of the two appraisers and accept one or the other or, using the information in evidence, reach its own conclusion as to value. Before doing so, the Court must assess the credibility of the two expert witnesses.
Credibility in this instance is different than judging the credibility of a fact witness. In that situation, a fact finder is concerned with the believability of the witness to determine whether the witness is lying or has a faulty memory. In this case, the Court finds that the experts were candid and truthful, so the Court will focus on the methodology and the applicability and reliability of the data presented.
Much has been argued about the fact that Mr. Scotti appraised the Property for the Defendant for the 2010 tax year at $14,500,000 in the Scotti 2011 City Report and then for the very next tax year, 2011, when he was appraising for the Plaintiff, he concluded the value was $6,040,000. See the Journal Report. Furthermore, he felt so strongly about the validity of his work in the Scotti 2011 City Report that he threatened to cease working for the Defendant if it compromised too much in an effort to resolve the previous litigation over the Property tax assessment. See Def.'s Ex. D. Defendant claims this invalidates his testimony and appraisal work. Plaintiff contends his past work is immaterial, and the issue is Mr. Scotti today versus Mr. Gustafson today.
Mr. Scotti attempted to explain the principal difference between then and now is that his opinion of highest and best use changed from single-tenant to multi-tenant and the condition of the building had deteriorated more than he realized. The Court has difficulty with this explanation. Mr. Scotti was very familiar with Providence commercial real estate. He would have understood there were no potential tenants for 150, 000 square feet of office space. Similarly, Mr. Scotti has inspected numerous buildings, and his experience should have led him to ask the right questions about the building's condition. Mr. Scotti finally said he just made a mistake. The Court finds that in 2011, Mr. Scotti looked at all the facts and drew all conclusions in the light most favorable to his client and then applied those conclusions to accepted appraisal principles to reach a result that supported the Defendant's position.
Similarly, Mr. Scotti, in his engagement for the Plaintiff, looked at the same facts and drew all his conclusions in the light most favorable to his current client and applied those conclusions to accepted appraisal principles to reach a result that supported the Plaintiff.
It is said that appraising real estate is an art not a science. There is no question Mr. Scotti has painted two different pictures of the same building, each to benefit his patron. Consequently, the Court is not inclined to accept either of these works of art. However, the Court may choose to use some of the same paints and brushes employed by Mr. Scotti in either of his paintings.
The Court therefore will address the appraisal reports Mr. Scotti submitted for this case. The Court recognizes the comparable sales analysis as a valid approach to valuation but finds it a glaring omission for Mr. Scotti to have excluded an income approach to valuation. Mr. Scotti did testify that, after he read Mr. Gustafson's report, for "back-of-the-envelope" purposes, he did an income analysis. (Tr. 84, Aug. 25, 2020.) He used Mr. Gustafson's expense numbers but rejected Mr. Gustafson's rent figures and instead used market rents of $16 and $18 per square foot. Id. at 86-89. The Court will not consider this testimony because Mr. Scotti offered no backup for how he reached any of his back-of-the-envelope conclusions.
Turning back to his appraisal, Mr. Scotti testified that he thought the highest and best use for the Property was "As if Vacant" (Pl.'s Ex. 2B, at 75) but because the building could not be razed without Historic District Commission approval, he concluded that its highest and best use was "for extensive rehabilitation for commercial purposes probably office." Id. at 76. He graded it as Class C office space while in the Scotti 2011 City Report, it was designated Class B.
Lastly, Mr. Scotti placed a great deal of reliance on the 2015 sale of 75 Fountain Street and two parking lots for $7.5 million. While the Court recognizes that a subsequent sale of property being assessed may have a bearing on its value, in this case it is too speculative. The Court will consider neither the 2015 sale nor the 2013 offer to purchase for $11.45 million. While Mr. Anderson's testimony was credible, it was evident that the larger business concerns of Plaintiff's parent, the Belo Corporation, influenced both the response to offers and the ultimate decision to sell. Since the Court has no evidence concerning these corporate strategies, it will not speculate as to why offers were accepted or rejected.
Similarly, the Court will not consider the evidence that Mr. Durkee told Mr. Scotti that the buyers of 75 Fountain Street spent $7 million on renovations or that they placed an $18 million mortgage on 75 Fountain Street and one of the parking lots. The failure to provide anything more than the naked statement that $7 million was spent renders this fact of little use to the Court. While, as will be discussed below, the Court feels that the cost of converting a single-use building to a multi-tenanted building is relevant to an income approach, Mr. Scotti failed to flesh out any details about how and for what the $7 million was spent.
Turning to the Gustafson City Report and Mr. Gustafson's testimony, the Court is concerned about his failure to include any cost of renovations or capital costs in his income approach. In his colloquy with the Court, he stated that because it was configured for a single user, he valued the Property as if it were sold to a single user. Yet he conceded "the highest and best use of this thing is to reconfigure the whole thing and make it a multi-tenant property, right, that's I think, you know, beyond the scope of what this valuation was meant to consider." (Tr. 84, Aug. 26, 2020.)
General Laws 1956 § 44-5-12(a) provides that "[a]ll real property subject to taxation shall be assessed at its full and fair cash value, or at a uniform percentage of its value, not to exceed one hundred percent (100%), to be determined by the assessors in each town or city. . ." Section 44-5-12(a). The Supreme Court of Rhode Island has defined "'full and fair cash value' as fair market value." Nos Limited Partnership v. Booth, 654 A.2d 308, 310 (R.I. 1995) (citing Allen v. Bonded Municipal Corp., 62 R.I. 101, 105, 4 A.2d 249, 251 (1938)). '"Fair market value"' has been construed to mean '"that price the property would probably bring in a transaction in a fair market between a willing seller and a willing buyer."' Ferland Corp., 626 A.2d at 215 (quoting Rosen v. Restrepo, 119 R.I. 398, 400, 380 A.2d 960, 961 (1977)).
Mr. Gustafson, in his income approach, did not fulfill that task. He displayed a lack of understanding of the Providence real estate market if he thought there was likely to be a single user for over 150, 000 square feet of office space. Moreover, even if there were one, such a tenant would most likely require a tenant allowance for repairs, renovations, and/or improvements. If, as he conceded, the highest and best use was to reconfigure it for multiple tenants, then there would by necessity have to be significant capital costs. Yet, Mr. Gustafson did not include the amortization of reasonable capital costs or tenant improvements in his income approach. As such, the Court does not look to his income analysis in deciding this case.
Both experts rejected the cost approach as inapplicable because of the age and configuration of the building. The Court concurs with this conclusion. Since the Court has dismissed both appraisers' income approach, the comparable sales analysis is the methodology the Court will engage to reach its conclusion as to fair market value. Both appraisers also identified sales that each believed to be comparable, adjusted the sales price based on several factors, and then converted the adjusted sales price to a per square foot amount. While the Court may not accept the subjective decisions made by the appraisers, it believes this methodology is the appropriate way to determine fair market value of the Property with the evidence before it.
Mr. Scotti compared the following nine properties:
1. 150 Washington Street, the former City Hall Hardware building which had been occupied by Roger Williams University.
2.170 Westminster Street, the Union Trust Building and former location of the Federal Reserve Restaurant.
3. 76 Westminster Street, the Turk's Head Building.
4. One Empire Plaza and 15 LaSalle Square, which had been occupied by Blue Cross.
5. 380 Westminster Street, the location of several federal agencies.
6.100 Weybosset Street, the former Providence Gas Site.
7.15 Park Row West, the American Express Building.
8. 275 Westminster Street, the former Cherry & Webb building.
9. 290 Westminster Street, the Lapham Building.
Mr. Gustafson compared the following five properties:
1. 555 Valley Street, a portion of the former Uniroyal manufacturing plant
2. 380 Westminster Street
3. One Empire Plaza
4. 76 Westminster Street, The Turk's Head Building.
5. 111 Westminster Street, the Superman Building.
The Court listened and questioned each expert and carefully reviewed their appraisal reports. While both analyzed the Turk's Head Building and 380 Westminster Street, the Court did not consider these sales in its analysis because these buildings were occupied, multi-tenanted, high-rise buildings with existing leases in effect and not single-tenanted buildings which needed to be renovated to accommodate more than one tenant. For similar reasons, the Court did not consider 170 Westminster Street. The Court did not consider 100 Weybosset, 290 Westminster Street, or 275 Westminster Street as these were purchased with the intent to convert to a use other than a multi-tenanted office building-residential for the first two and a charter school for the third. The different intended use may have impacted the sales price. The Court also did not consider 555 Valley Street because this property was not in the central business district and it had a significant amount of parking, unlike the other properties, including 75 Fountain Street which had much less parking. The Court also did not analyze the Superman Building because it was sold with a leaseback arrangement and, as is common knowledge, has been vacant for nearly eight years because it needs an undetermined amount of renovation and restoration.
The Court did analyze 150 Washington Street, 15 Park Row West, and One Empire Plaza (which was included in both appraisals). Each of these were designed originally to be single-tenanted and were to become multi-tenanted.
Before addressing the appraisers' calculations and adjustments to these sales, the issue of the number of square feet in the 75 Fountain Street building must be resolved. Mr. Scotti used a figure of 139, 696 square feet while Mr. Gustafson used 155, 982 square feet. No one asked Mr. Scotti where he obtained his number, but it appears that the number comes from page 2 of Plaintiff's Exhibit 41 which is the property card from Vision appraisal, which is the firm the Defendant used in conducting the December 31, 2015 revaluation. On the very last line of that page, for "Total Gross Liv/Lease Area," it states 139, 696. Mr. Gustafson did not remember exactly how he reached his conclusion but when portions of his deposition were read into the record, he had said, "And, specifically, we looked to the 2012 Assessor's card which detailed the building areas that were included with only two areas that were excluded from the rentable area due to lack of finishes that were in those areas." Tr. 130, Aug. 26, 2020. The "2012" card to which he referred had to be Plaintiff's Exhibit 39 which was the card of the Tyler firm that did the December 31, 2011 revaluation. That conclusion is reached for several reasons. First, the document is entitled "Commercial Property Record Card 2012." Secondly, the Vision card only displays the date it was printed but in the section entitled "Previous Assessments" it states "2013." The 2013 assessment could not have been a previous assessment in 2012. Lastly, on page 4 of Plaintiff's Exhibit 39, if one totals the square footage for "General Office 141, 066," "General Restaurant 3306," "Multi Use Office 3000," and "Warehouse 8610," the sum is 155, 982, which is the number Mr. Gustafson used. There is no evidence to explain the difference between the Tyler calculation and the Vision calculation. However, the tax years in dispute are 2011 through 2014, and the Vision card was not applicable until the 2016 tax year. Therefore, the Court feels constrained to use 155, 982 square feet in reaching its conclusion as to the fair market value of 75 Fountain Street.
Turning now to the three properties that the Court considered the most comparable.
Both appraisers made certain adjustments to the sale price in an attempt to compare it to the Property. The first adjustment was for market conditions because each comparable sale was in a different year than the year of the appraisal. The other adjustments related to features of the property. If there was a negative adjustment, it meant the comparable property was better than 75 Fountain Street and if it was a positive adjustment, the comparable was inferior to 75 Fountain Street. While each appraiser described his adjustments differently, but they were somewhat similar.
One Empire Plaza is the only property on both lists. However, Mr. Scotti analyzed this sale including One LaSalle Square making it somewhat difficult to compare the two appraisals. Mr. Gustafson's value for December 31, 2010 was $90 per square foot (the Court is ignoring the fact that in the December 31, 2011 appraisal Mr. Gustafson used a different number of square feet, 104, 316 vs. 110, 540 for the previous year). See Def.'s Ex. E, at 67. Mr. Scotti's value for the same year was $42.87, less than half of Mr. Gustafson's value.
Mr. Scotti had 5% negative adjustment for location, meaning the location of 75 Fountain Street was inferior. The Court does not feel this was justified, especially as to One Empire Plaza. While One LaSalle Square and 75 Fountain Street are both very close to Route 95 exits and across from the Civic/Convention Center and a major hotel, One Empire Plaza is slightly more removed from these positive location factors. In the Scotti 2011 City Report, he stated that no locational adjustment was necessary for these properties. Defendant's Ex. B, at 107. Mr. Scotti then deducted 20% for Age & Condition and 40% for Property Features which included a factor for parking and another for features and amenities. He quantified the Property Features as $20 to $45 a foot for renovations, $10,500 for each surface space, and $18,750 for each garage space. These amounts were then converted to a % adjustment. He was asked if there was double counting and he contended that there was not, that Age and Condition referred to obsolescence. However, this response is not credible given the fact that he uses a dollar figure per square foot for renovations when calculating the adjustment for Property Features. Presumably the amount spent on renovations would cure the obsolescence problems. Furthermore, in the Scotti 2011 City Report, he only used a physical characteristics adjustment of 15%. He also stated in that report that no garage adjustment was necessary. Id.
Turning to Mr. Gustafson's analysis of One Empire Plaza, he used a market adjustment of 5%. He also has positive 5% adjustments for Property Rights and Conditions of Sale and a negative 5% for Economics. Defendant's Ex. E, at 86. However, nowhere does he explain these adjustments or how he arrived at them, so the Court will not apply them. He did make an adjustment of -10% for condition and -5% for parking.
Another difference between the appraisals is that Mr. Scotti and Mr. Gustafson use a different number of square feet. Since the Court has no evidence as to the accuracy of either figure, it will average them. The Court accepts Mr. Scotti's market adjustment of -10%. The Court believes Mr. Gustafson's adjustment for Age/Condition and Parking totaling -15% is too low. Similarly, the Court believes Mr. Scotti's adjustment for Age/Condition and Property Features totaling 60% is too high, particularly because it appears to be double counting. Consequently, the Court finds the appropriate adjustment is -40%. Applying the Court's adjustments, the adjusted value of One Empire Plaza is $61.11 per square foot.
Turning to 15 Park Row West or the American Express Building, the Court accepts Mr. Scotti's market adjustment of -4.8%. However, the location adjustment is too high. While Capital Center is a better location than 75 Fountain Street, the Court believes -15% is more appropriate than the -20% which Mr. Scotti used. The Court eliminated Mr. Scotti's -20% for Age & Condition for the reasons stated above and uses a -30 % adjustment for Property Features. Applying the Court's adjustments, the adjusted value of 15 Park Row West is $65.51 per square foot.
Finally, the Court looked at 150 Washington Street, which Mr. Scotti said, "Overall, a pretty good comp for the subject in terms of condition, location, et cetera. Really not a building that required a lot of adjustments, but we obviously, made some." Tr. 46, Aug. 25, 2020. He also said it was one of the "best comps for the subject." Id. at 51. Interestingly, in the Scotti 2011 City Report, he said of this building, "150 Washington Street requires such a significant upward adjustment for physical characteristics that we exclude it." Defendant's Ex. B, at 105. In the Journal Report, Mr. Scotti made no adjustment for location, but the Court believes this is an error and does not accept Mr. Scotti's explanation that the locations are comparable. The Court believes that the Property being close to two hotels, the Civic/Convention Center, and having better highway access warrants a 5% positive adjustment to 150 Washington Street. The Court accepts the market adjustment of -10%. However, the Court has difficulty accepting the Property Features adjustment of -15%. According to Mr. Scotti, that consisted of +18% for a parking adjustment and -33% for renovations. The Court is troubled by this conclusion considering Mr. Scotti's failure to include 150 Washington Street in the Scotti 2011 City Report because of its physical characteristics. He also testified that "[i]t needed reconfiguration for any use other than a school." Tr. 52, Aug. 25, 2020. Reconciling the two reports of Mr. Scotti, the Court makes no adjustment for age, condition, or physical features except for the +18% for parking. Applying the Court's adjustments, the adjusted value of 150 Washington Street is $61.99 per square foot.
The Court's reconciliation of adjustments can be found on Decision Exhibit 1 attached.
The Court next looked at all three adjusted comparables and found the median to be $61.99 per square foot. The weighted average of the comparables using the methodology explained by Mr. Scotti was $63.29 per square foot very close to the $62.87 arithmetic average of the three. Averaging the median with the weighted average produced a value of $62.64 per square foot which the Court rounded to $63 per square foot. Applying that value to 155, 982 square feet, the Court arrived at a full fair cash value for 75 Fountain Street as of December 31, 2010 of $9,826,866 which it rounded to $9,826,900. Mr. Scotti's appraisal indicated that the market increased in 2011 by 3%, in 2012 by 2%, and in 2013 by 0%. Plaintiff's Ex. 2B, at 97. The Court applied these rates of increase to the December 31, 2010 full fair cash value to determine the assessed value for the three subsequent years which are the subject matter of this litigation. The Court's calculations are summarized on Decision Exhibit 2 attached.
Lastly, the Court determined the amount of overassessment and excessive tax on Decision Exhibit 3 attached.
In conclusion, the Court finds that for the four years in question, the Plaintiff was overtaxed by $289,825 and is entitled to judgment in that amount plus interest and costs. Counsel shall prepare the appropriate order and judgment.
(Exhibit 1 Omitted)
(Exhibit 2 Omitted)
(Exhibit 3 Omitted)