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Because rent increases under the lease historically have
lagged behind increases in the PPI, and in light of the
uncertainty about the magnitude and direction of changes in PPI
annual averages over a period as long as the 32 years remaining
on the lease term at the time of petitioner’s gifts, we conclude
that it is appropriate to take into account historical patterns
of actual rents under the lease. On the basis of our review of
all the expert reports and testimony, we conclude that Lipscomb’s
projection of a 5.2-percent rent increase every 3 years for the
duration of the lease is fair and reasonable.
b. Present Value of Projected Rental Payments
In determining the 1991 present value of the projected
rental payments, a critical factor is the discount rate applied
to the projected lease income stream.
Lipscomb selected a discount rate of 8 percent, as
representing “what a typical investor would have expected for
investments of this type of land.” His report indicates that
although the investment was “low-risk”, a higher discount rate
was warranted owing to the limited marketability of the
investment. Lipscomb applied the 8-percent discount rate to the
after-tax lease income stream (assuming a 35-percent tax rate).
Dilmore selected a discount rate of 13.5 percent, consisting
of a 12.5-percent “basic discount rate” and an additional 1
percent to reflect the lack of a reforestation clause in the
lease. Dilmore’s report states that he selected the 12.5-percent
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