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this leased interest was 20 years, with a 10-year option that had
been exercised and three 5-year options remaining. One real
estate investors’ survey, the Peter F. Korpacz National Investor
Survey, Third Quarter 1993, reported that the average going-in
capitalization rate on industrial properties such as this was
9.55 percent. The CB Commercial National Investor Survey for the
2d Quarter 1993 in the “Warehouse/Distribution” category,
reported a going-in capitalization rate of 9.8 percent. Because
the property had a highly credit-worthy tenant with a long-term
lease, Hulberg increased the rate slightly to 10 percent. The
estimated net operating income (NOI) of the subject property was
then divided by this rate. Because the property owners bear no
costs beyond their management, the $1.19 rental rate was reduced
to $1.17 per square foot to reflect the management fee, resulting
in an NOI of $542,081. The resulting property valuation would be
$5,420,810.
The second element of petitioner’s income approach valuation
is a discounted cash-flow analysis. Under this approach, the
value of the property is equal to the present value of the future
cash. The owner also possesses a reversionary interest at the
end of the holding period. The rate used to discount the
projected cash-flows and eventual reversionary interest takes
into consideration the inherent risks of real estate ownership
and competitive alternative investments. The estate appraiser
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Last modified: May 25, 2011