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riskiness associated with investment in real estate; and (3) a
minimum soil depletion factor of 2 percent, reflecting a
conservative forecast of the loss of topsoil through nursery
cultivation. Cobb’s conservative estimate of the required rate
of return is thus 12.77 percent. Although Cobb believes that
more reasonable estimates of each component would imply a rate of
return in the range of 16 to 18 percent, Cobb adopted the
conservative figure in his conclusions:
Required rent = ($871,000) (12.77%)
= $111,2272
Respondent contends that “Cobb committed a fundamental error
in financial analysis” by computing the hypothetical investor’s
rate of return on investment in terms of the fair market value of
the subject property instead of the original investment cost.
The Maschmeyers purchased the tracts for a total of $461,000. If
Cobb had multiplied his estimate of the required rate of return
by this amount, his conclusion would have been an annual rent of
less than $59,000, an amount which does not exceed the deduction
respondent has allowed.
We believe respondent misconstrues what Cobb’s required
return attempts to measure. As we understand it, his calculation
is based on the opportunity cost as of mid-1990 of holding the
subject property. The opportunity cost of an investment is the
2 Cobb’s figure is $111,562. This discrepancy is due to
rounding.
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