Maschmeyer's Nursery Inc. - Page 11

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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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Last modified: May 25, 2011