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The basis for Lady’s 4-percent figure is not evident from
his report, but as an estimate of the expected rate of
appreciation during the years at issue it seems very
conservative. The consumer price index for the 2 years prior to
April 1990 was increasing at 4-1/2 to 5 percent. An investor
holding land for interim agricultural use in the vicinity of
substantial residential development could presumably have
expected it to appreciate significantly in excess of the general
inflation rate. Information in the record is not sufficient for
the Court to estimate what rate of appreciation an investor could
reasonably have expected. Suffice it to say, however, that if we
selected a rate even one-half percentage point higher than
4 percent, the required rent implied by Cobb’s equation would no
longer exceed the amount determined by respondent.
Required rent = ($871,000) (7.32%)
= $63,760
Accordingly, Cobb’s analysis does not persuade us that
respondent’s determination is incorrect.
Our result would not be materially different if we
constructed an arm’s-length rent in a manner similar to that used
by Maschmeyer and petitioner’s accountant. The rental amount
determined by respondent would cover the Maschmeyers’ actual
costs and provide a reasonable return for ownership risk.
In his computation Maschmeyer allowed $26,004 for the
Maschmeyers’ average borrowing costs. Why this amount exceeds
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