- 104 -
to account for much of the difference between Mansbach's value
conclusions and the value conclusions of petitioners' experts.
However, one overriding problem we have with all the appraisers'
reports is their failure to consider the County of San Mateo's
lease of the East retail space, both the ground floor and
mezzanine, in their income capitalization analysis.
48(...continued)
comparable leases were for office space; none were for retail
space. Additionally, comparable lease number 1, the "Jeanne
Bishop" and comparable lease number 4, "Intermodel Delivery
Service" have no address identified. Mansbach finds the
comparable leases indicate a range of $1.00 to $1.30 per square
foot per month. Mansbach states that the Second floor office
space has "an attractive appearance which retains many of the
historic and architectural details of the original structure."
In spite of these facts, Mansbach still estimates a market rent
at the lower end of the indicated range. For the mezzanines, to
reflect their lower ceiling heights and his determination that
they must be rented in conjunction with the ground floor retail
areas, Mansbach estimates a "storage rent" of $.25 per month.
Based on our review of the lease comparables provided by the
experts, and in light of the rent provided for in the County of
San Mateo lease, we believe that the market rent estimated by
Mansbach is too low.
Our second problem with Mansbach's estimate is his
capitalization rate. Without consideration of the Jacobs lease,
Mansbach estimated a 9-percent capitalization rate. The
comparables presented by the experts indicate capitalization
rates ranging from a low of 6.5 percent to a high of 10.5
percent. Based on the comparables, we find Mansbach's 9-percent
capitalization rate too conservative under the circumstances.
Still another problem we have with Mansbach's estimate is,
when considering the impact of the Jacobs lease under the income
capitalization method, Mansbach still utilizes a capitalization
rate of 9 percent. We believe this was an error. Although
basically related to the rate of interest, the capitalization
rate also includes risk and liquidity factors. See Narver v.
Commissioner, 75 T.C. 53, 90 n.17 (1980), affd. 670 F.2d 855 (9th
Cir. 1982). Because 69 percent of the retail/office component
was subject to a long-term lease, albeit below market, the risk
of receiving that portion of income is slight. Consequently, we
believe the capitalization rate should be reduced to reflect the
lower of level risk.
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