Jane Crocker, F.K.A. Jane C. Jacobs, et al. - Page 15

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          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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