Eugene D. Lanier, Inc. - Page 16

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          its expected income-producing power.  In simple terms, under this           
          approach, value equals net annual operating income divided by a             
          capitalization rate.  The capitalization rate is influenced by              
          many factors.  Although basically related to the rate of                    
          interest, it also includes risk and liquidity factors and a                 
          recapture of capital component.  See Narver v. Commissioner, 75             
          T.C. 53, 90 n.17 (1980), affd. 670 F.2d 855 (9th Cir. 1982).  The           
          selection of a capitalization rate represents the appraiser's               
          subjective determination of the anticipated return on capital               
          invested in the property.  The lower the rate of capitalization,            
          the higher the estimate of property value will be.  See Estate of           
          Korman v. Commissioner, supra.                                              
               A.  Respondent's Expert                                                
               Respondent relies principally upon the report and testimony            
          of J. Harold Lambert (Lambert), a self-employed certified general           
          real property appraiser.  Lambert's report was prepared in                  
          October 1994.  The parties have stipulated that Lambert is an               
          expert.  Lambert utilized the replacement-cost, market-data, and            
          capitalization-of-earnings approaches in appraising the value of            
          the Property as of March 31, 1987.                                          
               Under the replacement-cost approach, Lambert viewed 5 vacant           
          land sales (vacant land sales) as comparables, to which he made             
          adjustments for such factors as location, corner influence, and             
          size.  He valued the land at $3.50 per square foot, or $313,000             
          (rounded).  He then determined the direct cost of the                       

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