- 16 -
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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