- 30 -
which provided for reserves for a broad range of project
expenditures, including routine and extraordinary maintenance,
insurance, taxes, debt service, etc. Dvorak acknowledged that he
did not consider the trust funds in his valuation analysis. On
balance, we believe the Federal Government’s liability for the
rents and the existence of the trust funds provide support for a
lower, not a higher, capitalization rate. On this record,
therefore, we conclude that the most appropriate capitalization
rate is the lower one used by Dvorak for the subject properties
in the absence of HUD subsidies.11
Final Values Based on Adjustments to Dvorak’s Report
Incorporating the adjustments above, we find that the value
of the real estate held by Charlotte was $1,720,000, and the
value of the real estate held by Monroe was $1,690,000. The
following tables show the derivation of these values:
Charlotte
Dvorak’s Report
Year 1 Year 2 Year 3 Year 4 Year 5
Net operating
income $190,344 $193,199 $196,097 $199,039 $202,024
Cash-flow 190,344 193,199 196,097 11,815,235
Present value2 165,517 146,086 128,937 1,037,867
11 Even the lower of Dvorak’s two capitalization rates is
arguably too high, since it takes no account of the HUD subsidies
(which tended to reduce the risk perceived by an investor, in our
view). Nevertheless, in the absence of an evidentiary basis on
which to compute the extent to which the capitalization rate
should be adjusted downward, we adopt the lower of the two
computed by Dvorak.
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