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ii. Nominal Versus Real Discount Rates
The lease terms adjust the annual rent payments for
inflation. The parties disagree over whether, in light of this
inflation-adjustment feature, it is appropriate to use a “real”
discount rate (i.e., a discount rate that eliminates the effects
of inflation) or a higher “nominal” discount rate (i.e., the real
rate plus the inflation rate). Maloy’s expert report states that
the appropriate discount rate to apply here is a real rate. On
brief, respondent argues that the discount rates used by
petitioner’s experts are too high because they are nominal rates.
Petitioner and his experts counter that in the instant
circumstances only nominal discount rates and not real rates are
appropriate.
The differences between the parties appear rooted at least
partly in semantics. Acknowledging that these matters are not
self-evident to those unbaptized in the murky waters of actuarial
science, we agree with petitioner and his experts, whose views
align with the aforementioned learned treatise, Appraisal
Institute, supra at 460-461, relied upon for different purposes
by both parties, which states as follows:
Because lease terms often allow for inflation with
* * * adjustments based on the Consumer Price Index
(CPI), it is convenient and customary to project income
and expenses in dollars as they are expected to occur,
and not to convert the amounts into constant dollars.
Unadjusted discount rates, rather than real rates of
return, are used so that these rates can be compared
with other rates quoted in the open market–-e.g.,
mortgage interest rates and bond yield rates. * * *
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