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The estate appraisal used the cost approach, the market
approach, and two of the income approach methods, the direct
capitalization method and the discounted cash-flow method.
Norman C. Hulberg, petitioner’s primary expert, opined that the
estate appraisal was sound. His report mainly focused on the two
income approaches.
The direct capitalization approach is based on estimates of
potential gross income that might be expected from the rental of
real estate and any possible losses and/or expenses that might be
incurred by the owner/lessor. In the direct capitalization
approach, the estate appraiser converted 1 year’s projected
rental income into a value by dividing adjusted income by an
income capitalization rate. The capitalization rate, which is
market derived, represents the relationship between net operating
income and value.
Using comparable leased properties with rental rates between
$1.72 and $3.25 per square foot, the estate appraiser opined that
like property would rent for approximately $2 per square foot.
The rental rate was affected by the fact that the market for
older properties, such as the Kmart property, was relatively soft
at that time due to the availability of newer properties in the
area. The actual rental rate in the Kmart lease was $1.19 per
square foot. The holding period for this type of property is
usually 10 to 15 years, although the actual holding period of
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Last modified: May 25, 2011