- 13 -
return from similar rental real estate, as Realty and Hulberg
did. Instead, Thomson looked at alternative investment rates for
investments of a certain level of risk. Relying on Kmart’s
creditworthiness, he determined that long-term debt instruments
of Kmart are ranked by Moody’s Corporate Bond ratings in the
various “A” classifications. “A” corporate bonds had a rate of
7.05 percent in September 1993, while “Baa” corporate bonds had a
7.34-percent rate. Adjusting for an existing 40-percent below-
market lease contract rate and the illiquidity of the leased
property, Thomson derived a 9-percent discount rate to apply to
rents through 2022. The lease rate increases to 90 percent of
market in 2023 through 2032, but because of the additional risk
of no longer having a significant rent advantage and having an
older building, Thomson increased the rate to 12 percent. These
discount figures result in a present value of the cash-flow of
$5,936,335.34.
Then assuming the building will have a $71,910.40 residual
economic value beyond 2032, Thomson added this to the cash-flow
value reaching a $6,008,245.34 value for the Kmart property.
Thomson also used a comparable sales approach to value the
Kmart property. He used three of the four properties that the
estate appraiser had used and arrived at the same undiscounted
value of $9 million before discounting for the below-market lease
rate on the property. Thomson and the estate appraiser used the
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011