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$2-per-square-foot market rental rate and calculated an annual
rent loss of $376,502.58. The estate appraiser had used a 10-
percent discount rate, equal to the discount rate used in its
direct capitalization method and 1 percentage point lower than
the rate used in the discounted cash-flow method. Thomson, on
the other hand, discounted the rental loss at 11 percent, 2
percentage points above his discount rate on the income stream
and increased it to 14 percent for the portion of the lease
between 2023 and 2032. This resulted in a value of $5,700,000.
Petitioner’s second expert, Morgan W. White (White),
presented a rebuttal of Thomson’s report/opinion. While White
acknowledged that direct capitalization was an accepted
methodology for valuing investment property, he chose not to use
it in this situation due to the type and length of lease,
specifically a long-term, flat-rate lease. Instead, White
followed Thomson’s method and evaluated the property using the
discounted cash-flow method.
White criticized Thomson’s choice of discount rates because
of the heavy reliance on the lessee’s high credit rating and
failure to recognize the long-term illiquidity and end-value
uncertainty. Instead, White concluded that the discount rate for
this type of investment calls for a premium to compensate the
lessor. He used a 3-percent premium for the first portion of the
lease. Using Thomson’s “Baa” bond rate of 7.34 percent as
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