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“capitalization” rate for the greater risks involved in leasing
property for use as a cardlock operation to a small independent
operator, such as petitioner, rather than to a major oil
company.5
Using this methodology, Mr. Harris determined the fair
market value and fair market rental value for the three
properties to be as follows:
Fair Market Capitalization Fair Market
Property Value Rate Rental Value
Watt Avenue $690,000 10% $69,000
Fee Drive 240,000 10 24,000
Mother Lode 230,000 10 23,000
Drive
Petitioner’s experts criticized Mr. Harris for failing to
account for the significant risks a landlord undertakes when
leasing property to an independent cardlock operator. According
to their uncontradicted testimony, underground petroleum storage
tanks have a history of leaking, causing soil and groundwater
contamination that must be remediated at significant cost. While
4(...continued)
Cir. 1952)), affg. T.C. Memo. 1970-74. The validity and amount
of allowed deductions should not depend on changes in market
conditions occurring after the parties’ contractual arrangements
were set. Because neither party offered evidence of changes in
market conditions, we will assume that market conditions did not
change between the lease date and the years in issue.
5Petitioner’s witnesses made a strong showing that leasing
property for use as a gas station carries with it significant
risks for the lessor, risks not taken into account in Mr.
Harris’s analysis.
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