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Petitioner’s
Respondent’s “Estate-Planning”
Property Appraisal Appraisal
(Mr. Harris) (Mr. McIntosh)
Watt Avenue $690,000 $674,000
Fee Drive 240,000 225,000
Mother Lode Drive 230,000 60,000
Total 1,160,000 959,000
Mr. McIntosh did not attempt to apply a “capitalization”
rate to his estate-planning values in order to justify
petitioner’s rental rates because such a high “capitalization”
rate could not be supported. Instead, Mr. McIntosh testified
that there is no consistent relationship between the value of
land and the rental value of land, and that “the use of a
hypothetical cap rate * * * can only do one thing, and that’s get
you an inaccurate, unrealistic conclusion.” This is because, Mr.
McIntosh claims, a tenant will pay more than the fair market rent
determined through the application of a “capitalization” rate
applied to the fair market value of the property if the tenant
can earn a profit at the higher rent.
We do not find Mr. McIntosh’s testimony credible in this
respect. The fair market value of the land reflects the highest
and best use of the property. The “capitalization” rate reflects
the rate of return that the owner would require from, and that a
tenant would pay to lease, the land. The “capitalization” rate
reflects prevailing market interest rates for risk-free
investments, together with a risk premium that takes into account
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