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the risks of the transaction, including the risks involved in the
particular real estate activities in which the tenant proposes to
engage. See Narver v. Commissioner, 75 T.C. 53, 91 n.17 (1980),
affd. 670 F.2d 855 (9th Cir. 1982); Lanier v. Commissioner, T.C.
Memo. 1998-7 (“The “capitalization” rate * * * Although basically
related to the rate of interest * * * includes risk and liquidity
factors”). A properly computed fair market value and
“capitalization” rate reflect competitive market conditions. Mr.
McIntosh’s suggestion that a “capitalization” rate is properly
used to determine fair market value from known rental rates but
not the other way around is inconsistent with basic mathematical
and appraisal principles.8 Mr. McIntosh’s testimony is also
inconsistent with the methodology he used in his December 8,
1999, letter criticizing respondent’s methodology.
We have previously recognized the appropriateness of using
“capitalization” rates to determine the fair market rental value
of real estate. For example, in Clairton Slag, Inc. v.
Commissioner, T.C. Memo. 1979-485, we stated:
inasmuch as no comparable leases were available from
which to extrapolate the fair rental value of the
Property, the next best method for determining the fair
rental value of the Property is the “comparable sales”
method (CSM). The CSM requires the identification of
two relevant figures: (1) the rate of return on
8If the present value of the property equals the rental
value divided by the “capitalization” rate, then, as a matter of
algebra, the rental value must equal the present value multiplied
by the “capitalization” rate.
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