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related-party lease does not provide reliable information
concerning fair market values.
However, we do agree with Mr. McIntosh’s and Mr.
Vanderbundt’s testimony that the “capitalization” rate used in
determining the fair market rental value of property should
reflect the additional risks incurred by a landlord in leasing
land to an independent cardlock operator such as petitioner,
rather than a major oil company. We find that a 13-percent
“capitalization” rate is an accurate assessment of the rate of
return that an arm’s-length lessor would have required from
petitioner during 1996 and 1997. A “capitalization” rate of 13
percent is in the range of rates suggested by Mr. McIntosh in his
December 8, 1999, letter, and is in the upper range of rates that
Mr. McIntosh claims would be derived from the Nella Oil lease,
which was entered into in the same general timeframe as
petitioner’s leases and was to a similar independent operator.
Mr. Harris credibly testified that a flat 10-percent rate
would be appropriate for leases to major oil company tenants.
However, the 10-percent rate fails to take into account the
environmental credit risks borne by a landlord when leasing
property to an independent cardlock operator. A 3-percent risk
premium seems appropriate to us, in light of the substantial
additional risks a landlord incurs when leasing property to an
independent operator of underground storage tanks. Therefore, we
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