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will apply a 13-percent “capitalization” rate in determining the
fair rental value of the properties.
Using the market values determined by Mr. Harris (values
that petitioner’s expert, Mr. McIntosh, conceded were, if
anything, on the high side), and using a “capitalization” rate of
13 percent, we conclude that the fair market rental values of the
properties were as follows:
Fair Market Capitalization Fair Market
Property Value Rate Rental Value
Watt Avenue $690,000 13% $89,700
Mother Lode Drive 230,000 13 29,900
Fee Drive 240,000 13 31,200
Petitioner is not entitled to deduct the amounts paid as
rent in excess of the fair market rental value of the property.
The excess amounts paid as rent were in the following amounts:
Property Rent Paid Fair Market Rent Excess
1996 1997 1996 1997
Watt Avenue $120,000 $120,000 $89,700 $89,700 $60,600
Mother Lode
Drive 27,600 28,800 29,900 29,900 ---
Fee Drive --- 116,000 --- 210,400 5,600
Total 147,600 164,800 119,600 119,602 66,200
1The Fee Drive property was leased for only 4 months in
1997, at a rent of $4,000 per month.
2Inasmuch as the Fee Drive property was leased for only 4
months, we have used four-twelfths of the annual fair market
rental value.
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