Question on tax-affecting a charitable leasehold interest

BVWireIssue #46-3
July 26, 2006

“I am appraising a leasehold interest in an office building next to a University Hospital, [which] is a qualified charity,” writes BVR subscriber Brian Sullivan, CPA ( “The leases that will be donated to a qualified charity have a lease term expiring in 8 years; 76% of the tenants (leasees) are physicians contracted by the Hospital. The landowner will qualify for a charitable deduction equal to the difference between the PV of the leasehold interest less the bargain purchase payment made by the charity. Since the tenants are all AAA quality, the proposed discount rate is 5.5%, which approximates the 10-year Treasury Bond rate. That said, should the cash flow be tax-affected…since the donee is a tax-exempt organization; or should another benchmark be used to reflect the appropriate discount? (P.S.: The PV of the leasehold interest using the discount rate of 5.5% on non-tax adjusted net cash flow is $14.5 million.)”

To answer Brian’s question in the critical (and controversial) tax-affecting arena, we turned to our BVR panel of experts, including Dan Van Vleet, ASA, CBA, Managing Director, Duff & Phelps, LLC ( To see Van Vleet’s response, click here.

Transcripts and/or CDs of BVR’s Tax Affecting telephone conference (June 8, 2006) are still available at

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