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While there is no exact guideline for determining whether real property is regarded as inventory or capital property for taxation purposes, there are common law

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While there is no exact guideline for determining whether real property is regarded as inventory or capital property for taxation purposes, there are common law principles applied to make the distinction. List and briefly explain three of the principles. A retailer is presently leasing 15,000 sq. ft. of store space. The retailer's lease is up for renewal and this space is in immediate need of additional improvements at an estimated cost of $13,000. The location is good and the retailer needs the space for at least another 10 years The landlord is offering the retailer two options for continued occupation of the premises: 10-year lease with escalation in Year 6 10-year lease with a flat rate for the entire term Option 1 The rate for Year 1 of the lease will be made of the base rate of $9,50 per sq. it. per annum plus an improvement amortization cost of $0.26 per sq. ft. per annum. The rate for Years 2-5 will be fixed at the same rate as Year 1. Cost of improvements will be amortized over the first 5 years of the lease. The rate for Year 6 will be calculated using the base lease rate for Year 1 and the growth of the Consumer Price Index (CPI) during the previous 5-year period. It is expected the CPI will grow at a rate of 5% per year, compounded annually. The rate for Years 7-10 will be fixed at the same rate as Year 6. Option 2 The rate for Year 1 of the lease will be made of the base rate of $11.50 per sq. ft. per annum, plus an improvement amortization cost of $0.17 per sq. ft. per annum. The rate for Years 2-10 will be fixed at the same rate as Year 1. Cost of improvements will be amortized over the entire 10-year term. Assume that lease payments are made at the beginning of each year and that the retailer's iscount rate is 7.5% per annum, compounded annually (j1 = 7.5%). he retailer has retained you to help choose an option. Using discounted cash flow analysis, termine the present value of each lease alternative. Which alternative should the retailer oose? Refer to your present value results in determining the best option. Briefly explain

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