Buena Vista Homes, Inc. v. United States, 6201.

• Decision Date: 15 June 1960
• Docket Number: No. 6201.,6201.
• Citation: 281 F.2d 476
• Parties: BUENA VISTA HOMES, INC., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

281 F.2d 476 (1960)

BUENA VISTA HOMES, INC., Appellant, v. UNITED STATES of America, Appellee.

No. 6201.

United States Court of Appeals Tenth Circuit.

June 15, 1960.

T. B. Keleher, Albuquerque, N. M., and William Duncan, El Paso, Tex. (Eugene R. Smith, El Paso, Tex., and W. A. Keleher, Albuquerque, N. M., were with them on the brief), for appellant.

Harold S. Harrison, Atty., Dept. of Justice, Washington, D. C. (Perry W. Morton, Asst. Atty. Gen., James A. Borland, U. S. Atty., D. New Mexico, Albuquerque, N. M., and Roger P. Marquis, Atty., Dept. of Justice, Washington, D. C., were with him on the brief), for appellee.

Before PICKETT and BREITENSTEIN, Circuit Judges, and SAVAGE, District Judge.

BREITENSTEIN, Circuit Judge.

The United States brought action to condemn a Wherry Act housing project and commissioners awarded $385,000 as just compensation to appellant, Buena Vista Homes, Inc. The appeal is from the judgment on that award. The issues relate to the instructions, the proper method of handling a reserve fund in determining value, and the adequacy of the award.

With the objective of providing low-cost military housing, built by private enterprise through the medium of Government-insured mortgages, Congress passed the Wherry Act of August 8, 1949.¹ Inducements to private builders included Government insurance of 90% of mortgages and elimination of land acquisition costs by the leasing of Government-owned military sites, free from the right of revocation, at nominal rentals. Those entering upon such a project were required to form a corporation with a charter as prescribed by the Federal Housing Administration. Because of the purpose of the act, to provide housing at rentals military personnel could afford to pay, and because of the high percentage of the cost insured by the Federal Government, the mortgagors were subject to regulations in such matters as rents, charges, capital structure, rate of return, and methods of operation.

Under authorization of agreements made pursuant to the Wherry Act, Buena Vista constructed 235 rental units with necessary service structures on 48 acres of leased Government land at the White Sands Proving Grounds in New Mexico. Site improvements such as streets, curbs, and utility lines were constructed by the United States out of appropriated funds and were not a part of the Buena Vista operations. The lease from the Government was for a term of 75 years² at an annual rental of $100. The rental units were completed in June, 1953, at a cost in excess of $2,000,000. The original principal amount of the mortgage given to the New York Life Insurance Company was $2,043,600.

The Act of August 7, 1956,³ known as the Capehart Act, made mandatory the acquisition by the United States of Wherry Act projects located at military installations where Capehart housing was approved. Such housing was approved at White Sands, New Mexico. The United States instituted condemnation proceedings, filed a declaration of taking, deposited $225,000 as estimated compensation, and took possession on January 2, 1958. As of the date of taking the unpaid principal balance due on the mortgage was $1,922,757.

Objection is made to Instruction No. 8 upon the ground that it eliminated from consideration the reproduction cost less depreciation method of valuation.⁴ In this instruction, the court said that reasonable market value was to be determined by methods which are, in order of importance; first, comparable sales, and, second, capitalization of income. No issue is raised as to the propriety of either of these methods.

The applicability of the reproduction cost less depreciation method of valuation in a condemnation proceeding involving a Wherry Act project was considered at length by the Fifth Circuit in the case of United States v. Benning Housing Corporation, 276 F.2d 248. The conclusion was reached that it was not a proper basis of valuation because the condemnee's rights with respect to the property were limited by the fact that the projects were subject to rent control by Federal Housing Administration and the consistent policy in regard to such projects had been the allowance of a return based on original cost rather than reproduction cost. We agree and can add nothing to the analysis made in that decision. Here, as there, the conclusion is supported by the absence in the record of any unequivocal evidence that the project would be reproduced by private investors at the risk of private capital.

Instruction No. 9 told the commissioners that the January 2, 1958, rent schedule was the basis of the rental income of Buena Vista.⁵ Buena Vista urges that the instruction was erroneous because it did not tell the commission that the rental income could be adjusted by appropriate action. Reliance is placed on the provision of the Wherry Act⁶ which states that the commissioner may, in his discretion, require the mortgagor to be regulated as to rents. This discretionary power was exercised and the mortgagor was forbidden to impose charges in excess of an approved rental schedule.⁷ In any event, the important aspect of federal control was the control over rate of return, which in this instance was fixed at 6.5%. Flexibility in rents permitted adjustments relating to operation, maintenance and like matters. It did not permit an increase in rate of return. The record shows that this factor was understood by witnesses and commissioners alike. The objections are not well taken.

The mortgage given by Buena Vista to New York Life Insurance Company required that the mortgagor, Buena Vista, pay to the mortgagee, New York, a specific monthly sum which the mortgagee would hold as a reserve for replacements. The purpose of the reserve was to assure that Buena Vista would make the necessary repairs and replacements. Actually the required maintenance was performed by Buena Vista without touching the reserve fund. The Capehart Act authorized the release by agreement of funds set up as reserve for replacement⁸ and pursuant to such an agreement the reserve fund now under consideration was returned to Buena Vista.

Instruction No. 15 was given to the commissioners over the objection of Buena Vista. Therein, the court stated that as the reserve fund was returnable to Buena Vista "it should be deducted from the amount you find to be the reasonable market value of defendant lessee's Buena Vista's interest in the Wherry Housing Project."

This reserve fund was treated in various ways by witnesses who appeared before the commissioners. Three witnesses arrived at estimates of fair market value from which the reserve fund, under their calculations, should be deducted. Two witnesses made their appraisals upon a basis to which the amount of the reserve fund should be added. One witness made no adjustment because of the reserve fund. A witness for the Government testified that the fund was tied to the property and not to the owners. A witness for Buena Vista disagreed, saying that the fund belonged to Buena Vista. The matter was further complicated by the fact that, at the time of taking, the property required repairs costing $75,000 to $100,000 to put it in good condition. The confusion and disagreement over the method in which the reserve fund should be treated could be further amplified but no good purpose would be served by so doing. The issue must be determined by reference to the findings and conclusions of the commission.

The commission, in its report, stated that in determining value "paramount consideration should be given to capitalization of income approach," and concluded its findings with this:

"* * * the fair market value of Defendant\'s leasehold interest as of January 1, 1958, is $440,000.00, less replacement reserve fund heretofore received by Defendant in the sum of $56,667.62, making a net to be received by the Defendant in the sum of $383,332.38."

Both parties filed objections to this report. At the...