Sonoma Apartment Assocs., Ltd. v. United States, 13-940C

• Decision Date: 22 September 2017
• Docket Number: No. 13-940C,13-940C
• Parties: SONOMA APARTMENT ASSOCIATES, A California Limited Partnership, Plaintiff, v. THE UNITED STATES, Defendant.
• Court: U.S. Claims Court

SONOMA APARTMENT ASSOCIATES, A California Limited Partnership, Plaintiff,
v.
THE UNITED STATES, Defendant.

No. 13-940C

United States Court of Federal Claims

Reissued for Publication: November 3, 2017^*
September 22, 2017

Trial; Section 515 of the Housing Act of 1949; Breach of Contract; Expectancy Damages; Lost Profits Versus Lost Asset Value; Postbreach Evidence; Discount Rates; Tax Neutralization Payment; Third-Party Standing

Daphne A. Beletsis and Deborah S. Bull, Santa Rosa, CA, for plaintiff.

Matthew P. Roche and Jeffrey A. Regner, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Judge

Plaintiff Sonoma Apartment Associates, a California Limited Partnership, obtained a loan from the federal government to construct rural low- and moderate-income housing. Plaintiff was contractually entitled to prepay the balance of the loan after twenty years, but when it sought to exercise this right, the government denied its request. After the government conceded liability for breach of contract, the court held a trial on the issue of damages. As explained in more detail below, the court awards damages to plaintiff in an amount to be determined in accordance with the court's findings and conclusions.

TABLE OF CONTENTS

I. FACTS ..................................................................... 3

A. Plaintiff's Contract With the Government and the Government's Breach of That Contract ............................................................. 3

Page 2

B. Plaintiff and Its Partners .................................................. 5

C. Sonoma Village Apartments ............................................... 9

D. The April 11, 2011 Appraisal Report ....................................... 11

II. PROCEDURAL HISTORY ................................................... 14

III. NONMONETARY RELIEF .................................................. 15

IV. EXPECTANCY DAMAGES ................................................. 18

A. Legal Standards ........................................................ 18

1. Expectancy Damages ............................................... 18
2. Date for Calculating Damages ........................................ 20
3. Discounting to Present Value ......................................... 21

B. The Parties' Experts .................................................... 21

C. The Parties' Methodologies and Calculations ................................. 23

1. Plaintiff's Approach ................................................ 23

a. Past Lost Profits ............................................... 24

i. Restricted Scenario ........................................ 24
ii. Unrestricted Scenario ...................................... 24
iii. Total Past Lost Profits ..................................... 32

b. Future Lost Profits ............................................. 32

i. Restricted Scenario ........................................ 32
ii. Unrestricted Scenario ...................................... 33
iii. Discounting to Present Value ............................... 35

c. Total Lost Profits .............................................. 36
d. Using Fair Market Value to Test the Reasonableness of the Lost Profits Calculations ................................................ 37

2. Defendant's Approach .............................................. 39

a. Unrestricted Scenario ........................................... 40
b. Restricted Scenario ............................................ 48
c. Total Damages ................................................ 49
d. Dr. Ben-Zion's Test to Assess the Reasonableness of His Calculations .... 49

D. Analysis .............................................................. 51

1. Methodology for Computing Plaintiff's Expectancy Damages ............... 51
2. Postbreach Evidence ................................................ 53
3. Past Damages ..................................................... 54

a. Estimating Plaintiff's Past Income in the Unrestricted Scenario .......... 54

i. Rents ................................................... 54
ii. Nonrental Income ......................................... 55
iii. Vacancy Rate ............................................ 55
iv. Conversion-Related Lost Income ............................. 56

b. Estimating Plaintiff's Past Expenses in the Unrestricted Scenario ........ 57

i. Data .................................................... 57

Page 3

ii. Loan-Related Expenses and the Mortgage Interest Rate ........... 58

c. Estimating Plaintiff's Past Income in the Restricted Scenario ............60
d. Estimating Plaintiff's Past Expenses in the Restricted Scenario .......... 60

4. Future Damages ................................................... 60

a. Projecting Plaintiff's Future Income in the Unrestricted Scenario ........ 60

i. Data .................................................... 60
ii. Nonrental Income and Vacancy Rate .......................... 61

b. Projecting Plaintiff's Future Expenses in the Unrestricted Scenario ....... 61
c. Projecting Plaintiff's Future Income in the Restricted Scenario .......... 62
d. Projecting Plaintiff's Future Expenses in the Restricted Scenario ........ 62
e. Calculating Projected Net Income in the Restricted Scenario ............ 62

5. Discounting Plaintiff's Damages ...................................... 63

a. Postjudgment Discount Rate ..................................... 63
b. Prejudgment Discount Rate ...................................... 64

6. Conclusion ....................................................... 65

V. TAX NEUTRALIZATION PAYMENT ......................................... 65

A. Legal Standard ........................................................ 66

B. The Parties' Experts .................................................... 67

C. Plaintiff's Position ......................................................68

1. The Tax Consequences of Converting Sonoma Village Apartments to a Market-Rate Rental Property .............................................. 68

a. Computing Tax Liability Assuming a Conversion ..................... 69
b. Computing Tax Liability Assuming the Status Quo ................... 72
c. Calculating Net Tax Liability ..................................... 74

2. The Tax Consequences of the Lump-Sum Damages Award ................. 74
3. Determining the Tax Neutralization Payment ............................ 75

D. Defendant's Response ................................................... 75

E. Analysis .............................................................. 77

VI. CONCLUSION ............................................................ 83

I. FACTS

This section contains the court's findings of fact as required by Rule 52(a)(1) of the Rules of the United States Court of Federal Claims.¹

Page 4

A. Plaintiff's Contract With the Government and the Government's Breach of That Contract

On September 4, 1984, plaintiff executed an agreement with the Farmers Home Administration of the United States Department of Agriculture in which the government agreed, pursuant to section 515 of the Housing Act of 1949, Pub. L. No. 81-171, 63 Stat. 413 (as added by Pub. L. No. 87-723, § 4(b), 76 Stat. 670, 671-72 (1962)), to lend plaintiff $1,261,080 to construct a low- and moderate-income housing project at 59 West Agua Caliente Road in Sonoma, California. Jt. Stip. ¶ 1; JX 1; see also Jt. Stip. ¶ 1 (indicating that the project is known as Sonoma Village Apartments). Plaintiff agreed to repay the loan in installments over a fifty-year period ending October 27, 2035. Jt. Stip. ¶ 4.

In conjunction with the loan agreement, plaintiff executed two promissory notes in favor of the government, one for $1,222,650, and the other for $38,430. Id. ¶ 3. Both promissory notes included the following provision: "Prepayments of scheduled installments, or any portion thereof, may be made at any time at the option of Borrower providing the loan is in a current status." Id. ¶ 5. The promissory notes, in turn, were secured by a deed of trust that was recorded in Sonoma County, California on October 28, 1985. Id. ¶ 6. The deed of trust included a rider containing the following language:

The borrower and any successors in interest agree to use the housing for the purpose of housing people eligible for occupancy as provided in section 515 of Title V of the Housing Act of 1949 and [Farmers Home Administration] regulations then extant during this 20-year period, beginning the date this instrument is filed of record.

Id. ¶ 7; JX 4 at 6. The aforementioned twenty-year period ended on October 27, 2005. Jt. Stip. ¶ 8. Plaintiff would not have accepted the loan from the government had it not been provided with the ability to prepay the loan after twenty years. Tr. 51 (Gullotta). Indeed, plaintiff always intended to prepay the loan after twenty years. Id. at 54, 100.

By accepting the loan from the Farmers Home Administration, plaintiff agreed to comply with United States Department of Agriculture regulations pertaining to the section 515 program, including regulations requiring the submission of annual financial reports and regulations regarding the management of housing projects. Jt. Stip. ¶¶ 13-14; 7 C.F.R. §§ 3560.102, .308 (2017); 7 C.F.R. §§ 1930.113, .124, & pt. 1930, subpt. C, ex. B (1985). The requirements set forth in these regulations are much more onerous than those for managing market-rate rental properties. Tr. 344-45 (Williams); see also id. at 44-45 (Gullotta) (characterizing the requirements of the section 515 program as "complex[]"). Indeed, in addition to submitting annual financial reports, properties in the section 515 program must submit to annual third-party audits, process lengthy rental applications, and engage in a time-consuming income-verification process. Id. at 344-45 (Williams). Further, the government reviews and approves the properties' budgets, monitors the properties' reserve capital accounts and all capital improvements, and

Page 5

controls the properties' ability to increase...