United States v. Certain Parcels of Land, No. 11273.

• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
• Writing for the Court: BIGGS, , and GOODRICH and McLAUGHLIN, Circuit
• Citation: 215 F.2d 140
• Parties: UNITED STATES v. CERTAIN PARCELS OF LAND IN CITY OF PHILADELPHIA et al.
• Docket Number: No. 11273.
• Decision Date: 12 August 1954

215 F.2d 140 (1954)

UNITED STATES
v.
CERTAIN PARCELS OF LAND IN CITY OF PHILADELPHIA et al.

No. 11273.

United States Court of Appeals, Third Circuit.

Argued April 19, 1954.

Decided August 12, 1954.

215 F.2d 141

Lewis M. Stevens, Philadelphia, Pa., (George V. Strong, Seth W. Watson, Jr., Merritt N. Willits, 3rd, Philadelphia, Pa., on the brief), for appellants.

John C. Harrington, Washington, D. C. (Perry W. Morton, Asst. Atty. Gen., W. Wilson White, U. S. Atty., Philadelphia, Pa., Roger P. Marquis, Atty., Dept. of Justice, Washington, D. C., on the brief), for appellee.

Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.

BIGGS, Chief Judge.

The creation of an "Independence National Historical Park" to consist of certain historical buildings located near Independence Hall in the City of Philadelphia was authorized by Congress in 1948. See 62 Stat. 1061, as amended, 16 U.S.C.A. § 407m et seq. The Secretary of the Interior was authorized by the Act creating the Park to acquire particular historical buildings and an area of approximately three city blocks to be made into a Park. One of the historical buildings described in the Act was the "Merchants' Exchange property" located on a city block bounded by Third Street, Walnut Street and Dock Street, in the City of Philadelphia. The Merchants Exchange is one of five properties mentioned in the Act as properties to be acquired and maintained for their historical interest in the setting of the new National Historical Park.

On March 1, 1951, the United States filed a declaration of taking covering the Merchants Exchange property and a number of other properties included within the area of the new Park. The government deposited $200,000 in the registry of the District Court as estimated just compensation for the Merchants Exchange. The present appellants,

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the owners of the Merchants Exchange, filed an answer in opposition to the proposed condemnation. The court below in substance overruled the owners' objections, in an opinion filed August 2, 1951. See 99 F.Supp. 714. The court then proceeded to appoint Commissioners to try and determine the issue of just compensation. See Rule 71A(h), F.R. C.P. 28 U.S.C. The Commissioners returned their Report on March 23, 1953, setting the fair market value of the Merchants Exchange as $309,000. The court below, for reasons to be stated later in this opinion, returned the Report to the Commissioners for specific additional findings. The Commissioners made a further Report to the court below on September 24, 1953, reaffirming the sum of $309,000 as the fair value of the property. The court below affirmed the new Report on November 18, 1953. The appeal at bar followed

The Merchants Exchange was built in 1833 and 1834 to be used as an exchange building by an association of Philadelphia merchants. The Exchange was designed by William Strickland, the foremost American architect of the time, and was constructed of Pennsylvania marble. The building was completely remodeled and fireproofed in 1898 for use by the Philadelphia Stock Exchange for its pit and for offices for its members. The Philadelphia Stock Exchange used the building until 1914. Since that time it has been employed as an office building. In addition to the office building proper, the property condemned, on the date of taking, also consisted of a cold storage space in the basement, seven one-story brick market stores facing Dock Street, and a gasoline service station located on the southeast corner of Third and Dock Streets. The Merchants Exchange is located on the edge of a large wholesale fruit and produce market area, and several of the uses of the building, including the basement cold storage space, are associated with that industry.

The main question on this appeal involves the measure of compensation used by the Commissioners in arriving at their estimate of just compensation. The Commissioners heard extensive testimony from experts in real estate valuation, both for the United States and for the condemnees. The testimony ranged over several bases for valuation, including replacement cost and capitalization of rental income. The standard of valuation most relied upon was capitalization of rental income. In their first Report, the Commissioners summarized all the testimony given by the experts in a careful manner. As has been stated, the Commission's conclusion was that a fair value for the property at the time of the taking was $309,000. The last two sentences of the Commissioners' first Report described how the Commissioners arrived at this figure: "If, therefore, the income formula is to be used and adopted by the Commissioners in arriving at the fair market value of the subject property on the date of condemnation, it cannot logically be argued that the space in the building should be appraised on the basis of the $2.25 per square foot figure the highest rental offered by a prospective tenant, and the Commissioners feel that an overall average for all the space in the building should not exceed a $2.10 per square foot valuation at the time of taking. Accordingly, using that figure and employing the method of computation used by the experts of the owners, which the Commissioners find to be fair, the valuation of the subject property on the date of taking, to wit, March 1, 1951, would approximate $309,000.00."

The "method of computation" used by the experts of the owners, to which the Commissioners referred, is a capitalization of the rental income of the building. The owners' experts first took the total space, in square feet, available for renting and multiplied this figure by $2.50, the amount the experts estimated to be a fair rental per square foot for the office space as of the date of taking. From the total thus obtained, the experts then deducted certain costs of operation. Some of these costs of operation are fixed, in the sense that they do not vary

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according to the rent per square foot obtained for the space. On the other hand, it is argued that three elements of operating cost vary directly with the rent per square foot obtained. These cost elements are depreciation, management expense, and vacancy expense. It is asserted that it is customary in the business of operating office buildings, similar to the Merchants Exchange, in Philadelphia to base depreciation expense on total rental income, after the estimated number of years of useful life of the building have been determined. Similarly, management expenses are estimated at 5% of total rental income. An estimate of the expense of vacancies is arrived at by multiplying an estimated percentage of the available space which will lie vacant by the fair rental value per square foot of the vacant space. The computation presented by the owners' experts is set out in the first column of the footnote.¹ A similar estimate based

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upon a fair rental value of $2.10 per square foot, the figure suggested by the Commissioners' Report, is set out in the third column of footnote 1 to indicate what the computation would have been had rental income been capitalized on the basis of $2.10 per square foot. It is asserted by the owners that it is possible to arrive at the $309,000 estimated by the Commissioners, using a figure of $2.10 per square foot, if the expenses of depreciation, management expense, and vacancy expense are incorrectly based upon the figures the owners' experts originally used, based upon $2.50 per square foot. This computation is set out in the second column of footnote 1

The condemnees argue that an obvious mistake has been made and that they are entitled to have that mistake corrected here. If the last two sentences of the Commissioners' Report, quoted above, are taken to be a full statement of the Commissioners' reasoning in arriving at the $309,000 figure, there is something to be said for the position of the owners.

The condemnees first raised this objection alleging a mistake in computation in exceptions to the Commissioners' first Report. The court below affirmed this first Report but later sent the Report back to the Commissioners for a reconsideration of the point raised by the condemnees. The court's order of reference is set out in the footnote.²

As was stated above, the Commissioners produced a second Report in response to this order of the court. In this second Report the Commissioners denied that they had arrived at a figure of $309,000 by any method of simple arithmetic based upon capitalization of a $2.10 rental income. The Commissioners said that they had not limited their estimate of valuation to rental income alone but had "* * * `given diligent and conscientious consideration to every piece of evidence and testimony submitted to them for that purpose * * *' The income approach, and specifically the $2.10 per square foot rental figure...