United States v. CERTAIN INTERESTS IN PROPERTY, ETC.

• Decision Date: 15 June 1960
• Docket Number: No. 36839.,36839.
• Parties: UNITED STATES of America, Plaintiff v. CERTAIN INTERESTS IN PROPERTY IN MONTEREY COUNTY, State of CALIFORNIA; Likins-Foster Monterey Corporation, a Delaware corporation, Likins-Foster Ord Corporation, a Delaware corporation, et al., and Unknown Owners, Defendants.
• Court: U.S. District Court — Northern District of California

186 F. Supp. 167

UNITED STATES of America, Plaintiff v. CERTAIN INTERESTS IN PROPERTY IN MONTEREY COUNTY, State of CALIFORNIA; Likins-Foster Monterey Corporation, a Delaware corporation, Likins-Foster Ord Corporation, a Delaware corporation, et al., and Unknown Owners, Defendants.

No. 36839.

United States District Court N. D. California, S. D.

June 15, 1960.

Lynn J. Gillard, U. S. Atty., Charles R. Renda, San Francisco, for plaintiff.

Joseph M. Williamson, Urbana, Ill., Raymond R. Dickey, Washington, D. C., for defendants.

YOUNGDAHL, District Judge.

This is an action brought by the United States to condemn defendants' leasehold interests, subject to outstanding mortgages, in a Wherry Act¹ housing project located near Monterey, California, on Fort Ord. Long-term leases on government land, with an annual nominal rental of $200 to be paid to the government by the defendants, were entered into on November 16, 1950 and June 27, 1952. The project was completed about 1952; some 615 residential buildings, comprising 1,000 dwelling units, were constructed, as well as all necessary streets, walks, and sewage systems. The leases provided that the defendant corporations were to operate the project, although some supervisory control was reserved to the plaintiff. The improvements became the property of the United States upon completion, with occupancy restricted to military or civilian personnel of the Armed Services, although provision was made for other residents in the event units were available. The property was condemned because additional military housing was found necessary at Fort Ord and under the provisions of the Capehart Act² acquisition of the Wherry project by negotiation or condemnation became mandatory. Negotiation having failed, a complaint in condemnation and a declaration of taking were filed by the United States on November 1, 1957.

At the trial, the sole issue for the jury to determine was the crucial one of "just compensation". The government asserted that the award should be between $650,000 and $683,000; the defendants contended they were entitled to between $3,680,000 and $3,880,000. The jury's verdict was $1,106,000.

Defendants have moved for a new trial. The principal point urged is that the government utilized a method of valuation that was improper in view of a stipulation between the parties. This stipulation, embodied in the pretrial order, reads:

"There are no comparable sales that should be considered by the jury in this case, and there will be no proffer of any comparable sales in the trial of this cause."

One of the methods utilized to determine the value of condemned property is comparable sales: the value of other similar property, as displayed by its recent sales price, is considered indicative of the condemned property's value. 1 Orgel, "Valuation Under Eminent Domain" § 137 (1953 ed.).

A second method utilized to determine the value of condemned property is by the capitalization of income: the future net income to be expected from the property is discounted to the present to provide for both a return on the investment and an amortization of the investment. 1 Orgel, supra, § 176 et seq.; and see Burritt Mutual Savings Bank v. City of New Britain, 1958, 20 Conn.Sup. 476, 140 A.2d 324.

In order not to prolong the trial with much testimony on the true comparability of the "comparable" sale, as well as to avoid the problem of whether the comparable sales establish a market value for the condemned property,³ the parties stipulated that the first method of valuation was not to be used. Defendants do not contend that the government violated the stipulation by showing sales prices of comparable property; defendants contend that the government's witnesses violated the stipulation indirectly by ascertaining their capitalization rates, in part, by referring to the rates of return on real estate transactions, including real estate that was similar to the Wherry project.

The Court is of the opinion that there is a distinction between:

(1) The use of comparable sales as direct proof of the value of the condemned property, and

(2) The use of the sales price of comparable property by an expert—along with noncomparable property such as stocks, bonds and dissimilar real estate— to arrive at prevailing market conditions, and thus be able, after consideration of the risk involved in the various sales, to set a realistic and just capitalization rate for the property condemned.⁴

It would seem apparent that if a capitalization rate is to be set, it should be ascertained by reference to the best evidence—the most similar property—as well as dissimilar investments, if that proves necessary. "The selection of a capitalization rate by comparison is perhaps the most widely accepted approach. It recognizes the behavioristic nature of economics, because by comparison one gets the reaction of people in the market place.⁵" And see United States v. Delano Park Homes, 2 Cir., 1944, 146 F.2d 473, in which Judge Learned Hand, for the court, stated that one of the points raised on appeal was "(3) that the testimony of an expert witness was allowed to stand, after it appeared upon cross-examination that he had in part based his appraisal upon sales made to the United States under the shadow of condemnation." These sales were expressly assumed by Judge Hand to be inadmissible under New York law (which was the applicable law) but

"Be that as it may, it would be absurd to exclude a qualified expert's appraisal because he had considered such evidence; indeed he ought to consider it; it is part of the data on which his opinion should rest. It is just because he is an expert, and for that reason able to give its proper weight to all data, that he is allowed to appraise the property at all. No court has held, so far as we can find, that his opinion shall not be received because it is so based in part; and we should not follow its ruling, if there were one, unless we had no escape." 146 F.2d at page 475.

That the stipulation must be construed to embrace only (1) and not (2), above, is evident from the explicit statement made by counsel for the government immediately after the stipulation at the pre-trial conference—a statement which went unquestioned by the defendants. Mr. Renda said:

"Yes, Your Honor, and it is for that purpose to save time that I am taking this step stipulating. However, I do urge upon the Court that the experts of the Government have, in considering what the market rate of return would be for this type of investment, investigated the sales mentioned, as well as other sales of similarly regulated and restricted types of property.

"Now, as the Court is undoubtedly aware, when an investor has a sum of money which he desires to place in an investment, he will look to similar types of investments to the one he is interested in to see whether or not he can get a better rate of return in order to justify the asking price or the offering price. This is what any prudent purchaser would do. And in the situation that we have here, where we have the hypothetical sale of our particular project, the question before the experts is, and as it will be presented to the jury: What would the prudent investor do? What would he pay for this property? And it is the opinion of the Government experts that the investor in this type of project would look to similar investments of similarly regulated and controlled type of projects, which would include 608's, 207's and Wherry projects, to find the rate of return * * *".

(Tr. ptc 125.)

Furthermore, it appears that even the defendants' expert witness considered real estate investments in fixing his capitalization rate, although it should be added that he did not think these real estate investments comparable.

"Q. Mr. Williamson Now, what are the sources of capitalization rates generally? A. Mr. Vaughan Well, you investigate what you might call the money market statistically to find out what investments are earning as of the dates you are concerned with.

"Q. Did you make such an investigation? A. Yes, sir; I did.

"Q. Would you describe such fields or financial experience as you have found available for you to examine into? A discussion of stocks and bonds and their yield followed.

"Q. Now, was there available to you any other indicator or criteria of value which you were able to employ in this case? A. Well, from personal experience. I had occasion to negotiate leases and assist in the preparation of leases of real estate in which the rate of return was critical—both the rate of return and the period of time over which the owner was to get his investment back.

"I could rely upon my own information and work I had done personally in the field, as well as statistical data.

"Then going back to the fact that we are dealing with a completely unique project in my experience, this is a property which is being taken over, occupied and in business and in operation, to continue in that operation.

"In the history of it I attempted to put myself in the position of an investor back to the days that these Wherry Projects were conceived and went into effect. * * *" (Tr. 362-364.)

On cross-examination, Vaughan's testimony went as follows:

"Q. Mr. Renda In your investigation of similar investments, Mr. Vaughan, you mentioned yesterday that you considered U. S. Government bonds and certain stocks, etc. Did you give consideration to various types of investments incorporating a similar type of housing; by that I mean housing that has similar restrictions by FHA and similar type of insured loans and for a similar purpose. A. I did not consider them comparable because you get into one area where the Wherry is unique. In the first place, it is located upon land owned by the Government at a very nominal rental; it is occupied by military personnel assigned by the base officer. There are many, many factors involved in a Wherry which I think make them different than 608's and provide more

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