United States v. CERTAIN INTERESTS IN PROPERTY, ETC.

Decision Date09 January 1964
Docket NumberNo. 113,Docket 27994.,113
Citation326 F.2d 109
PartiesUNITED STATES of America, Petitioner-Plaintiff-Appellee, v. CERTAIN INTERESTS IN PROPERTY IN the BOROUGH OF BROOKLYN, COUNTY OF KINGS, STATE OF NEW YORK, and Dayton Development Fort Hamilton Corp. and Fort Hamilton Manor, Inc., Defendants-Appellants.
CourtU.S. Court of Appeals — Second Circuit

COPYRIGHT MATERIAL OMITTED

Edmund B. Clark, Dept. of Justice, Washington, D. C. (Ramsey Clark, Asst. Atty. Gen., Harry T. Dolan, Sp. Asst. to the Atty. Gen., Brooklyn, N. Y., and Roger P. Marquis, Washington, D. C., on the brief), for petitioner-plaintiff-appellee.

Bernard L. Bermant of Skinner, Bermant, Leddy & Raber, New York City (Carl J. Moskowitz, New York City, on the brief; George B. Kenner, New York City, co-attorney), for defendants-appellants.

Before LUMBARD, Chief Judge, and KAUFMAN and HAYS, Circuit Judges.

HAYS, Circuit Judge:

Defendants, Fort Hamilton Manor, Inc., and Dayton Development Fort Hamilton Corporation, appeal from judgments entered in a proceeding for the condemnation of their leasehold interests in certain housing projects constructed under the Wherry Housing Act, 63 Stat. 570 (1949), 12 U.S.C. § 1748 et seq. (1958), as amended, 73 Stat. 682 (1959), 12 U. S.C. § 1748 et seq. (Supp. IV 1959-62). We affirm.

Congress passed the Wherry Act in 1949 to encourage the construction of low-cost military housing by private enterprise. Inducements to private builders included government insured mortgages of 90% of estimated cost of construction, without regard to the risk, and elimination of land acquisition costs through the leasing of government owned military sites at nominal or very low rentals. In return for these benefits and to ensure the realization of the objective of providing housing at rentals military personnel could afford, the mortgagors were made subject to Federal Housing Authority regulation of rents, charges, capital structure, rate of return, and methods of operation.

Fort Hamilton Manor, Inc., and Dayton Development Fort Hamilton Corporation, sister corporations, constructed Wherry Act Housing projects on government land at Fort Hamilton, Brooklyn, New York, under two 75-year leases. Together, the two projects comprise five six-story, elevator apartments, with a total of 682 rentable units.

In 1955, Congress adopted a new approach to military housing. The Capehart Act, 69 Stat. 651 (1955), as amended, 42 U.S.C. §§ 1594-1594j (1958), provided for government construction of new housing and made mandatory the acquisition by the United States of Wherry Act projects located at military installations where Capehart housing was approved. On December 15, 1960, the United States instituted condemnation proceedings with respect to the Fort Hamilton housing by filing a declaration of taking and by depositing into court $1,250,000 as estimated compensation. The United States took possession on February 1, 1961.1

Wherry leaseholds have unique features that render difficult the direct determination of market value, the usual measure of just compensation in condemnation cases. The leases themselves cannot be transferred and thus have no "market value." Although sale of a Wherry leasehold can be effected indirectly by sale of the stock in the mortgagor corporation, such sales have been infrequent. Because of the special riskreducing features of Wherry leases, sales of other leaseholds are not readily comparable.

On the other hand, Wherry leases are particularly amenable to the capitalization of income method of valuation, which estimates the market price of the right to receive a certain estimated income, since the regulation to which the projects are subject permits a relatively precise estimate of future income. At the beginning of the lease, maximum rentals are established that will restrict net income, after operating expenses and taxes, to less than 6.5% of the estimated cost of construction. If operating costs increase or the rate of occupancy changes significantly, the regulations permit a redetermination of maximum rentals, with the result that net income remains virtually constant over the period of the lease.

At the trial, the parties' appraisal experts, both of whom used the capitalization of income method, were in substantial agreement as to the amount of income to be capitalized. Their principal disagreement concerned the rate of return at which the capitalization was to be computed, the government witness adopting a higher rate of return and thus a lower capitalized value. The jury apparently accepted the opinion of the government expert, for their verdict ($200,000 for the Dayton Development leasehold and $675,000 for Fort Hamilton) adopted his appraisal to the penny.2

Defendants contend that the testimony of the government witness, Shlichta, was insufficient to support the verdict because it was based on evidence, which defendants claim was inadmissible, concerning sales of stock3 in Wherry corporations and FHA "608" housing corporations, National Housing Act § 608, 56 Stat. 303 (1942), as amended, 12 U.S.C. § 1743 (1958). The Wherry leaseholds as to which Shlichta testified were located in relatively isolated surroundings near Fort Devons, Massachusetts, Barksdale, Louisiana, and Quantico, Virginia, and covered frame buildings rather than six-story apartments as at Fort Hamilton. The FHA rent-controlled projects were located near Fort Hamilton and were substantially similar in construction to the Fort Hamilton developments. Rentals in these projects were lower than those in uncontrolled neighborhood apartment buildings but above the maximum for defendants' projects.

Defendants argue that evidence of such sales is not admissible unless the properties are comparable to that being valued and that because of the differences which we have described the properties were incomparable as a matter of law. For this conclusion they rely on Fairfield Gardens, Inc. v. United States, 306 F.2d 167, 170-173 (9th Cir. 1962), United States v. 190.71 Acres of Land in Lake County, Ill. Forrestal Village, 300 F.2d 52, 59-62 (7th Cir. 1962), and United States v. Tampa Bay Garden Apartments, Inc., 294 F.2d 598, 605 (5th Cir. 1961), which held that the trial court had not abused its discretion in excluding evidence of these same Wherry sales, and, in the Fairfield Gardens case, evidence of sales of nearby FHA "608" leaseholds.

Since comparability is essentially a question of fact, trial judges exercise broad discretion in ruling on the admissibility of proof of comparable sales. As the court stated in Forrestal Village, supra, 300 F.2d at 60, "`It is traditional that the question whether the compared property is truly comparable is for the judge to decide.'" Thus the cases cited by defendant do not require reversal of a trial judge who exercises his discretion to admit, rather than exclude, the challenged evidence.

Moreover, in the cases cited by defendants, the evidence as to comparable sales was offered as direct proof of value, whereas in the present case the government used the evidence of comparable sales not directly as proof of value but only to establish the ratio between income and sale price, i. e., as support for its estimate of the appropriate rate of return. We think there is sufficient similarity of risk to permit reference to the sales for that purpose. Although differences in durability of construction (which may affect the risk that physical deterioration will reduce income-producing capability), in proximity to civilian population centers (which provide alternative sources of tenants should the military installation be closed), and in the margin between the controlled and competitive uncontrolled rentals (which affords a cushion against a downward price trend) are factors creating a dissimilarity of risk, they operate over the long-term and are concerned with relatively speculative aspects. The compared leaseholds are alike in the more immediate, and more important, elements of low rentals, low mortgage interest rates, high mortgage coverage, and stable rental income. Taking all factors into consideration, we hold that the trial judge acted within his discretion in admitting the testimony. See United States v. Delano Park Homes, Inc., 146 F.2d 473, 474-475 (2d Cir. 1944); United States v. Tampa Bay Garden Apartments, Inc., supra, 294 F.2d at 605; United States v. Johnson, 285 F.2d 35, 40-41 (9th Cir. 1960); United States v. Certain Interests in Property in Monterey County, Cal., 186 F.Supp. 167, 169-170 (N.D.Cal.1960), aff'd sub nom. Likins-Foster Monterey Corp. v. United States, 308 F.2d 595, 599 (9th Cir. 1962).

Defendants argue that it was error to exclude evidence4 concerning current reproduction costs less depreciation, because such evidence was admissible under both federal decisions and under state decisions allegedly made applicable by Rule 43(a) of the Federal Rules of Civil Procedure.5 We look only to the federal decisions, because the propriety of basing an estimate of value on reproduction cost less depreciation involves a substantive rule of law rather than an evidentiary question governed by Rule 43(a), see United States v. Certain Property Located in Borough of Manhattan, 306 F.2d 439, 444 (2d Cir. 1962); cf. Westchester County Park Commission v. United States, 143 F.2d 688, 693-694 (2d Cir.), cert. denied, 323 U.S. 726, 65 S.Ct. 59, 89 L.Ed. 583 (1944), and because, in any event, the peculiarities of Wherry projects render the state decisions inapposite.

It cannot be seriously argued that evidence of reproduction cost was admissible as direct proof of value. The interest being condemned is essentially the prospect of receiving a certain income based on the original cost of the property. Fluctuations in costs of construction would afford no basis for an increase in rentals. "The Wherry Act did not contemplate that sponsors would recover reproduction costs...

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