United States v. Leavell & Ponder, Inc.

• Decision Date: 07 March 1961
• Docket Number: No. 18427.,18427.
• Citation: 286 F.2d 398
• Parties: UNITED STATES of America, Appellant, v. LEAVELL & PONDER, INC., and Morgan Company, Inc., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

286 F.2d 398 (1961)

UNITED STATES of America, Appellant, v. LEAVELL & PONDER, INC., and Morgan Company, Inc., Appellees.

No. 18427.

United States Court of Appeals Fifth Circuit.

January 23, 1961.

Rehearing Denied March 7, 1961.

A. Donald Mileur, Roger P. Marquis, Attys., D. of J., Washington, D. C., Perry W. Morton, Asst. Atty. Gen., D. of J., for appellant.

William Duncan, Eugene T. Edwards, El Paso, Tex., for appellees.

Before TUTTLE, Chief Judge, and RIVES and JONES, Circuit Judges.

TUTTLE, Chief Judge.

This is an appeal by the government from an award in a condemnation of a Wherry Housing Project. The matter was originally referred by the trial court to three commissioners as authorized by Rule 71A, Federal Rules of Civil Procedure, 28 U.S.C.A. The findings of fact and conclusions of the commissioners were accepted in full and adopted by the trial court.

The principal grounds of the government's appeal are: (1) the commissioners made a finding of value based on evidence of a prior sale of part of this same property, whereas such prior sale was not for cash or its equivalent, but was for part cash and part exchange of real estate, and as to the real estate no proper appraisal was made to support the value assigned to it by the parties to the transaction; and (2) in making a finding of value based on the capitalization of anticipated income from the property the Commission utilized a 4½% rate of return which was unrealistic and without support in the evidence; and (3) in making a further finding of value based on capitalization of income after a deduction for corporate income taxes the Commission made improper assumptions, departed from accepted principles of valuation in taking income taxes into consideration, and utilized a 2¾% ratio of return which was unrealistic and without any evidentiary support in the record.

The property condemned comprised leasehold interests in some 124 acres of government owned land within the Fort Bliss Military Reservation at El Paso, Texas. There were two practically identical developments, one owned by each of the two corporate appellees. Both projects combined were known as Van Horne Park. The leasehold interest had been improved by the construction by each of the sponsors of some 400 dwelling units and by the joint construction of a shopping and trade center.

The characteristics and nature of a Wherry Housing Project have been fully discussed by this Court in United States v. Benning Housing Corporation, 5 Cir., 276 F.2d 248, and by the Court of Appeals for the Tenth Circuit in Buena Vista Homes, Inc. v. United States, 10 Cir., 281 F.2d 476. In the Benning Housing case we said:

"In order to evaluate the contentions as to rent control, a brief survey of the background of these projects seems necessary. The projects were constructed under the aegis of the Wherry Act, which was enacted on August 8, 1949, in an attempt to relieve an acute shortage of housing which existed at that time at military installations throughout the country. The Act envisioned the construction of this needed housing by private builders and its provisions were consequently specifically designed to remove what appeared to its chief proponents to be the major impediments to such construction. The then current view of the problem was concisely expressed by Senator Wherry himself:

"`There are three requisites that must be provided in this legislation if it is to be successful: The program must be attractive to the builder or else you will get no construction; it must be attractive to the mortgage banker who supplies the money; the project must be made attractive to the Federal Housing Authority to enable it to set rental prices within the reach of families in the lower income brackets as well as in the higher brackets. S.Rep. No. 231, 85th Cong., 1st Sess., at p. 11.\'

"The Wherry Act proposed to meet these requisites by providing for: (1) the elimination of land and acquisition costs by the leasing of land on military installations on long-term, irrevocable leases at nominal rentals; (2) a special form of mortgage insurance which avoided the problem created by the fact that ordinary F.H.A. mortgage insurance was unavailable because of the risk involved by reason of the location of the needed housing and the question as to the permanent nature of the military installations; and (3) F.H.A. control over the rents which could be charged for housing constructed under this plan.

"Considered in the light of the purposes of the Wherry Act, the proper resolution of the controversy seems clear. The condemnees\' argument rests squarely upon a basic misconception of those purposes. For condemnees presuppose that the inducements offered by the Wherry Act to stimulate building, i. e., leases at nominal rentals and Government-insured mortgages, were outright gifts to the Wherry sponsors and for which the Government would not, and, indeed, could not, exact a return. Such is not the proper interpretation of that Act. These inducements were offered in return for lowcost housing. It is clear that the policy has consistently been one of allowing a return based upon original cost rather than reproduction. Rent increases were sanctioned only to offset rising operating costs and not to compensate for increased reproduction costs. The Act did not contemplate that sponsors would recover reproduction costs on a sharply rising market. And there was nothing unfair in its failure to do so. By insuring the mortgages on the projects, the Government assumed the risk of loss on a declining market. In such a situation, respect for the public interest practically required that no benefit should accrue to the sponsors as a consequence of inflation." 276 F.2d 248, 252.

It should be added to this that the sponsors were also subject to regulations relating to methods of operation of the housing.

The housing projects here sought to be condemned were required to be condemned under the terms of the Capehart Act, 42 U.S.C.A. § 1594a(b). Under this Act before the Federal Government could undertake to build similar housing on military reservations, it was required to acquire title to the Wherry projects. Construction on the Van Horne projects began on March 1, 1950, the first units were occupied on July 22, 1950, and all units were completed and occupied by April 15, 1951. The total cost of construction of each of the two units was $3,400,400.00.¹ The original mortgage was for $3,316,000.00.² Under the terms of the law the owners were permitted to and did receive rentals on the units without any obligation for mortgage or interest payments until September, 1951. Such rentals amounted to a net sum of approximately $100,000.00 for each project.

The declaration of taking by the government was accompanied by a deposit of $291,000.00 for each property. The commission found that the correct value was $977,266.47. The duty facing the commissioners was to make findings of fact and arrive at conclusions based on such findings fixing the fair market value of Van Horne Park, taking into consideration all of the facts and circumstances that would reasonably go into the making of a bargain of purchase and sale between a willing buyer under no obligations to buy, and a willing seller under no obligations to sell. Messer v. United States, 5 Cir., 157 F.2d 793. Gwathmey v. United States, 5 Cir., 215 F.2d 148.

We have held that in a condemnation of Wherry Housing projects the means of proving such market value may not include proof of reproduction cost less depreciation. United States v. Benning Housing Corporation, supra. In that case we stated that the means of ascertaining fair market value in such a case as this must be "on the basis of comparable sales, capitalization of income and original cost."

The commission heard considerable testimony as to reproduction costs of these projects. It expressly held, however, that this should not be considered in arriving at its determination of value. Its determination resulted from computations which it made after making certain findings of fact as an aid in arriving at a valuation by capitalizing projected net income. The commission's findings of fact and conclusions resulting from such findings were as follows:

"As a basis on which to arrive at the Owner\'s loss, the Commission in its deliberation has projected the income of the owners to the end of the considered economic life of the properties, fifty years, less 7 years passed, and has taken into consideration, as to interest paid on the mortgage, only the diminishing annual interest payments to date of the mortgage\'s complete liquidation, and finds the Owner\'s potential net gain to be $6,615,341.38, for each one-half of the project. The present value of $1.00 at what the Commission finds to be the proper interest rate of 4½% (4% F.H.A. mortgage insurance, plus ½% mortgage insurance) compounded annually for 43 years, for each one half is $996,670.91, which sum, we find to be the Owner\'s loss.

"The Commission has further considered the fact that if the purchaser of such property were a corporation it would pay an income tax of 52%, after giving credit for an exemption as provided by law for the first $25,000.00 in income each year exempt from the surtax. The projected income above shown $6,615,341.38, less the calculated income tax leaves a balance of $3,411,863.86, which the Owners could have expected to take home after taxes. The Commission has then used this figure and considered it as `non-taxable\' income to ascertain what a prudent buyer would be required to invest in non-taxable securities to obtain the above figure. It is the Commission\'s opinion that an earning rate of 2 and ¾% would be proper, and it has therefore reduced such net `non-taxable\' income to a `present value\' using published tables as heretofore stated and arrived at the Owner\'s loss of $1,062,607.75, for each one-half of the property.

"Had this property been purchased

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