Free Post Trial Brief - District Court of Federal Claims - federal

Case 1:94-cv-10002-CFL

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Nos. 94-10002C, 94-10003C, 94-10005C, 94-10006C, 94-10007C, 94-10008C 94-10010C, 94-10020C, 94-10030C, 94-10040C Judge Charles F. Lettow ______________________________________________________________________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS ______________________________________________________________________________ CLAREMONT VILLAGE COMMONS, et al., Plaintiffs, v. THE UNITED STATES, Defendant. ______________________________________________________________________________ DEFENDANT'S POST-TRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW ______________________________________________________________________________ PETER D. KEISLER Assistant Attorney General JEANNE E. DAVIDSON Director BRIAN M. SIMKIN Assistant Director KENNETH M. DINTZER Assistant Director DAVID A. HARRINGTON KENNETH D. WOODROW TIMOTHY P. McILMAIL SEAN DUNN BONDURANT ELEY Trial Attorneys Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 (202) 353-0513 June 12, 2007 Attorneys for Defendant

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TABLE OF CONTENTS STATEMENT OF FACTS DEFENDANT ESTABLISHED AT TRIAL . . . . . . . . . . . . . . . . . . 1 I. Statutory Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. B. The Section 221(d)(3) And 236 Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Benefits Of Participating In The Section 221(d)(3) And Section 236 Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1. 2. 3. C. Low-Risk, High Leverage Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Tax Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Other Opportunities For Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Preservation Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1. 2. ELIHPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 LIHPRHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

D. II.

Additional Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A. The Initial Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1. 2. 3. 4. 5. 6. 7. 8. 9. Claremont Village Commons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Covina West Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Del Vista Village . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 De Soto Gardens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Kittridge Gardens I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Kittridge Gardens II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Oxford Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Parthenia Townhomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Pioneer Gardens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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10. B. C. D. E. F. G. H. I.

Puente Park Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Further Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 The Properties Prior To Title II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Plaintiffs Each Signed A Use Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Delays In Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Los Angeles Rent Stabilization Ordinance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 8 Assistance Following Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

DEFENDANT'S CONTENTIONS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 I. The Los Angeles Plaintiffs' As-Applied Taking Claims Are Unripe . . . . . . . . . . . . . . . 25 A. As-Applied Taking Claims Do Not Ripen Until The Responsible Government Entity Provides A Final Decision Applying The Regulation At Issue To The Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 The Los Angeles Plaintiffs' As-Applied Taking Claims Are Not Ripe Because They Failed To Apply To Prepay Under The Preservation Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

B.

II.

The Preservation Statutes Did Not Effect A Regulatory Taking Under Penn Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 A. B. Plaintiffs Have Not Established An "Extraordinary Delay In Governmental Decisionmaking" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Plaintiffs Have Not Established That The Preservation Statutes, As Applied To Their Projects, Constitute A Regulatory Taking . . . . . . . . . . . . . . . 34 1. The Preservation Statutes Caused No Economic Impact . . . . . . . . . . . . . 35 a. b. Plaintiffs' Did Not Offer A Diminution In Value Measure Of Economic Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Plaintiffs Assess The Economic Impact Of The Wrong Restrictions At The Wrong Time . . . . . . . . . . . . . . . . . . . 36

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c.

Plaintiffs' Measure Of Economic Impact Uses An Arbitrary Benchmark That Is Divorced From Plaintiffs' Claims Of Alleged Damages . . . . . . . . . . . . . . . . . . . 37 Even If The Court Were To Use Plaintiffs' Flawed Returns-Based Approach, The Economic Impact Of The Preservation Statues Would Be Minimal . . . . . . . . . . . . . . . 38 The Statutory Sale Option Eliminated Any Economic Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

d.

e. 2.

The Preservation Statutes Do Not Have The Character Of A Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 a. b. c. Cienega VIII Is Not Dispositive . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The Preservation Statutes Promoted Important, Long-Standing Government Objectives . . . . . . . . . . . . . . . . . . . 44 The Preservation Statutes Did Not Shift The Burden Of Providing Low-Income Housing On To Plaintiffs . . . . . . . . . 46 i. Taxpayers Bore the Burden Of Extending Benefits To Developers Under ELIPHA And LIHPRHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 The Preservation Statutes Are Akin To Rent Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

ii. 3.

The Preservation Statutes Did Not Frustrate Investment-Backed Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 a. b. Investment Backed Expectations Are Measured At The Initial Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 The Preservation Statutes Did Not Interfere With A Reasonable Partnerships' Primary Expectations . . . . . . . . . . . . . 51 i. Reasonable Investors Anticipated That The Principal Returns Would Be Obtained Through Tax Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 The Preservation Statutes Did Not Frustrate The Expectations Of Reasonable Investors . . . . . . . . . . . 55

ii.

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c. III.

Plaintiffs Have Produced Insufficient Evidence Of The Respective Partnerships' Actual, Original Expectations . . . . . . . 56

Plaintiffs Are Owed No Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 A. The Los Angles Plaintiffs Are Not Entitled To Compensation Because They Would Not Have Prepaid Their Mortgages On Their Initial Eligibility Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Plaintiffs' Model Does Not Properly Measure Just Compensation . . . . . . . . . . . 61 1. 2. Plaintiffs Are Only Entitled To Nominal Damages . . . . . . . . . . . . . . . . . 61 Plaintiffs' Damage Model Overstates Just Compensation . . . . . . . . . . . 62 a. Plaintiffs Incorrectly Assesses Compensation At The End Of The Alleged Taking Period Using Ex Post Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 At Most, Plaintiffs Would Be Entitled To Fair Rental Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

B.

b. 3.

Plaintiffs' Lost-Profit Model Contains Numerous Errors . . . . . . . . . . . . 66 a. b. c. d. e. f. Dr. Peiser's Valuations For The Five Properties That Were Sold Is Inherently Speculative . . . . . . . . . . . . . . . . . . 66 Plaintiffs' Model Ignores HAP Contracts That Overlapped With The Prepayment Dates . . . . . . . . . . . . . . . . . . 70 Dr. Peiser Employs The Wrong Discount Rates . . . . . . . . . . . . . 72 Dr. Peiser Makes No Allowance For Phasing-In Market Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Dr. Peiser Acknowledged That His Use Of The Annual Adjustment Factor Renders His Model Unreliable . . . . . . . . . . . 73 Dr. Peiser Incorrectly Assumes That Each Plaintiff Could Have Immediately Obtained Permanent Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Dr. Peiser Adopts Incorrect Inflated Interest Rates . . . . . . . . . . . 74

g.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

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TABLE OF AUTHORITIES Cases: Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Am-Pro Protective Agency v. United States, 281 F.3d 1234 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Appolo Fuels, Inc. v. United States, 381 F.3d 1338 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 39 Bass Enterprises Production Co. v. United States, 54 Fed. Cl. 400 (2002), aff'd, 381 F.3d 1360 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 65 Bass Enterprises Production Co. v. United States, 381 F.3d 1360 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32, 43, 44 Bayou des Familles Dev. Corp. v. United States, 130 F.3d 1034 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Bluebonnet Sav. Bank, F.S.B. v. United States, 266 F.3d 1348 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Bohbot v. Santa Monica Rent Control Bd., 34 Cal. Rptr. 3d 827 (Cal. App. Dist. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Northern Helex Corp. v. United States, 524 F.2d 707 (Ct. Cl. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Chancellor Manor v. United States, 331 F.3d 891 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Cienega Garden v. United States, 33 Fed. Cl. 196 (1995), rev'd on other grounds, 194 F.3d 1231 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Cienega Gardens v. United States, 38 Fed. Cl. 64 (1997), rev'd on other grounds, 194 F.3d 1231 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 58 Cienega Gardens v. United States, 265 F.3d 1237 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

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Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim City of Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Cooley v. United States, 324 F.3d 1297 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Data General Corp. v. Johnson, 78 F.3d 1556 (Fed. Cir.1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Daubert v. Merrell Dow Pharmaceutical, Inc., 509 U.S. 579 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67, 68 FCC v. Florida Power Corp., 480 U.S. 245 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62, 64 Forest Properties, Inc. v. United States, 177 F.3d 1360 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 55 Gargoyles, Inc. v. United States, 37 Fed. Cl. 95 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Gilbert v. City of Cambridge, 932 F.2d 51 (1st Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Greenbrier v. United States, 193 F.3d 1348 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Hamilton Bank v. Williamson County Reg'l Planning Comm'n, 729 F.2d 402 (6th Cir. 1984), rev'd on other grounds, 473 U.S. 172 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Howard W. Heck & Assoc. v. United States, 134 F.3d 1468 (Fed. Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 29, 30 Independence Park v. United States, 465 F.3d 1308 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

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Independence Park v. United States, 449 F.3d 1235 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 38 King v. United States, 504 F.2d 1138 (Ct. Cl. 1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Lingle v. Chevron U.S.A., Inc., 544 U.S. 528 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 31 Loveladies Harbor, Inc. v. United States, 28 F.3d 1171 (Fed. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 MacDonald, Sommer & Frates v. Yolo County, 477 U.S. 340 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 MacLeod v. County of Santa Clara, 749 F.2d 541 (9th Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Maritrans Inc. v. United States, 342 F.3d 1344 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 36 NRG Co. v. United States, 31 Fed. Cl. 659 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Nemmers v. City of Dubuque, 764 F.2d 502 (8th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Nippon Steel Corp. v. United States, 458 F.3d 1345 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 North Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Palazzolo v. Rhode Island, 533 U.S. 606 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 27 Parkridge Investors LP v. Farmers Home Admin., 13 F.3d 1192 (8th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Penn Cent. Transp. Co. v. New York City, 438 U.S. 104 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

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Pettro v. United States, 47 Fed. Cl. 136 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Resolution Trust Corp. v. Diamond, 18 F.3d 111 (2d Cir.), rev'd on other grounds, 513 U.S. 801 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 272 F.3d 1335 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Rose Acre Farms, Inc. v. United States, 373 F.3d 1177 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 36, 44 Rose Acre Farms v. United States, 55 Fed. Cl. 643 (2003), rev'd on other grounds, 373 F.3d 1177 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . 74 Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 San Diego Gas & Elec. Co. v. City of San Diego, 450 U.S. 621 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Seiber v. United States, 364 F.3d 1356 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Stearns Co. v. United States, 396 F.3d 1354 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 27 Steinbergh v. City of Cambridge, 604 N.E.2d 1269 (Mass. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Suitum v. Tahoe Reg. Planning Agency, 520 U.S. 725 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Tabb Lakes, Ltd. v. United States, 10 F.3d 796 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32, 38, 62 Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32 Terran v. Sec'y of Health & Human Servs., 195 F.3d 1302 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 United States v. 50 Acres of Land, 469 U.S. 24 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62, 63

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United States v. 564.54 Acres of Land, 441 U.S. 506 (1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 United States v. Dow, 357 U.S. 17 (1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 United States v. Gen. Motors Corp., 323 U.S. 373 (1954) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 United States v. Mendoza, 464 U.S. 164 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44, 55 Wheeler v. City of Pleasant Grove, 833 F.2d 267 (11th Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65, 66 Whitney Benefits, Inc. v. United States, 752 F.2d 1554 (Fed. Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Whitney Benefits, Inc. v. United States, 926 F.2d 1169 (Fed. Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 31, 33, 37 Wyatt v. United States, 271 F.3d 1090 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32 Yancey v. United States, 915 F.2d 1534 (Fed. Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Yee v. City of Escondido, 503 U.S. 519 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Yuba Natural Res., Inc. v. United States, 904 F.2d 1577 (Fed. Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65, 69 Statutes: 12 U.S.C. § 1715l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 12 U.S.C. § 1715z-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 12 U.S.C. § 4101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 25, 27 12 U.S.C. § 4102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 ix

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12 U.S.C. § 4103 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4108 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4109 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4110 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 34 12 U.S.C. § 4119 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ELIHPA § 202 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ELIHPA § 222 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ELIHPA § 223 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ELIHPA § 224 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 46 ELIHPA § 225 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim ELIPHA § 230 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 6, 27, 49 City of Los Angeles Ordinance No. 166320 § 4 (Oct. 17, 1990) . . . . . . . . . . . . . . . . . . . . . . . 23 Emergency Low Income Housing Preservation Act, Pub. L. No. 100-242, 101 Stat. 1877-86 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Housing Opportunity Program Extension Act of 1996, Pub. L. No. 104-120, 110 Stat. 834 (March 28, 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . 8 L.A. Mun. Code § 151.02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 23, 58 Low-Income Housing Preservation and Resident Homeownership Act, Pub. L. No. 101-625, 104 Stat. 4249 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Pub. L. 104-34, Title I § 101(e), 110 Stat. 1321 (Apr. 26, 1996) . . . . . . . . . . . . . . . . . . 8, 25, 60 Other Authority: 24 C.F.R. § 882.219 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 29, 60

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H. Rep. No. 100-122, reprinted in 1987 U.S.C.C.A.N. 3317 . . . . . . . . . . . . . . . . . . . . . . . . . . 45 H.R. Conf. Rep. No. 100-426 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 S. Rep. No. 101-316 (1990), reprinted in 1990 U.S.C.C.A.N. 5763 . . . . . . . . . . . . . . . . . . . . . 45

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS CLAREMONT VILLAGE COMMONS, et al., Plaintiffs, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) )

Nos. 94-10002C, 94-10003C, 94-10005C, 94-10006C, 94-10007C, 94-10008C, 94-10010C, 94-10020C, 94-10030C, 94-10040C (Judge Charles F. Lettow)

DEFENDANT'S POST-TRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW Pursuant to the Court's February 27, 2007 order, defendant, the United States, respectfully submits the following memorandum of contentions of fact and law regarding plaintiffs' claims in this action. STATEMENT OF FACTS DEFENDANT ESTABLISHED AT TRIAL I. Statutory Background A. The Section 221(d)(3) And 236 Programs

In the 1960s, the Federal Government first enacted legislation to encourage the construction, ownership, and management of moderate- and low-income housing by private owners. In 1961, Congress amended the National Housing Act to establish the Section 221(d)(3) program, 12 U.S.C. § 1715l(d)(3). This program authorized the Federal Housing Administration, and subsequently the Department of Housing and Urban Development ("HUD") to provide mortgage insurance and to fund below-market interest rate loans to stimulate private development of moderate- and low-income housing. After 1968, owners received insured mortgages with an interest subsidy under the "Section 236" program. See 12 U.S.C. § 1715z-1. To obtain a Government-insured mortgage and additional taxpayer-funded benefits, at "initial closing," the developer of a Section 221(d)(3) or Section 236 project entered into a

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"regulatory agreement" with HUD whereby the owner accepted specific restrictions on the mortgaged property, including restrictions on tenant income, allowable rental rates, and cash distributions that could be received from the project. See generally Cienega Gardens v. United States, 331 F.3d 1319, 1234-35 (Fed. Cir. 2003). After initial closing, the project was built, the owners completed a cost certification process, and HUD provided a "final endorsement" on the mortgage note. The regulatory agreement remained in effect as long as the property was subject to the insured mortgage. The mortgage note prohibited prepayment of the mortgage without the Government's approval for 20 years after final endorsement. Thus, without Government approval, an owner could not prepay, dissolve the affordability restrictions, and realize residual value (i.e., equity) in the project for more than 20 years after executing the regulatory agreement. B. Benefits Of Participating In The Section 221(d)(3) And Section 236 Programs

In the Section 221(d)(3) and 236 programs, Congress provided lucrative benefits to entice the construction and operation of moderate- and low-income housing. Most significantly, the programs provided highly-leveraged, low-risk, Government-insured financing, which, coupled with accelerated depreciation of the project, produced exceptional tax benefits. DX420. 1. Low-Risk, High Leverage Financing

The Section 221(d)(3) and 236 programs enabled participants to obtain low-risk, highleverage financing that was far superior to that available for a conventional multi-family housing project. Tr. 121, 2670, 2758-59, 1509. Specifically, these programs provided Governmentinsured, non-recourse loans at below market interest rates. The loans were amortized over 40 years and financed a 90 percent of the project's replacement cost. Tr. 2656-58. In addition, participants were entitled to a Government credit called the Builder's and Sponsor's Profit and Risk Allowance ("BSPRA"). See, e.g., DX7E, DX7F, DX7I, DX7J, DX13B, DX24C, DX30B, DX33A, DX45B, DX47B, DX70B. The BSPRA further reduced the needed cash outlay to 2

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between zero and 3.5 percent of the project's replacement cost. Id. By contrast, banks typically required a 20 to 25 percent downpayment to finance a comparable conventional project. Tr. 2656-58. Favorable financing was a principal reason that the private sector chose to participate in the Section 221(d)(3) and 236 programs. Tr. 2092, 2670, 2758-59. 2. Tax Benefits

The other principal reason to participate in the Section 221(d)(3) and 236 programs was tax benefits. Tr. 2661, 2663, 2676, 2686, 2778. Projects developed under these programs were entitled to use accelerated depreciation. Tr. 143, 1625. Accelerated depreciation, when coupled with the project's high leverage and long amortization, made Section 221(d)(3) and 236 projects particularly attractive as tax shelters. Tr. 1624, 2764-66, 2670. The combination of accelerated depreciation and high leverage produced many years of large paper losses, Tr. 1508, 1511, 2764, 2773-74, which were passed through to the project's individual owners, who would use them to offset profits from other investments. Id. The original partners in a Section 221(d)(3) and 236 project had two ways to take advantage of the projects' tax benefits. First, if they had income from other sources, partners could retain their interest in the property and use the tax benefits to reduce their own tax burden. Tr. 2077, 2773-74. When partners kept tax benefits for their own use, they ordinarily recouped their initial investment within one or two years, depending upon their tax bracket, by sheltering outside income. Tr. 2773-74; DX420. Second, partners could sell shares in the partnership at a premium to private investors, who would in turn use the project's tax losses to shelter their own income. Tr. 2077-79, 1510-11. By monetizing the tax benefits in this manner, a project's original partners could obtain a substantial, almost immediate profit. Tr. 130-131, 133-36. 3. Other Opportunities For Profit

The 221(d)(3) and 236 programs provided owners with several other, albeit less 3

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significant, opportunities to profit: cash distributions; management and other fees; and possible profits from the project's residual value. Tr. 191, 2079, 2658-61, 2746, 2754-67, 2772-74. Under the Section 221(d)(3) and 236 programs, budget-based rents were set at a level that allowed annual cash distributions to the owners. Although the regulatory agreement limited distributions to 0.6 percent of the project's total value, Tr. 2658-59, because of the low initial cash investment, this provided a generous, double digit return (typically between 20 and 30 percent) on the owners' original investment. Tr. 2081-82. Owners also profited by selling services, such as property management and building maintenance, to their own projects. Tr. 1057-59, 2660. Finally, there existed a potential for profit from realizing the project's residual value (i.e., the owner's equity) after 20 plus years. Tr. 2660-61. The potential to realize residual value, however, paled in comparison to the value of tax and other benefits, and was not material to a reasonable investor. Tr. 121-2, 2079, 2076, 2663. C. The Preservation Statutes

In the late 1980s, as the 20-year anniversary approached for many Section 221(d)(3) and 236 properties, Congress became concerned that many owners would prepay their mortgages, triggering a substantial drop in the nation's supply of low-income housing. See, e.g., H.R. Conf. Rep. No. 100-426, at 192 (1987) (estimating almost 950,000 low-income housing units lost through mortgage prepayments); Tr. 1921-22. Consequently, in 1988 and 1990, Congress enacted and funded two statutes (collectively, the "Preservation Statutes") to preserve lowincome housing. 1. ELIHPA

In 1988, as a temporary measure, Congress enacted the Emergency Low Income Housing Preservation Act, Pub. L. No. 100-242, 101 Stat. 1877-86 (1988) ("ELIHPA" or "Title II"). The

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statute instituted a complex permitting process under which owners interested in prepaying their mortgage were required to apply to HUD for approval. ELIHPA §§ 221-23. This enabled HUD, using the agency's knowledge and expertise, to assess whether a project warranted preservation as low-income housing. ELIHPA § 225(a). As an alternative to prepayment, Congress authorized HUD to alter the project's regulatory structure "to provide a fair return [to] the owner." Id. §§ 224-25. Under ELIHPA, owners could obtain a Government-insured equity take out loan funded by increased rents, increased annual cash distributions, Section 8 housing assistance contracts, and financing for capital improvements. Id. §§ 224(b), 231; Tr. 1927-29. These benefits would be incorporated into a use agreement that amended the original regulatory agreement and provided a new regulatory regimen for operating the project. Id. § 225(b); see also DX182A. Congress also authorized HUD to provide assistance to facilitate a project's sale to a qualified nonprofit organization, tenant cooperative or public agency. Id. § 224(b). Under ELIHPA, interested owners submitted a notice of intent, obtained an appraisal, and provided a plan of action to HUD. Tr. 1932, 1935-36. Participation in the preservation process was voluntary. Tr. 1927-28. Finally, to prevent prejudice to owners that chose to proceed under ELIHPA, Congress provided that owners could to switch to benefits authorized by any successor statute. ELIHPA § 230 (allowing owners to opt for a different course even after incentives under ELIHPA had been accepted); Tr. 1934. 2. LIHPRHA

In 1990, Congress replaced ELIHPA with the Low-Income Housing Preservation and Resident Homeownership Act, Pub. L. No. 101-625, 104 Stat. 4249 (1990) (codified at 12 U.S.C. § 4101 et seq.) ("LIHPRHA" or "Title VI"). Like its predecessor, LIHPRHA asserted HUD's

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regulatory jurisdiction over prepayment, required owners to seek approval to prepay their HUDinsured mortgage, and provided opportunities to exit the program or alter the project's regulatory regimen in the event of a denial. 12 U.S.C. §§ 4101(a), 4108-10, 4114. Significantly, LIHPRHA authorized prepayment under two distinct avenues. 12 U.S.C. § 4101(a). An owner interested in pursuing the options provided by LIHPRHA filed notices of intent, conducted appraisals, and then submitted plans of action. 12 U.S.C. § 4102(a); Tr. 1935-36. Further, owners with regulatory plans pending under ELIHPA were allowed to continue under that statute or switch to LIHPRHA. 12 U.S.C. § 4101 note; see also ELIHPA § 230. Participation in the preservation process under LIHPRHA was voluntary. Tr. 1933-34. Pursuant to LIHPRHA, HUD could approve prepayment if prepayment would not cause a material hardship for current tenants or materially affect the availability of low-income housing in the area. 12 U.S.C. § 4108. As with ELIHPA, this provided HUD discretion to determine whether the project's preservation as low income housing was warranted. Id. (directing HUD to assess whether prepayment would "materially increase economic hardship for current tenants" or "materially affect . . . the availability of decent, safe, and sanitary housing affordable to low-income and very low-income families"). LIHPRHA also allowed owners to sell their property to a "qualified purchaser" at the "fair market value of the housing based on the highest and best use of the property," i.e., the project's market value without HUD restrictions. 12 U.S.C. §§ 4103(b), 4110(b); Tr. 1936-37. To facilitate sales, which enabled the owner to realize equity and exit the program, HUD funded virtually all transaction costs, provided mortgage insurance, and paid consultants to assist the parties. 12 U.S.C. § 4110(d). HUD also provided loans and grants that enabled non-profit organizations to acquire the projects. Id. If an owner seeking to sell did not receive a bona fide

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offer within specified time frames, did not receive financial assistance from HUD in connection with an approved offer, or was unable to consummate the transaction for any other reason, the owner would be allowed to prepay and exit the program. 12 U.S.C. § 4114(1)(B). Owners were free to reject offers. Tr. 1941.1 As in ELIHPA, LIHPRHA also permitted the owner to request changes to the regulatory structure in exchange for remaining in the program. 12 U.S.C. § 4109. HUD could authorize rent increases, an increased rate of return based upon the property's market value as conventional rental housing, access to project equity through a Government-insured loan, and financing for capital improvements. Id.; Tr. 1934-35. The agreed changes would be formalized in a use agreement that amended the project's original regulatory agreement. Tr. 537-38, 967, 993-94. Finally, LIHPRHA sought to ensure that owners were not disadvantaged by delays in processing applications and providing funds. Thus, LIHPRHA permitted owners to submit a notice of intent two years before their original prepayment date to minimize any administrative delays after prepayment eligibility. 12 U.S.C. §§ 4102, 4119(1)(B). Additionally, Congress ordered HUD to review applications within 180 days and, if the review extended beyond that, to provide retroactive incentives and assistance to owners. 12 U.S.C. § 4115(c). Federal district courts were empowered to enforce these provisions. Id. Furthermore, if within a fixed period use agreement incentives were not provided, or a sale was not consummated, the owner was allowed to prepay the original mortgage and leave the program. 12 U.S.C. § 4114; Tr. 1942-43.

California had its own preservation program, which required owners that wanted to prepay to offer the property for sale to qualified purchasers. DX152; Tr. 1038-41. Thus, Plaintiffs' claim that in the absence of the Preservation Statutes they would have been free to select a purchaser is inaccurate. See Pls.' Post-Trial Mem. of Proposed Findings of Fact and Conclusions of Law at 18 ("Br. __") (asserting that the sale option was a "severe limitation" on "the unrestricted ability to sell"). 7

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D.

Additional Legislation

The Preservation Statutes were subject to frequent criticism due to their generous provisions and excessive cost to the Government. In the mid-1990s, Congress commenced hearings to consider alternatives. HUD's Inspector General recommended, among other measures, that Congress "[d]iscontinue paying owners windfall profits for projects that threaten to prepay their mortgages and remove the low income character of the units." Hearing before the Subcommittee on VA, HUD, and Independent Agencies of the House Committee on Appropriations, 104th Cong., 1st Sess. (January 24, 1995). These concerns resulted in passage of the Housing Opportunity Program Extension Act of 1996 ("HOPE Act"), Pub. L. No. 104-120, 110 Stat. 834 (March 28, 1996). Although the HOPE Act did not expressly repeal LIHPRHA, it "restored the prepayment rights to owners" of moderate- and low-income housing. Chancellor Manor v. United States, 331 F.3d 891, 896 (Fed. Cir. 2003). Congress subsequently passed additional legislation that required HUD to offer some form of tenant-based Section 8 assistance to tenants displaced by prepayment. Pub. L. 104-34, Title I § 101(e), 110 Stat. 1321 (Apr. 26, 1996). II. The Plaintiffs Plaintiffs are ten unrelated limited partnerships that were each established to construct and operate a single low-income housing project. PX130, PX137, PX138, PX144, PX156, PX159, PX168, PX177, PX189, PX194, PX201. The partnerships were formed at or just before the "initial closing" on each HUD project. Tr. 468. Although the owners of the respective partnerships varied, each partnership agreement stated that the BSPRA would be waived by the partnership's construction contractor and inure to the benefit of the partnership. E.g., Tr. 400; PX130, PX137, PX138, PX144, PX156, PX159, PX168, PX177, PX189, PX194, PX201. The

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partnerships' projects were developed through either the Section 221(d)(3) or 236 program in the late 1960's or early 1970's. Br. 9-14. The partnerships each executed a regulatory agreement, finalized the land acquisition, and committed to build and operate a moderate- or low-income housing project at the "initial closing" with HUD. Tr. 462-63, 468-69, 475. In return, HUD agreed to insure a loan for 90 percent of the project's estimated replacement cost and provide a credit (BSPRA) that would further reduce the partnerships' equity investment. Tr. 368, 400; PX13B, PX24C, PX30B PX33A, PX45B, PX47B, PX68B, PX70B. After the partnerships had constructed the projects, and HUD had certified the costs, the agency provided a final endorsement on the mortgage note. Tr. 469, 475. During this period, shares in partnerships were sold at a profit to new partners interested in taking advantage of tax benefits. Tr. 75-76, 402, 2072, 2076, 2078-79, 2094. Only two of plaintiffs' original partners ­ Jona Goldrich and Robert Hirsch ­ testified at trial. Mr. Goldrich was an original partner in Claremont Village (17.5 percent), De Soto (28.5 percent), Del Vista (5 percent), Kittridge I (37.5 percent), Parthenia (33.3 percent), Pioneer (12.5 percent), and Puente Park (25 percent). DX494. Mr. Hirsch was an original partner in Claremont Village (15 percent), Covina West (25 percent), Del Vista (7.5 percent), Parthenia (33.3 percent), Puente Park (25 percent). DX494. Mr. Goldrich invested in low-income housing because, based upon the funding structure, there was no risk in the investments. Tr. 77-78, 121-22, 175. The investments' structure permitted him to immediately profit and then collect dividends and other fees. Tr. 129-31, 136. Mr. Goldrich also knew of the tax benefits resulting from low-income housing and took advantage of those benefits directly or through syndication. Tr. 75-76, 139, 145, 2072; see also Tr. 2674-76. Even if prepayment had not been allowed, Mr. Goldrich would have developed

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some projects in the HUD programs Tr. 2083. Mr. Hirsch testified that the low initial investment necessary was a key consideration. Tr. 368-70, 2092. He did not know if the availability of prepayment affected his decision to invest. Tr. 485. Certain corporations (i.e., G&K Construction, Active Cleaning) were also partners in some partnerships. DX494. The corporate partners invested to shelter income from their other activities. Tr. 2075, 2705-06. The original partners, who invested in plaintiffs' properties in the 1960's or 1970's, had no material investment-backed expectation regarding the property's market value over twenty years later. Tr. 2775; DX420. Rather, their primary investment-backed expectation was tax benefits. Tr. 139-45, 401, 2081, 2093-94, 2674, 2686. A. The Initial Deals

The ten plaintiffs entered the HUD programs subject to certain terms. Under the 221(d)(3) and 236 programs, the partnerships were entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. Tr. 368. Additionally, the partnerships were entitled to the BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. Tr. 2657-58, 2670; DX68B. Finally, the deals provided below market interest rates to subsidize the projects. See, e.g., DX61. 1. Claremont Village Commons

The Claremont Village partnership built a 150 unit apartment in 1970 under the Section 236 loan program. DX322. The resulting mortgage of $2,547,800 accounted for most of the project's financing. DX68B. Due to the BSPRA ($236,272) and land appreciation, the partnership's actual cash investment was only $16,917. DX420 at 20. The Claremont Village partnership's total cash outlay, therefore, was only 0.60 percent of the estimated cost of the Claremont Village apartment project. DX420 at 21.

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By January 1, 1971, before the project was completed, the partnership sold a 49 percent ownership stake in the partnership to Sam Mesler, so that he could utilize the property's tax benefits. DX494; Tr. 900, 2078. Mr. Mesler was a general partner and the partnership's largest shareholder. Id. The original partners made a profit on the sale to Mr. Mesler and utilized the remaining tax benefits themselves. Tr. 130-31, 140-41, 136, 900, 2072. 2. Covina West Apartments

The Covina West partnership built a 158 unit apartment in 1970 under the Section 236 loan program. DX322. The resulting $2,593,300 mortgage accounted for most of the project's financing. Tr. 368; DX33A. Due to the BSPRA ($220,770) and land appreciation, the partnership was required to make an actual cash investment of only $24,398. DX420 at 23-24. The Covina West partnership's total cash outlay, therefore, was only 0.85 percent of the estimated cost of the Covina West apartment project. Id. By 1971, before the project was completed, the G&K partners sold 25 percent ownership in the partnership to Leslie Sugar, and an additional 25 percent ownership interest to Milton Gottlieb. Both Mr. Sugar and Mr. Gottlieb were general partners. DX494. The original partners also sold 10 percent interest to W.C. Backus and an additional 10 percent to Frank & Lynn Kirk. Id. These individuals purchased ownership shares in the partnership so that they could utilize the property's tax benefits. Tr. 2076. The original partners made a profit on the sales and utilized the remaining tax benefits themselves. Tr. 130-31, 136, 140-41, 2072. The original partners continued to own a minority interest in Covina West through 1999. Tr. 907. 3. Del Vista Village

The Del Vista partnership built a 160 unit apartment in 1971 under the Section 221(d)(3) loan program. DX322. The resulting mortgage of $2,355,300 accounted for most of the project's

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financing. DX68C. Due to the BSPRA ($206,729) and land appreciation, the partnership was not required to make any actual cash investment in the project. DX420 at 26. By December 7, 1970, before the project was completed, the original partners had sold a 50 percent ownership stake to Sam Mesler, so that he could utilize the property's tax benefits. Tr. 908-09, 2078. Mr. Mesler was a general partner and continued to own 50 percent of the interest in the property until 1981. Id. The original partners made a profit on the sale and utilized the remaining tax benefits themselves. Tr. 130-31, 136, 140-41, 2072. 4. De Soto Gardens

The De Soto partnership built a 248 unit apartment in 1969 under the Section 221(d)(3) loan program. DX322. The resulting mortgage of $3,494,500 accounted for most of the project's financing. DX14B. Due to the BSPRA ($283,840) and land appreciation, the partnership was not required to make any actual cash investment in the project. DX14B; DX420 at 30. By March 1969, before the project was completed, the original partners sold 12.5 percent of the partnership to Richard Gunther and 12.5 percent to Stanford Tabb, both as general partners, so that they could utilize the property's tax benefits. DX494. The original partners made a profit on the sale and utilized the remaining tax benefits themselves. Tr. 130-31, 136. 5. Kittridge Gardens I

The Kittridge I partnership built a 128 unit apartment in 1968 under the Section 221(d)(3) loan program. DX322. The resulting mortgage of $1,507,000 accounted for most of the project's financing. DX7G at CVC021364. Due to the BSPRA ($123,336) and land appreciation, the partnership was required to make an actual cash investment of only $59,258. DX420 at 33. The partnership's total cash outlay, therefore, was only 3.5 percent of the estimated replacement cost

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of the project. Id. The original partners utilized the tax benefits from Kittridge I themselves. Tr. 140-41, 2072. 6. Kittridge Gardens II

The Kittridge II partnership built an 80 unit apartment in 1968 under the Section 221(d)(3) loan program. DX322. The resulting mortgage of $1,441,300 accounted for most of the project's financing. DX24B. Due to the BSPRA ($122,812) and land appreciation, the partnership was not required to make any actual cash investment in the project. DX420 at 36. The original partners utilized the tax benefits in Kittridge II themselves. Tr. 140-41, 2072. 7. Oxford Park

The Oxford Park partnership built a 109 unit apartment in 1971 under the Section 221(d)(3) loan program. DX322. The resulting mortgage of $1,519,800 accounted for most of the project's financing. DX47B. Due to the BSPRA ($136,248) and land appreciation, the partnership was required to make an actual cash investment of only $32,675. DX420 at 38-39. The Oxford Park partnership's total cash outlay, therefore, was only 1.9 percent of the estimated cost of the Oxford Park apartment project. Id. The original partners utilized the tax benefits in Kittridge II themselves. Tr. 130-31, 136, 140-41, 2072; DX494. 8. Parthenia Townhomes

The Parthenia partnership built a 24 unit apartment in 1971 under the Section 221(d)(3) loan program. DX322. The resulting mortgage of $368,000 accounted for most of the project's financing. DX70C. Due to the BSPRA ($30,811) and land appreciation, the partnership was not required to make any actual cash investment in the project. The original partners utilized the tax benefits in Parthenia themselves. Tr. 140-41, 2072.

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9.

Pioneer Gardens

The Pioneer Gardens partnership built a 141 unit apartment in 1970 under the Section 236 loan program. DX322. The resulting mortgage of $2,446,500 accounted for most of the project's financing. DX30B. Due to the BSPRA ($227,414) and land appreciation, the partnership was required to make an actual cash investment of only $34,505. The Pioneer Gardens partnership's total cash outlay, therefore, was only 1.3 percent of the estimated cost of the Pioneer Gardens apartment project. DX420 at 46. By June 1, 1971, and before the project was completed, the G&K partners sold 24 percent ownership in the partnership to David Pick and an additional 24 percent to Joseph Gorman, so that they could utilize the property's tax benefits. The original partners made a profit on the sale and utilized the remaining tax benefits themselves. Tr. 130-131, 136, 140-41, 2072. 10. Puente Park Apartments

The Puente Park partnership built a 132 unit apartment in 1969 under the Section 236 loan program. DX322. The resulting mortgage of $1,947,500 accounted for most of the project's financing. Due to the BSPRA ($170,169) and land appreciation, the partnership was not required to make any actual cash investment in the project. DX420 at 49. By June 1, 1971, before the project was completed, the original partners sold 48 percent ownership in the partnership to Sam Mesler and 13 percent to Zyg Taube, so that they could utilize the property's tax benefits. Tr. 2078-79. Messrs. Mesler and Taube were general partners. The original partners made a profit on the sale and utilized the remaining tax benefits themselves. Tr. 130-131, 133-36, 140-41, 2072. Puente Park has faced recent security issues. For approximately the past 18 months, the apartments have had a security service and added security cameras. Tr. 256. There was also

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substantial gang activity in the city of La Puente, and the sheriff had to evict some of the gang members living in Puente Park. Tr. 257. B. Further Benefits

The partners benefitted from the construction and management of the project. Tr. 268990. They contracted with an affiliated construction company ­ Goldrich and Kest Construction, Inc. ­ to build the apartments. Tr. 407. To manage the property, the apartment buildings contracted with G&K management ­ another affiliated company. Tr. 375, 407-08. The fees paid to these entities were funded almost entirely by the Federally-backed mortgages and rents. By selling shares in the project at a profit, or using the tax benefits themselves, the partnerships would have been able to recoup their initial investment in one or two years. Tr. 13031, 136, 2729-30, 2739. Thus, in return for minimal cash outlays of between zero and 3.5 percent of the project's cost, the partnerships received (a) uniquely advantageous financing, (b) the ability to utilize the project's tax benefits, (c) the ability to receive distributions of cash from operations, and (d) profits for individual partners by awarding them contracts for construction and project management. DX420. Additionally, the partnerships were entitled to any profits generated by the sale or other disposition of the projects upon exiting the HUD program. Of course, at the time of project's development in the late 1960s and early 1970s, the residual value of the apartments would have depended upon interest rates, property values, the renters' market, and other variables existing more than 20 years in the future. See Tr. 2663. These variables would have been unknowable at the time of development.

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C.

The Properties Prior To Title II

Although the HUD-insurance programs made low-income housing available, those programs did not provide any direct assistance for tenants to pay rents. Over time, HUD developed a number of programs to assist tenants in paying rent. One form of rental assistance was Housing Assistance Payment ("HAP" or "Section 8") contracts. Tr. 2053. The Government offered HAP contracts because some residents were unable to pay their rent, causing the buildings to default on their mortgages. Tr. 852, 1507-08. HAP contracts assisted the residents in place pay the rent. Id. These contracts, which were signed by apartment owners and HUD, covered a fixed number of units in a given building. See, e.g., DX93-100. HAP contracts were thus "project-based" assistance, meaning that the assistance ran with the building. Seven plaintiffs participated in the HAP program.2 Id. HAP contracts provided that "[p]repayment of the mortgage shall not, by itself, affect any rights of the Owner or HUD under this Contract." DX94 at 9, § 27(c). Thus, when an apartment building signed a Section 8 contract it agreed to adhere to the HUD restrictions even if the owner prepaid the mortgage. Id. HAP contracts provided benefits to apartment owners with HUD-insured mortgages. Without a HAP contract, the owners had to find tenants able to pay the entire rent, regardless of what percentage it was of their income. Tr. 775, 852. With HAP, tenants only had to pay a set portion of their adjusted gross income as rent, with HUD paying the rest. Tr. 848; DX94. As HUD paid its portion of the rent in a lump sum at the first of the month, a HAP contract reduced the apartment owner's credit risk, i.e, the risk that rent would not be paid. Tr. 1061-62. Owners also received the benefit of a reliable source of income through HAP contracts. Tr. 853. Claremont Village, De Soto, Kittridge I, Kittridge II, Oxford Park, Pioneer Gardens, and Puente Park. DX426. 16
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HAP contracts reduced the likelihood that a unit would be empty ("vacancy risk"). For HUD properties, there are generally waiting lists of individuals who have applied to the property for housing. Tr. 243-44. Conventional properties typically do not have such lists. Tr. 244. Not only did HAP contracts reduce vacancy risk by enlarging the pool of eligible tenants, it also provided subsidies for vacant units. Of course, owners never had to rent a unit if they did not want to do so, and could have chosen to leave a unit empty at any time. Tr. 856, 930-31. The Government never selected the plaintiffs' tenants. Tr. 856, 928-31. Prior to 1996, HAP contracts were only renewed in five-year increments. Tr. 871. Before ELIHPA, Claremont Village, De Soto, Kittridge I and II, Oxford Park, Pioneer Gardens, and Puente Park each signed five-year HAP contracts that overlapped with their initial prepayment dates. Tr. 870-71. Although the owners asked for shorter HAP contracts, HUD refused their request. Tr. 865-66.3 These properties would therefore have continued to be subject to affordability restrictions even if they had prepaid their HUD-insured mortgages. In the absence of the Preservation Statutes, these plaintiffs would have faced a choice: forego HAP assistance before the prepayment date or renew the HAP contract for five years despite the fact that it would limit the rents chargeable upon prepayment. Indeed, five plaintiffs did face this choice prior to ELIHPA and elected to enter HAP contracts that effectively extended

The properties had the following prepayment eligibility dates and expiration dates for their HAP contracts: Claremont Village, December 21, 1991 initial prepayment date, July 31, 1991 HAP expiration date; De Soto, November 2, 1990 initial prepayment date, June 30, 1991 HAP expiration date; Kittridge I, September 17, 1989 initial prepayment date, September 30, 1991 HAP expiration date; Kittridge II, April 14, 1991 initial prepayment date, September 30, 1991 HAP expiration date; Oxford Park, October 6, 1992 initial prepayment date, August 31, 1997 HAP expiration date; Pioneer Gardens, May 26, 1991 initial prepayment date, October 31, 1992 HAP expiration date; Puente Park, August 31, 1990 initial prepayment date, June 30, 1991 HAP expiration date. Tr. 857-60, 865, 867, 869-70; PX102, PX103, PX115, DX97, DX98, DX99, DX103A, DX130, DX345. 17

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the project's affordability restrictions. Tr. 870-71; DX94, 97-99, 103A. Even if the other two plaintiffs had chosen to forgo HAP contracts, and plaintiffs give no reason to believe they would have acted differently, the properties would have suffered substantial financial losses as a result and potentially faced foreclosure. D. Plaintiffs Each Signed A Use Agreement

Plaintiffs were free to choose among the options available under the Preservation Statutes. Tr. 1927-28, 1933-34. Each plaintiff chose not to sell its property through the preservation process, although it could have extracted the entire fair market value of its equity. Tr. 1936-37, 1941, 2203. Had plaintiffs wished to sell their property to a non-profit organization for its appraised fair market value, there would have been a willing buyer available. Tr. 1046-1049, 1053, 1931, 1943. Several nonprofit organizations contacted the G&K partners, seeking to acquire apartment buildings under the preservation process. Tr. 1053. If, for some reason, plaintiffs did not receive a bona fide offer, plaintiffs could have prepaid their mortgages. 12 U.S.C. § 4114; Tr. 1942-43. At the time plaintiffs filed their initial notices of intent to prepay for Pioneer Gardens, Claremont Village, and Parthenia, plaintiffs did not know if they wanted to convert to conventional housing, sell the apartments as condominiums, or tear the properties down. Tr. 312, 315; PX30, PX31. Although the G&K partners were uncertain of their plans, they did not have a rule or policy against selling their properties. Tr. 1050. Later, when given the option of switching to LIHPRHA, each plaintiff refused. Through a process of appraisal and appraisal review, each plaintiff negotiated with HUD regarding what the property's value would be if there had been no HUD restrictions. Tr. 563, 558, 609, 618, 919, 920-21. For Oxford Park, HUD accepted the appraised value proposed by the owners with no

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changes. Tr. 701. Ultimately, plaintiffs and HUD agreed upon the following valuations: Claremont Village ­ $7,976,000; Covina West ­ $8,342,000; Del Vista ­ $7,222,000; De Soto ­ $12,750,000; Kittridge I ­ $7,365,000; Kittridge II ­ $5,700,000; Oxford Park ­ $5,350,000; Parthenia ­ $1,576,600; Pioneer Gardens ­ $6,124,000; Puente Park ­ $7,650,000. See PX1. These agreed-upon valuations were the basis for plaintiffs' incentives in the preservation process. If plaintiffs had chosen to sell their properties under ELIHPA, these values would have also served as the selling price. Had plaintiffs opted to proceed under LIHPRHA, the LIHPRHA valuation process would have been employed. See Tr. 540. Plaintiffs offered no evidence whatsoever to rebut the conclusion that the agreed-upon valuations represented the true market values of the properties. Tr. 1499. Indeed, plaintiffs' expert, Dr. Peiser, relied upon these valuations throughout his economic impact and damages analyses. Tr. 1613, PX1. Owners seeking a use agreement could choose one of two rent options. They could get rent increases either through the annual adjustment factor, which permitted unlimited distributions to the partners, or they could receive a budget-based rent with a limited distribution. Tr. 540, 983-84. Rent increases under use agreements using an Annual Adjustment Factor ("AAF") were to approximate market rents. Tr. 2106. Owners whose rents were calculated choosing the budget-based option received a fixed percent distribution of project equity. Tr. 540, 985. Claremont Village, Del Vista, De Soto, and Pioneer Gardens chose the budget-based option because of risks associated with security concerns at those projects. Tr. 541, 996, 1003, PX50, PX52, PX53, PX58. The remaining plaintiffs chose unlimited distributions. PX51, PX54-57, DX181. Use agreements changed the regulations under which the projects operated, perhaps most notably by increasing the annual cash distribution. Tr. 986. Pioneer Gardens' use agreement, for

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example, authorized an annual distribution of 8.6 percent of the project's contemporaneous equity. Tr. 991-92, 1479; PX58. The agreed distributions for Claremont Village, Del Vista, and De Soto were set at 7.5 percent, 5.1 percent and 8.0 percent of preservation equity, respectively. PX50, PX52, PX53, DX256. These were all dramatic increases in the allowed distribution. Limits on cash distributions for the remaining properties were lifted completely. By 1995, each plaintiff had signed a use agreement. PX50-58; DX181.4 Plaintiffs understood that these agreements amended the original regulatory agreement and revised the restrictions that would govern the projects going forward. Tr. 993-94. Plaintiffs chose to execute use agreements, rather than sell pursuant to the Preservation Statues, because the use agreements were better financially than a sale at fair market value. See Tr. 2266-67. Before signing the use agreement, plaintiffs had learned that restrictions on prepaying might be lifted. Tr. 499-501; DX253. E. Delays In Processi