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

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

CLAREMONT VILLAGE, et al., Plaintiffs, v. UNITED STATES, Defendant.

) ) ) ) ) ) ) ) ) )

No. 94-10002C; 94-10003C; 9410005C; 94-10006C; 94-10007C; 9410008; 94-10010C; 94-10020C; 9410030C; 94-10040C (consolidated) Judge Lettow

PLAINTIFFS' POST-TRIAL MEMORANDUM OF PROPOSED FINDINGS OF FACTS AND CONCLUSIONS OF LAW

Everett C. Johnson LATHAM & WATKINS LLP 555 Eleventh Street, NW Suite 1000 Washington, D.C. 20004 Tel: (202) 637-2200 Fax: (202) 637-2201

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TABLE OF CONTENTS I. II. INTRODUCTION ...............................................................................................................1 PROPOSED FINDINGS OF FACT ....................................................................................1 A. B. C. D. E. F. Regulatory Background ...........................................................................................1 Plaintiffs' Properties ................................................................................................7 ELIHPA and LIHPRHA ........................................................................................14 Plaintiffs' Use Agreements ....................................................................................21 Plaintiffs' Financial Losses Resulting From ELIHPA And LIHPRHA ................28 Just Compensation .................................................................................................30 1. 2. III. Los Angeles Rent Stabilization Ordinance ................................................35 Interest on Just Compensation Award .......................................................38

PROPOSED CONCLUSIONS OF LAW..........................................................................39 A. B. Plaintiffs' Takings Claims Are Ripe For Review Because Filing A Request For Prepayment Would Have Been Futile ...............................................39 ELIHPA And LIHPRHA Effected A Temporary Regulatory Taking Of Plaintiffs' Rights To Prepay Their HUD-Insured Mortgages On Their Twenty-Year Prepayment Eligibility Dates...........................................................41 1. ELIHPA And LIHPRHA Have The Character Of A Taking ....................42 a. Evidence Adduced At Trial Reinforces The Federal Circuit's Holding That The Government's Actions In Enacting ELIHPA And LIHPRHA Had The Character Of A Taking ........................................................................................42 The Government Adduced No Evidence That Undermines The Federal Circuit's And This Court's Conclusion That The Enactment Of ELIHPA And LIHPRHA Have The Character Of A Taking...................................................................46

b.

2.

ELIHPA And LIHPRHA Caused Sufficiently Severe Economic Impact To Effect A Taking ........................................................................48

i

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a.

The Evidence Adduced By Plaintiffs Regarding Plaintiffs' Losses On Their Rates Of Return Is Sufficient As A Matter Of Law To Demonstrate Serious Financial Loss...........................48 The Government Failed To Demonstrate That Plaintiffs' Economic Impact Analysis Is Not The Correct Method Of Measuring The Economic Impact Of ELIHPA And LIHPRHA On Plaintiffs.................................................................51 The Government Fails To Demonstrate That The Return-On-Equity Measure Is Unsound ............................51 (2) The Sale Option Does Not Diminish Plaintiffs' Economic Impact ...............................................................54 (3) LARSO Does Not Alter The Economic Impact Analysis..............................................................................57 Alternatively, Even If This Court Were To Apply A Change-In-Value Model, The Court Should Nevertheless Find Plaintiffs Suffered A Severe Economic Impact.....................59 Whether This Court Applies A Return-on-Equity or Change-in-Value Approach, The Court Should Nevertheless Find An Unconstitutional Taking As A Matter Of Law ...........................................................................................60 (1)

b.

c.

d.

3.

ELIHPA And LIHPRHA Frustrated Plaintiffs' Distinct, Reasonable, and Investment-Backed Expectations....................................62 a. At All Times, Plaintiffs Expected To Exercise Their Prepayment Rights On The Twenty-Year Prepayment Eligibility Dates .............................................................................62 Plaintiffs' Expectations Of Exercising Their Prepayment Rights On The Twenty-Year Prepayment Eligibility Dates Were Objectively Reasonable........................................................66

b.

C.

Plaintiffs Are Entitled To Just Compensation For The Taking Of Their Property..................................................................................................................68 1. Plaintiffs Are Entitled To Just Compensation For The Damages They Suffered From The Date Of The Taking Until The Date They Either Sold The Property Or The End Of The Use Agreement .................68 Plaintiffs Are Entitled To Compound Interest As A Component Of Just Compensation .....................................................................................72

2. IV.

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

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TABLE OF AUTHORITIES

CASES Allenfield Associates v. United States, 40 Fed. Cl. 471 (1998) .......................................................................................................45 America Federal Bank, FSB v. United States, 72 Fed. Cl. 586 (2006) .......................................................................................................54 America Pelagic Fishing Co., L.P. v. United States, 55 Fed. Cl. 575 (2003) .......................................................................................................70 Armstrong v. United States, 364 U.S. 40 (1960).............................................................................................................42 Asia N. America Eastbound Rate Agreement v. Pac. Champion Service Corp., 864 F. Supp. 195 (D.D.C. 1994) ........................................................................................54 Bass Enterprises Prod. Co. v. United States, 48 Fed. Cl. 621 (2001) .......................................................................................................69 CCA Associates v. United States, 75 Fed. Cl. 170 (2007) .....................................................................................49, 54, 67, 74 Cienega Gardens v. United States, 67 Fed. Cl. 434 (2005) ............................................................................................... passim Cienega Gardens v. United States, 331 F.3d 1319 (Fed Cir. 2003)................................................................................... passim Cienega Gardens v. United States 265 F.3d 1237 (Fed Cir. 2001)...............................................................................39, 40, 41 City Line Joint Venture v. United States, 71 Fed. Cl. 486 (2006) .......................................................................................................43 District Intown Properties Ltd. Partnership v. District of Columbia, 198 F.3d 874 (D.C. Cir. 1999) ...........................................................................................48 Hodel v. Irving, 481 U.S. 704 (1987)................................................................................................... passim Independence Park Apartments v. United States, 61 Fed. Cl. 692 (2004) ............................................................................................... passim

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Independence Park Apartments v. United States, 465 F.3d 1308 (Fed. Cir. 2006)......................................................................................1, 68 Independence Park Apartments v. United States, 449 F.3d 1235 (Fed. Cir. 2006)..........................................................................................70 ITT Corp. v. United States, 17 Cl. Ct. 199 (1989) .........................................................................................................74 Kimball Laundry Co. v. United States, 338 U.S. 1 (1949).............................................................................................45, 68, 69, 70 Kirby Forest Industrial, Inc. v. United States, 467 U.S. 1 (1984)...............................................................................................................72 Lucas v. S.C. Coastal Council, 505 U.S. 1003 (1992)...................................................................................................42, 61 Maritrans v. United States, 342 F.3d 1344 (Fed. Cir. 2003)..........................................................................................62 Palazzolo v. Rhode Island, 533 U.S. 606 (2001)...........................................................................................................42 Penn Central Transport Co. v. City of New York, 438 U.S. 104 (1978)................................................................................................... passim Prudential Insurance Co. of America v. United States, 801 F.2d 1295 (Fed. Cir. 1986)..........................................................................................45 Rose Acre Farms v. United States, 75 Fed. Cl. 527 (2007) .......................................................................................................50 Rose Acre Farms v. United States, 373 F.3d 1177 (Fed. Cir. 2004)....................................................................................48, 50 Shelden v. United States, 34 Fed. Cl. 355 (1995) .......................................................................................................72 Studiengesellschaft Kohle v. Dart Industrial, Inc., 862 F.2d 1564 (Fed. Cir. 1988)..........................................................................................72 Suitum v. Tahoe Reg'l Planning Agency, 520 U.S. 725 (1997)...........................................................................................................55

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Tahoe-Sierra Preservation Council, Inc. v. Tahoe Reg'l Planning Agency, 535 U.S. 302 (2002)...........................................................................................................53 United States v. General Motors Corp., 323 U.S. 373 (1945)...............................................................................................45, 68, 69 United States v. Miller, 317 U.S. 369 (1943).....................................................................................................68, 72 United States v. Petty Motor Co., 327 U.S. 372 (1946).....................................................................................................68, 69 United States v. Pewee Coal Co., 341 U.S. 114 (1951)...........................................................................................................45 Whitney Benefits, Inc. v. United States, 752 F.2d 1554 (Fed Cir. 1985)...........................................................................................54 Whitney Benefits, Inc. v. United States, 926 F.2d 1169 (Fed Cir. 1991)...........................................................................................54 Whitney Benefits v. United States, 30 Fed. Cl. 411 (1994) ...........................................................................................73, 74, 75 Yancey v. United States, 915 F.2d 1534 (Fed. Cir. 1990)..........................................................................................48

STATUTES AND REGULATIONS 12 U.S.C. § 1715l.......................................................................................................................2, 15 12 U.S.C. 1715l note.............................................................................................................. passim 12 U.S.C. § 1715z-1.........................................................................................................................2 12 U.S.C. § 4101.................................................................................................................... passim 12 U.S.C. § 4108......................................................................................................................16, 40 12 U.S.C. § 4110............................................................................................................................55 24 C.F.R. § 221.524 ............................................................................................................... passim 24 C.F.R. § 226(b)(6).....................................................................................................................27

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24 C.F.R. § 236.30 .....................................................................................................................4, 67 24 C.F.R. §§ 248.101-261 (1991) ..................................................................................................16 24 C.F.R. §§ 248.1-319 (1993) .............................................................................................. passim 24 C.F.R. § 248.233(d)(3) (1990) ..................................................................................................27 24 C.F.R. § 248.31 (1990) .......................................................................................................27, 55 L.A. Mun. Code, ch. XV, §§ 151 et seq ................................................................................ passim Housing Opportunity Program Extension Act of 1996, Pub. L. No. 104-120, 110 Stat. 834 (1996)........................................................................27

OTHER AUTHORITIES S. Rep. No. 87-281 (1961), reprinted in 1961 U.S.C.C.A.N. 1923 .................................................................................1 S. Rep. No. 101-316 (1990), reprinted in 1990 U.S.C.C.A.N. 5763 .........................................................................41, 67 H.R. Rep. No. 100-122(I) (1987), reprinted in 1987 U.S.C.C.A.N. 3317 .........................................................................25, 26

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I.

INTRODUCTION 1. In Cienega Gardens v. United States, 331 F.3d 1319 (Fed Cir. 2003) ("Cienega

VIII"), the Federal Circuit reversed the granting of summary judgment for the government, finding that the very same statutes at issue in this case constituted a temporary regulatory taking. In Independence Park Apartments v. United States, 61 Fed. Cl. 692 (2004) ("Independence Park I"), Cienega Gardens v. United States, 67 Fed. Cl. 434 (2005) ("Cienega IX"), and Independence Park Apartments v. United States, 465 F.3d. 1308 (Fed. Cir. 2006) ("Independence Park IV"), this Court and the Federal Circuit confirmed the appropriate measure of just compensation. The evidence on liability in this case is consistent with, and in fact exceeds, that found sufficient by Cienega VIII and Cienega IX as a matter of law. The evidence on damages is consistent with the rulings in the Independence Park and Cienega Gardens litigation, and the government has not adduced any new evidence justifying a contrary result. Accordingly, Plaintiffs are entitled to damages incurred as a result of the government's temporary regulatory taking of their property in the amount of $100,803,400. II. PROPOSED FINDINGS OF FACT A. 2. Regulatory Background During the 1960s, Congress moved beyond its decades-long past practice of

enacting federal low-income housing programs primarily with the participation of local public housing authorities and non-profit organizations, and created programs that for the first time fully utilized the private sector to develop and manage low-income housing. Congress sought to "enable private enterprise to participate to the maximum extent in meeting the housing needs of moderate-income families," and the "fullest practicable utilization of the resources and capabilities of private enterprise" in housing low-income and moderate-income families. S. Rep. No. 87-281, at 4 (1961), reprinted in 1961 U.S.C.C.A.N. 1923; 82 Stat. 476, 476 § 2 (1968).

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Accordingly, in 1961 and 1968, Congress amended the National Housing Act to allow private developers to construct, own, and manage housing for low- and moderate-income families under Sections 221(d)(3) and 236, respectively. 12 U.S.C. § 1715l. 3. The government provided mortgage insurance and interest-rate subsidies to

private developers under the Section 221(d)(3) and 236 programs (the "HUD programs"), which helped the developers obtain loans from private lenders. See 12 U.S.C. § 1715z-1. The developers, in turn, were required to rent to tenants who met government eligibility standards and to charge substantially below-market rents. Trial Transcript ("Tr.") 365:21-367:3 (Hirsch); PX 305, 309, 313-15, 317-19, 321, DX 61. 4. Between 1969 and 1972, Plaintiffs1 agreed to develop and operate properties in

accordance with these government programs. Jona Goldrich, Sol Kest, Robert Stern, Robert Hirsch, and Warren Breslow, or entities controlled by them or some combination thereof, ("General Partners") developed the properties and were the general partners in each of the ten partnerships during the time periods relevant to this action. General Partners were original investors in the partnerships and as general partners made the decisions for Plaintiffs to develop the subject properties under the HUD programs. Tr. 76:24-77:5 (Goldrich); Tr. 363:20-367:24 (Hirsch); PX 130-145, 148-152, 154-205.

1

Plaintiffs are the partnerships that own the ten subject properties. Herein, the Claremont Village Commons partnership is referred to as "Claremont;" the Covina West Apartments partnership is referred to as "Covina West;" the Del Vista Village partnership is referred to as "Del Vista;" the DeSoto Gardens Apartments partnership is referred to as "DeSoto;" the Kittridge Gardens I partnership is referred to as "Kittridge I;" the Kittridge Gardens II partnership is referred to as "Kittridge II;" the Oxford Park Apartments partnership is referred to as "Oxford Park;" the Parthenia Townhouses partnership is referred to as "Parthenia;" the Pioneer Gardens Apartments partnership is referred to as "Pioneer;" and the Puente Park Apartments partnership is referred to as "Puente Park." 2

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5.

Plaintiffs executed a series of contemporaneous and interlocking contracts which

memorialized the terms of their participation, including long-term Regulatory Agreements and either Deed of Trust Notes or Secured Notes. PX 98-103, 104-106, 115, 305, 309, 313-15, 31719, 321; DX 61. The Regulatory Agreements severely restricted Plaintiffs' use of their properties. They required Plaintiffs to use the property only for housing low-income tenants at HUD-established rents; to grant HUD a security interest in the income arising from the property; to be limited to a maximum return of 6% of HUD's calculation of the original equity; to submit to HUD audits, inspections, and management reviews; and to maintain each project according to HUD standards. Id. The restrictions bound Plaintiffs while HUD insured Plaintiffs' mortgages. HUD's insurance obligations would terminate, and Plaintiffs' obligations under the Regulatory Agreements would expire, once Plaintiffs paid off the mortgages. Id. 6. Claremont, Covina West, Oxford Park, Pioneer, and Puente Park entered into

HUD-endorsed Deed of Trust Notes ("Trust Notes") with private lenders.2 PX 98-99, 103, 10506. The Trust Notes were printed on forms HUD prepared and evidenced HUD's commitment to insure 40-year loans to Plaintiffs secured by mortgages on their properties. Id. Rider A to the Trust Notes (FHA Form 4104(e)), granted these five Plaintiffs the unfettered right to prepay the mortgages and exit the HUD program after 20 years without HUD or lender approval.3 Id. 7. Del Vista, DeSoto, Kittridge I, Kittridge II, and Parthenia signed Secured Notes

which evidenced a 40-year loan that the mortgagee was permitted to prepay after 20 years Both the Trust Notes and the Secured Notes discussed infra were endorsed by the Federal Housing Administration ("FHA"), which was then, and is now, part of HUD. FHA and HUD are therefore used interchangeably herein.
3 2

Each Trust Note permitted prepayment if "the Maker is a limited distribution mortgagor which is not receiving payments from the Commissioner under a rent supplement contract pursuant to Section 101 of the Housing and Urban Development Act of 1965, and the prepayment occurs after the expiration of twenty (20) years from the date of final endorsement of this Note by the Commissioner." PX 98-99, 103, 105-06. 3

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without HUD or lender approval. PX 100-102, 104, 115. The Secured Notes were printed on forms HUD designed, reviewed and endorsed.4 Id. 8. At the time Plaintiffs executed their Regulatory Agreements and either Trust

Notes or Secured Notes, HUD regulations provided that "[a] mortgage indebtedness may be prepaid in full and the Commissioner's controls terminated without the prior consent of the Commissioner where . . . the prepayment occurs after the expiration of 20 years from the date of final insurance endorsement of the mortgage . . . ." 24 C.F.R. § 236.30 (1970); accord 24 C.F.R. § 221.524(a)(1)(ii) (1970). Plaintiffs' Regulatory Agreements incorporated by reference HUD's then-existing regulations regarding prepayment of the Trust Notes and Secured Notes. PX 305, 309, 313-15, 317-19, 321; DX 61. 9. The 20-year unfettered prepayment right was an absolutely critical and material

inducement to Plaintiffs; Plaintiffs would not have entered into the HUD programs if they knew they could not prepay in 20 years and cease using their properties for low-income housing. See, e.g., Tr. 83:23-84:17 (Goldrich) (The right to prepay was "the most important thing because I would not have done all that work for only 6 percent, I would look to the future."); see also Tr. 86:14-87:6, 96:9-24 (Goldrich) (testifying he "would not have dealt with HUD if [he] did not think [he] could [prepay in 20 years]"); Tr. 392:9-393:17 (Hirsch) (testifying that he "would not have entered into the HUD programs with the income limitations and the rent restrictions if [he] knew that [he] could not prepay the loans after 20 years"). Plaintiffs intended and expected to exercise their rights to prepay their mortgages on their respective 20-year prepayment dates and convert to conventional market-rate properties, which Plaintiffs expected would yield "six, seven

The Secured Notes required HUD approval for prepayment except "a maker which is a limited dividend corporation may prepay without such approval after 20 years from the date of final endorsement of this Note by the Federal Housing Commissioner." PX 100-102, 104, 115. 4

4

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or eight times as much [as the HUD rents]." Tr. 85:14-18 (Goldrich); Tr. 287:7-14, 290:10292:14, 309:3-315:17, 877:2-8 (Glodney); Tr. 378:14-381:9 (Hirsch); PX 18-19, 27-31. 10. In reliance on the prepayment right, Plaintiffs intentionally developed properties

that would increase in value and allow them, after 20 years, to attract market-rate tenants. In sharp contrast to most other low-income housing developers, Plaintiffs paid top-dollar premiums for sites in middle-class areas, constructed high-quality buildings, and always maintained the buildings with the same care as General Partners' market-rate apartments. Indeed, Plaintiffs exceeded the HUD building requirements and "did a number of things that added . . . cost" such as installing air-conditioning units, car ports, courtyards, and balconies, using superior plumbing materials, and adding an extra coat of paint to the subject properties. Tr. 371:19-373:19, 381:11386:22 (Hirsch); see also Tr. 86:2-115:2 (Goldrich); Tr. 220:7-13, 222:16-223:12 (Glodney); Tr. 1725:8-15 (Crosson) (properties were well-maintained and did not have deferred maintenance at prepayment eligibility date); PDX 1-10. 11. Plaintiffs invested significant amounts of time and work, as well as additional

monies for land, construction, and maintenance, because they "planned for good long-term benefit" after 20 years when they could realize the appreciation and increased rental rates of a market-rate apartment complex. Tr. 383:16-20 (Hirsch). Plaintiffs' investment strategy relied on long-term appreciation; from the beginning, Plaintiffs intended to own the properties for the long-term so they could realize significant gains upon exiting the HUD programs after 20 years. See, e.g., Tr. 369:15-373:19 (Hirsch) ("We were looking at the benefit of long-term."); Tr. 193:17-21 (Goldrich) ("I go for the long run and I am a great believer that inflation will never stop and 20 years later, I will make a lot of money.").

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12.

Plaintiffs' expectations regarding their prepayment rights were based on the

express language in their Trust Notes and Secured Notes, and on the HUD regulations incorporated into the Regulatory Agreements. PX 98-103, 104-106, 115, 305, 309, 313-15, 31719, 321; DX 61. 13. Two of the General Partners also own G&K Management Co., Inc. ("G&K"),

which, for a fee, currently manages seven of Plaintiffs' properties.5 Tr. 374:25-378:3 (Hirsch). These General Partners formed G&K to ensure a high standard of maintenance and aesthetic appeal to keep the properties attractive to tenants, and to maintain the properties so they could convert to conventional rentals at minimal or no cost and be competitive in the market after prepayment. Id.; Tr. 190:3-191:10, 200:4-10 (Goldrich). Carole Glodney is the President of G&K. Tr. 214:9-16 (Glodney). 14. The HUD programs allowed Plaintiffs to borrow only up to 90% of HUD's

allowable cost for a project--not what the project actually cost Plaintiffs to build. Tr. 386:23389:6 (Hirsch). For example, Plaintiffs bore the extra costs of improved amenities or better construction. Tr. 385:16-19 (Hirsch). It was also common for construction costs to exceed HUD's allowable cost for a project. Tr. 386:23-389:7 (Hirsch). Because of the amount of time (often two years) it took to process the Regulatory Agreements, Plaintiffs frequently paid more for the land because the original option to buy the land expired and the seller increased the price. Id. (testifying a landowner might want $25,000 more for an additional six months). Plaintiffs were never allowed to borrow these increased costs. Id. As a result, Plaintiffs often invested more than 10% of the project cost in cash and sweat equity. Id.

5

G&K does not currently manage the Claremont, Covina West, or Pioneer properties; however it managed them until approximately one year after they were sold. Tr. 218:11-219:9 (Glodney). 6

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15.

Plaintiffs would have prepaid their HUD mortgages had they been permitted. See,

e.g., Tr. 104:15-113:14 (Goldrich). Even if a rent control statute might have prevented Plaintiffs from raising their rents for a few years, they would still have prepaid. Tr. 389:8-391:7, 475:20483:17 (Hirsch); Tr. 117:14-118:24 (Goldrich); see also Tr. 2275:6-23 (Hamm) (testifying there are circumstances in which it would be economically beneficial to prepay even where rent control would limit rate of rental increases). 16. At the time Plaintiffs entered the HUD programs and invested significant

resources in reliance on the right to prepay (given the express language in the Trust Notes, Secured Notes, and HUD regulations) they did not anticipate--and had no reason to believe that--Congress would unilaterally rescind the unfettered 20-year prepayment right in order to remedy a low-income housing shortage Congress caused by failing to fund new and replacement affordable housing programs. Tr. 803:19-806:9 (Glodney); Tr. 380:15-19 (Hirsch); Tr. 1961:131962:18 (Vitek); Tr. 1351:13-20 (Peiser). B. 17. Plaintiffs' Properties DeSoto, Kittridge I, Kittridge II, Oxford Park, and Parthenia have owned their

subject properties at all times. PX 130-145, 148-205; DX 92A. Some partnership interests in these Plaintiffs have changed over time, but the partnerships have never dissolved. Id. Claremont, Covina West, Del Vista, Pioneer, and Puente Park developed their subject properties and owned and operated them until they were sold to HUD-approved purchasers on April 26, 2001, August 2, 2002, March 12, 2004, April 26, 2001, and November 29, 2001, respectively.6 Tr. 616:20-21, 714:19-20 (Glodney); PX 459, 472, 494, 497, 621-22, 634.

The properties were sold while subject to Use Agreements but were not sold pursuant to ELIHPA or LIHPRHA. PX 459, 472, 494, 497, 621-22, 634. 7

6

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18.

The properties are multifamily apartment complexes, and thus are income-

producing properties. PX 458-461, 463, 465, 467, 469, 471-472D. Claremont Village Commons 19. The Claremont Village Commons property is a 150-unit garden-style family

apartment complex located at 955 West Arrow Highway, Claremont, California, 91711. It consists of 95 two-bedroom, 53 three-bedroom, and 2 employee units. It is located in a residential middle-class neighborhood with several schools nearby and single-family homes across the street. Tr. 248:23-251:9 (Glodney). The complex is gated, has a community recreation room, playgrounds for children, and ample parking for tenants. PDX 1. 20. On December 1, 1970, Claremont entered into a Regulatory Agreement with

HUD under Section 236. PX 305. The Regulatory Agreement limited Claremont's maximum annual dividend to $16,936, 6% of the original equity investment as calculated by HUD. Id. 21. Also on December 1, 1970, Claremont signed a Trust Note with Union Bank for

$2,547,800. PX 98. Rider A to the Trust Note permitted Claremont to prepay its mortgage without HUD or lender approval after 20 years. Id. HUD issued its final endorsement of the Trust Note on December 21, 1971. Id. Thus, Claremont's prepayment eligibility date was December 21, 1991. Covina West Apartments 22. Covina West Apartments property is a 158-unit garden-style family apartment

complex located at 929 West Cameron Avenue, West Covina, California 91790. It consists of 42 one-bedroom, 59 two-bedroom, 47 three-bedroom, 8 four-bedroom, and 2 employee units. It is located in a residential middle-class neighborhood, is surrounded by conventional apartments,

8

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and has single-family homes, stores, and restaurants nearby. Tr. 251:10-252:14 (Glodney). The complex has a community recreation room and playgrounds for children. PDX 2. 23. On June 1, 1970, Covina West entered into a Regulatory Agreement with HUD

under Section 236. PX 309. The Regulatory Agreement limited Covina West's maximum annual dividend to $16,042, 6% of the original equity investment as calculated by HUD. Id. 24. Also on June 1, 1970, Covina West signed a Trust Note with Union Bank for

$2,593,300. PX 99. Rider A to the Trust Note permitted Covina West to prepay its mortgage without HUD approval after 20 years. Id. HUD issued its final endorsement on the Trust Note on May 26, 1971. Id. Thus, Covina West's prepayment eligibility was May 26, 1991. Id.; Tr. 251:10-15 (Glodney). Del Vista Village 25. The Del Vista Village property is a 160-unit garden-style complex located at 976

Avenida Del Vista, Corona, California, 92882. It consists of 40 one-bedroom, 80 two-bedroom, 38 three-bedroom, and 2 employee units. It is located in a middle-class neighborhood, is surrounded by condominiums and conventional apartments, is near a large residential area with single-family homes, and is next to an elementary school and near a high school. Tr. 252:23253:22 (Glodney). The complex is gated, has a picnic area and large playgrounds for children, and a pool and a community recreation room were added to the complex recently. Id.; PDX 3. 26. On December 1, 1970, Del Vista entered into a Regulatory Agreement with HUD

under Section 221(d)(3). DX 61. The Regulatory Agreement limited Del Vista to a maximum annual dividend of $15,644, 6% of its original equity investment as determined by HUD. Id. 27. Also on December 1, 1970, Del Vista signed a Secured Note with Union Bank for

$2,355,300. PX 100. The Secured Note permitted Del Vista to prepay its mortgage without

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HUD approval after 20 years. Id. HUD endorsed the Secured Note on April 7, 1972. Id. Thus, Del Vista had a prepayment eligibility date of April 7, 1992. Id.; Tr. 252:16-19 (Glodney). DeSoto Gardens 28. The DeSoto Gardens property is a 248-unit garden-style family apartment

complex located in the Canoga Park area of Los Angeles at 8722 DeSoto Avenue, Canoga Park, California, 91304. It consists of 248 units, including 24 one-bedroom, 124 two-bedroom, 98 three-bedroom, and 2 employee units. It is located in a middle-class neighborhood surrounded by a large number of conventional market-rate apartment complexes and condominiums in the same general area as Independence Park Apartments--a property involved in Set I of this litigation which has operated as a market-rate complex since its owners prepaid the HUD-insured mortgage in 1996. Tr. 260:2-261:22 (Glodney). The complex is gated and has a community recreation room and playgrounds for children, and a recently-added pool. Id.; PDX 6. 29. On May 15, 1969, DeSoto entered into a Regulatory Agreement with HUD under

Section 221(d)(3). PX 313. The Regulatory Agreement limited DeSoto's maximum annual dividend to $29,559, 6% of the original equity investment as calculated by HUD. Id. 30. Also on May 15, 1969, DeSoto signed a Secured Note with United California

Bank for $3,494,500. PX 101. The Secured Note permitted DeSoto to prepay its mortgage without HUD approval after 20 years. Id. HUD issued its final endorsement of the Secured Note on November 2, 1970. Id. Thus, DeSoto had a prepayment eligibility date of November 2, 1990. Id.; Tr. 260:2-6 (Glodney). Kittridge Gardens I 31. The Kittridge Gardens I property is a 128-unit garden-style family apartment

complex located in Los Angeles at 6540 Wilbur Avenue, Reseda, California, 91335. The

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property has 32 one-bedroom, 64 two-bedroom, and 31 three-bedroom units, as well as one employee unit. It is located in a middle-class neighborhood with conventional apartment complexes and condominiums across the street. The complex is near a park and a police station, and has shopping and several schools within one mile. Tr. 261:23-263:4 (Glodney). The property has a recreation room, barbeque area, and large playground areas. Id.; PDX 7. 32. On June 1, 1968, Kittridge I entered into a Regulatory Agreement with HUD

under Section 221(d)(3). PX 314. This agreement limited Kittridge I to a maximum annual dividend of $9,949, 6% of the original equity investment as calculated by HUD. Id. 33. Also on June 1, 1968, Kittridge I signed a Secured Note with United California

Bank for $1,491,400. PX 115. The Secured Note permitted Kittridge I to prepay its mortgage without HUD approval after 20 years. Id. HUD issued its final endorsement on the Secured Note on September 17, 1969. Id. Thus, Kittridge I's prepayment eligibility date was September 17, 1989. Id.; Tr. 261:23-262:2 (Glodney). Kittridge Gardens II 34. The Kittridge Gardens II property is a 2-story, 80-unit garden-style family

apartment complex located in Los Angeles at 6540 Wilbur Avenue, Reseda, California, 91335. It contains 32 two-bedroom, 16 three-bedroom, and 32 four-bedroom units. It is located next door to the Kittridge I property in a middle-class neighborhood near a park and a police station, with several schools and shopping within one mile. Tr. 264:11-265:11 (Glodney). The property has a recreation room, barbeque area, and playground areas. Id.; PDX 8. 35. On February 16, 1970, Kittridge II entered into a Regulatory Agreement with

HUD under Section 221(d)(3). PX 313. This agreement limited Kittridge II to a maximum annual dividend of $10,420, 6% of the original equity investment as calculated by HUD. Id.

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36.

Also on February 16, 1970, Kittridge II signed a Trust Note with Security Pacific

National Bank for $1,441,300. PX 102. Rider A to the Trust Note permitted Kittridge II to prepay its mortgage without HUD approval after 20 years. Id. HUD issued its final endorsement on the Note on April 14, 1971. Id. Thus, Kittridge II's prepayment eligibility date was April 14, 1991. Id.; Tr. 264:11-16 (Glodney). Oxford Park Apartments 37. The Oxford Park Apartments property is a 3-story, 109-unit senior apartment

complex located at 1920 South Oxford Street, Los Angeles, California, 90018. All of the units are one-bedroom units and the complex has two elevators and underground parking. Oxford Park is located in a middle-class neighborhood with single-family homes with historic mansion architecture next door and across the street. Tr. 265:12-267:12 (Glodney). The complex has a large community recreation room and a recently-added gazebo in the courtyard. Id.; PDX 9. 38. On November 2, 1970, Oxford Park entered into a Regulatory Agreement with

HUD under Section 221(d)(3). PX 317. This agreement limited Oxford Park to a $9,691 maximum annual dividend, 6% of the original equity investment as calculated by HUD. Id. 39. Also on November 2, 1970, Oxford Park signed a Trust Note with Security

Pacific National Bank for $1,519,800. PX 103. Rider A to the Trust Note permitted Oxford Park to prepay its mortgage without HUD approval after 20 years. Id. HUD issued its final endorsement on the Note on October 6, 1972. Id. Thus, Oxford Park's prepayment eligibility date was October 6, 1992. Id.; Tr. 265:12-17 (Glodney). Parthenia Townhouses 40. The Parthenia Townhouses property is a 24-unit garden-style apartment complex

located in the Canoga Park area of Los Angeles at 21218 Parthenia Street, Canoga Park,

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California, 91304. It consists of 16 two-bedroom and 7 three-bedroom units, as well as one employee unit. It is located in a middle-class neighborhood with condominiums nearby, and is in the same area as the DeSoto and Independence Park properties. Tr. 267:18-268:9 (Glodney). It has a barbeque area and a playground for children. Id.; PDX 10. 41. On April 1, 1971, Parthenia entered into a Regulatory Agreement with HUD

under Section 221(d)(3). PX 318. This agreement limited Parthenia to a maximum annual dividend of $2,455, 6% of the original equity investment as calculated by HUD. Id. 42. Also on April 1, 1971, Parthenia signed a Secured Note with Prestige Mortgage

Corporation for $368,000. PX 104. The Secured Note permitted Parthenia to prepay its mortgage without HUD approval after 20 years. Id. HUD issued its final endorsement on the Secured Note on December 17, 1971. Id. Thus, Parthenia had a prepayment eligibility date of December 17, 1991. Id.; Tr. 267:13-17 (Glodney). Pioneer Gardens Apartments 43. The Pioneer Gardens Apartments property is a 141-unit garden-style family

apartment complex located at 9039 Pioneer Boulevard, Santa Fe Springs, California, 90670. It consists of 16 one-bedroom, 63 two-bedroom, 37 three-bedroom, 23 four-bedroom, and 2 employee units. It is in a middle-class neighborhood with single-family homes, a park, and a community center. Tr. 253:23-255:7 (Glodney). Placita Park Apartments, a property in Set IV of this litigation that prepaid its mortgage and is operating conventionally, is two blocks away. Pioneer is gated and has a community recreation room and playgrounds for children. Id.; PX 4. 44. On June 1, 1970, Pioneer entered into a Regulatory Agreement with HUD under

Section 236. PX 319. The Regulatory Agreement limited Pioneer's maximum annual dividend to $15,374, 6% of the original equity investment as calculated by HUD. Id.

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45.

Also on June 1, 1970, Pioneer signed a Trust Note with Union Bank for

$2,448,500. PX 105. Rider A to the Trust Note permitted Pioneer to prepay its mortgage without HUD approval after 20 years. Id. On May 26, 1971, HUD issued its final endorsement on the Trust Note. Thus, Pioneer's prepayment eligibility date was May 26, 1991. Tr. 253:23-3 (Glodney). Puente Park Apartments 46. The Puente Park Apartments property is a 132-unit garden-style family apartment

complex located at 14714 East Prichard Street, La Puente, California, 91744. It consists of 8 one-bedroom, 87 two-bedroom, 35 three-bedroom, and 2 employee units. It is located on a quiet street in a middle-class neighborhood of single family homes and a school. Tr. 255:13-256:6 (Glodney). It is gated and has a community recreation room and playgrounds. Id.; PDX 5. 47. On September 10, 1969, Puente Park entered into a Regulatory Agreement with

HUD under Section 236. PX 321. The Regulatory Agreement limited Puente Park's maximum annual dividend to $12,692, 6% of the original equity investment as calculated by HUD. Id. 48. Also on September 10, 1969, Puente Park signed a Trust Note with Union Bank

for $1,947,500. PX 106. Rider A to the Trust Note permitted Puente Park to prepay its mortgage without HUD approval after 20 years. HUD issued its final endorsement on the Trust Note on August 31, 1970. Id. Thus, Puente Park's prepayment eligibility date was August 31, 1990. Tr. 255:8-12 (Glodney). C. 49. ELIHPA and LIHPRHA In the 1980s, the government substantially decreased its funding of new

affordable housing programs, which exacerbated the existing problem of a severely inadequate supply of affordable housing. Tr. 1961:13-1962:18 (Vitek). Thus, as owners approached their 20-year prepayment dates, "it became clear to Congress that large numbers of owners would 14

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prepay their mortgages and remove their properties from the federally-assisted low-income housing pool." Cienega VIII, 331 F.3d at 1326 & n.13 (quoting H.R. Conf. Rep. No. 100-426, at 192 (1987)) ("[Findings] indicate that almost 950,000 low-income housing units could soon be lost through mortgage prepayments"). 50. In an attempt to limit the exacerbation of the nation's low-income housing

shortage, Congress passed emergency legislation on February 5, 1988, the Emergency Low Income Housing Preservation Act of 1987, 12 U.S.C. § 1715l (1988) ("ELIHPA" or "Title II"), which temporarily rescinded the unfettered prepayment rights of owners of properties in the HUD programs (including those of Plaintiffs), forcing them to keep their properties in the HUD programs. 12 U.S.C. § 1715l; Tr. 1921:23-1922:11, 1961:13-1962:18 (Vitek). 51. On November 28, 1990, Congress enacted the Low Income Housing Preservation

and Residential Homeownership Act of 1990, 12 U.S.C. § 4101 et seq. ("LIHPRHA or "Title VI"), which permanently prohibited owners of properties operating under the HUD programs (including Plaintiffs) from prepaying their HUD-insured mortgages, converting to conventional apartments, and raising their rents to market levels. 52. By enacting ELIHPA and LIHPRHA, Congress shifted the expenses of a severe

national low-income housing shortage from all taxpayers to just the owners of properties in the HUD programs. See Tr. 1961:13-1962:18 (Vitek). 53. ELIHPA and LIHPRHA substantially interfered with Plaintiffs' rights to use,

transfer, and exclude others from their properties by preventing Plaintiffs from prepaying their mortgages and exiting the HUD programs in accordance with the Trust Notes and Secured Notes and compelling the physical occupation of Plaintiffs' properties exclusively by governmentapproved tenants at the below-market rents. 12 U.S.C. § 1715l; 12 U.S.C. § 4101 et seq.

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54.

Title II and Title VI, and the regulations promulgated thereunder, gave owners in

the HUD programs three options to mitigate damages caused by the taking of their prepayment right: an owner could (1) sign a "Use Agreement" after a significant delay, under which it agreed to maintain the property as affordable housing in exchange for possible HUD-approved financial incentives; (2) sell the property after a significant delay--not at fair-market value but at a HUDapproved price determined by HUD regulations and set years before an actual sale could occur-- to a HUD-approved and HUD-subsidized purchaser who agreed to maintain the property's lowincome affordability restrictions; or (3) prepay the mortgage if the owners could demonstrate that prepayment would not negatively impact the affordable housing supply or raise rents more than 10%. Tr. 1927:18-1928:13 (Vitek); see also 12 U.S.C. § 4108; 24 C.F.R. § 248.141(a)(1). None of these options reimbursed Plaintiffs for the cash flows they lost as a result of the prohibition on prepaying and converting to market rent levels on the original prepayment eligibility dates. 12 U.S.C. § 4108; 24 C.F.R. § 248.141(a)(1). Owners who did not pursue one of the three options were forced to continue to operate under the original Regulatory Agreements' highly restrictive terms, under which they could only receive, at most, a 6% annual return on the HUD-derived original equity for the remainder of their 40-year mortgages. Tr. 1927:18-14 (Vitek).7

HUD did not issue final regulations implementing ELIHPA until October 22, 1990, almost 33 months after ELIHPA passed. 24 C.F.R. §§ 248.101-261 (1991). And HUD issued final regulations implementing LIHPRHA on May 8, 1992, almost 18 months after LIHPRHA passed. 24 C.F.R. §§ 248.1-319 (1993). No owners could proceed under Title II or Title VI until after their the statute's respective regulations were implemented. PX 552; Tr. 325:9-327:7 (Glodney). Nor could owners make an election between proceeding under ELIHPA or LIHPRHA until after these regulations were enacted, because they did not know what the Title VI "incentives" would be. Tr. 325:9-327:7 (Glodney). Further, HUD did not want to process "plans of action," the documents in which owners requested financial incentives from HUD in exchange for a commitment to continue charging below-market rents, until it knew under which guidelines to process them. Tr. 325:9-327:7 (Glodney); see also Tr. 1928:3-7 (Vitek). 16

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55.

Plaintiffs could not have met the statutorily-required criteria for prepayment under

Title II or Title VI because Plaintiffs were located in areas with low HUD-vacancy rates and thus prepayment would have materially affected the supply of low-income housing and resulted in annual rental increases of more than 10%. Tr. 526:9-527:8, 537:14-25 (Glodney); Tr. 1962:151965:13 (Vitek). Compare PX 322, 327, 337, 348, 359, 362-63, 375, 375A, 387, 392-93 with PX 422-23, 452-457, 615. HUD was thus statutorily prohibited from permitting Plaintiffs to prepay. Id. In fact, HUD told Plaintiffs' representatives that it would be futile for Plaintiffs to apply for prepayment because Plaintiffs could not meet the statutory criteria for prepayment. Tr. 532:12-533:8, 812:3-820:18, 828:8-12 (Glodney). The government has judicially admitted that HUD did not approve any prepayments in California pursuant to the relevant prepayment provisions (Section 225(a)(1) of Title II or Section 218(a) of Title VI). PX 632. 56. Accordingly, while Plaintiffs filed notices of intent to prepay, PX 18-19, 28-32A,

Plaintiffs did not ultimately file requests with HUD for approval to prepay under ELIHPA or LIHPRHA because such requests would have been futile and would have further delayed the plan of action process. Id.; Tr. 532:12-533:8, 812:3-820:18, 828:8-12 (Glodney); Tr. 19621965:13 (Vitek) (testifying that he was not aware of any owners in California who were able to meet the prepayment standard due to the lack of available affordable housing). 57. If an owner could not qualify for prepayment but wanted to mitigate the damages

ELIHPA and LIHPRHA caused, the owner had to either seek incentives through a plan of action via a Use Agreement or pursue a sale that was both unlikely to occur and would require a sale at a price set by HUD to a HUD-approved and HUD-subsidized buyer. See Tr. 2038:24-2039:25 (Matthews); Tr. 1931:19-1936:15, 1985:3-8 (Vitek).

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58.

Participation in a Title II Use Agreement required the extension of the

affordability restrictions for the remainder of the original 40-year mortgage, and enabled owners to request distributions based on the property's income rather than on a HUD-established rate of return. Tr. 322:19-323:19 (Glodney). In contrast, participation in a Title VI Use Agreement required that the owner agree to continue the affordability restrictions for the longer of 50 years or the property's remaining useful life, in exchange for a limited 8% return for that period. Id. 59. Plaintiffs proceeded under Title II because they believed "the incentives offered

under Title II were more beneficial to the partnership." Tr. 323:4-6, 323:20-324:4 (Glodney). Pursuing incentives under Title II was a more rational choice, indeed "something that probably just about all owners would prefer." Tr. 2852:10-24 (Vitek).8 60. The Title II "sale option" was itself a severe limitation on Plaintiffs' property

rights. Tr. 2222:3-21 (Hamm) (acknowledging that the sale option restrained Plaintiffs' ability to sell to a buyer of their choice in the open market). Prior to Title II's enactment, Plaintiffs possessed the right, upon prepayment, to sell their properties free of restrictions to the highest bidders on the open market. Tr. 2206:1-2 (Hamm). Although Plaintiffs intended to hold their properties for the long-term and earn the anticipated benefits of operating the properties conventionally after 20 years, the unrestricted ability to sell their properties in a free-market sale after 20 years was clearly a valuable property right. Tr. 86:6-13, 200:25-201:4 (Goldrich)

8

If an owner filed a notice of intent prior to January 1, 1991, the owner could elect to seek incentives under either Title II and Title VI; otherwise the owner would be limited to Title VI incentives. See 12 U.S.C. 4101l note, § 604(a). Plaintiffs were eligible for Title II incentives because they filed notices of intent to prepay prior to January 1, 1991. PX 18, 19-32A. Within 30 days of the effective date of the regulations governing Title VI, owners were required to file a notice of election to proceed under either Title II or Title VI (HUD Form 9610). PX 39; Tr. 507:2-15, 513:22-516:16 (Glodney). 18

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(noting willingness to sell after prepayment if Plaintiffs would have made a greater profit on the sale than on operating the property conventionally). 61. Under ELIHPA, however, owners could only sell their properties to qualified

HUD-approved purchasers at a price set by HUD. The price was often set years before any actual sale could take place, was not updated to reflect appreciation during the period of delay, and did not reflect the lost income during the delay period (between prepayment date and sale date).9 Tr. 534:25-535:20 (Glodney); Tr. 1984:15-1985:8 (Vitek). To consummate a sale, owners were required to submit a plan of action, which had to include an appraisal. 24 C.F.R. 248.213. The property's value was then determined by HUD through a review of the ownersubmitted independent third-party appraisal, yielding the HUD "as is" value. 24 C.F.R. § 248.213; PX 619; see also PX 255-57, 422-23, 452-57, 615. According to HUD officials, the "appraisal review process for Title II [was] a long and arduous task," which included an audit of the appraisal review process, a Preservation Capital Needs Assessment ("PCNA"), an additional limited review, and a re-review phase. PX 250. Owners could not select a buyer of their choice; to qualify as a HUD-approved purchaser under Title II, a purchaser had to (1) be "a qualified nonprofit organization, limited equity tenant cooperative, public agency, or other entity acceptable to the Secretary," and (2) agree to maintain the low-income affordability restrictions.

HUD valued Plaintiffs' properties significantly lower than Plaintiffs' independent appraiser. For example, Plaintiffs' independent appraiser valued Claremont Village at $9,294,200, while HUD agreed to an "as-is" value of only $7,976,000. Compare PX 409 with PX 452. HUD deflated each one of Plaintiffs' appraisals to a similar degree (with the exception of Oxford Park, for which HUD agreed with the owner-submitted appraisal). Plaintiffs' independent appraiser valued Covina, Del Vista, DeSoto, Kittridge II, Oxford Park, Parthenia, Pioneer, and Puente Park at $10,000,000, $8,800,000, $13,500,000, $6,200,000, $5,350,000, $1,785,000, $8,600,000, and $9,575,000, respectively. PX 410-412, 415-418, 420. By contrast, the HUD "as-is" values for these same properties were $8,342,000, $6,400,000, $12,750,000, $5,700,000, $5,350,000, $1,576,600, $6,124,000, and $7,650,000. PX 422-23, 453-54, 455A, 456-57, 615. 19

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12 U.S.C. 1715l note, § 224(7). Even by the Government's account, sales under Title II were not the equivalent of what the property would have sold for at an unrestricted sale. Tr. 2184:9-25 (Hamm) (testifying that a fair market transaction requires a willing buyer and a willing seller); Tr. 2043:15-2044:3 (Matthews) (testifying that buyers had to meet HUD qualifications). 62. The testimony also established that the Title II sale process took much longer than

the process of seeking incentives under a Title II Use Agreement, Tr. 1984:15-1985:8 (Vitek), and therefore entailed more risk, delay, and loss, than the Use Agreement option.10 63. Furthermore, the majority of owners that attempted to sell their properties were

unable to do so. See Tr. 2038:24-2039:25 (Matthews) (testifying that less than half of owners who chose to sell their properties under Title II and Title VI were able to sell them); Tr. 2608:62610:7 (Hamm) (same). Further, unlike Title VI, Title II did not give an owner who was unable to consummate a sale the option of then prepaying; rather, the owner's only option was to submit an entirely new plan of action seeking incentives under Title II. See 12 U.S.C. 1715l note.11 64. When given the choice, Plaintiffs viewed the option to lose their properties

forever in a non-fair market Title II sale as highly unappealing. Plaintiffs' only other viable option under Title II was to pursue "incentives" by signing the Use Agreements Congress provided for in Title II. Tr. 315:22-324:4 (Glodney). The Use Agreements were statutorilyimposed measures which Plaintiffs were required to accept if they wished to retain any Although the government's HUD witness testified that a Title II sale would in fact take longer than seeking Use Agreement incentives under Title II, Tr. 1984:15-1985:8 (Vitek), the government did not offer any evidence concerning the Title II sales process or even that a Title II sale ever occurred.
11 10

Plaintiffs' so-called "choice" between a Title II and Title VI sale as a practical matter did not exist because the Title VI regulations were not promulgated until May 8, 1992--after the prepayment dates of all but just one of the properties (Oxford Park). Thus, although Plaintiffs could start the prepayment process up to one year before their prepayment date, Plaintiffs that chose to do so were only able to proceed under Title II in the absence of any Title VI regulations. See supra note 7. 20

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ownership interest in their properties and mitigate the financial losses Title II and Title VI imposed. The HUD-mandated recitation in Plaintiffs' Use Agreements that owners agreed to extend their affordability restrictions in exchange for incentives was not actual consideration. PX 50-57, 58, DX 181. Plaintiffs did not have the power to bargain away their prepayment right, as Congress had already taken that right through Title II and Title VI. Tr. 537:14-25 (Glodney). 65. Plaintiffs' decision to accept the "incentives" prescribed by Title II Use

Agreements mitigated their damages, thus benefiting the government. PX 50-57, 58, DX 181. Use Agreements were the best mitigation available. See Tr. 2820:2-2821:8 (Malek) (testifying that continued operation is better than a sale); Tr. 2248:1-9, 2265:25-2266:15, 2620:25-2621:16 (Hamm) (testifying that Plaintiffs were rational, analyzed the options, and concluded that entering into Use Agreements offered risk-adjusted benefits that were superior to a sale). D. 66. Plaintiffs' Use Agreements To obtain Title II "incentives," Plaintiffs were required to agree to extend the

affordability restrictions on their properties for the remaining term of the HUD-insured mortgages. Tr. 1972:11-15 (Vitek); Tr. 537:7-25 (Glodney). The Use Agreements limited the rents Plaintiffs could charge and limited to whom the properties could be rented until the expiration of the properties' 40-year mortgages. PX 50-57, 58, DX 181. 67. To obtain Title II incentives, Plaintiffs were required to arrange for an

independent third-party appraisal (via the same process as if seeking a sale or transfer of the property, as described supra), prepare a plan of action, and submit the plan of action and appraisal to HUD for each of their properties. 12 U.S.C. 1715l note, § 223; 24 C.F.R. 248.213; Tr. 603:10-21 (Glodney). Through the plan of action, Plaintiffs could seek either budget-based rent increases with limited distributions to owners or annual rent increases with unlimited distributions to owners. Tr. 539:12-540:12 (Glodney). 21

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68.

Preparing and obtaining HUD's approval of a plan of action was extremely time-

consuming and fraught with delays by HUD officials. First, under Title II, HUD would not accept any notices of intent prior to one year before the prepayment date. Indeed, while Plaintiffs attempted to file notices of intent in February 1990, more than a year before their prepayment dates, HUD rejected and returned these notices of intent, stating they were submitted too early. See, e.g, PX 27; Tr. 295:11-297:17 (Glodney). Second, when owners requested financial incentives other than those set out in the regulations (including retroactive incentives to make up for lost income between the prepayment dates and the effective dates of the Use Agreements), HUD rejected those requests and instead, because of those requests, issued deficiency notices which required owners to submit entirely new plans of action, thereby continuing to delay the process. Tr. 334:18-335:13, 520:10-25, 522:17-525:1 (Glodney); PX 563; 24 C.F.R. § 248.15, 17-18. This process resulted in substantial delays in processing Plaintiffs' plans of action. Tr. 538:1-540:12 (Glodney); Tr. 1970:14-1978:22 (Vitek). 69. Third, delays in approving Plaintiffs' plans of action were also due in large part to

numerous changes in HUD's requirements, including new requirements to file a notice of election to proceed, and to perform a PCNA,12 lead-based testing, and a limited appraisal review in accordance with appraisal guidelines. Tr. 507:7-15, 516:7-16, 615:5-616:12 (Glodney). For example, according to HUD officials, the "appraisal review process for Title II [was] a long and arduous task," which included an audit of the appraisal review process, an additional "limited review," and a re-review phase. PX 250.

12

During the processing of Plaintiffs' plans of action, HUD informed Plaintiffs and other properties that were already engaged in Title II processing that they were now required to submit to a PCNA. In the PCNA, HUD determined whether, in its opinion, the property needed repairs or rehabilitation, thus further delaying the plan of action process. Tr. 615:5-20 (Glodney). 22

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70.

Delays were particularly egregious in the Los Angeles HUD office, where

Plaintiffs' plans of action were submitted and initially processed. Tr. 337:15-338:5, 589:4592:24, 696:8-14 (Glodney); Tr. 1965:14-1968:1 (Vitek). According to Plaintiffs' representative, Ms. Glodney, HUD officials acknowledged that "we just don't have staff to get [the plans of action] done." Tr. 592:15-18 (Glodney). Plaintiffs pressed HUD to process their plans of action expeditiously so they could receive Title II incentives. Plaintiffs wrote several letters and "constantly call[ed]" HUD to seek explanations for the delays, request faster processing, and express their dissatisfaction. Tr. 591:13-592:24, 724:8-761:4 (Glodney); PX 238A, 240, 246-48, 250-51, 254. After languishing in the Los Angeles office, some of Plaintiffs' plans of action were eventually transferred to the HUD San Francisco office for processing. However, at different stages, the plans of action were sent back to Los Angeles for approval, which further delayed the process. Tr. 750:7-755:1 (Glodney); PX 260, 262A-B. A Los Angeles HUD official told Ms. Glodney that if Plaintiffs continued to complain about delays, their plans of action "would be put at the bottom of the pile." Tr. 591:24-592:4 (Glodney). 71. Due to the numerous administrative and regulatory delays, the negotiation and

processing of Plaintiffs' plans of action took, on average, five-and-a-half years. See Tr. 1969:1014 (Vitek) (testifying he was "not surprised" that Plaintiffs' plans of action took so long to process). Kittridge I's plan of action took nearly seven years to process. PX 18, 53. Pioneer, Del Vista, Kittridge II, DeSoto, Covina West, Oxford Park, and Claremont's plans of action each took approximately five-and-a-half years. PX 19, 50-53, 55-56, 58. For Parthenia, the period was approximately four-and-a-half years, while Puente Park took close to three-and-a-half years. PX 28, 31, 57; DX 181.

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72.

HUD's extensive delays harmed Plaintiffs because they were bound by the

maximum 6% limited return and other restrictions in their Regulatory Agreements during the delay period, and could not receive retroactive benefits to compensate them for the losses they suffered during the period between the submission of their plan of action and its approval. Tr. 334:18-335:13, 520:10-25, 522:17-525:1 (Glodney); PX 563. Plaintiffs did not begin receiving incentives under Title II until their respective Use Agreements were signed. Id. 73. HUD utilized the valuation from the appraisal submitted by the owner--as

adjusted by HUD--to determine rents the owner could charge under its Use Agreement. PX 422-23, 452-457, 615. If the owner disagreed with the rents HUD set, the owner could meet with HUD; but never once in this process did HUD adjust Plaintiffs' rents or values upwards. Tr. 620:8-14 (Glodney). If Plaintiffs wanted Title II incentives, they were compelled to agree with these values (the "as-is" or "agreed-upon" rents or values which would later, under Title VI, be called "preservation" value). See Tr. 1927:18-1928:13 (Vitek) (testifying that the only other option was to continue to own and operate properties under the HUD programs' original terms). Once approved, neither the owner nor HUD could change the initial rent amounts an owner could charge under a Use Agreement. PX 50-57, 58, DX 181. 74. The rents Plaintiffs were permitted to charge under their Use Agreements did not

keep up with the conventional market rents because they were based on an annual adjustment factor "that had no relationship in total to the market." Tr. 773:18-25 (Glodney). The Use Agreement rents were not adjusted to account for market increases between the rent determination date and the time the agreed-upon rents became effective (the first day of the month after the execution of the Use Agreement). These rents increasingly fell below the market rate over time. Tr. 773:18-25 (Glodney); Tr. 2244:9-25, 2603:24-2604:8 (Hamm) (testifying that