Free Memorandum of Contentions of Fact and Law - District Court of Federal Claims - federal

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No. 94- 10002C; 94-10003C; 94-10005C;94-10006C; 94-10007C; 94-10008; 94-10010C; 94-10020C; 94-10030C; 94-10040C (consolidated) Judge Lettow ______________________________________________________________________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS _____________________________________________________________________________ CLAREMONT VILLAGE COMMONS, et al, Plaintiffs, v. UNITED STATES, Defendant. ______________________________________________________________________________ DEFENDANT'S PRETRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW ______________________________________________________________________________ PETER D. KEISLER Assistant Attorney General JEANNE E. DAVIDSON Acting Director BRIAN M. SIMKIN Assistant Director KENNETH M. DINTZER Assistant Director DAVID A. HARRINGTON KENNETH D. WOODROW TIMOTHY P. McILMAIL SEAN DUNN MICHAEL AUSTIN Trial Attorneys Commercial Litigation Branch Civil Division Department of Justice 1100 L Street, N.W. Attn: Classification Unit 8th Floor Washington, D.C. 20530 (202) 514-7300 February 15, 2007 Attorneys for Defendant

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TABLE OF CONTENTS PAGES DEFENDANT'S PRETRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STATEMENT OF FACTS DEFENDANT EXPECTS TO PROVE AT TRIAL . . . . . . . . . . . . . 2 I. Statutory Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A. B. The Section 221(d)(3) And 236 Programs . . . . . . . . . . . . . . . . . . . . . . . . . 2 Benefits Of Participating In The Section 221(d)(3) And Section 236 Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. 2. 3. C. Low-Risk, High Leverage Financing . . . . . . . . . . . . . . . . . . . . . . . 3 Tax Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Other Opportunities For Project Owners . . . . . . . . . . . . . . . . . . . . 5

The Preservation Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. 2. ELIHPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 LIHPRHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

D. II.

The HOPE Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 A. The Initial Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1. 2. 3. 4. 5. Claremont Village Commons . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Covina West Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Del Vista Village . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 De Soto Gardens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Kittridge Gardens I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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6. 7. 8. 9. 10. 11. B. C. D. E.

Kittridge Gardens II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Oxford Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Parthenia Townhomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Pioneer Gardens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Puente Park Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Further Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

The Properties Prior To Title II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Plaintiffs Each Signed A Use Agreement . . . . . . . . . . . . . . . . . . . . . . . . 21 Prepayment Of The HUD-Insured Mortgages . . . . . . . . . . . . . . . . . . . . . 22 Los Angeles Rent Stabilization Ordinance . . . . . . . . . . . . . . . . . . . . . . . 23

DEFENDANT'S CONTENTIONS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 I. II. The Los Angeles Properties Would Not Have Prepaid Their Mortgages . . . . . . 25 The Preservation Statutes Did Not Effect A Regulatory Taking Under Penn Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 A. The Preservation Statutes Had No Economic Impact Upon Plaintiffs . . 27 1. 2. The Sale Option Eliminates Any Potential Economic Impact . . . 28 Even Under Assumptions Favorable To Plaintiffs, The Preservation Statutes Did Not Result In A "Severe Economic Deprivation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Plaintiffs' Diminution-In-Profits Approach Provides No Insight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

3.

B.

The Preservation Statutes Did Not Frustrate Investment-Backed Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1. The Preservation Statutes Did Not Interfere With The Primary Expectations Of A Reasonable Investor In Low-Income -ii-

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Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

a.

Expectations Of Reasonable Developers And Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 The Preservation Statutes Did Not Affect Developer's And Investor's Reasonable Expectations . . . . . . . . . . . . 39

b.

2.

Plaintiffs' Partners Placed Little Import Upon The Opportunity To Prepay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

C.

The Preservation Statutes Do Not Have The Character Of A Taking . . . 42 1. The Preservation Statutes Promoted Important, Long-Standing Government Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The Preservation Statutes Did Not Shift The Burden Of Providing Low-Income Housing On To Plaintiffs . . . . . . . . . . . 45

2.

III.

Plaintiffs' Lost-Profits Model Does Not Provide A Proper Measure Of Just Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 A. B. Plaintiffs Are Only Entitled To Nominal Damages . . . . . . . . . . . . . . . . . 46 Plaintiffs' Damage Model Overstates Just Compensation . . . . . . . . . . . . 47 1. Plaintiffs Incorrectly Assesses Compensation At The End Of The Alleged Taking Period Using Ex Post Data . . . . . . . . . . 47 Dr. Peiser Employs The Wrong Discount Rates . . . . . . . . . . . . . 51

2. C.

Plaintiffs' Lost-Profit Model Contains Numerous Errors . . . . . . . . . . . . 52 1. Plaintiffs' Model Ignores HAP Contracts That Overlapped With The Prepayment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Dr. Peiser Makes No Allowance For Phasing-In Market Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Dr. Peiser Incorrectly Assumes That Each Plaintiff Could Have Obtained Permanent Financing On The Assumed Prepayment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 -iii-

2.

3.

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4.

Dr. Peiser Overstates The Hypothetical Price For The Five Properties That Were Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Dr. Peiser's Model Fails To Consider The Effect Of LARSO Upon Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Dr. Peiser's Report Suffers From Numerous Other Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

5.

6.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

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TABLE OF AUTHORITIES CASES: PAGES:

Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 American Pelagic Fishing Co., LLP v. United States, 379 F.3d 1363 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Andrus v. Allard, 444 U.S. 51 (1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Armstrong v. United States, 364 U.S. 40 (1960) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Bass Enterprises Prod. Co. v. United States, 54 Fed. Cl. 400 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Bass Enterprises Production Co. v. United States, 381 F.3d 1360 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Bowles v. United States, 31 Fed. Cl. 37 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 CCA Assocs. v. United States, ___ Fed. Cl. ___, 2007 WL 315350 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Chancellor Manor v. United States, 331 F.3d 891 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Cienega Gardens v. United States, 38 Fed. Cl. 64 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim City Line Joint Venture v. United States, 71 Fed. Cl. 486 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 City of Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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Commonwealth Edison Co. v. United States, 271 F.3d 1327, 1348 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Concrete Pipe & Products of Cal., Inc. v. Construction Laborers Pension Trust for S. Cal., 508 U.S. 602 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32 Danforth v. United States, 308 U.S. 271 (1939) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 FCC v. Florida Power Corp., 480 U.S. 245 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Florida Rock Industries, Inc. v. United States, 45 Fed. Cl. 20 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Florida Rock Industries, Inc. v. United States, 791 F.2d 893 (Fed. Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Forest Properties, Inc. v. United States, 177 F.3d 1360 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Formanek v. United States, 26 Cl. Ct. 332 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Greenbrier v. United States, 193 F.3d 1348 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Independence Park Apartments v. United States, 61 Fed. Cl. 692 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Independence Park Apartments v. United States, 449 F.3d 1235 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Jentgen v. United States, 228 Ct. Cl. 527 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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Kirby Forest Indus., Inc. v. United States, 467 U.S. 1 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 48 Loveladies Harbor v. United States, 21 Cl. Ct. 153, 160 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Loveladies Harbor, Inc. v. United States, 28 F.3d 1176 (Fed. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 42 Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 28 MacLeod v. County of Santa Clara, 749 F.2d 541 (9th Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Olson v. United States, 292 U.S. 246 (1934) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 39 RCK Properties, Inc. v. United States, 528 U.S. 951 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Rose Acre Farms, Inc. v. United States, 373 F.3d 1177 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Tabb Lakes, Ltd v. United States, 10 F.3d 796 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 48 Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 35 United States v. 50 Acres of Land, 469 U.S. 24 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 49 United States v. Dickinson, 331 U.S. 745 (1947) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

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United States v. Dow, 357 U.S. 17 (1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41, 48 Walcek v. United States, 49 Fed. Cl. 248 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Wyatt v. United States, 271 F.3d 1090 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Yancey v. United States, 915 F.2d 1534 (Fed. Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 49 Yee v. City of Escondido, 503 U.S. 519 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Yuba Natural Res., Inc. v. United States, 904 F.2d 1577 (Fed. Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 STATUTES: 12 U.S.C. § 1715l(d)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 12 U.S.C. § 1715z-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 12 U.S.C. § 4101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 12 U.S.C. § 4102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 8 12 U.S.C. § 4103(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 28, 40 12 U.S.C. § 4108 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4109 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 28, 45 12 U.S.C. § 4110 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4115(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 42 U.S.C. § 12702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 -viii-

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

No. 94- 10002C; 94-10003C; 94-10005C; 94-10006C; 94-10007C; 94-10008; 94-10010C; 94-10020C; 94-10030C; 94-10040C (consolidated) Judge Lettow

DEFENDANT'S PRETRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW Pursuant to the Court's May 23, 2006 order, and paragraph 14(b) of Appendix A of the Rules of the United States Court of Federal Claims ("RCFC"), defendant, the United States, respectfully submits the following memorandum of contentions of fact and law regarding the claims of plaintiffs Claremont Village Commons, Covina West Apartments, Del Vista Village, De Soto Gardens, Kittridge Gardens I, Kittridge Gardens II, Oxford Park, Parthenia Townhomes, Pioneer Gardens, and Puente Park Apartments. QUESTIONS PRESENTED 1. Whether the Emergency Low Income Housing Preservation Act ("ELIHPA" or

"Title II") or the Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA" or "Title VI") effected a regulatory taking of plaintiffs' property, and 2. If the Court concludes that a regulatory taking has occurred, what compensation,

if any, is owed to plaintiffs.

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STATEMENT OF FACTS DEFENDANT EXPECTS TO PROVE AT TRIAL I. Statutory Background A. The Section 221(d)(3) And 236 Programs

Modern national housing policy began in the New Deal era with the passage of the National Housing Act of 1934. Initially, the Federal Government sought to provide low-income housing by subsidizing projects developed, owned, and managed by local public housing authorities. By the 1960s, however, the Federal Government shifted its focus by enacting 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 market-rate mortgages with an interest subsidy under a program known as "Section 236." See 12 U.S.C. § 1715z-1. Claremont Village, Covina West, Pioneer Gardens, and Puente Park were developed pursuant to the Section 236 program. DX322 at 14-15. Del Vista, De Soto Gardens, Kittridge Gardens I and II, Oxford Park, and Parthenia Townhomes were developed pursuant to the Section 221(d)(3) program. Id. To obtain a Government-insured mortgage and additional taxpayer-funded benefits, the developers of a Section 221(d)(3) or Section 236 project entered into a "regulatory agreement" with HUD whereby the owner accepted specific restrictions on the mortgaged property, including 2

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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). 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 the project's first 20 years. Consequently, it was only after 20 years that the owner could prepay without the Government's approval, dissolve the affordability restrictions, and realize any residual value (i.e., equity) in the project. B. Benefits Of Participating In The Section 221(d)(3) And Section 236 Programs

The Section 221(d)(3) and 236 programs, as established by Congress, provided lucrative and immediate benefits to entice developers and investors to participate. Most significantly, the programs provided low-risk, Government-insured financing, and tax benefits. These were the principal reasons that developers chose to construct and operate projects pursuant to Section 221(d)(3) and Section 236. DX420. 1. Low-Risk, High Leverage Financing

The Section 221(d)(3) and 236 programs enabled developers to obtain low-risk, highleverage financing that was far superior to that available for a conventional multi-family housing project. Specifically, developers of these projects were able to obtain Government-insured, nonrecourse loans at below market interest rates. The loans were amortized over 40 years and financed a full 90 percent of the project's replacement cost. In addition, developers were entitled to a Government credit called the Builder's and Sponsor's Profit and Risk Allowance ("BSPRA"). See DX7G, 14B, 24B, 30B, 33A, 47B, 68B, 68C, 70C, 337. The BSPRA further reduced a developer's cash outlay to between zero and 3.5 percent of the project's replacement 3

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cost.1 Id. By contrast, banks typically required developers to put down 20 to 25 percent to finance a comparable conventional project. Favorable financing was a principal reason that developers chose to participate in the Section 221(d)(3) and 236 programs. 2. Tax Benefits

The other principal reason developers chose to participate in the Section 221(d)(3) and 236 programs was tax benefits. Projects developed under these programs were entitled to use accelerated depreciation. Accelerated depreciation, when combined with the project's high leverage, made these projects particularly attractive as tax shelters. DX420. Accelerated depreciation and high leverage ensured that a project would record large paper losses throughout its initial years. These losses could be passed through to the project's individual owners, who could use them to offset profits from other investments. Id. For this reason, developers of Section 221(d)(3) and 236 projects had two ways to take advantage of the projects' tax benefits. First, if they had income from other sources, developers could retain their interest in the property and use the tax benefits to reduce their own tax burden. When developers 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 their outside income. Second, developers could sell shares in their property at a premium to private investors, who would in turn use the project's tax losses to shelter their own income. By monetizing the tax benefit in this manner, developers could obtain a substantial, almost immediate profit.

Because HUD-insured loans were non-recourse, the developer never put at risk more than this small, initial cash investment. 4

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3.

Other Opportunities For Project Owners

Several other, less significant opportunities for profits also were available to developers of moderate- and low-income housing projects: annual cash distributions; management and other fees; and possible profits from the project's residual value. Under the Section 221(d)(3) and 236 programs, budget-based rents were set at a level that allowed annual cash distributions to the owner. The regulatory agreement limited distributions to 0.6 percent of the project's total value. Because of the low initial cash investment, however, this provided a generous, double digit return (often in excess of 25 percent) on the owner's original cash investment. Owners also were allowed to profit by selling a wide range of services, such as property management or building maintenance, to their own project. Finally, there existed the potential for profit from realizing the project's residual value (i.e., the owner's equity) after 20 years. As explained in a contemporary treatise, however, "there are several reasons why in normal course this [last] expectation might not be realized in federally assisted housing." DX421 (Charles L. Edson & Bruce S. Lane, A Practical Guide to Low- and Moderate-Income Housing (B.N.A. 1972)). 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 dramatic 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). Consequently, in 1988 and 1990, Congress enacted two statutes (collectively, the "Preservation Statutes") to preserve low-income housing. 5

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1.

ELIHPA

In 1988, as a temporary measure, Congress enacted ELIHPA, Pub. L. No. 100-242, 101 Stat. 1877-86 (1988). The statute, which was enacted with a two-year sunset provision, instituted a 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. As an alternative to prepayment, Congress authorized numerous benefits "to provide a fair return [to] the owner." Id. §§ 224-25. Financial benefits available to project owners under ELIHPA included 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. In exchange for these financial benefits, owners executed a use agreement that extended the existing use restrictions on the property. 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, public agency, or other entity. Id. § 224(b). Participation by owners in the preservation process was voluntary. Finally, to prevent prejudice to owners that chose to proceed under ELIHPA, Congress permitted such owners to switch to benefits authorized by any successor statute. ELIHPA § 230 (allowing owners to change course even after incentives under ELIHPA had been accepted). 2. LIHPRHA

In 1990, Congress replaced ELIHPA with LIHPRHA, Pub. L. No. 101-625, 104 Stat. 4249 (1990) (codified at 12 U.S.C. § 4101 et seq.). Like its predecessor, LIHPRHA asserted 6

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HUD's regulatory jurisdiction over prepayment, required owners to seek approval to prepay their HUD-insured mortgage, and provided opportunities to exit the program or seek monetary benefits 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); see also 12 U.S.C. §§ 4108, 4114. An owner interested in pursuing the options provided by LIHPRHA was required to file notices of intent, conduct appraisals, and then submit plans of action. 12 U.S.C. § 4102(a). Further, owners with regulatory plans pending under ELIHPA were given the option of continuing under that statute or switching to LIHPRHA. 12 U.S.C. § 4101 note; see also ELIHPA § 230. All aspects of the preservation process under LIHPRHA were voluntary. 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 enabled HUD to determine whether the project's preservation as low income housing was warranted. Id. (directing HUD to consider factors such as whether prepayment would "materially increase economic hardship for current tenants" or "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)(2), 4110(b)(1). To facilitate these sales, which released the owners from the program entirely, HUD funded virtually all transaction costs, provided mortgage insurance, and paid consultants to assist the parties. 7

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HUD also provided loans and grants that enabled non-profit organizations to acquire the project. 12 U.S.C. § 4110(d). An owner seeking to sell would be allowed to prepay and exit the program if (1) it did not receive a bona fide offer within specified time frames, (2) HUD decided not to provide financial assistance in connection with an approved offer, or (3) the purchaser was unable to consummate the transaction for any other reason. 12 U.S.C. § 4114(1)(B). As in ELIHPA, LIHPRHA permitted HUD to provide owners financial incentives in exchange for extending their properties' use restrictions. 12 U.S.C. § 4109. HUD could provide rent increases to owners, 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. Finally, LIHPRHA sought to ensure that owners were not disadvantaged by agency delay in processing applications or providing funds. The statute permitted owners to submit their first 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, HUD was to provide retroactive incentives and assistance to owners. 12 U.S.C. § 4115(c). Federal district courts were empowered to enforce Section 4115(c). Id. Moreover, if within a set 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.

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D.

The HOPE Act

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 explore alternatives. See Hearing before the Subcommittee on VA, HUD, and Independent Agencies of the House Committee on Appropriations, 104th Cong., 1st Sess. (January 24, 1995). 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) (statement of Susan Gaffney, HUD Inspector General). 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 moderateand low-income housing. E.g., Chancellor Manor v. United States, 331 F.3d 891, 896 (Fed. Cir. 2003). II. The Plaintiffs The plaintiffs are ten unrelated limited partnerships developed to invest in low-income housing. Through the 236 and 221(d)(3) programs, each plaintiff developed one multifamily apartment building or complex in the late 1960s and early 1970s. The shares in most of the partnerships were sold, in part, to partners to take advantage of the tax benefits that arose from the investment.

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Plaintiffs had no significant expectations regarding the opportunity to prepay the HUDinsured mortgage at the time of the partners' original investments. Jona Goldrich, Sol Kest, Robert Stern, Robert Hirsch2 (collectively, the "G&K partners") were partners in the plaintiff partnerships, as well as numerous other partnerships that invested in low-income housing, although the composition of each partnership varied. Typically, the G&K partners became general partners in the properties they developed. These individuals invested in low-income housing because, based upon the funding structure, there was no risk in the investments. The investments permitted the G&K partners to immediately profit and then collect dividends and fees in perpetuity. Some or all of the G&K partners also own the following companies, which provided management and maintenance services for the plaintiffs: G&K Management Co., Inc.; Mechanical Services; Overland Computer Services; Pacific Coast Micro Utility Co. Ltd; Greater California Micro Utility, Ld; G&K Builders Supply; Active Mortgage Corp.; Overland Media Co., LLC. Thus, the G&K partners profited from the services rendered to plaintiffs. The G&K partners syndicated many of their buildings. Under syndication agreements, the G&K partners sold as much as 99 percent of the properties to outside investors. When properties were syndicated by a third party, the syndicator created, and the G&K partners approved, prospectuses describing the investments. DX82E. The outside investors who invested in plaintiffs' properties in the later 1960s and early 1970s had no investment backed expectations regarding the property's market value twenty years

Warren Breslow was not one of the original partners on any of the ten plaintiffs, but he later became one of the G&K partners as the group developed properties in the late 1970s. 10

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later. The only expectation actually backed with an investment was the lucrative tax benefits. Similarly, the G&K partners' decision to sell large shares of their low-income apartments demonstrated that they were not focused on the long-term returns but looking to profit immediately from their investment. A. The Initial Deals

The ten plaintiffs entered the HUD programs subject to the following terms. 1. Claremont Village Commons

The Claremont Village partnership built a 150 unit apartment in 1970 under the Section 236 loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $2,547,800 accounted for the bulk of the financing of the project. DX68B at G-CV03376. The partnership was to finance the remaining $283,189 in costs. As the project's developers, however, the Claremont Village partnership was entitled to a Builder's and Sponsor's Risk Premium and Allowance ("BSPRA") equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. Due to the BSPRA ($236,272) and land appreciation, the partnership was required to make an actual cash investment of 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. By January 1, 1971, before the building was completed, the G&K partners had sold 49 percent ownership in the partnership to Sam Mesler, so that he could utilize the property's tax

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benefits. DX324 at 3. Mr. Mesler was a general partner. Id. The G&K partners made a profit on the sale and utilized the remaining tax benefits themselves. 2. Covina West Apartments

The Covina West partnership built a 158 unit apartment in 1970 under the Section 236 loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $2,593,300 accounted for the bulk of the financing of the project. DX33A at CVC024880. The partnership was to finance the remaining $288,168 in costs. As the project's developers, however, the Covina West partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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 building was completed, the G&K partners had sold 25 percent ownership in the partnership to Leslie Sugar, and 25 percent ownership interest to Milton Gottlieb. Both Mr. Sugar and Mr. Gottlieb were general partners. DX324 at 5. The G&K 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 he could utilize the property's tax benefits. The G&K partners made a profit on the sales and utilized the remaining tax benefits themselves. The G&K partners continued to own a minority interest in the Covina West partnership at the time of the alleged taking.

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3.

Del Vista Village

The Del Vista Village partnership built a 160 unit apartment in 1971 under the Section 221(d)(3) loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $2,355,300 accounted for the bulk of the financing of the project. DX68C at G-CV00318. The partnership was to finance the remaining $261,723 in costs. As the project's developers, however, the Del Vista Village partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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 building was completed, the G&K partners had sold 50 percent ownership in the partnership to Sam Mesler, so that he could utilize the property's tax benefits. Mr. Mesler was a general partner. The G&K partners made a profit on the sale and utilized the remaining tax benefits themselves. 4. De Soto Gardens

The De Soto Gardens partnership built a 248 unit apartment in 1969 under the Section 221(d)(3) loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $3,494,500 accounted for the bulk of the financing of the project. DX14B at CVC020051. The partnership was to finance the remaining $388,336 in costs. As the project's developers, however, the De Soto Gardens partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition

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costs. 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 building was completed, the G&K partners had 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. DX324 at 7. The G&K partners made a profit on the sale and utilized the remaining tax benefits themselves. 5. Kittridge Gardens I

The Kittridge Gardens I partnership built a 128 unit apartment in 1968 under the Section 221(d)(3) loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $1,507,000 accounted for the bulk of the financing of the project. DX7G at CVC021364. The partnership was to finance the remaining $167,494 in costs. As the project's developers, however, the Kittridge Gardens I partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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 Kittridge Gardens I partnership's total cash outlay, therefore, was only 3.5 percent of the estimated cost of the Kittridge Gardens I apartment project. Id. The G&K partners utilized all of the tax benefits themselves. 6. Kittridge Gardens II

The Kittridge Gardens II partnership built an 80 unit apartment in 1968 under the Section 221(d)(3) loan program. Under that program, the partnership was entitled to receive an insurable

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mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $1,441,300 accounted for the bulk of the financing of the project. DX24B at G-CV02044. The partnership was to finance the remaining $161,729 in costs. As the project's developers, however, the Kittridge Gardens II partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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 G&K partners utilized all of the tax benefits themselves, although to best utilize the tax benefits, 75 percent of the ownership of the property was held by Goldrich and Kest, Inc., a separate entity owned by Mr. Goldrich and Mr. Kest that specialized in construction. DX324 at 10. 7. Oxford Park

The Oxford Park partnership built a 109 unit apartment in 1971 under the Section 221(d)(3) loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $1,519,800 accounted for the bulk of the financing of the project. DX47B at CVC021860. The partnership was to finance the remaining $168,923 in costs. DX420 at 39. As the project's developers, however, the Oxford Park partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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

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partnership's total cash outlay, therefore, was only 1.9 percent of the estimated cost of the Oxford Park apartment project. Id. The G&K partners sold 50 percent of the ownership of the property to Active Cleaning & Maintenance, and another 25 percent to Goldrich and Kest, Inc., to best utilize the tax benefits from the property. DX324 at 11. 8. Parthenia Townhomes

The Parthenia Townhomes partnership built a 24 unit apartment in 1971 under the Section 221(d)(3) loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $368,000 accounted for the bulk of the financing of the project. DX70C at CVC020469. The partnership was to finance the remaining $40,924 in costs. Id. As the project's developers, however, the Parthenia Townhomes partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. Due to the BSPRA ($30,811) and land appreciation, the partnership was not required to make any actual cash investment in the project. 9. Pioneer Gardens

The Pioneer Gardens partnership built a 141 unit apartment in 1970 under the Section 236 loan program. Under the 236 program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $2,446,500 accounted for the bulk of the financing of the project. DX30B at CVC025198. The partnership was to finance the remaining $271,919 in costs. Id. As the project's developers, however, the Pioneer Gardens partnership was entitled to a BSPRA equal to 10 percent of the

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"total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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 building was completed, the G&K partners had sold 24 percent ownership in the partnership to David Pick and 24 percent to Joseph Gorman, so that they could utilize the property's tax benefits. The G&K partners made a profit on the sale and utilized the remaining tax benefits themselves. 10. Puente Park Apartments

The Puente Park Apartments partnership built a 132 unit apartment in 1969 under the Section 236 loan program. Under that program, the partnership was entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $1,947,500 accounted for the bulk of the financing of the project. DX337 at CVC020371. The partnership was to finance the remaining $216,453 in costs. Id. As the project's developers, however, the Puente Park Apartments partnership was entitled to a BSPRA equal to 10 percent of the "total estimated development cost," i.e., the estimated replacement cost, less land acquisition costs. 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, and before the building was completed, the G&K partners had sold 48 percent ownership in the partnership to Sam Mesler and 13 percent to Zyg Taube, so that they

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could utilize the property's tax benefits. Messrs. Mesler and Taube were general partners. The G&K partners made a profit on the sale and utilized the remaining tax benefits themselves. 11. Further Benefits

The G&K Partners benefited both from the construction and management of the project. They contracted with their own construction company ­ Goldrich and Kest Construction, Inc. ­ to build the apartments. To manage the property, the apartment buildings contracted with G&K management ­ another wholly-owned company. The fees paid to these affiliated entities, including the construction costs and the management fees, were almost entirely funded by the Federally-backed mortgages and rents. With the profits from the sale of interests in the building and the use of the tax benefits themselves, the G&K partners would have been able to recoup their initial investment in one or two years, depending upon the portion of the project sold to outside investors. 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 the G&K partners by awarding them contracts for construction and project management. 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

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more than 20 years in the future. These variables would have been unknowable at the time of development. B. 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 provided a number of programs to assist tenants in paying rent. One form of rental assistance was Housing Assistance Payment ("HAP" or "Section 8") contracts. These were contracts, which were signed by an apartments' owners and HUD, covered some set number of units in a given building. See, e.g., DX93-100. HAP contracts were project-based assistance, meaning that the assistance ran with the building. Seven of the plaintiffs participated in the HAP program. Id.3 HAP contracts provided that "[p]repayment of the mortgage shall not, by itself, affect any rights of the Owner or HUD under this Contract." DX93 at 9, § 27(c). 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 their entire rent, regardless of what percentage it was of their income. With HAP, tenants only had to pay 30 percent of their adjusted gross income (whatever that happened to be) as rent, with HUD paying the rest.

Claremont Village Commons, De Soto Gardens, Kittridge Gardens I, Kittridge Gardens II, Oxford Park, Pioneer Gardens, and Puente Park Apartments. DX426. 19

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A HAP contract reduced the apartment owner's credit risk (i.e, the risk that the rent would not be paid). Also, under HAP contracts, HUD paid its portion of the rent in a lump sum at the first of the month. HAP contracts reduced the likelihood that a unit would be empty ("vacancy risk"). For HUD properties, there are generally waiting lists with from 10 to 1,000 names. This is not true for conventional properties. Indeed, G&K Management does not maintain waiting lists for its conventional properties. Not only did HAP contracts reduce vacancy risk by enlarging the pool of eligible tenants, it also provided subsidies for vacant units. Under the terms of plaintiffs' Section 8 contracts, HUD paid the owners 80 percent of the contract rents on vacant units, for up to 60 days. Before 1996, HAP contracts were renewed in five year increments. Claremont Village, De Soto Gardens, Kittridge Gardens I and II, Oxford Park, Pioneer Gardens, and Puente Park each signed five-year HAP contracts that overlapped with their initial prepayment dates. Specifically, each of the properties faced the following initial prepayment dates and the accompanying expiration dates for their HAP contracts: Property Claremont Village Commons De Soto Gardens Kittridge Gardens I Kittridge Gardens II Oxford Park Pioneer Gardens Puente Park Apartments Prepayment date 12/21/91 11/2/90 9/17/89 4/14/91 10/6/92 5/26/91 8/31/90 HAP expiration date 7/31/96 6/30/91 9/30/91 9/30/91 8/31/97 10/31/92 6/30/91

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DX130; DX94-103A; DX345. Thus, the properties would have been subject to affordability restrictions beyond their original prepayment dates even if they had prepaid their HUD-insured mortgages. In the absence of the Preservation Statutes, plaintiffs would have faced a choice: forego HAP assistance until the prepayment date or renew their HAP contract for five years although it would limit the rents the buildings could charge upon prepayment. If plaintiffs had chosen to forgo the HAP contracts that overlapped their initial prepayment, the properties would have suffered substantial financial loss and faced potential foreclosure. C. Plaintiffs Each Signed A Use Agreement

Plaintiffs were free to choose among the options available under the Preservation Statutes. Each plaintiff chose not to sell its property through the Preservation Statutes despite the fact that it could have extracted the entire fair market value of their equity. 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. If, for some reason, plaintiffs had not received a bonafide offer, plaintiffs could have prepaid their mortgages pursuant to12 U.S.C. § 4114. Instead, the ten plaintiffs each filed notices of intent to seek Use Agreements under Title II. Later, when given the option of switching their applications to Title VI, 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. Ultimately, plaintiffs and HUD reached the following valuations: · Claremont Village Commons: $7,976,000 (DX189) · Covina West Apartments: $8,342,000 (DX188C) 21

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· Del Vista Village: $7,222,000 (DX211) · De Soto Gardens: $12,750,000 (DX185D) · Kittridge Gardens I: $7,365,000 (DX184D) · Kittridge Gardens II: $5,700,000 (DX180) · Oxford Park: $5,350,000 (DX227B) · Parthenia Townhomes: $1,576,600 (DX196) · Pioneer Gardens: $6,124,000 (DX197) · Puente Park Apartments: $7,650,000 (DX144B) These valuations served as the basis for plaintiffs' incentives in the preservation process. If plaintiffs had chosen to sell their properties under Title II, these values would have also served as the selling price. By 1995, each of the plaintiffs signed Use Agreements with HUD. DX245-52, 258-59.4 In exchange for valuable financial benefits, each plaintiff traded in their opportunity to prepay. The Use Agreements placed plaintiffs in the same or better financial position than they would have occupied had they prepaid their respective mortgages. If not, plaintiffs would have chosen to sell the properties at a market rate and pursue other investment opportunities. D. Prepayment Of The HUD-Insured Mortgages

Prepayment of a HUD-insured mortgage has certain costs and risks for an owner. To prepay a HUD-insured mortgage, an owner must obtain a new, non-subsidized loan for the property. Lenders were unwilling to make long-term, unsubsidized loans for the properties without evidence that the properties could obtain the conventional rents that they projected. Generally,

The fact that the plaintiffs obtained funded Title II use agreements does not establish that their as-applied, regulatory taking claims are ripe. Plaintiffs' claims would be ripe only if HUD rejected requests to prepay pursuant to the Preservation Statues, see 12 U.S.C. § 4108, or plaintiffs establish that applying to prepay pursuant to the Preservation Statues was futile. Greenbrier v. United States, 193 F.3d 1348, 1359-60 (Fed. Cir. 1997). 22

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lenders wanted an owner to demonstrate what conventional rates the property could get for two or three years before providing a long-term unsubsidized loan. If an owner wished to prepay, it had two options: finance the prepayment with cash obtained from the partners, or obtain a bridge loan with the partners' personal property at risk if the loan defaulted. Either option increased the partners' investment ­ and risk ­ in the property. Also, if an owner prepaid, it would have to pay mortgage transaction costs twice. The first set of transaction costs would result from the bridge loan necessary to finance prepayment. The second set would result from securing a long-term mortgage after two or three years of a proven track record as a conventional property. Finally, in converting to a conventional property, an owner faced various "conversion costs" such as increased vacancies and increased costs for advertising and obtaining tenants. E. Los Angeles Rent Stabilization Ordinance

The Los Angeles City Counsel added the Los Angeles Rent Stabilization Ordinance ("LARSO") to the Los Angeles Municipal Code in 1979 in response to a housing crises. DX352. The city imposed control on rents in a wide range of multifamily rental units. The ordinance set maximum rents at the rent in effect in April 1979, and allowed for periodic increases. In 1980, the city counsel amended LARSO to add a vacancy decontrol provision, allowing owners to increase rents when rental units were vacated voluntarily or because of an eviction based upon specific grounds. Id. From its inception, LARSO exempted from regulation "[h]ousing accommodations which a government unit, agency or authority owns, operates, or manages . . . ." DX352 (LARSO Section 151.02). This exemption encompassed a wide range of housing including federally-

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subsidized, privately-owned multifamily developments, public housing, student housing owned by public universities, units with Section 8 rental subsidies, properties owned by HUD, the state, or the city after a mortgage or tax foreclosure. Id. This "Government owned or operated" exemption from rent control was temporary, existing only during the period of Government ownership or regulation. In 1990, the Los Angeles City Council promulgated amendments to LARSO which were "not intended as substantive changes in the law . . .," but were intended "to clarify what has always been the intent of the City Council." DX352 (City of Los Angeles Ordinance No. 166320, Section 4, October 17, 1990). These amendments explained that rental units which were exempt from LARSO only because of their Government involvement would become subject to LARSO upon termination of Governmental regulation, and that "such units are not subject to 'vacancy decontrol' during the transitionary period." Id. The 1990 amendments applied to all units that had previously been exempt on the basis of their governmental exemption, including LIHPRHA-eligible properties prepaying their mortgages, student housing sold by a public university, public housing sold by a public university and converted to non-student housing. Id. LARSO is a law of "general applicability" as that term is defined in LIHPRHA. LARSO prohibited property owners from raising their rents to market rates after prepaying their HUD-insured mortgages. Independence Park v. United States, 449 F.3d 1235 (Fed. Cir. 2006). DeSoto Gardens, Kittridge Gardens I, Kittridge Gardens II, Oxford Park, and Parthenia Townhouses are within Los Angeles and, therefore, subject to LARSO. Because LARSO would have prevented these plaintiffs from raising the rents on the subject properties, it

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would not have been economically feasible for these plaintiffs to obtain new mortgages and prepay the mortgages on the subject properties. Cienega Gardens v. United States, 38 Fed. Cl. 64, 84-85 (1997) (reversed and remanded on other grounds). Tenants who have been in rent-controlled apartments for a significant duration are currently paying below-market rents. Tenants with rent controlled apartments ­ particularly those who have been in rent-controlled apartments for long periods ­ relocate less frequently than those with apartments not subject to rent control. DEFENDANT'S CONTENTIONS OF LAW I. The Los Angeles Properties Would Not Have Prepaid Their Mortgages Even if Congress had not passed the Preservation Statutes, the five properties in the City of Los Angeles would have chosen to remain in the HUD program rather than prepay their mortgage and be subject to Los Angeles's rent control ordinance. Los Angeles City Counsel passed LARSO in 1979, with the purpose of safeguarding tenants from excessive rent increases. LARSO significantly limits the ability of property owners to raise rents in Los Angeles. See DX353, §§ 151.02, 151.04. With few exceptions, rental properties in Los Angeles are limited to small increases, as provided by the city. See id. § 151.06. While LARSO exempts properties engaged in certain Federal programs, the ordinance expressly applies to any property leaving such a program, thereby preventing an immediate rent increase. See Id. LARSO would have prevented plaintiffs from raising their rents to a "market level" had the plaintiffs prepaid their mortgages after 20 years in the HUD program. See id. The city would have limited plaintiffs to only "raise their rents by the amounts allowed for the annual allowable

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rent increase after it had been 12 months since the last rent increase." In each of the years following prepayment, LARSO would have continued to limit plaintiffs to small annual rent increases until the tenants left, which would have "decontrolled" the apartment and permitted the owner to raise its rent to a market rate. See id. §§ 151.02, 151.04. In this way, the city would have treated plaintiffs like every other apartment owner in Los Angeles. LARSO's limit on rent increases would have significantly reduced the value of the right to prepay ­ the opportunity plaintiffs claim the Government took. Indeed, the Court should conclude that because LARSO would have limited plaintiffs' ability to raise rents, the Los Angeles plaintiffs would not have chosen to convert to conventional properties, even if they had been given the opportunity to do so. See DX353, § 151.02. Specifically, if LARSO limited the Los Angeles plaintiffs' ability to raise rents, plaintiffs would not have generated enough cash flow to service the new mortgages that would result from the prepayment of the HUD-insured mortgages. DX426. Given the income stream available to plaintiffs under the LARSO restricted rents, plaintiffs would not have been able to obtain financing to prepay their mortgages and that plaintiffs would not have prepaid their mortgages. Id. Thus, given the proper application of LARSO in the but-for world, the Court should conclude that plaintiffs would not have prepaid their mortgages and would have stayed in the HUD program, even if the Government had not temporarily restricted plaintiffs' ability to prepay their mortgages. II. The Preservation Statutes Did Not Effect A Regulatory Taking Under Penn Central A "regulatory taking" only occurs when Government action, although not encroaching upon or occupying private property, "goes too far." Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922). Claimants must bear the costs of regulations that restrict some of the uses of

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