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

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 1 of 70

No. 97-334C (Judge Charles F. Lettow) ______________________________________________________________________________

IN THE UNITED STATES COURT OF FEDERAL CLAIMS CCA ASSOCIATES, a Louisiana partnership, Plaintiff, v. THE UNITED STATES, Defendant. ______________________________________________________________________________ DEFENDANT'S POST-TRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW ______________________________________________________________________________ PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director BRIAN M. SIMKIN Assistant Director KENNETH D. WOODROW DAVID A. HARRINGTON Trial Attorneys Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 (202) 353-0513 Dated: November 9, 2006 Attorneys for Defendant

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 2 of 70

TABLE OF CONTENTS

PAGE(S) DEFENDANT'S POST-TRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STATEMENT OF FACTS DEFENDANT ESTABLISHED AT TRIAL . . . . . . . . . . . . . . . . . . . 2 I. STATUTORY BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A. The Section 221(d)(3) Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 B. Benefits Of Participating In The Section 221(d)(3) Program . . . . . . . . . . . . . . . . . 3 1. Low-Risk, High Leverage Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Tax Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3. Other Opportunities For Project Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 C. The Preservation Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1. ELIHPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. LIHPRHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 D. The HOPE Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 II. THE PLAINTIFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 A. The Initial Deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 B. Plaintiff's Failure To Participate In The Preservation Statutes' Administrative Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 C. CCA Failed To Seek Allowable Rent Increases And Failed to Diligently Submit Its Audited Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 15 D. CCA's Eventual Prepayment Of Its HUD-Insured Mortgage And Conversion i

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 3 of 70

To Market Rate Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 E. Economic Effect Of Remaining In The HUD Subsidy Program . . . . . . . . . . . . . 18 DEFENDANT'S CONTENTIONS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 I. The As-Applied, Regulatory Taking Claim Asserted By CCA Is Not Ripe Because CCA Failed To Exhaust The Administrative Preservation Process . . . . . . . 19 A. CCA's Claim Is Not Ripe Because It Failed To Apply To Prepay Under The Preservation Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1. The Doctrine Of Futility Is Inapplicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2. Applying To Prepay Would Not Have Been Futile . . . . . . . . . . . . . . . . . . . . 24 a. The Preservation Statutes Gave HUD Discretion To Determine When Prepayment Would Be Allowed . . . . . . . . . . . . . . . . . . . . . . . . . . 24 b. Prepayment Under The Preservation Statutes Was "Possible" . . . . . . . . . 25 (1) A Well-Conceived Plan Of Action Would Not Have Resulted In A Material Hardship To Current Tenants . . . . . . . . . . . . . . . . . . . . . . . 25 (a) In 1991, The Rents Charged By CCA Were Close To Market . . . 25 (b) The Rents Actually Charged By CCA In 1991 Are Not The Correct Starting Point For Analysis Of A Plan Of Action To Prepay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (2) A Plan Of Action To Prepay Need Not Involuntarily Displace Current Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (3) The Preservation Statutes' Provisions Concerning Low-Income And Very Low-Income Tenants Are Irrelevant . . . . . . . . . . . . . . . . 29 c. The Evidence Proffered By CCA Is Insufficient To Establish Futility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 B. Even If It Were Futile To Apply To Prepay, CCA's Claim Would Still Not Be Ripe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 II. The Preservation Statutes Did Not Effect A Regulatory Taking Under Penn ii

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 4 of 70

Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 A. The Preservation Statutes Had Little Or No Economic Impact On CCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1. The Sale Option Eliminates Any Potential Economic Impact . . . . . . . . . . . . 33 2. Even Under Assumptions Favorable To CCA, The Preservation Statutes Did Not Result In A "Severe Economic Deprivation" . . . . . . . . . . . 35

3. CCA's Various Calculations Of Economic Impact Are Flawed And Should Be Disregarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 B. The Preservation Statutes Did Not Frustrate Investment-Backed Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1. The Preservation Statutes Did Not Interfere With The Primary Expectations Of A Reasonable Developer . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 a. Expectations Of Reasonable Developers . . . . . . . . . . . . . . . . . . . . . . . . . 40 b. The Preservation Statutes Did Not Affect A Developer's Reasonable Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2. CCA's Supposed Original Expectations Were Not Reasonable . . . . . . . . . . . 44 C. The Preservation Statutes Do Not Have The Character Of A Taking . . . . . . . . . 46 1. The Preservation Statutes Promoted Important, Long-Standing Government Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 b. The Preservation Statutes Did Not Shift The Burden Of Providing Low-Income Housing On To CCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 III. CCA Is Owed No Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 A. Providing Compensation To CCA Would Be Unjust . . . . . . . . . . . . . . . . . . . . . 51 B. Even If The Pecuniary Benefits Available Under The Preservation Statutes Are Ignored, Dr. Ragas's Calculations Overstate Just Compensation . . . . . . . . . 51 1. CCA Incorrectly Assesses Compensation At The End Of The Alleged iii

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 5 of 70

Taking Period Using Ex Post Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 a. CCA's Approach Is Contrary To The Law And Will Lead To Bizarre Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 b. Dr. Dickey Uses An Appropriate Ex Ante Approach . . . . . . . . . . . . . . . . 55 2. CCA's Calculation Of Just Compensation Contains Significant Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 a. CCA Fails To Take Into Account Its Own Failure To Seek Rent Increases From HUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 b. CCA's Estimated "Market Rents" Are Overstated . . . . . . . . . . . . . . . . . . 58 c. CCA's Calculations With Request To The Project's Three Bedroom Apartments Are In Error . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3. CCA's Model Uses An Inappropriate Interest Rates To Compound Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

iv

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 6 of 70

TABLE OF AUTHORITIES CASES PAGES

Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Andrus v. Allard, 444 U.S. 51 (1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Bass Enterprises Production Co. v. United States, 381 F.3d 1360 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 35, 47 Boise Cascade Corp. v. United States, 296 F.3d 1339 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Chancellor Manor v. United States, 331 F.3d 891 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 39 City of Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 DLX, Inc. v. Kentucky, 381 F.3d 511 (6th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 FCC v. Florida Power Corp., 480 U.S. 245 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Gilbert v. City of Cambridge, 932 F.2d 51 (1st Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Greenbrier v. United States, 193 F.3d 1348 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 21, 23, 30

v

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 7 of 70

Herrington v. Sonoma County, 857 F.2d 567 (9th Cir. 1988), cert. denied, 489 U.S. 1090 (1989) . . . . . . . . . . . . . . . . . 22 Howard W. Heck & Assoc. v. United States, 134 F.3d 1468 (Fed. Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 23, 30 Kawaoka v. City of Arroyo Grande, 17 F.3d 1227 (9th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Kinzli v. City of Santa Cruz, 818 F.2d 1449 (9th Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Kirby Forest Industries, Inc. v. United States, 467 U.S. 1 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Lingle v. Chevron U.S.A., Inc., 544 U.S. 528 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 39 Loveladies Harbor, Inc. v. United States, 28 F.3d 1171 (Fed. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 47 Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32 MacDonald, Sommer & Frates v. Yolo County, 477 U.S. 340 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 MacLeod v. County of Santa Clara, 749 F.2d 541 (9th Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Maritrans, Inc. v. United States, 342 F.3d 1344 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Morris v. United States, 392 F.3d 1372 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Olson v. United States, 292 U.S. 246 (1934) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Palazzolo v. Rhode Island, 533 U.S. 606 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 21 Parkridge Investors, LP v. Farmers Home Admin., vi

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 8 of 70

13 F.3d 1192 (8th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Rose Acre Farms, Inc. v. United States, 373 F.3d 1177 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 36 Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Seguin v. City of Sterling Heights, 968 F.2d 584 (6th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Seiber v. United States, 364 F.3d 1356 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 20, 37 Southern Pac. Transp. Co. v. City of Los Angeles, 922 F.2d 498 (9th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Stearns Co. v. United States, 396 F.3d 1354 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 31 Tabb Lakes, Ltd. v. United States, 10 F.3d 796 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 34 United States v. 50 Acres of Land, 469 U.S. 24 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 54 United States v. Dow, 357 U.S. 17 (1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 United States v. Riverside Bayview Homes, 474 U.S. 121 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 vii

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 9 of 70

Wyatt v. United States, 271 F.3d 1090 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Yancey v. United States, 915 F.2d 1534 (Fed. Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53, 54 Yee v. City of Escondido, 503 U.S. 519 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 STATUTES 12 U.S.C. § 4101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4101(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 12 U.S.C. § 4102(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 12 U.S.C. §§ 4103(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 33, 43, 51 12 U.S.C. §§ 4108 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 12 U.S.C. § 4109 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 20, 30, 33, 50 12 U.S.C. §§ 4110(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12 U.S.C. §§ 4110(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12 U.S.C. § 4110(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 U.S.C. § 4115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12 U.S.C. §§ 4119(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12 U.S.C. § 4119(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 42 U.S.C. § 1437a(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 42 U.S.C. § 12702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 12 U.S.C. § 1715l(d)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 viii

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 10 of 70

IN THE UNITED STATES COURT OF FEDERAL CLAIMS CCA ASSOCIATES, a Louisiana Partnership, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) )

No. 97-334C (Judge Charles F. Lettow)

DEFENDANT'S POST-TRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW Pursuant to the Court's August 29, 2006 order, defendant, the United States, respectfully submits the following memorandum of contentions of fact and law regarding the claims of plaintiff, CCA Associates ("CCA"). QUESTIONS PRESENTED 1. Whether CCA's as-applied, regulatory taking claim is unripe because the

partnership failed to seek and obtain a final decision from the Department of Housing and Urban Development ("HUD") applying the challenged statutes to its property; 2. Whether CCA's failure to obtain a final agency decision is excused by the

doctrine of futility where: a. b. CCA did not make a single application to HUD, and the application of the challenged statutes to the plaintiff's property is uncertain.

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 11 of 70

3.

If the Court concludes that CCA has presented a ripe claim, whether the

Emergency Low Income Housing Preservation Act or the Low Income Housing Preservation and Resident Homeownership Act effected a regulatory taking of CCA's property, and 4. If the Court concludes that a regulatory taking has occurred, what compensation,

if any, is owed to CCA. STATEMENT OF FACTS DEFENDANT ESTABLISHED AT TRIAL I. STATUTORY BACKGROUND A. The Section 221(d)(3) Program

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 to private development, 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 HUD) to provide mortgage insurance and fund below-market interest rate loans to stimulate private development of moderate- and low-income housing. CCA's property was developed through to the section 221(d)(3) program. PX2. Pursuant to the section 221(d)(3) program, private developers entered into a "regulatory agreement" with HUD whereby the owner accepted specific restrictions on the mortgaged property, including restrictions on tenant income, allowable rental rates, and cash distributions 2

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 12 of 70

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) Program

The section 221(d)(3) program, as established by Congress, provided lucrative and immediate benefits to entice developers and investors to participate. It provided low-risk, highlyleveraged Government-insured financing that allowed developers to develop housing projects with a cash outlay as little as two to three percent of the project's total cost. Moreover, it allowed private developers to realize significant tax savings that could be used to offset income earned from other sources. In many cases, developers made back their cash investments within the first one to three years of their investment in the program. Tr. 1172-73d (Malek). These were the principal reasons that developers chose to construct and operate projects pursuant to section 221(d)(3). Tr. 1156-59 (Malek); DX176. 1. Low-Risk, High Leverage Financing

The section 221(d)(3) program enabled developers to obtain low-risk, high-leverage financing that was far superior to that available for a conventional multi-family housing project. Tr. 1191 (Malek). Specifically, developers of section 221(d)(3) projects were able to obtain Government-insured, non-recourse loans at below market interest rates. Tr. 1160, 1164 (Malek). The loans were amortized over 40 years and financed a full 90 percent of the project's 3

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 13 of 70

replacement cost. Tr. 1161 (Malek). In addition, developers were entitled to a Government credit called the Builder's and Sponsor's Profit and Risk Allowance ("BSPRA"). The BSPRA further reduced a developer's cash outlay to between 1.8 and 3.0 percent of the project's replacement cost. Because HUD-insured loans were non-recourse, the developer never put at risk more than this small, initial cash investment. Tr. 1167 (Malek). By contrast, banks typically required developers to put down 20 to 35 percent to finance a comparable conventional project. Tr. 1160, 1164 (Malek). Favorable financing was a principal reason that developers chose to participate in the section 221(d)(3) program. Tr. 1191-93 (Malek). 2. Tax Benefits

The other principal reason developers chose to participate in the section 221(d)(3) program was tax benefits. Tr. 1191-92 (Malek). Section 221(d)(3) projects were entitled to use accelerated depreciation. Unlike conventional real estate investments, the highly-leveraged nature of the Section 221(d)(3) program ­ combined with accelerated depreciation ­ created a "multiplier effect" with respect to the tax deductions. Tr. 1161 (Malek). The projects generated a stream of tax deductions that typically ranged from 2 to 4 times the equity investment required in the project and the write-off ratio of these tax deductions were much higher per dollar invested than a comparable investment in a conventional housing project. Tr. 1177, 1182 (Malek). These losses could be passed through to the project's individual owners, who could use them to offset profits from other investments. Tr. 1174-77 (Malek). Typically, investors were accorded 99 percent of the tax losses that would be thrown off by the project, as well as 99 percent of the project's cash flow. Tr. 1158-59 (Malek).

4

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 14 of 70

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 profit from the project's residual value. Under the section 221(d)(3) program, 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. See PX2 (6 percent of the owner's 10 percent initial, stated equity). However, because of the low initial cash investment (typically 2 to 3 percent of the project's total value), this provided a generous, double digit return (often in excess of 25 percent) on the owner's original cash investment. Tr. 1172-73 (Malek). Owners also were allowed to profit by selling a wide range of services, such as property management or building maintenance, to their own project. Developers typically formed relatedparty entities to perform these services and were paid for the services from cash flow generated by the property. 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." Tr. 1192-93 (quoting PX176 (Charles L. Edson & Bruce S. Lane, A Practical Guide to Low- and Moderate-Income Housing (B.N.A. 1972)). For most investors, the potential for profit from realizing the project's residual value was not a primary consideration and most investments of this kind were marketed solely for their tax benefits. Tr. 1193-94.

5

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 15 of 70

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. 1. ELIHPA

In 1988, as a temporary measure, Congress enacted the Emergency Low Income Housing Preservation Act ("ELIHPA" or "Title II"), Pub. L. No. 100-242, 101 Stat. 1877-86 (1988). ELIHPA, 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's preservation as low-income housing was warranted. 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). HUD also was authorized to provide assistance to facilitate the project's sale to a

6

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 16 of 70

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 the Low-Income Housing Preservation and Resident Homeownership Act of 1990 ("LIHPRHA" or "Title VI"), Pub. L. No. 101-625, 104 Stat. 4249 (1990) (codified at 12 U.S.C. § 4101 et seq.). Like its predecessor, LIHPRHA asserted 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 adversely 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 7

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 17 of 70

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. 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 it did not receive a bona fide offer within specified time frames, if HUD decided not to provide financial assistance in connection an approved offer, or if 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 owners rent increases, an increased rate of return based upon the property's market value as conventional rental housing, access to project equity through a Government-insured loan, and financing for capital improvements. Id. 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 8

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 18 of 70

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. And 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. 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 PX60. 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 moderate- and low-income housing. E.g., Chancellor Manor v. United States, 331 F.3d 891, 896 (Fed. Cir. 2003).

9

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 19 of 70

II.

THE PLAINTIFF The plaintiff, CCA Associates ("CCA"), is a family-owned and operated partnership with

its principal place of business in New Orleans, Louisiana. CCA owns Chateau Cleary Apartments, a moderate-income apartment complex developed in 1969 under HUD's section 221(d)(3) program. See DX3; DX9. A. The Initial Deal

During 1969, two brothers ­ Ernest B. Norman, Jr. and J. Robert Norman ­ decided to build and operate the Chateau Cleary housing project. Tr. 297 (Norman). The brothers were equal partners in the development. Id. On November 7, 1969, the Norman brothers executed a regulatory agreement pursuant to section 221(d)(3) of the National Housing Act. Compl. ¶ 8. Pursuant to the Regulatory Agreement, the Norman brothers received from HUD a firm commitment to insure a 40-year loan in the amount of $1,601,100, at a market interest rate of 7.5 percent and an effective below-market interest rate of 3 percent. Tr. 298-99 (Norman); DX3; PX3; PX4. Under the 221(d)(3) program, the Norman brothers were entitled to receive an insurable mortgage of 90 percent of the project's estimated replacement cost. The resulting mortgage of $1,601,100 accounted for the bulk of the financing of the project. Tr. 302 (Norman); PX4. The Norman brothers were to finance the remaining $199,845 in costs. Id. However, as the project's developers, the Norman brothers were entitled to receive 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. Tr. 1165-68 (Malek); 30203 (Norman). Due to the BSPRA ($143,968) and appreciation of the land value pursuant to an 10

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 20 of 70

FHA valuation ($24,000), the Norman Brothers were required to make an actual cash investment of only $31,877. Id. The Norman brother's total cash outlay, therefore, was only 1.8 percent of the estimated cost of the Chateau Cleary project. Tr. 1156 (Malek). The Norman brothers profited both from the construction and management of the project. They contracted with their own construction company ­ Stratford Construction Company ­ to build the Chateau Cleary Apartments for an estimated cost of $1,227,655. Tr. 1171 (Malek); DX9. Stratford was formed specifically to construct the CCA project. Tr. 304 (Norman). To manage the property, the Norman brothers contracted with Apartment Management Corporation ­ another wholly-owned a company that was managed by Ernest B. Norman, III. Tr. 310-11 (Norman); 1172 (Malek); DX 8. Pursuant to the original management agreement, Apartment Management Corporation received a fee of 6 percent of the property's gross rental receipts. Id. The fees paid to these affiliated entities, including the construction costs and the management fees, were almost entirely funded by the Federally-backed mortgage, which provided leverage far in excess of what a conventional real estate investor could obtain. Tr. 1160 (Malek). The Norman brothers were also able to profit from tax benefits associated with the section 221(d)(3) program. The tax shelter aspects of the CCA project were particularly valuable to the Norman brothers because of their investments in oil and gas projects. Mr. Norman testified that his family invested in oil and gas and that they expected to achieve annual returns of 15 to 20 percent from those investments. Tr. 292 (Norman). As the Governments' tax expert, Mr. Malek, explained, once an oil or gas well begins pumping product, then the value of the oil or gas is treated as taxable income and the oil or gas investment no longer serves a purpose as a tax shelter. Tr. 1169-70; 1205-06 (Malek). In the years following the development of the CCA 11

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 21 of 70

project, the Normans could have used the tax losses from accelerated depreciation of the CCA project to offset income they earned from their oil and gas investments. By employing "component depreciation" at CCA (a type of depreciation in which individual components of the building structure are depreciated at different rates), the Normans achieved the same effect as accelerated depreciation. Tr. 1178; 1180-81; 1183. The uncontroverted evidence demonstrates that the Normans employed component depreciation and were treating the CCA project as having a composite life of 17 years. Tr. 1178; 1181; 1220-21. Based upon evidence that the Normans employed component depreciation in computing the tax writeoffs for the CCA project, and upon Mr. Norman's testimony that he and his family expected annual returns of 15 to 20 percent from their oil and gas investments, Mr. Malek demonstrated that the internal rate of return on the Normans' investment in CCA was at least 38 percent ­ regardless of the residual value left in the property at the end of the initial 20-year period. Tr. 1216-18 (Malek). As Mr. Malek explained in the demonstrative he prepared for the Court, the internal rate of return upon the Normans' CCA investment can be computed from the Normans' initial investment, the actual dividends paid out by the project during its first 20 years, and the tax losses incurred during the same time-frame (assuming a conservative 50 percent tax rate). See DDX3; Tr. 1216-17. Mr. Malek demonstrated that the tax losses alone ­ from 1972 to 1975 ­ significantly exceeded the amount of the Normans' initial investment. Tr. 1216. Moreover, Mr. Malek demonstrated that the internal rate of return upon the Normans' initial

12

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 22 of 70

investment was at least 38 percent, regardless of whether the property was worth $0, $1.9 million, or $4 million at the end of the initial 20-year period.1 Tr. 1217-18. Thus, in return for a minimal cash outlay of only 1.8 percent of the project's cost, the Norman brothers received (a) uniquely advantageous financing, (b) the ability to utilize the project's tax benefits to offset their other investments in oil and gas, (c) the ability to receive a high internal rate of return in excess of the returns expected from their oil and gas investments; (d) the ability to receive distributions of cash from operations, and (e) profits from awarding themselves contracts for construction and project management. Additionally, the brothers were entitled to any profits generated by the sale or other disposition of the project upon exiting the HUD program. Of course, at the time of project's development in 1969, the residual value of the Chateau Cleary apartments would have depended upon interest rates, property values, the renters' market, and other variables existing more than 20 years in the future. These variables would have been unknowable at the time of development. In January 1985, to facilitate their estate planning, the brothers agreed that J. Robert Norman would sell his 50 percent share of the project to Ernest B. Norman, Jr., for $677,550. Subsequently, in March 1985, Ernest B. Norman, Jr., assigned his right to purchase his brother's interest to CCA Associates, a partnership comprised of Mr. Norman, his children and grandchildren, and their trusts. Ernest B. Norman, III, was appointed the managing partner of CCA Associates and remains in that role today.

Mr. Malek's computation accounted for the effect of recapture taxes upon the sale of the CCA property at the end of the 20-year period. 13

1

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 23 of 70

B.

Plaintiff's Failure To Participate In The Preservation Statutes' Administrative Process

CCA was free to choose among the options available under the Preservation Statutes. Despite being advised that CCA was eligible to receive significant incentives, and despite being aware that a non-profit organization was interested in purchasing Chateau Cleary in order to preserve it as affordable housing, CCA chose to do nothing. In December 1990, about five months before its prepayment eligibility date, CCA Associates filed a notice of intent under ELIHPA stating that it intended to request incentives or sell the project to a non-profit purchaser. Tr. 197 (Norman); PX 42. After passage of LIHPRHA, in June 1992, CCA filed a notice of election to proceed under ELIHPA. Tr. 205-06 (Norman); PX 51. Other than these two preliminary steps, CCA took no action to avail itself of the options available under the Preservation Statutes. CCA's inaction did not result from ignorance. CCA's managing partner, Mr. Norman, was well aware of the options under the Preservation Statutes, and received advice and analysis regarding these options from several third-party consultants. DX11; DX123. For example, in November 1990, Mr. Norman had discussions with Andrea Lockett at USGI, the company servicing CCA's HUD-insured mortgage, during which USGI indicated that they had aligned themselves with a non-profit that was potentially interested in purchasing Chateau Cleary. Tr. 371-76 (Norman); PX38; PX41; DX124. Ms. Lockett estimated that, after paying off the old loan, the sale could potentially provide $1,900,000 in cash to the owners. Id. Similarly, Mr. Norman discussed the terms of a potential equity take-out loan with Ms. Lockett. Tr. 375

14

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 24 of 70

(Norman). Ms. Lockett's preliminary estimate indicated that an equity loan of roughly $1.3 million would be available under LIHPRHA. DX124; Tr. 375 (Norman). On December 28, 1990, following his discussions with Ms. Lockett, Mr. Norman submitted a notice of intent on behalf of CCA pursuant to section 222 of ELIHPA. The notice stated that CCA would seek incentives or sell to a non-profit entity during 1991. PX42. Mr. Norman, however, took no further action at that time and failed to pursue either option under ELIHPA. Tr. 383-84 (Norman). In May 1992, Mr. Norman learned of HUD's June 8, 1992 deadline for requiring property owners to make an election of whether to proceed under ELIHPA or LIHPRHA. PX53; Tr. 38485 (Norman). Consequently, on June 5, 1992, CCA submitted its notice of election to proceed under ELIHPA and, on June 8, 1992, CCA submitted a revised notice. PX51. Although Mr. Norman continued to discuss the sale and incentive options under the Preservation Statutes by meeting with consultants in 1993 to discuss the LIHPRHA appraisal process and by obtaining information from additional consultants in 1994, DX126, CCA chose not to act upon any of the advice it received. Because CCA did not pursue the preservation process, HUD never issued a final decision regarding the preservation incentives available to CCA, or prepayment pursuant to ELIHPA or LIHPRHA. C. CCA Failed To Seek Allowable Rent Increases And Failed To Diligently Submit Its Audited Annual Financial Statements

In 1985, Mr. Norman assumed the role as the full-time managing partner of CCA Associates, a role that he continues in today. Tr. 350 (Norman). He also continues to manage

15

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 25 of 70

the day-to-day affairs of the two related-party entities, Apartment Management Corporation and Norman Company, that provide services to CCA. Tr. 310-14; DX8. Under the terms of the regulatory agreement, CCA was eligible to request rent increases from HUD at any time. Tr. 1094-97 (Kizzier); PX2. In applying for rent increases, CCA decided the amount of any increase they sought. Tr. 339 (Norman). CCA's rents were established through a budget-based process. Tr. 330 (Norman). The project's operating budget included the allowable annual surplus cash distribution to the owners. Id.; Tr. 1094 (Kizzier). As the project's costs increased, HUD allowed project rents to keep pace. Tr. 340-41 (Norman); 1095 (Kizzier). Requests for rent increases were typically based upon the project's audited financial statements from the previous year. Tr. 340 (Norman). However, if the project could demonstrate that its expenses were expected to rise substantially in the next year ­ such as expenses associated with utilities or insurance costs ­ it could receive a larger rent increase than would have been justified simply based upon the audited financials. Tr. 340-41 (Norman). By allowing owners to seek rent increases based upon the budgeted costs of operation, HUD ensured that the owner would be able to cover increased costs and pay the allowed annual dividend. Tr. 1095-96 (Kizzier). Between 1971 and 1985, CCA regularly applied to HUD for rent increases. PDX33. However, when Mr. Norman took over as the managing partner in 1985, CCA stopped seeking regular increases from HUD. Tr. 332 (Norman). CCA sought (and received) only one rent increase between 1985 and 1994, despite the fact that its annual operating expenses in every year between 1985 and 1994 were higher than they were in 1983, Tr. 342 (Norman), 996 (Ragas), and its expenses had gone up during that time by more than 37 percent. Tr. 996 (Ragas); PDX33. 16

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 26 of 70

According to Anne Kizzier, the Director of Multifamily Housing in HUD's New Orleans office, HUD "automatically" granted budget-based rent increases of 5 percent, provided that the owner brought in the appropriate documentation, such as the previous year's financial statement. Tr. 1095 (Kizzier). However, by 1991, CCA's rents were substantially lower than the rents that

HUD would have allowed it to charge. In addition to failing to diligently seek rent increases, CCA also failed to timely provide its annual financial statements to HUD. The regulatory agreement required CCA to submit its audited annual financial statements to HUD within 60 days of the end of the project's fiscal year. PX2. Because CCA's fiscal year ended on December 31st, its audited annual financial statements were due to HUD by the beginning of March of each year. Tr. 353-54 (Norman). However, from 1984 onward, CCA was routinely late in submitting its audited annual financial statements. Tr. 360 (Norman). In fact, there was not a single year between 1985 and 1998 when CCA put in its annual financial statement within 60 days, as required by the regulatory agreement. Id. In some years, there were significant time lapses between the time when CCA received the financial statements from its auditor and when CCA certified that statement and provided it to HUD. See Tr. 363-64 (4 months); 367. In at least one case, CCA did not provide its audited financial statement to HUD until more than 1 year after the end of its fiscal year. Tr. 365-66 (Norman). D. CCA's Eventual Prepayment Of Its HUD-Insured Mortgage And Conversion To Market Rate Operation

In June 1995, nearly one year before passage of the HOPE Act, CCA's managing partner, Ernest B. Norman, III, was informed that LIHPRHA was out of money and that Congress would likely reinstate the owners' ability to prepay without HUD approval. Tr. 446-47; PX60. He

17

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 27 of 70

learned that HOPE had been enacted on the very day of its passage. PX60. He also was aware of several consultants who could assist owners with prepayment. Tr. 456 (Norman). In October 1996, CCA received a letter from Eustis Mortgage offering a loan in the amount of $1,275,000 and stating that the loan could be closed before the end of the year. PX73. This loan would have been sufficient to pay off the remaining balance of CCA's mortgage. Tr. 457. In April 1998, CCA received a loan commitment from Whitney National Bank to prepay the mortgage and refinance CCA, but CCA chose not to act. PX80-A; Tr. 458. It was not until September 1998, more than two years after the passage of HOPE, that CCA prepaid its mortgage. E. Economic Effect Of Remaining In The HUD Subsidy Program

The market value of Chateau Cleary Apartments without HUD restrictions on May 18, 1991 was $1,850,000. Tr. 1341-45 (Derbes); DX172; DX173. The property's value, if required to continue operations as a HUD-subsidized project through May 27, 1996, was $1,515,000. Tr. 1422-23 (Derbes); DX174. Thus, the economic impact to CCA of choosing to remain in the Federal housing program from May 1, 1991, through May 27, 1996, was only 18.1 percent. Tr. 1619-28 (Dickey).

18

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 28 of 70

DEFENDANT'S CONTENTIONS OF LAW I. The As-Applied, Regulatory Taking Claim Asserted By CCA Is Not Ripe Because CCA Failed To Exhaust The Administrative Preservation Process A property owner asserting a regulatory taking claim must establish that the regulation "has in substance `taken' their property by going `too far.'" Greenbrier v. United States, 193 F.3d 1348, 1357 (Fed. Cir. 1999). However, "a court cannot determine whether a regulation has gone `too far' unless it knows how far the regulation goes." MacDonald, Sommer & Frates v. Yolo County, 477 U.S. 340, 350 (1986). Thus, an "as-applied" taking claim does not ripen "until the government entity charged with implementing the regulations has reached a final decision regarding the application of the regulations to the property at issue." Palazzolo v. Rhode Island, 533 U.S. 606, 618 (2001). Additionally, where a regulatory restriction might be avoided by alternate avenues, an "as applied" taking claim does not ripen until each avenue has been exhausted. See Stearns Co. v. United States, 396 F.3d 1354, 1358 (Fed. Cir. 2005). CCA's claim that the Preservation Statutes effected a temporary taking does not alter these requirements. A temporary taking can occur in one of two ways: (1) by reason of extraordinary administrative delay in the Governmental decision making process; or (2) when what would otherwise be a permanent taking is temporally cut short. Seiber v. United States, 364 F.3d 1356, 1364 (Fed. Cir. 2004). CCA does not ­ and cannot ­ allege extraordinary administrative delay. CCA asserts instead that the Preservation Statutes effected a permanent, as-applied taking that was cut short by the HOPE Act. See Compl. ¶¶ 18, 37; see also Seiber, 364 F.3d at 1364 (a temporary taking can occur when the Government denies a permit and at some later point reconsiders the earlier denial or revokes the permitting requirement). The

19

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 29 of 70

"essential element" of this type of temporary taking "is a finite start and end to the taking." Seiber, 364 F.3d at 1364; Wyatt v. United States, 271 F.3d 1090, 1097 n.6. (Fed. Cir. 2001). Consequently, where, as here, a statutory permitting requirement is revoked, "the initial denial of a permit is still a necessary trigger for the temporary taking." Seiber, 364 F.3d at 1364; see also Boise Cascade Corp. v. United States, 296 F.3d 1339, 1347-48 (Fed. Cir. 2002) ("a taking occurs [only] after a permit has been denied") (applying United States v. Riverside Bayview Homes, Inc., 474 U.S. 121 (1985)). The Preservation Statutes established a complex administrative process by which a project owner could prepay, sell or receive monetary incentives. See Chancellor Manor v. United States, 331 F.3d 891, 905 (Fed. Cir. 2003). The process had two basic stages. First, HUD determined if the project's preservation as low income housing was necessary. See Tr. 1100-01 (Kizzier); ELIHPA § 225(a); 12 U.S.C. § 4108. If HUD concluded that preservation was not required, the owner was allowed to prepay and exit the program. Second, if a project was to be preserved, the owner chose between (1) exiting the program by selling at the project's fair market value without HUD-restrictions, and (2) remaining in the program in exchange for valuable monetary incentives. ELIHPA §§ 225(b), 230; 12 U.S.C. §§ 4109-10, 4114. If the owner's chosen option did not promptly come to fruition, the owner was allowed to prepay. 12 U.S.C. § 4114. CCA failed to pursue, much less exhaust, the preservation process. Tr. 1085 (Kizzier). CCA never applied to HUD for permission to prepay. Id. Nor did CCA submit a plan of action to sell or obtain incentives under the Preservation Statutes. Id. In short, CCA did nothing. As a result, HUD never made "a final decision regarding the application of the regulations to the 20

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 30 of 70

property at issue." Palazzolo, 533 U.S. at 618. Having failed to exhaust the preservation process, it cannot be said that the Preservation Statutes actually precluded prepayment by CCA. See ELIHPA § 225(a); 12 U.S.C. §§ 4101, 4108, 4114. Equally uncertain is the economic effect of the challenged regulations. Accordingly, the as-applied taking claim in this action is not ripe. See, e.g., Palazzolo, 533 U.S. at 618; Greenbrier, 193 F.3d at 1357. A. CCA's Claim Is Not Ripe Because It Failed To Apply To Prepay Under The Preservation Statutes

Under both ELIHPA and LIHPRHA, owners could apply to HUD to prepay.2 See ELIHPA § 225(a); 12 U.S.C. § 4108. This first step in the preservation process enabled HUD, using the agency's expertise in low- and moderate-income housing, to determine if preserving a particular project was necessary. See Tr.1085 (Kizzier). CCA did not request HUD's permission to prepay under either ELIHPA or LIHPRHA. Id. Consequently, HUD never reached a final decision regarding the need to preserve Chateau Cleary. For this reason, CCA's as-applied taking claim is not ripe. E.g., Palazzolo, 533 U.S. at 618. CCA concedes that it never sought HUD's permission to prepay. Tr. 383-84 (Norman). However, CCA asserts that its failure to apply to prepay should be excused by the doctrine of futility. See Pl.'s Pretrial Br. at 4, 22. CCA is mistaken. The doctrine of futility cannot be invoked until a claimant has made at least one application. Furthermore, under the respective statutory standards, it is far from certain that HUD would have denied a well-conceived plan of action to prepay the Chateau Cleary mortgage.

The statutory standards, while similar, were different in important particulars. Compare ELIHPA § 225(a) with 12 U.S.C. § 4108. 21

2

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 31 of 70

1.

The Doctrine Of Futility Is Inapplicable

A property owner must make at least one application to use their property before invoking the futility exception. Howard W. Heck & Assoc. v. United States, 134 F.3d 1468, 1472 (Fed. Cir. 1998). The futility exception serves only to "`protect property owners from being required to submit multiple applications when the manner in which the first application was rejected makes it clear that no project will be approved.'" Id. (emphasis in original) (quoting Southern Pac. Transp. Co. v. City of Los Angeles, 922 F.2d 498, 504 (9th Cir. 1990)); see also Morris v. United States, 392 F.3d 1372, 1376 (Fed. Cir. 2004). Thus, before invoking "futility," a property owner must give the Government the opportunity, using its own reasonable procedures, to decide and explain the reach of the challenged regulation. Indeed, this rule is uniformly established in takings jurisprudence. See DLX, Inc. v. Kentucky, 381 F.3d 511, 518 (6th Cir. 2004) ("the [futility] exception only applies where a landowner has `submitted at least one meaningful application for a variance'"); Kawaoka v. City of Arroyo Grande, 17 F.3d 1227, 1232 (9th Cir. 1994) (the "futility exception does not alter a party's obligation to file at least one meaningful development proposal"); Seguin v. City of Sterling Heights, 968 F.2d 584 (6th Cir. 1992) ("at least one meaningful application must be submitted as a prerequisite to a plaintiff's attempt to benefit from the futility exception"); Gilbert v. City of Cambridge, 932 F.2d 51, 61 (1st Cir. 1991) ("the filing of one meaningful application will ordinarily be a necessary, although not alone sufficient, precondition for invoking the futility exception"); Herrington v. Sonoma County, 857 F.2d 567, 569 (9th Cir. 1988), cert. denied, 489 U.S. 1090 (1989) ("A property owner cannot rely on the futility exception until he or she makes at least one meaningful

22

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 32 of 70

application."); Kinzli v. City of Santa Cruz, 818 F.2d 1449, 1455 (9th Cir. 1987) ("at least one `meaningful application' must be made" before futility may be raised). Here, in order to claim futility, CCA had to apply to HUD for permission to prepay at least once. If CCA's plan of action was denied, then and only then would CCA be permitted to argue that further applications would be futile. As the Supreme Court explained in United States v. Riverside Bayview Homes, 474 U.S. 121 (1985), requiring an owner to seek approval for a given use of its property "does not itself `take' the property in any sense." The Court explained that: even if the permit is denied, there may be other viable uses available to the owner. Only when a permit is denied and the effect of the denial is to prevent "economically viable" use of the land in question can it be said that a taking has occurred. Id. at 127; see also Greenbrier, 193 F.3d at 1357 (approving this analysis for takings claims against the Preservation Statutes). CCA declined to submit a plan of action seeking HUD's permission to prepay pursuant to the Preservation Statutes. Tr. 383 (Norman). Because CCA failed to apply to prepay even once, HUD never denied any request by CCA to prepay its mortgages and, consequently, CCA's claim that the Government took its property by restricting prepayment cannot fall within the futility exception and is not ripe for judicial review. Greenbrier, 193 F.3d at 1359; Heck, 134 F.3d at 1472; see also Chancellor Manor, 331 F.3d at 905 (LIHPRHA "did not simply prevent prepayment," but rather "created a complex statute, which vested discretion in HUD").

23

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 33 of 70

2.

Applying To Prepay Would Not Have Been Futile a. The Preservation Statutes Gave HUD Discretion To Determine When Prepayment Would Be Allowed

Under the Preservation Statutes, HUD is authorized to approve a plan of action terminating affordability restrictions through prepayment upon finding: (1) implementation of the plan of action will not­ (A) materially increase economic hardship for current tenants, and will not in any event result in . . . an increase in the monthly rental payment in any year that exceeds 10 percent . . . ; or (B) involuntarily displace current tenants where comparable and affordable housing is not readily available . . . (2) the supply of vacant, comparable housing is sufficient to ensure that such prepayment will not materially affect­ (A) the availability of decent, safe, and sanitary affordable housing to lowincome and very low income families or persons in the area that the housing could reasonably be expected to serve. . . . 12 U.S.C. § 4108.3 The Preservation Statutes, thus, gave HUD discretion to determine whether prepayment would be allowed. HUD was to decide what constituted "comparable and affordable housing," a "material increase in economic hardship," a "material affect" upon "the availability of decent, safe, and sanitary housing affordable to low-income and very low-income families," and "the area that the housing could reasonably be expected to serve." See id. Even the proviso stating that implementation of the plan of action should not result in "an increase in the monthly

ELIHPA did not contain the ten percent provision and, thus, gave HUD even greater discretion to allow prepayment. Emergency Low Income Housing Preservation Act of 1987, Pub.L. 100-242, Title II § 224(a), 101 Stat. 1877 (Feb. 5, 1988). 24

3

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 34 of 70

rent payment . . . that exceeds 10 percent" permitted HUD to exercise discretion in assessing what change in rents would be expected from the proposed plan of action. See id. At trial, CCA offered no evidence establishing how HUD would have exercised its discretion had CCA participated in the preservation process and submitted a well-designed plan of action to prepay. Indeed, at this juncture, any attempt to divine how HUD would have responded to such a plan would be pure speculation. b. Prepayment Under The Preservation Statutes Was "Possible"

Under the Preservation Statutes, HUD-approved plans of action allowed some project owners to prepay and exit the section 221(d)(3) and 236 programs. Tr. 1692 (Dickey); DDX221. Moreover, CCA inquired about obtaining the possibility of prepaying some years prior to prepayment eligibility. CCA was informed that, with work, obtaining HUD consent was "possible." Tr. 398-99 (Norman); PX23. Thus, far from being futile, CCA was told that it might be possible to obtain HUD's permission to prepay. Id. Because the evidence fails to establish that HUD was required to reject all possible plans of action to prepay the Chateau Cleary mortgage, CCA has not established that the preservation process was futile. (1) A Well-Conceived Plan Of Action Would Not Have Resulted In A Material Hardship To Current Tenants (a) In 1991, The Rents Charged By CCA Were Close To Market

During the late 1980's, the New Orleans economy was adversely affected by a crash in oil prices. Tr. 155 (Norman), 822 (Ragas), 1348-49 (Derbes). As a result, rents for multi-family apartments declined and approached the HUD-approved rents being charged by CCA. Tr. 15525

Case 1:97-cv-00334-CFL

Document 108

Filed 11/09/2006

Page 35 of 70

56 (Norman); 1349-50 (Derbes). Not until the early 1990's did the real estate market begin to recover. Tr. 964 (Ragas). Given this backdrop, HUD could have concluded that prepayment by CCA would not constitute a "material hardship" to current tenants. 12 U.S.C. § 4108. Furthermore, a well-conceived plan of action to prepay need not have resulted in "an increase in the monthly rental payment . . . that exceeds 10 percent." Id. Under the Preservation Statutes, a plan of action to prepay would not be permitted if HUD concluded that the proposed plan of action would increase rents by more than 10 percent. 12 U.S.C. § 4108. An owner seeking to prepay would, therefore, take two steps. First, before submitting a plan of action, the owner would apply for a rent increase to maximize its HUD rents. See PX2 (allowing a request to increase rents "at any time"). Second, in its plan of action, the owner would propose no improvements or upgrades that would increase the project's rents after prepayment. In this way, the owner would minimize the rent differential and maximize the likelihood that its plan of action would be approved by HUD. In 1991, the HUD rents being charged by CCA were withi