Sonoma Apartment Associates v. United States

In the United States Court of Federal Claims

No. 13-940C

(Filed Under Seal: September 22, 2017)

(Reissued for Publication: November 3, 2017)*

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SONOMA APARTMENT ASSOCIATES, *

A California Limited Partnership, *

* Trial; Section 515 of the Housing Act of

Plaintiff, * 1949; Breach of Contract; Expectancy

* Damages; Lost Profits Versus Lost Asset

v. * Value; Postbreach Evidence; Discount

* Rates; Tax Neutralization Payment;

THE UNITED STATES, * Third-Party Standing

*

Defendant. *

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Daphne A. Beletsis and Deborah S. Bull, Santa Rosa, CA, for plaintiff.

Matthew P. Roche and Jeffrey A. Regner, United States Department of Justice, Washington, DC,

for defendant.

OPINION AND ORDER

SWEENEY, Judge

Plaintiff Sonoma Apartment Associates, a California Limited Partnership, obtained a loan

from the federal government to construct rural low- and moderate-income housing. Plaintiff was

contractually entitled to prepay the balance of the loan after twenty years, but when it sought to

exercise this right, the government denied its request. After the government conceded liability

for breach of contract, the court held a trial on the issue of damages. As explained in more detail

below, the court awards damages to plaintiff in an amount to be determined in accordance with

the court’s findings and conclusions.

TABLE OF CONTENTS

I. FACTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. Plaintiff’s Contract With the Government and the Government’s Breach of That

Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

*

For the reasons stated during the November 3, 2017 status conference, the court

reissues this decision for publication without redactions.

B. Plaintiff and Its Partners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

C. Sonoma Village Apartments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

D. The April 11, 2011 Appraisal Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

II. PROCEDURAL HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

III. NONMONETARY RELIEF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

IV. EXPECTANCY DAMAGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

A. Legal Standards.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1. Expectancy Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2. Date for Calculating Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3. Discounting to Present Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

B. The Parties’ Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

C. The Parties’ Methodologies and Calculations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1. Plaintiff’s Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

a. Past Lost Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

i. Restricted Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

ii. Unrestricted Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

iii. Total Past Lost Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

b. Future Lost Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

i. Restricted Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

ii. Unrestricted Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

iii. Discounting to Present Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

c. Total Lost Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

d. Using Fair Market Value to Test the Reasonableness of the Lost Profits

Calculations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

2. Defendant’s Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

a. Unrestricted Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

b. Restricted Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

c. Total Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

d. Dr. Ben-Zion’s Test to Assess the Reasonableness of His Calculations. . . . 49

D. Analysis.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

1. Methodology for Computing Plaintiff’s Expectancy Damages. . . . . . . . . . . . . . . 51

2. Postbreach Evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

3. Past Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

a. Estimating Plaintiff’s Past Income in the Unrestricted Scenario. . . . . . . . . . 54

i. Rents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

ii. Nonrental Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

iii. Vacancy Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

iv. Conversion-Related Lost Income.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

b. Estimating Plaintiff’s Past Expenses in the Unrestricted Scenario. . . . . . . . 57

i. Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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ii. Loan-Related Expenses and the Mortgage Interest Rate. . . . . . . . . . . 58

c. Estimating Plaintiff’s Past Income in the Restricted Scenario.. . . . . . . . . . . 60

d. Estimating Plaintiff’s Past Expenses in the Restricted Scenario. . . . . . . . . . 60

4. Future Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

a. Projecting Plaintiff’s Future Income in the Unrestricted Scenario. . . . . . . . 60

i. Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

ii. Nonrental Income and Vacancy Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 61

b. Projecting Plaintiff’s Future Expenses in the Unrestricted Scenario.. . . . . . 61

c. Projecting Plaintiff’s Future Income in the Restricted Scenario. . . . . . . . . . 62

d. Projecting Plaintiff’s Future Expenses in the Restricted Scenario. . . . . . . . 62

e. Calculating Projected Net Income in the Restricted Scenario. . . . . . . . . . . . 62

5. Discounting Plaintiff’s Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

a. Postjudgment Discount Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

b. Prejudgment Discount Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

6. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

V. TAX NEUTRALIZATION PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

A. Legal Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

B. The Parties’ Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

C. Plaintiff’s Position.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

1. The Tax Consequences of Converting Sonoma Village Apartments to a Market-

Rate Rental Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

a. Computing Tax Liability Assuming a Conversion.. . . . . . . . . . . . . . . . . . . . 69

b. Computing Tax Liability Assuming the Status Quo. . . . . . . . . . . . . . . . . . . 72

c. Calculating Net Tax Liability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

2. The Tax Consequences of the Lump-Sum Damages Award. . . . . . . . . . . . . . . . . 74

3. Determining the Tax Neutralization Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

D. Defendant’s Response.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

E. Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

VI. CONCLUSION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

I. FACTS

This section contains the court’s findings of fact as required by Rule 52(a)(1) of the Rules

of the United States Court of Federal Claims.1

1

The court derives these facts from the parties’ Joint Stipulation of Facts (“Jt. Stip.”), the

transcript of testimony elicited at trial (“Tr.”), the exhibits admitted into evidence during trial

(“PX,” “DX,” or “JX”), and the relevant statutes and regulations. Citations to the trial transcript

will be to the page number of the transcript and the last name of the testifying witness.

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A. Plaintiff’s Contract With the Government and the Government’s Breach of That

Contract

On September 4, 1984, plaintiff executed an agreement with the Farmers Home

Administration of the United States Department of Agriculture in which the government agreed,

pursuant to section 515 of the Housing Act of 1949, Pub. L. No. 81-171, 63 Stat. 413 (as added

by Pub. L. No. 87-723, § 4(b), 76 Stat. 670, 671-72 (1962)), to lend plaintiff $1,261,080 to

construct a low- and moderate-income housing project at 59 West Agua Caliente Road in

Sonoma, California. Jt. Stip. ¶ 1; JX 1; see also Jt. Stip. ¶ 1 (indicating that the project is known

as Sonoma Village Apartments). Plaintiff agreed to repay the loan in installments over a fifty-

year period ending October 27, 2035. Jt. Stip. ¶ 4.

In conjunction with the loan agreement, plaintiff executed two promissory notes in favor

of the government, one for $1,222,650, and the other for $38,430. Id. ¶ 3. Both promissory

notes included the following provision: “Prepayments of scheduled installments, or any portion

thereof, may be made at any time at the option of Borrower providing the loan is in a current

status.” Id. ¶ 5. The promissory notes, in turn, were secured by a deed of trust that was recorded

in Sonoma County, California on October 28, 1985. Id. ¶ 6. The deed of trust included a rider

containing the following language:

The borrower and any successors in interest agree to use the housing for the

purpose of housing people eligible for occupancy as provided in section 515 of

Title V of the Housing Act of 1949 and [Farmers Home Administration]

regulations then extant during this 20-year period, beginning the date this

instrument is filed of record.

Id. ¶ 7; JX 4 at 6. The aforementioned twenty-year period ended on October 27, 2005. Jt. Stip.

¶ 8. Plaintiff would not have accepted the loan from the government had it not been provided

with the ability to prepay the loan after twenty years. Tr. 51 (Gullotta). Indeed, plaintiff always

intended to prepay the loan after twenty years. Id. at 54, 100.

By accepting the loan from the Farmers Home Administration, plaintiff agreed to comply

with United States Department of Agriculture regulations pertaining to the section 515 program,

including regulations requiring the submission of annual financial reports and regulations

regarding the management of housing projects. Jt. Stip. ¶¶ 13-14; 7 C.F.R. §§ 3560.102, .308

(2017); 7 C.F.R. §§ 1930.113, .124, & pt. 1930, subpt. C, ex. B (1985). The requirements set

forth in these regulations are much more onerous than those for managing market-rate rental

properties. Tr. 344-45 (Williams); see also id. at 44-45 (Gullotta) (characterizing the

requirements of the section 515 program as “complex[]”). Indeed, in addition to submitting

annual financial reports, properties in the section 515 program must submit to annual third-party

audits, process lengthy rental applications, and engage in a time-consuming income-verification

process. Id. at 344-45 (Williams). Further, the government reviews and approves the properties’

budgets, monitors the properties’ reserve capital accounts and all capital improvements, and

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controls the properties’ ability to increase rents.2 Id. at 346-47, 349; see also id. at 850-51

(Pedrotti) (explaining that the government approves rent increases based on its analysis of a

property’s operating expenses, and prefers that any increases will not result in net profits

exceeding $2000). The government also limits the amount of income that may be distributed to

plaintiff from operating Sonoma Village Apartments. See, e.g., 7 C.F.R. § 3560.305 (2017)

(allowing borrowers a return on their investment under certain circumstances); JX 1 at 3

(reflecting that funds in plaintiff’s reserve account could be used, with the government’s

approval, “[t]o pay dividends to the partners of up to 8 percent per annum of the borrower’s

initial investment of $64,350.00,” but if the “return on investment for any year exceed[ed] 8

percent,” the government could “require that the borrower reduce rents the following year and/or

refund the excess return on investment to the tenants or use said excess in a manner that [would]

best benefit the tenants”); see also JX 34 at 1 (indicating, in plaintiff’s 2013 budget and 2014

proposed budget, that plaintiff would receive only $5310 per year from operating Sonoma

Village Apartments); PX 54 at 74 (reflecting, in a budget history spreadsheet for 2008 through

2010, that plaintiff proposed receiving $5310 per year from operating Sonoma Village

Apartments).

After plaintiff executed the loan agreement, the promissory notes, and the deed of trust

(collectively, “the contract”), Congress, concerned with the loss of low-income housing that was

caused, in part, by loan prepayments, enacted two statutes that retroactively limited borrowers’

rights to prepay the balance of loans made through the section 515 program: the Emergency Low

Income Housing Preservation Act of 1987, Pub. L. No. 100-242, 101 Stat. 1877 (1988), and the

Housing and Community Development Act of 1992, Pub. L. No. 102-550, 106 Stat. 3672.

On November 5, 2010, plaintiff submitted a written request to Rural Development–the

agency within the United States Department of Agriculture responsible for the rural housing

programs formerly administered by the Farmers Home Administration, Jt. Stip. ¶ 2–to prepay the

balance of its loan. Id. ¶ 9. Its request reflected that it intended to prepay the balance of the

loan–approximately $1.2 million–without refinancing, and that it possessed the financial

resources to do so. JX 5 at 2-4; Tr. 56 (Gullotta); see also Tr. 56-57 (Gullotta) (indicating that at

the time of trial, plaintiff still had the wherewithal to prepay the balance of the loan without

refinancing). However, Rural Development did not accept plaintiff’s request to fully prepay the

balance of its loan. Jt. Stip. ¶ 10. Rather, on January 3, 2011, Rural Development offered

plaintiff certain incentives in lieu of accepting prepayment. Id. Rural Development’s refusal to

accept full prepayment constitutes a breach of contract. Id. ¶ 11.

2

In addition to reviewing and approving the amount of rent that plaintiff can charge its

tenants, the government limits the amount of rent that plaintiff can retain. Tr. 353 (Williams).

Specifically, of the rent it collects from its tenants, plaintiff is entitled to retain the base rent–“the

rent that is approved in the budget for [it] to spend on operations.” Id. If it collects more than

the base rent, as it does with respect to approximately twelve tenants at Sonoma Village

Apartments, the overage is sent to the government. Id. at 353-54.

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B. Plaintiff and Its Partners

Plaintiff was formed on August 27, 1984. JX 51 at 1. Originally, it had two

partners–Richard Gullotta and Richard Parasol–who each owned a 2.5% general partnership

interest and a 47.5% limited partnership interest. Tr. 53, 100 (Gullotta). Mr. Parasol sold his

limited partnership interest to a married couple–the Belks–and after her husband’s death, Mrs.

Belk sold the interest to Richard Gullotta’s children,3 id. at 53-54, 100-01, Mark Gullotta, Eric

Gullotta, and Karen Kass (née Gullotta),4 id. at 46, 100. Thus, at the time of the government’s

breach of contract in 2011, plaintiff had two general partners and four limited partners, as

follows:

Partnership

Sonoma Apartment Associates Interest

General Partners

Richard Gullotta 2.5%

Richard Parasol 2.5%

Limited Partners

Richard Gullotta 47.5%

Mark Adrien Gullotta Revocable Living Trust 47.5%

Eric S. Gullotta Revocable Living Trust 1/3 of 47.5%

Karen N. Gullotta Revocable Living Trust 1/3 of 47.5%

Id. at 46, 104-05; JX 51. All profits received and losses incurred by the partnership are allocated

to its partners in accordance with the partnership agreement, JX 57 at 17, 27, 41-42; Tr. 1194,

1200 (Krabbenschmidt); see also Tr. 1194-95 (Krabbenschmidt) (explaining that under the

Internal Revenue Code, the partners can “modify the way the income is allocated between the

partners all the way up until April 15th . . . following the year end”), and the partners are

responsible for paying taxes on their shares of any profits, Tr. 1193-94 (Krabbenschmidt); see 26

U.S.C. § 701 (2012) (“A partnership as such shall not be subject to the income tax imposed by

this chapter. Persons carrying on business as partners shall be liable for income tax only in their

3

Although the Belks’ limited partnership interest was purchased by Richard Gullotta’s

children’s revocable living trusts, JX 51, the court will, for simplicity, refer to the children as the

owners of the limited partnership interest.

4

For clarity, the court will refer to Richard Gullotta and his children by their first and last

names.

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separate or individual capacities.”). Further, the partnership’s available cash flow is distributed

to its partners in accordance with the partnership agreement. JX 57 at 18, 41-42.

Richard Gullotta conceived of and developed plaintiff’s low- and moderate-income

housing project. Tr. 48-50 (Gullotta). He has extensive financial and real estate experience.

With respect to his financial experience, Richard Gullotta received an undergraduate degree in

accounting in 1965, worked for several years as a revenue agent for the Internal Revenue Service,

became a Certified Public Accountant (“CPA”) in 1972, and received a master’s degree in

taxation in 1976. Id. at 41-42. In his CPA practice, he prepares approximately 750 income tax

returns per year, including his own return and the returns of his children. Id. at 43, 60; see also

id. at 57 (reflecting that Richard Gullotta has been preparing tax returns since 1969), 90

(indicating Richard Gullotta’s intention to “continue [his] CPA practice” as long as he could

“help people”). With respect to his real estate experience, Richard Gullotta became a licensed

real estate broker in 1990, and was accredited as a national mortgage loan originator in 2010. Id.

at 41-43. He owns a number of rental properties–mostly single family residences–that he

manages with his wife. Id. at 43-45, 97; see also id. at 97 (reflecting that Richard Gullotta and

his wife managed nine rental properties in 2014). In addition, he owns, either personally or as a

partner, ten low-income rental properties that are managed by a third-party management

company. Id. at 43-46.

On their 2015 federal income tax return, Richard Gullotta and his wife reported an

adjusted gross income of $415,220. JX 81 at 2; see also DX 18 (indicating that the couple’s

adjusted gross income fluctuated between 2011 and 2015, with a high of $430,096 in 2011 and a

low of $275,222 in 2014). Approximately half of their income was derived from Richard

Gullotta’s CPA practice. JX 81 at 2, 53. In addition, a small percentage of their income came

from unemployment compensation. Id. at 2; see also Tr. 94-96 (Gullotta) (indicating that in

2014, Richard Gullotta received unemployment compensation for the six months following the

tax season, during which time he earned no income from his CPA practice or as a property

manager). Richard Gullotta and his wife also reported total passive activity losses of $409,345

for 2015,5 which included $13,994 in unallowed losses attributable to the operation of Sonoma

5

A passive activity loss, as the term is used in this decision, is a loss incurred by a

property owner who does not materially participate in the property. Tr. 72 (Gullotta); accord 26

U.S.C. § 469(c)(1)-(2); see also Tr. 72 (Gullotta) (defining “material participation” as “put[ting]

in 500 hours”). A passive activity loss incurred in one year can be carried forward and used to

offset income from passive activities in the following year. Tr. 71, 77 (Gullotta); 26 U.S.C.

§ 469(b), (d)(1). Indeed, a property owner can continue to carry forward the loss to subsequent

years until the entire loss is exhausted. Tr. 75 (Gullotta), 1247 (Krabbenschmidt). Although the

loss has no other effect on a property owner’s tax liability, id. at 76, 130, 155 (Gullotta), a

property owner must report its passive activity losses on his or her federal income tax returns, id.

at 76. The amount reported on a particular year’s income tax return may not ultimately reflect

the amount of passive activity losses incurred in that year. See id. at 125-35 (reviewing Richard

Gullotta’s reported passive activity losses from 2011 to 2015, and reflecting Richard Gullotta’s

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Village Apartments. JX 81 at 32, 65-66; see also JX 58 at 22-23 (reporting a $301,977 passive

activity loss for 2011, $154,612 of which was carried forward from 2010); JX 59 at 22-23

(reporting a $394,068 passive activity loss for 2012, $301,977 of which was carried forward from

2011); JX 60 at 33-34 (reporting a $584,493 passive activity loss for 2013, $425,318 of which

was carried forward from 2012); JX 61 at 28-29 (reporting a $347,108 passive activity loss for

2014, after carrying forward $631,758 from 2013); JX 81 at 32 (reporting a $409,345 passive

activity loss for 2015, $347,108 of which was carried forward from 2014); Tr. 137-38 (Gullotta)

(reflecting that Richard Gullotta anticipated carrying forward passive activity losses for the

indefinite future). At the time of trial (October 2016), Richard Gullotta was nearly seventy-three

years old, and would therefore turn ninety-two years old in 2035, “if [he was] alive.”6 Tr. 89

(Gullotta).

Mark Gullotta and his wife reported an adjusted gross income of $282,572 on their 2015

federal income tax return. JX 67 at 1; see also DX 16 (indicating that the couple’s adjusted gross

income in 2015 far exceeded the adjusted gross income they reported for the previous four years,

which ranged from $133,583 to $162,505). They also reported a $13,334 passive activity loss,

all of which was carried forward from the previous year and was attributable to the operation of

Sonoma Village Apartments. JX 67 at 15-16. Mark Gullotta is a CPA and an attorney, and his

wife is a CPA. Id. at 2. They have three children. Id. at 1.

Eric Gullotta and his wife reported an adjusted gross income of $12,585 on their 2014

federal income tax return, most of which was derived from business profits described on two

Schedule Cs. JX 55 at 1, 5-8; see also DX 17 (reflecting similarly low adjusted gross incomes

explanation that one year’s passive activity loss might not match the passive activity loss carried

forward into the following year if something happened in the meantime that required an

adjustment to that loss), 154-55 (explaining that an adjustment to an amount of passive activity

loss carried forward from the prior year could be due to a partner filing an income tax return

before receiving the K-1 statement from the partnership’s tax preparer). But see id. at 1267

(Krabbenschmidt) (indicating that “most people” do not file their income tax returns before

receiving their K-1 statements, and that even if a taxpayer did so, his or her income tax return

would be required to contain “a good faith estimate” of the amounts that would appear on the K-

1 statement). However, the parties dispute whether a property owner must report an adjustment

of the amount of passive activity losses incurred in a particular year after the federal income tax

return for that year has been filed. Compare id. at 125 (Gullotta) (reflecting Richard Gullotta’s

averment that there is no requirement to notify the Internal Revenue Service when adjusting a

passive activity loss to be carried forward to the following year), with id. at 1264

(Krabbenschmidt) (reflecting Mr. Krabbenschmidt’s averment that the Internal Revenue Service

“typically . . . likes to see you file an amended tax return to properly report” passive activity

losses).

6

Richard Gullotta mistakenly testified that he would be ninety-three years old in 2035,

Tr. 89 (Gullotta), a minor discrepancy.

-8-

for 2011 through 2013). They also reported a $17,750 passive activity loss, $5,253 of which was

carried forward from the previous year and all of which was attributable to the operation of

Sonoma Village Apartments. JX 55 at 21-22. Eric Gullotta is a tax attorney, id. at 5, and

“started his own law practice in approximately 2011,” Tr. 1205 (Krabbenschmidt). For the first

four years of his new law practice, he “had almost an . . . equal amount of operating expenses

offsetting [the law practice’s] gross income.” Id. at 1205-06; accord DX 17. Indeed, in 2014,

Eric Gullotta’s law practice had gross income of $293,924, expenses of $282,626, and profits of

$11,298. JX 55 at 5. He attributed the law practice’s high amount of expenses to the cost of

starting a new law practice, and did not expect that the costs would be so high in the future. Tr.

1206 (Krabbenschmidt). Eric Gullotta’s wife is a realtor, and in 2014 she reported gross receipts

of $59,320, expenses of $43,813, and profits of $15,507. JX 55 at 7. The couple has three

children. Id. at 1.

Karen Kass and her husband reported an adjusted gross income of $72,841 on their 2015

federal income tax return. JX 72 at 1; see also DX 19 (indicating that the couple’s adjusted gross

income was $110,244 in 2013 and $45,743 in 2014); JX 68 at 1 (reflecting, on Karen Gullotta’s

2011 federal income tax return, a filing status of “single” and an adjusted gross income of

$84,922); JX 69 at 1 (reflecting, on Karen Gullotta’s 2012 federal income tax return, a filing

status of “single” and an adjusted gross income of $92,618). They also reported a $12,497

passive activity loss, all of which was carried forward from the previous year and was

attributable to the operation of Sonoma Village Apartments. JX 72 at 18-19. Karen Kass is an

attorney and her husband is an accountant.7 Id. at 2. The couple has one child. Id. at 1.

The trial record lacks any evidence concerning the financial situation of the remaining

partner, Mr. Parasol.

Plaintiff’s financial statements are audited annually by “[a]n independent CPA firm.” Tr.

60-61 (Gullotta). The firm provides its certified audits to the government, and the government

has never identified any problems with the certified audits. Id. at 61. The firm also prepares

plaintiff’s income tax returns, and Richard Gullotta relies on those returns when preparing his

and his children’s income tax returns. Id.

7

Defense counsel represented to a testifying witness that Karen Kass stated during her

deposition that she was not currently working, but planned on going back to work. Tr. 813.

However, Karen Kass did not testify during trial, nor was her deposition testimony offered into

evidence. In addition, defense counsel twice represented to testifying witnesses that Karen

Kass’s husband stated during his deposition that he would be taking the CPA examination and, if

he became a CPA, expected his income to increase. Id. at 808-09, 1213. However, Mr. Kass did

not testify during trial, nor was his deposition testimony offered into evidence.

-9-

C. Sonoma Village Apartments

The low- and moderate-income housing project that plaintiff constructed with the

proceeds of the Farmers Home Administration loan–Sonoma Village Apartments–is a thirty-unit

apartment complex consisting of fourteen one-bedroom/one-bathroom units, eight two-

bedroom/one-bathroom units, four three-bedroom/one-bathroom units, and four three-

bedroom/one-and-one-half-bathroom units.8 Id. at 1009 (Weinberg); Jt. Stip. ¶¶ 1, 12; PX 54 at

2, 99. Its neighborhood–an area of the Sonoma Valley region situated between the town of

Sonoma and a corridor containing wineries and vineyards–is oriented toward lower-income

housing. Tr. 169-70 (Burwell). Historically, Sonoma Village Apartments has no vacancies and

there is always a waiting list for its units. Id. at 195.

The property manager for Sonoma Village Apartments is AWI Management Corporation

(“AWI”), which is owned by Tina Williams and her husband. Id. at 342-43, 345 (Williams).

Ms. Williams has managed Sonoma Village Apartments since its inception. Id. at 345. Indeed,

Ms. Williams has managed affordable multifamily housing properties since 1983, and at the time

of trial, simultaneously managed 135 such properties, including ten properties owned by Richard

Gullotta. Id. at 342-43; see also id. at 344 (indicating that Ms. Williams has managed

approximately eighty Rural Development properties). Additionally, she managed two rural

market-rate rental properties–a fifty-unit complex in Middletown, California, and a twenty-unit

complex in Weaverville, California–for a period of approximately five years beginning in 2009.

Id. at 373-75. Due to the work involved in complying with the extensive requirements of the

section 515 program, AWI’s management services are more costly than the management services

provided for market-rate rental housing. Id. at 351. At the time of trial, AWI charged plaintiff

$52 per unit, id., an amount approved by Rural Development based on a biennial survey

conducted by its national office, id.; accord id. at 852 (Pedrotti).

If plaintiff were allowed to prepay the balance of its loan, Richard Gullotta would

personally manage Sonoma Village Apartments; he would have an employee on site to handle

tenant complaints and would use contractors to handle maintenance issues. Id. at 83-84

(Gullotta). Additionally, plaintiff would make certain capital improvements to reduce its

ongoing repair and maintenance costs. Id. at 84-85. Indeed, had Rural Development accepted

plaintiff’s tender of prepayment in 2011, plaintiff would have incurred expenses of $378,424 to

renovate the property, including $25,000 for reroofing, $73,824 for exterior painting and repairs,

$54,600 for repaving the parking area, and $225,000 ($7,500 per unit) for interior upgrades. Jt.

Stip. ¶ 15. During these renovations, plaintiff would experience a decrease in rental income. Id.

¶ 16.

8

Although the parties jointly stipulated that Sonoma Village Apartments included four

three-bedroom/two-bathroom units, Jt. Stip. ¶ 12, the evidence in the trial record reflects that

these four units each contained only one-and-one-half bathrooms, PX 54 at 99-100; Tr. 1009

(Weinberg).

-10-

Finally, under the current tenants’ leases, plaintiff would be required to provide at least

sixty days advanced notice of a rent increase. Tr. 854 (Pedrotti). If, after the notice period, a

tenant failed to pay rent, then plaintiff could initiate eviction proceedings. Id. at 854-55.

D. The April 11, 2011 Appraisal Report

In conjunction with plaintiff’s request to prepay the balance of its loan, Rural

Development commissioned an appraisal of Sonoma Village Apartments to determine what its

market value might be as conventional unsubsidized housing. PX 54 at 25. The appraisal was

conducted by two appraisers from the Howard Levy Appraisal Group, Inc., id. at 5, both of

whom were licensed in California as certified general appraisers and one of whom held an MAI

designation,9 id. at 7. Their report, issued on April 11, 2011 (“the Levy appraisal”), was

reviewed and approved by Rural Development. Id. at 2-3, 5.

The appraisers analyzed Sonoma Village Apartments using two approaches. Id. at 54, 63.

One, the sales comparison approach,

is based upon the assumption that an informed purchaser will pay no more for a

property than the cost of acquiring an existing property of the same utility. This

approach estimates market value by comparing the sales prices of recent similar

transactions with the various attributes of the property under appraisement. Any

dissimilarities are resolved by making appropriate adjustments. These differences

may pertain to time, age, location, construction, condition, size or external

economic factors.

Id. at 62. Under this approach, the appraisers compared Sonoma Village Apartments to eight

similar properties in Sonoma County that had then recently sold,10 id. at 79-92, and concluded

that Sonoma Village Apartments would be worth $100,000 per unit, or $3,000,000 total, id. at

91-92, 108.

The second approach used by the appraisers, the income approach,

converts the anticipated future benefits of property ownership (dollar income) into

an estimate of present value. The Income Approach is generally selected as the

9

To obtain an MAI designation, an appraiser must have a certain amount of experience

(which is peer-reviewed over a four-year period), pass a comprehensive examination, and submit

a demonstration appraisal report. Tr. 162 (Burwell). Only approximately 6500 appraisers

possess the MAI designation. Id. at 163.

10

One property was located in Rohnert Park, four properties were located in Santa Rosa,

and three properties were located in Sonoma. PX 54 at 79-86. Six of the properties sold in 2010,

one property sold in 2009, and the remaining property sold in late 2008. Id.

-11-

preferred technique for income-producing properties because it most closely

reflects the investment rationale and strategies of typical buyers. To utilize the

Income Approach, the appraiser must project net income, select an appropriate

capitalization rate and then capitalize the net income into value, applying the

proper discounting procedure.11

Id. at 62 (footnote added); accord id. at 93. The specific steps involved in this approach are:

First, a market rent is determined for the subject property based upon recent

rentals in the market area. Then, vacancy and expenses are deducted to arrive at a

net operating income which is divided by the capitalization rate to arrive at the

market value.

Id. With respect to the market rent element of the analysis, the appraisers determined the

reasonable market rents for each unit type at Sonoma Village Apartments:

Monthly

Unit Type Market Rent

1 Bed/1 Bath $850

2 Bed/1 Bath $1,000

3 Bed/1 Bath $1,100

3 Bed/1.5 Bath $1,175

Id. at 99-100. Thus, after adding an amount for miscellaneous income, the appraisers projected

that the property would generate annual gross income of $358,800. Id. at 11, 100, 107.

11

The capitalization rate is the rate of return for a property based on the property’s

income, Tr. 206, 209 (Burwell), and is “used by appraisers to estimate the fair market value of a

property at any given time,” id. at 500 (Ben-Zion). Specifically, the capitalization rate for a

particular property is the net income of the property (before debt service) divided by the

property’s purchase price. Id. at 201 (Burwell); see also PX 42 (indicating the capitalization rates

for major apartment complex sales in Sonoma Valley for 2010 through 2015, which ranged from

an average of 6.4% in 2011-2012 to an average of 5.47% in 2014-2015); Tr. 949 (Weinberg)

(defining “debt service” as the amount needed “to cover the cost of [a] mortgage”). Thus, to

estimate a capitalization rate for a property, one analyzes sales of comparable properties. PX 54

at 93; Tr. 500 (Ben-Zion). The capitalization rate is “a reflection of what the market thinks at the

time is a fair return to the invested capital and a risk factor.” Tr. 494 (Ben-Zion); accord id. at

494-95 (indicating that “whenever one uses a cap[italization] rate into the future, since the future

is unknown, it’s appropriate to use a cap[italization] rate that contains both the risk and

uncertainty about the future and the interest rate”).

-12-

Accounting for projected vacancies and credit losses (using a standard 5% vacancy factor), id. at

101, 107, the appraisers determined that the property’s annual effective gross income would be

$340,860, id. at 107. The appraisers then projected the property’s operating expenses and

reserves using historical data from the property and actual expenses incurred by comparable

properties in Sonoma County.12 Id. at 101-03; see also id. at 101 (indicating that the appraisers

“utilized information on expenses” from the Institute for Real Estate Management (“IREM”)

“[a]s an additional aid in determining reasonable expense projections”), 101-03 (reflecting that

the projected operating expenses did not include debt service). They concluded that the

property’s annual total expenses would be $145,120, which is 43% of effective gross income. Id.

at 103, 107; see also id. at 103 (“The subject’s total expenses equate to 43% of [effective gross

income] while the comparable sales showed a range of 32% to 45% of [effective gross income].

The subject’s projected expense ratio is within the range provided by the comparables, albeit

toward the high end, and is thus considered reasonable.”). Upon subtracting the total expenses

from the effective gross income, the appraisers projected that the property would generate annual

net income of $195,740. Id. at 11, 107. Finally, the appraisers determined that an appropriate

capitalization rate was 6.5%, id. at 103-07, and, upon applying this rate to the property’s

projected annual net income, concluded that the property’s value under the income approach

would be $3,010,000, id. at 11, 107.

Ultimately, because investors would give more weight to a value determined under an

income approach, and because the value determined under the sales comparison approach

supported that value, the appraisers concluded: “The hypothetical market value of the leased fee

interest of the subject property, based on the condition that the improvements comprise

conventional unsubsidized market rate housing, and assuming stabilized occupancy at market

rents, as of April 11, 2011, is therefore estimated to be $3,010,000.”13 Id. at 108.

12

Two of the properties were located in Sonoma, one property was located in Petaluma,

and the remaining property was located in Santa Rosa. PX 54 at 101.

13

During trial, Richard Gullotta provided his lay opinion, pursuant to Rule 701 of the

Federal Rules of Evidence, that if Sonoma Village Apartments was a market-rate rental property,

it would be worth between $200,000 and $250,000 per unit–between $6,000,000 and $7,500,000

in total. Tr. 86-88 (Gullotta). He further testified that, in his opinion, Sonoma Village

Apartments, as a subsidized housing complex, was worthless. Id. at 86-87. In contrast, Sandra

Pedrotti, Rural Development’s area specialist who oversees approximately twenty-five section

515 properties in northern California, id. at 842-43 (Pedrotti), testified that there is an active

market for section 515 properties, including Sonoma Village Apartments, and that half of the

properties in her portfolio had transferred to new owners, id. at 853, 858-59; see also id. at 861

(reflecting that Ms. Pedrotti had “no idea” what Sonoma Village Apartments was worth). One of

defendant’s experts agreed with Ms. Pedrotti that there is an active market for section 515

properties, including for Sonoma Village Apartments. Id. at 910-11 (Weinberg). The court is

nonetheless aware, as defense counsel acknowledged during closing arguments, that purchasers

of these properties make their purchases for the tax write-offs. See Tr. 1529.

-13-

II. PROCEDURAL HISTORY

Plaintiff filed suit in the United States Court of Federal Claims (“Court of Federal

Claims”) on November 27, 2013, alleging that Rural Development improperly refused its request

to prepay the balance of its loan. Plaintiff thereafter filed an amended complaint in which it

asserted two claims for relief: breach of contract and a violation of the Takings Clause of the

Fifth Amendment to the United States Constitution. In its prayer for relief, plaintiff sought

monetary damages for defendant’s alleged breach of contract, just compensation for defendant’s

alleged taking, prejudgment interest as permitted by law, and any additional relief the court

deemed just and proper.

After the parties concluded fact discovery, plaintiff filed a motion for partial summary

judgment as to the government’s liability for breach of contract and defendant filed a motion to

dismiss plaintiff’s Fifth Amendment takings claim. In its December 30, 2015 Opinion and

Order, the court granted both motions. Sonoma Apartment Assocs. v. United States, 124 Fed.

Cl. 595 (2015). As a result, the sole remaining issue was the amount of damages, if any, due

plaintiff for the government’s breach of contract.

On May 2, 2016, the parties exchanged expert reports on the issue of damages. The

report of one of plaintiff’s experts contained a new claim for a “tax neutralization payment”–a

payment to neutralize the negative tax consequences of receiving a lump-sum damages award.

Shortly after receiving this report, defendant filed a motion for partial summary judgment,

contending that plaintiff could not recover such a payment. The court denied defendant’s motion

in its August 24, 2016 Opinion and Order, concluding that the award of a tax neutralization

payment was not barred as a matter of law and that plaintiff was therefore entitled to present

evidence on the issue at trial. Sonoma Apartment Assocs. v. United States, 127 Fed. Cl. 721

(2016).

The parties and the court toured Sonoma Village Apartments on October 18, 2016, after

which the court conducted a seven-day trial. During its case-in-chief, plaintiff presented the

testimony of Richard Gullotta, Ms. Williams, and two expert witnesses–Dana Burwell, a certified

general appraiser, and Barry Ben-Zion, Ph.D., an economist.14 Defendant, during its case-in-

chief, presented the testimony of Ms. Pedrotti and two expert witnesses–Brad Weinberg, a

14

The court qualified Mr. Burwell, without objection, “as an expert in the field of

appraisal to testify about the elements of discounted cash flow analysis as well as renovation

costs and rent loss during the conversion period.” Tr. 165. The court qualified Dr. Ben-Zion,

over defendant’s objection, id. at 408, 415, as an expert who could perform “a damage

calculation based on forensic economic concepts” and who would opine on “[a]ll of plaintiff’s

economic damages including tax neutralization,” id. at 416-17.

-14-

certified general appraiser and certified valuation analyst, and Jon Krabbenschmidt, a CPA.15

Plaintiff presented rebuttal testimony from Dr. Ben-Zion.

After trial, the parties submitted posttrial memoranda and orally presented closing

arguments. In its opening posttrial memorandum, plaintiff asserts that the court could

compensate it for the government’s breach of contract in one of two ways. Plaintiff’s preference

is for the court to declare that the government’s breach excuses plaintiff’s future performance

under the contract, and to award it monetary damages for the period between the date of breach

(January 3, 2011) and the date of trial (estimated to be December 31, 2016).16 Alternatively,

plaintiff requests that the court award it monetary damages consisting of past damages for the

period between the date of the government’s breach and the date of trial, future damages for the

period between the date of trial and the date that the loan agreement will expire (October 27,

2035), and a tax neutralization payment. The court begins by addressing plaintiff’s request for

nonmonetary relief.

III. NONMONETARY RELIEF

As plaintiff correctly notes, “[i]n general the same contract law is applied when the

government is party to a contract as applies to contracts between private parties.” Ace

15

The court qualified Mr. Weinberg, without objection, “as an expert in the field of

appraisal and valuation of multifamily real estate, the calculation of discounted cash flows, and

the analysis of plaintiff’s damages . . . .” Tr. 869. The court qualified Mr. Krabbenschmidt,

without objection, “as an expert in the field of tax calculation as well as the calculation of tax

gross-ups in particular.” Id. at 1174.

16

Although plaintiff does not specifically request that the court declare that the

government’s breach of contract excuses plaintiff’s future performance under the contract, it

devotes an entire section of its opening posttrial memorandum to arguing that it has the right to

cease performance under the contract in light of defendant’s breach. Moreover, plaintiff’s

posttrial memoranda contain multiple suggestions that the court should make the requested

declaration. See, e.g., Pl.’s Posttrial Memo. 1 (“What is disputed in this case is whether

[plaintiff’s] future performance is excused . . . .”), 2 (“[I]f the Court orders that [plaintiff’s]

obligation to perform under the contract in the future is excused by the Government’s breach,

only damages up to the date of trial need be awarded by the Court.”), 46 (“[Plaintiff] seeks to be

permitted to exercise the normal right of a non-breaching party to cease performance under a

contract. It seeks past and (if necessary) future damages.”), 47 (“If the Court finds that [plaintiff]

is required to continue performing under the contract despite the Government’s breach, [plaintiff]

requests an award of . . . future damages . . . .”); Pl.’s Posttrial Reply 32 (“Unless the Court

acknowledges [plaintiff’s] right as a non-breaching party to cease performing, Plaintiff will now

operate Sonoma Village Apartments as an indentured servant of the Government until 2035, at a

tremendous loss.”). Accordingly, the court construes plaintiff’s arguments and suggestions as a

request for the aforementioned declaration.

-15-

Constructors, Inc. v. United States, 499 F.3d 1357, 1360 (Fed. Cir. 2007). Thus, just as with any

contract between private parties, if the government breaches a contract, the nonbreaching party

has the right to cease performance. Stone Forest Indus., Inc. v. United States, 973 F.2d 1548,

1550 (Fed. Cir. 1992); Malone v. United States, 849 F.2d 1441, 1446 (Fed. Cir. 1988). However,

in this case, the government refused to accept plaintiff’s tender of the balance of the loan,

effectively requiring plaintiff to continue performance. Plaintiff therefore requests a declaration

from this court that it is entitled cease performance. Unfortunately for plaintiff, its request runs

up against this court’s jurisdictional limitations.

The Court of Federal Claims possesses jurisdiction to entertain claims for breach of

contract against the United States. 28 U.S.C. § 1491(a)(1) (2012); Loveladies Harbor, Inc. v.

United States, 27 F.3d 1545, 1554 (Fed. Cir. 1994) (en banc). However, except in a limited

number of statutorily defined circumstances not relevant here,17 the court cannot award

nonmonetary equitable relief. See Bowen v. Massachusetts, 487 U.S. 879, 905 & n.40 (1988);

Gonzales & Gonzales Bonds & Ins. Agency, Inc. v. Dep’t of Homeland Sec., 490 F.3d 940, 943

(Fed. Cir. 2007); Kanemoto v. Reno, 41 F.3d 641, 644-45 (Fed. Cir. 1994). Plaintiff’s request

for a declaration that it is entitled to cease contract performance is, in essence, a request for

specific performance because plaintiff can only cease performance if it pays the balance of the

loan, and Rural Development will not accept the payment tendered by plaintiff as contractually

required without a court order. Specific performance is an equitable remedy. Texas v. New

Mexico, 482 U.S. 124, 131 (1987). As such, it cannot be ordered by this court. See also Glidden

Co. v. Zdanok, 370 U.S. 530, 557 (1962) (Harlan, J., plurality opinion) (“From the beginning

[the United States Court of Claims, the predecessor to the Court of Federal Claims,] has been

given jurisdiction only to award damages, not specific relief.”); Larson v. Domestic & Foreign

Commerce Corp., 337 U.S. 682, 704 (1949) (holding that “in the absence of a claim of

constitutional limitation,” specific “relief cannot be had against the sovereign”); District of

Columbia v. Barnes, 197 U.S. 146, 152 (1905) (noting that the United States Court of Claims

was “unable to grant a decree for specific performance, or exercise the peculiar powers of a court

of equity”); United States v. Jones, 131 U.S. 1, 14-19 (1899) (holding that the Tucker Act does

not authorize suits “for equitable relief by specific performance”); Massie v. United States, 226

F.3d 1318, 1321-22 (Fed. Cir. 2000) (noting that the Court of Federal Claims lacks the ability to

direct specific performance).

Moreover, the decisions relied upon by plaintiff for the proposition that courts have

directed specific performance do not control the result in this case. Those decisions concerned

17

See 28 U.S.C. § 1491(a)(2) (providing the court with jurisdiction to issue, “as incident

of and collateral to” an award of money damages, “orders directing restoration to office or

position, placement in appropriate duty or retirement status, and correction of applicable

records”); id. (providing the court with jurisdiction to render judgment in nonmonetary disputes

arising under the Contract Disputes Act of 1978); id. § 1491(b)(2) (providing the court with

jurisdiction to award declaratory and injunctive relief in bid protests); id. § 1507 (providing the

court with jurisdiction to issue declaratory judgments under 26 U.S.C. § 7428).

-16-

the claims of at least seventeen other owners of rural low- and moderate-income housing projects

whose attempts to prepay the balance of their loans were rebuffed by the government. See

generally Atwood-Leisman v. United States, 72 Fed. Cl. 142 (2006). Two of the owners–

Kimberly Associates and Atwood-Leisman–filed suit in both the Court of Federal Claims and the

United States District Court for the District of Idaho.18 Id. at 146-47, 147 n.10. In their suit in

the Court of Federal Claims, the owners sought only monetary damages for the government’s

breach of contract, both for damages incurred up until they filed suit and for damages they would

continue to incur. See 2d Amend. Compl. Prayer for Relief ¶ 1, Atwood-Leisman, 72 Fed. Cl. at

142 (No. 98-815C). By comparison, in their district court suits, the owners sought orders

directing the government to accept their prepayments and quieting title to their properties. See

Atwood-Leisman, 72 Fed. Cl. at 146, 147 n.10; Kimberly Assocs. v. United States, No. 98-83,

slip op. (D. Idaho Dec. 12, 2002), aff’d, 109 F. App’x 138 (9th Cir. 2004) (indicating that the

government voluntarily dismissed its appeal and affirming the district court’s denial of a motion

to intervene); Atwood-Leisman v. United States, No. 98-416, slip op. (D. Idaho Nov. 18, 2002);

see also 2d Amend. Compl. ¶ 36, Atwood-Leisman, 72 Fed. Cl. at 142 (No. 98-815C) (reflecting

the owners’ recognition that although their suits to quiet title were properly brought in the district

court, they could only be made whole by filing a breach-of-contract suit for money damages in

the Court of Federal Claims). The district court possessed the authority to grant the relief

requested by the owners pursuant to 28 U.S.C. § 2410(a), which provides that “the United States

may be named a party in any civil action or suit in any district court . . . to quiet title to . . . real or

personal property on which the United States has or claims a mortgage or other lien.” See also

Kimberly Assocs. v. United States, 261 F.3d 864, 868 (9th Cir. 2001) (holding that the claim of

Kimberly Associates was cognizable under 28 U.S.C. § 2410); Kimberly Assocs., No. 98-83, slip

op. (granting the requested relief); Atwood-Leisman, No. 98-416, slip op. (granting the requested

relief). The Court of Federal Claims is not a district court. Ledford v. United States, 297 F.3d

1378, 1382 (Fed. Cir. 2002) (per curiam); accord 28 U.S.C. § 451 (defining “district court” as

those courts described in chapter 5 of title 28 of the United States Code); Lightfoot v. Cendant

Mortg. Corp., 137 S. Ct. 553, 563 (2017) (distinguishing between “the Court of Federal Claims”

and “federal district courts”). Accordingly, it lacks the authority to grant the type of equitable

relief that the district court granted to Kimberly Associates and Atwood-Leisman.19 Accord

Dwen v. United States, 62 Fed. Cl. 76, 80 (2004) (“Plainly stated, the court is without

jurisdiction to entertain a stand alone claim to quiet title.”).

Finally, plaintiff’s statement that “nothing prevents the court from acknowledging that,

under settled law, [plaintiff] has the right not to continue to perform in the face of the

Government’s breach,” Pl.’s Posttrial Reply 21, is not well taken. An “acknowledgment” that

18

Kimberly Associates and Atwood-Leisman were plaintiffs in the same Court of

Federal Claims suit, but were plaintiffs in separate district court suits.

19

If plaintiff desired the type of relief obtained by Kimberly Associates and Atwood-

Leisman, it could have filed a quiet title action in district court and a companion suit in the Court

of Federal Claims for money damages.

-17-

plaintiff has the right to cease performance is tantamount to a declaratory judgment, which, as

explained above, the court is without authority to issue. Moreover, such an “acknowledgment” is

unnecessary for the court to grant plaintiff the other relief that it seeks–an award of money

damages.

In sum, the court declines plaintiff’s invitation to award it the nonmonetary equitable

relief it describes in its posttrial memoranda.20

IV. EXPECTANCY DAMAGES

Shifting to plaintiff’s request for monetary relief, the court first reviews plaintiff’s request

for $6,072,317 in expectancy damages, namely, the profits it has and will lose as a result of the

government’s breach of contract: $897,209 for the period between the date of the breach and the

date of trial, and $5,175,108 for the period between the date of trial and the date that the loan

agreement will expire. Defendant contends that plaintiff has not met its burden of proving the

claimed expectancy damages, and that the evidence in the trial record instead reflects that

plaintiff is entitled to expectancy damages of $1,090,000.

A. Legal Standards

1. Expectancy Damages

“The general rule in common law breach of contract cases is to award damages that will

place the injured party in as good a position as he or she would have been [in] had the breaching

party fully performed.” Estate of Berg v. United States, 687 F.2d 377, 379 (Ct. Cl. 1982). “One

way the law makes the non-breaching party whole is to give him the benefits he expected to

receive had the breach not occurred.” Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374,

1380 (Fed. Cir. 2001). These expected benefits–expectancy damages–“are recoverable provided

they are actually foreseen or reasonably foreseeable, are caused by the breach of the promisor,

and are proved with reasonable certainty.” Bluebonnet Sav. Bank, F.S.B. v. United States, 266

F.3d 1348, 1355 (Fed. Cir. 2001); accord Fifth Third Bank v. United States, 518 F.3d 1368,

1374-75 (Fed. Cir. 2008).

In this case, expectancy damages can be measured in two ways: by “the market value of a

lost income-producing asset (‘lost asset’ or ‘lost asset value’ damages),” or by the “future lost

profits that could have been derived from the lost income-producing asset (‘lost profits’

damages).” Anchor Sav. Bank, FSB v. United States, 597 F.3d 1356, 1369 (Fed. Cir. 2010);

accord First Fed. Lincoln Bank v. United States, 518 F.3d 1308, 1317 & n.4 (Fed. Cir. 2008)

20

Plaintiff’s request for nonmonetary equitable relief is also problematic because, as

defendant notes, plaintiff did not set forth such relief in its amended complaint, and the court had

previously advised plaintiff–during a telephonic status conference and in a subsequent order–that

it lacked jurisdiction to grant such relief. See Order, Sept. 29, 2014.

-18-

(distinguishing between the lost value of an asset and the lost earnings from that asset); Spectrum

Scis. & Software, Inc. v. United States, 98 Fed. Cl. 8, 14 (2011) (“Although both forms of

damages–lost profits and the value of a lost asset–are often pursued alternatively in the same

case, they are different, particularly in terms of their respective proof demands.”). With respect

to the former approach, “[t]he market value of income-generating property reflects the market’s

estimate of the present value of the chance to earn future income, discounted by the market’s

view of the lower future value of the income and the uncertainty of the occurrence and amount of

any future property.” First Fed. Lincoln Bank, 518 F.3d at 1317. With respect to the latter

approach, lost profits are “a recognized measure of damages, where their loss is the proximate

result of the breach and the fact that there would have been a profit is definitely established, and

there is some basis on which a reasonable estimate of the amount of the profit can be made.”

Neely v. United States, 285 F.2d 438, 443 (Ct. Cl. 1961). “‘When the defendant’s conduct

results in the loss of an income-producing asset with an ascertainable market value, the most

accurate and immediate measure of damages is the market value of the asset at the time of

breach–not the lost profits that the asset could have produced in the future.’” First Fed. Lincoln

Bank, 518 F.3d at 1317 (quoting Schonfeld v. Hilliard, 218 F.3d 164, 176 (2d Cir. 2000)).

However, there is no requirement that expectancy damages be measured using the lost asset

approach instead of the lost profits approach. Anchor Sav. Bank, FSB, 597 F.3d at 1369.

“If a reasonable probability of damage can be clearly established, uncertainty as to the

amount will not preclude recovery.” Locke v. United States, 283 F.2d 521, 524 (Ct. Cl. 1960);

see also Energy Capital Corp. v. United States, 302 F.3d 1314, 1325 (Fed. Cir. 2002) (“To

recover lost profits for breach of contract, the plaintiff must establish by a preponderance of the

evidence that . . . a sufficient basis exists for estimating the amount of lost profits with

reasonable certainty.” (citation omitted)). Indeed, “[t]he ascertainment of damages is not an

exact science, and where responsibility for damage is clear, it is not essential that the amount

thereof be ascertainable with absolute exactness or mathematical precision.” Bluebonnet Sav.

Bank, F.S.B, 266 F.3d at 1355; accord Specialty Assembling & Packing Co. v. United States,

355 F.2d 554, 572 (Ct. Cl. 1966) (per curiam). Thus, a court may award damages if “a

reasonable basis of computation is afforded” and “the evidence adduced enables the court to

make a fair and reasonable approximation of the damages.” Locke, 283 F.2d at 524; accord

Specialty Assembling & Packing Co., 355 F.2d at 572; cf. Fifth Third Bank, 518 F.3d at 1378-79

(“We [have] interpreted the ‘reasonable certainty’ standard to apply only to the fact of damages,

after which the court may ‘make a fair and reasonable approximation of the damages.’” (quoting

Bluebonnet Sav. Bank, F.S.B, 266 F.3d at 1357)). Further, in determining the amount of

damages, a court “may act upon probable and inferential as well as direct and positive proof.”

Locke, 283 F.2d at 524; see also Fifth Third Bank, 518 F.3d at 1375 (noting that in breach-of-

contract cases, “proof of damages to a reasonable certainty” is an issue of fact); Cal. Fed. Bank,

FSB v. United States, 245 F.3d 1342, 1350 (Fed. Cir. 2001) (“Both the existence of lost profits

and their quantum are factual matters . . . .”).

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2. Date for Calculating Damages

Damages for breach of contract are typically measured as of the date when performance

was due, which is often “the date of breach.” Energy Capital Corp., 302 F.3d at 1330. For

example, when the nonbreaching party is claiming “damages for lost income-producing

property,” such damages are

properly determined as of the time the property is lost (usually the time of the

breach) because the market value of the lost property reflects the then-prevailing

market expectation as to the future income potential of the property, and it is

precisely this opportunity that the nonbreaching party has lost.

First Fed. Lincoln Bank, 518 F.3d at 1317. This “rule does not apply, however, to anticipated

profits or to other expectancy damages that, absent the breach, would have accrued on an

ongoing basis over the course of the contract. In those circumstances, damages are measured

throughout the course of the contract.” Energy Capital Corp., 302 F.3d at 1330. Consequently,

“[a] court may consider post-breach evidence when determining damages in order to place the

non-breaching party in as good a position as he would have been [in] had the contract been

performed.” Fifth Third Bank, 518 F.3d at 1377; accord Anchor Sav. Bank, FSB, 597 F.3d at

1369-70; see also Fifth Third Bank, 518 F.3d at 1377 (holding that “it was appropriate, and

certainly not clear error, for the [Court of Federal Claims] to consider the improved markets for

conversion and branch sales” that occurred after the government’s breach of contract “to

compensate [the plaintiff] for the damage sustained” from being forced to convert “to stock

ownership” and sell one of its divisions); Fishman v. Estate of Wirtz, 807 F.2d 520, 551-52 (7th

Cir. 1986) (affirming the district court’s valuation of a going concern, which was based on the

concern’s gains in the ten-year period following the date of injury, and noting that it “[knew] of

no case that suggests that a value based on expectation of gain is more relevant and reliable than

one derived from actual gain”); Neely, 285 F.2d at 443 (concluding, in a case in which the

government breached a contract that allowed plaintiff to mine coal on certain land, that the

profits subsequently realized by another entity from strip-mining that land “would furnish some

basis for a fairly reliable estimate of what plaintiff’s profits would have been”); Restatement

(Second) of Contracts § 352 cmt. b, illus. 6 (Am. Law Inst. 1981) (noting, in a situation where

the breaching party failed to construct facilities for a new business within the time provided for

in the contract, that the nonbreaching party could attempt to prove its lost profits with records of

the new business’s “subsequent operation and the operations of similar” businesses); cf. Sinclair

Ref. Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 698 (1933) (remarking that when a

court is “measuring the damages for a breach of contract” and “years have gone by before the

evidence is offered” at trial, “[e]xperience is then available to correct uncertain prophecy”–“not

to charge the offender with elements of value nonexistent at the time of his offense,” but “to

bring out and expose of light the elements of value that were there from the beginning”).

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3. Discounting to Present Value

When “computing the damages recoverable for the deprivation of future benefits, . . .

adequate allowance [must be] made, according to circumstances, for the earning power of

money[.]” Chesapeake & Ohio Ry. Co. v. Kelly, 241 U.S. 485, 491 (1916); accord Jones &

Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 536 (1983) (remarking that when an “award of

damages to replace [a] lost stream of income . . . is paid in a lump sum at the conclusion of the

litigation, and when it–or even a part of it–is invested, it will earn additional money”). Thus,

“where it is reasonable to suppose that interest may safely be earned upon the amount that is

awarded, the ascertained future benefits ought to be discounted in the making up of the award.”

Chesapeake & Ohio Ry. Co., 241 U.S. at 490.

A key factor in discounting a damages award is choosing the appropriate discount rate,

which “is a question of fact.” Energy Capital Corp., 302 F.3d at 1332. “[T]he discount rate

performs two functions: (i) it accounts for the time value of money; and (ii) it adjusts the value

of the cash flow stream to account for risk.” Id.; accord id. at 1331 (noting that “anticipated net

cash flows . . . are . . . discounted to present value to account for both: (i) the time value of

money; and (ii) business and financial risks”). “In a given case, it is for the fact-finder to

determine the method of adjusting for risk which most closely represents the value of damages.”

Id. at 1334.

As a general rule, “[t]o prevent the unjust enrichment of the plaintiff, damages that would

have arisen after the date of judgment . . . must be discounted to the date of judgment.” Id. at

1330. Further, “the risk portion of the discount rate applied to post-judgment lost profits must

also be applied to the lost profits claimed between the time of the breach and judgment.”

Franconia Assocs. v. United States, 61 Fed. Cl. 718, 766 (2004); accord id. (“[W]hile the court

need not reduce to present value the post-breach, pre-judgment lost profits, it must . . . still

reduce those anticipated profits to account for risk, at least in a case such as this, where a

hypothetical transaction is involved.”).

B. The Parties’ Experts

The parties presented the testimony of three experts on the issue of expectancy damages.

Plaintiff’s first expert witness was Mr. Burwell. Mr. Burwell is licensed in California as a

certified general appraiser, and works primarily in Marin, Napa, and Sonoma Counties for a wide

range of clients. PX 40; Tr. 160, 163, 171 (Burwell). He is a member of the Appraisal Institute

and holds an MAI designation. PX 40; Tr. 163 (Burwell). During his career as an appraiser,

which began in 1988, Mr. Burwell has appraised market-rate multifamily dwellings in Sonoma

County between thirty and fifty times. Tr. 163, 171-72 (Burwell). In addition, he has been

qualified to testify as an expert appraiser between ten and fifteen times. Id. at 163-64. Mr.

Burwell was asked to perform the following five tasks: (1) determine the market rents for

Sonoma Village Apartments for 2011, 2012, 2013, 2014, and 2015; (2) estimate the “market rent

over the term of the contract”; (3) determine a discount rate; (4) ascertain the cost of renovating

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the apartments when converted to market-rate apartments; and (5) estimate amounts for repair

and maintenance. Id. at 165-66.

Plaintiff’s second expert witness was Dr. Ben-Zion. Dr. Ben-Zion is an economist who

holds a bachelor’s degree, a master’s degree, and a doctorate in economics, and is currently a

professor emeritus at Sonoma State University. Id. at 390-91 (Ben-Zion); PX 1. During his

thirty-one-year tenure at Sonoma State University, Dr. Ben-Zion taught economics at the

undergraduate and graduate levels, including a graduate-level course–managerial economics–in

which he taught his students how to understand financial statements and tax returns. PX 1; Tr.

391-93, 395 (Ben-Zion). He also conducted research in three areas: regional economic

projections, finding reliable statistics concerning the economy, and forensic economics. PX 1;

Tr. 396-97 (Ben-Zion). With respect to the latter area of research, Dr. Ben-Zion has been

working as a forensic economist since 1972, Tr. 397 (Ben-Zion), and is a member of three

professional organizations for forensic economists, id. at 401-02; PX 1. Further, as a forensic

economist, Dr. Ben-Zion has prepared economic analyses for legal cases “[m]any, many

hundreds of times,” including cases in which an individual has lost the ability to earn income,

cases involving commercial damages, and family law cases in which he has been asked to value

assets, such as a family business.21 Tr. 402-03 (Ben-Zion); accord id. at 408 (reflecting that Dr.

Ben-Zion has prepared between 150 and 200 business valuations, either in breach-of-contract

cases or family law cases); PX 1. Dr. Ben-Zion “was asked to estimate the economic damages”

to plaintiff resulting from its inability to convert Sonoma Village Apartments to a market-rate

rental property due to the government’s breach of contract. Tr. 417-18 (Ben-Zion).

Defendant’s sole expert witness on the issue of expectancy damages was Mr. Weinberg.

Like Mr. Burwell, Mr. Weinberg is licensed in California as a certified general appraiser, is a

member of the Appraisal Institute, holds an MAI designation, and has been previously qualified

as an expert. Id. at 863, 865 (Weinberg); DX 1. Mr. Weinberg is also a certified valuation

analyst. DX 1; Tr. 865 (Weinberg). Currently, he is a partner in the evaluation group at

Novogradac & Company LLP (“Novogradac”), an accounting and consulting firm that

21

Dr. Ben-Zion testified that during the course of providing economic analyses in family

law cases, he has reviewed at least 300 appraisal reports concerning family homes, family-owned

rental properties, and family-owned commercial properties. Tr. 512-13 (Ben-Zion); accord id. at

758. He further testified that he has “some knowledge of the real estate market in Sonoma

County . . . because [he is] an economist who has lived in the county . . . since 1969

continuously,” has been “hired by the county to make economic projections that included

housing demand [and] housing construction,” and has been “asked by the county to analyze the

impact of Proposition 13,” which “limit[ed] the property taxes to a certain percentage of assessed

value” and prevented taxes from increasing “more than 2% per year.” Id. at 513-14. Finally, he

testified that he has “constructed two commercial shopping centers and a rather large office

building and managed them for quite a few years and sold them,” and still has “some rental

property, including one [property] in Sonoma Valley.” Id. at 515. However, Dr. Ben-Zion was

not offered, or qualified, as an expert in real estate.

-22-

specializes in affordable housing. Tr. 862-63 (Weinberg). The evaluation group conducts

market studies and appraisals throughout the country, primarily for multifamily developments.

Id. at 863. Mr. Weinberg has worked for Novogradac for more than twenty years, but he only

recently moved to California to work in its San Francisco office. Id. at 864; accord id. at 992

(indicating that Mr. Weinberg moved to California in June 2016). Approximately 80% of his

work concerns affordable housing, while another 15% of his work concerns market-rate housing.

Id. at 866; see also id. at 909 (noting that he has appraised section 515 properties throughout the

nation for twenty years, for developers and lenders, in both sales and refinancing contexts). He

has conducted approximately twenty appraisals in Sonoma County,22 id. at 992, and “close to

fifty [United States Department of Agriculture] deals in California over the last seven, eight

years,” id. at 1135. In conducting appraisals, Mr. Weinberg is obligated to abide by the Uniform

Standards of Professional Appraisal Practice. Id. at 922-23. Mr. Weinberg “was asked to

determine the quantum of damages related to” plaintiff’s inability to convert Sonoma Village

Apartments to a market-rate rental property due to the government’s breach of contract. Id. at

869.

C. The Parties’ Methodologies and Calculations

The parties take different approaches in calculating plaintiff’s expectancy damages.

Plaintiff measures its damages by the profits it has lost, and will continue to lose, as a result of

Rural Development’s refusal to allow plaintiff to prepay the balance of its loan and exit the

section 515 program. Defendant, in contrast, measures plaintiff’s damages by the value of the

property that plaintiff lost as a result of the government’s breach of contract. Notwithstanding

these distinct approaches, the parties’ calculations share similar elements. First, both parties

calculate what plaintiff’s total net income would be for the duration of the contract under the

status quo, in other words, in light of the government’s breach of contract (“the restricted

scenario”). Second, both parties calculate what plaintiff’s total net income would have been for

the same time period had the government not breached the contract (“the unrestricted scenario”).

Third, both parties compare the restricted scenario to the unrestricted scenario to determine

plaintiff’s loss. Finally, both parties apply a discount rate to ascertain the present value of

plaintiff’s loss. The court describes how each party incorporates these elements into their

approaches, beginning with plaintiff.

1. Plaintiff’s Approach

As previously noted, plaintiff uses the lost profits approach to measure its damages and

separates its lost profits into two distinct time periods: (1) the period between the date of the

government’s breach of contract and the date of trial, for which plaintiff seeks the profits it

actually lost, and (2) the period between the date of trial and the date that the loan agreement will

22

Mr. Weinberg did not specify the types of properties that he appraised in Sonoma

County, in what parts of Sonoma County the properties were located, or when he conducted the

appraisals.

-23-

expire, for which plaintiff seeks its projected lost profits. Accord id. at 418-19, 736 (Ben-Zion).

Dr. Ben-Zion calculated plaintiff’s lost profits for each time period using data provided by

plaintiff, Mr. Burwell, and Ms. Williams, as well as information that he downloaded from the

IREM’s website. Id. passim.

a. Past Lost Profits

i. Restricted Scenario

With respect to the first time period plaintiff specifies, the date of the government’s

breach of contract through the date of trial, Dr. Ben-Zion used data from plaintiff’s financial

statements–both the actual income received and the actual expenses incurred–to determine

plaintiff’s net income in the restricted scenario. Id. at 423, 442-44, 746, 751-52; see also id. at

747 (explaining that the amounts for 2016 are annualized from the actual income received and

expenses incurred during the first quarter of 2016). He concluded that in the restricted scenario,

plaintiff realized total net income of $146,330 for the 2011 to 2016 time period. See id. at 471-

72; PX 52 at 1; PX 53 at 1; see also Tr. 443-44 (Ben-Zion) (specifying plaintiff’s net income for

2011, 2012, 2013, and 2014), 444-45 (characterizing Sonoma Village Apartments as essentially

unprofitable).

ii. Unrestricted Scenario

To calculate net income for the 2011 to 2016 time period in the unrestricted scenario, Dr.

Ben-Zion estimated both the income that plaintiff would have received by charging market rents

and the expenses that plaintiff would have incurred in operating Sonoma Village Apartments as a

market-rate rental property.

Dr. Ben-Zion based his rental income estimates on data provided by Mr. Burwell. PX 52

at 1; PX 53 at 1; Tr. 516, 678, 684, 708, 729 (Ben-Zion). Mr. Burwell, in turn, used data

compiled by Scott Gerber as the basis for calculating the rental income that plaintiff would have

received in the unrestricted scenario. Tr. 166 (Burwell). Mr. Gerber is a commercial real estate

broker who handles multifamily properties in the North Bay market, which includes Sonoma

County. Id. at 166, 168-69, 256. He prepares biannual surveys of rents at multifamily properties

in the North Bay, id. at 174-75; his surveys are “well known” and are “considered the standard

for understanding multifamily trends in the North Bay,” id. at 174; accord id. at 175 (indicating

that “a lot of professionals” rely on Mr. Gerber’s surveys), 259 (“Appraisers rely on commercial

real estate brokers to develop market transactions, rent transactions, [and] sales transactions.”),

322 (“Appraisers rely very strongly on commercial real estate brokers for leads, information on

sales, rent comp[arable]s, [and] investment surveys. . . . [T]hey are involved in the transactions

and they tell us a tremendous amount . . . .”); PX 54 at 43 (reflecting that data from Mr. Gerber’s

rent survey for Sonoma Valley were used in the Levy appraisal). The survey that Mr. Gerber

prepares for the Sonoma Valley market is based on data from seven properties (300 units total),

and specifies the average monthly rent for one-, two-, and three-bedroom units; the average

-24-

square footage of each unit type; the average rent per square foot; and the vacancy rate. Tr. 167-

68 (Burwell), 176-77; accord PX 41.

After obtaining the data from Mr. Gerber’s rent surveys, Mr. Burwell visited the seven

apartment complexes that Mr. Gerber surveyed. Tr. 183 (Burwell). But see id. at 254-55

(reflecting that Mr. Burwell did not visit the apartment complexes or speak with anyone at the

apartment complexes until after he provided his data to Dr. Ben-Zion). He inspected the

properties and spoke with “a couple of on-site managers” and some tenants. Id. Although all of

the properties are older and cater to lower-income households, they differ in the number and

types of amenities provided to tenants. Id. at 185; see also id. at 183-84 (indicating that Mr.

Burwell considered some of the properties to be superior to Sonoma Village Apartments, some

of the properties to be inferior to Sonoma Village Apartments, and the remainder to be roughly

the same as Sonoma Village Apartments); cf. id. at 196-97 (indicating that the utilities paid for

by the landlords at the seven properties and Sonoma Village Apartments were “pretty much the

same”). Mr. Burwell explained that in a sophisticated market, the number and quality of

amenities are priced into rents, but in an unsophisticated market like Sonoma Valley, rents are

not affected by amenities. Id. at 187-88. Accordingly, Mr. Burwell did not adjust the average

rents or average rents per square foot supplied in Mr. Gerber’s rent surveys to account for any

differences in amenities between the seven surveyed properties and Sonoma Village Apartments.

Id.

Thus, for each of the unit types at Sonoma Village Apartments, Mr. Burwell used Mr.

Gerber’s average rent per square foot to calculate the rents that plaintiff could obtain on the open

market for 2011 through 2015.23 Id. at 190-91, 266, 324. Mr. Burwell then reduced those gross

rents to account for possible vacancies using the vacancy rates supplied by Mr. Gerber. Id. at

192. Those adjustments gave Mr. Burwell plaintiff’s effective gross income for each year. Id.

Mr. Burwell’s conclusions are summarized in the following table:

2011 2012 2013 2014 2015

Monthly

Market Rents

1 Bed/1 Bath $946.50 $1003.29 $1003.29 $1066.39 $1173.66

2 Bed/1 Bath $1158.00 $1158.00 $1158.00 $1266.08 $1374.16

3 Bed/1 Bath $1407.60 $1407.60 $1407.60 $1519.80 $1642.20

3 Bed/1.5 Bath $1428.00 $1509.60 $1509.60 $1652.40 $1652.40

23

Plaintiff’s experts did not possess data from Mr. Gerber’s 2016 rent surveys. Tr. 235

(Burwell), 433 (Ben-Zion).

-25-

Monthly Gross $406,289 $419,746 $419,746 $452,963 $487,235

Income24

Vacancy Rate 3.5% 4.1% 1.5% 0.9% 2.4%

Effective Gross $392,069 $402,537 $413,450 $448,886 $475,517

Income

PX 43.

Dr. Ben-Zion used the estimated rents supplied by Mr. Burwell to determine gross rental

income. See PX 52 at 2; PX 53 at 2; Tr. 423, 440, 678-79, 684 (Ben-Zion). However, rather

than using the actual vacancy rates experienced in Sonoma Valley to arrive at an effective gross

income, Dr. Ben-Zion used a uniform 3% vacancy rate for each year.25 PX 52 at 2; PX 53 at 2.

He then further adjusted the estimated gross rental income by adding an estimated amount of

“other income” (2.3% of the gross rental income)–essentially laundry and vending income, Tr.

749 (Ben-Zion)–to project the annual net rental income amounts. PX 52 at 2; PX 53 at 2.

Finally, Dr. Ben-Zion divided the net rental income he estimated for 2011 in half to reflect the

receipt of only six months of market-rate rental income beginning on July 1, 2011.26 See PX 52

at 2; PX 53 at 2; Tr. 441 (Ben-Zion).

Next, Dr. Ben-Zion made an adjustment to account for plaintiff’s costs of making certain

capital improvements to the property and the rental income that plaintiff would lose during such

renovations. PX 52 at 2; PX 53 at 2. He did so by reducing the estimated net rental income for

2011 by the renovation costs–stipulated by the parties to be $378,424, Jt. Stip. ¶ 15–and six

24

Monthly gross income and effective gross income amounts are rounded to the nearest

dollar.

25

Dr. Ben-Zion did not testify regarding the origin of the 3% vacancy rate that he used to

calculate past damages in the unrestricted scenario. However, the trial record as a whole

indicates that he used the 3% “long term market vacancy” rate supplied by Mr. Burwell. See PX

39 (containing some of the information that Mr. Burwell provided to Dr. Ben-Zion); Tr. 194-96

(Burwell) (indicating the basis for the 3% vacancy rate). In fact, it bears noting that 3% is greater

than the average of the actual vacancy rates noted by Mr. Burwell (2.5%).

26

Presumably, Dr. Ben-Zion posited that plaintiff would receive income from restricted

rents from January 1, 2011, to June 30, 2011. Indeed, as explained below, Dr. Ben-Zion

subtracted six months of restricted rental income from 2011’s estimated net rental income to

account for the fact that there would be no tenants at Sonoma Village Apartments for the first six

months of the year. However, the trial record lacks any evidence that Dr. Ben-Zion credited

plaintiff with six months of restricted rental income before he deducted the amount to reflect the

vacancies. See also infra note 27.

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months of lost rental income, which he determined was $144,598.27 PX 52 at 2; PX 53 at 2;

accord Tr. 1366-67 (Ben-Zion); see also id. at 216-18 (Burwell) (reflecting Mr. Burwell’s

conclusions, which he believed were confirmed in part by two apartment complex renovations

that he observed while he was working on this case, that it would take five to six months to

complete the interior renovations, that units would need to be vacant to complete these

renovations, and that no rent would be collected during the renovations), 968 (Weinberg)

(indicating that the $144,598 amount came from Mr. Burwell’s expert report); PX 39 (containing

Mr. Burwell’s conclusion that “[r]ent loss during renovation is 5-6 month[s’] rent loss at contract

rent”).

Dr. Ben-Zion then used two methods to estimate the expenses that plaintiff would have

incurred in the unrestricted scenario. Tr. 446 (Ben-Zion). Under the first method, which he

believed was the more reasonable method, id. at 817, 823-24, Dr. Ben-Zion relied on data

supplied by Ms. Williams, id. at 446, 450; PX 53. At Richard Gullotta’s request, Ms. Williams

estimated the expenses that plaintiff would have incurred operating Sonoma Village Apartments

as a market-rate rental property from 2011 through 2016. Tr. 376-77 (Williams). Ms. Williams

based her estimates on the actual expenses incurred by plaintiff (some of which would be the

same under both the restricted and unrestricted scenarios), information provided by Richard

Gullotta regarding how the property would be managed in the unrestricted scenario, and her

experience in managing multifamily rental properties. Id. at 356-57, 358, 361. The following

table summarizes the bases for Ms. Williams’s estimates:

27

As plaintiff’s counsel confirmed during closing arguments, Tr. 1486-89, it appears that

Dr. Ben-Zion made two adjustments for lost rental income for 2011, effectively double counting

six months of lost income. Initially, when estimating the net rental income that plaintiff would

have received in 2011, Dr. Ben-Zion started with a baseline of six months of net rental income at

market rents ($201,692), rather than a full year of net rental income. See id. at 1365-66 (Ben-

Zion); PX 52 at 2; PX 53 at 2. He then subtracted “[l]ost rent (6 mos.)” ($144,598) from that

amount, which appears to reflect the unrestricted rental income that would be lost due to the

renovations. See PX 52 at 2; PX 53 at 2; Tr. 218 (Burwell) (reflecting Mr. Burwell’s estimate

that it would take “five to six months” to accomplish the renovations and that plaintiff would

lose 100% of the rent for that time period), 441-42, 1364, 1367 (Ben-Zion).

-27-

Expense Item Basis or Bases for Ms. Williams’s Estimate

Operating Expenses

Maintenance and Repairs (1) Richard Gullotta’s representation that he

Payroll would not have any on-site employees, (2) her

knowledge of the state requirement that a

responsible person be available to advise the

owner of any issues, and (3) her personal

experience regarding the amount of a typical

monthly stipend for the responsible person

Maintenance and Repairs Actual expenses, reduced to accommodate

Supply Richard Gullotta’s representation that he would

contract out more maintenance and repair work

Maintenance and Repairs (1) Actual expenses, increased to accommodate

Contract (a) Richard Gullotta’s representation that he

would contract out more maintenance and repair

work and (b) actual experience in turning over an

average of eight apartments per year; and (2) her

“best guess”

Painting Actual experience in turning over an average of

eight apartments per year

Grounds Her knowledge of the cost to hire a third party to

“mow and blow” once per month and trim hedges

once per year

Services (mainly pest Actual expenses

control)

Annual Capital Budget Average of annual actual expenses

Other Operating Expenses Average of annual actual expenses

Utilities

Electricity; Water; Sewer; Actual expenses

Fuel (Oil/Coal/Gas); Trash

Removal

Administrative Expenses

Site Manager Payroll; Richard Gullotta’s representation that he would

Management Fee personally manage the property and not have any

on-site employees

-28-

Legal Average of annual actual expenses

Advertising Average of annual actual expenses

Telephone Actual expenses

Office Supplies Actual expenses, reduced by half to account for

the elimination of paperwork required by Rural

Development

Office Furniture and Average of annual actual expenses

Equipment

Training Actual expenses for a required fair housing

course

Other Administrative Average of annual actual expenses

Expenses

Taxes and Insurance

Real Estate Taxes Actual expenses, but she believes that they would

change in the unrestricted scenario

Other Taxes, Licenses, and Actual expenses, but she believes that they would

Permits change in the unrestricted scenario

Property and Liability Actual expenses, but she believes that they would

Insurance change in the unrestricted scenario

Fidelity Coverage Actual expenses, but she believes that they would

Insurance change in the unrestricted scenario

Id. at 357-72, 380-81, 384-86; PX 10. Ultimately, Ms. Williams estimated amounts for each

expense item save two: Site Manager Payroll and Management Fee. PX 10. For those two

items, she estimated $0 in expenditures due to Richard Gullotta’s representation that he would

personally manage Sonoma Village Apartments. Tr. 380 (Williams); accord id. at 83-84

(Gullotta), 710 (Ben-Zion); cf. id. at 379-80 (Williams) (agreeing that it was a good idea to have

an on-site manager and an on-site maintenance person). In addition, Ms. Williams indicated that

plaintiff would incur expenses for bookkeeping and accounting services, but she could not say

how much those services would cost. Id. at 365-66 (Williams). Dr. Ben-Zion used the amounts

estimated by Ms. Williams in his calculations. Compare PX 10 (Ms. Williams’s estimated

expenses), with PX 53 at 2 (Dr. Ben-Zion’s estimated expenses). He commented, however, that

although he did not include any amounts for a management fee, there is a cost associated with

this item that should be accounted for in the calculation of plaintiff’s lost profits. Tr. 450, 680-

83, 706 (Ben-Zion); see also id. at 679-83 (indicating that Dr. Ben-Zion proposed a $1000

management fee based on his experience managing properties and a monthly amount he was

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recently charged for the management of a small property, but also describing the amount as

“random[]” and acknowledging that he did not know what management companies charge

today). Finally, it bears noting that for 2011, Dr. Ben-Zion divided each expense item in half to

reflect his assumption that expenses would be incurred for only six months that year. Compare

PX 10 (Ms. Williams’s estimated expenses), with PX 53 at 2 (Dr. Ben-Zion’s estimated

expenses). However, he did not make any adjustments based on the likelihood that plaintiff

would incur the full amount of at least some of the expenses–for example, training and real estate

taxes–despite only receiving six months of rental income. Accord Tr. 1156 (Weinberg).

Under the second method of estimating expenses, which he provided as a way to check

the results of the first method, id. at 817, 823 (Ben-Zion), Dr. Ben-Zion relied on information

that he downloaded from the IREM website, id. at 461-62, 716-17; PX 52; cf. Tr. 717 (Ben-Zion)

(indicating that the information downloaded by Dr. Ben-Zion was offered by the IREM for free

as a sample of the information available in the products that they offered for purchase). “IREM

surveys apartment community owners throughout the country and compiles detailed operating

expense information on a per square foot [basis] or as a percent of [projected gross income].”

PX 54 at 101; accord Tr. 423 (Ben-Zion) (explaining that the IREM “provides guidelines of what

percentage expenses you would expect in apartment buildings”). Dr. Ben-Zion downloaded

information for “Anytown, USA,” Tr. 467, 719 (Ben-Zion), which Dr. Ben-Zion assumed

represented the national average, id. at 467, 721; see also id. at 725 (acknowledging that the

downloaded information likely did not include data from Sonoma County). Dr. Ben-Zion did not

know what years the information represented. Id. at 722, 733.

From the “Anytown, USA” information that he downloaded from the IREM website, Dr.

Ben-Zion used the median expense percentages for low-rise apartment complexes with more than

twenty-four units. Id. at 725; see also id. at 725 (acknowledging that the data used by Dr. Ben-

Zion was derived from information concerning thirty-seven buildings with an average of 222

apartments per building). Dr. Ben-Zion represented that this data reflected that on average, net

operating income was 63.3% of gross possible income. Id. at 469-70. He further represented

that the remaining 36.7% of gross possible income reflected expenses; for example, the

management fee was 3.8% of gross possible income. Id. at 470. In estimating plaintiff’s

expenses using the IREM information, Dr. Ben-Zion used the following categories and items of

expenses: management and administrative costs (management fee and other administrative

costs), operating costs (supplies, fuel for heating, electricity, water, gas, building services, other

administrative costs), maintenance (security, ground maintenance, maintenance/repairs, painting

and decorating), real estate taxes, other taxes and permits, insurance, recreational amenities, and

other payroll. PX 52 at 3-9; see also Tr. 728 (Ben-Zion) (reflecting Dr. Ben-Zion’s

acknowledgment that he used expense items that were not applicable to Sonoma Village

Apartments). Applying the percentages associated with each expense item, Dr. Ben-Zion

calculated the annual expenses that plaintiff would have incurred in the unrestricted scenario.

PX 52 at 2. Then, as he did when estimating expenses under the first method, Dr. Ben-Zion

divided each expense item in half for 2011 to reflect his assumption that expenses would be

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incurred for only six months; in doing so, he again did not account for expenses that would be

incurred for the entire year regardless of the amount of income received. Id.

Then, under both methods for estimating expenses, Dr. Ben-Zion added an estimated

interest expense, PX 52 at 2; PX 53 at 2, to account for the “opportunity cost of invested capital,”

Tr. 450 (Ben-Zion). Dr. Ben-Zion explained that if Richard Gullotta proceeded as he intended

and paid the $1.2 million balance of the loan with cash instead of refinancing, he would lose the

opportunity to earn money by investing that cash elsewhere. Id. at 453. Dr. Ben-Zion concluded

that the best–and most conservative–method of accounting for this opportunity cost was to

deduct from plaintiff’s estimated income the interest that plaintiff would have paid if it

refinanced the loan. Id. at 453-54. For his calculations, Dr. Ben-Zion assumed that plaintiff

would have obtained a thirty-year mortgage on July 1, 2011, at a 4.3% interest rate. Id. at 454.

The 4.3% interest rate used by Dr. Ben-Zion was provided by Mr. Burwell.28 Mr.

Burwell, in turn, obtained this interest rate by contacting a local, privately owned, commercial

bank that lends money to apartments. Id. at 219 (Burwell); see also id. at 241-42 (explaining that

“the local bank market is stronger for smaller multifamily properties” while other lenders, such

as life insurance and credit companies, are more likely to finance mortgages for large apartment

properties acquired by institutional investors), 328 (noting that nationwide lending rates for large

institutional properties are not applicable because those properties and their buyers are different

from the type of property and ownership in this case). He was “quoted a lending rate of 4.3% for

a five-year loan with a thirty-year amortization” for 2011. Id. at 219; see also id. at 284-85

(indicating that these were the terms on the bank’s offering sheets, but that Mr. Burwell did not

know whether the bank actually lent money under these terms), 326 (indicating that loan terms

are confidential). Although one other bank was a major lender to apartments in the area, Mr.

Burwell did not contact that bank to obtain their 2011 lending rates. Id. at 285. Nor did Mr.

Burwell use the rates published in the Appraisal Institute’s national magazine, which are similar

to the “national rates for institutional properties” published in the Korpacz survey. Id. at 287; see

also id. at 932-33 (Weinberg) (explaining that the Korpacz survey is a widely used resource that

provides the expected changes in rents and expenses based on a survey of market participants).

However, he noted that the 4.3% interest rate was within the range of rates provided in Mr.

Gerber’s rent survey. Id. at 286, 339 (Burwell); see also id. at 327 (noting that Mr. Gerber’s

position as a broker allows him access to detailed information regarding mortgage interest rates).

28

Although Dr. Ben-Zion did not affirmatively state the source of the interest rate, the

evidence in the trial record reflects that the interest rate was provided by Mr. Burwell. See Tr.

219, 283-84 (Burwell).

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Ultimately, Dr. Ben-Zion calculated the amount that plaintiff’s estimated income should be

reduced each year to reflect the mortgage interest that it would have paid.29 PX 52 at 2; PX 53 at

2.

iii. Total Past Lost Profits

Once he determined plaintiff’s net income for the 2011 to 2016 time period in both the

restricted and unrestricted scenarios, Dr. Ben-Zion subtracted the former from the latter to arrive

at plaintiff’s lost profits. Tr. 471 (Ben-Zion). Using the expense data provided by Ms. Williams,

Dr. Ben-Zion determined that plaintiff would have realized net income of $1,043,539 in the

unrestricted scenario and, after subtracting the $146,330 that plaintiff actually realized in the

restricted scenario, concluded that plaintiff lost profits of $897,209. PX 53 at 1-2. Alternatively,

using the expense information that he downloaded from the IREM website, Dr. Ben-Zion

determined that plaintiff would have realized net income of $761,375 in the unrestricted scenario

and, after subtracting the $146,330 that plaintiff actually realized in the restricted scenario,

concluded that plaintiff lost profits of $615,045. PX 52 at 1-2. Dr. Ben-Zion did not discount

either amount–$897,209 or $615,045–because they represented past damages, which “would

normally not be discounted to present value.” Tr. 420 (Ben-Zion); accord id. at 506-07 (“[W]e

don’t discount past damages for interest or inflation.”). Indeed, he commented that one would

only discount past damages if there was some uncertainty regarding what the income or expenses

would be; in such cases, a risk factor could be applied. Id. at 495, 508; accord id. at 506 (“[Y]ou

don’t need the interest rate to discount the past, only the . . . risk and uncertainty factor.”), 509

(“Past damages are never discounted for interest.”); see also id. at 507 (“[I]f you want to apply a

risk factor to the past and the risk factor is 1%, you can discount the total calculations by 1% for

the past.”).

b. Future Lost Profits

i. Restricted Scenario

With respect to the second time period plaintiff specifies, the date of trial through the date

that the loan agreement will expire, Dr. Ben-Zion appears to have projected plaintiff’s future net

income in the restricted scenario by increasing plaintiff’s projected gross rental income for 2016

by a set percentage each year through 2035, determining projected net rental income by adjusting

the projected gross rental income to account for projected vacancies and the receipt of other

projected income, increasing plaintiff’s projected expenses for 2016 by a set percentage for each

29

Because Dr. Ben-Zion assumed that plaintiff would obtain a mortgage on July 1, 2011,

he specified only six months of interest expense for 2011. PX 52 at 2; PX 53 at 2. However,

Richard Gullotta was prepared to prepay the balance of the loan at the time of the government’s

breach of contract on January 3, 2011. See Jt. Stip. ¶ 9; JX 5.

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year through 2035, and then subtracting the projected expenses from the projected net rental

income to arrive at each year’s projected net income.30

To determine the percentage for increasing plaintiff’s projected gross rental income, Dr.

Ben-Zion considered two factors: (1) that from 2005 to 2015, rents at Sonoma Village

Apartments increased annually by 2%,31 id. at 426-27; and (2) that the Congressional Budget

Office projects that inflation will be approximately 2% per year for the next fifteen years, id. at

439. Accordingly, he opined that it was reasonable to project that the future rent growth rate in

the restricted scenario would continue to be 2%. Id. at 437-39.

With respect to the percentage for increasing plaintiff’s projected expenses, which is only

applicable to the projections based on the data provided by Ms. Williams, Dr. Ben-Zion

apparently used the same percentage that he used to increase plaintiff’s projected expenses under

the unrestricted scenario: 2%.32 See id. at 738 (reflecting that Dr. Ben-Zion calculated future

expenses by taking “what would have existed in 2016 for the expenses and increased them by

2%,” but not specifying whether he took this approach in both the restricted and unrestricted

scenarios); see also id. at 476, 478-79, 710-11 (indicating that Dr. Ben-Zion increased the

amount of projected expenses in the unrestricted scenario each year by 2%–the rate of inflation

projected by the Congressional Budget Office for the next fifteen years); PX 53 at 3-8 (reflecting

a 2% increase in projected expenses in the unrestricted scenario for 2017 through 2035).

ii. Unrestricted Scenario

After calculating each year’s projected net income under the restricted scenario, Dr. Ben-

Zion performed the same task for the unrestricted scenario. To do so, he projected both the

income that plaintiff would receive by charging market rents and the expenses that plaintiff

would incur in operating Sonoma Village Apartments as a market-rate rental property.

30

There is no direct evidence regarding the precise methodology used by Dr. Ben-Zion to

determine plaintiff’s projected net income in the restricted scenario, but the trial record as a

whole strongly suggests that Dr. Ben-Zion took this approach.

31

Dr. Ben-Zion may have obtained this data from Mr. Burwell. See PX 39 (containing

Mr. Burwell’s determination that “[l]ong term restricted rent growth is estimated at 2.0%”); Tr.

200 (Burwell) (indicating Mr. Burwell’s determination that, historically, rents in the restricted

scenario increased annually by 2%).

32

The trial record contains no direct evidence that Dr. Ben-Zion used the same approach

in both scenarios; the only direct evidence of the rate for increasing projected expenses pertains

to the unrestricted scenario. See Tr. 476, 478-79 (Ben-Zion).

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Dr. Ben-Zion based his income projections on data provided by Mr. Burwell. Id. at 440-

41, 480, 739-40; PX 52 at 1; PX 53 at 1. Mr. Burwell, in turn, determined that the long-term

market rent growth rate would be 3.5%. PX 39; Tr. 197-98, 273-74, 291, 310, 325 (Burwell).

He based his determination on Mr. Gerber’s finding that the market rent growth rate in Sonoma

Valley for 2011 through 2015 was slightly above 5%, Tr. 198, 274, 325 (Burwell), and his own

assumption that market rents “would probably increase less going forward in the future once they

get marked up to market,” id. at 198; see also id. at 275 (“I do read a lot on rental trends in . . .

Sonoma County [and the] Bay Area.”). Mr. Burwell did not base his determination on inflation

rates because of his belief that the growth rate in market rents would continue to outpace the rate

of inflation due to the insufficient supply of apartment units in Sonoma Valley. Id. at 199. Dr.

Ben-Zion accepted Mr. Burwell’s 3.5% growth rate and, using 2016 as the base year, projected

the gross rental income for each year from 2017 to 2035. Id. at 440-41, 473 (Ben-Zion); see also

id. at 480-81 (reflecting that Dr. Ben-Zion did not use the same growth rate that he used to

increase future expenses–the projected rate of inflation–because “the rate of inflation and the rate

of rent increases diverge[d] from each other considerably . . . in the past”).

Next, Dr. Ben-Zion reduced the projected annual gross rental income amounts to account

for projected vacancies using the vacancy rate supplied by Mr. Burwell. Id. at 473; accord PX 52

at 3-9; PX 53 at 3-8. Mr. Burwell, in turn, determined that the long-term vacancy rate would be

3%. PX 39; Tr. 194, 196 (Burwell). He based his determination on two factors: (1) the fact that

the vacancy rate in Sonoma County for the prior ten years “has probably been 2% or less,” Tr.

194 (Burwell); and (2) his assumption that increased demand for apartment units will result in

increased supply, and, consequently, a higher vacancy rate, id. at 194, 196. He did not account

for collection losses in his projected long-term vacancy rate, id. at 288, because collection losses

are likely nominal, collection losses are not tracked for Sonoma Valley, and there is no

information upon which he could estimate collection losses, id. at 328-29. After applying this

vacancy factor, and adding an amount for “other income” (2.3% of gross rental income), Dr.

Ben-Zion obtained plaintiff’s projected net rental income for each year from 2017 to 2035. PX

52 at 3-9; PX 53 at 3-8.

Dr. Ben-Zion then used–as he did for the 2011 to 2016 time period–two methods to

project plaintiff’s future expenses in the unrestricted scenario. Under the first method of

projecting expenses, Dr. Ben-Zion used the data supplied by Ms. Williams for 2016 as a starting

point.33 PX 53 at 2-3; Tr. 476 (Ben-Zion). He then increased those projected expenses each year

by 2%–the rate of inflation projected by the Congressional Budget Office for the next fifteen

years. PX 53 at 3-8; Tr. 476, 478-79, 710-11 (Ben-Zion); see also id. at 547 (Ben-Zion)

(reflecting that Dr. Ben-Zion increased real estate taxes by 2% per year due to the 2% limit

imposed by Proposition 13), 709-10 (reflecting that if there was a management fee, Dr. Ben-Zion

33

Again, Dr. Ben-Zion did not include any amounts for a management fee or for

bookkeeping and accounting services, PX 53 at 3-8, even though he believed that management

fees should be accounted for, Tr. 450, 680-83, 706 (Ben-Zion), and Ms. Williams believed that

there would be some cost for bookkeeping and accounting services, id. at 366 (Williams).

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would have increased it by 3.5% per year). He explained that it was reasonable to use this

projected inflation rate because it was determined by forecasting experts and because economists

consider the Congressional Budget Office to be a reliable source. Tr. 481-82 (Ben-Zion). In

addition, he noted that the Congressional Budget Office’s inflation rate is derived from the

nationwide Consumer Price Index and applies to all goods and services. Id. at 482, 711; see also

id. at 711 (noting that one of the components of the Consumer Price Index is rents). Under the

second method of projecting expenses, Dr. Ben-Zion applied the percentages set forth in the

information that he downloaded from the IREM website to each year’s projected gross rental

income, id. at 722, with the exception of real estate taxes, which he increased by 2% per year due

to the 2% limit imposed by Proposition 13, id. at 729, 743; see also id. at 744 (reflecting Dr. Ben-

Zion’s acknowledgment that real estate taxes included both ad valorem taxes and direct

assessments, and that Proposition 13 did not apply to direct assessments). See generally PX 52 at

3-9. Then, under both methods for projecting expenses, Dr. Ben-Zion added the projected

interest expense described above. PX 52 at 3-9; PX 53 at 3-8. Upon taking this final step, Dr.

Ben-Zion arrived at a projected net income for each year from 2017 to 2035. PX 52 at 3-9; PX

53 at 3-8.

iii. Discounting to Present Value

Once Dr. Ben-Zion determined plaintiff’s projected net income for each year from 2017

to 2035 in both the restricted and unrestricted scenarios, his next step was to discount those

amounts to their present value. Tr. 591-92 (Ben-Zion); see PX 52 at 3-9 (showing that Dr. Ben-

Zion discounted the projected income for each year in the unrestricted scenario); PX 53 at 3-8

(same); see also Tr. 308 (Burwell) (“[T]he discount rate applies to a future stream of income or

cash flows . . . .”), 420 (Ben-Zion) (“The future has to be discounted to present value as of the

date of the trial.”). To accomplish this task, he was required to select an appropriate discount

rate.

According to Dr. Ben-Zion, a discount rate generally includes two components–an

“interest rate” and a “risk and uncertainty rate.” Tr. 497-98 (Ben-Zion). But see id. at 766

(explaining that a discount rate “potentially” has three components: (1) a risk and uncertainty

component, (2) an interest component, and (3) an inflation component). In this case, plaintiff’s

experts opined, the discount rate is comprised of a capitalization rate–which itself includes an

interest component and a risk component–and a growth rate. Id. at 206-07, 212, 302, 334-35

(Burwell), 494-95, 767 (Ben-Zion); see also id. at 308 (Burwell) (indicating that another name

for the “capitalization rate” is the “property discount rate”).

Mr. Burwell provided Dr. Ben-Zion with a 7% discount rate. Id. at 206 (Burwell), 492,

495-96, 762-63 (Ben-Zion); PX 39. This discount rate includes two components: (1) a

capitalization rate of approximately 5.5%, Tr. 209, 334 (Burwell), which Mr. Burwell based on

his knowledge of the Sonoma Valley market and data from Mr. Gerber indicating an average

capitalization rate for 2015 of 5.47%, id. at 208-09; PX 42, and (2) a growth rate of “a little less

than 2%,” Tr. 212 (Burwell). See generally id. at 206, 210, 304-05 (explaining that arriving at a

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discount rate is “somewhat subjective” in that there are no published discount rates for the North

Bay area that can be used as a reference). The rate does not account for any debt that plaintiff

might have or incur on Sonoma Village Apartments. Id. at 309.

Adopting the 7% discount rate, Dr. Ben-Zion discounted the net income figures for each

year in the unrestricted scenario, presumably discounted the net income figures for each year in

the restricted scenario,34 and then summed the resulting amounts under each scenario. See PX

52; PX 53. For the unrestricted scenario, he determined that under the method of projecting

expenses based on the data provided by Ms. Williams, plaintiff’s total future net income would

be $5,261,608 in present dollars, PX 53 at 1, 8, and that under the method of projecting expenses

based on the information that he downloaded from the IREM website, plaintiff’s total future net

income would be $3,969,912 in present dollars, PX 52 at 1, 9. Then, for the restricted scenario,

he determined that plaintiff’s total future net income would be $86,500 in present dollars. PX 52

at 1; PX 53 at 1. Subtracting the projected profits in the restricted scenario from the projected

profits in the unrestricted scenario, Dr. Ben-Zion concluded that plaintiff’s future lost profits

were either $5,175,108 (using Ms. Williams’s data), PX 53 at 1, or $3,883,412 (using IREM

information), PX 52 at 1.

c. Total Lost Profits

To determine plaintiff’s total lost profits from the date that the government breached the

contract to the date that the loan agreement will expire, Dr. Ben-Zion summed his determinations

of past lost profits and future lost profits, as reflected in the following table:

34

There is no direct evidence that Dr. Ben-Zion used a 7% discount rate in the restricted

scenario, but given that the trial record contains no evidence that plaintiff used a discount rate

other than 7%, the court presumes that Dr. Ben-Zion used the same 7% discount rate in both

scenarios.

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Using Ms. Williams’s Using IREM

Data Information

Past

Unrestricted Scenario $1,043,539 $761,375

Restricted Scenario $146,330 $146,330

Net Lost Profits $897,209 $615,045

Future

Unrestricted Scenario $5,261,608 $3,969,912

Restricted Scenario $86,500 $86,500

Net Lost Profits $5,175,108 $3,883,412

Total Lost Profits $6,072,317 $4,498,457

PX 52 at 1; PX 53 at 1. In short, when basing his projected expenses on the data provided by

Ms. Williams, Dr. Ben-Zion determined that plaintiff’s lost profits were $6,072,317, PX 53 at 1,

and when basing his projected expenses on the information that he downloaded from the IREM

website, Dr. Ben-Zion determined that plaintiff’s total lost profits were $4,498,457, PX 52 at 1.

d. Using Fair Market Value to Test the Reasonableness of the Lost Profits Calculations

After calculating plaintiff’s total lost profits, Dr. Ben-Zion tested the reasonableness of

his conclusions by calculating the damages that plaintiff would receive under the lost asset

methodology. Tr. 548 (Ben-Zion). The starting point for his test was the fair market value of

Sonoma Village Apartments in the unrestricted scenario in 2016, as calculated by Mr. Burwell.35

Id. at 549; accord PX 44. Dr. Ben-Zion distinguished the determination of a property’s fair

market value from the determination of the equity and debt held in the property, noting that “the

value of the property is independent of what the debt is of its owners.” Tr. 759 (Ben-Zion);

accord id. at 760 (“[I]f you are just estimating the fair market value of the property, the debt on

the property has no impact on the value.”). Determining the amount of equity in a property, he

35

According to the trial transcript, Dr. Ben-Zion testified that the fair market value

calculated by Mr. Burwell was $5,000,070. See Tr. 549 (Ben-Zion). In light of the information

contained in the exhibit prepared by Mr. Burwell, PX 44, the amount set forth in the transcript

reflects a transcription error or a misstatement by Dr. Ben-Zion.

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explained, requires a threshold determination of the property’s fair market value, and the

subtraction from that value of the amount of any debt held on the property. Id. at 760; accord id.

at 761 (“There is no independent way of valuing the fair market value of the equity without first

determining the fair market value of the property.”).

Mr. Burwell determined that the fair market value of Sonoma Village Apartments was

$5,070,000; he arrived at this amount by multiplying $506,724, his estimated gross rental income

generated by the property in 2016, by ten, his estimated gross rent multiplier for 2016. PX 44;

accord Tr. 203, 215, 295 (Burwell); see also id. at 201 (explaining that the gross rent multiplier

for a particular property is the sales price of the property divided by the gross rents generated by

the property), 201-02 (indicating that gross rent multipliers are used by lenders and borrowers,

and are “strongly relied upon [by] buyers of smaller apartment complexes, properties that are

twenty to fifty units in size”), 297-98 (reflecting that Mr. Burwell determined fair market value

using a “sales approach”). But see Tr. 982-84 (Weinberg) (labeling the gross rent multiplier

method of valuation as “the least accurate approach” and stating that such an approach should

only be used, if at all, for form-based appraisals of “very small properties”). He estimated the

property’s gross rental income using the data he obtained from Mr. Gerber. Tr. 203, 215

(Burwell). Similarly, Mr. Burwell used Mr. Gerber’s data to determine the gross rent multiplier;

specifically, he used an average of gross rent multipliers for recent comparable sales in Sonoma

County. Id. at 204, 215; see also PX 42 (indicating that in 2014-2015, the average gross rent

multiplier in Sonoma County was 10.2); Tr. 205 (Burwell) (averring that a gross rent multiplier

of ten “is very reasonable”).

Next, from the $5,070,000 fair market value, Dr. Ben-Zion subtracted the value of

Sonoma Village Apartments in the restricted scenario. Tr. 549 (Ben-Zion). Mr. Burwell had

determined that the property had no value in the restricted scenario. Id. at 205-06 (Burwell), 549

(Ben-Zion). However, Dr. Ben-Zion opted to use the value determined by defendant’s expert,

Mr. Weinberg: $167,000. Id. at 549-51 (Ben Zion); see also DX 12 at 2 (indicating that the

value of the property in the restricted scenario would be $167,472); DX 14A (same); Tr. 975

(Weinberg) (same).

Dr. Ben-Zion further reduced the $5,070,000 fair market value by the value of Sonoma

Village Apartments in 2035 in the unrestricted scenario, in present dollars. Tr. 551 (Ben-Zion).

This amount–$725,000–was based, once again, on data supplied by Mr. Weinberg (a terminal

value of $3,800,000 and an 8.75% discount rate). Id. at 551-52; see also DX 11A at 2 (indicating

that the property had a terminal value of $3,820,292 in 2035 in the unrestricted scenario).

The final amount that Dr. Ben-Zion subtracted from the $5,070,000 fair market value was

the residual value of Sonoma Village Apartments in 2035 in the restricted scenario. Tr. 552-53

(Ben-Zion). Mr. Burwell indicated that in 2035, the property would be a teardown, valueless

aside from the land value (which includes the right to build a thirty-unit apartment complex). Id.

at 229, 289-91 (Burwell); accord id. at 205-06 (indicating that the property has no value in the

restricted scenario); see also id. at 552-53 (Ben-Zion) (“I don’t know what is today’s fair market

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value. I can only tell you what Mr. Burwell said. I understood he said that it has no market. . . .

That suggests zero value. But maybe it is not zero. . . . I will leave it up to Your Honor to

decide what value it might have under the restricted scenario.”).

Performing the calculations described by Dr. Ben-Zion results in a total amount of

$4,178,000. Because this amount is “close to” his calculated future lost profits of either

$5,175,108 or $3,883,412, id. at 553 (Ben-Zion), Dr. Ben-Zion implied that his calculated future

lost profits were reasonable, see id. at 554-55 (explaining that Mr. Weinberg’s lost asset value

determination was not reasonable because it was premised on incorrect inputs).

2. Defendant’s Approach

Defendant does not dispute that plaintiff is entitled to expectancy damages. Rather, it

disputes the methodology chosen by plaintiff to measure its damages and the amount of lost

profits that plaintiff calculated using that methodology. Accordingly, through its expert, Mr.

Weinberg, defendant provides its own determination of plaintiff’s lost profits using a lost value

approach, concluding that plaintiff is entitled to recover expectancy damages of $1,090,000. See

generally DX 14A.

Because Mr. Weinberg measured plaintiff’s damages by the value of Sonoma Village

Apartments that plaintiff lost as a result of the government’s breach of contract, he did not

calculate damages separately for the pretrial and posttrial time periods. Instead, he calculated

damages as of the date of the government’s breach–January 3, 2011. Id.; Tr. 969 (Weinberg); see

also Tr. 969 (Weinberg) (reflecting that Mr. Weinberg calculated damages through September

2035), 1020 (explaining that “[y]ou can’t take into consideration actual future events,” but must

instead “determine what the expectation was of investors, buyers, and sellers in the market as of

the January 2011 date”). In broad strokes, Mr. Weinberg first determined the value of Sonoma

Village Apartments in the unrestricted scenario by projecting plaintiff’s income, expenses, and

debt service; deducting the renovation costs and the income projected to be lost during the

renovations; making adjustments to account for the value of the property at the end of the

damages period;36 and discounting the resulting cash flow to its present value. See DX 11A.

Then, Mr. Weinberg determined the value of Sonoma Village Apartments in the restricted

scenario by projecting plaintiff’s income, expenses, and debt service; making adjustments to

account for the value of the property at the end of the damages period;37 and discounting the

36

These adjustments appear on the spreadsheet summarizing Mr. Weinberg’s

calculations in the unrestricted scenario. See DX 11A at 2 (indicating, under the heading

“Reversion Calculation,” a “Terminal Rate” of 8%, a “Sales Cost” of 4%, a “Terminal Value” of

$3,820,292, a “Loan Payoff” of $407,202, and “Net Proceeds” of $3,413,090). However, Mr.

Weinberg did not explain the adjustments during his trial testimony.

37

These adjustments appear on the spreadsheet summarizing Mr. Weinberg’s

calculations in the restricted scenario. See DX 12 at 2 (indicating, under the heading “Reversion

-39-

resulting cash flow to its present value. See DX 12. Finally, Mr. Weinberg subtracted the value

of Sonoma Village Apartments in the restricted scenario from the value of Sonoma Village

Apartments in the unrestricted scenario, and then adjusted the resulting amount to account for a

presumed judgment date of December 31, 2016. See DX 14A; Tr. 870-71, 968-69 (Weinberg).

To prepare his report on plaintiff’s damages due to the government’s breach of contract,

Mr. Weinberg visited Sonoma Village Apartments in March 2016, touring the property and its

neighborhood. Tr. 871-73 (Weinberg). He found the property to be of “very average

construction typical with section 515 developments, and . . . in fair to average condition . . . .”

Id. at 881. He also found the property to be “generally functional” as a section 515 property, and

“generally functional,” but “at the lower end of that functionality,” as a market-rate rental

property. Id. at 882.

In addition to visiting Sonoma Village Apartments, Mr. Weinberg conducted a market

rent survey for seven properties that he deemed reasonably comparable to Sonoma Village

Apartments. Id. at 873, 875, 992-93; see also id. at 877 (indicating that he ascertained the

primary market area for Sonoma Village Apartments–the area from which most of the property’s

tenants will come–to assist in identifying comparable properties). As part of his survey, he

attempted to obtain, in addition to current rents, information regarding rent concessions,

amenities (both inside the units and for the property as a whole), who pays for utilities, any

renovations, and the general operation of the property. Id. at 874; accord id. at 884-86. He also

sought rents for 2011, but was unable to obtain them. Id. at 1002-03. Further, Mr. Weinberg

performed several other analyses, including analyses of the state of the local economy as of the

end of 2010, id. at 875-76, the area’s demographics as of the end of 2010, id. at 876, the area’s

median income at the end of 2010, id. at 878; see also id. at 878-79 (noting that the median

income for the primary market area was lower than the median income for Sonoma County,

which, in turn, was higher than the national median income), and Sonoma Village Apartment’s

neighborhood, id. at 879-80.

a. Unrestricted Scenario

After collecting the data he deemed relevant, Mr. Weinberg determined the rents that

plaintiff could have charged had the government not breached the contract, in other words, the

rents that plaintiff could have charged in the unrestricted scenario. Mr. Weinberg based his

estimated rents on the information that he obtained from his survey of current market rents for

the properties he found to be comparable to Sonoma Village Apartments, adjusting the amounts

for differences in included utilities and amenities. Id. at 883, 889, 891, 894, 993. Once he

determined the market rents that could be achieved by Sonoma Village Apartments for 2016, he

deflated those rents by 35% to ascertain the rents that Sonoma Village Apartments could have

Calculation,” a “Terminal Rate” of 8%, a “Sales Cost” of 4%, and “Net Proceeds” of $1,409,316,

and further indicating, under a column titled “Reversion Year 2036,” net income of $117,443).

However, Mr. Weinberg did not explain the adjustments during his trial testimony.

-40-

obtained on the open market in 2011. Id. at 895-96, 913, 926, 995-96; DX 7A; see also id. at

898, 912, 1028, 1032 (explaining that his adjustment removed the real estate market trends from

2011 to 2016); cf. id. at 895, 898 (reflecting that Mr. Weinberg would have liked to have used

data from 2011 to determine achievable market rents for 2011, but he was unable to go back in

time to perform such a survey). Mr. Weinberg opined that his approach–using current rents and

deflating them back to the desired date–was “standard practice,” but he could not identify any

literature that supports the use of his approach. Tr. 1006 (Weinberg). He also agreed that his

results do not comport with what actually happened to market rents from 2011 though 2016, but

that they reflect “what an investor would have expected to have happened as of 2011.” Id. at

1029; accord id. at 1030 (“[When you are] expecting what’s going to happen to your property

over the next however many years, you’re going to base it on information that you had at the

time.”), 1034 (“People sitting . . . in January 2011 did not have the expectation there was going to

be substantial rent growth over the next few years, . . . and no investor would have considered

it.”); see also id. at 922-23 (indicating that the Uniform Standards of Professional Appraisal

Practice and the standards of the Appraisal Institute contain “very specific guidelines and

instructions on how you have to deal with retrospective values,” and that “you can[not] take into

consideration the events that occurred that you would not have known at the time after the date of

value”).

Mr. Weinberg derived the 35% deflation rate from Sonoma County rent data published by

Real Answers, an entity that collects real estate data. Id. at 896-87, 996; see also id. at 998

(acknowledging that Real Answers did not specifically break out data for Sonoma Valley), 1003-

04 (reflecting Mr. Weinberg’s inability to obtain deflation rates from comparable properties),

1006-07 (reflecting that Mr. Weinberg did not encounter Mr. Gerber’s rent surveys during his

research). He then checked his conclusion by reviewing a rent survey that Novogradac had

conducted in another town in Sonoma County–Rohnert Park–in 2009. Id. at 898, 996, 1000-02.

Mr. Weinberg did not use or rely on the Levy appraisal to project plaintiff’s damages even

though he had access to it, id. at 1008, 1011, 1124, because, he averred, it would violate appraisal

standards to use the data contained in another appraisal report without verifying it himself, id. at

1014; accord id. at 1113 (“I can’t rely on other people’s work. So anything that I would have . . .

used from [the Levy appraisal], I would have had to have reconfirm[ed] the data . . . .”), 1125 (“I

can’t just trust somebody else’s third-party report.”). Mr. Weinberg’s conclusions are

summarized in the following table:

-41-

2016 Achievable Adjusted 2011

Unit Type Market Rents Rents

1 Bed/1 Bath $1500 $975

2 Bed/1 Bath $1750 $1138

3 Bed/1 Bath $1850 $1203

3 Bed/1.5 Bath $2025 $1316

DX 7A.

Using the rents that he determined for 2011, Mr. Weinberg calculated plaintiff’s

estimated gross rental income for 2011. DX 11A. Then, to that amount, Mr. Weinberg added an

estimated amount for other income (2.7% of gross rental income) and subtracted an estimated

amount to account for vacancies (5% of gross rental and nonrental income) to determine

plaintiff’s estimated net rental income for 2011.38 Id.; see also Tr. 929-30 (Weinberg) (reflecting

that Mr. Weinberg’s estimated vacancy losses incorporated estimated collection losses, in other

words, amounts that plaintiff might expect to lose due to tenants not paying rent), 1039

(reflecting that Mr. Weinberg’s vacancy rate was “an estimate based on a variety of data points”),

1040-41 (reflecting that Mr. Weinberg used an estimated 5% vacancy rate, which incorporates an

estimated 2-3% rate for vacancies and an estimated 1-3% rate for collection losses), 1041-42

(reflecting that Mr. Weinberg’s estimate of collection losses is derived from his survey of

operating expenses for properties he found comparable to Sonoma Village Apartments, which is

described in more detail below). However, due to the need to account for the time that it would

take for Sonoma Village Apartments to convert from 100% restricted rents to 100% market rents,

Tr. 915 (Weinberg), Mr. Weinberg did not use the net rental income that he calculated for 2011

as the baseline for projecting plaintiff’s net rental income for 2012 and beyond. Rather, as

explained in the following paragraph, Mr. Weinberg separately projected plaintiff’s net rental

income for 2012 and 2013 and then used 2014 as the baseline for subsequent years.

According to Mr. Weinberg, the conversion from 100% restricted rents to 100% market

rents generally does not occur all at once because tenants are entitled to remain in their units

pursuant to the terms of their leases until the leases expire, tenants are entitled to sixty days

advance notice of rent increases, and property owners want to avoid the bad publicity that might

result from evicting all of their lower-income tenants at the same time. Id. at 915-17, 1088,

1090-91. Instead, Mr. Weinberg stated, property owners typically find it most prudent to wait for

tenants to leave on their own volition due to the expiration of their leases and the subsequent

increase in rent. Id. at 917-18, 1088, 1090-91, 1094-95, 1138-39; see also id. at 919, 1090-92

38

Although Mr. Weinberg uses the term “effective gross income” to describe the

adjusted amount, the court uses the term “net rental income” to be consistent with plaintiff’s

usage.

-42-

(acknowledging that property owners sometimes offer incentives to tenants to terminate their

leases early), 1095 (remarking that “85% of the tenants turn over in the first two years”). Mr.

Weinberg explained that in such cases, appraisers typically assume a three-year conversion

period, and that a three-year time frame is realistic.39 Id. at 918-19; see also id. at 1095

(reflecting that Mr. Weinberg’s opinion is based on his “experience with . . . close to two dozen

repositionings where [he] actually worked with property owners to reposition the property” and

what “is actually . . . happening at properties in the area”), 1137-38 (clarifying that his

repositioning experience was with multifamily properties in general, and not just with affordable

housing). But see id. at 1089 (reflecting that Mr. Weinberg did not know the length or expiration

date of the leases at Sonoma Village Apartments, but that his prior experience with the United

States Department of Agriculture suggested to him that plaintiff uses one-year leases), 1136

(reflecting Mr. Weinberg’s understanding, based on experience, that Rural Development uses

one-year leases for section 515 properties). Thus, Mr. Weinberg’s projected gross rental income

for 2011, 2012, and 2013 reflects a mix of restricted and market rents. Id. at 919-20. From 2014

forward, Mr. Weinberg’s projected gross rental income–and, consequently, his projected net

rental income–reflects only market rents. Id. at 920, 1027, 1031-32.

Next, Mr. Weinberg estimated the expenses that plaintiff would have incurred in 2011.

He did so by examining the historic expenses incurred by Sonoma Village Apartments; he gave

this data a great deal of weight, but recognized that certain expenses would be higher in the

unrestricted scenario. Id. at 928-29. He also examined the expenses incurred by other properties

“in the area” that he obtained from audited information in Novogradac’s possession. Id. at 930-

31, accord id. at 1068. Specifically, Mr. Weinberg “attempt[ed] to identify properties of similar

size, geographic location, and . . . geographic similarities in terms of demographics to use as

comparables.” Id. at 1063; accord id. at 1068 (reflecting that Mr. Weinberg “extracted data . . .

for properties that are most similar in size, age, condition, and general geographic

characteristics”); see also id. at 1063-67 (reflecting the similarities and differences that Mr.

Weinberg perceived between Sonoma Village Apartments/Sonoma Valley and his selected

comparable properties/locations); cf. id. at 1061-62 (reflecting that Mr. Weinberg did not

consider data from the IREM to estimate the expenses that plaintiff would incur in 2011). The

Novogradac database included information from eight properties that met Mr. Weinberg’s

criteria; some of the pertinent characteristics of these properties are summarized in the following

table:

39

Defendant did not retain Mr. Krabbenschmidt to provide an opinion on plaintiff’s

expectancy damages. See infra Section V.B. Nevertheless, Mr. Krabbenschmidt testified that

he had personally converted “very low-income housing to much more upscale housing,” and that

despite planning for a one-year conversion, the conversion actually took three years. Tr. 1193

(Krabbenschmidt).

-43-

Operating

Expenses as Vacancy

Number of a Percent of Collection

40

Project Location Units Revenue Percentage

Santa Rosa, 111 50% 0%

Sonoma County

Santa Rosa, 80 51% 0%

Sonoma County

Santa Rosa, 120 57% 3%

Sonoma County

Waterford, 40 80% 7%

Stanislaus County

King City, 50 65% 3%

Monterey County

Vallejo, 76 60% 6%

Solano County

Gilroy, 84 35% 4%

Santa Clara County

St. Helena, 50 76% 1%

Napa County

DX 9. Using all of this information, id. at 931-32, Mr. Weinberg projected expenses for 2011 in

eight categories: (1) administrative and marketing expenses, (2) maintenance and operating

expenses, (3) utilities, (4) payroll, (5) management fees, (6) insurance, (7) real estate taxes, and

(8) replacement reserve, DX 11A. Mr. Weinberg explained how he determined the projected

expenses in six of these categories.

First, with respect to utilities and insurance, Mr. Weinberg based his projections on what

actually occurred at Sonoma Village Apartments rather than on data from comparable properties.

Tr. 1069, 1116 (Weinberg).

Second, with respect to payroll, Mr. Weinberg assumed that plaintiff would have, due to

the size of Sonoma Village Apartments, two part-time, on-site employees: one to manage the

property and the other to maintain the property. Id. at 940, 1078; DX 10. Although he

40

The court takes judicial notice, pursuant to Rule 201(b)(2) of the Federal Rules of

Evidence, of the counties in which each project is located.

-44-

acknowledged that Richard Gullotta intended to manage the property himself and use contractors

for maintenance issues, Tr. 1078-79, 1081 (Weinberg), and therefore would not actually incur

these expenses, id. at 1082, he did not believe that an eighty- or ninety-year-old man with a full-

time job could effectively perform these tasks, and that regardless of whether a property owner

assumed these tasks without compensation, there remains a cost of performing these tasks that

should be taken into account, id. at 942-43, 1079. Accordingly, Mr. Weinberg projected an

amount for payroll for 2011. Id. at 940-41, 1078; DX 11A; see also Tr. 1079, 1134-35 (reflecting

that if he assumed that Richard Gullotta would manage the property himself and rely on

contractors, he would have eliminated the maintenance payroll expense, but increased the

maintenance expense).

Third, with respect to management fees, Mr. Weinberg again acknowledged that Richard

Gullotta intended to manage the property himself, Tr. 1078, 1081 (Weinberg), but explained that

even when an owner self-manages a property, he would recommend that the owner “actually take

an operating expense for that,” id. at 1079. Therefore, he evaluated the management fees at

comparable properties and determined that an appropriate fee would be 7% of plaintiff’s

estimated net rental income. Id. at 945.

Fourth, with respect to real estate taxes, Mr. Weinberg explained that real estate taxes in

California have two components–an ad valorem tax based on the assessed value of the property

and any direct assessments–and that, as Dr. Ben-Zion previously acknowledged, only the ad

valorem tax is subject to the limits imposed by Proposition 13. Id. at 946; see also id. at 946,

1054-56 (noting that direct assessments have increased to make up for the limits imposed by

Proposition 13). He further explained that because the ad valorem tax increases when the

underlying property is sold, appraisers in California assume a sale, and the attendant

reassessment of the property, when projecting the real estate taxes owed for the property. Id. at

946-47, 1057; see also id. at 947 (explaining that an appraisal is used to determine the market

value of a property, and market value “only can be monetized in the form of an exchange”

between a buyer and a seller), 1057-58 (same). Accordingly, to determine the real estate taxes

owed by plaintiff in 2011, Mr. Weinberg assumed that Sonoma Village Apartments sold on the

date that the government breached the contract, determined the new assessed value of Sonoma

Village Apartments, calculated the ad valorem tax owed on that assessed value, and then added

the direct assessments to the ad valorem tax. Id. at 946-47, 1050, 1057; accord id. at 1012; see

also id. at 1046, 1049-50 (indicating that the direct assessment component of the 2011 real estate

taxes was derived from the actual direct assessments); cf. id. at 1030, 1057-58 (acknowledging

that the trial record does not include any evidence that plaintiff intended to sell Sonoma Village

Apartments), 1073 (reflecting that had Mr. Weinberg not assumed a sale, his projected real estate

taxes would be lower, which comports with the fact that his projected real estate taxes “deviate

significantly from the actual[]” real estate taxes).

And fifth, with respect to the replacement reserve, Mr. Weinberg explained that it was

“standard practice” for a property owner to set aside funds every year in a reserve account to be

available for capital expenditures. Id. at 948. He further noted that there are “industry standards”

-45-

that describe a range of reasonable reserve amounts that are based on the unit mix and age of the

property. Id. According to Mr. Weinberg, the range for a property similar to Sonoma Village

Apartments is $300 to $400 per unit, and so he used $350 per unit in his calculations. Id. But

see DX 11A (including an expense item for “Replacement Reserve,” but failing to show an

amount of $10,500 ($350 x 30 units) for 2011 or any year thereafter).

After estimating the total amount of expenses that would be incurred by plaintiff in 2011

in the unrestricted scenario, Mr. Weinberg subtracted that amount from the estimated net rental

income for 2011 to determine estimated net income for 2011.41 DX 11A; Tr. 954-55 (Weinberg).

Next, Mr. Weinberg projected plaintiff’s income and expenses for 2012 through 2035 by

applying a growth rate to the relevant baseline amounts. See generally DX 11A. With respect to

projected net rental income, Mr. Weinberg used 2014 as the baseline year for applying the

growth rate because that was the first year after the conversion to 100% market rents. See Tr.

919, 1015-16 (Weinberg). He determined that the appropriate growth rate was 2.5%. Id. at 932,

1085; see also id. at 1015-16 (explaining that his projected net income did not increase at an

annual rate of 2.5% from 2011 to 2014 because the projected net income for those years is based

on differing mixes of restricted and market rents). See generally DX 11A. He based this rate on

data published in the Korpacz survey, his own discussions with investors, the interviews he

conducted during his rent survey, and information from Novogradac’s database. Id. at 932-33,

939, 1017-19; see also id. at 1018 (reflecting that Mr. Weinberg did not have access to long-term

historical data regarding growth rates, but if he did, he would have considered it).

Then, with respect to projected expenses, Mr. Weinberg used 2011 as the baseline year

for applying the growth rate. See generally DX 11A. He used the same 2.5% growth rate that he

used for projecting future net rental income. Tr. 932, 1055, 1060, 1085 (Weinberg). He

explained that it was standard practice to use the same inflation rate for rental income and

expenses because it prevented the manipulation of property valuations that resulted from

projecting that rental income increased at a greater rate than expenses. Id. at 934-35. He further

explained that historically, the long-term trend was for rental income to increase at a similar rate

as expenses. Id. at 935-36, 1055, 1130-31. Because Mr. Weinberg used the same growth rate to

project future income and expenses, his projected expenses–postconversion–were 55.3% of his

projected net rental income. Id. at 1070, 1118; cf. DX 9 (indicating that the comparable

properties that Mr. Weinberg used to assist in his estimation of plaintiff’s expenses had expense-

to-income ratios of 50%, 57%, 80%, 65%, 60%, 35%, and 76%).

Once Mr. Weinberg projected plaintiff’s net income for each year from 2011 through

2035, he reduced those amounts by debt service to arrive at an amount for after-debt cash flow.

Id. at 954-55; DX 11A. To determine the amount of debt service for 2011, Mr. Weinberg

reviewed information contained in “files from the time frame” that indicated “what interest rates

41

Although Mr. Weinberg uses the term “net operating income,” the court uses the term

“net income” to be consistent with plaintiff’s usage.

-46-

were in that market,” and a Novogradac publication that provides information regarding

mortgage interest rates for conventional and affordable multifamily housing that “tend[s] to be

smaller . . . , noninstitutional grade properties.” Tr. 950-51 (Weinberg); accord id. at 1083

(reflecting that Mr. Weinberg reviewed a Novogradac publication and “appraisal files from back

around the time frame to see what actual rates were for properties that [Novogradac] worked

on”). Mr. Weinberg assumed a $1,171,000 loan, which was the balance of plaintiff’s current

mortgage, and a 5.5% interest rate. Id. at 1083, 1119; see also DX 11A (indicating that the

estimated debt service for 2011 was $59,959.80 and the estimated debt service for each

subsequent year was $79,834).

After Mr. Weinberg determined each year’s projected after-debt cash flow,42 he

discounted those amounts to their present value. To accomplish this task, he was required to

select an appropriate discount rate. See also Tr. 956-57 (Weinberg) (indicating that while the

determination of a discount rate is “not an exact science,” it also is not subjective because it is

based on mathematics and reason).

According to Mr. Weinberg, a discount rate generally includes two components, one that

accounts for the “time value of money,” and one that accounts for “the risk associated with a

particular investment.” Id. at 951. Mr. Weinberg described two types of discount rates: (1) an

equity discount rate, which incorporates the risk that a property owner might not recover its

equity in the property after any mortgages have been satisfied, and (2) a property discount rate,

which is based on the assumption that there is no debt associated with the property. Id. at 952;

see also id. (indicating that “equity tends to have a higher rate of return”). Because Mr.

Weinberg projected plaintiff’s cash flows on an after-debt basis, they were equity cash flows. Id.

at 954-55. Therefore, he used an equity discount rate to determine present value. Id. at 954; see

also id. at 957 (indicating that this approach was the accepted methodology in the appraisal

industry). To determine the proper rate, he first calculated an overall discount rate by blending

the appropriate equity rate of return and mortgage interest rate, arriving at 6.25%.43 Id. at 953,

958-59; accord id. at 953 (indicating that the blended rate can be calculated by multiplying the

equity rate of return by 25%, multiplying the mortgage interest rate by 75%, and then summing

42

For 2035, Mr. Weinberg added to the projected after-debt cash flow an amount to

reflect the value of the property at the end of the contract period. DX 11A at 2; Tr. 551 (Ben-

Zion). This amount–$3,413,090–equals the terminal value of the property–$3,820,292–minus

the amount necessary for plaintiff to pay off the assumed loan–$407,202. DX 11A at 2.

43

Although Mr. Weinberg testified that he arrived at a 6.3% overall discount rate, Tr.

959, 1099 (Weinberg), other evidence in the trial record reflects that this percentage is rounded

up from 6.25%, see, e.g., id. at 507 (Ben-Zion) (reporting that Mr. Weinberg “says that the

cap[italization] rate is 6.25%”), 1099 (Weinberg) (indicating that his discount rate was 8.75%

and his growth rate was 2.5%).

-47-

the results44); see also id. at 1099 (labeling the 6.25% overall discount rate as the “equity

capitalization rate,” and not “a property capitalization rate”). Then, to that percentage, he added

the same 2.5% growth rate that he used to project income and expenses forward from the

baseline year, id. at 959, 1086, arriving at an 8.75% discount rate, id. at 1086, 1099. Applying

the 8.75% discount rate to his projected after-debt cash flows in the unrestricted scenario, both

prejudgment and postjudgment, Mr. Weinberg calculated a net present value of $1,629,059. DX

11A at 2; DX 14A.

b. Restricted Scenario

For the restricted scenario, Mr. Weinberg used the actual income and expenses from

plaintiff’s approved budget for 2011. Tr. 883, 927-28, 1020-21 (Weinberg). He then applied a

2.5% growth rate to determine the net rental income, id. at 1022; see also id. at 1024 (explaining

that the 2.5% growth rate is “somewhat budget based” and that the growth rate actually

experienced by Sonoma Village Apartments was “not important . . . because the limitation on

distributions means [plaintiff is] not going to get the [net income] anyway”), and expenses, see

DX 12 (reflecting that expenses increased by 2.5% each year), for each subsequent year. After

Mr. Weinberg projected each year’s net income, he subtracted an amount for debt service to

arrive at a potential after-debt cash flow. DX 12; see also id. at Tr. 949 (Weinberg) (indicating

that the amount Mr. Weinberg determined for debt service was based on the effective interest

rate of the loan that plaintiff obtained from the government). Then, to account for the limitation

on distributions imposed by Rural Development, Mr. Weinberg reduced those potential after-debt

cash flows to determine plaintiff’s projected maximum return on investment. DX 12; Tr. 1122

(Weinberg). As a consequence of the distribution limitation, Mr. Weinberg determined that

plaintiff would obtain a maximum return of investment of $5310 every year. DX 12.

Mr. Weinberg applied two different discount rates to his projected maximum returns on

investment. Id. at 2; Tr. 1096-97, 1121-22 (Weinberg). For the prejudgment period, he used a

“safe rate” because there is no risk of the unknown associated with events that had already

occurred. Tr. 1097, 1101-02 (Weinberg); see also id. at 1102 (explaining that the projected

maximum returns on investment still needed to be discounted to reflect “the time value of

money”). That rate was 4.12%. DX 12 at 2; see also Tr. 1098 (Weinberg) (indicating that the

rate was “4% or 4.17%”), 1101 (indicating that the risk component of the 8.75% discount rate

was 4.5% or 4.6%), 1121 (indicating that the rate was “just over 4%”). In contrast, for the

postjudgment period, Mr. Weinberg used a 10.5% discount rate. DX 12 at 2; Tr. 1120

(Weinberg). This rate was based on the fact that plaintiff faced a limitation on distributions of

8% of its initial investment and a 2.5% growth rate. Tr. 1120 (Weinberg). After calculating the

44

Based on this information, the fact that Mr. Weinberg presumed a 5.5% mortgage

interest rate, and the fact that Mr. Weinberg calculated a 6.25% blended discount rate, the

following equation can be used to determine the equity rate of return: (equity rate of return ×

25%) + (5.5% × 75%) = 6.25%. Solving the equation, the equity rate of return is 8.5%.

-48-

present value of each year’s projected maximum return on investment,45 Mr. Weinberg summed

the resulting amounts, DX 12, calculating a net present value of $167,472, id. at 2; DX 14A.

c. Total Damages

To determine plaintiff’s total damages, Mr. Weinberg began with the net present value of

plaintiff’s after-debt cash flow in the unrestricted scenario of $1,629,059. DX 14A; Tr. 968

(Weinberg). From that amount, he subtracted the stipulated renovation costs of $378,424. DX

14A. He also subtracted $144,598 for the rental income that plaintiff would lose during the

renovations, an amount that was projected by Mr. Burwell. Id.; Tr. 968 (Weinberg); accord Tr.

1087 (reflecting that Mr. Weinberg did not separately project the amount of rental income that

plaintiff would lose during renovations). From this subtotal, Mr. Weinberg subtracted the net

present value of plaintiff’s after-debt cash flow in the restricted scenario of $167,472 to

determine that plaintiff would incur damages of $938,565 due to the government’s breach of

contract. DX 14A; Tr. 968, 1121 (Weinberg). Mr. Weinberg then adjusted that amount to

account for a December 31, 2016 date of judgment by applying an annual 2.5% growth rate, Tr.

1097-98 (Weinberg), and concluded that plaintiff should receive compensation of $1,090,000, id.

at 969; DX 14A.

d. Dr. Ben-Zion’s Test to Assess the Reasonableness of His Calculations

As described above, Dr. Ben-Zion performed some additional calculations to test the

reasonableness of his future lost profits determination, and in doing so, used data supplied by Mr.

Weinberg. See supra Section IV.C.1.d. As his starting point, Dr. Ben-Zion used the 2016 fair

market value of Sonoma Village Apartments in the unrestricted scenario determined by Mr.

Burwell; Mr. Burwell, in turn, calculated the fair market value using estimated gross rental

income and an estimated gross rent multiplier. See id. Consequently, Mr. Burwell’s fair market

value did not account for any debt that might be held on the property. Tr. 973 (Weinberg).

However, all of the data from Mr. Weinberg that Dr. Ben-Zion used in his calculations–the

$167,000 for the value of the property in the restricted scenario, the $3,800,000 for the value of

the property in 2035 in the unrestricted scenario, and the 8.75% discount rate–were based on

after-debt (in other words, equity) cash flows. Id.; accord DX 11A at 2; DX 12 at 2.

Accord

This text is long and has been trimmed here. Open the source document for the complete record.