# Sonoma Apartment Associates v. United States

> United States Court of Federal Claims · November 3, 2017

URL: https://www.frixlaw.com/law-library/cases/4217868

## Case

- **Court:** United States Court of Federal Claims
- **Decided:** November 3, 2017
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Margaret M. Sweeney
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4217868

## How later opinions describe it (automated extraction)

- 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”

## Opinion text

In the United States Court of Federal Claims
No. 13-940C
(Filed Under Seal: September 22, 2017)
(Reissued for Publication: November 3, 2017)*

*************************************
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. *
*************************************

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.

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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.

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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

-21-
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

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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).

-31-
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.

-32-
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

-35-
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

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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 conditio

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4217868. Public record. Not legal advice.