Valuing a Temporary Takings Claim: ‘Every Which Way but Right’ in spite of Kimball Laundry

1. Valuing a Temporary Takings Claim:‘Every Which Way but Right’in spite of Kimball Laundry ALI-ABA Conference Inverse Condemnation and Related Government Liability Scottsdale, April 14, 2007 William W. Wade, Ph. D. Energy and Water Economics

2. PresentationOutline • 1 Tahoe Sierra missed the point. • Lost Use Values are not measured by Before and After Appraisals. • Fair Market Value is an over used concept. • 4 Kimball Laundry Supreme Court Decision overturned faulty trial court Fair Rental Value notion. • 5 So, why do so many subsequent decisions struggle with different ways to measure FRV? • 6 Federal Claims Court finally got it right with lost earnings and end date as valuation benchmark. • 7 Tulare Lake Basin got it right with owner’s prejudgment interest rate at owner’s opportunity cost.

3. 1 TAHOE-SIERRA PRESERVATION COUNCIL, INC., et al. v. TAHOE REGIONALPLANNING AGENCY et al. 535 U. S. 302,330 (2002) • “A permanent deprivation of the owner’s use of the entire area is a taking of the parcel as a whole. • A temporary restriction that merely causes a diminution in value is not. Logically, a fee simple estate cannot be rendered valueless by a temporary prohibition on economic use, because the property will recover value as soon as the prohibition is lifted.” • DUH! That misses the point: temporary prohibitions on economic use involve lost income or at least time values of lost income.

4. 2 Remedial Note on Valuation of Temporary Loss of Use Values Total Economic Value = Tangible Asset Values + Intangible Asset Values Tangible Assets = Real Property. Valued typically by real estate appraisal methods. Intangible Assets = the business operations that USE the property. Value is Present Value of Net Cash Flows.

5. 3 Fair Market Value is an over used concept. • Partial or temporary takings of income producing properties must be valued to establish economic prongs of Penn Central test and to estimate damages. • Before and After appraisals to estimate the change in market values of the property continue to be used by government counsel. WHY? • This approach fails to measure the true economic loss to the plaintiff – the foregone cash flows.

6. 3 Fair Market Value is an over used concept. (2) • Real property valued from the perspective of buyers and sellers makes sense only for real property transaction. • Plaintiff in a partial or temporary taking case has lost income from the use of his property • Plaintiff’s factual basis for that income, not hypothetical property market comps, matter. • Factual record must capture plaintiff’s foregone marginal revenues less marginal operating costs.

7. 4 Kimball Laundry started things off right. No. Supremes overturned rental value and remanded for an evaluation of lost earnings due to lost trade routes.

8. 5 What went wrong? Rental Rate of Delayed Incremental Development

9. 5 What went wrong? Nemmers. Errors: Lost use values determined by difference in comps. Delayed cash flows were not considered in evidence.

10. 5 What went wrong? Wheeler. M&M Separation Theorem: Value of a business is independent of financing. Financial structure has nothing to do with value or damages.

11. 5 What went wrong? Miller Brothers. WACC is only a floor value of owner’s loss. Actual estimated lost earnings of the asset is the proper measure. Firm’s cost of capital may reflect wholly different risk profile from the asset at issue.

12. 5 What went wrong? SDDS. Interest on the lost cash flow does not replace the lost cash flow.

13. 6 Federal Claims Court Got it right in 2004. Lost Cash Flows benchmarked to end date. Chancellor Manor, Cienega Gardens and CCA (2007) followed Independence Park.

14. 7 Pre Trial Interest Rate: risk free or Plaintiff’s lost opportunity rate?

15. If regulatory delay imposes no loss in values, has there been a taking?

16. What if during the restriction prices rise to increase delayed cash flows?

17. Effect of opportunity cost of capital on Penn Central DIBE and damages.

18. Measure damages at start or end of taking?

19. Doesn’t matter if owner’s opportunity cost of capital governs pretrial interest. Damages at start date or end date become equal if compounded to payment date at discount rate, not risk free rate. Prejudgment interest is not lower risk than operating risk. Owner’s demonstrated opportunity cost of capital governs discount rates during both time periods. [or, prudent investor’s return?]

20. Arguing for risk free interest rates is a waste of court and expert time. • “The government argues that a single, risk-free rate interest rate should be used to bring cash flows forward, not only to the date the taking ended or to the date the judgment is entered, but to the date the judgment is paid. • . . . [T]he government contends that the defendant’s debt rate should be used because an owner’s claim at the time of the taking is against the government, and such a claim bears no risk. • The government’s approach, however, does not adequately ‘adjust the value of [CCA’s lost] cash flow stream to account for risk.’” (CCA @ 45-46.)