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UNITED STATES v. IMPROVED PREMISES LOCATED AT THE

April 10, 1973

UNITED STATES of America, Petitioner-Plaintiff,
v.
IMPROVED PREMISES LOCATED AT the NORTHWEST CORNER OF IRVING PLACE AND SIXTEENTH STREET, known as 111 East Sixteenth Street, BOROUGH OF MANHATTAN, CITY AND STATE OF NEW YORK, et al., Defendants. UNITED STATES of America, Petitioner-Plaintiff, v. CERTAIN LAND, together with the improvements thereon, LOCATED AT the NORTHWEST CORNER OF IRVING PLACE AND SIXTEENTH STREET, BOROUGH OF MANHATTAN, CITY AND STATE OF NEW YORK, and Benjamin Kaufman, et al., Defendants


Bonsal, District Judge.


The opinion of the court was delivered by: BONSAL

Bonsal, District Judge.

These are proceedings to determine the fair compensation to the defendants arising out of the Government's use and occupancy of the Borgfeldt Building at 111 East 16th Street, Borough of Manhattan, New York City.

 The Borgfeldt Building has been in continual litigation since its occupancy by the Government. United States v. 396 Corp., 264 F.2d 704 (2d Cir.), cert. denied, 361 U.S. 817, 80 S. Ct. 60, 4 L. Ed. 2d 64 (1959); United States v. Improved Premises, 355 F.2d 316 (2d Cir 1966); United States v. Certain Land, Civ. Nos. 62-2272, 131-97 (S.D.N.Y. July 6, 1964), rev'd, 415 F.2d 265 (2d Cir.), modified, 420 F.2d 370 (2d Cir. 1969). See also United States v. Improved Premises, Civ. No. 131-97 (S.D.N.Y. Feb. 23, 1960).

 The present proceeding is to determine the reasonable annual rental for the three years from July 1, 1964 to June 30, 1967 and to determine the direct economic loss, if any, sustained by the defendants by reason of the Government's annual options to renew on 30 days' notice for the seven years from July 1, 1960 to June 30, 1967.

 The Borgfeldt Building is situated at the northwest corner of 16th Street and Irving Place. It was built in 1909 for occupancy by the George Borgfeldt Company, an importer of German toys and merchandise, which company went out of business sometime after the United States entered the First World War in 1917. Its history from then to the middle 1930s is not clear, except that it was unoccupied for a period of five or six years following the onset of the 1929 Depression. The Metropolitan Life Insurance Company acquired title to the property through foreclosure sometime in the middle 1930s, and in 1937 leased the building to Consolidated Edison Company, which made improvements to render the building more suitable for office use. On June 1, 1945, the Government subleased the building from Consolidated Edison, and in September of 1947 commenced the first of a series of condemnations which kept it in occupancy through June 30, 1967, the end of the period here involved. During its occupancy, the Government made significant expenditures to fit the building for its office use, which improvements were not to become the property of the condemnees, the Government retaining the right to remove them within six months after it vacated the premises. Under the terms of the takings, the condemnees were responsible for exterior repairs, insurance and taxes, the Government being responsible for all other expenses.

 In 1945, 396 Corporation ("396 Corp.") purchased the building from the Metropolitan Life Insurance Company for the sum of $1,000,000, paying $200,000 in cash and giving a 15-year purchase money mortgage (4%) in the amount of $800,000. The stockholders of 396 Corp. were Samuel E. Aaron and Jacob Freidus. In September, 1960, a sale and leaseback transaction was entered into between 396 Corp. as seller, and Benjamin Kaufman and Nathan P. Jacobs as purchasers. 396 Corp. sold the property to Kaufman and Jacobs for $2,136,000, who leased it back to 396 Corp. for a term of 21 years with an option to renew for six additional 21-year terms. On the sale, 396 Corp. received $1,000,000 in cash from the purchasers together with a $500,000 purchase money mortgage. The purchasers took the property, subject to the existing mortgage which had been reduced to $636,000. 396 Corp. assigned its purchase money mortgage to Kaufman and Jacobs to secure its obligations under the lease.

 Under the terms of the lease, 396 Corp. was required to pay an annual rental of $120,000 (which is equal to 12% interest on the $1,000,000 which it received). In addition, 396 Corp. was required to pay real estate taxes and other expenses arising out of the possession and operation of the building not paid for by the Government, including mortgage payments on the existing first mortgage which were added to the basic rent of $120,000. (51-54).*

 In September, 1961, 396 Corp. was dissolved and its assets were liquidated to its two stockholders, Aaron and Freidus. On the liquidation, Aaron and Freidus reported a "gain on dissolution" of $659,775.15. Aaron subsequently died, and his estate was substituted as a defendant in these proceedings.

 In April, 1962, Kaufman and Jacobs initiated summary proceedings against Aaron and Freidus for non-payment of rent, which proceeding was settled by stipulation which provided, in part, that Kaufman would operate the building, collect all payments from the Government and remit any excess to Aaron and Freidus. (99).

 In the late spring of 1967, Kaufman and Jacobs contracted to sell the building to Peter Feinberg conditioned on the termination of the leasehold. Title closed on February 1, 1968, to be effective January 1, 1968. *fn1" (56). Feinberg paid $400,000 cash, delivered a purchase money mortgage in the amount of $1,072,000, and assumed the existing first mortgage on which there was a balance of approximately $528,000. (57, 93). In connection with this sale, a second dispossession proceeding was institutes by Kaufman and Jacobs in June of 1967, and a final order of eviction and termination of the Aaron-Freidus leasehold was made on August 16, 1967. Kaufman agreed that he would await the outcome of these proceedings before he collected some $150,000 then due and owing to him by the lessees.

 Annual Rental for the Three Years July 1, 1964 to June 30, 1967 The Government, based on the testimony of its expert, Morris, contends that the fair rental value for the property for the years in question is as follows: 1964 $248,500 1965 255,000 1966 260,000

 Defendants contend, on the basis of the testimony of their expert, O'Keefe, that the fair rental value for the property for the three years is $438,000 per annum or a total for the three years of $1,314,000. Both Morris and O'Keefe filed detailed appraisals. In considering this issue, a review of the rentals on the property during the Government's occupancy, which were previously paid or fixed by the court in the condemnation proceedings, is enlightening: Rent PER ANNUM 1947-1953 $ 145,335.82 (Stipulated) 1953-1956 215,000.00 (Stipulated) 1958-1960 225,000.00 By the court. (Includes an award by reason of the Government's options, 264 F.2d 704 (1959).) 1958-1960 225,000.00 By the court. (Plus reimbursement for any increase of real estate taxes.) 1960-1964 230,000.00 By the court. (Lumbard, J. at 415 F.2d 265, 268 stated: "The parties do not object to the basic fair rental value found by the district court for the years in question [1960-1964]. This value was set by the court at $ 230,000 per annum, after it declined to adopt the government expert's figure of $ 207,500, and the defendants' expert's figure of $ 385,000, the latter estimate taking into account the options.") In this proceeding, defendants seek an increase in the fair rental value for 1964-1967 to $438,000 per annum as against $230,000 for 1960-1964, while the Government contends that the fair rental value is: 1964 $248,500 1965 255,000 1966 260,000 Defendant's expert, O'Keefe, found that the fair rental value was $2.25 per square foot, less 70 cents (for cost of operation by the Government), leaving $1.55 per square foot, which he multiplied by an estimated rental square footage of 283,000 to find a rental figure of $438,000 per annum. The Government appraiser, Morris, used a gross income approach and then deducted expenses. He estimated the gross rentals for the property as follows: 1964 $1.80 X 292,000 sq. ft. = $525,000 1965 1.85 X 292,000 sq. ft. = $540,000 1966 1.90 X 292,000 sq. ft. = $555,000

 Morris then deducted the estimated expenses of running the building to reach his net rental figures for the three years. *fn2"

 In the proceeding to determine the fair rental value for 1960-1964, Judge Dimock used 215 Park Avenue South as a comparable building in fixing the rental at $230,000 per annum. In reaching this figure, Judge Dimock reduced his 215 figure by 20% because of improvements at 215 not present in the Borgfeldt Building. O'Keefe and Morris both used 215 Park Avenue South in their appraisals in this proceeding. O'Keefe found that the average net rental at 215 was $1.81 per square foot in 1964. Morris found that the average net rental for 1971 -- four years after the period here involved -- was $2.40, and he would make a 10% deduction because of the difference in the appointments of the two buildings.

 The evidence at the trial did not show how much fair rental value from 1964-1967 had increased as compared to 1960-1964. O'Keefe testified that during the entire period 1960-1967 there was a substantial demand for older buildings in the Union Square area by Federal, State and City governmental departments.

 In considering the fair rental value, 1964-1967, O'Keefe states, ". . . it can be safely asserted that no two properties in the area are comparable (as modern office buildings are comparable)." Nevertheless, in estimating the rental value, "It is essential to refer to rentals paid in buildings in the area at the same time." Then, after reviewing four other buildings (401 Park Avenue South; 343 Park Avenue South; 260 Park Avenue South; and 215 Park Avenue South) and two individual floor leases made by the City of New York in 1966 and 1967 at 257 Park Avenue South and 315 Park Avenue South, O'Keefe expressed the opinion that the fair and reasonable rental value of the subject property from 1964 through 1967 was $2.25 per square foot, or $1.55 after deducting 70 cents for costs paid by the Government. O'Keefe's estimates appear to have been influenced by the fact that Kaufman sold the building to Feinberg in 1968, who completely rehabilitated the building and rented it to the City of New York for rentals substantially higher than those previously paid. The Government's appraiser, Morris, using the income approach on a multi-tenant building (which this is not) estimated gross income as follows: 7/1/64 - 6/30/65 $525,000 7/1/65 - 6/30/66 540,000 7/1/66 - 6/30/67 555,000 and after deducting a 10% reserve for vacancies and other contingencies and estimated operating expenses, and adding on the insurance and reserve for outside repairs and the cost of management, reached an estimated fair rental value as follows: 7/1/64 - 6/30/65 $248,500 7/1/65 - 6/30/66 255,000 7/1/66 - 6/30/67 260,000

 Since the entire building was rented to the Government during the three years (1964-1967), there is no apparent reason for Morris's deduction of 10% from the gross rentals for risk of vacancy and other contingencies. While the assessed value of the property remained at $1,650,000 for 1964-1967, the real estate taxes increased as follows: 1963-64 (the year before the period here involved) $ 65,700 1964-65 74,580 1965-66 76,395 1966-67 82,401

 This would indicate that taxes increased by approximately 23.8% between 1963-1964 and 1966-1967.

 Having been completely renovated, the present building can no longer serve as a basis for determining the fair rental value for the years 1964-1967.

 Both O'Keefe and Morris testified as to other old buildings in the area. However, their testimony made it quite clear that, for one reason or another, these buildings were not comparable but were merely used in connection with their expert opinions. They are different in many respects and none of them were single occupancy buildings during the period involved.

 The court cannot indulge in hindsight based on the subsequent history of the building when it was sold to Feinberg and leased to the City. There was not the slighest evidence that the defendants even envisaged, much less sought to take, the kind of action which Feinberg took after he purchased the building and the Government vacated it.

 The court concludes that because of the nature of the building and the tenancy, its location, and its age, the Borgfeldt Building had no ascertainable ...


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