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United States v. 38,994 Net Usable Square Feet of Space etc.

United States District Court for the Northern District of Illinois, Eastern Division
May 10, 1989, Decided
No. 87 C 8569
Reporter
1989 U.S. Dist. LEXIS 5167 *

UNITED STATES OF AMERICA, Plaintiff, v.

38,994 net usable square feet of space at 910 S.
Michigan Avenue, Chicago, Illinois; AMERICAN
NATIONAL BANK AND TRUST COMPANY
OF CHICAGO as Trustee Under Trust Nos. 32501
and 40589; 910 S. Michigan Avenue Building, a
limited partnership; and LEONARD KOVAL,
General Partner, Defendants

Core Terms
space, just compensation, conversion, costs, lease,
plans, temporary taking, buyer, anticipated, rental,
economically, preparations, temporary, cases

Case Summary
Procedural Posture
Plaintiff United States brought condemnation
proceedings against defendant owners of an office
building. The parties disagreed as to the theory of
valuation to be employed in determining the
measure of just compensation owed the owners for
the government's temporary taking of a portion of
the owners' leasehold interest in the building.
Overview
The owners leased two floors of the building to the
government. The owners declined to extend the
government's lease due to a planned conversion of
the building. The government filed a complaint in
condemnation. The parties disagreed as to what
constituted just compensation for the government's
use of the space during the period subsequent to the

termination of the lease. The owners argued that

they were entitled to compensation for the effective
taking of the entire building and that a
determination of the fair market value rent for the
space occupied had to include consideration of all
the costs that a tenant would have to pay to obtain a
voluntary lease for space in an otherwise empty
building ready for conversion with contractors
ready to work. The government maintained that the
measure of just compensation was the fair market
rental value of the occupied space for the period of
taking and that the figure should be calculated
without regard to the fact that the owners were
planning conversion. The court found that the
owners' theory of valuation was correct and
prepared an instruction to the fact finder regarding
the appropriate method of valuation of just
compensation.
Outcome
The court determined the appropriate method of
valuation of just compensation.

LexisNexis Headnotes
Civil Procedure > Special Proceedings > Eminent
Domain Proceedings > General Overview
Constitutional Law > Bill of Rights > Fundamental
Rights > Eminent Domain & Takings
Contracts Law > Types of Contracts > Lease
Agreements > General Overview
Real Property Law > Eminent Domain
Proceedings > General Overview

1989 U.S. Dist. LEXIS 5167, *5167

Real Property Law > Estates > General Overview

Real Property Law > Estates > Present Estates > Fee
Simple Estates
Real Property Law > Inverse
Condemnation > General Overview

HN1 While "moving costs" may not be proven as

separate items of damage in cases involving the
government's temporary takings of leasehold
interests in real property, such items may be used to
aid in the determination of what would be the
market price paid for such temporary occupancy of
the property. Where the government takes an entire
interest, it is not required to pay for any resulting
consequential damages. This general rule is not
applicable where the government commits a partial
taking. When less than a fee interest in property is
taken, the owner is left with the remainder and must
eventually return to the remainder which may be
useless. Thus, allowing the government to pay for
only the market rental value of the interest it took
would not meet the requirement of just
compensation as contemplated by the Fifth
Amendment. If the government need only pay the
long-term rental of an empty building for a
temporary taking a way will have been found to
defeat the Fifth Amendment's mandate for just
compensation in all condemnations except those in
which the contemplated public use requires the
taking of the fee simple title. The value of a
temporary occupancy must be ascertained not by
treating what is taken as an empty building to be
leased for a long-term, but what would be the
market rental value of such a building on a lease by
the long-term tenant to the temporary occupier.
Civil Procedure > Special Proceedings > Eminent
Domain Proceedings > General Overview
Real Property Law > Eminent Domain
Proceedings > General Overview
Real Property Law > Inverse
Condemnation > General Overview

HN2 Loss of going concern value in a business is a

consequential loss not compensable in permanent

fee takings. This rule is based on the assumption

that the business can be moved elsewhere.
However, an award for the taking of the going
concern business value is proper in temporary
takings cases. In temporary takings cases, it is not
reasonable to indulge in the fiction that the business
can be moved elsewhere because even if that is
possible, the owner would end up with undesired
duplicate businesses once the taking ended. The
temporary interruption as opposed to the final
severance of occupancy so greatly narrows the
range of alternatives open to the condemnee that it
substantially increases the condemnor's obligation
to him. It is a difference in degree wide enough to
require a difference in result.
Civil Procedure > Special Proceedings > Eminent
Domain Proceedings > General Overview
Civil Procedure > Special Proceedings > Eminent
Domain Proceedings > Jury Trials
Real Property Law > Eminent Domain
Proceedings > General Overview

HN3 In the case of a temporary taking, the

condemnee is entitled to compensation for more
than the space actually occupied. While the cases
do not stand for the proposition that the condemnor
must pay for consequential losses as distinct items
of damage, such factors as the loss of the right to
convert the property during the term of the taking,
the increased construction and financing cost
resulting from waiting six months to convert, and
the anticipated costs of carrying and operating the
entire property due to the government's presence
are proper for the jury to consider in determining
what the condemnee has lost because of the
condemnation. The government must remember
that in establishing the amount of just
compensation due the condemnee, the question is
what has the owner lost, not what has the taker
gained.
Opinion by: [*1] KOCORAS

Opinion
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1989 U.S. Dist. LEXIS 5167, *1

MEMORANDUM OPINION
CHARLES P. KOCORAS, UNITED STATES
DISTRICT JUDGE
This case arises over a disagreement involving the
theory of valuation to be employed by the Court in
determining the measure of just compensation owed
Defendants ("Owners") for Plaintiff United States'
temporary taking of a portion of Defendants'
leasehold interest in an office building.
FACTS
The defendants are the Owners of a twenty story
building located at 910 S. Michigan Avenue in
Chicago. In June, 1977, the Owners leased two
floors of the building to the Government for a
period of ten years. The remainder of the building
was fully rented, except for occasional vacancies in
one or two-room offices.
In 1985, the Owners retained an architect to
prepare a preliminary feasibility study for the
planned conversion of the property into seventeen
floors of apartments, retail and office space, and
associated parking. These plans were completed in
early 1986. On April 1, 1986, the Owners
approached a larger firm of architects about
designing and supervising the conversion project.
In late April, 1986, the Owners' largest tenant
terminated its lease, effective October 31, 1986,
and during May of 1986, the [*2] Owners became
aware that the Government was advertising for new
space for its operations. Thereafter, on June 18,
1986, the Owners signed a contract with the
architectural firm for the design and supervision of
the project.
On July 8, 1996, approximately one year before the
expiration of this lease, the Government requested
a one year extension of its lease. However, the
Owners, by letter dated July 24, 1986, informed the
Government that they could not extend its lease due
to the planned conversion of the building.
Subsequently, the Owners began arranging the

financing and general contracting for the proposed

conversion and sought and ultimately obtained
approval for the proposed conversion from
Housing and Urban Development. Therefore, by
the end of 1986, the Owners had the architects and
planning in place, HUD and Illinois approval,
financing in process, and a building which was
substantially less than full as the Owners waited for
the property to empty completely.
By letter dated January 29, 1987, the Government
notified the Owners of its intention to remain in its
space until August 31, 1987, exercising its
contractual right to extend its occupancy for 90
days. On May 29, 1987, [*3] a meeting was held
between representatives of the Government and the
Owners during which there was discussion of the
Government remaining in its space after August 31,
1987. The Owners again refused. Subsequently, the
Government sent the Owners another letter stating
that it would remain in the MEPS space until early
1988 and that it was prepared to condemn the
space unless a lease extension was agreed to by the
Owners. No extension was granted.
On September 22, 1987, discussions began between
the Government and the Owners to determine
whether there were any conditions under which the
Owners' plans for demolition and renovation of the
building could proceed while the Government
remained in the building. Due to the fact that
asbestos insulation material had to be removed
prior to demolition and renovation and because of
noise, dust and other increased expenses related to
the Government's operation, the Owners decided
not to proceed until the building was completely
vacant. The parties agreed that the Owners'
decision to wait until the Government vacated the
building to begin conversion was an economically
prudent thing to do.
The Government filed its complaint in
condemnation on October [*4] 1, 1987, thirty
days after the Government actually "took" the
space, and it deposited an advance rental payment
for six months of $ 253,481.00 based on an
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1989 U.S. Dist. LEXIS 5167, *4

estimate of just compensation due the Owners for

the taking. The Government ultimately vacated the
premises on February 22, 1988.
Both parties agree that the Government must pay
"just compensation" for its use of the space during
the 6 month period subsequent to the termination of
the lease. However, the parties disagree as to what
constitutes just compensation and the proper
method of valuation in determining the amount.
Essentially, the Owners argue that they are entitled
to compensation for the Government's effective
taking of the entire building and contend that a
determination of the "fair market value rent" for
the space occupied must include consideration of
all the costs that a would-be tenant would have to
pay to obtain a voluntary lease for space in an
otherwise empty building ready for conversion,
with contractors ready to work. The Government
maintains that the measure of just compensation is
the fair market rental value of the occupied space
for the period of taking and that this figure should
be calculated without [*5] regard to the fact that
the Owners were planning conversion. This Court
believes that the Owners' theory of valuation is
correct.
DISCUSSION
The guidelines for measuring just compensation in
cases involving temporary takings of leasehold
interests in real property were first established by
the Supreme Court in United States v. General
Motors, 323 U.S. 373 (1945). In General Motors,
the Government temporarily took a manufacturer's
long-term lease rights in a warehouse used for parts
distribution. To make space available for the
Government, General Motors ("GM") had to move
parts out of the warehouse and dismantle fixtures
erected for its use. At trial, GM tried to recover
compensation for the fair market value of the space
taken plus the costs of removing its parts and the
value of the destroyed fixtures. However, the trial
court barred evidence of GM's moving costs.
General Motors, 323 U.S. at 376.

On appeal, the Supreme Court held that HN1 while

"moving costs" may not be proven as separate
items of damage, such items may be used to aid in
the determination of what would be the market
price paid for such temporary occupancy of the
property. The Court acknowledged that [*6] where
the Government takes an entire interest, it is not
required to pay for any resulting consequential
damages. Nevertheless, the Court felt that this
general rule was not applicable where the
Government committed a partial taking because a
fundamental difference existed between a partial
and a complete taking. The Court reasoned that
when less than a fee interest in property is taken,
the Owner is left with the remainder and must
eventually return to the remainder which may be
useless. Thus, allowing the Government to pay for
only the market rental value of the interest it took
would not meet the requirement of just
compensation as contemplated by the Fifth
Amendment. The Court found, "If the Government
need only pay the long-term rental of an empty
building for a temporary taking . . . a way will have
been found to defeat the Fifth Amendment's
mandate for just compensation in all
condemnations except those in which the
contemplated public use requires the taking of the
fee simple title." Id. at 381. The Court concluded,
therefore, that the value of such a temporary
occupancy must be ascertained not by treating what
is taken as an empty warehouse to be leased for a
long-term, [*7] but what would be the market
rental value of such a building on a lease by the
long-term tenant to the temporary occupier. Id. at
382.
The Supreme Court decided a second temporary
taking case several years later in Kimball Laudry
Co. v. United States, 338 U.S. 1 (1949). In Kimball,
the Government took the buildings and equipment
of a commercial laundry for a temporary term of
about seven months, subsequently extending the
taking in one year increments. 338 U.S. at 3. The
jury awarded the owner $ 70,000 as rental income,
covering taxes, insurance, normal depreciation, and
a return on the value of the Laundry's physical
Page 4 of 6

1989 U.S. Dist. LEXIS 5167, *7

assets. Id. at 4. The corporate owner claimed a right

to additional compensation for the taking of its
intangible property interest in the going concern
value of the business. The trial and appellate courts
denied such compensation, but the Supreme Court
reversed.

the taker gained." Boston Chamber of Commerce v.

Boston, 217 U.S. 189, 195 (1909). Accordingly, the
Court finds the following instruction to the fact
finder regarding the method of valuation of just
Compensation appropriate.
INSTRUCTION

The Court acknowledged that HN2 loss of going

concern value in a business is a consequential loss
not compensable in permanent fee takings. This
rule is based on the assumption that the business
can be moved elsewhere. Kimball, 338 U.S. at 1011. The Court held, however, that an award for
the [*8] taking of the going concern business value
is proper in temporary takings cases. The Court
reasoned that in temporary takings cases, it is not
reasonable to indulge in the fiction that the business
can be moved elsewhere because even if that is
possible, the owner would end up with undesired
duplicate businesses once the taking ended. Id. at
15. The Court found that "[t]he temporary
interruption as opposed to the final severance of
occupancy so greatly narrows the range of
alternatives open to the condemnee that it
substantially increases the condemnor's obligation
to him. It is a difference in degree wide enough to
require a difference in result." Id.
These decisions make it clear that HN3 in the case
of a temporary taking, the condemnee is entitled to
compensation for more than the space actually
occupied. While we do not believe that these cases
stand for the proposition that the condemnor must
pay for consequential losses as distinct items of
damage, we do think that such factors as the loss of
the right to convert the property during the term of
the taking, the increased construction and financing
cost resulting from waiting six months to convert,
and the anticipated costs [*9] of carrying and
operating the entire property due to the
Government's presence are proper for the jury to
consider in determining what the condemnee has
lost because of the condemnation. The Government
must remember that in establishing the amount of
just compensation due the condemnee, "the
question is, What has the owner lost? not, What has

In cases of this sort, calculation of the amount of

just compensation owed by the Government
involves a two-step process. First, you must
determine the amount that an economically
reasonable person would have paid on September
1, 1987, to purchase the entire Property if vacant at
that time and if the buyer would have had no
reasonable cause to believe that the Government
would remain in the MEPS Space beyond August
31, 1987 and the Government actually vacated on
time. In other words, in determining this amount,
you are to ignore the effect, if any, of the
Government's June, 1987, announcement that it
would [*10] remain in the MEPS Space beyond
August 31, 1987. In making this determination, you
should assume that this hypothetical purchaser, if
he wished to, could have purchased without
transaction costs and could have taken over the
Owners' plans and preparations for conversion
(such as you find them to have been) as if the
purchaser had himself made the plans and
preparations.
You should then determine what an economically
reasonable buyer would have paid on September 1,
1987, to purchase the entire Property knowing
what the Owners knew as of that date about the
Government's plans, and assuming that the buyer,
if he wished to, could have purchased without
transaction costs and taken over the Owners' plans
and preparations for conversion as if he were the
one who had made the plans and preparations. In
deciding this issue you may consider evidence
proffered by the Owners to the effect that a buyer
for the Property would have diminished the price to
be paid based on anticipated increased costs of
construction, anticipated increased costs of
financing the conversion, anticipated costs of
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1989 U.S. Dist. LEXIS 5167, *10

carrying the entire Property during the taking,

anticipated increased costs of operating the
Property because [*11] of the Government's
presence, and anticipated loss of income.
Additionally, the Owners claim that when the
Government remained in the MEPS Space on
September 1, 1987, it was not then clear when the
Government would vacate the MEPS Space. If you
find from the evidence that this is true, and if you
find from the evidence that such uncertainty would
normally effect the price that a willing buyer would
pay, then you also may consider this in making
your findings. You shall determine the weight to be
given to such evidence.

End of Document

You should award the Owners as just compensation

the difference between the two amounts you find.
The Court directs you to assume away transaction
costs and any possible dimunition in price because
of inefficiencies in taking over a conversion,
because these events did not occur and because
diminishing purchase prices by these amounts
would unfairly diminish the just compensation
owed.
In determining these amounts, you should take into
account all factors which could realistically be
suggested by the seller to increase the sales price,
and which could be realistically suggested by the
buyer to decrease the sales price except for the
already mentioned transaction costs [*12]
matters. Your determination should be made in
light of fact as shown by the evidence, including the
stipulations of the parties, and your application of
common sense to these facts. In determining these
amounts, you should not given any consideration to
any economically illogical unwillingness by the
Owners to sell the Property. You should instead
consider factors which you find that economically
reasonable buyers and sellers would have
considered in bargaining for a contract for sale.
It is so ordered.

Page 6 of 6