Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.
The creation of an "Independence National Historical Park" to consist of certain historical buildings located near Independence Hall in the City of Philadelphia was authorized by Congress in 1948. See 62 Stat. 1061, as amended, 16 U.S.C.A. § 407m et seq. The Secretary of the Interior was authorized by the Act creating the Park to acquire particular historical buildings and an area of approximately three city blocks to be made into a Park. One of the historical buildings described in the Act was the "Merchants' Exchange property" located on a city block bounded by Third Street, Walnut Street and Dock Street, in the City of Philadelphia. The Merchants Exchange is one of five properties mentioned in the Act as properties to be acquired and maintained for their historical interest in the setting of the new National Historical Park.
On March 1, 1951, the United States filed a declaration of taking covering the Merchants Exchange property and a number of other properties included within the area of the new Park. The government deposited $200,000 in the registry of the District Court as estimated just compensation for the Merchants Exchange. The present appellants, the owners of the Merchants Exchange, filed an answer in opposition to the proposed condemnation. The court below in substance overruled the owners' objections, in an opinion filed August 2, 1951. See 99 F.Supp. 714. The court then proceeded to appoint Commissioners to try and determine the issue of just compensation. See Rule 71A(h), F.R.C.P. 28 U.S.C. The Commissioners returned their Report on March 23, 1953, setting the fair market value of the Merchants Exchange as $309,000. The court below, for reasons to be stated later in this opinion, returned the Report to the Commissioners for specific additional findings. The Commissioners made a further Report to the court below on September 24, 1953, reaffirming the sum of $309,000 as the fair value of the property. The court below affirmed the new Report on November 18, 1953. The appeal at bar followed.
The Merchants Exchange was built in 1833 and 1834 to be used as an exchange building by an association of Philadelphia merchants. The Exchange was designed by William Strickland, the foremost American architect of the time, and was constructed of Pennsylvania marble. The building was completely remodeled and fireproofed in 1898 for use by the Philadelphia Stock Exchange for its pit and for offices for its members. The Philadelphia Stock Exchange used the building until 1914. Since that time it has been employed as an office building. In addition to the office building proper, the property condemned, on the date of taking, also consisted of a cold storage space in the basement, seven one-story brick market stores facing Dock Street, and a gasoline service station located on the southeast corner of Third and Dock Streets.The Merchants Exchange is located on the edge of a large wholesale fruit and produce market area, and several of the uses of the building, including the basement cold storage space, are associated with that industry.
The main question on this appeal involves the measure of compensation used by the Commissioners in arriving at their estimate of just compensation. The Commissioners heard extensive testimony from experts in real estate valuation, both for the United States and for the condemnees. The testimony ranged over several bases for valuation, including replacement cost and capitalization of rental income. The standard of valuation most relied upon was capitalization of rental income. In their first Report, the Commissioners summarized all the testimony given by the experts in a careful manner. As has been stated, the Commission's conclusion was that a fair value for the property at the time of the taking was $309,000. The last two sentences of the Commissioners' first Report described how the Commissioners arrived at this figure: "If, therefore, the income formula is to be used and adopted by the Commissioners in arriving at the fair market value of the subject property on the date of condemnation, it cannot logically be argued that the space in the building should be appraised on the basis of the $2.25 per square foot figure [the highest rental offered by a prospective tenant], and the Commissioners feel that an overall average for all the apace in the building should not exceed a $2.10 per square foot valuation at the time of taking. Accordingly, using the figure and employing the method of computation used by the experts of the owners, which the Commissioners find to be fair, the valuation of the subject property on the date of taking, to wit, March 1, 1951, would approximate $309,000.00."
The "method of computation" used by the experts of the owners, to which the Commissioners referred, is a capitalization of the rental income of the building. The owners' experts first took the total space, in square feet, available for renting and multiplied this figure by $2.50, the amount the experts estimated to be a fair rental per square foot for the office space as of the date of taking. From the total thus obtained, the experts then deducted certain costs of operation. Some of these costs of operation are fixed, in the sense that they do not vary according to the rent per square foot obtained for the space. On the other hand, it is argued that three elements of operating cost vary directly with the rent per square foot obtained. These cost elements are depreciation, management expense, and vacancy expense. It is asserted that it is customary in the business of operating office buildings, similar to the Merchants Exchange, in Philadelphia to base depreciation expense on total rental income, after the estimated number of years of useful life of the building have been determined. Similarly, management expenses are estimated at 5% of total rental income. An estimate of the expense of vacancies is arrived at by multiplying an estimated percentage of the available space which will lie vacant by the fair rental value per square foot of the vacant space. The computation presented by the owners' experts is set out in the first column of the footnote.*fn1 A similar estimate based upon a fair rental value of $2.10 per square foot, the figure suggested by the Commissioners' Report, is set out in the third column of footnote 1 to indicate what the computation would have been had rental income been capitalized on the basis of $2.10 per square foot. It is asserted by the owners that it is possibile to arrive at the $309,000 estimated by the Commissioners, using a figure of $2.10 per square foot, if the expenses of depreciation, management expense, and vacancy expense are incorrectly based upon the figures the owners' experts originally used, based upon $2.50 per square foot. This computation is set out in the second column of footnote 1.
The condemnees argue that an obvious mistake has been made and that they are entitled to have that mistake corrected here. If the last two sentences of the Commissioners' Report, quoted above, are taken to be a full statement of the Commissioners' reasoning in arriving at the $309,000 figure, there is something to be said for the position of the owners.
The condemnees first raised this objection alleging a mistake in computation in exceptions to the Commissioners' first Report. The court below affirmed this first Report but later sent the Report back to the Commissioners for a reconsideration of the point raised by the condemnees. The court's order of reference is set out in the footnote.*fn2
As was stated above, the Commissioners produced a second Report in response to this order of the court. In this second Report the Commissioners denied that they had arrived at a figure of $309,000 by any method of simple arithmetic based upon capitalization of a $2.10 rental income. The Commissioners said that they had not limited their estimate of valuation to rental income alone but had "* * * 'given diligent and conscientious consideration to every piece of evidence and testimony submitted to them for that purpose * * *' The income approach, and specifically the $2.10 per square foot rental figure was used only as a guide in checking the amount unanimously agreed upon, namely, approximately $300,000.00. Specifically, the Commissioners never intended that each and every figure used by the Owners' experts reflected the absolute, exact and accurate basis for its computation. It did, however, subscribe to the method employed. We again desire to stress that this procedure was used solely and only for checking purposes." The Commissioners reaffirmed their award of $309,000.
The condemnees wish us to reject this second Report as "meaningless". They argue that: "This second report was filed six months after the first report, and it is clearly nothing more than an attempt to rationalize an obvious mistake in the original report and to support retroactively a valuation of $309,000 on grounds consistent with the opinion of Judge Welsh. If the reasoning of the Commissioners in the second report is anything other than that, it is hard to explain why the alleged use of the capitalization of income method only as a guide was not mentioned in the first report, and why the Commissioners did not say in the first report that prior to their drafting of that report they had decided the value of the property was approximately $300,000."
But the first Report, taken in its entirety, does not indicate that the Commissioners relied exclusively on a capitalized rental income of $2.10 per square foot in arriving at their estimate of $309,000. The first Report is 30 pages long. It summarizes the testimony of all of the witnesses and discusses in detail a number of elements of value having nothing to do with rental, such as sales of nearby office buildings, historical value of the Merchants Exchange, the past history of real estate development in the section of Philadelphia in which the Merchants Exchange is located, and the future possibilities of real estate in that area. As the Commissioners stated in their second Report, the first Report itself declares that all the evidence was considered. Finally, even the final two sentences of the first Report quoted above do not say that the Commissioners used a figure of $2.10 per square foot but rather that "an overall average for all the space in the building should not exceed a $2.10 per square foot valuation at the time of taking." We conclude that the Commissioners' first Report and second Report, taken together, indicate that many elements of value were taken into consideration and the $309,000 figure was not he result of a simple arithmetical computation.
In arguing that the first Report is "meaningless", the owners are insisting that the figure of $309,000 could have been arrived at only by making the mistake in computation pointed out in our footnote 1. This is not necessarily true for the amount arrived at by the Commissioners might have been a pure coincidence. But even if the long arm of coincidence may not fairly be deemed to reach so far and the Commissioners actually arrived at the $309,000 figure in the way the owners suggest they did, the Commissioners' valuation is nevertheless sustainable if in fact all the other elements having nothing to do with rental were actually taken into consideration by the Commissioners. The important point, however, is that the Commissioners in their second Report emphasize that $309,000 was their fair estimate of the value of the Merchants Exchange, with each and every element of value considered. This statement by the Commissioners constitutes an explanation of what they did and how they did it, and in the absence of an allegation of bad faith, which the owners do not make, the Commissioners' computation should stand. Cf. Baetjer v. United States, 1 Cir., 1944, 143 F.2d 391, at page 394; United States v. Hirsch, 2 Cir., 1953, 206 F.2d 289, 294. And see United States v. Miller, 1943, 317 U.S. 369, 374, 763 S. Ct. 276, 87 L. Ed. 336.
The owners also object that the court below did not make separate findings of fact and conclusions of law. Before August 1, 1951 findings and conclusions were not required in condemnation cases. See Baetjer v. United States, 1 Cir., 1944, 143 F.2d 391, 394. This was true because the Federal Rules of Civil Procedure did not apply to proceedings in condemnation. See former Rule 81(a)(7), F.R.C.P. Findings and conclusions in ordinary civil cases are required by Rule 52 F.R.C.P. Rule 71A, F.R.C.P., effective August 1, 1951, however, had the effect of applying Rule 52 to condemnation cases. Rule 71A sets out a form of procedure to be followed in all condemnation proceedings under federal law, and a clause in the rule expressly makes all ...