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decided: February 22, 1982.


Appeal from the Order of the Court of Common Pleas of Philadelphia County in case of In Re: Petition of 1301 Filbert Limited Partnership for the Appointment of Viewers to ascertain the just compensation due Petitioner arising from the De Facto Condemnation of Petitioner's property at 1301 Filbert Street, Philadelphia, Pennsylvania, by the City of Philadelphia, No. 2357 February Term, 1978.


Louis B. Kupperman, with him Jeffrey A. Less, of counsel: Dilworth, Paxson, Kalish & Levy, for appellant.

Marjorie H. Stern, Chief Assistant City Solicitor, with her Alan J. Davis, City Solicitor, for appellee, City of Philadelphia.

President Judge Crumlish and Judges Blatt and Williams, Jr., sitting as a panel of three. Opinion by Judge Williams, Jr. Judges Wilkinson, Jr. and Palladino did not participate in the decision in this case.

Author: Williams

[ 64 Pa. Commw. Page 607]

In this case, an eminent domain appeal, the 1301 Filbert Limited Partnership (Partnership) seeks reversal of a lower court order that dismissed its petition for a board of viewers to assess condemnation damages. The issue facing us, as it did the court below, is whether the actions of the City of Philadelphia (City), relative to a certain public project, destroyed the commercial viability of a hotel owned by the Partnership and thereby worked a de facto taking of the property. The lower court's dismissal of the Partnership's petition was on a determination that no such de facto taking had occurred; and, it is that determination which is here contested.

In February 1978, the Partnership filed in the Court of Common Pleas of Philadelphia County a petition for the appointment of viewers to assess condemnation damages against the City. The petition alleged, in essence, that the City's activities and publicity regarding a "Center City Commuter Tunnel Project" (Tunnel) resulted in a de facto taking of an eleven story building called the Essex Hotel (Essex), which is owned by the Partnership subject to a mortgage, and which abuts the route officially designated for construction of the Tunnel. Underlying this assertion of a taking is a further allegation: that the City's actions rendered the Essex useless as a hotel for such a significant period of time that the Partnership lost needed financing, and is now faced with total loss of the hotel through mortgage foreclosure.

[ 64 Pa. Commw. Page 608]

The Partnership's petition, filed pursuant to Section 502(e) of the Eminent Domain Code,*fn1 was based on a theory that the City's Tunnel activities deprived the Partnership of the beneficial use of the Essex, and thereby inflicted a compensable injury, without a formal declaration of taking having been filed.

In March 1978, the lower court overruled the City's preliminary objections to the petition; thereafter, the court conducted an evidentiary hearing to determine if the City had committed a de facto taking as alleged. During June 1979 and July 1979, the court heard evidence from fact and expert witnesses for both parties. Finally, by an order dated January 9, 1980, the court made its ruling that the City had not committed a de facto taking of the hotel; and, thus, the court dismissed the Partnership's petition for viewers. When that order was entered of record the instant appeal followed.

For us to decide whether or not there has been a de facto taking of the Essex Hotel, it is obvious that we must consider the nature of the Tunnel project itself and the nature of the City's activities relative to the project. So too, we must consider the nature of the hotel property and the nature of the Partnership's operative interest in it. As a further matter, we must consider the nature of the impact which the Tunnel project and the City's activities had on the Partnership's use of, and interest in, the hotel. One of the things giving this case a special posture is the fact that at no time material to the proceedings was the Essex Hotel open to guests or available for other commercial use.

[ 64 Pa. Commw. Page 609]

The Tunnel Project

In center-city Philadelphia there are two commuter railroad stations or terminals, Suburban Station and Reading Terminal. Suburban Station, located at 16th Street and John F. Kennedy Boulevard, chiefly serves passengers commuting to and from suburbs to the west and southwest of the city. About five blocks east of Suburban Station is Reading Terminal, which is located at 12th and Market Streets. Reading Terminal chiefly serves commuters to and from points in the north of the city and the suburbs beyond.

To further describe the locational relationship between these two rail stations, it is significant to add that a few blocks to the east of Suburban Station, its front street, John F. Kennedy Boulevard, becomes Filbert Street, which continues in a straight course eastward and, in the distance of a few more blocks, passes directly under part of the rear of Reading Terminal. Putting it differently, John F. Kennedy Boulevard and Filbert Street together constitute a single, straight thoroughfare, which at one point passes adjacent to Suburban Station, and at another point about five blocks away passes adjacent to Reading Terminal.

Since early in this century various business, governmental and civic groups have envisioned the linking of Philadelphia's center-city railroad stations by means of a Tunnel. Yet, until the 1960's such a project remained little more than a concept. In that decade, however, the government of the City of Philadelphia began efforts to convert the concept into reality.

In 1960, the City engaged an engineering firm to prepare a study addressing the feasibility of a Tunnel connecting Suburban Station and Reading Terminal by way of Kennedy Boulevard and Filbert Street. That same year, City planners published a land-use document

[ 64 Pa. Commw. Page 610]

    that made specific reference to a Tunnel under Filbert Street. In 1961 the City included the Tunnel project in its "Capital Program," and in 1963 appropriated money for the project for the first time. In the middle 1960's the City had private engineers prepare preliminary designs for the Tunnel. Those designs showed that the Tunnel would include several blocks of Filbert Street, with certain building along Filbert Street being underpinned during construction of the Tunnel. During most of the 1960's, it was hoped that the City, and the railroads involved, would finance the Tunnel's construction.

In 1968, after the creation of the Federal Urban Mass Transportation Administration, the City applied for federal funding to further the project. Pursuant to that application the federal government, in 1972, awarded the City a "technical study grant" of several million dollars; the purpose of the grant was to enable the City to update its preliminary designs for the Tunnel, and to prepare cost analyses and an impact statement. In the wake of that grant a City engineer was made project manager for the Tunnel; and contracts were entered into with private engineers for project scheduling and coordination.

In 1974, the City published its "Capital Program" for the years 1974-1979, and that publication continued the specific references to the Tunnel. The publication stated that as of 1973 the City had spent over $7,000,000 for Tunnel purposes, and that an expenditure of about $198,000,000 was estimated for the six-year period 1974-1979. It was also estimated that Tunnel expenditures for the year 1973 alone would exceed $43,000,000. The City further announced in 1974 that it intended to move forward with the Tunnel if the federal government would fund a major portion of the entire project.

[ 64 Pa. Commw. Page 611]

In July of 1975, the federal authorities granted the City $25,000,000 in capital assistance, to fund such project items as land acquisition and construction and engineering plans. Then, by a City ordinance passed in December 1975, the City's Department of Public Property was authorized to spend up to $20,000,000 to purchase, lease, condemn or otherwise acquire specific properties, to the extent those properties were needed for the Tunnel project. Included on that list of properties was the Essex Hotel, which is located at 13th and Filbert Streets abutting the path of proposed Tunnel construction. We note, in this context, that the mentioned ordinance authorized the acquisition of the listed properties but did not purport to mandate it.

After appraising the value of the Essex, the City compared the costs of underpinning the structure and the cost of acquiring it. The conclusion was reached that underpinning would be cheaper; consequently, the Essex was excluded from the group of properties the City actually intended to acquire pursuant to the Tunnel project.

In January 1977, the federal government and the Mayor of Philadelphia signed a construction funding contract, whereby the federal government would provide the City with over $240,000,000 of a total of about $300,000,000 needed to construct, and put into operation, the Tunnel connecting Suburban Station and Reading Terminal. In April 1977, the Philadelphia City Council approved the construction funding contract. After the grant of construction funding, opponents of the Tunnel instituted a suit in the federal district court to block the project; however, that effort failed with the dismissal of the action in September 1977.

[ 64 Pa. Commw. Page 612]

The Partnership and the Essex Hotel

In the midst of the City's efforts regarding the Tunnel, the Partnership purchased the Essex Hotel. In June 1974 the Partnership, by means of straw parties, entered into an agreement for the purchase of the hotel at a price of $600,000. Settlement for the purchase occurred on February 28, 1975, on which occasion the Partnership paid $150,000 in cash, and executed a purchase money mortgage to the seller for the $450,000 balance. The purchase money mortgage was to become due in three years, on February 28, 1978.

At the time the Partnership purchased the hotel no federal money had been appropriated for construction of the Tunnel, or even for land acquisition in connection with the Tunnel project.

The Essex is an eleven story, steel and masonry structure built in 1917; and contains 225 guest rooms. On the hotel's ground floor are a lobby, a restaurant, and several retail stores; on the second floor are function rooms; and, the remaining nine floors contain the guest rooms. Other main features are a two level basement housing various facilities; and a parking lot is at the rear of the hotel property. The only public entrances to the Essex face on Filbert Street.

At the time of the Partnership's purchase, the Essex had been closed for several years and was in a state of serious disrepair. The Partnership's purpose in buying the hotel was to renovate it and convert it to a low or moderate price, European style hotel, hopefully in time for the Bicentennial celebration in 1976. According to detailed projections done for the Partnership, a renovated Essex would be a profitable hotel operation.

The Partnership commenced renovations soon after making settlement in February 1975. Indeed, contractors and workmen had been engaged even prior to settlement. The original estimate was that the renovations

[ 64 Pa. Commw. Page 613]

    would cost about $523,000; and the partners expected to finance that cost by their own contributions and by loans from financial institutions. The partners also expected to obtain long-term financing to satisfy the purchase money mortgage before its due date in February 1978. However, in March 1975, after renovations were underway, one of the partners heard a news report which he interpreted to mean that the federal government had granted the City funds to construct the Tunnel. In truth, however, federal construction funding had not been granted as of that time.

In response to the news report, the Partnership met with the City's Commissioner of Public Property, about March 20, 1975, to discuss the Tunnel and the Essex. In that meeting the Partnership proposed selling the hotel to the City; but that proposal was rejected. The Commissioner informed the Partnership that construction funding had not been approved as of then and that, in any event, the City did not intend to acquire the Essex, either by purchase or condemnation. The Commissioner also stated that the Essex was not on the route of the Tunnel, and that Tunnel construction would not damage the hotel or interfere with renovation work. Following the meeting of March 20, the Partnership decided to continue with the hotel renovations.

Soon after it received the federal capital assistance grant in July 1975, the City sent a letter to the Partnership advising that the City was going to appraise the Essex to ascertain its fair market value, for purposes of possible condemnation in connection with the Tunnel. As a result of that letter the Partnership had a second meeting with the Commissioner of Public Property; and, again, the Partnership was told that because the Essex was not in the right-of-way for the Tunnel the City would not purchase or condemn the hotel.

[ 64 Pa. Commw. Page 614]

During 1975 the Partnership experienced delays, union problems and work stoppages in connection with the renovation efforts. Moreover, it was becoming apparent that the renovations required were more extensive than initially conceived and that the costs would greatly exceed the original estimates. By December 1975 the Partnership had spent over $500,000 on renovations; and yet, substantial work remained. December of 1975 also brought a visit to the hotel by two City-retained engineers: their purpose was to prepare plans for the underpinning of the building. This visit prompted a third meeting of the Partnership and the Commissioner, who once again stated that the City was not interested in acquiring the hotel. A few days after this meeting, however, the City enacted the ordinance which authorized the acquisition or condemnation of certain Tunnel-related properties; and that list of properties did include the Essex.

The following year, 1976, brought continued but further-troubled renovation activity by the Partnership. Deficiencies in work coordination became apparent; and delinquencies in the payment of contractors caused work stoppages. By June 1976 the Partnership had accumulated unpaid bills totaling more than $350,000; and of that amount over $230,000 was owed to contractors. It became clear that the hotel would not be open in time for the 1976 Bicentennial as the partners had initially planned.

The partners also realized in 1976 that outside financing was needed. Consequently, in August 1976 the Partnership engaged William Batoff, a mortgage correspondent for the Sun Life Insurance Company of America (Sun Life), to arrange permanent financing and a construction loan for the Essex. Batoff, upon analyzing the hotel enterprise, concluded that it was commercially viable; accordingly, he recommended to Sun Life that the permanent financing be undertaken.

[ 64 Pa. Commw. Page 615]

In March 1977, Sun Life issued a letter of commitment to loan the Partnership $1,250,000 for a term of twenty-five years, conditioned upon the completion of the hotel's first seven floors by November 1, 1977. However, to complete those floors the Partnership had to obtain a short-term construction loan to pay for the remaining work.

Armed with the commitment letter from Sun Life, Batoff applied to the Continental Bank (Continental) to arrange an interim construction loan of $1,200,000; the proceeds of which were intended for completing the seven floors required by Sun Life, paying outstanding contractor claims, and retiring the purchase money mortgage on the hotel. It was further contemplated that the Continental loan would be "taken out," or paid off, by the permanent loan from Sun Life.

A few months prior to the Sun Life commitment letter, there occurred another event which was to have special significance: in January 1977 the federal government approved construction funding for the railroad Tunnel. On January 12, 1977, the requisite contract was signed by the Federal Secretary of Transportation and the Mayor of Philadelphia.

The Sun Life financing commitment remained in force even after the Philadelphia City Council, in April 1977, voted approval of the Tunnel construction funding contract. Sun Life did, however, in July 1977, issue an amended commitment letter, providing as follows: to loan the Partnership $1,000,000 (instead of $1,250,000) if the first seven floors of the hotel were completed by October 19, 1977 (instead of November 1). The amendment also increased the amount of financing to $1,450,000 if the remaining four floors were to be completed as hotel rooms; or to $1,650,000 if those remaining four floors were to be made ...

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