The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge
ORDER DETERMINING WHETHER VALUATION OF CONDEMNED LAND MAY BE BASED ON THE DIFFERENCE BETWEEN THE UNRESTRICTED FEE AND RESTRICTED
Pending before the Court is a motion filed by Defendant San Diego Unified Port District ("Port"), in which the Port seeks a ruling regarding its proposed valuation methodology for just compensation due to it following the United States' condemnation of 32.42 acres of historic tidelands on behalf of the United States Navy. For the following reasons, the Court concludes that valuation of the Port's interest based on the difference between the property's unrestricted fee value and United States' leasehold value does not satisfy Federal Rule of Evidence 702, and therefore, an opinion utilizing such methodology is not admissible at trial.
Because the facts are well known the parties, the Court sets forth only those facts relevant to the disposition of this motion. The United States has condemned 32.42 acres of tide and submerged lands located at the south side of North Harbor Drive at Nimitz Boulevard on the San Diego Bay. In 1949, as part of a comprehensive exchange agreement*fn1 between the United States and the City of San Diego, the Navy received a long-term lease of the property for 50 years with a right of renewal for an additional 50 years. (See Doc. 52, Ex. A.) The lease included several provisions, including: (1) the United States paid no rent; (2) the United States was given the right "to make alterations, attach fixtures, and erect additions, structures or signs in or upon the premises," and those improvements would remain the property of the United States, which it could abandon on the property, unless the City objected; (3) the property could be used only for military purposes, and if there were a failure of that condition or if the property was abandoned, the property would revert to the City; and (4) the United States could not assign or sublet the leasehold. (Doc. 49, Ex. 1.)
In 1963, the City conveyed its interest in the property to the Port District. The Port remains the successor in interest to the property. On December 5, 1996, the Navy exercised its option to extend the lease for an additional 50 years. The Port and the California State Lands Commission ("Commission") opposed the extension on grounds that the lease was invalid. The United States then sought to condemn the Port and the Commission's interest in the subject property. Pursuant to the terms of a settlement in United States v. 32.38 Acres of Land, Case No. 99cv1622 (S.D.Cal. 2000), the United States was given a leasehold interest in the property through August 8, 2049.
On May 31, 2005, the United States filed the instant action to condemn the property, estimating just compensation at $237,500. In its declaration of taking, the United States asserts that it is condemning the Port's fee simple estate, including the State of California's tidelands trust rights and any subsurface or mineral rights, "but excluding the [leasehold] interest of the United States" and any public utility easements. (Doc. 2, Sched. C.) On January 6, 2006, the Port filed its objections to the United States' condemnation of the Subject Property. On January 9, 2006, the Commission filed a separate motion for summary judgment, challenging the United States' authority to extinguish the State's public trust rights in the land. This Court issued an order overruling the Port's objections and denying the Commission's motion on April 26, 2008. (Doc. 24.) The Commission's motion was denied on grounds that the taking by the United States extinguished California's public trust easement. (Id., at 5-8.)This Court found that: with respect to the 27.54 acres of lands which are filled and are not subject to the tidelands, the United States takes the lands free of any public trust restrictions. As to the remaining 4.88 acres which are within the bulkhead line but remain tidelands, the United States acquires the property subject to its own federal trust. (Id.)
Thereafter, on October 28, 2008, this Court issued an order determining that the land should be valued as burdened by California's tidelands trust, but that condemnation of the trust itself -- as a non-pecuniary sovereign attribute -- was not compensable. (Doc. 43, at 8.)
Federal Rule of Civil Procedure 71.1 (renamed from Rule 71A in 2007) governs procedural matters in a federal condemnation cases. Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 3-4 (1984). "In an action involving eminent domain under federal law, the court tries all issues, including compensation, except when compensation must be determined" by a specially constituted tribunal, jury, or court-appointed commission. Fed. R. Civ. P. 71.1(h). Rule 71.1 permits the jury to decide only the "precise issue of the amount of compensation to be awarded," a decision which is to be made "within ground rules established by the trial judge." United States v. Reynolds, 397 U.S. 14, 20 (1970) Consequently, the trial court is responsible for making preliminary determinations that affect the valuation of condemned property. See Scott Lumber Co. v. United States, 390 F.2d 388, 392 (9th Cir. 1968) (court determines legality of potential uses for condemned land prior to valuation).
"[J]ust compensation is the value of the interest taken." United States v. Petty Motor Co., 327 U.S. 372, 377 (U.S. 1946). It is measured by "the market value of the property at the time of the taking contemporaneously paid in money." Olson v. United States, 292 U.S. 246, 255 (1934). Market value is defined as "the price which a reasonable seller who desires to sell but is not required to sell would demand for the property and the price which a reasonable buyer who desired to buy but was not required to buy would pay for the same." United States v. 429.59 Acres of Land, 612 F.2d 459, 462 (9th Cir.1980). It is settled that just compensation is determined by the owner's loss, not the taker's gain. United States ex rel T.V.A. v. Powelson, 319 U.S. 266, 281 (1943). A property owner "is entitled to be put in as good a position pecuniarily as if his property had not been taken. He must be made whole but is not entitled to more." Olson, 292 U.S. at 255.
The United States and the Port agree that the proper measure of just compensation in this case is the property's fair market value on the date of taking, May 31, 2005. But the parties disagree as to the proper valuation methodology. The Port seeks a ruling on the admissibility of appraisal expert evidence, arguing that valuation of its lease fee interest may be based on the difference between the subject property's unrestricted fee value and the leasehold value. The United States argues that the motion does not address an evidentiary issue; rather, the Port seeks a ruling as to the proper measure of just compensation. Although the Port describes its expert's methodology and the legal basis for the appraisal, it does not provide the Court with the appraisal. Accordingly, the Court construes the motion as a request for a legal determination that the Port's expert's methodology is a reliable method of computing just compensation. See Fed. R. Evid. 702.
The Port contends that the fair market value of its interest can be determined by the difference between the fair market value of the subject property at its highest and best use and the value of the United States' leasehold interest. It argues that valuation should proceed according to the "undivided fee rule," citing United States v. 1.377 Acres of Land, 352 F.3d 1259, 1269 (9th Cir. 2003). Under this rule, the government provides just compensation for its taking, and the award is then apportioned among parties holding various interests in the condemned property. 1.377 Acres of Land, 352 F.3d at 1269 According to the Port, their appraiser properly determined the value of its interest using the following method: (1) the value of the fee simple absolute is determined; (2) the value of the United States' leasehold interest is then determined; and (3) the difference between the two constitutes the Port's award.
The United States contends that this methodology is improper because the United States is not condemning the entire fee. Instead, it is only condemning the Port's reversionary lease fee interest, which becomes possessory in 2049 upon expiration of the lease. It cites Richland Irrigation Dist. v. United States, 222 F.2d 112, 114 (9th Cir. 1955), for the proposition that the filing of a declaration of taking condemns the described property interest, vesting the United States with title and obligating it to pay just compensation for the condemned interest only. It further argues that the "undivided fee rule" is a rule of allocation, not valuation, such that it determines the value of a condemnee's interest where the condemnee owns an interest in property that has been condemned. According to the United States, such a rule is inapplicable here because, as the lessee, it is condemning the Port's reversionary lease fee interest only, not the entire fee. It argues that the proper valuation question is what a buyer would pay for the Port's interest on the ...