       In the United States Court of Federal Claims
                                      No. 12-151C

                              (Filed: December 19, 2013)

************************************ *
                                     *
JEMAL’S LAZRIV WATER, LLC,           *
                                     *
                    Plaintiff,       *          Contract Disputes Act; GSA Leases for
                                     *          Office Space; Tax Adjustment Clause;
v.                                   *          Contract Interpretation; Determination
                                     *          of Base Year and Full Assessment;
THE UNITED STATES,                   *          Cross-Motions for Summary Judgment.
                                     *
                    Defendant.       *
                                     *
************************************ *

Lynn Estes Calkins, Holland & Knight, LLP, Washington, D.C. for Plaintiff.

Martin M. Tomlinson, with whom were Stuart F. Delery, Assistant Attorney General,
Bryant G. Snee, Acting Director, and Franklin E. White, Jr., Assistant Director,
Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington,
D.C. for Defendant.

                                OPINION AND ORDER

WHEELER, Judge.

       This case arises under the Contract Disputes Act, 41 U.S.C. § 7104 and the Tucker
Act, 28 U.S.C. §§ 1491(a)(1) and (2), and stems from different interpretations of a clause
contained in five leases for space in an office building in Washington, D.C. Each of the
five leases between Plaintiff Jemal’s Lazriv Water, LLC (“Jemal’s”) and the General
Services Administration (“GSA”) includes a tax adjustment clause which states that the
Government shall make a payment to Jemal’s for its share of any increase in real estate
taxes over the amount established as the base year taxes. Jemal’s and the Government
disagree as to what constitutes “the base year.” Each lease defines base year taxes to
include “the real estate taxes for the first 12-month period of the lease term coincident
with full assessment.” Joint Stipulation (“Stip.”) ¶¶ 7-8.
       At the heart of this dispute is the meaning of the term “full assessment” in the
leases. Under Plaintiff’s interpretation, a full assessment occurred no later than tax year
2007. According to the Government, the property in question was not fully assessed until
tax year 2010,1 and so GSA’s contracting officer denied Plaintiff’s claims for payment
for the Government’s share of the increase in real estate taxes during the 2008, 2009, and
2010 tax years. Jemal’s argues that the Government is contractually obligated to
reimburse Plaintiff for the Government’s share of the tax increase during these years. On
March 30, 2013, Jemal’s filed its complaint in this Court to recover the $2,240,884.74
plus interest it claims it is entitled to under the five leases. The matter comes before the
Court on cross-motions for summary judgment. The Court heard oral argument on
December 4, 2013.

                                               Factual Background

        Between 2004 and 2008, GSA entered into five leases with Jemal’s for office
space located at 1900 Half Street, S.W., Washington, DC 20024 (“the Property”). Stip. ¶
3. GSA accepted space under two of the leases in 2005, and accepted space under the
other three leases in 2006, 2007, and 2008. Id. In addition to rent, GSA was obligated to
pay tax adjustments as provided in the solicitation, which was incorporated into the
leases. Under the tax adjustment clause, the United States “shall 1) make a single annual
lump sum payment to the Lessor for its share of any increase in real estate taxes during
the lease term over the amount established as the base year taxes or 2) receive a rental
credit or lump sum payment for its share of any decreases in real estate taxes during the
lease term below the amount established as the base year taxes.” Stip. ¶ 5.

       The leases define the base year taxes as “the real estate taxes for the first 12-month
period coincident with full assessment.”2 Stip. ¶¶ 7-8. According to the definition
contained in the leases, the full assessment means that “the taxing jurisdiction has

1
 In the District of Columbia, the assessed value for all real property is the estimated market value of such property
on the valuation date. This assessment is used to calculate taxes for the following tax year. For instance, if a
property was assessed on January 1, 2009, this assessment would be used to calculate taxes for the 2010 tax year
which began on October 1, 2009 and ended September 30, 2010.
2
  In four of the five leases, the base year taxes are defined as “1) the real estate taxes for the first 12-month period
coincident with full assessment or 2) may be an amount negotiated by the parties that reflects an agreed upon base
for a fully assessed value of the property.” Stip. ¶ 7. Neither party argues that the parties negotiated an agreed upon
base for purposes of the tax adjustment clause, and so the Court limits its attention to the first part of the definition.
For purposes of the fifth lease, the base year taxes are solely defined as “the real estate taxes for the first 12-month
period of the lease term coincident with full assessment.” Stip. ¶ 8.


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considered all contemplated improvements to the assessed property in the valuation of the
same. Partial assessments for newly constructed projects or for projects under
construction, conversion, or renovation will not be used for establishing the
Government’s base year for taxes.” Stip. ¶ 10. The taxing jurisdiction for the Property is
the District of Columbia’s Office of Tax and Revenue (“OTR”). Stip. ¶ 26.

        An OTR representative testified in a deposition that the D.C. Code obligates OTR
to base its assessments on 100 percent of the market value of the property being assessed.
Stip. ¶ 31. When appraising the Property, OTR used what is called the “income
approach” to determine the market value. Stip. ¶ 33. The income approach is most often
used when appraising a property owned for its ability to produce income to the owner.
Under this approach, OTR estimates the property’s potential net operating income, to
which it applies a capitalization rate3 for the class of property at issue to derive the
stabilized value4 of the property. Id. OTR then calculates the present value of lease-up
costs, which is an estimated value of lost rent and the necessary tenant improvements
required to lease vacant space or renew space. Stip. ¶ 39. Once calculated, the lease-up
costs are subtracted from the stabilized value of the property to arrive at the assessed
market value of the property. Stip. ¶ 40. The table below depicts the information
provided by the parties about the building’s vacant space, the lease-up costs, OTR’s
assessment of the value of the Property, and the annual real estate taxes during 2007-
2010.

       Tax year5            Square feet of         Lease-up costs              OTR’s                Annual real
                           rentable office                                 assessment of            estate taxes
                           space available                                the value of the
                           in the previous                                    Property
                                 year
          2007                     471,736            $18,086,828            $35,668,065             $659,859.20
          2008                     317,672            $14,762,448            $51,213,028             $947,441.02
          2009                     130,336             $8,922,880            $95,303,032           $1,757,106.08
          2010                      89,948            Not provided          $121,780,000           $2,246,930.00



3
  The capitalization rate is the rate of return on a real estate investment property based on the expected income that
the property will generate. The rate is calculated by dividing the income the property will generate (after fixed costs
and variable costs) by the total value of the property.
4
    Stabilized value is the value of a property after it reaches a normal occupancy rate and operating expenses.
5
    The District of Columbia tax year runs from October 1 to September 30.


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       No tenant improvements had been performed on any of the office space in the
Property at the time GSA initially contacted Plaintiff regarding leasing a portion of the
Property. Stip. ¶ 41. Tenant improvements were made to the Property on a lease-by-
lease basis as GSA accepted the premises. Stip. ¶ 41-43. Plaintiff reported spending
$12,841,041 on capital improvements to the Property in 2007 and $5,528,346 on capital
improvements in 2008. Stip. ¶¶ 51-52. The final tenant improvements to the property
were not completed until shortly before GSA accepted the fifth and final space in
September 2008. Stip. ¶¶ 3, 43.

       The assessed value of the property increased by $86,111,935 between tax year
2007 and tax year 2010. Stip. ¶¶ 68-71. Pursuant to the terms of each of the five leases,
Jemal’s submitted tax documents to GSA seeking reimbursement for the Government’s
share of the increase in real estate taxes. Stip. ¶ 11. On January 26, 2012, GSA denied
Plaintiff’s certified claims submitted under the Contract Disputes Act.6

                                                   Analysis

        A. Standard of Review

       Summary judgment is proper “if the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of law.” Rule
56(a) of the Rules of the Court of Federal Claims. The moving party bears the initial
burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986). Summary judgment will not be granted if the
“evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving
party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).

       In reviewing a motion for summary judgment, the Court views the factual record
and the inferences to be drawn from the record in the light most favorable to the non-
moving party. Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
When cross-motions for summary judgment are presented, the Court evaluates each
motion on its own merits and draws reasonable inferences against the party whose motion
is under consideration. Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390-
91 (Fed. Cir. 1987). The Court will deny both motions if a genuine issue of material fact
exists. Id. Here, both Jemal’s and the Government agree that there are no disputed issues
of material fact. This case presents an issue of contract interpretation, and as a question

6
  On January 26, 2012, GSA issued formal denials on four of the five certified claims. GSA did not issue a formal
denial on the final claim within 60 days of Plaintiff’s submission. Because the CO did not reach a final decision
within 60 days of that date, the claim is deemed denied. Stip. ¶¶ 16-17.


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of law, may be decided on motions for summary judgment. Blackstone Consulting Inc.
v. United States, 65 Fed. Cl. 463, 468 (2005).

        In questions of contract interpretation, the inquiry begins “with the language of the
written agreement.” NVT Techs., Inc. v. United States, 370 F.3d 1153, 1159 (Fed. Cir.
2004). The Court must construe a contract so as to “effectuate its spirit and purpose,”
Northrop Grumman Corp. v. Goldin, 136 F.3d 1479, 1483 (Fed. Cir. 1998) (quoting
Gould, Inc. v. United States, 935 F.2d 1271, 1274 (Fed. Cir. 1991)), and a contract must
be considered as a whole and interpreted in such a manner to harmonize and give
reasonable meaning to all of its parts. McAbee Constr., Inc. v. United States, 97 F.3d
1431, 1434-35 (Fed. Cir. 1996). A contract clause is construed in order to give it the
effect intended by both parties. Honeywell, Inc. v. United States, 661 F.2d 182, 186 (Cl.
Ct. 1981).

        B. The Plaintiff’s Interpretation of the Full Assessment Term is not Reasonable.

       The meaning of the full assessment term in the five leases is the legal question at
the heart of the dispute before the Court. The threshold question is whether this term
contains ambiguous language or supports only one reading. NVT Techs., 370 F.3d at
1159. The Court begins this inquiry by examining the plain language of the contract and
determining if it can reasonably be interpreted in more than one way. LAI Servs., Inc. v.
Gates, 573 F.3d 1306, 1314 (Fed. Cir. 2009).

       As expressly defined by the terms in the lease, a full assessment has occurred
when the taxing jurisdiction has “considered all contemplated improvements to the
assessed property in the valuation of the same.” Stip. ¶ ¶ 10. Both parties assert that the
term is unambiguous. The Government takes the position that “full assessment” requires
OTR to consider all improvements contemplated in the lease once the improvements are
completed.7 According to the Plaintiff’s interpretation, OTR has considered the
contemplated improvements if OTR acknowledges that there are contemplated
improvements to the property which have yet to be completed. Under Plaintiff’s
interpretation, a full assessment occurred no later than tax year 2007. In essence, the
dispute boils down to different readings of the phrase “considered all contemplated
improvements” and whether the OTR can consider improvements before the
improvements have been completed.


7
 GSA states that the contemplated improvements were not completed until September 2008. Such improvements
would have been considered in the assessment when OTR determined the estimated market value of such property
on the valuation date in January 2009. This assessment would have been used to calculate taxes for tax year 2010.


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        To show an ambiguity, it is not enough that the parties differ in their respective
interpretations of a contract term. Rather, both interpretations must fall within a zone of
reasonableness. Metric Constructors, Inc. v. Nat’l Aeronautics & Space Admin., 169
F.3d 747, 751 (Fed. Cir. 1999). It is a fundamental tenet of contract construction that a
contract should be interpreted so as not to render portions of it meaningless. Medlin
Constr. Grp. v. Harvey, 449 F.3d 1195, 1201 (Fed. Cir. 2006). Here, Plaintiff’s
interpretation of the full assessment term renders the term meaningless. Any tax
assessment by the OTR, according to Plaintiff’s definition, will qualify as a full
assessment because the OTR always considers the improvements that still need to be
made to a property when it calculates lease-up costs. Under such an interpretation, an
assessment of an empty shell of a building with no tenants would meet the definition of
full assessment. If the parties intended the base year to be any year before improvements
had been made there would have been no need to add the full assessment term.
Plaintiff’s interpretation of full assessment is unreasonable because it renders the term
meaningless. See Medlin, 449 F.3d at 1201 (finding the government’s interpretation of a
provision unreasonable because it would render portions of the contract meaningless).
Thus, the full assessment term is unambiguous because only the Government’s
interpretation of the term is reasonable.

      C. The Government’s Interpretation Comports with the Intent and Purpose of the
         Full Assessment Term.

        The ultimate aim of contract interpretation is to arrive at a definition that most
clearly reflects the original intentions of the parties. Alliant Techsystems Inc. v. United
States, 74 Fed. Cl. 566, 576 (2007). The intent of the parties is determined by a review of
the contract, and if necessary, other objective evidence. Flexfab, LLC v. United States,
424 F.3d 1254, 1262 (Fed. Cir. 2005). Thus, the Court analyzes the parties’ intentions
regarding the full assessment term based upon the language of the lease and secondary
sources on the use of tax escalation clauses.
       Plaintiff has submitted a declaration from the former Chief Assessor of OTR,
David Fitzgibbon, which states that as part of its assessment methodology, OTR
considers all improvements required for the use of the assessed property. Such a fact is
far from dispositive. The full assessment term is a contractual term used by the parties,
and is not automatically dependent upon the labels used by the taxing jurisdiction to
describe its assessment methodology. Rather, the Court must construe the term in a
manner that gives effect to the parties’ intentions. Here, the parties included the
following sentence after the express definition of full assessment: “Partial assessments
for newly constructed projects or for projects under construction, conversion, or
renovation will not be used for establishing the Government’s base year for taxes.” Stip. ¶
10. The inclusion of this sentence strongly suggests a recognition by the parties that

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partial assessments were inappropriate for determining the base year because partial
assessments would render the base period arbitrarily low and make the lessee liable for a
sudden rise in taxes.

        Indeed, a review of secondary sources on tax escalation clauses reinforces the
Government’s position that the full assessment term requires OTR to consider all
improvements contemplated in the lease once the improvements are completed. Tax
escalation clauses are regularly used in leases to share risks between the lessor and lessee.
If taxes rise during the term of the lease, the lessor can pass on increases in real estate
property taxes to the lessee in proportion to the space occupied by the lessee. Kimbrell v.
Fischer, 15 F.3d 175, 176-77 (Fed. Cir. 1994). On the other hand, if taxes fall during the
term of the lease, the lessee can share in the tax savings. However, tax escalation clauses
contain a widely recognized trap for a lessee. If a lessee enters a lease while the property
is undergoing major improvements, the taxing authority will consider the improvements
that still need to be made to the property and subtract them from the stabilized value of
the property to arrive at the assessed market value. This renders the base period
artificially low and exposes the lessee to the risk of significant tax escalation as the
improvements are completed. See, e.g., William F. Treanor, Challenges to Rent
Escalation Clauses in Commercial Leases, Prob. & Prop., May/June 1990, at 6-7. For
this reason, sophisticated tenants like the GSA, when negotiating with sophisticated
lessors like Jemal’s, often insist on the inclusion of a term explicitly stating that the tax
escalation clause shall not apply until the leased premises have been assessed by the
taxing authority as fully improved. Otherwise, the increases in taxes will not reflect
normal tax increases but rather the gradual completion of improvements to the building.
See, e.g., 2 Real Estate Leasing Practice Manual § 48:17. Thus, Plaintiff’s interpretation
frustrates both the intent and purpose of the term. Conversely, the Government’s
interpretation gives meaning to the term in light of the parties’ intent at the time they
entered into the agreement.

       D. Precedent for the Government’s Interpretation is Found in Opinions from this
          Court and Administrative Boards.

       Not only does the Government’s interpretation comport with the plain language of
the lease term and with common sense, but the Government’s interpretation also is
consistent with the way other courts have interpreted similar terms. For instance, in
Appeal of Otto K. Wetzel Landmark Ctr., the General Services Board of Contract
Appeals (“GSBCA”) recognized that the full assessment term protected GSA from
having to pay for significant tax increases that were the result of improvements to other
tenant spaces. GSBCA No. 7466, 85-2 B.C.A. (CCH) ¶ 18099 (Apr. 30, 1985). The
GSBCA defined “full assessment” as the completion of “all improvements contemplated


                                             7
by the lessor to the assessed property,” and explained that “this tax escalation clause is
not to be interpreted to hold respondent responsible for tax increases resulting from
improvements to other tenant spaces in the Center.” Id. at *3. Likewise, in Kimbrell v.
Fischer, the Federal Circuit adopted the GSBCA’s analysis and reasoning in Wetzel, and
found that full tax assessment meant assessment after all improvements contemplated in
the lease were made. 15 F.3d at 177.

        Jemal’s notes that the present case can be distinguished from Kimbrell and Wetzel
because the leases at issue in those cases did not contain an express definition of full
assessment, while the term is defined in the lease between Jemal’s and the GSA.
However, this is a distinction without a difference. The GSBCA’s underlying reasoning
in Wetzel applies here—the Government should not have to pay for tax increases
resulting from improvements to other tenant spaces in the Property.

       Furthermore, support for GSA’s interpretation that “full assessment” can only
occur after contemplated improvements have been completed is found in a recent case
from this Court involving an identical term. Like the present case before the Court, the
parties in Alpena Marc, LLC v. United States disagreed over what constituted the base
year for purposes of the tax escalation clause. 108 Fed. Cl. 200 (2012). The lease in
Alpena Marc contained a tax adjustment clause in ¶ 3.4 with the exact same definition of
“full assessment” that is in the lease between GSA and Jemal’s. The dispute over the
base year in Alpena Marc stemmed from the fact that there was a patent ambiguity
between the terms in ¶ 3.4 and a separate term in the lease that said 2005 was the base
year.

        While the issue in Alpena Marc differs from what is before the Court now, it is
significant that Judge Christine O.C. Miller interpreted the phrase “considered all
contemplated improvements” to mean considered all completed improvements. The
property at issue in Alpena Marc required substantial renovations before it would meet
the Government’s requirements. In analyzing the two conflicting terms, Judge Miller
wrote, “the court agrees with defendant that ¶ 3.4.B. defines ‘base year taxes’ as the real
estate taxes for the twelve-month period that corresponds to the first full assessment of
the renovated property.” Id. at 206 (emphasis added). Judge Miller’s use of the phrase
“renovated property” suggests that full assessment has occurred after the contemplated
improvements have been completed. Applying that reasoning to the case before the
Court, the base year would be 2010.




                                            8
E. Full Assessment did not Occur until Tax Year 2010 after the Improvements
   Contemplated in the Lease were Completed.

       Finding 2007 as the base year would penalize the Government for being the first
tenant to accept space in a vacant building in need of improvements. This result was
certainly not the parties’ intention when they included the tax adjustment clause in the
leases. On the contrary, the primary purpose of the full assessment term was to ensure
that the Government was not responsible for paying tax increases due to tenant
improvements to other tenant spaces. Here, the assessed value of the property increased
241 percent between tax year 2007 and tax year 2010. It is possible that the property rose
in value, in part, due to external conditions in the market place—such as the fact that the
Property is located in close proximity to the newly constructed Nationals Baseball Park in
Washington, D.C. However, it is also true that the Property experienced a jump in value
because OTR’s 2007 assessment was of a completely vacant building in need of
significant improvements to attract tenants. Not surprisingly, such improvements
increased both the value of the building and the taxes assessed by OTR. This type of tax
increase is precisely what the full assessment term is designed to prevent as a charge to
the lessee.

        Accordingly, the Court finds that the first tax year for which OTR could have
possibly considered the completed improvements in its valuation of the property was tax
year 2010, which ran from October 1, 2009 through September 30, 2010. It was then that
OTR was able, for the first time, to fully incorporate into its valuation of the property the
fact that all of the contemplated improvements had been completed.

                                            Conclusion

       For the reasons set forth above, Plaintiff’s motion for summary judgment is
DENIED and the Government’s cross-motion for summary judgment is GRANTED. The
Clerk of the Court shall enter final judgment for the United States. No costs.

       IT IS SO ORDERED.

                                                         s/ Thomas C. Wheeler
                                                         THOMAS C. WHEELER
                                                         Judge




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