Takings Law In Plain English Part 1

TAKINGS LAW In Plain English

By Christopher J. Duerksen & Richard J. Roddewig

With a Foreword by the Honorable Randall T. Shepard Chief Justice, Indiana Supreme Court

TABLE OF CONTENTS

FOREWORD

EXECUTIVE SUMMARY

I. AN OVERVIEW OF TAKINGS LAW
A. The Courts Reshape the Constitution
B. The Takings Inquiry
C. The 1978 Penn Central Decision
D. The Takings Issue in the 1980s and 1990s

II. REAL ESTATE ECONOMICS & THE TAKINGS ISSUE

A. What Property Interest Has Been Affected?
B. What is a Reasonable Use or Return?
C. In the Rare Event That a Taking Occurs, What is the Measure of Damages?


III. TAKINGS LAW IN SUMMARY, WITH EXAMPLES


IV. A PRACTICAL GUIDE FOR RESPONDING TO THE TAKINGS ISSUE


CASE CITATIONS
ABOUT THIS DOCUMENT...


FOREWORD

AT THE VERY beginning of our nation, Americans decided that the enjoyment of our property was among the most important rights possessed by citizens.

Just as the Declaration of Independence announced that life, liberty, and the pursuit of happiness were the birthright of us all, the Bill of Rights guaranteed us freedom of speech, freedom of religion, and, yes, freedom from interference with our homes and neighborhoods. The Fifth Amendment in the Bill of Rights promises that government may not take our land for public purposes without paying for it.

Over the generations, Americans have joined forces time and time again to build clean, safe and prosperous communities and to protect our enjoyment of them. The fishermen who seek to save a river full of great bass, the neighborhood association which works to revitalize the area's historic homes, and the activists who strive to give us cleaner air--all have the need and the right to use the legal tools which can keep our nation a decent and healthy place.

In modern times, these common efforts at building better communities are often under assault from those who seek only individual advantage. Most Americans see the Fifth Amendment as a shield protecting us from government overreaching. Others seek to use it as a sword, a weapon against efforts to conserve what is special about this land.

Americans who are committed to building better communities must understand the role of law and the takings clause of the Fifth Amendment if they are to be effective builders. Unfortunately, the legal thicket of explanations by the U.S. Supreme Court and other courts is difficult to access and harder to master. Moreover, there has never been a shortage of misinformation about the meaning of this critical piece of our legal history.

Christopher Duerksen and Richard Roddewig, two of the most able people in this field, provide in this book the keys to understanding the legal history and its import for modern Americans. People who take the time to absorb this straightforward explanation of the law of takings will assuredly be better prepared to protect what is special in our nation.

Randall T. Shepard

Chief Justice, Indiana Supreme Court


EXECUTIVE SUMMARY

As discussed in further detail in this publication, the courts have laid out a number of general principles that should be kept in mind by those wishing to understand the law of takings:

No one has an absolute right to use his land in a way that may harm the public health or welfare, or that damages the quality of life of neighboring landowners, or of the community as a whole.

Historical precedent and recent case law make clear that reasonable land use and environmental regulations will have little trouble withstanding constitutional scrutiny in the vast majority of cases. Only in rare instances will such regulations be deemed so onerous as to effect a "taking" under the Fifth Amendment to the U.S. Constitution, which holds that private property shall not be taken for public use without just compensation.

Courts have outlined several broad factors to be considered on a case-by-case basis in determining if a taking has occurred, including: the economic impact of the regulation on the property owner; the public purpose for which the regulation was adopted; and the character of the government action. Generally, a regulation will be upheld if it (1) furthers a valid public purpose; and (2) leaves a property owner with some viable economic use of the property.

Property owners have a right to a reasonable return or use of their land, but the U.S. Constitution does not guarantee the most profitable use.

Courts have upheld a wide variety of purposes as valid reasons for enacting environmental and land use regulations--including pollution prevention, resource protection, historic preservation, design controls, and scenic view protection.

Communities can legitimately insist that development pay its own way. Land dedications or mandatory exactions are valid, assuming that they are adopted to respond to the demands created by the project.

Before a landowner or developer can bring a lawsuit to claim a taking, a development plan must be submitted for review and all administrative avenues of relief must be exhausted.

The focus of the takings inquiry continues to be on the entire property interest. A severe adverse impact of a regulation on one portion of the property or ownership interest will not amount to a taking if the property as a whole continues to have a reasonable economic use.

On the rare occasion that a taking is found to have occurred, the community does not have to buy the entire property. Damages are payable only for a temporary taking for the period in which the regulations were in effect. Generally, the measure of damages will take into account the difference in value of the property without the offending regulations in place and with them, an appropriate interest rate to be applied for the temporary loss of value, and the length of time the regulations were in effect.

As part of legislation, lawmakers should include an administrative process that allows those who administer the law to consider the specific effect of the law on an individual landowner, and--consistent with the interest of the public being protected--afford an administrative relief process for undue economic hardship.

I. AN OVERVIEW OF TAKINGS LAW

". . . nor shall private property be taken for public use, without just compensation."

WITH THESE FEW words, the framers of the United States Constitution enshrined in the Fifth Amendment one of the most fundamental of individual rights--to own property free of the threat of seizure by government, unless the government pays for it. This basic property right was derived from 17th and 18th Century English legal tradition that prohibited the king from taking a subject's property except by a duly enacted law of the land and with full indemnification.

Historical records show that what the drafters of the Bill of Rights had in mind when they adopted the "just compensation" or "takings" clause was to permit the government to take private property for public use--for example, land needed for a public highway--but only upon payment of compensation. Today, we call this government action exercising the right of eminent domain or condemnation. Thus once again, the framers demonstrated their genius in balancing the rights of the individual with the clear need of the people--government--to undertake public projects for everyone's benefit. It is hard to imagine how the nation could have grown or society would have functioned without the ability to judiciously exercise the power of eminent domain to build roads, dams, parks, and other projects. Indeed, hardly any reasonable person would quarrel with that notion.

How then has the just compensation clause of the Fifth Amendment become the center of a controversy that lawyers like to call the "takings" issue--which has little to do with the actual seizure of property or exercise of the power of eminent domain as our forefathers understood it?

Historically, a corollary of the right to hold property has been a duty to refrain from using it in a manner that would cause harm or injury to neighboring landowners or the general public. Because the use of land invariably affects neighbors and the community health and welfare, absolute use has never been considered a protected property right.

This principle is exemplified in numerous decisions of the U.S. Supreme Court, and the high courts of the individual states. To cite just one example, in 1908 the Maine legislature asked the Maine Supreme Court whether the state could regulate the cutting or destruction of trees on private land for a variety of environmental purposes, including erosion control, without paying compensation. Focusing on the goal of the legislation to prevent use of private property that would be injurious to citizens generally, the court affirmed the authority of the state to adopt the law, quoting the following language from earlier decisions of the U.S. Supreme Court:

We think it a settled principle, growing out of the nature of well-ordered civil society, that every holder of property, however absolute and unqualified may be his title, holds it under the implied liability that use of it may be so regulated that it shall not be injurious....to the rights of the community." In re Opinion of the Justices (Maine 1908).
These types of enactments raised the question to what extent government can regulate the unbridled use of private property to protect the public health and the investment of neighbors and the community without having to pay a landowner to refrain from certain undesirable activities. By judicial decision in the early 1920s, the U.S. Supreme Court expanded the scope of the Fifth Amendment property clause from addressing the narrow circumstance of the actual seizure or physical taking of land into a more far reaching provision that confines the permissible reach of land-use and environmental regulations.

Courts in recent years have struggled to find an equitable balance between the rights of the public to a healthy environment and livable communities and the rights of landowners. Because of the enormous stakings involved, this constitutional quarrel is far more than an intellectual exercise. The health of our environment and quality of our communities are at stake.

A. THE COURTS RESHAPE THE CONSTITUTION

Interestingly, early experience from England and Colonial America does not suggest that by simply regulating, the government could "take" someone's property. Indeed, there are many examples of strict government regulation of land during this period where there is no hint that anyone expected compensation to be paid. These cases reflect the American tradition of landowner responsibility to use property prudently. For example, after the great fire in Boston in the late 17th Century, a series of laws was enacted directing the use of brick or stone in buildings. No dwelling house could be constructed otherwise upon threat of serious fine. A later act declared that any building that did not meet these standards was a nuisance subject to demolition.

Where landowners sought compensation, courts typically were unsympathetic. For example, in Hadacheck v. Sebastian (1915), the City of Los Angeles banned brick making--an industrial operation that spewed "fumes, gases, smoke, soot, steam and dust" into the air-- from certain areas of the city to protect surrounding residential neighborhoods, even though the plaintiff's brickyard was built before people moved into the area. The factory owner sued, arguing a taking had resulted because the value of his property was reduced from $800,000 to $60,000. The U.S. Supreme Court rejected this argument, balancing the needs of the public against the harmful or inappropriate use of land. The city was promoting a legitimate public need, and the property owner could still use the parcel, even if for a different purpose.

The general rule was that "acts done in the proper exercise of governmental powers, and not directly encroaching upon private property, though their consequences may impair its use, are universally held not to be a taking within the meaning of the constitutional provision."

The clear line between actual physical takings and regulatory takings began to blur in the 1920s. In a case called Pennsylvania Coal Company v. Mahon (1922), the U.S. Supreme Court accepted the notion that regulations can cause a taking even if there is no actual physical invasion of the property in question. The State of Pennsylvania had passed a law forbidding coal mining that would cause buildings or streets on the surface to subside into the mine shafts--even though the coal mining companies retained that right when they sold the surface rights to individual landowners.

While the Supreme Court found that the law served a valid public purpose, the only constitutionally acceptable method to accomplish that goal was for the government to buy the property interest held by the coal company. Since the state law did not authorize compensation, only regulatory control, the Court struck down the legislation, and Justice Oliver Wendall Holmes said:

"The general rule, is that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking."
Just how far was too far? The cases that provided the setting to address that key question revolved around the then-novel idea of zoning.
At the behest of the business community, which was concerned about the disorderly development of the nation's cities and the need to protect economic investments, the U.S. Department of Commerce promulgated a model zoning act that was adopted by many communities. In Village of Euclid v. Ambler (1926), the Supreme Court gave its approval to an early zoning ordinance in a Cleveland suburb-- despite an argument by the plaintiff landowner that the government should have to pay for prohibiting industrial development on his land, which reduced its value by 75 percent--from $10,000 to $2,500 per acre.

Shortly thereafter, however, in a case titled Nectow v. Cambridge (1928), the Supreme Court made it clear that under certain circumstances zoning ordinances may in fact go "too far." In that case the Court struck down a zoning ordinance that allowed only residential use for property that was under contract to be sold for industrial use. This time the Court said that, under the particular facts of the case, "no practical use [could] be made of the land in question for residential purposes," since "there would not be adequate return on the amount of any investment for the development of the property."

The court went on the same year to uphold a Virginia law requiring the destruction of disease- carrying red cedar trees because of potential damage to nearby apple orchards--all without compensation. Having established the principle of considering both the economic impact of a regulation on a landowner and the need to protect or benefit the public, the Supreme Court then retired from the "takings" field for the next fifty years or so, leaving it to the lower federal and state courts to work out the rules on a case-by-case basis.

B. THE TAKINGS INQUIRY

In literally thousands of cases over the ensuing decades, state and federal courts were called upon to determine whether a particular environmental or zoning regulation was overly burdensome and violated the takings clause. Judges considering these cases had considerable difficulty in establishing hard and fast rules--largely because each situation involving the use of land is unique, both as to the economic impact of regulation, and the impact of unregulated use on neighboring property owners and the public generally. Nonetheless, these various court cases have outlined several broad factors to be considered on a case-by-case basis in determining if a taking has occurred:

1. What is the economic impact of the regulation on the property owner? The economic impact of a particular regulation is obviously an extremely important factor in determining whether the regulation has resulted in a taking. At times, courts have focused on the decrease or diminution in property value before and after the regulation is applied. At other times, courts have focused on whether the owner is left with any "reasonable economic use" of the property. [As discussed below, this latter formulation has been used hy the U.S. Supreme Court in its most recent decisions in the takings area.] Regardless of approach, however, the decisions of the courts make it clear that economic impact must be extreme in order to result in a taking.

Those courts that have focused on the reduction in value caused by a governmental regulation have typically required an almost total elimination of value before they find a regulatory taking. As the Supreme Court has observed, the cases are legion that sustained zoning against serious economic damage." In recent years, courts have shown an increasing inclination to reject challenges despite large reductions in value. For example, in William C. Haas & Co. v. City and County of San Francisco (1979), a California federal court approved a local regulation that reduced the allowable height for a future residential high-rise building on the plaintiff's property from 300 to 40 feet, despite a reduction in the speculative value of the property from $2 million to $100,000. In so ruling the court cited the substantial public benefit of reducing congestion in the neighborhood, preserving light and air available to neighbors, and serving aesthetic values to the city as a whole.

It is clear that there are no hard and fast numerical formulas to determine when a regulatory taking has occurred--it is a question that must be decided on a case-by-case basis depending on the facts of each situation. Indeed, several studies that attempted to identify a mathematical formula for the amount of loss in land value that courts will accept have proved unsuccessful and inconclusive.

Most courts in recent years have assessed the economic impact of a land-use regulation by determining whether the owner is left with a reasonable economic use of the property. Simply denying the so-called "highest and best use" of a property does not give rise to a taking. For example, if a historic building can he rented out profitably, denying the landowner the ability to demolish it to make way for a high-rise office, thereby reducing the parcel's speculative value, does not give rise to a taking.

What constitutes a reasonable economic use is determined on a case-by-case basis. Many courts have upheld strict floodplain and wetlands regulations because an owner is able to pursue farming and recreational uses that could produce a reasonable economic return. A few courts have struck down regulations in similar circumstances. The outcome will depend on specific facts: When were the regulations adopted? Did the owner know of the regulations when the property was purchased? Is the loss claimed by the owner the speculative value of future development? Could the owner make a reasonable return under the property's current use, or some other allowed

2 . Does the regulation promote a valid public purpose? In reviewing a health and safety, land-use, environmental, or similar regulation under the takings clause, courts pay heed not only to the economic impact on the owner but also to the public purposes being served by the regulation. In fact, some courts have combined these two inquiries into a single examination, often referred to as "balancing of public benefit against private loss."

Typically, courts grant great deference to elected officials in determining what is a valid public purpose for regulation. Attempts by property owners to hold governments to a more onerous standard or burden of proof have been almost uniformly rejected in a regulatory context (as opposed to instances of actual physical invasion).

Recent cases from the Supreme Court and the states show a continuing expansion of what are considered permissible public goals for land-use and environmental regulations.

These goals include open-space and agricultural land protection, landmark preservation and design controls, and protection of environmentally sensitive areas such as wetlands and floodplain, all of which reflect society's growing concern about the impact of people's activities on our air, water, and land--and a determination to bequeath a healthy, livable environment to our children. Only in special instances, such as where land-use regulations are used to exclude from a community special groups like the mentally handicapped or group homes, have the courts insisted on a higher standard of proof.

3. What is the character of the government action? Courts have been particularly sensitive to government regulations or actions that can be characterized as efforts to obtain public access to private property. For example, in Allingham v. City of Seattle (1988), the Washington Supreme Court struck down a local greenbelt protection ordinance, heavily influenced by the fact that when the city ran out of funds for greenbelt acquisition, it resorted to a regulatory program to accomplish the same ends. Similarly, in Kaiser Aetna v. United States (1980), the Supreme Court held the government's attempt to require the property owner to allow public access to a private pond to be a taking.

More recently, in Dolan v. City of Tigard, the court invalidated a land dedication requirement that included mandatory public access suggesting that it will closely scrutinize land use regulations of this type. At the same time, the court recognized that it is accepted practice nationally to require developers and landowners to provide public open space and trails on their property where it can be demonstrated their proposed developments create a corresponding need. These conditions to development have generally been upheld even though they have characteristics comparable to a physical "taking"-- that is, by allowing public access to private land--so long as there is a sufficient relationship between needs created by a project and the amount of land or type of access required.

C. THE 1978 PENN CENTRAL DECISION

In the late 1970s, the Supreme Court agreed to consider another major land use takings case. By that time, the proper steps in the takings balancing act, while not always uniformly applied by the lower courts, were generally understood by governments and property owners alike.

Moreover, of the thousands of land-use cases heard by the courts, only a relatively small percentage raised the takings issue (perhaps reflecting the difficulty in succeeding on that theory)--many more were decided on other grounds such as failure to follow required procedures for hearings.

In 1978, in Penn Central Transportation Company v. New York City, the Supreme Court reaffirmed the accepted takings analysis that an owner must be denied all reasonable use of a property for a taking to occur. While the decision involved a challenge to a landmark preservation ordinance, the analysis of the Court is equally relevant to a variety of public interest laws, including environmental controls, wetlands and natural habitat protections, health and safety regulations, and zoning and land use regulations. As recently as 1993, in Concrete Pipe and Products v. Construction Laborers Pension Trust, the Supreme Court unanimously embraced the principles of Penn Central in rejecting a takings challenge to a federal pension law. What are those principles? Briefly, that--

Communities clearly have the authority to adopt laws and regulations that are designed to protect and enhance the quality of life of their citizens.

The regulation of private property will not constitute a taking, as long as: (1) the regulation advances a legitimate governmental interest; and (2) the property owner retains some viable use of the property (particularly as measured by the owner's reasonable investment-backed expectations).

Property owners may not establish a taking "simply by showing that they have been denied the ability to exploit a property interest that they heretofore had believed was available for development."

In deciding whether a particular governmental action has caused a taking, a reviewing court must examine the effect of the regulation on the entire property, and not focus on any one specific segment or interest.

D. THE TAKINGS ISSUE IN THE 1980s AND 1990s

Historians are already characterizing the 1980s as the decade when profit took precedence over people. The guiding philosophy seemed to be "live for today; tomorrow will take care of itself." Fueled by easy money from savings and loan institutions and generous federal tax benefits, real estate development boomed in many places. Public lands were increasingly drilled, logged, and mined. That boom ran head on into growing public concern over the need to protect the public health, the environment, and the character of our communities. Industry and real estate developers chafed under laws designed to guard the public against health risks from air and water pollution and to preserve wildlife habitats and other sensitive natural areas that had been put in place in many communities and states during the 1970s. Not surprisingly, real estate developers and resource development companies fought in the courts to weaken protection laws.

The major thrust of these challenges revolved around the takings issue. Frustrated by their lack of success in winning takings claims in but a relatively few cases, landed interests--real estate developers, mining companies, forest and timber firms, and kindred businesses--attempted to persuade a newly realigned Supreme Court to change the painstakingly developed balancing rules, and move the takings line in their favor. A close examination of the Supreme Court's takings decisions over the last decade or so, however, shows that the general principles of takings law, as reflected in the Penn Central decision, remain essentially unchanged.

The first major takings case of the 1980s in which the Supreme Court actually reached the merits of a takings claim was Keystone Bituminous Coal Association v. DeBenedictis (1987). In that case, the Court rejected a takings claim brought by a consortium of coal companies in a fact situation remarkably similar to the Pennsylvania Coal case decided in the 1920s. The State of Pennsylvania had again enacted a mining safety act to protect the public against the environmental and economic damage from surface subsidence that occurs when companies removed coal from subsurface seams. The law in question required that coal operators leave 50 percent of coal beneath public buildings, homes, and cemeteries in place to provide surface support. Several coal companies sued claiming the restrictions amounted to a taking. The Court rejected that argument, pointing out that the mining regulations did not deny the mine operators all "economically viable use" of their land.

Importantly, the Court also rejected the mining companies' argument that it should focus only on the restricted portion of their property--the coal they had to leave in the ground and their support estates--and find that all viable economic use of those restricted portions had been taken by the act. Instead, the majority reaffirmed the rule laid down in Penn Central:

"Takings jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses both on the character of the action and on the nature of the interference with the rights in the parcel as a whole." (Emphasis added by the Court.)
Not to be deterred, industry and real estate development advocates took a different tack--they argued that if a taking occurred, simply invalidating the offending regulation was not enough. They maintained that the regulating authority had to pay money damages for the full value of the property--in effect, "you over regulated my property, so you bought it." Part of the strategy was to discourage governments from regulatory activities because of the potential for large compensation awards from takings claims.

Again, the Supreme Court rejected this extreme position, although it did crack the door open a bit by holding that damages might be due for a temporary taking during the time when the offending regulations were in place. In First English Evangelical Lutheran Church v. County of Los Angeles (1987), the plaintiff church argued that interim floodplain development restrictions imposed by Los Angeles County amounted to a taking for which payment was due. (The floodplain regulations in question prohibited reconstruction of buildings in a church-owned campground for handicapped children that had been earlier swept by killer floods.) The California Supreme Court denied the church's takings claim, relying on its earlier decisions that only invalidation, not money damages, is available when a regulation goes too far. On appeal, the U.S. Supreme Court did not determine whether a taking had occurred in the case, but agreed with the principle that the remedy for a taking includes compensation for the period the taking is in effect:

"We merely hold that, where government's activities have already worked a taking of all use of property, no subsequent action by the government can relieve it of the duty to provide compensation for the period during which the taking was effective."
It is important to emphasize that the First English decision only addressed the question of available remedies, and not whether the regulation at issue in the case actually resulted in a taking--a point that is often misunderstood about the case. Indeed, on remand to the lower courts to decide whether a taking had actually occurred, the church lost and never recovered any money damages, because the public necessity of keeping handicapped children out of harm's way was found to outweigh the alleged economic impact on the landowner.

It is also important to emphasize that the Court in First English rejected the notion that the sole remedy for a taking is payment of the full value of the property affected. Where a taking is temporary--for example where the regulation causing the taking is later withdrawn or invalidated--only temporary damages are due. Finally, the Court noted that its focus on "temporary takings" was not intended to refer to "normal delays in obtaining building permits, changes in zoning ordinances, variances and the like."

The Supreme Court decided three other major takings cases during the past several years, all of which are often claimed as significant victories for real estate development interests. A close analysis reveals, however, that the decisions continue to reflect a balanced approach by the Court on the takings issue and are unlikely to have a major long-term impact on the way lower courts handle that subject.

In the first, Nollan v. California Coastal Commission (1987), the Court addressed the growing practice by local governments of requiring land or other contributions from developers to offset the cost of public facilities created by their projects. In this case, the state was demanding that the plaintiffs allow public access across their private beach in return for a building permit for a three-bedroom vacation home.

In considering the matter, the Supreme Court made it clear that such development conditions (or "exactions") will be upheld-- even if they amount to a permanent physical occupation of land--so long as they further valid governmental interests, and are adopted to respond to the burdens or needs created by the development. The Court, however, struck down the specific exaction in the case as not being reasonably related to the burden imposed by the development, finding it "impossible to understand" how public access along the beach could help to remedy the burden imposed by the proposed development on access to the coast.

In Nollan, the Court again focused on the relationship between public needs and private economic impact. Thus if a development creates a need for a two-lane road to connect to a nearby highway, the local government can fairly require that the developer pay for such an improvement. However, the local government cannot insist that the developer build at his sole expense a four-lane parkway that would serve other developments as well.

A second highly publicized decision of the Court involved the regulation of development in a coastal hazard zone, in a case entitled Lucas v. South Carolina Coastal Council (1992). This case involved the adoption of strict shoreline development regulations by the state in the wake of devastating hurricanes. The regulations made building on the plaintiff's beachfront lots very difficult if not impossible, despite the fact that surrounding property owners had built homes on their land before the regulations went into effect. (When Lucas acquired the land, residential development was allowed.) In addition, there were no provisions in the law when it was first adopted to provide relief if the balancing test showed too significant of an adverse economic impact on any particular property owner.

In Lucas, there was no dispute that the regulations served a valid public purpose or that the economic impact was severe--if not a complete "wipe-out" of the developer's financial interest in the property (as was concluded by the lower court in the case). However, the state argued that when a regulation is aimed at protecting against extraordinarily serious harm to the environment or the public (in this case, by preventing construction of buildings that might be destroyed in a storm along with their owners, or that might wreak havoc by being tossed by waves into other homes), then it can never give rise to a taking. This theory has been called by legal scholars the "nuisance exception" to the takings clause.

The Supreme Court refused to dismantle the nuisance exception, recognizing that uses of property which amount to a nuisance may be forbidden despite a complete deprivation of economic use. The Court, however, limited the rule somewhat, by saying that in the "relatively rare" instance where a regulation goes so far as to deny all economic use of property, it will generally be considered a taking unless the prohibited use is "barred by existing rules or understandings" derived from background principles of property law or nuisance. This reformulation of the "nuisance exception," however, is not likely to have much effect in practical terms, particularly in light of the Court's express recognition that a total economic wipe out is an "extraordinary circumstance." Consequently, most commentators agree that the Lucas decision will affect only a tiny number of land-use and environmental regulatory actions.

The most recent of the Court's takings decisions, Dolan v. City of Tigard (1994), involved the increasingly common practice of requiring a public dedication of land in return for development approval. In this case, the plaintiff applied for a permit to expand her hardware business. The city, as a condition of permit approval, required dedication of a floodplain area to handle increased storm water runoff. The Court had no problem with this exaction, finding it was reasonably related to a need created by the development.

The Court balked, however, at the city's requirement that the property owner open the floodplain corridor to public access for a bicycle and pedestrian trail. The Court ruled that the city had failed to show that either the floodplain or transportation impact of the expanded business was reasonably related in "rough proportion" to the requirement of public access. The Dolan decision, while not altering the basic takings analysis used by the court, did place a greater burden on local governments to justify land dedication requirements, especially those mandating public access.

Thus, despite all the media attention and misunderstanding surrounding the First English, Nollan, Lucas, and Dolan decisions, the rules of the balancing act remain remarkably similar to what existed in 1978 when the Court decided the Penn Central case.

Perhaps as importantly, on the road to those decisions, the Court decided a quartet of less celebrated land-use takings cases that are proving to be of equal if not more relevance in day-to-day circumstances. These cases, Agins v. City of Tiburon (1980), San Diego Gas & Electric v. City of San Diego (1981), Williamson Co. Regional Planning Commission v. Hamilton Bank (1985), and MacDonald, Sommer Frates v. County of Yolo (1986), establish important "ripeness" standards that must be met before an aggrieved party can pursue a takings claim in court. First, an actual development plan must be filed--no theoretical challenges are allowed except in unusual circumstances. Second, if the development proposal is rejected, the project proponent must pursue available avenues of administrative relief such as seeking a variance in the regulations.

In Agins, the plaintiffs, who owned extremely valuable land in upscale Marin County, California, challenged a change of the zoning of their property that limited the number of residential structures that could be built on their five-acre lot. The landowners claimed that were entitled to money damages for a taking. However, the Court refused to reach the damage issue, because it found that no taking had occurred. The landowners jumped the gun--they had not filed a development plan, and the ordinance on its face allowed some residential use that might be profitable. As discussed later, Agins and others in this line of cases have been often embraced by many lower courts in rejecting takings claims.

II. REAL ESTATE ECONOMICS & THE TAKINGS ISSUE

IN CONSIDERING SPECIFIC takings claims, and in applying the judicial precedent described in the previous chapter, a growing number of courts in recent years have applied standard principles of real estate analysis in handling and analyzing takings cases, particularly in measuring the economic impact of land use or environmental regulation. Application of these principles is useful in answering three of the central questions of the takings inquiry:

What is the property interest alleged to be affected by the regulation?

What is a reasonable use of or return on property?

In the rare event that a taking has occurred, how should damages be measured?

A. WHAT PROPERTY INTEREST HAS BEEN AFFECTED?

First year law students learn that owning real estate is like owning a bundle of sticks. The "sticks" in the bundle are the various rights that accompany property ownership. For example, on the simplest level, a property owner may personally "use" it, let family members "use" it, "lease" it, "mortgage" it, join with others to "develop" it, "bequeath" it to heirs, or "sell" it. Each of those simple uses can be accomplished in an endless variety of ways.

One of the most basic rules of takings law is that the focus of the inquiry must be on the entire "bundle"--not the individual sticks. If a regulation destroys the opportunity to use one or more of the sticks, but the remaining sticks give value to the bundle as a whole, no taking has occurred. This rule was set forth by the U.S. Supreme Court in Penn Central (1978) (" [t]aking' jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. . ."). It was later restated forcefully in Keystone Bituminous Coal (1987).

The only exception to the rule is where a governmental action amounts to a compelled physical occupation of land, in which case a court will look at the specific impact, no matter how small.

For obvious reasons, real estate and other development interests want the courts to focus on the individual sticks rather than the entire bundle. The courts have resisted these efforts. In Penn Central, the Supreme Court focused on the entire tax parcel owned hy the developer, not on the air rights that had allegedly been taken. In the 1987 Keystone case, the Supreme Court focused on the total coal owned by the company, not simply the portion of the coal required to he left in the ground by the regulation.

How a court characterizes the property interest allegedly "taken" therefore can virtually decide the outcome of the case. This was recognized quite clearly by Justice Blackmun in his dissent in the Court's 1992 Lucas decision: "As the Court admits, whether the owner has been deprived of all economic value of his property will depend on how property' is defined."

In defining the "property" affected, it is important to note that only property interests that are legally recognized will be considered to be protected by the Constitution. In addition, a reviewing court is unlikely to find a taking where a property interest asserted is speculative, or if it is but one of many that give value to the property as a whole. Thus, some of the real estate analytical questions important to this part of the analysis include the following:

Does the law recognize the interest allegedly affected as a legitimate legal interest in property, i.e., is it actually part of the bundle of sticks? This question was phrased by the Supreme Court in Lucas as "whether and to what degree the State's law has accorded legal recognition and protection to the particular interest in land" that has allegedly been affected.
Is the alleged interest in the property a current right or a prospective future interest?

Is there a genuine use or market for that right or property interest?

Are there other productive or valuable uses not affected by the regulation?
Finally, it is worth noting that the U.S. Supreme Court, in a non-land use case, Concrete Pipe and Products v. Construction Laborers Pension Trust (1993), recently--and strongly--reaffirmed its rule that for purposes of analyzing whether a taking has occurred, the property must be viewed as a whole. Citing its Penn Central decision, the Court unanimously rejected the plaintiff's attempt to focus on only one stick in the bundle of rights:
"We rejected this analysis years ago in Penn Central Transportation Co. v. New York City, here we held that a claimant's parcel of property could not first be divided into what was taken and what was left for the purpose of demonstrating the taking of the former to be complete and hence compensable."

B. WHAT IS A REASONABLE USE OR RETURN?
As discussed above, one of the key factors considered by the courts to determine if a taking has occurred is whether the owner is left with a reasonable use of or return on the property. The most complete discussion of this part of the takings inquiry is in various decisions by former Justice Brennan. In the 1978 Penn Central decision, Justice Brennan, writing for the majority, focuses on the ability of landowners to enjoy "both a reasonable return' on their investment and maximum latitude to use their parcels for purposes not inconsistent" with the public interest. Justice Brennan also includes among the relevant factors in reviewing takings claims "[t]he economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations...." But Brennan also warns that property owners may not establish a taking "simply by showing that they have been denied the ability to exploit a property interest that they heretofore had believed was available for development."

This economic theory of takings as explained in Penn Central and elsewhere thus focuses on the following key questions:


Can the property owner continue to use the property productively even after enactment of the challenged regulation?

If there has been an "investment" in the property, can the owner still obtain a reasonable return on that investment after enactment of the challenged regulation?

In some takings cases, such as Penn Central, reviewing courts simply analyze the past use or uses of the property to see if any or all such uses can continue unaffected by the regulation. In other takings cases, the courts engage in a more complicated economic analysis of the impact of the regulation. Typically, the starting point is to compare the value of the property "before" the challenged regulation was adopted to the value of the property "after" the regulation was adopted. The court may factor in the owner's actual investment in the property, and consider the owner's reasonable expectations in light of the broader economic environment and the comparative risk of the investment. In any event, as discussed above, the economic impact must be extremely high before the "takings" threshold is crossed.

Nothing in the Supreme Court's 1992 Lucas decision changed any of the economic principles of takings analysis. Justice Scalia, writing for the majority in Lucas, states that there is categorically a taking "where regulation denies all economically beneficial or productive use of land," and then goes on to paraphrase the Brennan takings formulation as stating that "total deprivation of beneficial use is a taking.

In Lucas, once again, the Supreme Court recognizes that there is no magical point at which the impact on value automatically creates a taking. Nonetheless, despite the enthusiasm with which real estate development advocates promote the case, the decision reinforces the conclusion that the threshold is, indeed, a high one. In fact, the case only reaffirms a conclusion reached by most legal analysts long ago--if a regulation totally deprives an owner of all use of a property, it will more than likely be found to be a taking.

Finally, in its recent decision in Concrete Pipe and Products v. Construction Laborers Pension Trust (1993), the Supreme Court provided some additional guidance on the issue of "reasonableness," in the context of a claim that a regulation amounts to an "interference with reasonable investment-backed expectations": The Court once again noted that "our cases have long established that mere diminution in the value of property, however serious, is insufficient to demonstrate a taking." It went on, quoting from several earlier decisions, to say that "those who do business in [a] regulated field cannot object if the legislative scheme is buttressed by subsequent amendments to achieve the legislative end." According to the Court, "legislation readjusting rights and burdens is not unlawful solely because it upsets otherwise settled expectations...."

C. IN THE RARE EVENT THAT A TAKING OCCURS, WHAT IS THE MEASURE OF DAMAGES?

There is little or nothing in the land use decisions of the U.S. Supreme Court that helps in understanding how to measure damages should a taking actually occur. The issue, however, is a significant one: If the amount of potential liability is great--even if the risk that a court will find a taking is relatively small--there will be a natural tendency on the part of communities to refrain from any type of activity that could invoke a takings claim. As explained below, however, the potential liability is generally smaller than most people associate with the concept of "takings."

In examining this issue, it is important to understand the difference between a temporary and a permanent taking. If a regulatory taking is "permanent"--that is, the regulations are not temporary, or cannot be undone--then the appropriate compensation to the property owner is the full value of the property, as determined by well-accepted real estate valuation principles. If a regulatory taking is "temporary"--that is, the regulation is subsequently lifted by a court's action in striking it down, or if it is withdrawn by the government--compensation is due only for the period the regulation was in place, and will be far less. The significance of this difference is that, while any type of regulatory taking is rare, in most such cases the offending regulation may either be withdrawn by the court or by the government itself--limiting the taking to a temporary period. The corresponding liability for temporary damages is considerably smaller than that of a permanent "taking."

How then are damages measured in the case of a regulatory taking? Although the few courts that have addressed this issue have taken no consistent approach, two main alternative methods have emerged from two federal appeals court decisions. Under the first, based on Nemmers v.City of Dubuque (1985), the government is required to pay a percentage (reflecting a reasonable annual rate of return) of the loss of value of the property for the period of time that it was covered by the regulation. Under the second, based on Wheeler v.City of Pleasant Grove (1990), the government is required to pay a percentage (again, reflecting a reasonable rate of return) of the amount of investment the landowner would have put into the property had development not been prohibited by the regulation-- but, again, only for the period the regulation was actually in effect.

Most analysts favor the Nemmers test, since Wheeler has been subject to criticism that it overstates the true economic impact on a piece of property. In either case, the entire loss of value or investment is not required to be repaid, since both value and investment potential are restored to the owner once the regulation is lifted.

An example of how these damages principles apply in a given case are included in the takings law Summary, on pages 37-38. For a more detailed discussion of this issue, see R. Roddewig & C. Duerksen, Measuring Damages in Takings Cases: The Next Frontier, 15 Zoning & Planning Law Report 49 (Clark Boardman Callaghan, New York 1992).

III. TAKINGS LAW IN SUMMARY, WITH EXAMPLES

GIVEN THE FLURRY of Supreme Court land use cases in the 1980s and early 1990s, what are the Fifth Amendment rules that have been established to strike a fair balance between public need as embodied in governmental environmental and land-use restrictions and private economic interests?

Here is a plain English summary, with some illustrations:

PRINCIPLE 1:
No Absolute Right of Use

No one has an absolute right to use his property in a manner that may harm the public health or welfare, or damage the interests of neighboring landowners or the community as a whole.

Example: The owner of a petroleum refinery, once located far from any city or town, has watched over the years as development from the nearest metropolitan area has crept closer and closer. The refinery was once surrounded by open fields, but is now surrounded by residential subdivisions, shopping centers, and schools. The local community has grown concerned that smoke and other pollutants from the factory are having an adverse effect on the health of local residents, as well as the economic health of the community as a whole. The county council finally decides enough is enough, and adopts a law that prohibits emission levels above certain amounts. The owner says that he cannot afford the necessary emission controls, and will be forced to close the plant if required to comply with the law. He claims that the result would be a taking.

Analysis: Communities have the right to stop harmful activities of individual landowners. This is the case even for activities that have been carried out for many years, since changes in circumstances will permit changes in the general law to protect the public interest. In almost every instance, the property in question may be put to other uses, including--as in this case--developed for residential or other low-impact uses. Even where no other use is possible, however, compensation will not be due if the prohibition is based on established principles of the law of property and nuisance.

PRINCIPLE 2:
Reasonable Return or Use

Property owners have a right to a reasonable return or use of their land, but the U.S. Constitution does not guarantee that the most profitable use will be allowed.

Courts continue to insist on a high threshold for takings claims. All or virtually all reasonable use or return must be denied the property owner before a court will find a taking. A significant reduction in value does not necessarily give rise to a taking. A governmental action that restricts the value (or valuable uses) of land is not a taking, so long as it advances a legitimate public interest, and so long as some reasonable use of the property remains.

Example: A dilapidated building in a large city is designated as a local historic landmark, due both to its architectural significance and its historic importance as the early residence of an internationally-known author. Current zoning of the area permits a wide variety of low- and high-density uses, and a number of properties adjacent to the landmark have been developed as high-rise office towers. However, the local landmark law prohibits demolition or major changes to the building except as approved by a local landmarks commission, under very strict criteria. The landmark is purchased by a developer, who seeks permission to demolish it in order to develop another office tower. At the hearing, the developer submits uncontroverted evidence that the current value of the property is about $100,000, but that it would be worth over $2 million if it could be developed to its "highest and best" use. The landmarks commission nonetheless denies the demolition application; the developer claims that the severe diminution of value amounts to a taking. Is he right?

Analysis: No. The U.S. Supreme Court has repeatedly held, as recently as 1993, that the mere diminution of property values is insufficient to demonstrate a taking. This principle goes back to the early zoning cases that upheld the imposition of new zoning regulations that instantly decreased property values because of the loss of development potential. In this case, there are likely to be a number of other, lower-density uses to which the property can be put, and which would not necessitate the demolition of the existing structure.

Coastal zone laws, like numerous other environmental and land use laws, have been upheld as a valid basis for regulation.


PRINCIPLE 3:
Furthering the Public Interest

Courts have and are continuing to sustain a wide variety of purposes as valid reasons for enacting environmental and land use regulations.
Natural resource protection, agricultural land preservation, historic preservation, scenic view ordinances, design controls, protection of environmentally sensitive areas such as wetlands and floodplain--all these are valid purposes for land-use regulation. Importantly, basing regulations upon a well-thought out comprehensive plan helps to clarify the reasons for citizens and protect government actions against takings claims.

Example: A coastal state is concerned about the continuing loss of life and property that occurs whenever a major hurricane strikes. After an extensive period of study, the state enacts a comprehensive package of laws to restrict the type and place of development along the state's beaches and barrier islands. The law effectively zones development in coastal areas, requires stricter building codes in certain high-danger areas, and limits new construction within a set-back zone along the beach. A series of permit requirements are set in place, with appropriate variance measures comparable to those under zoning law. A property owner, who would like to build a vacation home within the set-back zone, claims that the Supreme Court struck down this type of law in the Lucas case. Will he win?

Analysis. It is unlikely. The Supreme Court did not strike down the coastal zone law at issue in Lucas. In fact, the Court recognized that the government has broad authority to regulate the use of land both to confer benefits on the public, and to prevent harm. Coastal zone laws, like numerous other environmental and land use laws, have been upheld as a valid basis for regulation.

The issue in Lucas was whether the law, even as a valid exercise of regulatory power, would require compensation if it denied a property owner all use of his property. (The Court said it would, unless the ban was justified by principles of nuisance and property law.) In the example above, the incorporation of a variance provision makes it less likely that a taking will arise in any given case. [The law in Lucas did not include a variance provision until one was added after the property owner had initially been denied the right to build; he applied for permits under the amended law (and received them) only after the Supreme Court had issued its opinion].


PRINCIPLE 4:
Consider the Parcel as a Whole

The focus of a takings inquiry continues to be on the entire property interest.

A severe adverse impact of a regulation on one portion of a property or ownership interest is not enough to constitute a taking, if the property as a whole continues to have a reasonable economic use.

Example: A county in a western state has had a water shortage for a number of years and needs additional sources to provide drinking water to its residents. A lake in one part of the county has never been tapped for drinking water because of high pollution levels, primarily from run-off from adjacent development. The county decides that, in order to ensure the availability of the lake as a source of drinking water, it will establish a 100-foot buffer zone around the lake shore, within which no new construction or ground-disturbing activity will be permitted. A lakeside property owner, who had hoped one day to develop his rustic campground into a commercial marina complex, claims that the government has effectively condemned a 100-foot swath of his property.

Analysis: Assuming that the county can demonstrate that the 100-foot buffer is necessary to achieve the legitimate public need for a pure water source, the real issue here is the residual use of the parcel affected by this regulation. Contrary to popular belief, takings law does not look primarily at the portion of the land that is restricted, but rather on the remaining use of the entire parcel. If the landowner retains a reasonable use of the property--here the continuation of a valid existing use, or the development of some other portion of the property--the lot as a whole can continue to be viably used, and there is no taking.

It is worth noting, however, that a variance or hardship procedure would protect the county against takings claims by providing a means to alleviate any hardship that might exist on a case-by-case basis due to unusual topographical or other circumstances. It is also worth noting that, as is explained below in Principle 9 (pages 39-40), the justification for a development ban in this case, if supported by background principles of nuisance law, may cause the restriction to be upheld even if all use of the parcel is prohibited.