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California Eminent Domain Report "…nor shall private property be taken for public use, without just compensation."

Regulatory Takings: Economics, Confusion and Inconsistency

Posted in Inverse Condemnation & Regulatory Takings

When analyzing potential liability for a regulatory takings claim, most land use and eminent domain attorneys immediately look to the three-prong test set forth by the U.S. Supreme Court in Penn Central Transportation Co. v. New York City (1978) 438 U.S. 104.  Those three factors include:

  • the economic impact of the regulation;
  • the extent to which the regulation has interfered with distinct investment-backed expectations; and
  • the character of the government’s regulation.

Unfortunately, it’s much easier said than done.  Practitioners and courts alike have struggled over the years in (1) deciding how to measure a regulation’s economic impact and (2) determining whether the regulation has interfered with an owner’s "distinct investment-backed expectations."  This is especially true given the Supreme Court’s direction that each case deserves an independent, "ad hoc" factual inquiry.

William Wade, an expert in financial economics, has prepared an excellent article addressing what has resulted from this perplexity:  unpredictability in evaluating the merits of regulatory takings claims.  Mr. Wade’s article, "A few thoughts about origins of confusion subsequent to Penn Central," suggests this stems from "too much talk and not enough math," as the calculations are straight-forward for financial experts, yet the waters are muddied through the courts’ reluctance to apply economics and analyze income losses as opposed to property value depreciation.

For example, Mr. Wade suggests that while an appraisal may accurately measure a change in a property’s value, it does not accurately measure economic losses to the owner of an income-producing property.  For purposes of analyzing a temporary regulatory taking, Mr. Wade urges us not to consider the property’s percentage decline in value, but instead the property owner’s change in income.  This is how damages are calculated in tort cases, and Mr. Wade advocates that damages in regulatory takings cases should be no different.

Mr. Wade sums up his article with the conclusion that "[u]ntil the Supreme Court puts an end to faulty understanding of economics within the Penn Central test, . . . widespread confusion of takings jurisprudence will persist."  

The recent Guggenheim Ninth Circuit en banc decision (pet. denied May 16, 2011) turns out be be consistent with standard economics expressed by the Court in Loveladies Harbor, Inc. v. U.S. (Fed. Cir. 1994) 28 F.3d 1171, 1177: 

[T]he owner who bought with knowledge of [a particular] restraint could be said . . . to have assumed the risk of any economic loss.  In economic terms, . . . the market had already discounted for the restraint, so that a purchaser could not show a loss in his investment attribu[table] to [the regulatory action]." 

While more recent Federal Circuit cases have confounded basic economics, Loveladies made sense at the time and rings true in Guggenheim.  Take a look at Mr. Wade’s article for yourself.

  • Gideon Kanner

    That Loveladies quote is nonsensical. The question is whether the regulation is unconstitutional not whether the buyer knew of its unconstitutionality. The buyer’s knowledge does not make an unconstitutional regulation any less unconstitutional.

    For example, if an African-American family were to buy a home that is subject to one of those old “restrictive” CC & Rs or similar regulations, would you argue that they can’t complain about its unconstitutional effect that bars them from living in the house they bought, because they bought with knowledge and assumed the risk?

  • Brad Kuhn

    Professor Kanner raises an excellent point above. Just because a purchaser acquires a property subject to an unconstitutional regulation does not mean the regulation should bar the owner’s constitutional rights.

    However, within the context of a regulatory takings claim, there is something to be said for the fact that the owner likely acquired the property at a reduced price that took into consideration the regulation (unconstitutional or not). The regulation’s economic impact, and the owner’s investment-backed expectations, are likely not as hampered where the owner is aware of the regulation prior to acquisition.

    On the other hand, the Loveladies’ court’s interpretation would effectively discourage someone from buying a property and challenging an unconstitutional regulation (at least on the grounds of a regulatory takings claim). I’m not sure that is the policy our courts want to establish.

  • Gideon kKanner

    Many thanks for your response. Unfortunately your qualified defense of that nonsense doesn’t do the trick.

    People buy distressed properties all the time, whether the distressed condition is physical or regulatory. They do so in the perfectly reasonable and common expectation that the problem can be remedied, and that the prospect of gain justifies the risk. But because of the prospective uncertainty, expense and delay they face, they pay less than the full-pop fair market price? What could possibly be wrong with that? It’s done all the time. So why should that strip them of their constitutional rights as opposed to their vendor? Why is the vendor entitled to enforce his constitutional rights but not his buyer?

    The buyer undertakes the risk that his hoped-for deal won’t work out, not that the government will steal his property?

    And didn’t the Supreme Court make it clear as far back as Nollan that the fact that the regulated property is sold does not deprive the buyer of his constitutional rights?

    The question which you didn’t address is why should the reasoning underlying takings law be different? Wanna try again?

  • Brad Kuhn

    Professor Kanner,

    I definitely see your point of view, and to some extent I very much agree with your opinion. That is what my last paragraph was meant to address; we shouldn’t discourage individuals from taking these risks/opportunities and buying properties at a reduced value with the hopes of challenging an unconstitutional ordinance simply because the ordinance was in-place when they bought the property. Challenging a regulation as unconstitutional should not be prevented simply due to a change in ownership. However, if we’re going to stick within the Penn Central framework, I do not think a buyer should be able to buy a property knowing full well of a regulation, paying a reduced price for the property due to the regulation, and then later complain that they’re entitled to damages because of the exact regulation they knew about and took advantage of. This was the court’s opinion in Ridgewater Associates, and there’s obviously a way to document around these issues by assigning the prior owner’s potential claim.

    All the best.

    Brad

  • Gideon Kanner

    Sorry. Penn Central has nothing to do with this issue. Penn Central deals with the question of what is a taking, not who may sue for it. You are dancing around the mulberry bush and won’t address my question. Doesn’t your argument lead you to the conclusion that segregated housing is functionally OK because the present (white) owner has no intention of suing, and is not aggrieved, while an African-American buyer buys with knowledge of the [unconstitutional] restriction, so according to your reasoning, he got what he bought and paid for, and can’t complain?

    How now, brown cow? And while you’re at it, what happened to Palazzolo? Specifically to Justice Kennedy’s point that you can’t thus put an expiration clause on the Fifth Amendment, which under your reasoning would occur after a generation or two of title transfers?

    I believe that between the two of us we have demonstrated why every commentator who has written on inverse condemnation agrees that the law is a mess, going back to the sainted Arvo Van Alstyne who wrote in the 1960s.

    GK

    PS – If you are a Penn Central fan I suggest you read my article Making Laws and Sausages, 13 William & Mary Bill of Rights Journal 653 (or 679) — the kids screwed up the pagination, but I’m sure you will find it. If you decide to read it I suggest that you have a drink first. Enjoy!

  • Brad Kuhn
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