When Does Downzoning Result in a Regulatory Taking?

An update to our original 2011 post

As we have previously discussed, downzoning (changing the zoning designation for property from a more intensive use to a more restrictive use) can possibly rise to the level of a regulatory taking, depending on each individual situation. A recent case, FFV Coyote LLC v. City of San Jose, 2022 U.S. Dist. LEXIS 195036, analyzed this issue at the motion to dismiss stage and concluded that the plaintiffs had sufficiently plead a Fifth Amendment regulatory takings claim to survive a motion to dismiss.

Background

Plaintiffs own property in San Jose, California, originally acquired in the 1960s. The land is undeveloped and unused, with the exception of a seasonal pumpkin patch with associated attractions.

The City of San Jose’s general plan originally designated the property as “light industrial,” but through general plan amendments, the property’s zoning has changed over time to “agricultural”, “campus industrial”, and later “industrial park”. As development became more likely in the area that encompasses the property, community pressure increased to keep the area as open space. The City even purchased land adjacent to the property (which was also designated as “Industrial Park”) to preserve it as open space.

In 2019, the City began exploring a general plan amendment to address development in the area including the property. Ultimately, the general plan was amended and the property designation was changed from “Industrial Park” to “Agricultural.” While the general plan amendment was under review, the property owners entered into a contract to sell the property to a developer for $44.1 million. Days after the property’s designation was changed, the developer terminated the contract to buy the property.

Procedure

The property owners brought suit in federal district court, claiming, among other things, that the City’s general plan amendment violates the takings clause of the Fifth Amendment, as the downzoning constitutes a regulatory taking. The City filed a motion to dismiss for failure to state a claim.

Analysis

The district court determined that the plaintiffs stated a claim for violation of the Fifth Amendment as a regulatory taking under the Penn Central factors, and denied the City’s motion to dismiss. The Penn Central test requires the evaluation of three factors: (1) the economic impact of the regulation on the claimant, (2) the extent to which the regulation has interfered with distinct investment-backed expectations, and (3) the character of the governmental action. The plaintiffs satisfied the requirements, at least at the pleading stage.

First, plaintiffs allege that the economic impact of the City’s action is “severe,” in that the City’s action was directly responsible for the termination of the $44.1 million purchase agreement. Further, plaintiffs’ complaint alleged that an expert report supports the position that agriculture is not an economically viable use of the property. Also, plaintiffs alleged that even the most recent use of the property as a pumpkin patch would no longer be permitted under the new land use designation. Given these allegations, the district court determined the plaintiffs had plausibly alleged that the economic impact of the regulatory change may be so severe as to constitute a taking.

Second, the plaintiffs allege that the property was purchased as a long-term investment and that the property could reasonably be sold for development. They alleged that the historical land use designation for the property indicated the property was suitable for industrial development and that there had been a significant expenditure of funds on infrastructure improvements in the area since the 1980s to facilitate the area for the development of industrial uses. The district court concluded that deciding whether the expectation of future industrial development was reasonable was a factual inquiry that could not be decided at the pleading stage.

Third, the plaintiffs allege that the City’s action was intended to “preserve” the property for the benefit of the public in a way that necessitates the payment of just compensation. They allege that the City accomplished this goal through its downzoning set forth in the general plan amendment. The district court concluded that such allegations support a regulatory takings claim.

In sum, the district court determined that plaintiffs had sufficiently stated a claim for a taking in violation of the Fifth Amendment. Therefore, at this stage, the City’s motion to dismiss is denied and the claim for a regulatory taking may proceed.

Conclusion

While this is not a final determination on whether or not downzoning constitutes a regulatory taking, it demonstrates the type of allegations that can be made to survive a motion to dismiss. This case will be interesting to follow to see if the court determines that this is a permissible use of the City’s police power, or if it raises to the level of a regulatory taking.


Our original post from 2011

What is Downzoning and When is it Compensable?

"Downzoning" describes a government agency's rezoning a parcel of land once previously zoned for a more intense use to a more restrictive use (e.g., changing the commercial zoning designation of an undeveloped parcel of land to agricultural or open space). Those who purchase an undeveloped property zoned for commercial, industrial, or residential uses, only to later have that property rezoned for agricultural or open space uses unquestionably suffer a loss. But when is it compensable?

There's an interesting news article on the Daily Zilla about an alleged downzoning case taking place in the City of Richmond, California. A property owner alleges that the City intends to change the zoning of its undeveloped industrial property to open space so the property can eventually be acquired by the City at a reduced price for a public park.

If the City simply wants to change the zoning to a more restrictive use, California law provides that unless the change in zoning results in a regulatory taking or deprives the owner of a vested right, the property owner is not entitled to compensation. In other words, the owner is not entitled to compensation unless (1) the new zoning designation results in a loss of substantially all economically viable uses of the property, or (2) the owner has done substantial work or expended large sums of money in good faith reliance on a development permit. 

However, if the downzoning is done in bad faith, the owner may be entitled to compensation. For example, if the change in zoning can be shown as a subterfuge to reduce the acquisition price in a subsequent condemnation action, it constitutes a taking. Similarly, compensation may be owed if the change in zoning was meant to accomplish the same purpose of acquisition of the land (i.e., for open space purposes). And, a government agency may be on the hook if it tries to preserve the status quo by denying development applications for the purpose of reducing the eventual acquisition price. 

  • Jillian Friess Leivas
    Associate

    Jillian Friess Leivas focuses her practice on eminent domain laws and regulations. She has experience assisting with the right-of-way process, from precondemnation acquisition activities through to preparing pleadings and ...

  • Bradford B. Kuhn
    Partner

    Brad Kuhn, Chair of Nossaman's Eminent Domain & Valuation Group, guides property owners, developers, businesses, utilities, and public agencies through complex real estate development and infrastructure projects – ...

California Eminent Domain Report is a one-stop resource for everything new and noteworthy in eminent domain in California. We cover all aspects of eminent domain in California, including condemnation, inverse condemnation, and regulatory takings. We also keep track of current cases, project announcements, budget issues, legislative reform efforts, and report on all major California eminent domain conferences and seminars.

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