Retail Property Values and Land Use Regulation: Judicial Approaches to Measuring Diminution of Value and Strategies to Redress Loss of Property Value

Segmentation of property can be of three kinds: conceptual, geographic and temporal. In the first kind, conceptual segmentation, the segment or denominator may be one strand in the bundle of property rights, such as the right to exclude others. Geographic segmentation is simply the physical extent of the property. A temporal segmentation occurs when the question is whether a taking occurred for a limited period of time, eg, as a result of a moratorium.

The segmentation issue in Penn Central was a conceptual one, namely a takings claim based on the owners' property interest in one type of legal interest in property, ie, the airspace above the terminal. A year later in Andrus v. Allard, 444 U.S. 51 (1979), the Court again applied the whole parcel rule to hold that federal regulations that prohibited the sale of Indian artifacts made from certain bird feathers was not a taking. This, said the Court, was “because the aggregate must be viewed in its entirety,” and the owners of the artifacts still retained other “strands” in the bundle of property rights, namely, they could still possess, transport, donate, or devise the artifacts. By contrast, in Kaiser Aetna v. U.S., 444 U.S. 164 (1979), when the property interest involved the owner's right to exclude the public from its property ' a coastal pond for which the owner had also dredged a channel ' the Court held that the federal government's attempt to ensure public access through the channel to the pond was a taking of a property right for which it must pay compensation.

The geographic segmentation issue requires a determination of the geographic extent of the parcel alleged to have been taken by government regulation. Obviously, if the extent of the parcel can be narrowly defined, it increases the possibility that a takings claim will be successful. One factor that is important in the determination of the geographic extent of the parcel is whether the property was purchased at one time and is under single ownership. Where a zoning ordinance is challenged, even though the property may be subject to more than one zoning classification, the courts are most likely to treat the entire parcel as one whole.

Where multiple parcels are involved, particularly involving wetlands, the courts have been more flexible in defining the whole parcel. For example, in one wetlands case, the court considered such factors as the degree of contiguity, dates of acquisition, the extent to which the parcel was treated as a single parcel, and the degree by which the regulated portion enhanced the value of the remaining parcels. Because the landowner had treated the parcels as a single parcel for purposes of purchase and financing, the court held that the individual lots should not be treated as separate parcels.

Temporal segmentation is best illustrated by the Supreme Court's decision in the Tahoe-Sierra case. In that case, the Tahoe Regional Planning Agency (“TRPA”) ' the regional governmental body established by a congressionally approved compact between California and Nevada with the power to plan and control development within the 501 square mile bi-state region around the lake ' had enacted a series of moratoria between 1981 and 1987 to halt development while a new regional plan was being prepared to protect the alpine lake from environmental impacts.

The property owners challenged these moratoria as categorical takings. They argued that, for purposes of determining whether the regulations constituted a taking, the court should define narrowly, as a separate property interest, the temporal “slice” of each property owner's fee interest that covered the time period during which each moratorium was in effect. The plaintiffs asserted that each carved-out piece of each plaintiff's property interest had been “taken” by the moratorium regulations.

The Supreme Court rejected as “circular” the property owners' argument that the 32-month segment should be severed from each landowner's fee simple estate “and then ask whether the segment has been taken in its entirety by the moratoria.” Their argument, said the Court, raised the “denominator” question. That is, whether the portion of property alleged to be taken (the numerator) must be viewed in relation to the property as a “whole” (the denominator) or whether that portion may be severed from the whole and addressed separately, in effect making the numerator and the denominator one and the same.

In the temporary taking context created by the TRPA moratoria, the property owners had convinced the trial court that the fee interest in each property should be separated into the temporal segments that corresponded to the time period of the moratorium regulations and then analyzed for whether all economically viable use was deprived during each time period. This was error, said the Court, because it has consistently rejected this approach to the “denominator” question and stressed that in regulatory takings cases the focus must be on the extent to which the regulation affects “the parcel as a whole” both physically and temporally: The trial court should first have asked whether there was a total taking of the entire parcel: “[I]f not, then Penn Central was the proper framework.”

The Agins Two-Part Takings Test

Two years after the Supreme Court announced its multifactor takings test in Penn Central, it adopted a different regulatory takings test in Agins v. City of Tiburon, 447 U.S. 255 (1980). Donald Agins and his wife had brought a facial takings attack on the city's Residential Planned Development and Open Space Zone that had been placed on their 5-acre parcel as part of the city's implementation of a comprehensive plan open space element. The Agins had never sought development approval of their property under the new zoning that allowed single-family dwellings, accessory buildings and open-space uses. They argued that because their ridgelands property, with its magnificent views of San Francisco Bay and surroundings, had the highest market values of all lands in Tiburon, the rezoning had “completely destroyed the value of [their] property for any purpose or use whatsoever. … ” The Court dismissed this facial takings challenge, stating:

The application of a general zoning law to particular property effects a taking if the ordinance does not substantially advance legitimate state interests … or denies an owner economically viable use of his land. …

The Court held that the open space zoning substantially advanced legitimate governmental goals because it was an exercise of the city's police power to protect the city's residents from the “ill effects of urbanization.” As for whether the zoning denied the Agins economically viable use of their land, the Court concluded that although the zoning limited development of their parcel, it “neither prevent[s] the best use” of their property nor “extinguish[es] a fundamental attribute of ownership.” The Agins were “free to pursue their reasonable investment expectations by submitting a development plan to local officials.”

Agins 'Substantially Advances' Prong for Takings Invalidated

Twenty-five years after adopting the Agins two-prong takings test with its “substantially advances” formula, the Supreme Court has now rejected the “substantially advances” prong as a “stand-alone regulatory takings test” independent of the multifactor takings test established in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978) (discussed in Part One) or any other test. In Lingle v. Chevron, 125 S.Ct. 2074 (2005), a non-land use case, the Court concluded that this type of inquiry does not address the magnitude or character of the burden a particular regulation imposes upon private property rights, and therefore has no place in the Court's takings jurisprudence. This standard, therefore, is no longer available to property owners who make a takings claim against a regulation that is alleged not to substantially advance the stated government purpose. Such takings claims were typically facial challenges to regulations.

Legal Strategies to Redress Loss of Property Value

The attorney for retail developers and shopping center owners should consider a number of legal strategies to redress the loss of property value resulting from the imposition of restrictive regulations. All of these strategies, in essence, are based on the constitutional protection afforded by the takings clause.

Takings Challenges

As Applied Takings Challenge Based on Penn Central

In Palazzolo v. State of Rhode Island, 533 U.S. 606, 633 (2001), and then a year later in Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302(2002), the Supreme Court indicated that where regulation of property causes less than a total deprivation of value, such a partial regulatory taking may be compensable under the multifactor test outlined in Penn Central. Now that the Supreme Court has held that where there is no per se taking, the Penn Central multifactor balancing test is the “default” test in such takings cases, this test has particular relevance in considering a takings challenge to a new regulation that partly, but substantially, diminishes the value of property. Of the factors discussed above, the economic impact and investment-backed expectations factors become prominent. At this point, the most recent cases in which the courts have found takings based on multifactor analysis have been primarily environmental regulation cases. However, while the outcome of a court takings challenge in some cases is uncertain (eg, involving the imposition of new building and site design regulations upon an existing shopping center seeking approvals to allow a partial redevelopment), the three factors of Penn Central certainly are relevant. As for economic impact of the regulation, an analysis by an appraiser can demonstrate severe economic impact. The second factor, the extent of distinct investment-backed expectations may be also borne out by the appraiser's analysis. Lastly, the character of the government action, if not a comprehensive zoning enactment, could be properly characterized as a land use regulatory action directed exclusively at the shopping center.

Claims Based on Property Rights Statutes

In recognition of the difficulty in prevailing on a takings claim under both state and federal constitutions, a number of states have enacted property rights legislation. There are two basic types of property rights statutes: 1) assessment statutes and 2) compensation statutes. In general, assessment statutes direct the state attorney general or agencies, before proposed rules or regulations take effect, to determine whether they would result in a taking.

The compensation statute, by contrast, provides the opportunity for an award of compensation to redress those circumstances where the application of laws or regulations may significantly limit private property rights or impair property value, even if it does not amount to a taking under the federal and state constitutions. Examples of this type of statute are found in North Carolina, Louisiana, Mississippi, Texas and Florida.

The Florida Bert J. Harris Private Property Rights Act is the Florida Legislature's express recognition that “some laws, regulations, and ordinances of the state and political entities in the state, as applied, may inordinately burden, restrict, or limit private property rights without amounting to a taking under the State Constitution or the United States Constitution.” The Harris Act is designed to protect the interests of private property owners from such inordinate burdens by providing relief, or payment of compensation, when a new law, rule, regulation, or ordinance unfairly affects real property.

Legal Strategy Tips

Below are some legal strategies that owner's counsel should consider in seeking to preserve existing property value and/or redress loss of value of a developed shopping center or other retail property that is subjected to restrictive land use regulations affecting building design, placement and site layout.

• Negotiate an exemption from design requirements that impact economic viability of use and operational requirements. The owner whose proposal to redevelop its retail property makes the property subject to new form-based design requirements should negotiate to have the property “deemed conforming” under the new regulations. If the property is made nonconforming as a result of the new design requirements, the owner will have difficulty financing redevelopment and expansion of the business, selling the business or rebuilding structures that are damaged. The owner should also seek to obtain an exemption from any design requirements that defeat or make impractical the operations of the use that are necessary for it to be economically viable.
• If an exemption from design requirements cannot be negotiated, seek an agreement allowing for incremental application of new requirements. Where an exemption from new land use regulations cannot be negotiated and the client does not wish to challenge the new regulations in court, the best strategy may be to negotiate an incremental or phased compliance with the various elements, particularly design requirements, of the new regulations.
• If new land use regulations result in the imposition of an unconstitutional monetary exaction on the retail owner's property, counsel should check state law to determine if it is possible to pay the exaction under protest and challenge it later without being barred from doing so. A developer who chooses to pay a monetary exaction that it believes is unconstitutional and sue after it has obtained final approvals and even built the proposed development may be faced by the government's argument that the legal challenge should be barred as a matter of public policy. The government's argument is that in order to avoid the expense to taxpayers of a damages award if the exaction is found to be a taking, it should have the opportunity first to withdraw the exaction as a condition of development approval. That opportunity is lost if suit can be brought after the condition is satisfied and the developer's only remedy is damages. The government may also base its argument on fairness, arguing that it is unfair for a developer to accept the benefits of an approved plan and later challenge the conditions of that approval. The problem with this public policy argument is that such a rule barring a post-development approval challenge to an exaction would place tremendous pressure on landowners and developers to accept the government-imposed conditions rather than be forced to delay the proposed development pending the outcome of litigation.

Before choosing to pay the exaction with the expectation of challenging it later, developers should determine if state law, as defined by court decisions or a statute, allows a post-approval challenge of an exaction. Some states such as California, for example, provide by statute that a landowner may tender the cost of compliance with the condition, give notice of protest, continue with the development, and then sue.

Part One of this article discussed the Penn Central multifactor takings test. The conclusion addresses the “whole parcel” rule announced in Penn Central as well as the two-part takings test established by Agins v. City of Tiburon, 447 U.S. 255 (1980) and suggests strategies to redress loss of property values due to regulations.

The Whole Parcel Rule

In Penn Central, the Supreme Court stated that a landowner may not “divide a parcel into discrete segments and then attempt to determine whether rights in a particular segment have been abrogated.” In other words, Penn Central could not base its takings claim solely on its rights to the airspace above the terminal. This so-called “segmentation issue” can be extremely important to the outcome of a takings claim. The rule announced in Penn Central is sometimes referred to as the “whole parcel” or “denominator” rule. It determines how the unit of property or relevant parcel is defined for purposes of the court's takings analysis.

Segmentation of property can be of three kinds: conceptual, geographic and temporal. In the first kind, conceptual segmentation, the segment or denominator may be one strand in the bundle of property rights, such as the right to exclude others. Geographic segmentation is simply the physical extent of the property. A temporal segmentation occurs when the question is whether a taking occurred for a limited period of time, eg, as a result of a moratorium.

The segmentation issue in Penn Central was a conceptual one, namely a takings claim based on the owners' property interest in one type of legal interest in property, ie, the airspace above the terminal. A year later in Andrus v. Allard , 444 U.S. 51 (1979), the Court again applied the whole parcel rule to hold that federal regulations that prohibited the sale of Indian artifacts made from certain bird feathers was not a taking. This, said the Court, was “because the aggregate must be viewed in its entirety,” and the owners of the artifacts still retained other “strands” in the bundle of property rights, namely, they could still possess, transport, donate, or devise the artifacts. By contrast, in Kaiser Aetna v. U.S. , 444 U.S. 164 (1979), when the property interest involved the owner's right to exclude the public from its property ' a coastal pond for which the owner had also dredged a channel ' the Court held that the federal government's attempt to ensure public access through the channel to the pond was a taking of a property right for which it must pay compensation.

The geographic segmentation issue requires a determination of the geographic extent of the parcel alleged to have been taken by government regulation. Obviously, if the extent of the parcel can be narrowly defined, it increases the possibility that a takings claim will be successful. One factor that is important in the determination of the geographic extent of the parcel is whether the property was purchased at one time and is under single ownership. Where a zoning ordinance is challenged, even though the property may be subject to more than one zoning classification, the courts are most likely to treat the entire parcel as one whole.

Where multiple parcels are involved, particularly involving wetlands, the courts have been more flexible in defining the whole parcel. For example, in one wetlands case, the court considered such factors as the degree of contiguity, dates of acquisition, the extent to which the parcel was treated as a single parcel, and the degree by which the regulated portion enhanced the value of the remaining parcels. Because the landowner had treated the parcels as a single parcel for purposes of purchase and financing, the court held that the individual lots should not be treated as separate parcels.

Temporal segmentation is best illustrated by the Supreme Court's decision in the Tahoe-Sierra case. In that case, the Tahoe Regional Planning Agency (“TRPA”) ' the regional governmental body established by a congressionally approved compact between California and Nevada with the power to plan and control development within the 501 square mile bi-state region around the lake ' had enacted a series of moratoria between 1981 and 1987 to halt development while a new regional plan was being prepared to protect the alpine lake from environmental impacts.

The property owners challenged these moratoria as categorical takings. They argued that, for purposes of determining whether the regulations constituted a taking, the court should define narrowly, as a separate property interest, the temporal “slice” of each property owner's fee interest that covered the time period during which each moratorium was in effect. The plaintiffs asserted that each carved-out piece of each plaintiff's property interest had been “taken” by the moratorium regulations.

The Supreme Court rejected as “circular” the property owners' argument that the 32-month segment should be severed from each landowner's fee simple estate “and then ask whether the segment has been taken in its entirety by the moratoria.” Their argument, said the Court, raised the “denominator” question. That is, whether the portion of property alleged to be taken (the numerator) must be viewed in relation to the property as a “whole” (the denominator) or whether that portion may be severed from the whole and addressed separately, in effect making the numerator and the denominator one and the same.

In the temporary taking context created by the TRPA moratoria, the property owners had convinced the trial court that the fee interest in each property should be separated into the temporal segments that corresponded to the time period of the moratorium regulations and then analyzed for whether all economically viable use was deprived during each time period. This was error, said the Court, because it has consistently rejected this approach to the “denominator” question and stressed that in regulatory takings cases the focus must be on the extent to which the regulation affects “the parcel as a whole” both physically and temporally: The trial court should first have asked whether there was a total taking of the entire parcel: “[I]f not, then Penn Central was the proper framework.”

The Agins Two-Part Takings Test

Two years after the Supreme Court announced its multifactor takings test in Penn Central, it adopted a different regulatory takings test in Agins v. City of Tiburon , 447 U.S. 255 (1980). Donald Agins and his wife had brought a facial takings attack on the city's Residential Planned Development and Open Space Zone that had been placed on their 5-acre parcel as part of the city's implementation of a comprehensive plan open space element. The Agins had never sought development approval of their property under the new zoning that allowed single-family dwellings, accessory buildings and open-space uses. They argued that because their ridgelands property, with its magnificent views of San Francisco Bay and surroundings, had the highest market values of all lands in Tiburon, the rezoning had “completely destroyed the value of [their] property for any purpose or use whatsoever. … ” The Court dismissed this facial takings challenge, stating:

The application of a general zoning law to particular property effects a taking if the ordinance does not substantially advance legitimate state interests … or denies an owner economically viable use of his land. …

The Court held that the open space zoning substantially advanced legitimate governmental goals because it was an exercise of the city's police power to protect the city's residents from the “ill effects of urbanization.” As for whether the zoning denied the Agins economically viable use of their land, the Court concluded that although the zoning limited development of their parcel, it “neither prevent[s] the best use” of their property nor “extinguish[es] a fundamental attribute of ownership.” The Agins were “free to pursue their reasonable investment expectations by submitting a development plan to local officials.”

Agins 'Substantially Advances' Prong for Takings Invalidated

Twenty-five years after adopting the Agins two-prong takings test with its “substantially advances” formula, the Supreme Court has now rejected the “substantially advances” prong as a “stand-alone regulatory takings test” independent of the multifactor takings test established in Penn Central Transportation Co. v. City of New York , 438 U.S. 104 (1978) (discussed in Part One) or any other test. In Lingle v. Chevron , 125 S.Ct. 2074 (2005), a non-land use case, the Court concluded that this type of inquiry does not address the magnitude or character of the burden a particular regulation imposes upon private property rights, and therefore has no place in the Court's takings jurisprudence. This standard, therefore, is no longer available to property owners who make a takings claim against a regulation that is alleged not to substantially advance the stated government purpose. Such takings claims were typically facial challenges to regulations.

Legal Strategies to Redress Loss of Property Value

The attorney for retail developers and shopping center owners should consider a number of legal strategies to redress the loss of property value resulting from the imposition of restrictive regulations. All of these strategies, in essence, are based on the constitutional protection afforded by the takings clause.

Takings Challenges

As Applied Takings Challenge Based on Penn Central

In Palazzolo v. State of Rhode Island , 533 U.S. 606, 633 (2001), and then a year later in Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency , 535 U.S. 302(2002), the Supreme Court indicated that where regulation of property causes less than a total deprivation of value, such a partial regulatory taking may be compensable under the multifactor test outlined in Penn Central. Now that the Supreme Court has held that where there is no per se taking, the Penn Central multifactor balancing test is the “default” test in such takings cases, this test has particular relevance in considering a takings challenge to a new regulation that partly, but substantially, diminishes the value of property. Of the factors discussed above, the economic impact and investment-backed expectations factors become prominent. At this point, the most recent cases in which the courts have found takings based on multifactor analysis have been primarily environmental regulation cases. However, while the outcome of a court takings challenge in some cases is uncertain (eg, involving the imposition of new building and site design regulations upon an existing shopping center seeking approvals to allow a partial redevelopment), the three factors of Penn Central certainly are relevant. As for economic impact of the regulation, an analysis by an appraiser can demonstrate severe economic impact. The second factor, the extent of distinct investment-backed expectations may be also borne out by the appraiser's analysis. Lastly, the character of the government action, if not a comprehensive zoning enactment, could be properly characterized as a land use regulatory action directed exclusively at the shopping center.

Claims Based on Property Rights Statutes

In recognition of the difficulty in prevailing on a takings claim under both state and federal constitutions, a number of states have enacted property rights legislation. There are two basic types of property rights statutes: 1) assessment statutes and 2) compensation statutes. In general, assessment statutes direct the state attorney general or agencies, before proposed rules or regulations take effect, to determine whether they would result in a taking.

The compensation statute, by contrast, provides the opportunity for an award of compensation to redress those circumstances where the application of laws or regulations may significantly limit private property rights or impair property value, even if it does not amount to a taking under the federal and state constitutions. Examples of this type of statute are found in North Carolina, Louisiana, Mississippi, Texas and Florida.

The Florida Bert J. Harris Private Property Rights Act is the Florida Legislature's express recognition that “some laws, regulations, and ordinances of the state and political entities in the state, as applied, may inordinately burden, restrict, or limit private property rights without amounting to a taking under the State Constitution or the United States Constitution.” The Harris Act is designed to protect the interests of private property owners from such inordinate burdens by providing relief, or payment of compensation, when a new law, rule, regulation, or ordinance unfairly affects real property.

Legal Strategy Tips

Below are some legal strategies that owner's counsel should consider in seeking to preserve existing property value and/or redress loss of value of a developed shopping center or other retail property that is subjected to restrictive land use regulations affecting building design, placement and site layout.

• Negotiate an exemption from design requirements that impact economic viability of use and operational requirements. The owner whose proposal to redevelop its retail property makes the property subject to new form-based design requirements should negotiate to have the property “deemed conforming” under the new regulations. If the property is made nonconforming as a result of the new design requirements, the owner will have difficulty financing redevelopment and expansion of the business, selling the business or rebuilding structures that are damaged. The owner should also seek to obtain an exemption from any design requirements that defeat or make impractical the operations of the use that are necessary for it to be economically viable.
• If an exemption from design requirements cannot be negotiated, seek an agreement allowing for incremental application of new requirements. Where an exemption from new land use regulations cannot be negotiated and the client does not wish to challenge the new regulations in court, the best strategy may be to negotiate an incremental or phased compliance with the various elements, particularly design requirements, of the new regulations.
• If new land use regulations result in the imposition of an unconstitutional monetary exaction on the retail owner's property, counsel should check state law to determine if it is possible to pay the exaction under protest and challenge it later without being barred from doing so. A developer who chooses to pay a monetary exaction that it believes is unconstitutional and sue after it has obtained final approvals and even built the proposed development may be faced by the government's argument that the legal challenge should be barred as a matter of public policy. The government's argument is that in order to avoid the expense to taxpayers of a damages award if the exaction is found to be a taking, it should have the opportunity first to withdraw the exaction as a condition of development approval. That opportunity is lost if suit can be brought after the condition is satisfied and the developer's only remedy is damages. The government may also base its argument on fairness, arguing that it is unfair for a developer to accept the benefits of an approved plan and later challenge the conditions of that approval. The problem with this public policy argument is that such a rule barring a post-development approval challenge to an exaction would place tremendous pressure on landowners and developers to accept the government-imposed conditions rather than be forced to delay the proposed development pending the outcome of litigation.

Before choosing to pay the exaction with the expectation of challenging it later, developers should determine if state law, as defined by court decisions or a statute, allows a post-approval challenge of an exaction. Some states such as California, for example, provide by statute that a landowner may tender the cost of compliance with the condition, give notice of protest, continue with the development, and then sue.