In Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), the Supreme Court famously announced that when, as in that case, the trial court found that a regulation rendered the property “valueless,” the owner could assert a per se takings claim on the theory that he had been “called upon to sacrifice all economically beneficial uses” of his property. Several justices in Lucas expressed discomfort with the idea that a regulation barring development can literally render property “valueless,” and courts and scholars have struggled to define the scope of the Lucas rule ever since.
The very recent decision of the U.S. Court of Appeals for the Federal Circuit in Lost Tree Village Corp. v. United States considerably deepens the mystery surrounding the Lucas per se rule and, unless reexamined by the Federal Circuit or overturned by the Supreme Court, will make the Lucas rule considerably harder to apply in practice.
A little background on the Lost Tree case: In 1968, plaintiff acquired an option to purchase several thousand acres of land along the Atlantic coast in Florida. Over the ensuing decades plaintiff purchased portions of the property in increments and developed them, gradually creating a very high-end gated community complete with two golf courses, a beach club and so forth. Toward the end of the development process, plaintiff purchased the five-acre wetland property at issue in the Lost Tree case for the modest price of $5370, and originally announced that it would set the area aside for conservation purposes, but later changed its mind. The Federal Circuit has now ruled that the parcel had a value of $4,245,000 for development and that the Army Corps of Engineers’ rejection of a section 404 wetlands-fill permit constituted a taking entitling plaintiff to just compensation in (roughly) that amount.
How the plaintiff came to the decision to develop the five-acre property is itself instructive. A neighboring property owner, likewise subject to federal wetlands strictures, identified a separate undeveloped portion of plaintiff’s vast property holdings as a suitable location to conduct wetlands mitigation work that would generate “mitigation credits” and allow the neighbor to proceed with a planned development project under the Army Corps regulations. Thus alerted to the opportunity to generate mitigation credits on its property, plaintiff decided to try to use the credits for its own account; this led plaintiff to search for development opportunities on its lands that would require mitigation, which is turn led plaintiff for the first time to consider developing the five acres. So if you ever wondered if the Army Corps wetlands mitigation policies can actually foster wetlands destruction, here is proof positive that they can!
In an initial appeal to the Federal Circuit, the court of appeals rejected the government’s effort to defeat the claim based on application of the parcel as a whole rule. See Lost Tree Village Corp. v. United States, 707 F.3rd 1286 (Fed Cir. 2013). The government argued that the five-acre parcel on which plaintiff based its claim should be considered in the context of the several thousand acres that comprised the entire development; in the alternative, the government argued that, at a minimum, the trial court properly rejected the takings claim by evaluating the five-acre parcel in conjunction with several other adjacent and nearby parcels. But the Federal Circuit rejected both arguments, concluding that the special history leading to the plaintiff’s decision to attempt to develop this particular parcel several years after the rest of the development had been largely completed somehow meant that plaintiff had developed “distinct economic expectations” with respect to this particular parcel, justifying its treatment as a distinct parcel for the purpose of takings analysis. It remains a mystery why, if (as the court correctly assumed) the parcel rule would bar the takings claim if the developer sought to develop the five-acre parcel concurrently with the rest of the development, the result should be different because this particular parcel had so little development interest that the developer essentially forgot about it until the rest of the development had been completed. Nonetheless, the Federal Circuit denied an application for rehearing and the case has proceeded on the basis that the five acres represented the relevant parcel.
On remand, the trial court found that the permit denial constituted a taking under Lucas and the Federal Circuit has affirmed; the Federal Circuit declined to reach the trial court’s alternative holding that the plaintiff also suffered a taking under Penn Central. The most interesting part of this recent decision is the Court’s problematic reasoning for rejecting the government’s argument that the trial court’s conclusion that the property retained (post permit-denial) a residual value of $27,500 precluded a finding of a taking under Lucas. Under Lucas, the government argued, the destruction of value must be total, as under the facts of Lucas, or as the Court articulated the test in the Tahoe-Sierra case. The Federal Circuit’s answer to this argument was that the parcel’s residual value only reflected its “environmental value” and not its “economic value,” and that property value attributable to environmental value can and should be disregarded for the purpose of applying the Lucas test.
But this approach is surely wrong, on multiple grounds. First, there is no warrant in the Takings Clause for privileging property value that derives from the development of land from value that depend on its preservation. The government’s expert testified at trial that the land had economic value for recreational purposes, and the courts accepted that testimony; even if this use is “environmental” in nature, there is no reason why the value of the land for private recreational purposes should not be taken into account in determining a property’s value after a permit application has been denied. Also, as illustrated by the origins of this case in wetlands mitigation, undeveloped areas (either in pristine or restored states) can have real economic value in the marketplace as mitigation sites and there is no sound reason why these values should be disregarded for the purpose of takings analysis.
Second, the Federal Circuit’s approach is flawed because it divorces takings analysis from the realities of the actual marketplace in land. Takings analysis is difficult enough, and already subject to too much gamesmanship. Tethering estimates of the economic impact of regulation on land values to actually observable real estate values provides at least some assurance that takings law will remain in touch with reality. But if the courts decide that some factors affecting land values are legally cognizable (because they are “economic” in nature) and others are not (because they are “environmental” in nature), then fact-based data on the market value of regulated property become irrelevant. Environmental values, like development opportunities, can have significant impacts on the market value of land. But, in the real world, the impacts of these different influences on land value cannot be distinguished one from the other. If the courts are supposed to look for evidence of land value divorced from environmental value, they will come up empty handed, meaning that the search for economic impact for the purpose of takings analysis will become a purely abstract exercise. Absent some grounding in actual data, takings analysis will likely become difficult if not impossible to perform; at a minimum, it will become more random and unpredictable.
Perhaps the Federal Circuit needs to rethink its latest decision.
One might assume that “takings” would be a remote issue when it comes to the federal bailout of the automobile and financial services industries during the economic crisis of a few years ago. After all, if the government spent billions of taxpayer dollars to protect particular companies, and the economy as a whole, from going over a cliff, how could the government be accused of taking anything? But if one made this assumption, one would turn out to be wrong. Two ongoing cases illustrate the point. Read on …