January 27, 2014 Article

Planning or Taking? The Project Influence Rule and Inverse Condemnation

Learn about the two tools to recover real estate devaluation caused by government planning

by Dan Biersdorf and Ryan Simatic

Public construction projects take months, years, or even decades of planning.  For example, the location of a new school may be contested or a county may need to thoughtfully study the alignment of a new highway. While government entities prepare for such public projects, a major constitutional concern lurks in the background:  the public acquisition of private property. 

Public entities can and do acquire property for public projects through negotiation. Sometimes a willing seller has the land needed for a project. Other times a public entity will make an offer that changes an unwilling seller’s mind. But often the seller is unwilling to sell or the government is unwilling to offer a price the owner considers fair. In these latter instances, the government will often seize the property by exercising the power of eminent domain in a process called “condemnation.” This seizure of private property is constitutionally limited: To condemn private property, the government must pay “just compensation.” Albert Hanson Lumber Co. v. United States, 261 U.S. 581, 587 (1923).

A public entity can coordinate its land use regulations and its public projects. Local authorities regulate land use through such official acts as comprehensive plans or a zoning ordinance. Less official are government planning tools such as a general area plan or a traffic study. If the plan contemplates future public acquisitions, public knowledge of that plan can affect the real estate market well in advance of condemnation.

When a condemnor plans a public project with limited dissemination to the public, the transition from planning to acquisition (whether through purchase or condemnation) often has little effect on the real estate market. For example, when a road is planned by government engineers, the engineers determine the preferred layout and present the preferred layout to the public.  Acquisitions and condemnations commence before the real estate market can react to the impending project. But when a condemnor plans a project in the open, potential or planned acquisitions can impact the real estate market long before actual acquisitions or condemnation occurs.  

In general, the law requires that factfinders measure just compensation from the date of taking (i.e., when the government legally takes title to the property). In a traditional taking, just compensation represents the fair market value of the property on the date of taking. When the condemnor takes less than the entire property, an owner is also entitled to damages for the diminution of value of the property not taken. United States v. Miller, 317 U.S. 369, 376, 63 S. Ct. 276, 281, 87 L. Ed. 336 (1943).  But when a condemnor plans a project, and the public is aware of those plans, that public knowledge can depreciate fair market value before the date of taking. What buyer would be willing to purchase a property destined for government appropriation?

The law provides two different tools to protect landowners from project-related devaluation: the project influence rule and inverse condemnation. The project influence rule applies when the condemnor has commenced formal condemnation proceedings. Inverse condemnation applies when the project planning has, in effect, already taken the property, but the condemnor has not commenced formal condemnation.

The Project Influence Rule

Public projects can devalue real estate before the required condemnations for the project occur. Courts have devised a rule to prevent condemnors from benefitting from the depreciated value of condemned property when the depreciation is a result of the project. This rule, sometimes called the “project rule” or “project influence rule” by courts (see e.g., Spanbauer v. State, Dep't of Transp., 2009 WI App 83, ¶ 21, 320 Wis. 2d 242, 254, 769 N.W.2d 137, 143; City of Boulder v. Fowler Irrevocable Trust 1992-1, 53 P.3d 725, 727 (Colo. App. 2002); W.R. Associates of Norwalk v. Comm'r of Transp., 46 Conn. Supp. 355, 362, 751 A.2d 859, 866 (Super. Ct. 1999)) cuts both ways. The project influence rule holds that a court may not increase or decrease just compensation for a property to be condemned (and the value of a condemnee’s property) based on the effects of the project for which the condemnation occurs. See generally, J. Sackman, et al., Nichols on Eminent Domain § 12B.17 (3d ed. 2009).

The classic example of applying the project influence rule is a scenario where the project creates value in property that did not previously exist. For example, if the government wants to put in a new highway, then being on the new highway would give agricultural land new commercial development potential. The project influence rule dictates that for compensation purposes, the land acquired for the highway cannot be valued as if the highway already existed and the property had commercial development potential. While this application of the rule demonstrates the result where a project potentially increases a parcel’s value, the rule also applies where a project would decrease a parcel’s value.

Clark County v. Alper shows one application of the project influence rule. 100 Nev. 382, 685 P.2d 943 (1984). In the early 1970s, Nevada’s Clark County sought to widen Flamingo Road in Las Vegas. The county condemned a strip of property that the Alpers owned. The county’s appraiser theorized that the Alpers property had only a nominal value because “no legal economic uses” could be made of the property. The county’s appraiser based his opinion largely on information contained in the Las Vegas Valley Master Plan, which indicated that the county would eventually widen Flamingo Road to alleviate anticipated traffic congestion. The plan went so far as to specify right-of-way guidelines, and the Alper property fell entirely within the future width of Flamingo Road. The county’s appraiser thus concluded that because of these right-of-way guidelines, which were coextensive with the taking, no county official would grant a development or building permit for the Alper property. According to Clark County, because it would not have issued the permit, the Alper property had only nominal value.

Put differently, Clark County valued the Alper property as if the condemned property was already right-of-way but the the county did not compensate the Alpers for essentially regulating their land into county right-of-way. The project influence rule, however, prevented the county from taking unfair advantage of the depreciating effect of its own planning. The court ruled that the Alpers should receive just compensation determined as if the plan never existed.

Like the plan in Alper, local development moratoria may create problems with property devaluation. In the late 1990s, San Diego planned to urbanize the City’s north side. City of San Diego v. Rancho Penasquitos P'ship, 105 Cal. App. 4th 1013 (2003). Meanwhile, the California legislature had planned for decades to build a state highway, SR-56, in the same area but never finalized the highway’s alignment. In previous planning, the city approved dense residential zoning in this northern area but restricted all development until the state finalized the exact alignment of the highway. After the state determined the highway’s alignment, the city condemned approximately 10 acres owned by the Rancho Penasquitos Partnership (RPP). RPP moved to exclude the valuation. 

At trial, RPP argued that the city enacted its development moratorium to freeze property values in the area and thus minimize acquisition costs for the highway. RPP asserted that the area was ripe for development and that the moratorium could not be used to artificially depress property values. By contrast, the city explicitly included the effect of the moratorium in its valuation, valuing RPP’s property as agricultural land despite the approved dense residential zoning. The court agreed with RPP’s position and excluded all evidence related to the moratorium under the project influence rule.  

In Alper, a master plan set aside a portion of the Alpers property as a right-of-way long before the condemnation. With their property already designated as right-of-way, why should the Alpers have to wait for the county to decide to actually take the property? No investor would purchase the property in the intervening period because, with the right-of-way already set, any investor would know he/she could not develop the property. Similarly, was RPP compelled to wait until San Diego actually condemned its property? What if instead of the geographically expansive area covered by San Diego’s moratorium, the condemnor enacted a moratorium to cover a specific area in anticipation of a public project? Instead of suffering through years of declining property values, could the owner compel the government to pay just compensation without waiting for official condemnation?

Inverse Condemnation

The project influence rule prevents a condemnor from benefitting from devaluation caused by the project. But the project influence rule does not apply until the condemnor chooses to initiate the condemnation. In some instances, a landowner whose property has already been devalued can initiate the lawsuit. If project planning (or land use regulations) significantly decrease property values in advance of the actual project, owners may file an “inverse condemnation” action. By filing an inverse condemnation action, a landowner can avoid lengthy delays in receiving compensation for a property already devalued by a public project.

Inverse condemnation is generally a two-step process. First, the owner must prove that a taking has occurred. Second, if the owner is successful, the factfinder determines just compensation for that taking. Traditionally, inverse condemnations stemming from land use regulations (sometimes called “regulatory takings”) involve the more official actions of zoning ordinances or a comprehensive plan. But more informal plans, like those in Clark County, can also give rise to a constitutional taking. 

Where the plan for a public project specifically designates real estate for acquisition, the plan may cause a taking even in advance of formal condemnation. If project planning goes too far, the acts of planning can trigger a condemnation (and potentially the date of valuation) rather than a formal court filing by the condemnor.

In 1990, WBF Associates bought 632 undeveloped acres north of Allentown, Pennsylvania. Lehigh-Northampton Airport Auth. v. WBF Assoc., 728 A.2d 981 (Pa. Commw. Ct. 1999). The property was agricultural and adjacent to the Lehigh Valley Airport. WBF planned to build a planned residential development (PRD) on the property, applying for zoning changes and engaging architectural, engineering, and design professionals to plan the project. But in January 1994, the airport announced an expansion plan that encompassed all of WBF’s property. WBF could no longer develop it. No reasonable person would invest in a development that could be subject to airport condemnation at any moment, and the property thus sat vacant. The airport announced the expansion and began acquiring properties but held off on acquiring WBF’s land. On September 30, 1996, WBF filed an inverse condemnation action (called a “de facto taking” under Pennsylvania law) to compel the airport to acquire WBF’s property.

The court affirmed the trial court’s conclusion that a taking had occurred and agreed that the date of taking was September 30, 1996—the day that WBF filed its petition. In assessing damages, the trial court properly ignored the impact of the project and valued the property as if it was developable as a PRD.

But arguably, the taking occurred over two years before the date of taking established by the court. WBF’s use of the land—development—was halted in January 1994, when the airport made public its expansion plans. A taking, after all, is not necessarily established by filing a paper with a court. The public entity’s acts may also give rise to the taking. The date of taking—and hence the date of valuation—should be set based on the acts of the condemnor, not the condemnee.

Beyond designating specific lands for acquisition, condemnors may act in furtherance of the project in other ways that interfere with owners’ property rights. This legal interference can be the linchpin of when a taking occurs.

In 1973, the City of Racine, Wisconsin, planned to redevelop its central business district (CBD). Maxey v. Redevelopment Auth. of Racine, 94 Wis. 2d 375 (1980). On June 5, 1973, the city passed a moratorium on the issuance of theater licenses in the CBD. The moratorium covered an area that included the Baker Block, a building that housed a theater licensed by the city. Maxey owned a 99-year lease on the Baker Block. Approximately 40 years remained on Maxey’s lease at the time of the moratorium. After the moratorium passed, city officials made public statements that it would condemn the Baker Block through eminent domain proceedings. The city also contacted tenants in the Baker Block and encouraged them to leave.

On August 20, 1974, the city denied Maxey’s application to re-license the theater, relying on its moratorium. But the city did not promptly move to complete its contemplated acquisition.  Although the city removed the Baker Block from tax rolls in December 1975, the city had yet to condemn the building as of the beginning of 1976. On July 15, 1976, the city offered to purchase Maxey’s interest. He rejected the offer. Despite the fact that the city had not condemned the building, the public and the real estate market knew that the city had committed to condemning the Baker Block in 1973. On September 21, 1976, Maxey filed a petition for inverse condemnation.  

The Supreme Court of Wisconsin held that Maxey’s property was taken on August 20, 1974, the date the city refused to relicense the theater. Although the city itself later petitioned for condemnation (three days after Maxey petitioned for inverse condemnation), the court’s holding shows that Maxey was not compelled to wait for the city to condemn the property when the city’s actions already constituted a taking. The court held that Maxey’s right to file an inverse condemnation claim existed until such time as the condemning authority had actually exercised its power of eminent domain. The court stated that its holding (and the statute authorizing inverse condemnation actions generally) was “designed to protect property owners against the slothful actions of a condemnor which, having constructively taken an owner's property, is in no hurry to compensate the owner during a period when the property's value may be steadily declining.”  Id. at 393–94.

The Intersection of Inverse Condemnation and Project Influence

Where a public entity’s planning for public projects causes a taking, landowners do not have to wait for actual condemnation to receive just compensation. They may instead pursue inverse condemnation. But when does planning cross the line to become a taking? On one hand, Maxey suggests that when a government entity draws definite geographic lines and commits to acquisition, a taking has occurred. The Sixth Circuit seems to align with Maxey, stating “the crucial geographic boundary is not that around the general planning area or the project area, but around the property that the city has demonstrated that it intends to appropriate.” Sayre v. City of Cleveland, 493 F.2d 64, 69 (6th Cir. 1974) (where urban renewal project included landowners’ parcels in general plan but did not designate those parcels for acquisition, there was no taking). 

On the other hand, a New Jersey court has held that the filing of an alignment map for a planned highway and a stated long-range plan to acquire a parcel did not constitute a taking. Kingston E. Realty Co. v. State, By Comm'r of Transp., 133 N.J. Super. 234 (N.J. Super. Ct. App. Div. 1975). In Kingston, the condemnor filed a map for a new highway that included the owner’s parcel and also stated publicly that it would acquire that property. The owner claimed a taking because he could not obtain a building permit. But when the owner applied for the permit, if the permit was withheld because of the project, it triggered a 120-day period where the condemnor had to acquire the property, agree to acquire the property, or start an action to condemn the property. In other words, the “legal interference” (i.e., the potential denial of the permit because of the project) and acquisition in Kingston were intertwined.  At the moment of potential legal interference, proceedings for acquisition of the property started immediately. The resolution of whether project planning rises to the level of a taking may turn on whether there is a “legal interference with the physical use, possession or enjoyment of the property or a legal interference with the owner's power of disposition of the property.” City of Buffalo v. J. W. Clement Co., 28 N.Y.2d 241, 255 (1971). The Maxey opinion supports this rule because the city’s denial of the license for purposes of its project legally interfered with Maxey’s otherwise legal right to operate a theater on his property. There, the court set the date of taking as of that date of interference. 

Synthesized together, the elements necessary for a successful inverse condemnation claim due to government planning would seem to be (1) designation of a specific geographic area, (2) a stated intent to acquire, and (3) legal interference with the owner’s use of the property. It may seem unfair that a condemnor could satisfy only the first two elements and avoid the declaration of taking for the affected property, where these first two elements alone likely will have a depreciating effect on the property’s value before condemnation occurs. Again, no reasonable investor would want to buy in an area targeted for public acquisition.

This brings us to the boundary of project influence and inverse condemnation. While the failure to satisfy all of the foregoing elements may prevent a declaration of taking by inverse condemnation, when the taking does occur, the project influence rule should still prevent a condemnor from the benefit of the depreciating effect caused by its own project. That rule prevents such an inequitable result by excluding evidence of depreciation caused by the project.  “In such a case, compensation [is] based on the value of the property at the time of the taking, as if it had not been subjected to the debilitating effect of a threatened condemnation.” J. W. Clement, 28 N.Y.2d at 255.

Keywords: real estate litigation, eminent domain, condemnation, valuation, taking

Dan Biersdorf and Ryan Simatic are attorneys for Biersdorf & Associates in Minneapolis, Minnesota.


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