In the Lost Tree I, the Federal Circuit clarified the contours of the “relevant parcel” rule by which courts determine the extent of the property to be considered in addressing a taking claim. As the court explicitly recognized in that decision, defining the relevant parcel can be pivotal in regulatory taking cases, particularly in cases involving large-scale development projects extending over long periods of time. In Lost Tree II, the Federal Circuit affirmed that the categorical taking rule of Lucas applies where regulatory action eliminates all productive “use” of property, even if the property retains some nominal market value. Taken together, the two Lost Tree decisions are instructive about what real estate owners must show to prevail on a regulatory taking claim under Lucas, and they also demonstrate that it is possible practically to succeed on such a claim.
Regulatory Takings
The Supreme Court first recognized the concept of a regulatory taking in Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 315 (1922). There, Justice Oliver Wendell Holmes, writing for the Court, identified the inherent tension between the police powers and private property rights—noting that the unbridled exercise of regulatory authority would eventually lead to the disappearance of private property rights altogether. To avoid that unconstitutional outcome, the Mahon Court proclaimed that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Of course, as one might imagine, ever since then courts have struggled to determine how far is “too far.”
Penn Central laid down the general rule for addressing that question, instructing that while there is “no set formula,” several factors have particular significance: (1) the economic impact of the regulation, (2) the extent to which the regulation interferes with distinct investment-backed expectations, and (3) the character of the governmental action. 438 U.S. at 124. There are, however, two categorical exceptions to Penn Central’s multifactor analysis. The first are physical takings, which arise when the government intrudes on private property or by law authorizes another party to occupy private property. In those cases, the Supreme Court has held that a taking results “per se” whenever the government occupies or authorizes a third party to occupy real property owned by another. See Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982). The second exception to Penn Central, relevant in the Lost Tree litigation, is carved out in Lucas, which holds that a “per se” taking also results—without regard to any other factor—if regulation entirely wipes out the value of property.
Facts Surrounding Lost Tree’s Claim
Lost Tree’s taking claim arose when the U.S. Army Corps of Engineers denied Lost Tree’s application for a wetlands fill permit, under section 404 of the Clean Water Act, for a five-acre parcel of property known as Plat 57. The parcel is located in John’s Island, an upscale gated community near Vero Beach, Florida. Lost Tree had already obtained all other state and local permits and approvals necessary to develop the lot, including approval from the local town to construct a single-family house, the only use allowed by applicable zoning.
Because the Corps of Engineers’ permit denial precluded any development of Plat 57, Lost Tree filed suit in the Court of Federal Claims, asserting that the denial effected a Lucas taking. In response, the government claimed that the relevant property for assessing the taking claim was not Plat 57 but instead the entire John’s Island community, which comprised about 1,300 acres and contained hundreds of other parcels. Under that theory, the denial of the permit at Plat 57 had only minimal impact on the large amount of relevant property and clearly did not wipe out its value. Lost Tree replied that Plat 57 alone was the relevant parcel. In support of this position, Lost Tree noted that (1) all the other home sites in John’s Island had been developed and sold by Lost Tree years ago; (2) Lost Tree actually had exited the development business altogether in the early 1990s when development of the community was completed; (3) Plat 57 was the only remaining developable parcel in John’s Island; and (4) Lost Tree never considered developing Plat 57 until 2002, when it fortuitously became aware that it had obtained certain wetlands mitigation credits and it went looking for a place to use them.
The Court of Federal Claims denied cross-motions for summary judgment on the relevant parcel or “parcel-as-a-whole” issue. This issue is also sometimes called the “denominator” issue, based on the following passage from Keystone Bituminous Coal Ass’n v. DeBenedictis:
Because our test for regulatory taking requires us to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property “whose value is to furnish the denominator of the fraction.”
480 U.S. 470, 497 (1987) (citations omitted).
This issue is important in regulatory taking cases because the smaller the relevant parcel, the more concentrated and severe the impact of the offending regulatory action. Conversely, where a large expanse of property is deemed the relevant unit for analysis, regulatory action directed to only a faction of that property will have little impact on the overall, larger relevant parcel and therefore will generally defeat a Lucas taking and greatly diminish the possibility of a court finding a Penn Central taking.
In Lost Tree, following a seven-day trial, the Court of Federal Claims rejected both the government’s position that the relevant parcel was the entire John’s Island community and Lost Tree’s position that Plat 57 alone was relevant. The court found instead that the relevant property consisted of Plat 57 together with a nearby parcel known as Plat 55 and various scattered wetlands in John’s Island. Because the permit denial at Plat 57 only reduced the value of that collection of relevant properties by 58 percent, the court found no taking under either Lucas or Penn Central.
Lost Tree I: the Relevant Parcel Issue
The Federal Circuit reversed, agreeing with Lost Tree that the relevant parcel was Plat 57 alone. It then remanded for the Court of Federal Claims to apply the appropriate framework (Penn Central or Lucas) and determine if the Corps of Engineers’ permit denial had caused a taking of that parcel. The court recognized that while the Supreme Court has provided some “guideposts,” it has not settled the question of how to determine the relevant parcel in regulatory taking cases. Drawing on its own precedent, the Federal Circuit explained that “in determining the relevant parcel where the landowner holds (or has previously held) other property in the vicinity, . . . the “critical issue is ‘the economic expectations of the claimant with regard to the property.’” Lost Tree I, 707 F.3d at 1293 (quoting Norman v. United States, 429 F.3d 1081, 1091 (Fed Cir. 2005), and Forest Props., Inc. v. United States, 177 F.3d 1360, 1365 (Fed. Cir. 1999)). More specifically, “even when contiguous land is purchased in a single transaction, the relevant parcel may be a subset of the original purchase where the owner develops distinct parcels at different times and treats the parcels as distinct economic units.” Id. at 1293.
Applying those principles, the Federal Circuit concluded that “Lost Tree did not treat Plat 57 as part of the same economic unit as other land it developed into the John’s Island community.” Instead, “[t]he objective evidence of Lost Tree’s actions demonstrates that the company considered the John’s Island community completed long before it proposed to fill wetland on Plat 57. The company’s long hiatus from development efforts reinforces the conclusion that Lost Tree did not consider Plat 57 part of the same economic unit as the John’s Island community.” In essence, the Federal Circuit found that Lost Tree’s taking claim should be assessed as if Plat 57 was the only property Lost Tree owned in the area. This makes sense because after Lost Tree’s “long hiatus from development efforts,” Plat 57 was virtually the only property in the community that it owned.
What is significant about Lost Tree I is not the rule that a landowner’s economic expectations are critical in determining whether multiple parcels should, or should not, be aggregated for purposes of assessing a claimed regulatory taking. Federal Circuit precedent had long applied that rule. However, until Lost Tree I, the Federal Circuit had done so only to allow the aggregation of multiple contiguous parcels for takings purposes. What is new about Lost Tree I is that it stands for the converse: When warranted by the facts, the “economic expectations” rule can also be applied to isolate a distinct parcel for purposes of assessing a regulatory taking claim. Thus, based on Lost Tree I, in factually appropriate cases the economic expectations rule may make it easier to establish that governmental action—for example, denial of a permit needed for development—wipes out the value of the distinct relevant parcel and qualifies as a Lucas taking.
Lost Tree II: The “No Productive Use” Issue
On remand, the Court of Federal Claims relied on evidence from the original trial to find that Plat 57’s value with the Corps of Engineers’ permit (and thus fully developed) was $4.76 million, but given the permit denial, the parcel was worth only a “nominal” amount, which the court pegged at $27,500. Both figures were as of the time of the permit denial in 2004, which sets the date of the regulatory taking. Thus, the permit denial eliminated 99.4 percent of Plat 57’s value. The trial court also found that “the assigned valuation without a permit . . . does not reflect any economic use.”
Based on these findings, the Court of Federal Claims concluded that the government was liable for a taking under the per se rule of Lucas. The court also applied its findings to the Penn Central framework and found a taking on that basis as well, concluding that the 99.4 percent diminution of value resulting from the Corps of Engineers’ action weighed very strongly in Lost Tree’s favor under the Penn Central factors. The court therefore awarded Lost Tree just compensation of $4.7 million—Plat 57’s value at the time of the taking—plus interest from 2004. (The Takings Clause requires, as a component of “just compensation,” payment of interest from the date of the taking to the date of payment).
The Federal Circuit affirmed the finding of a Lucas taking and concluded it need not address Penn Central. The court rejected all three of the government’s principal objections to application of the Lucas rule. First, the government argued that because Lucas requires a total economic loss, the $27,500 in value that remained in Plat 57 after the permit denial precluded application of the Lucas rule. The Federal Circuit disagreed, explaining that Lucas turns on deprivation of economic use of the property, even if some nominal value remains. To support this distinction, the court cited Federal Circuit precedent in which the deprivation of all economic use was found even though the property had some “de minimis” value.
Second, the government argued that Lost Tree’s ability to sell the property qualifies as an “economic use.” Again the Federal Circuit disagreed, noting that (1) it was wrong of the government to assume that “noneconomic appraisal value enables a landowner to sell” a parcel, (2) the government produced no evidence a sale was possible, and (3) speculative land uses are not considered in any takings inquiry. Even assuming that Plat 57’s residual, nominal value permitted Lost Tree to sell the parcel, the court found it unreasonable to conclude that sales qualify as economic uses, explaining that “[t]ypical economic uses enable a landowner to derive benefits from land ownership rather than requiring that landowner to sell the affected parcel.”
Third, the government lodged a policy objection that was, in essence, an attack on the Lucas rule. It claimed that affirming a taking in this case would encourage speculators to purchase regulated property on the cheap, apply for a development permit, and if the permit was denied, sue for a taking. The Federal Circuit dismissed that concern, agreeing with Lost Tree that “in the real world, real estate investors do not commit capital either to undevelopable property or to long, drawn-out, expensive and uncertain takings suits.” The court added that the government’s hypothetical actually supported Lost Tree, suggesting that if post-deprivation property retained value solely because of the prospect of winning a taking claim, that value would have to be disregarded so as not to eviscerate the Lucas rule.
The Federal Circuit’s focus in Lost Tree II on the elimination of productive use of property, even if some nominal market value remains, preserves the viability of the Lucas rule because apart from toxic waste dumps and other similarly impaired property, few if any real property parcels will have a market value of zero. Together with the court’s relevant parcel determination in Lost Tree I, these rulings show that real property owners can, in fact, prevail in cases claiming a per se Lucas taking. As the decisions also make clear, taking claimants need to be careful and thorough in developing the facts that are necessary to succeed under the sometimes arcane and esoteric law governing regulatory takings.
Keywords: real estate litigation, regulatory taking, per se taking, economically viable use
Jerry Stouck is with Greenberg Traurig, LLP, in its Washington, D.C., office.