Opinion ID: 210344
Heading Depth: 2
Heading Rank: 2

Heading: Need To Consider the Offsetting Benefits

Text: The second error committed by the Court of Federal Claims lies in its failure to consider the offsetting benefits that the statutory scheme afforded which were specifically designed to ameliorate the impact of the prepayment restrictions. This error affects all of the plaintiffs. The Court of Federal Claims characterized the government's argument as overreaching, Cienega IX, 67 Fed.Cl. at 470, theorizing that Congress may not establish through an option that it will provide value equal to forty, or fifty, or sixty cents on the dollar for a taking, and thereby evade paying the constitutionally-required just compensation. Id. The court stated that the value of any options the plaintiffs were offered should not change the character of the governmental action or the way that the Penn Central takings analysis is applied. Id. The court held instead that any benefits should be addressed in the determination of just compensation, not as part of the takings analysis. Id. The Supreme Court in Penn Central, 438 U.S. at 137, 98 S.Ct. 2646, clearly held that offsetting benefits must be accounted for as part of the takings analysis itself. There, in exchange for restrictions on the development of historic properties, New York City's zoning laws provided developers with the right to develop nearby parcels that the developer already owned. Id. at 113-14, 98 S.Ct. 2646. The Court explained that to the extent appellants have been denied the right to build above the [Penn Central] Terminal, it is not literally accurate to say that they have been denied all use of even those pre-existing air rights. Id. at 137, 98 S.Ct. 2646. Thus, the plaintiff's ability to use these rights has not been abrogated; they are made transferable to at least eight parcels in the vicinity of the Terminal. Id. The Court concluded that these benefits undoubtedly mitigate whatever financial burdens the law has imposed on appellants and, for that reason, are to be taken into account in considering the impact of the regulation. Id. The Court of Federal Claims did not take into account this aspect of the Penn Central decision, finding support for its holding instead in our decisions in Whitney Benefits, Inc. v. United States, 926 F.2d 1169 (Fed.Cir.1991), and Whitney Benefits, Inc. v. United States, 752 F.2d 1554 (Fed.Cir.1985). The Whitney Benefits cases provide no support for the Court of Federal Claims' approach. At issue in the Whitney Benefits cases was a statute that prevented a land owner from mining its property, but, in exchange, the Department of the Interior was authorized to agree with such [land owners] to convey the fee to, or lease in exchange, other federal land embodying coal deposits. Whitney Benefits, 752 F.2d at 1555. This court stated that the value of the new property offered in exchange for the restriction could not be considered under the takings analysis because the exchange transaction is a method of ascertaining and paying just compensation for a taking, which may be negotiated and agreed upon either before or after the taking itself, and is optional with the claimants. Whitney Benefits, 926 F.2d at 1175; see also Whitney Benefits, 752 F.2d at 1560. However, unlike in Penn Central where the benefits were tied to the property already owned by the affected parties, in Whitney Benefits the government offered those parties new properties. This case does not involve a transfer of new property to the owner as in Whitney Benefits, but rather an amelioration of the restrictions imposed on the existing property. There can be no claim here that the government compensated the owner by providing substitute property. The benefits must be considered as part of the takings analysis. [14] The Court of Federal Claims, we think, overstated the effect of the statute when it concluded that [n]one of the options available to plaintiffs permitted them to exercise their right to transfer their property to a purchaser of their choice. Cienega IX, 67 Fed.Cl. at 467. As a practical matter LIHPRHA provided owners with two alternatives: (1) the right to sell the property at its fair market value or, if there was no offer or if HUD failed to provide financial assistance to the purchasers, the right to prepay the mortgage and eliminate the regulatory restrictions; or (2) entering into a use agreement with HUD under which HUD would provide financial incentives to the owner. See 12 U.S.C. §§ 4107, 4110 (2000). With respect to the first option, the owners here do not dispute that the opportunity for a fair market value sale would eliminate any takings claim. See Florida Rock Indus., Inc. v. United States, 791 F.2d 893, 903 (Fed.Cir.1986) (if there is found to exist a solid and adequate fair market value [for the property] which [the owner] could have obtained from others for that property, that would be a sufficient remaining use of the property to forestall a determination that a taking had occurred or that any just compensation had to be paid by the government). Rather the owners complain that sale to qualified buyers was unlikely, that the sale process took time during which the rent and other restrictions remained in place, that appraisal value was not adjusted over the course of the two-year sale period, and that prepayment was not possible until the sale process was complete (and unsuccessful). However, any trouble finding a buyer only increased the probability that the owner would be able to prepay if a sale was not completed. Moreover, the sale process was not as time consuming as the plaintiffs assert. To reduce any administrative delays, LIHPRHA permitted the owners to begin the sale process by filing a notice of intent up to two years before their prepayment eligibility date. 12 U.S.C. § 4119(1)(B) (2000). The owners and HUD would then appraise the property to determine the fair market value of the housing based on the highest and best use of the property. Id. § 4103(b)(2). Upon HUD's approval of the sale, the owner would file a second notice of intent with HUD. [15] Id. § 4106(d)(1). This triggered a fifteen month period for which the owner was required to keep the offer to sell open. Id. § 4110(b)(1). First, the owner was required to make an offer to sell to a priority purchaser for twelve months. Id. § 4111(b)(1). A priority purchaser was a resident council organization or a nonprofit organization that agrees to maintain low-income affordability restrictions for the remaining useful life of the housing. Id. § 4121(a). The negotiated sale price could not exceed the appraised value of the property. Id. § 4110(b)(1). If no priority purchaser made an offer, the owner was required to hold the offer open for three additional months to any qualified purchaser. Id. § 4110(c). A qualified purchaser was any entity that agree[d] to maintain low-income affordability restrictions for the remaining useful life of the housing. Id. § 4121(b). If no sale was completed after fifteen months, the owner could then prepay the mortgage. Alternatively, if HUD failed to provide assistance to the purchasers to enable them to complete the sale, the owner also could prepay the mortgage. Id. § 4114(a)(1)(B). However, the prepaying owner could not raise the rents for any tenants who were residents when the owner filed its notice of intent to sell the property for three years. Id. §§ 4113(c)(1), 4114(a). The duration of these restrictions is an important factor in the takings analysis. The Supreme Court in Tahoe-Sierra concluded that the duration of the restriction is one of the important factors that a court must consider in the appraisal of a regulatory takings claim. 535 U.S. at 342, 122 S.Ct. 1465; see also Rose Acre Farms, Inc. v. United States, 373 F.3d 1177, 1195 (Fed. Cir.2004) (instructing the trial court to consider the temporary nature of the restrictiontwo yearson remand). Thus to the extent that owners could initiate and complete the process near the original prepayment date and sell the property for fair market value, the restriction had no practical significance beyond the three-year restriction on raising rents and the requirement that the owner pay a portion of tenants' relocation expenses. On remand, the Court of Federal Claims should assess whether the sale process prescribed by LIHPRHA provided the opportunity for a fair market value sale at or near the original prepayment date. Alternatively, an owner could enter into a use agreement. The owner was required to file a plan of action. [16] 12 U.S.C. § 4107(a) (2000). This plan of action included the types of financial incentives requested. Id. § 4107(b)(1)(A)-(F). These incentives included the right to earn higher dividends, rent increases for current tenants, repair and capital improvement loans, and second mortgages. [17] LIHPRHA required HUD to approve the plan if it was the least costly alternative that [was] consistent with the full achievement of the purposes of this title and if the owner made a binding commitment to extend the restrictions on the property, including agreeing that the housing [would] be retained as housing affordable for very low-income families or persons, low-income families or persons, and moderate-income families or persons for the remaining useful life of such housing. Id. § 4112(a)(1)(2). If HUD approved the plan but did not provide the funding incentives within fifteen months, the owner could prepay the mortgage. Id. § 4114(a)(1)(A). If the owner did prepay under this circumstance, as with a sale, the owner was still prohibited from raising rents on any existing tenants for three years following prepayment and was required to pay fifty percent of relocation expenses. Id. § 4113(b), (c)(1). The sale and use agreement options thus conferred considerable benefits on the owners. The major effect of the statute on an owner who did not elect to enter into a use agreement and wished to prepay was to keep the restrictions in place during the sale period which might expire near the prepayment date; to compel the owner to offer the property for sale at a fair market value; and, if there was no sale (and the owner prepaid the mortgage), to restrict rent increases for a three-year period. This sale option was plainly an available alternative because many owners in fact elected to sell their property. See Cienega IX, 67 Fed.Cl. at 444 (noting that of a group of 205 to 210 projects in California, 37 percent intended to sell); see also Cienega Gardens J.A. at 103174 (testimony by Richard Mandel, from the California Housing Partnership Corporation, that he was not aware of any [properties involved in the sale process] that did not receive a bona fide offer). The benefits to the owners electing to enter into use agreements were also considerable, as confirmed by the legislative history to LIHPRHA. The bill authorize[d] an array of financial incentives that [t]he Committee believe[d]. . . . [would] provide sufficient economic incentive for the vast majority of owners of eligible low income housing to retain the current use and occupancy restrictions on their projects. H.R.Rep. No. 101-559, at 76 (1990); see also 136 Cong. Rec. H6053-01 (July 31, 1990) (statement of Rep. Conte) (The provision offers a package of incentives for owners to maintain their projects as low-income housing.). When signing LIHPRHA, President Bush expressed concern that the incentives were in fact too generous: One important preservation strategy is to provide project owners with economic incentives to maintain their properties for low-income use. I am concerned, however, that the incentives in S. 566 are more generous than are necessary, providing excessive benefits over the long term that will be paid by all taxpayers. Statement on Signing the Cranston-Gonzalez Nation Affordable Housing Act, 26 Weekly Comp. Pres. Doc.1931 (Nov. 28, 1990). The President's sentiment was echoed in the hearings leading to the enactment of HOPE, where HUD's Inspector General testified that the government should [d]iscontinue paying owners windfall profits for projects that threaten to prepay their mortgages and remove the low income character of the units. Hearing Before the Subcomm. on VA, HUD, and Independent Agencies of the H. Comm. on Appropriations, 104th Cong., 1st Sess. (Jan. 24, 1995) (statement of Susan Gaffney, HUD Inspector General). In summary, we think the Court of Federal Claims erred in not considering offsetting benefits with respect to those owners who entered into use agreements and those that did not. In considering whether the owners that elected to enter into use agreements suffered a taking, available offsetting benefits must be taken into account generally, along with the particular benefits that actually were offered to the plaintiffs.