Opinion ID: 210344
Heading Depth: 2
Heading Rank: 1

Heading: Need To Consider the Effect on the Property as a Whole

Text: We think the Court of Federal Claims erred in not considering the impact of the restriction on the property as a whole. Rather, the Court of Federal Claims compared the rate of the return that the owner would receive on its investment with and without the restriction of a single year. This error impacted the court's Penn Central analysis. The Court of Federal Claims applied a return-on-equity approach, considering the income from the project for each individual year as a separate property interest. Cienega IX, 67 Fed.Cl. at 475-76. For each owner, the court compared the return on equity that the owner received under the restrictions with the return on equity that the owner would receive absent the restrictions. The court determined that, under LIHPRHA, the owner's return was limited to a six percent dividend on its initial equity investment. The court found that without the restrictions the owner could receive an 8.5 percent annual return (the Fannie Mae bond rate) on the owner's entire equity in the property at the prepayment eligibility date. The initial equity investment was significantly smaller than the entire equity value at the prepayment date because the owners had built equity in the property over the twenty-year period by making mortgage payments. Accordingly, the court found that the economic impact on the plaintiffs ranged from 90.5 to 97.7 percent. Id. at 476-78. We believe that, in adopting this approach, the Court of Federal Claims erred. The Supreme Court, in cases like Penn Central, Concrete Pipe and Products of California, Inc. v. Construction Laborers Pension Trust for Southern California, 508 U.S. 602 (1993), and Tahoe-Sierra has made clear that in the regulatory takings context the loss in value of the adversely affected property interest cannot be considered in isolation. Penn Central, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631, arose in the permanent regulatory takings context. New York City had designated Penn Central station, and the city block that it sat on, as a historic landmark site, and thus restricted development of the property. The appellants argued that the taking at issue was a taking of the air space above Penn Central station. The appellants urged that the economic impact of this restriction on developing the air space should be considered in isolation, rather than considering the property as a whole. Id. at 130, 98 S.Ct. 2646. The Supreme Court rejected this approach as quite simply untenable. Id. The Court explained: Taking jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole  here, the city tax block designated as the landmark site. Id. at 130-31, 98 S.Ct. 2646. The Supreme Court reaffirmed that the correct approach is to consider the parcel as a whole in Concrete Pipe, 508 U.S. at 643-44, 113 S.Ct. 2264. There the Court reiterated Penn Central' s holding: [A] claimant's parcel of property could not first be divided into what was taken and what was left for the purpose of demonstrating the taking of the former to be complete and hence compensable. To the extent that any portion of property is taken, that portion is always taken in its entirety; the relevant question, however, is whether the property taken is all, or only a portion of, the parcel in question. Id. at 644, 113 S.Ct. 2264. The Court explained that 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, [and] one of the critical questions is determining how to define the unit of property `whose value is to furnish the denominator of the fraction.' Id. (quoting Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470, 497, 107 S.Ct. 1232, 94 L.Ed.2d 472 (1987)); see also Andrus v. Allard, 444 U.S. 51, 65-66, 100 S.Ct. 318, 62 L.Ed.2d 210 (1979) (where an owner possesses a full `bundle' of property rights, the destruction of one `strand' of the bundle is not a taking, because the aggregate must be viewed in its entirety); Seiber v. United States, 364 F.3d 1356, 1368 (Fed.Cir. 2004) (The Supreme Court has repeatedly instructed that the impact of an alleged taking must be considered in terms of the `parcel as a whole'. . . . ). In Tahoe-Sierra, the necessity of considering of the overall value of the property was explicitly confirmed in the temporary regulatory takings context. 535 U.S. at 331, 122 S.Ct. 1465. There the petitioners argued that a thirty-two-month moratorium on building was a per se regulatory taking because there had been a complete taking of development rights during that thirty-two-month period. The Supreme Court rejected this argument stating: Of course, defining the property interest taken in terms of the very regulation being challenged is circular. With property so divided, every delay would become a total ban; the moratorium and the normal permit process alike would constitute categorical takings. Petitioners' conceptual severance argument is unavailing because it ignores Penn Central 's admonition that in regulatory takings cases we must focus on the parcel as a whole. Id. The Court thus concluded that the District Court erred when it disaggregated petitioners' property into temporal segments corresponding to the regulations at issue and then analyzed whether petitioners were deprived of all economically viable use during each period. Id. Justice Thomas's dissent specifically complained that the majority had improperly compared the reduction in value resulting from the regulation to the value of the parcel as a whole, i.e., the land's infinite life. Id. at 355, 122 S.Ct. 1465 (Thomas, J., dissenting). Thus we conclude that in a temporary regulatory takings analysis context the impact on the value of the property as a whole is an important consideration, just as it is in the context of a permanent regulatory taking. The plaintiffs justify the return-on-equity approach by relying on the Supreme Court's decision in Kimball Laundry Co. v. United States, 338 U.S. 1, 69 S.Ct. 1434, 93 L.Ed. 1765 (1949), which held that just compensation for the taking of a laundry was the rental that probably could have been obtained. Id. at 7, 69 S.Ct. 1434. However, the reasoning of Kimball Laundry does not apply here. First, as the plaintiffs recognize, the Supreme Court in Kimball Laundry applied the return on equity approach when determining just compensation and not when determining whether a taking had occurred in the first place. Second, Kimball Laundry is a physical takings case and thus does not govern the regulatory takings context. As the Supreme Court concluded in Tahoe-Sierra, [t]his longstanding distinction between acquisitions of property for public use, on the one hand, and regulations prohibiting private uses, on the other, makes it inappropriate to treat cases involving physical takings as controlling precedents for the evaluation of a claim that there has been a `regulatory taking,' and vice versa. 535 U.S. at 323, 122 S.Ct. 1465; see also Tuthill Ranch, Inc. v. United States, 381 F.3d 1132, 1135 (Fed.Cir.2004) (The Supreme Court has recognized that the government may `take' private property by either physical occupation or regulation, and that these two categories of takings are subject to different analyses.) Consideration of the property as a whole is particularly important because our cases have established that a regulatory taking does not occur unless there are serious financial consequences. In Cienega VIII, we stated that [w]hat has evolved in the case law is a threshold requirement that plaintiffs show `serious financial loss' from the regulatory imposition in order to merit compensation. 331 F.3d at 1340; see Loveladies Harbor, Inc. v. United States, 28 F.3d 1171, 1177 (Fed.Cir.1994). We previously have explained that the requirement of severe economic deprivation comes from the nature of regulatory takings claims, which lack the `typically obvious and undisputed' predicate of a physical invasion or appropriation of private property by the government and are in essence, a claim that `a taking has occurred because a law or regulation imposes restrictions so severe that they are tantamount to a condemnation or appropriation.' Rose Acre Farms, Inc. v. United States, 373 F.3d 1177, 1195 (Fed.Cir.2004) (quoting Tahoe-Sierra, 535 U.S. at 322 n. 17, 122 S.Ct. 1465). We note that in a temporary taking situation, there appear to be at least two ways to compare the value of the restriction to the value of the property as a whole so as to determine if there has been severe economic loss. See Rose Acre Farms, 373 F.3d at 1188 (stating that there are a number of different ways to measure the severity of the impact of the restrictions). First, a comparison could be made between the market value of the property with and without the restrictions on the date that the restriction began (the change in value approach). The other approach is to compare the lost net income due to the restriction (discounted to present value at the date the restriction was imposed) with the total net income without the restriction over the entire useful life of the property (again discounted to present value). Neither approach appears to be inherently better than the other, and on remand the Court of Federal Claims should consider both as well as any other possible approaches that determine the economic impact of the regulation on the value of the property as a whole. [13]