Endangered Species Act Conference

Foster Associates, Inc.

Endangered Species Act Conference

Bennett & “Undue Economic Hardship”:

Florida Rock V’s “Stable Framework” to Analyze

Penn Central’s “Particularly Significant” Factors

William W. Wade, Ph. D.

Senior Vice President

CLE Conference

November 18-19, 1999

San Francisco CA.

810 Walker Street

Columbia TN 38401

ph. 931-490-0060

www.foster-tn.com


Bennett’s Economic Policy Questions

• What will the courts measure to analyze “economic impacts?”

• When does an “economic impact” become “undue economic hardship?”

• How will the courts evaluate “needless economic dislocation?”


Pinnacle of Economic Clarity for Takings - 1928

“[T]he master finds that no practical use can be made of the land in question [subject to the change in zoning] because . . . there would not be adequate return on the amount of any investment for the development of the property.”

– Nectow v. City of Cambridge, 277 U. S. 72 L.ed. 842, 844 (1928)

“[H]ealth, safety, convenience and general welfare . . . will not be promoted by . . . the ordinance.”

“[T]he invasion of the property of plaintiff . . . was serious and highly injurious.”

– Nectow at 845.


Overview of Presentation

1. Economic Failings of Penn Central» Penn Central’s Economic Problems - Off on the Wrong

Foot.» Brennan v. Rehnquist.

2. Florida Rock V Restores Economic Clarity» Economic Impact.» Reasonable Investment-Backed Expectations.» Character of Government Action.» Takings Computation.» Takings Fraction.» Takings Fraction Illustrations.


Overview of Presentation (2)

3. Economic Methods and Thresholds

Where are we?» What criteria to establish compensable taking?

» Takings Economics Decision rules.

A view of takings balance.

4. Do you know why Parcel-as-a-Whole is the Law?» Judicial Failings: Brennan, Michelman & Breitel.

» Claimant’s Failings.


Florida Rock V’s “Stable Framework” to Analyze

Penn Central’s “Particularly Significant” Factors

1. Economic Failings of Penn Central


Penn Central’s Economic Problems - Off on the Wrong Foot

Takings guidance originates with Penn Central (1978).

Three “particularly significant” factors govern payment:» Economic impact on the claimant;» Interference with distinct investment-backed

expectations;» Character of government regulation.

Two hinge on economic theory, not legal doctrine!» Economic impacts - measurable.» Interference - defined by theory & accepted practice.

Decision at odds with economic theory and practice.


Penn Central - Brennan v. Rehnquist

Bottom Line Economic Conflict:» Award compensation because Landmark Law precluded

earning future returns on new permitted investment?

OR -

» Deny compensation because existing terminal business earning a reasonable return on past investments?

Decision: Parcel-as-a-whole ruling eliminated incremental importance of future lease income.» “Bundle,” not “Sticks.”» No precedent for this cavalier ruling.

– See slides at end if interested in Brennan’s errors.


Penn Central - Brennan v. Rehnquist (2)

Brennan looked backward and saw terminal earning a “reasonable return.” » No evidence submitted by claimants to the contrary.» Unrebutted assumption by Brennan.» Terminal value remaining matters.

Rehnquist looked forward and saw foreclosed lease income important to Penn Central finances.» Recognized that majority had no notion of reasonable

returns or not. (FN 13)

» Defined loss consistent with economic doctrine. » Argued value taken matters.


Value Remaining or Value Taken?

Penn Central “Remaining Value” economic (non)theory confounded takings law.» Regulation a taking only if owner denied “economically

viable use” of the “whole property.”

Mis-focus on value remaining rather than the loss confounded evaluation of economic efficiency.» Efficiency governs too little/too much regulation.» Investors not compensated for change in firm value.

Value taken - essential economic element to balance with public gain to achieve efficiency.


Florida Rock V’s “Stable Framework” to Analyze Penn Central’s “Particularly

Significant” Factors


2. Florida Rock V Restores Economic Clarity


Florida Rock V Restores Economic Clarity

Court must consider Penn Central factors. (P.2.)

“A stable framework is beginning to crystallize . . . [how to analyze takings law.]” (p. 3.)

“[A] partial regulatory taking may be found where a regulation results in a deprivation of a substantial part but not essentially all of the economic use or value of the property.” (p. 14.)



Economic Impact (1)

Five Considerations:

1. Diminution in Value» Value before Permit Denial $10,500 per acre» Value after Permit Denial $ 2,822 per

acre» Magnitude of reduction 73%

“[C]ourt does not rely on the magnitude of this diminution . . . alone . . . to determine severity of economic impact.” (p. 20.)



Economic Impact (2)

2. Reciprocity of advantage

“Mere diminution occurs when the property owner has received the benefits of a challenged regulation, such that an ‘average reciprocity of advantage’ results from it.’” (p. 21.)

“A partial taking occurs when a regulation singles out a few property owners to bear burdens while benefits are spread widely across the community.” (p. 21.)



Economic Impact (3)

3. Alternative Permitted Activities

Are “any other activities . . . still permitted . . . which are economically realistic?” (p.21.)

» Only post regulation use of Florida Rock’s land is a sale into a speculators’ market.



Economic Impact (4)

4. Recoupment of Investment

“In determining the severity of economic impact, the owner’s opportunity to recoup its investment or better . . . cannot be ignored.” (p. 15 and 22.)» Plaintiff’s expert concluded that economic basis

adjusted for inflation was $6,000 per acre, $597,000.» Resale as a speculative investment would recover

barely half of its inflation adjusted investment.

5. Severe Economic Impact

Yes: Diminished by 73%: not offset by any reciprocity of advantage; unable to recoup its investment.



Reasonable Investment-Backed Expectations

“A reasonable investment-backed expectation must be more than a unilateral expectation or an abstract need.” (p. 23, citing Ruckelhaus v. Monsanto)

» Bought 1560 acres in 1972 for $2.96 million.

» Conducted feasibility study in 1974 and commenced preliminary mining operations.

» Removed overburden and built a road.

» Demonstrated expectation of Florida Rock was mining limestone.



Reasonable Investment-Backed Expectations

Emphasized the importance of obtaining a “reasonable return” on the owner’s investment, citing back to Penn Central. (p. 24.)

Determined that Florida Rock had not been able to recoup its investment.

Determined that the entire 98 acre parcel at issue had been burdened by the regulation. (p. 24)

“Accordingly, . . . 100% of the primary use of the parcel was affected, [which amounts to] a very large interference with investment-backed expectations.” (p. 24.)



Character of Government Action

No dispute that preservation of wetlands is a a legitimate state interest. (p. 25.)

The final prong of the Penn Central test argues for a taking; i. e., Florida Rock’s bundle of property rights were severely diminished to benefit the public. (p. 27.)



Taking Computation

Fact-specific inquiry shows that:

• Florida Rock lost 73% of the value of the relevant parcel;

• The loss was not offset by reciprocity of advantage;

• Re-sale of the parcel recoups barely half of the inflation adjusted investment;

• No reasonable return is possible.

“Plaintiff has been made the unwilling custodian of the wetlands on his property for the benefit of the public . . ., at plaintiff’s risk and expense.” (p.29.)


Takings Fraction

A permit denial that reduces property value begs the measurement and calculation of the percentage of value lost in the relevant property.

Justice Stevens reconfirmed the Penn Central confusion and imprinted the Keystone Comparison error:» “[O]ur test . . .requires us to compare the value that has

been taken from the property with the value that remains[;] one of the critical questions is . . . to define the unit of property ‘whose value is to furnish the denominator of the fraction.’” (Keystone, 480 U.S. at 497.)

» Value remaining should not be an issue!


Takings Fraction (2)

Evaluation of economic viability begins with tabulating numerator items and denominator items.

Numerator before and after permit denial houses before and after revenues from services provided by the relevant parcel.

Denominator before and after houses investments in the relevant parcel.

So, revenues go to numerator; investments go to denominator. » Value taken matters. How much are revenues reduced?



The “takings fraction” is the ratio of the revenues to the investments in the single parcel or aggregated parcels.

• Stand alone parcel compares revenues before and after denial to investment.

• Parcel as a whole compares revenues from whole parcel to investment in whole parcel.

Calculation of takings fraction per se reveals the change in economic viability associated with permit denial.» When financial calculations are properly done.



Economic viability is measured by the return on investment before and after permit denial.

Economic viability is tautologically equivalent to a competitive, risk adjusted rate of return.

If before permit denial the owner’s project made good economic sense, and after permit denial, earnings are too low to attract and reward capital, economic viability has been extinguished.

Literally, present value (Net Operating Revenues - Investments) > 0 is the test.



Parcel as a whole analysis reveals whether the foreclosed project is essential to the economic viability of the entire property.

This is the same as asking whether the owner can “do without” the incremental income and still earn sufficient income to justify the entire investment.

While economists can calculate the result, the question is not an economic question.

The takings question hinges on the balance of the two economic tests with the “character of government regulation.”

Takings Fraction I llustration 1 - Small Loss

Present Value % Taking Fraction

Bef ore Af ter Loss Bef ore Af ter

1 100 200 150 25% 200/ 100 150/ 100 50

2 50 60 60 na na na -

3 10 15 15 na na na -

Whole

Parcel 160 275 225 18% 275/ 160 225/ 160 50

ParcelI nvest-

mentDamages


Takings Fraction I llustration 2 - Uneconomic Whole



1 100 200 - 100% 200/ 100 0/ 100 200

2 50 60 60 na na na -

3 10 15 15 na na na -

Whole

Parcel 160 275 75 73% 275/ 160 75/ 160 200

ParcelI nvest-

mentDamages


Takings Fraction I llustration 3 - Barely Economic



1 10 20 - 100% 20/ 10 0/ 10 20

2 50 60 60 na na na -

3 10 15 15 na na na -

Whole

Parcel 70 95 75 21% 95/ 70 75/ 70 20

ParcelI nvest-

mentDamages


Takings Fraction I llustration 4 - Parcel 1 Essential



1 50 100 - 100% 100/ 50 0/ 100 100

2 100 70 70 na na na -

3 80 80 80 na na na -

Whole

Parcel 230 250 150 40% 250/ 230 150/ 230 100

ParcelI nvest-

mentDamages


Takings Fraction I llustration 5 - Uneconomic Parcel/Whole



1 50 100 40 60% 100/ 50 40/ 50 60

2 100 70 70 na na na -

3 80 80 80 na na na -

Whole

Parcel 230 250 190 24% 250/ 230 190/ 230 60

ParcelI nvest-

mentDamages


Takings Fraction I llustration 6 - Ripple Eff ect on 2



1 50 100 40 60% 100/ 50 40/ 50 60

2 100 70 30 57% 70/ 100 30/ 100 40

3 80 80 80 0% na na -

Whole

Parcel 230 250 150 40% 250/ 230 150/ 230 100

ParcelI nvest-

mentDamages



Regulatory Takings - Where Are We?

1. Lucas Standard - Categorical Taking if all economic value taken. (Lucas, 1992)

2. Florida Rock V Standard - Partial Taking if regulation results in a deprivation of a substantial part but not essentially all of the economic use or value of the property.


Florida Rock V - Losses Matter

Loss need not be 100 percent to justify compensation.

Fifth Amendment prohibits the uncompensated taking of private property without reference to the owner's remaining property interests.”

Florida Rock V conformed the law to the Fifth Amendment and economic practice: » Dropped Penn Central's value remaining (non)theory of

economics.


Criteria to Measure Economic Impacts

Appropriate measure of loss:» The opportunity foreclosed by unforeseen regulation

that prohibits the planned economic use of the assets.

1.Establish timing and amounts of invested capital, and property interests to demonstrate legitimate, reasonable investment-backed expectation.

2.Document planned activities proscribed by regulation. » Show ability of the property and business to supply

activities/uses intended;» Show market conditions that create foreclosed

opportunity.



3. Establish time period of loss: a specific temporary period or in perpetuity.

4. Estimate reduced profits caused by regulation.

5. Estimate tangible asset values reduced by the regulatory constraint:

» Determine portion of property retaining any economic use, if any.



6. Estimate intangible asset values, including business goodwill, reduced by regulatory constraint:

» How severe is economic loss as measured by change in net present value of ongoing and foreclosed enterprise?

» Does economic viability of entire enterprise remain, although at a lower level?


Takings Economic Decision Rules

Economic value for asset in use = net present value (NPV) of project cash flows.» Diminution in NPV is proper measure of loss.» If regulation reduces the NPV, but it remains positive,

this is an "economic impact."

When NPV swings from positive to negative, investment expectations frustrated.

Difference between the calculated NPV before/after regulatory prohibition measures loss/damages.


A View of Takings Balance

Foreclosed project, not the firm, is the relevant property, the basis for investor expectations.» “Sticks,” not “bundles!”» Incremental economic loss, not value remaining!

Remaining value of firm has no bearing on economic impact of proscribed incremental project. » The value remaining should be a moot point. » Keystone Comparison test is meaningless.

Loss per se measured and compared with benefits from regulation to achieve economic efficiency.







4. Origin of Parcel as a Whole Error


Brennan, Michelman & Breitel (1)

Where did parcel-as-a-whole come from?» The takings fraction dispute was born of two errors.

1. Double Misread of Michelman’s 1967 HLR article!» Misapplied “Speculator Exception.”

» Misconstrued “fraction of value destroyed” test:– “Once having found the denominator, [the ‘thing’ affected by the

imposition], the test ask[s] what [fraction has been destroyed.]”

– Test should not ask “how much value has been destroyed, but whether . . . the [regulation] can . . . be seen to have [reduced] some sharply crystallized, investment-backed expectation.”

» Michelman created the language found in Penn Central and applied it to the discrete twigs of the bundle. – Brennan misused the words.



“. . . focus on the the particular thing [injured]”

» (p. 1192)

“’fraction of value destroyed’ test . . . [proceeds] by first . . . [isolating ] some ‘thing’ owned . . . .” (p. 1232)

“. . . Land speculator . . . unable to show . . . any specific plans . . . still has a package of possibilities, . . . though lessened. . . .”

» (p.1234)

“parcel as a whole.”

“parcel as a whole.”

Penn Central building development was planned and had no other possibilities.



2. NY Chief Judge Breitel’s economic lunacy in the underlying decision confused the Brennan majority.» Breitel’s agglomerated income from the vicinity of

Grand Central to Penn Central’s owners, failing to recognize that prior investments laid claim to these revenues.

» Breitel doctrine of legal-economic gobbelty-gook:– “[P]roperty may be capable of producing a reasonable return . . .

even if it can never operate at a profit.”

» “City Tax Block” in Penn Central delimited “vicinity,” but still makes no commonsense as denominator.– Sunk costs are sunk!


Penn Central - Claimant’s Failings (1)

Loss of intangible asset values not well presented by claimants and not recognized by the majority.

No evidence of health of rails business.» Importance of building lease income v. rails income to

IRR not reported.

No evidence of investment expectations w/ & w/o building.» Effect on shareholders/owners not reported.» NPV of cash flows w/ & w/o building not reported.


Penn Central - Claimant’s Failings (2)

Accounting testimony looked backward.» Couldn’t afford cost of upkeep on the building.» Claimed operating loss.» Didn’t emphasize lost income.

Court disregarded testimony.» “Failed to impute rental values . . . .”» “Improperly attributed . . . operating expenses and

taxes . . . .”

Court ruled terminal earned a “reasonable return.”» Brennan’s economic failings began with submitted

evidence -- accounting data, without financial analysis.

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