The Fifth Amendment Takings Clause

The central challenge of the takings law is how best to respond to two issues. The first involves so-called “regulatory taking,” where the government leaves an owner in possession of his property but restricts either its use or disposition (e.g., by limiting it to residential use or prohibiting its sale). The second deals with exactions: the government announces that it will only issue a permit or license to the property owner if the owner in exchange either turns over part of that property to the government, pays cash to the public treasury, or pays for off-site repairs or improvements to benefit the public as a whole. 

In both settings, the modern view favors a low level of judicial scrutiny, commonly called the “rational basis” test. Unfortunately, that test is unsupported by anything in the text of the Takings Clause. Unfortunately, it opens all government decisions to unacceptable risks of faction and political intrigue.

The mischief starts with the three-part test announced in Supreme Court’s 1978 decision in Penn Central Transportation Co. v. City of New York. New York City’s Landmarks Preservation Commission prohibited the owner of the Grand Central Terminal from constructing a multistory office tower above the Terminal. Under New York law, the owners of the Terminal owned the air rights above the terminal that they could either use or sell. The landmark restriction wiped out the value of those air rights, but the City offered them no compensation to offset that loss. In upholding the City’s actions, Penn Central did not treat the government action as a taking of the air rights, but as a restriction on land use governed by a three-part test, which looked at: (1) the economic impact on owners; (2) a set of “investment-backed” expectations (how investors expected to use the property); and (3) the character of government regulation, under which land use regulations were subject to far less scrutiny than government occupation of property.

Unfortunately, Penn Central never asks the right social question, which is whether the net costs of the regulation will exceed its social benefits. That test would be met if the City were forced to buy the air rights above the landmark Terminal, which the City would not do if the public gains were smaller than the private losses. But it gobbled up those rights because it did not have to pay one cent to acquire them.

Penn Central’s three factors are all sideshows to the main event. The economic impact on owners is a measure of harm for the loss imposed. But just as with physical takings, the size of the loss is irrelevant to question of whether compensation is owed. The reference to “investment-backed expectations” is needless obscurantism that Justice Brennan invoked in an ad hoc way, by announcing without proof that Penn Central was chiefly interested in the success of its current terminal—which hardly shows that the company placed no value on its air rights. Finally, the character of the invasion, physical or regulatory, offers no explanation as to why the two forms of taking should receive different levels of scrutiny.

The correct approach follows the disproportionate impact test of Armstrong v. United States (1960). If landmark designation advances city beautification, the public, and not a single owner, should bear its entire cost. This outcome makes sense whether or not we say that the government or Penn Central now “occupies” the now unusable air space.

The problem of exactions raises similar issues. The government of course has rights to issue permits and licenses for potentially dangerous activities. But it cannot withhold them on a whim. It would be wholly improper for any government agent to tell a landowner that she may only build if she pays $1 million into the public treasury to fund general improvements. Those should be paid for by general taxes under the Armstrong formula. The result does not change if, as in Nollan v. California Coastal Commission (1987), the government tells a private owner that she can build an ordinary house on her own property only if the public receives for free a lateral public easement across the front of its land. The same logic applies if the government insists that it will issue a building permit on one half a plot of land only if the landowner transfers the other half to it free of charge or dredges a public river.

How then to distinguish proper conditions from improper exactions? The best test asks whether the government condition is intended to block an action, which if allowed to take place would create the kind of nuisance that the government could properly stop by legal action. Some conditions—such as making sure that the dirty water from your plant does not enter the river—meet that test. But others—repairing public facilities along the river—do not. To meet the Armstrong test, those last improvements should be funded by the public at large, and not foisted off on the last to build.

Increasing the level of judicial scrutiny of both regulatory takings and exactions will not block much needed government regulations. But it will help control the nonstop political intrigue so common today in land use regulation and elsewhere.

The most controversial questions in takings law involve determining when the government must compensate a property owner whose property has been burdened by regulation. The same principle that justifies requiring compensation when the state confiscates property for public use—preventing “Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole” (Armstrong v. United States (1960))—also seems to justify occasionally requiring compensation when an owner bears an exceptionally heavy regulatory burden. But trying to generalize about when the state should compensate regulated property owners has proven exceptionally difficult for both courts and legal scholars. 

In one 2005 case, Lingle v. Chevron, U.S.A., the Supreme Court helpfully clarified that, in considering whether to compensate property owners, decisionmakers should not focus on the rationality or wisdom of the regulation in question but rather on the fairness of the burden it imposes on owners.  Any exercise of the state’s police power must be minimally rational, but the best constitutional framework for evaluating rationality is not the degree to which the restriction advances a legitimate state purpose, the standard of review that the Court applies to certain suspect state actions under the Due Process Clause. In the regulatory context, the question to which the Takings Clause directs itself is whether a valid exercise of the police power nevertheless imposes such a heavy burden on a property owner that the state must pay compensation.

The principal legal rubric through which the courts evaluate that burden was set forth in the Supreme Court’s 1978 decision in Penn Central Transportation Co. v. New York City. In that case, New York City designated Grand Central Terminal a historic landmark, and it prohibited the owner of the Terminal from building a multistory office tower on top of it. In considering whether to require New York City to compensate the owners of Grand Central Terminal for the burden of designating the terminal as an historic landmark, the Court discussed three factors: (1) the economic impact of the regulation on the owner; (2) the degree to which the regulation interfered with “distinct investment backed expectations,” and (3) the character of the government action. All three factors focus on different ways in which a regulation might burden an owner. The first factor looks to the economic loss the regulation causes. The second focuses on the degree to which the regulation unsettles expectations about how the property would be used  under an earlier (more permissive) regulatory regime—expectations on which the owner has relied in some way. The third turns to other considerations that might color our interpretation of the fairness of the regulatory burden, for example, by asking whether the state is intruding on the owner’s privacy or singling out the owner for unfavorable treatment.

In a few contexts, the Supreme Court has supplemented the flexible Penn Central factors with more rigid rules, such as when the state authorizes the permanent physical occupation of property or when it regulates property to such an extent that it leaves the owner with no economically viable use of the property. But those rules are both (correctly) exceptional and narrow. As frustrating as Penn Central’s indeterminate factors are to some commentators, they appropriately leave courts with broad discretion about when to require compensation to burdened owners and do a good job of guiding this fairness-based inquiry. The question of when to require compensation for onerous regulation is an area where rules are no substitute for sound judgment.

Another takings context in which the Court has deviated from the Penn Central approach concerns so-called “exactions,” where a government conditions regulatory approval on the owner’s handing over some property (either money or some in-kind property interest) to the government. The idea of property owners paying for regulatory permission strikes some as closely resembling corruption or extortion. In a series of cases, the Supreme Court has held that, when the government conditions regulatory approval on the owner’s handing over of property interests, courts must scrutinize the exactions to ensure (1) that they share a logical connection (“nexus”) with the reasons why the state might legitimately deny regulatory permission in the first place, and (2) that they are roughly proportional to the impacts of the action for which the owner is seeking regulatory permission.

Although exactions do provide an opportunity for government abuse of property owners, they can also serve as a valuable tool for increasing flexibility in regulatory structures while ensuring that owners’ use of their property does not impose costs on the community. In scrutinizing exactions, courts should focus on those situations in which the burdens of exactions have the greatest potential to fall unevenly on regulated owners. Consequently, courts should defer to the government where exactions operate in a transparent and general way, akin to taxation. For example, exactions that call for the payment of money according to a formulaic schedule laid out in advance should receive deferential review in court.