Property Class Notes 1/14/04

It’s important to understand the difference between the Holmes and Brandeis opinions. Brandeis thinks that the public purpose is more important than Holmes thought it was: this is a problem that exists throughout Pennsylvania. Brandeis also thinks the coal company hasn’t lost much.

The denominator problem

Both Holmes and Brandeis say you weigh the public benefit against the harm to the landowner. But what’s the harm to the landowner? We know what’s regulated, and we know what the coal company can and can’t do. But what fraction of their “total rights” is infringed? Do we make the “denominator” the entirety of the property that’s regulated? In that case, it’s a 100% deprivation. Or, on the other hand, do we make the “denominator” the entirety of the property owned by the coal company? Is it relevant if they “chop up” their property rights?

Brandeis says: Look at all the coal they own. They’ve lost 100% of the value of the coal under the house, but they own lots and lots of coal. Therefore, Brandeis would argue, the burden on the coal company is not so great as Holmes wants to claim.

Penn Central Transportation Company v. City of New York

Grand Central is a pretty building! What does New York want? They want to protect historic buildings! Penn Central owns Grand Central and they want to build an office building on top. That would have gotten them millions of dollars in rent every year! They applied for it and got denied.

This was a very big case. It went all the way to the Court of Appeals of New York and then to the U.S. Supreme Court. It was a cause celebre at the time.

Is Grand Central worth saving? Does anybody really care? Leonard Bernstein did and a lot of other people in New York did.

What does the lower court do? The trial court grants an injunction. On appeal, the intermediate appellate court says that the restrictions on Penn Central were okay because they were for a public purpose.

Then the high court says there’s no taking because there’s no physical invasion. But we know that’s clearly wrong! The Court of Appeals of New York analyzes the case as a substantive due process issue.

The Supreme Court says this is no good! The Court goes through two stages of analysis. First, the Court asks whether the landmarks statute is constitutional on its face. Since it is, the Court asks whether the statute is constitutional in its particular application to Penn Central.

The constitutionality of the statute

Is there a public purpose to the statute? Sure there is! It’s a public purpose to have a beautiful city with beautiful architecture. That confers some benefit on the people who live there. The regulation of aesthetics is considered an appropriate state purpose.

Moreover, not all exercise of the state police power constitutes a taking. When does the police power go too far? It can go too far if it frustrates “investment backed expectations”. But just because Grand Central is worth less than before doesn’t make it a taking. If it’s just zoning, that’s okay. If it’s just regulating a nuisance, even though it might have a severe effect on the value of the property, that doesn’t make it a taking either. We all own land subject to certain laws and regulations with respect to how we use it; there’s no absolute ownership. One of those laws is that you can’t create a nuisance on your land. That’s actually sort of part of your title.

The Court distinguishes the actual situation with a situation where the train station had to be closed as a train station and reopened as a museum that would be far less profitable than the station. That would certainly be a taking.

But how do you measure the amount of the investment in the building? Say they paid $1 million to build the building in the 1920’s when it was constructed. Say the building is now worth $50 million. What is their “investment-backed expectation”? Is it the $1 million or the $50 million? The majority seems to look at the original cost and the value of improvements, but not current value. This is not the way an economist would look at it and this certainly isn’t how Penn Central would look at it as a business.

If you own property and the property has gone up in value, you make a decision on the margin whether or not to sell it based not on the original value but based on what it’s worth now. The economist would say what’s relevant is the opportunity cost: every day they make the decision that “I’d rather have this building than, say, $20 million.” But that’s not how the court is looking at it.

The extent of the loss is important, but not dispositive: decrease in value by itself is insufficient to establish a taking. The Court refers to the brick furnace case from L.A. There was a big decline in the value of the regulated property, but because it was such a nuisance, it still wasn’t found to be a taking.

In turn, when we look at whether the problem has decreased in value, we have the denominator problem again. The majority looks at the value of the airspace rights above Grand Central compared to their entire holdings in the area. On the other hand, the minority looks at the airspace rights as an independent property right that has been taken away.

The dissent is saying that you look at the air rights and you find that those rights have been taken away 100%. There is no plan that will satisfy the Commission and allow them to develop their air rights. Therefore, the minority says that they’ve gone too far.

Who ultimately carried the day? Holmes or Brandeis? The majority opinion is most like Brandeis’s opinion. The dissent says that Penn Central has been deprived of 100% of the air rights. The majority says they have been deprived of, say, 10% of their total rights (including the train tracks, the other buildings they own and all that).

The majority doesn’t focus on what they can develop. They focus on what they own and whether they can get a “reasonable return” on their investment. The majority says that their investment expectations have not been frustrated.

What the dissent is saying is that it’s not necessary to invalidate all landmark statutes, it’s just that the people who benefit from the statutes should pay the people who incur the cost of preservation.

Braunstein doesn’t buy the argument that there’s “average reciprocity of advantage” here. Penn Central gets to enjoy their building and see how pretty it is just like everybody else in New York. They also get the benefit of the 400 landmarks located around New York. This argument strikes Braunstein as somewhat facile: Penn Central is bearing a huge cost that nobody else has to bear. The Court says, however, that everybody in the city benefits, and thus there is average reciprocity of advantage.

The other thing that the Court dismisses is the argument from Crosby. A guy had a chicken farm and military was flying planes over the farm. The planes scared the hens such that they wouldn’t lay eggs. The guy sued the government for compensation for abridging his air rights. But the majority says this case can be distinguished. In Crosby, the government was physically occupying the airspace and using it solely to benefit themselves, that is, in its enterprise capacity. But the majority argues that New York City is not regulating for its own benefit, but rather for the benefit for the people of New York.

The majority concludes that this isn’t a take. It’s a regulation, but not one that “goes too far”.

But is this statute constitutional as applied in this particular case? The majority says that there is no interference with the property’s current use (as a train station). The court again says that investment expectations are protected and there is average reciprocity of advantage.

The dissent in Penn Central

The dissent says: this is not zoning, at least not in the typical sense. Why not? This isn’t like the traditional use of zoning laws. The minority says this is more haphazard than zoning. You have 400 landmarks scattered in 31 different historic districts. Zoning regulates land use within an area, but in this case the government is just picking and choosing. The minority thinks there is a problem of fairness here: “Beauty is in the eye of the beholder and so forth.”

Also, with zoning, you get hurt by the zoning, but you also benefit from the restrictions on other people. I can’t build a smokestack on my residentially-zoned land, but neither can my neighbors so I’ll be able to breathe and stuff.

The dissent also denies that there is average reciprocity of advantage.

The minority also says that the analogy to regulations that prohibit nuisances is not apt. Everybody agrees that regulation of a nuisance is no taking, but nobody’s saying that Grand Central, if it was developed as proposed, would be a nuisance. In fact, it would be in compliance with all other New York City regulations except the landmark law.

Finally, the dissent believes Penn Central has suffered a total loss: they choose the entirety of the air rights as the “denominator” here.

But this isn’t the end of the story! The see-saw is going to flip back by Nollan!

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