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Quiet Victories on the Regulatory Takings Front

Leonard Gilroy
October 13, 2009, 9:10pm

I recently ran across two interesting news articles on the regulatory takings front, but they need a little background to put them into context. As I discussed at length in this study, regulatory takings are essentially the flip side of eminent domain, where the uses of private property are restricted not through a wholesale acquisition of the property by government (as in eminent domain), but rather are effectuated virtually by regulations like development codes and environmental mandates.

In essence, rather than taking a landowner's property outright, governments routinely pass regulations that restrict the use of private property (such as local zoning laws, farmland preservation ordinances or the Endangered Species Act, for example) to the extent that it represents a virtual "taking," a major loss in economic value due to government restrictions on land use.

When a landowner has paid full market value for a property, and that value is based on the development potential at that time, government effectively pulls the rug out from under that landowner when it changes the rules of the game later such that the potential value can no longer be achieved. When private landowners bear the burden of providing public benefits in this manner—and when that economic loss to the landowners merits compensation from the government—it's known as a "regulatory taking."

As I discuss in the study referenced above, the courts haven't exactly been helpful on regulatory takings. Essentially, over the years they've validated the idea that there are such things as regulatory takings that merit compensation. But beyond that, the courts haven't done much to offer clear guidance on what actually constitutes a regulatory taking. Even worse, the court system is essentially rigged to keep potential regulatory takings cases bouncing around in an infinite administrative loop such that it becomes very difficult—and costly—for an aggreived landowner to even get a case into the legal system to begin with, much less receive any compensation for adverse government regulatory action.

Hence, it was interesting to see the recent news alert from the Nossaman law firm on some recent developments on this front in the federal courts:

"All bark and no bite." Typically, that is a fair description of regulatory takings litigation: the litigation generates a lot of noise and gnashing of teeth but, at the end of the day, rarely are government agencies bitten with an order that they pay compensation. But a new opinion from the federal Ninth Circuit Court of Appeals, Guggenheim v. City of Goleta (Sept. 28, 2009, Case No. 06-56306), demonstrates that regulatory takings litigation can have teeth. In Guggenheim, the Ninth Circuit holds that the City of Goleta's rent control ordinance on mobile home parks went too far and that the City will have to pay the park's owners just compensation. This case, particularly coupled with two other recent regulatory takings cases, Monks and Casitas, suggests that agencies may now need to pay close attention to their regulations if they hope to avoid a regulatory takings bite.

The other article to highlight comes from Flagstaff, Arizona. For context, Arizona voters passed Proposition 207 in 2006, which not only tightened the state's eminent domain laws to prevent abuse, but also required governments to either offer compensation to landowners or issue waivers related to any new land use regulation (outside of those enacted to protect public health and safety) that lowers current landowners property values. The Goldwater Institute's Clint Bolick wrote an excellent overview of Prop 207 in Reason Foundation's Annual Privatization Report 2009 that's well worth a read.

As Bolick writes, there have been a number of property rights victories in the wake of Prop 207, and governments now have to clearly think through the potential economic impact of any proposed land use regulations before they consider passing them, lest they open themselves to numerous Prop 207 claims. The latest example comes from an Arizona Daily Sun article discussing how Flagstaff is considering a new form-based code to guide the future development of its downtown area, but they're structuring it as an optional code so as not to trigger Prop 207 challenges:

Roger Eastman, the city's zoning code administrator who is overseeing the overhaul, said the form-based codes will encourage incremental changes in the city's urban core while preserving its historic character. [...]

Under the new proposed zoning codes, which have not been approved by the Flagstaff City Council, a developer could conceivably erect a three-story building covering most of the property, including over the existing parking lot, in exchange for following the form-based codes.

The current zoning would not allow for such a large building because the owner would likely need to provide for more on-site parking, not less.

But Eastman said a form-based code would not require on-site parking if the downtown parking plan includes a parking garage. He said the city can offer incentives like less parking, smaller setbacks and a streamlined approval process to encourage developers to use the form-based codes.

Eastman points out that even if the proposed zoning is approved by the City Council, it would be entirely optional for property owners.

A state law passed in 2006, better known as Prop 207, has made the city of Flagstaff reluctant to rezone private property without the owner's consent. The law requires cities to compensate property owners for any value lost due to new regulations.

Property owners could continue to use the underlying zoning already in place for any development plans, Eastman said.

This says a few important things. Despite the false, "sky is falling" rhetoric one usually hears from urban planners about how regulatory takings reform will bankrupt governments and decimate planning, it doesn't actually work that way in practice. Flagstaff is on the verge of passing a large-scale planning overhaul involving form-based codes, one of the trendiest regulatory approaches among professional planners right now. All they had to do to make it kosher from a property rights/regulatory takings perspective was to make it optional. Then you're not taking anyone's current rights away but creating a parallel mechanism offering a streamlined, revamped regulatory system for those who choose to take advantage of it. Win-win; property owners win, planners win.

What this demonstrates is that it's far easier to graft property rights into current planning systems than the professional planning community assumes or acknowledges. Regulatory takings reform in Arizona prompted planners and policymakers in Flagstaff to think twice before proposing a blanket form-based code to replace the existing zoning. Considering the property rights implications upfront caused them to adjust the model slightly to make it more landowner-friendly, flexible and dynamic.

With the tough economic times that cities are facing these days, I'd argue that the more dynamism and flexibility on the land use front, the better.

» Reason Foundation's Eminent Domain and Regulatory Takings Research and Commentary


Leonard Gilroy is Director of Government Reform


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