Following is the chapter on the legal implications of transfer of development rights from the 2003 book Beyond Takings and Givings: Saving Natural Areas, Farmland and Historic Landmarks with Transfer of Development Rights and Density Transfer Charges available from the Planners Book Service (www.planning.org) and Amazon.com. This material was made available to BILD with the permission of the author. Most of Beyond Takings and Givings was written by Rick Pruetz, FAICP. For more information on TDR, the book and updates to TDR program profiles, please see www.BeyondTakingsAndGivings.com.
This chapter was written by attorney Donald I. Berger, who received his JD from UCLA in 1982. He is currently a partner in the Los Angeles office of Latham & Watkins where his practice primarily involves the representation of clients in the financing, acquisition, development, entitlement, construction and leasing of real property, with a particular emphasis on the representation of investment banks, real estate funds and other institutional clients. Mr. Berger’s profile from the Latham & Watkins web site is located at the end of this chapter.
IV WHAT ARE TDR’S LEGAL CONSIDERATIONS?
BY DONALD I. BERGER
Other chapters in this book touch on legal issues associated with TDR. For example, the U.S. Supreme Court decision in Penn Central is noted for its historical significance in Chapter III; the taking issue is briefly addressed in Chapter II, in conjunction with the need to develop a functional TDR market; and legal considerations represent an important criterion in the evaluation of alternative implementation techniques found in Chapter III. But this chapter deals exclusively with legal considerations, specifically: A) Legal Frameworks, B) Local Authority To Implement TDR Regulations, C) TDR Consistency With Zoning And Land Use Laws, D) TDR’s Role In The Property Rights Debate, E) Taxation of TDR and F) Documenting TDR Transfers.
A. Legal Frameworks
TDR is often referred to as “innovative.” In the planning context, this innovation is aptly reflected in the myriad approaches to implementing TDR provisions, as documented throughout this book. In the legal context, innovation is reflected in the difficulties state legislatures, municipalities and, most importantly, the courts, have had in attempting to define TDR and understand its role relative to deeply embedded legal concepts, some of which, such as property rights, date back to medieval times.
The legal character of TDR is perhaps best understood as a convergence of three separate legal paradigms: governmental regulation, property rights, and contracts. In order to use TDR effectively as a planning tool, it is important to understand how TDR may be assimilated into each of these three broad legal frameworks.
1. Governmental Regulation
At its most fundamental, TDR is a creature of governmental regulation. In order for TDR to have any meaning, it must be understood in the context of the so-called “zoning envelope” which limits development within a three dimensional space by regulating the length, width, height, and bulk of structures to be placed within the envelope, as well as the use of such structures and the underlying land. If the right to build on land were not regulated by land use controls, TDR would have no function: the ability to transfer development rights from one parcel to another would be meaningless since parcel owners would be unrestricted1 in their ability to develop at whatever density or intensity they desire.
It is through the regulation of both the sending site and the receiving site that TDR takes on its form and function. The nature of this regulation is not only essential to understand the role of TDR for planning purposes, it is also vital to understand its legal validity. The regulatory underpinnings of TDR ordinances are discussed in Section B below, while the integration of TDR with other land use regulations is explored in Section C.
2. Property Rights
While the relationship between TDR and governmental regulation is rather apparent, its role in the arcane world of property rights is not. Although the idea of dividing ownership of property into a “bundle” of fractional components is almost as old as the idea of “property” itself, state legislatures, municipal governments, and the courts are only now adjusting to more modern conceptions of such fractional interests, such as the right to build within one’s “air space.” Thus, it should come as no surprise that the idea of severing one’s right to use portions of one’s “zoning envelope” and transferring such right to another parcel may pose significant conceptual challenges to courts which have consistently struggled with the more general relationship between governmental regulation and property rights.
Because it may be viewed, alternatively, as a tool of governmental regulation and as a property interest in its own right, TDR is susceptible to being caught up in the courts’ ongoing effort to define the limits of governmental regulation of property interests. And so it has. As discussed in detail in Section D below, in their effort to determine the circumstances in which governmental regulation becomes so invasive as to constitute an unconstitutional taking of property, a number of courts have been asked to determine what role TDRs may have in restoring value to the regulated property. To the extent TDRs are valuable property interests, the States and courts have also wrestled with questions as to how and when TDR may be subject to taxation, as discussed in Section E below. Together the “property rights” cases have had, and will continue to have, an important influence on current use and application of TDR regulations.
3. Contractual Relationships
With all the attention focused recently on the role of TDR in the governmental regulation and property rights context, it is easy to forget that the means pursuant to which a transfer of development rights is affected will typically be some form of contract. Yet, it is precisely because of the innovative use of TDR in the governmental regulation and property rights arenas that more attention needs to be focused upon the subtleties of properly documenting the transfer of development rights. Various factors and drafting suggestions are discussed further in Section F below.
B. Local Authority To Implement TDR Regulations
The authority of local governmental agencies to adopt TDR regulations derives from a State’s “police power” to regulate the use and development of land so as to protect and promote the public health, safety and welfare. Although such police power belongs to State government, every State in the country has delegated the power to impose land use regulations to local municipalities.2 The explicit delegation to local governments of the right to adopt and implement TDR regulations is not as common. Thus, many communities which have adopted TDR programs have relied upon the broad delegation of land use authority under either the State Constitution, general enabling statutes, or legislative enactments which permit “home rule” or municipal “charter” provisions.
By contrast, a number of states, have specifically delegated to municipal govern-ments the power to authorize and implement the transfer of development rights. In some jurisdictions, these TDR-specific enabling statutes merely provide for the adoption of TDR ordinances as part of the local governmental entities’ broad land use or zoning authority.3 In other jurisdictions, the authority to adopt TDR regulations has been delegated in the context of imposing specified procedural or substantive limitations on the use and application of TDR. For example, the Delaware enabling statute limits designation of TDR receiving areas to locations where the County has determined that growth should be encouraged and where a transfer of development rights would not result in the inability of either existing or planned public facilities to serve the area to accommodate such growth.4 Likewise, communities in New York and North Carolina can adopt TDR programs as long as specified procedures are followed.5 And in Pennsylvania, municipalities can adopt TDR ordinances as long as prescribed rules are followed and rights are not transferable beyond the boundaries of the municipality.6
Communities should not make assumptions about their authority to use TDR based on the absence or presence of TDR programs in their state. A recent search of state statutes found that the following states have adopted TDR lesislation: Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maryland, Nevada, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and Washington.7 Yet the nationwide survey discussed in Chapter III did not find TDR programs in six of these states: Delaware, Kansas, North Carolina, Rhode Island, South Dakota and Tennessee. Conversely, the survey found TDR programs in 10 states that are not on this list: Maine, Massachusetts, Michigan, Minnesota, Montana, Oregon, South Carolina, Texas, Virginia and Wyoming.
In addition, TDR programs exist in some states where many planners believe that state law does not authorize local jurisdictions to use TDR. It is beyond the scope of this chapter to attempt to resolve these conflicting opinions on a state by state basis since such resolution would require extensive analysis and a legal opinion. Given the potential uncertainties associated with a community’s adoption of TDR regulations, in the absence of explicit legislative authority, a municipality may be well advised to get a legal opinion on this question before investing too much time and effort in the development of a TDR program.
C. TDR Consistency With Zoning And Land Use Laws
As one may well imagine, the diversity in various state and local government’s approach to land use planning and zoning precludes broad generalizations concerning the relationship between TDR regulations and other features of local land use controls. Indeed, although a number of municipalities can trace their planning and zoning laws to “standard” planning and zoning enabling acts dating back decades8, the states have approached local land planning quite differently, with some states not requiring local governments to engage in any formal planning while other states require local governments to adopt detailed planning requirements.9
In a number of the states which have adopted mandatory planning requirements, a hierarchical approach is employed to ensure that a municipality’s more detailed and parcel-specific planning efforts are consistent with broader legislative and policy objectives. Thus, a number of states not only require local governments to adopt “comprehensive” or “general” plans which reflect the fundamental planning objectives of the community, they also mandate that subsequent implementing ordinances, including local zoning codes, maintain consistency with these objectives.10 In turn, property-specific approvals, such as subdivision maps, site plans, and special use permits, must often comply with applicable zoning laws and the comprehensive plan.
It is into this potential vortex of intersecting state and local land use controls that TDR regulations are often placed. Since the principal import of TDR is to re-allocate components of the “zoning envelope”—use rights, density, and intensity—from one parcel (the sending site) to another (the receiving site), TDRs, by their very nature, interject a series of legal consistency issues into the regulatory process, as discussed below.
1. Consistency With Comprehensive Plan And Zoning Laws.
Since one of the principal uses of TDR is to better achieve broad planning objectives by providing incentives to direct growth, or certain types of growth, to portions of the community in which such growth is desirable, transferring development rights from one area to another should not present any conceptual difficulties. However, “the devil is in the details.” Unless the TDR regulations themselves specifically require that the recipient area possess planning and zoning designations sufficient to accommodate the transfer of density, or require concurrent amendments necessary to ensure such consistency, the transfer of development to the receiving parcel could result in development or density allocations in excess of that permitted under the applicable regulatory regime. The case studies found in Part Three of this book demonstrate a wide range of methods for maintaining consistency. At the more sophisticated end of the spectrum, the general plan and/or the zoning code predesignate receiving sites and provide a lower density for projects that do not incorporate TDR versus a higher maximum density for projects that do. Simpler TDR programs may not predesignate receiving areas; in these programs, consistency can be achieved by general plan amendments and rezonings which accommodate the additional density resulting from a transfer.
2. Necessity For Additional Environmental Review.
In a number of jurisdictions, significant land use planning initiatives and changes give rise to concomitant environmental review. The purpose of such review is typically to ensure that changes to existing conditions will not have significant adverse impacts upon the environment, including traffic, noise, aesthetics, etc. In large part, the need for additional environmental review depends on whether or not the approval of the transfer is a discretionary or administrative action. Many communities want to retain the ability to decide whether transfers should be allowed on a case-by-case basis; these communities typically study the potential environmental impacts before making their decisions. Alternatively, many communities perform environmental review on the TDR ordinance itself but not on each individual project; in these communities, the transfers are approved administratively with the understanding that the environmental effects were analyzed and considered when the TDR program was adopted.
D. TDR’s Role In The Property Rights Debate
Governmental agencies have identified a wide variety of objectives in adopting TDR regulations. As discussed in detail in Chapter III, these objectives include environmental protection, farmland preservation and the safeguarding of historic landmarks, infrastructure, urban design and housing.
Although not cited as frequently, in a number of instances—perhaps more than local governmental agencies have admitted—one objective in adopting TDR regulations is to help insulate the governmental agency from claims that restrictive regulations have resulted in a “taking” of the regulated parcel owner’s property. To the extent a TDR program provides valuable property rights in exchange for reduced development options, it may be viewed as a palliative measure which can reduce the prospects for time consuming and expensive litigation. Thus, it is no coincidence that in a number of instances TDR regulations have been adopted in the context of particularly invasive regulations of a type that often provoke litigation. The more aggressive communities are in restricting economically beneficial uses of property, the more appealing TDR may become as a means to “cushion” the impact of such regulations.
Although lawsuits filed in response to onerous land use regulations may be based upon a variety of claims, one of the most frequently litigated issues is whether the use of property has been regulated to such an extreme that the owner’s property rights have been “taken” for public purposes without “just compensation” under the Fifth and Fourteenth Amendments of the Constitution. In this regard, it is certainly no coincidence that the relative explosion of TDR regulations throughout the country occurred after the Supreme Court’s landmark “takings” decision in Penn Central Transportation Co. v. City of New York.11 In Penn Central, the Court appeared to implicitly sanction the use of TDR as a legitimate means to preserve “valuable” property rights and, in so doing, provided governmental agencies throughout the country with a means to reduce the prospects of successful legal challenges to restrictive regulations on the grounds of alleged unconstitutional takings.
However, the law of “regulatory takings” and the use of TDR to avoid takings-based challenges have evolved considerably, to the point that now, some 25 years later, in Suitum v. Tahoe Regional Planning Agency, the Supreme Court has recently decided a second case potentially limiting the role TDR may play as a mechanism to prop up regulations which substantially restrict owners’ ability to use their property. The following section provides an overview of regulatory takings within the TDR context and, in particular, the two “book ends” of TDR/takings cases:Penn Central and Suitum.
1. Overview Of Takings in the TDR Context
a. General Takings Principles
Although a detailed discussion of the myriad issues, and at times conflicting rulings, underpinning the regulatory takings arena is well beyond the scope of this book, some background in the law of regulatory takings will be helpful in understanding the context in which a TDR regulation may be considered.
Under the Fifth Amendment of the Constitution, made applicable to the states under the Fourteenth Amendment, the government is prohibited from taking private property for public use without “just compensation,” and from depriving individuals of their private property without “due process of law.” The courts have long held that the “Takings” Clause may be applied to particularly restrictive land use regulations: “While property may be regulated to a certain extent, if the regulation goes too far, it would be recognized as a taking.”12
By the time the Supreme Court decided the Penn Central case, it had become clear that the courts were generally reluctant to rely upon any set formula for determining when a governmental regulation constitutes a taking, opting instead for “essentially ad hoc, factual inquiries.”13
Nevertheless, although many issues remain stubbornly unresolved, a number of general principles have emerged from the Supreme Court’s takings cases.
(i) Economically Beneficial Use. In those rare instances where a zoning regulation either on its face or as applied results in a denial of all “economically beneficial use” of an owner’s land, the regulation may constitute a taking of property without just compensation unless the restricted uses could have been prohibited under the applicable state’s nuisance or property law.
Thus, in Lucas v. South Carolina Coastal Council,14 the Supreme Court explained that to the extent “background principles” of nuisance and property law would otherwise have prohibited the same use of the property prohibited by the governmental regulation, such use was, in effect, always unlawful, and the governmental agency could properly make such prohibition explicit through the adoption of the regulation without paying just compensation to the landowner. The court noted that the inquiry as to whether state nuisance law would otherwise excuse a “total taking” would ordinarily entail an analysis of the degree of harm to public lands and resources (or adjacent private property) posed by the property owner’s proposed activities, the social value of the property owner’s activity, the suitability to the locality in question, and the relative ease with which the alleged harm could be avoided through measures taken by the property owner and the governmental agency.
Although the courts have not clearly defined when the deprivation of all economically beneficial use occurs, the Supreme Court has suggested that requiring land to be left substantially in its natural state (i.e., open space) would constitute such a deprivation. One of the most controversial uses of TDR, as reflected in the Suitum case discussed below, is to preserve a portion of a parcel’s value in the face of a land use determination which may otherwise deprive the owner of economically productive uses.
(ii) Partial Takings. Mere diminution in value of property as a result of a restrictive land use regulation generally will not be sufficient, alone, to constitute a taking. Although the courts have rarely upheld takings challenges where some economically viable use of a property has been preserved, there has been some recognition that “partial takings” may be actionable where the regulation has substantially interfered with “distinct investment-backed expectations” of the property owner.15 Among other factors considered by courts in making this determination are:16
- The severity and extensiveness of regulations at the time the property was purchased.
- The past regulatory history of the specific property.
- The degree of impairment of the uses of the property.
- The uses available before the enactment of the challenged regulation.
- The novelty or expectation of the governmental actions.
- Whether existing uses were permitted to continue.
- The ability to sell the property to others at a fair price.
- The ability to obtain a reasonable return or profit on one’s investment in the property.
- Whether any development rights were substituted for those impaired by the zoning regulation.
This last factor, recognized by the Court in Penn Central, is the embodiment of a TDR regulation and reflects the potentially important role TDR may play in the takings context.
(iii) Ripeness. Finally, because courts have been reluctant to become enmeshed in speculation over a regulation’s impact as applied to particular property, they have been fairly insistent that the property owner diligently pursue relief from the subject regulation, in the form of a “final decision” on the application of the regulation to the owner’s parcel and “just compensation” for any alleged taking.17 Since almost every agency defending against a takings claim can argue that a given decision is not completely “final,” the so-called “ripeness” of the agency’s decision is almost invariably an issue.18 Because of its potential restorative impact upon a landowner’s bundle of “rights”, prior to the Supreme Court’s decision in Suitum, a number of courts had viewed TDR as playing a significant role in the application of these ripeness principles.
b. Penn Central Decision.
Penn Central involved the application of New York City’s Landmarks Preservation Law to a proposal to construct an office building on top of the Grand Central Terminal. The Landmarks Preservation Law then in effect in New York City created a Landmarks Preservation Commission which was responsible for identifying properties and areas which were of such special historical or aesthetic value that they should be designated as a “landmark” and preserved from certain architectural or exterior alterations. In the event an owner of a “landmark” desired to make such alterations, the Preservation Law required that the approval of the Commission be obtained under one of several different administrative procedures, each of which vested the Commission with substantial discretion in determining whether the proposed alterations would unduly affect the aesthetic, historical, or architectural values of the structure. Additional procedures permitted the property owner to (i) ensure that designation of a site as a landmark did not cause economic hardship; and, importantly, (ii) transfer unused development rights from the landmark parcel to other parcels of land in the vicinity.
After the Commission designated the Grand Central Terminal as a “landmark”, the owner of the Terminal, Penn Central Transportation Co., entered into a long term lease of the air space above the Terminal, and applied to the Commission for permission to construct an office building within the air space. Two separate plans, one for a 55 story office building, the other for a 53 story office building, were both considered by the Commission and rejected on the grounds that the proposals would destroy significant architectural features.
Penn Central did not seek judicial review of the denial of either proposal, did not seek to be relieved of the burdens of the “landmark” designation under the economic hardship procedures, did not submit any other plans to the Commission for consideration, and did not attempt to avail itself of the TDR provisions. Instead, Penn Central sued the City, claiming, among other things, that the Preservation Law had taken its property—the air rights—without just compensation, and arbitrarily deprived Penn Central of its property without due process of law. After several appellate courts upheld the Preservation Law, the Supreme Court agreed to hear the case in order to determine whether a regulatory taking of Penn Central’s property had in fact occurred, and, if so, “whether the transferable development rights afforded appellants constitute ‘just compensation’ within the meaning of the Fifth Amendment.”
The Court held that no taking of property had occurred. After noting that the determination of whether a particular regulatory restriction affects a taking of property “depends largely upon the particular circumstances [in that] case”, the Court turned to the specific facts underlying the application of the Preservation Law to the Terminal.
The Court noted that Penn Central did not dispute a number of critical facts (each of which are often hotly contested in regulatory takings cases). Thus, Penn Central conceded that the restrictions imposed under the Preservation Law were an appropriate means of advancing legitimate state interests in preserving historically and architecturally significant structures. Penn Central also accepted that the Terminal itself, absent development of the air space, was capable of producing a reasonable return on Penn Central’s investment and that the transferable development rights afforded Penn Central were “valuable,” even if not as valuable as the rights to build within the air space.
Given these concessions, the Court’s analysis shifted away from the question as to whether the underlying regulation improperly deprived Penn Central of its economically beneficial use of the Terminal itself. Instead, the Court focused on the question of whether restrictions on building within the air space above the Terminal was, alone, a taking of Penn Central’s property. The Court rejected this claim, ruling: (1) the regulation is not rendered invalid by its failure to provide “just compensation” merely because it restricts an owner from exploiting individual property interests, such as air rights, to the same extent provided for under applicable zoning laws; (2) because restrictions on use of the air rights did not deprive Penn Central of a “reasonable return” on its investment such restrictions were not specifically compensable; (3) Penn Central’s failure to apply for the construction of a smaller structure within the air rights precluded a determination that it had been prohibited from any use of the air space; and (4) Penn Central’s ability to use its air rights had not been prohibited inasmuch as the City permitted the transfer of development to other parcels.
With respect to this last finding, the Court indicated that “while these rights may well not have constituted ‘just compensation’ if a ‘taking’ had occurred, the rights nevertheless undoubtedly mitigate whatever financial burdens the law has imposed on appellants and, for that reason, are to be taken into account in considering the impact of regulation.”
c. Impact of Penn Central on the Use of TDR
There is little question that Penn Central was a watershed decision not only in takings jurisprudence but also in establishing the legal context for using TDR to abate impacts from potentially invasive regulations. By declining Penn Central’s invitation to treat air rights as a “specifically compensable” segment of its ownership interest in the Terminal, while at the same time recognizing that any financial burden imposed by restrictions upon full development of the property may be “mitigated” by the transfer of development to other parcels “suitable” for similar development, the Court paved the way for the innovative application of TDR: governmental agencies could limit the density or intensity of development within the air rights above a parcel and use the transfer of such development rights to “soften the blow”, all without offending the proscriptions of the Fifth and Fourteenth Amendments.
Penn Central was significant in understanding the role of TDR for other reasons. The Court recognized that the application of TDR to avoid an unconstitutional taking was not unlimited. Thus, while Penn Central’s transferable development rights were clearly “valuable” and should be considered in determining what financial burdens were imposed by the underlying regulation, if those burdens, when considered along with other factors identified in the Court’s opinion, nevertheless resulted in a “taking” of Penn Central’s property, the TDR “may well not have constituted ‘just compensation’.” This distinction between TDR as mitigation and as just compensation is more than academic, and suggests some real limitations on the efficacy of TDR regulations, as discussed further below.
Another critical principal to emerge from Penn Central in shaping the legal import of TDR regulations centered around the Court’s hesitation to conclude that a taking had occurred before the full measure of the Preservation Law’s impact could be determined. Although the Court focused more upon Penn Central’s failure to seek approval from the Landmarks Commission of “a smaller structure,” it is clear that its failure to pursue a transfer of development rights also ignored “opportunities to further enhance not only the Terminal Site proper, but also other properties.” In effect, the Court was presaging the development of the rigorous “ripeness” requirements (described below) which create formidable barriers against property owner assertions that a regulation has actually deprived them of property without just compensation. Prior to Suitum, a number of courts applied this principle in the TDR context, requiring that a property owner pursue the transfer of development rights prior to pursuing a regulatory takings claim. As discussed below, Suitum effectively ends the use of TDR as a weapon in a governmental agency’s ripeness arsenal.
d. Evolution of Takings Principles After Penn Central.
In the years following Penn Central, a number of the core principles addressed by the Court have, indeed, evolved. For example, in First English Evangelical Lutheran Church v. County of Los Angeles,19 the Court held that “temporary takings” may be compensable—i.e., that in the event a regulation effectively prohibits all economically beneficial use of an owner’s property, the owner may recover damages for the period of time before a final determination is made that the regulation constitutes a taking of the property. The temporary takings doctrine “raises the stakes” for governmental agencies seeking to rely upon a TDR program to avoid regulatory takings claims. If the TDR program is not accepted as appropriate “mitigation” for the restrictions imposed upon the sending site owner, the agency may be liable for damages upon adoption of the regulation, even though adjudication of the impacts of the regulation could take years. Additionally, if no market for the sale of TDR is in effect at the time the restrictions of the regulation become fully operative, it is possible that in certain circumstances, a temporary taking may be deemed to occur.
In Lucas, the Court clarified that a land use regulation which deprives owners of all economically beneficial use of their land may constitute a taking of property without compensation, regardless of the meritorious nature of the governmental interests asserted in defense of the regulation. Several courts have since applied this so-called “categorical” or “total takings” rule in situations where the practical effect of a land use regulation is to deny a property owner from developing its property. By blurring the distinction between the loss of development rights and the loss of economic value, these decisions have opened the door to challenges to TDR programs on the grounds that while TDR may restore economic value to the property owner, they do not restore the “use” of the restricted parcel itself.
Finally, in a series of rulings beginning with the Court’s decisions in Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City,20 and MacDonald, Sommer & Frates v. County of Yolo21, and culminating in Lucas and Suitum, the Court first established and then contracted various procedural barriers to regulatory takings claims. The Court held that in order for a takings claim to be “ripe” for adjudication in Federal Court, the property owner must obtain a “final decision” from local land use authorities and, if dissatisfied with the development rights denied or limitations imposed by such final decision, seek compensation from the state before seeking the redress of federal courts. Because TDR regulations provide mechanisms for property owners to restore value potentially eroded by the adoption of regulatory restrictions, the question arises as to whether they may serve as a procedural buffer to regulatory takings challenges.
As it happens, each of the principles identified above—the use of TDR as mitigation and just compensation, the relationship between the loss of development rights and the loss of economic value, the situations in which a “temporary taking” may occur, and the necessity of pursuing TDR as a procedural prerequisite to rendering a legal challenge “ripe”—were all at play in Suitum.
e. Suitum.
The Suitum case is the most recent, and significant, challenge to the use of TDR. As discussed below, not only did the Supreme Court address the application of TDR regulations to the “ripeness” of a regulatory takings challenge, but at least three justices questioned the ongoing efficacy of TDR as a means to mitigate for a regulation’s adverse economic impact.
The law challenged in the Suitum case, the 1987 Regional Plan adopted by the Tahoe Regional Planning Agency (TRPA), is described in detail in Part III of this book, and has been the target of numerous lawsuits from frustrated property owners claiming that the effect of the TRPA Plan is to eliminate or materially impair the beneficial use of their property.22 The principal goal of the Plan is to help promote the preservation of open space and natural resources by prohibiting or limiting development in environmentally sensitive areas while providing for the transfer of density to areas more suitable for development. This objective is accomplished through an evaluation system pursuant to which the TRPA assigns a numerical score to residential lots within its jurisdiction (the Lake Tahoe Basin of Nevada and California) depending upon the impact development of the parcel will have on various environmental criteria established by the TRPA.23 Owners of parcels with “scores” above a certain level are permitted to seek building permits, while those with scores below that level may proceed with development only if their scores are re-evaluated, or the target level is lowered.
The TRPA Plan also places a ceiling on the total amount of residential development that may occur, controls the pace of development by limiting the number of building permits that may be issued each year, and, in order to address drainage issues, limits the amount of impervious coverage resulting from permitted development. Each of these objectives is implemented through a complex series of restrictions requiring eligible property owners to possess or obtain a “residential development right” and allocations of residential and “land coverage” density. The TRPA Plan provides for the transfer of the same development and allocation rights from parcels which are not eligible for development.
The TRPA Plan is consistent with many TDR regulations in that the “market” for purchasing TDRs, and the “value” to be restored to the sending site owner, is purely a product of the regulatory restrictions imposed upon potential receiving sites. However, unlike most of the regulatory schemes described elsewhere in this book, in which some development rights are preserved on the sending parcel, the TRPA Plan prohibits any development within certain parcels which have been identified as particularly environmentally sensitive.24 Thus, parcels within a Stream Environment Zone (SEZ) are prohibited from virtually any permanent land disturbance activities. To restore some of the value impaired by this development ban, the TRPA Plan provides owners of SEZ property with certain “bonus” allocations of transferable residential density, and permits the transfer of a percentage of “land coverage” which may be used to enhance the developability of qualifying receiving sites.
As several of her peers had previously, Mrs. Suitum challenged the TRPA’s use of TDR as a means to compensate her for the lost use of her residential property. Before filing her takings claim, Mrs. Suitum applied to the TRPA for relief from the restrictions imposed under the TRPA Plan, seeking both the reevaluation of her eligibility criteria and the repeal of the SEZ designation for her property. The TRPA rejected both claims, and directed Mrs. Suitum to pursue the transfer of her development rights and allocations as provided in the TRPA Plan.
Rather than attempting to sell her development rights and allocations, Mrs. Suitum sued in Federal Court, alleging that the TRPA Plan deprived her of all economically viable use of her property and constituted a taking without just compensation. Both the District Court and the Court of Appeals dismissed her complaint on ripeness grounds, finding that Mrs. Suitum’s failure to pursue the transfer of the TDR prohibited a meaningful determination of whether the TRPA regulations had deprived her of the economically beneficial use of her property. In so holding, the lower courts identified TDR as a “valuable” property right which could be used to offset the impacts of the underlying regulatory scheme. The Supreme Court reversed the two lower courts, holding that the Court’s earlier “ripeness” decisions were only intended to apply to a governmental agency’s underlying decision about how a property owner’s land may be used, not the circumstances in which TDR may be transferred. Because the TRPA had already rejected Mrs. Suitum’s request for relief from the underlying land use restrictions incorporated in the TRPA Plan, and because “the only decision left to the agency is the approval of a particular transfer of TDRs to make certain that a given buyer may lawfully use them” and not the transferability of the TDRs themselves, the “final decision” requirement had been satisfied and Mrs. Suitum was free to pursue her takings claim.
f. Further Implications of Suitum on the Use of TDR.
In overturning the lower court’s decisions in Suitum, the Supreme Court specifically confined its ruling to the ripeness and final decision principles noted above: “While the pleadings raise issues about the significance of the TDRs both to the claim that a taking has occurred and to the constitutional requirement of just compensation, we have no occasion to decide, and we do not decide, whether or not these TDRs may be considered in the issue of whether there has been a taking in this case, as opposed to the issue of whether just compensation has been afforded for such a taking. The sole question here is whether the claim is ripe for adjudication, even though Suitum has not attempted to sell the development rights she has or is eligible to receive.”
In a concurring opinion authored by Justice Scalia, three members of the Court went a good deal further, concluding that TDRs should never be considered in determining whether a taking has occurred, but only in determining whether the land owner has been justly compensated for a taking, According to the three concurring Justices, to the extent Penn Central suggested that TDRs could generally serve as mitigation for restrictive impacts of land use regulation “it would deserve to be overruled.”
The reluctance of the majority of the Court to address the broader application of TDRs in the regulatory context when coupled with the concurring Justices sharply worded opinion that “the relevance of TDRs is limited to the compensation side of the takings analysis,” leaves unresolved the potential future role of TDRs in offsetting the impact of restrictive regulations. The two principal regulatory implications of TDR - as mitigation and compensation - are discussed further below.
2. The Use of TDR as Mitigation for Restrictive Regulations
To a great degree, the current use of TDR relies upon the concept that property owners otherwise restricted in their use of property may restore the value of their interests, if not the use itself, by transferring all or some portion of the restricted rights to certain third parties not similarly restricted. Unquestionably, this concept of the restorative value of TDR draws much of its strength from the Penn Central Court’s acknowledgment that TDR may be “valuable.” However, the particular facts of the Penn Central case may have masked potential limits on the use of TDR to offset the impacts of overly restrictive land use regulations.
The Supreme Court, in Penn Central and a number of subsequent cases, has identified at least three important factors which should be considered in determining when a land use regulation may go “so far” in restricting the use of property that it constitutes a taking. These factors are: (1) the character of the underlying governmental action; (2) the regulation’s interference with the investment-backed expectations of the regulated property owner; and (3) the economic impact of the regulation as applied to the property in question.25 Because Penn Central had conceded that the New York Landmark Preservation Law was an appropriate exercise of New York City’s police powers (factor 1), and permitted a “reasonable return” on Penn Central’s investment in the Terminal (factor 2), the Court’s consideration of the TDR provisions focused upon the third factor: the economic impact of the regulation itself. Thus, the Court held that TDRS “undoubtedly mitigate whatever financial burdens” were imposed as a result of the restrictions on Penn Central’s ability to use the air space above its Terminal, and “must be taken into account in considering the impact of regulation.” This concept has been echoed in a number of other decisions in which the use of TDR has been upheld as a viable means to mitigate the impacts of burdensome regulatory restrictions.26
The Suitum case, however, calls into question the extent to which TDR may be used as mitigation, particularly when all development and productive use of the underlying property is prohibited and the only value to be derived by the landowner is through the transfer of its development rights. This issue goes to the very heart of what TDRs really are. Are they, as the TRPA argued, part of the “bundle” of property interests owned by Mrs. Suitum and, therefore, an economically beneficial use of her property?27 Or are they nothing more than “disembodied abstractions of man’s ingenuity” to be severed from the sending site and sent into a void of contingent market conditions and future governmental approvals until attached, if at all, to the receiving site,28 as contended by Mrs. Suitum and her supporters. These questions turn on when a regulation is deemed to deny “economically beneficial use,” as well as the other two principal factors cited in Penn Central and its progeny: the character of the underlying governmental action and the extent to which such action interferes with the landowner’s investment-backed expectations.
a. Economically Beneficial Use.
With respect to a regulation’s impact upon “economically beneficial use,” the Supreme Court’s previous decisions in the taking arena, including Penn Central, appear to suggest that the “use” of property means something more than the right to develop it.29 These decisions, and others, tend to evaluate “beneficial use” in economic terms: to what extent does the challenged regulation strip a property of its “value.”30 In this regard, several courts have defined the “use” of property for takings purposes to be any attribute which makes the owner’s interest “desirable” to sell to third parties for similar use.31
This broader interpretation of “economically-beneficial” use is at odds with the more narrow concept favored by Justice Scalia and reflected in his concurring opinion in Suitum. According to Justice Scalia, the notion of a property owner’s “economically-beneficial use” is limited exclusively to the actual use or development of the owner’s property itself, not TDRs. “TDRs, of course, have nothing to do with the use or development of the land to which they are (by regulatory decree) “attached”. The right to use and develop one’s own land is quite distinct from the right to confer upon someone else an increased power to use and develop his land. The latter is valuable, to be sure, but it is a new right conferred upon the landowner in exchange for the taking, rather than a reduction of the taking. In essence, the TDR permits the landowner whose right to use and develop his property has been restricted or extinguished to extract money from others. Just as a cash payment from the government would not relate to whether the regulation “goes too far” (ie., restricts use of land so severely as to constitute a taking), but rather to whether there has been adequate compensation for the taking; and just a chit or coupon from the government, redeemable by and hence marketable to third parties, would relate not to the question of taking but to the question of compensation; so also the marketable TDR, a peculiar type of chit which enables a third party not to get cash from the government but to use his land in ways the government would otherwise not permit, relates not to taking but to compensation.”
At this point, it is not clear whether Justice Scalia’s view of TDR will prevail. If it does, TDR’s role in the regulatory takings context would be confined to determining to what extent (if at all) they may be used to justly compensate a property owner for the impacts of overly restrictive land use controls. However, until a majority of the Justices adopt Justice Scalia’s formulation of “economically beneficial use”, there is some reason to believe that TDRs may continue to serve as “mitigation” for the purpose of determining whether a land use regulation has “gone too far” and constitutes a taking of property.
To the extent that it is the market for the sale of “desirable” development rights which determines whether a deprivation of use has occurred, an intriguing paradigm is established for evaluating the ongoing efficacy of TDR. To the extent a market for the purchase and sale of TDRs exists, or may be reasonably expected to develop, a landowner’s right to sell TDRs may constitute sufficient “use” to be considered as mitigation for the adverse economic impacts of the subject regulation.32 By the same token, if no viable market for the transfer of development rights exist, TDR may have little or no value to the sending site owner and, as a result, may have no value in mitigating the impact of the subject regulation.33
The value of TDRs is a product of a number of factors, including: (i) the geographic area to which development rights may be transferred; (ii) the number of receiving sites eligible to use the TDRs; (iii) the complexity and timing of the procedures required to consummate a transfer; (iv) the extent to which regulatory restrictions on the receiving sites generate demand for TDRs; (v) the level of discretion retained by the governmental agency in approving individual transfers of TDRs; and (vi) whether other transfers of TDRs have occurred within the subject jurisdiction or other communities with comparable TDR regulations.34
b. Character of Governmental Action
Even if a viable market for TDR exists, the mere presence of such market may not fully address the two other factors to be weighed in assessing a regulation’s impact upon the sending site. Clearly, a development right which takes its value only upon its transfer to a third party is not the same as a right that may be exploited by the property owners themselves. This distinction may be an important factor in gauging how a court assesses both the nature of the government’s action in regulating the use of a parcel and how such action impacts the parcel owner’s “investment-backed expectations.”
For example, the Suitum case raises the issue of whether a governmental agency (the TRPA) may force landowners to sell their property interest (the TDR) as a means to preserve “beneficial use” of their property interests. It is one thing to permit property owners to sell TDR in order to enhance the value of their property (for example, where density limitations allow a reasonable economic return but allow the sending site owner to sell TDR in lieu of expanding its density). It is another thing entirely to require property owners to sell TDR in order to recover any value for their property. In the latter case, the governmental action begins to resemble an eminent domain or condemnation proceeding and could be considered sufficiently confiscatory that a court could construe it as a taking which requires just compensation.35
c. Investment-Backed Expectations
Suitum also raises the question of what reasonable investment- backed expectations individuals have if they purchase a parcel, particularly a residential parcel, at a time when neither the restrictive regulation nor the TDR program exists. Assuming the effect of the regulation is not only to deny the use contemplated by the owner upon purchase (including, in the case of a residential lot, the right to build and occupy a home), but also to preclude other income-generating uses such as leasing or operating a business on such property, it is not clear that the substitution of a one-time sale of TDR would be compatible with the owner’s reasonable investment-backed expectations. Indeed, it was the prospect that a governmental agency could use TDR as a means to avoid paying just compensation for the loss of the physical use of the property (as opposed to the economic use) which seemed to particularly alarm Justice Scalia and the other concurring Justices.
d. Observations About TDR As Mitigation
Obviously, there is a continuum of governmental action, reasonable expectations, and economic impact which will vary from jurisdiction to jurisdiction and from parcel to parcel. Consistent with the “ad hoc” nature of the takings inquiry, and in light of the uncertainty surrounding the future role of TDR in the takings context in light of Suitum, it is difficult to make black and white distinctions about the ongoing use of TDR as a means to address economic dislocations arising from land use regulations. However, two general observations are warranted:
First, where, as in Suitum, the underlying regulation restricts all development and productive use of the sending parcel, there will be little margin for error in setting up a TDR program intended to serve as the sole means to compensate the landowner for such restrictions. To the extent no market exists for the sale of TDRs it may be difficult to defend the TDR program as mitigation for economic loss. Indeed, even if a market eventually develops, inordinate delays in a property owner’s ability to sell its TDRs and obtain some economic return on its investment could, conceivably, lead to a temporary takings challenge.
Second, where, as in Penn Central, the underlying regulation restricts the density or intensity of development—i.e., constrains the owners’ ability to build within their air space—but does not prohibit outright potentially productive uses of the property, TDR programs may continue to function as “mitigation” for the impairment of economic value occasioned by such restrictions. In such cases, a TDR program adopted concurrently with the underlying restrictive regulation may properly be viewed as part of the regulation itself and therefore as an inextricable factor in determining the regulation’s impact.36 Additionally, the preservation of at least some alternative use of the property (other than the sale of TDR) is likely to undermine claims that the character of the governmental regulation is equivalent to a forced sale of property interests or unduly interferes with the owner’s investment-backed expectations.
3. TDR As Compensation For A Taking
As discussed elsewhere in this book, one of the principal purposes for adopting TDR regulations is to compensate an owner for the economic impact of associated regulatory restrictions. So long as the underlying land use controls do not go “so far” that they constitute a taking of the owner’s property, the governmental agency need pay no compensation and the value derived from the TDR “compensation” would be considered “bonus” income. Indeed, it was TDR’s role as compensation for land use restrictions which do not rise to the level of a taking that Justice Scalia referred to as “commendable” in his concurring opinion.
Of course, one cannot always know when an underlying land use regulation will be deemed to go “too far” and constitute a taking. As a result, a governmental agency may adopt a TDR regulation with the objective of not merely providing “bonus” compensation to a landowner but by providing all or a portion of the “just compensation” required under the Takings Clause.
In Penn Central and other cases, the Supreme Court has made quite clear that the question of whether the government has provided “just compensation” is a separate inquiry from the determination of whether the regulation constitutes a taking in the first place.37 As noted above, this distinction was quite apparent in Penn Central, where the Court strongly suggested that New York’s “far from ideal” TDR program, while creating “valuable” rights which must be taken into account in considering the economic impact of the Preservation Law, “may well not have constituted ‘just compensation’.” This holding is clearly well rooted in the Court’s insistence that once a taking is deemed to have occurred, the Fifth Amendment does not allow simply an approximate compensation, but rather “a full and perfect equivalent for the property taken.”38
The requirement that compensation be a “full and perfect equivalent” for the loss of use caused by the underlying regulation poses potentially serious obstacles to any reliance upon a TDR program as the exclusive means to compensate for a regulatory taking. If the value afforded a landowner under a TDR program is deemed sufficiently inadequate that a taking has been found, it is hard to see how such value could meet the more exacting standard of “full and perfect equivalent” for the property taken. Additionally, in some jurisdictions, state law prohibits the government from compensating an individual whose property it has taken with anything other than cash.39 In these states, TDRs would not qualify to be considered “just compensation” until they were actually converted to money.
Moreover, even if the governmental agency purchases TDR directly from the sending site owner, it would not necessarily insulate itself from a takings claim:
“Rather, the buyout would likely implicate the issue of just compensation. Thus, an owner who believed that the government bought out his property at an unfairly low price might choose to bring an action for just compensation. The fact that he already received some money from the government in return for his property does not establish as a matter of law that economically viable uses for his property remain or that a taking did not occur.”40
This principle appears to be equally applicable in situations where the purchaser of the subject property is a private party.41
The advent of “temporary takings” makes reliance upon TDR as “just compensation” even more problematic. Because the landowner is entitled to compensation for the period of time between the occurrence of the taking—when the invasive regulation goes into effect—and the time compensation is actually paid or the objectionable restrictions are removed, even if the TDR were sold for the full compensable value of the property interest taken, the regulating agency may still be liable for losses incurred by the landowner as a result of the regulation prior to the actual sale of the TDRs.
For all of the reasons noted above, a TDR program should not be relied upon as a reliable mechanism to compensate a landowner if the regulation enacted by the agency is likely to be so restrictive as to constitute a taking of the owner’s property. If some market for the sale of TDRs has materialized or is likely to do so, or if the government is obligated to purchase the TDRs, there is little doubt that the “fair market value” of the TDRs may be considered at least partial remuneration towards the just compensation required if a taking has occurred. In this respect, TDR may still have substantial value in reducing the governmental agency’s exposure in adopting overly restrictive regulations: to the extent the free market compensates the landowner for the governmental restrictions imposed, that much less compensation would be owed by the agency in the event a taking of property was, in fact, deemed to occur.
E. Taxation Of TDR
One of the issues raised in the Suitum case is whether TDR should be considered one of the fractional interests in the amalgam of rights comprising the ownership of real property. In the takings context, this question arises in conjunction with the inquiry as to whether, and to what extent, TDRs may be considered part of a landowner’s beneficial use of its property. However, the question of whether TDRs should be considered a property interest, and if so what kind, is also an issue in determining the extent to which the transfer of TDRs may be subject to taxation.
As one might expect, taxing authorities have not been bashful in attempting to assess the sending or receiving parcel owners (and in some cases both) upon consummation of a transfer of TDRs. The principal cases addressing the imposition of income tax and real property/ad valorem tax, are discussed below.
1. Income Tax
Very few reported decisions have addressed the question of whether the sending site owner is subject to federal or state income tax upon the disposition of TDRs. In Warfield v. Commissioner of Internal Revenue,42 landowners sold the development rights of their agricultural land to the State of Maryland for a cash payment. The U.S. Tax Court held that these monies were capital gains from the sale of farmland and were not exempt from the alternative minimum tax. In reaching its decision, the Court rejected the argument that the sale of development rights was a “one time deal” with the State of Maryland for the benefit of the general public and that, therefore, this benefit should “militate against categorization of plaintiff’s gain as a tax preference.”
This decision would seem to be generally consistent with federal tax law, which would subject a property owner to capital gain liability upon transfer of property interests. Under this approach, the amount of gain, and the sending site owner’s tax liability, would depend upon a number of factors, including the sending site owner’s tax “basis” in the rights conveyed and the valuation of the TDRs upon transfer.
With respect to the valuation of TDRs, presumably in instances where a transfer has actually occurred in an arm’s length transaction, the principal, if not exclusive, factor in determining the gain of the sending site owner would be the amount of compensation actually received. However, in at least one case, a Tax Court was required to determine how to value a transfer of TDRs. Lorenc v. Bernards Township,43 involves a local zoning plan pursuant to which development rights could be transferred to designated upland property within appropriate zones. The expert for the local agency concluded that the value of the TDRs should be based upon the value of the recipient parcel: the value would be determined by what another landowner would be willing to pay for the TDRs and this price would be based mainly upon the value of the additional development rights to be received. The Court concluded that this valuation method was “logical and convincing” and upheld the valuation.
2. Real Property and Ad Valorem Taxation
In those states which impose an ad valorem tax upon the disposition of real property or other value-enhancing activities (such as additional development/construction), the question arises as to whether the recipient site owner may be subject to reassessment and additional taxation upon purchase of TDRs. In some states, this issue is addressed directly, through statutory provisions which either define TDRs as real property interests subject to reassessment or specifically exempt the transfer of TDRs therefrom. In most jurisdictions however, the relationship between TDR and the State’s real property tax system is not specifically addressed.
Several courts have considered the real property assessment impacts of a TDR transfer. In Wilkinson v. St. Jude Harbors, Inc.,44 a Florida Court of Appeal concluded that TDRs were not real property subject to ad valorem taxation. Under the applicable Florida statute, real property was defined as “land, building, fixtures, and all other improvements to land.” Based upon this definition, the Court reasoned that the Legislature intended to tax only property having a physical, tangible existence which can be reasonably valued as such. Because TDRs lacked such qualities they should not be classified as real property, but rather a personal property interest whose value is “significantly dependent upon how much they enhance the value of the property to which they are, or are to be, transferred.”
A different result was reached by a California Court of Appeal in Mitsui Fudosan v. County of Los Angeles.45 In that case, the Court was again asked to determine whether TDRs constituted real property under a statute somewhat similar to that considered in Wilkinson. The applicable California statute defined real property as “the possession of, claim to, ownership of, or right to the possession of land.” The Court reasoned that although the word “land” was not specifically defined under the California Statute “no purpose would be served by attempting to force relatively recent three-dimensional land use concepts such as TDRs into one of the cubicles reserved for traditional interests in real property.” Noting that TDRs “are appropriately viewed as one of the fractional interests in the complex bundle of rights arising from the ownership of land,” the Court concluded that the transfer of TDRs from the sending site to the recipient site for in excess of $8,000,000 bore “all the hallmarks of a transfer of real property,” including the execution of a Purchase and Sale Agreement, the establishment of an escrow, the issuance of title reports, and the recordation of covenants restricting development of the sending parcel. On this basis, the Court held that TDRs constituted a taxable real property interest and that the purchase of the TDRs reflected a sufficient “change in ownership” as to trigger reassessment of the recipient parcel. The Court also concluded that the assessor was entitled to rely upon the purchase price paid by the recipient landowner for purposes of determining the increased value of the parcel.
F. Documenting TDR Transactions
As reflected in the discussion above, the transfer of development rights between sending and receiving sites (or between the sending site and the local governmental agency) is subject to a variety of economic, legal, regulatory, and logistical constraints which may not be present in a typical transfer of real or personal property. Thus, while the implementation of a TDR transaction may take on a number of the attributes present in a real property purchase and sale contract,46 the transaction should also address the various issues peculiar to the TDR to be conveyed. Some of these issues are discussed further below.
1. Due Diligence
Prior to entering into an agreement for the transfer of TDR, both the sending and recipient site owners will need to conduct a reasonable “due diligence” inquiry to determine if the other party to the transaction is capable of consummating the transfer. With respect to the recipient site owner, this would typically mean an analysis of the rights the sending site owner has to transfer the TDRs—including its title to the underlying real property, the quantity and quality of development rights which may be transferred under the applicable TDR regulation, and the nature and timing of governmental agency approval of the transfer. Conversely, the sending site owner should seek to confirm that the recipient site is authorized under the applicable TDR regulations to use the subject TDRs, an inquiry which, among other things, would also entail a review of title and the underlying zoning applicable to the recipient site.
2. Conditions to the Purchase and Sale of TDR
Even after the parties to a TDR transaction have completed their due diligence review, depending upon the level of governmental agency review associated with the TDR transfer, substantial uncertainty as to the parties’ respective ability to consummate the transfer may still exist. This potential for further governmental approval may well place the parties to the transfer in the position of having to execute some form of purchase and sale agreement prior to agency approval of the transfer: for example, it would not be unusual for the governmental agency to require that the parties to a TDR transfer submit some form of written contract to the regulating agency prior to approval of the transfer.47 Clearly, under these circumstances, any resulting contract should contain appropriate contingencies which allow either party to back out of the deal in the event the governmental agency either rejects the transfer outright, or conditions it in a manner which changes the fundamental “business terms”. It would also be appropriate to include in the contract some form of reasonable cooperation covenants which obligate each party to use reasonable efforts to obtain any necessary governmental agency approvals.
3. Recordation of Covenants or Easements Against the Sending Site
In order to ensure that a true “transfer” of development rights from the sending site to the recipient site will actually occur and that the sending site owner will not, after conclusion of the transfer, later be able to reassert the development rights so transferred, the governmental agency implementing the TDR program will typically require that some form of covenant or easement (“TDR Covenant”) be recorded against the sending site reflecting the future limitations on development arising from the TDR transfer. The recordation of this type of TDR Covenant is likely to be a condition to the regulating agency’s recognition of the recipient site owner’s rights to use the TDRs. For this reason, the recipient site owner should add provisions to the transaction documents which make payment of the purchase price (or at least a substantial portion of it) contingent upon the sending site owner’s execution of a TDR Covenant and either the recordation of such document or the delivery thereof to the governmental agency or the recipient site owner. Conversely, the sending site owner should ensure that once the TDR covenant has been recorded against its property, it is entitled to retain the purchase price for the TDRs regardless of whether the recipient site owner ultimately is able to use the TDRs in the manner anticipated.
NOTES
1. Even without land use controls, property owners’ ability to use their land indiscriminately would not truly be unrestricted since various common law concepts such as nuisance and trespass would likely impose some constraints. As a practical matter, however, the limited, ad hoc restrictions imposed under nuisance and trespass laws could not, in any real way, give rise to TDR as a viable concept.
2. Peter W. Salsich, Jr. Land Use Regulation, Shepard’s/McGraw Hill,1991. (“Salisich”)
3. See Md. Ann. Code Art. 28, § 8-101; Tenn. Code Ann. § 13-7-101.
4. 9 Del. C. § 2653. See also, N.C. Gen. Stat. § 136- 66.11 (1995) (enabling statute requires local governing board to amend zoning ordinance to address transfer of severable development rights).
5. New York Village Law §7-701; N.C. Gen. Stat. § 136- 66.11 (1995).
6. Pennsylvania Municipalities Planning Code, P.L. 1329, No. 170, 1988 Section 619.1.
7. Mark White, Jd, AICP, Freilich, Leitner & Carlisle, letter of April 11, 1997.
8. See Standard City Planning Enabling Act, U.S. Department of Commerce (1928), reproduced as ALI, a Model Land Development Code APPB Tent. Draft No. 1 (1968); Standard State Zoning Enabling Act, U.S. Department of Commerce (1922); ALI, a Model Land Code (1975).
9. Salsich, supra, at Section 2.03.
10. See, e.g., California Government Code Sections 65350, 65860.
11. 435 U.S. 920 (1978).
12. Pennsylvania Coal Co. v. Mahon, 26 U.S. 393 (1922).
13. Penn Central, 438 U.S. at 124.
14. 505 U.S. 1003 (1992).
15. See Lucas, supra, 505 U.S. 1019 at fn. 8, and Penn Central, 438 U.S. at 124.
16. See Berger, “Happy Birthday Constitution, the Supreme Court Establishes New Ground Rules for Land Use Planning,” 20 Urban Lawyer (1988); Rehard v. Lee County, 968 F.2d 1131 (11th Cir. 1992).
17. Williamson County Regional Planning Commission v. Hamilton Bank, 473 U.S. 172, 186 (1985); MacDonald, Sommer & Frates v. County of Yolo, 477 U.S. 340, 348 (1986).
18. Carpenter v. Tahoe Regional Planning Agency, 804 F. Supp. 1316, 1322 (D. Nev. 1992).
19. 482 U.S. 304 (1987).
20. 473 U.S. 172 (1985).
21. 477 U.S. 340 (1986).
22. See, e.g., Stephans v. Tahoe Reg. Plan. Agency, 697 F. Supp. 1149 (D. Nev. 1988); Carpenter, supra, 804 F. Supp. at 1316.
23. Land is categorized for erosion, hazard, runoff potential and the presence of a stream environment zone; land in the most sensitive capability classification cannot be covered by impervious surfaces with some exceptions such as recreational improvements or site access. For a detailed description, see Chapter XII.
24. For other programs which prohibit or come close to prohibiting development on sending sites, see the case studies for Blacksburg, Virginia; Monterey County, California; Long Island Pine Barrens, New York; San Mateo County, California; New York City, New York; and San Francisco, California.
25. See also, Loretto v. Tele Promp Ter Manhattan CATV Corp., 458 U.S. 419 (1982); Lucas v. North Carolina Coastal Council, 505 U.S. 1003 (1992).
26. See, e.g., Aptos Seascape Corp., 138 Cal. App. 3d 484, 496 (1982) (zoning regulation which provides for TDR “may preclude a finding that an unconstitutional taking has occurred”); Glisson v. Alachua County, 558 So. 2d 1030 (1990) (where regulations provided a mechanism for individual landowners to obtain a variance or TDR, no taking deemed to occur).
27. Numerous courts have referred to the various fractional interests comprising property ownership as a “bundle of rights.” See Loretto, supra, 458 U.S. at 436; United States v. General Motors Corporation, 323 U.S. 373, 378 (1945) (Among various rights comprising this “bundle” acknowledged by the courts are the rights of possession (United States v. Pee Wee Coal Co., 341 U.S. 114, 117 (1951); exclusion (Dolan v. City of Tigard, 114 S. Ct. 2309 (1994; and devise (Hodel v. Irving, 481 U.S. 704, 716 (1987)).
28. See Fred F. French Investing Co. v. City of New York, 39 N.Y. 2d 587, 597-98, cert. denied, 429 U.S. 990 (1976).
29. See Lucas, supra, 505 U.S. at 1019, fn. 8; see, e.g., Dolan, supra, 129 L. Ed. at 321 (right to exclude is “one of the most essential sticks in the bundle of rights that are commonly characterized as property.”)
30. Lucas, supra, 505 U.S. at 1007, 1016, 1017; Penn Central, supra, 438 U.S. at 136, 137.
31. See Park Avenue Tower Associates v. City of New York, 746 F.2d 135, 139 (2d Cir. 1984), cert. denied 470 U.S. 1087 (1985); Del Monte Dunes at Monterey Ltd. v. Monterey, 95 F.3d 1422 (9th Cir. 1996).
32. Indeed, in some circumstances where physical or economic obstacles may substantially impair or eliminate the developability of a parcel, the “highest and best use” of a sending site may be as mitigation for the development needs of the receiving site. This circumstance arises, for example, in situations where the topography of a site or its remoteness from existing infrastructure may have the dual effect of discouraging development and promoting the presence of natural habitats, including endangered or sensitive species. The most likely purchaser of such a site may well be someone who owns property which is more suitable to development but which, if developed, may also result in the loss of natural habitats or sensitive species. Such receiving site owners may well seek to mitigate the impacts of their development by purchasing and conserving the sending sites. Some TDR programs require common ownership of both the sending and receiving site. Perhaps because of this common ownership requirement, some of these programs have experienced no transfers to date, including Chanceford, Pennsylvania, Clearwater, Florida and Teton County, Wyoming. However, in other communities, transfers have occurred despite the requirement that both sending and receiving sites be in common ownership, such as Alachua County, Florida, Lower Chanceford, Pennsylvania, Smithtown, New York and Springfield, Pennsylvania. In addition, transfers between parcels under common ownership have also occurred in some communities in which common ownership is not a requirement, including Caroline County, Maryland and Perinton, New York.
33. See Deltona Corp. v. United States, No. 370-76, United States Court of Claims, Slip Opinion (1980). Even the Penn Central case seemed to suggest that an important factor in acknowledging the mitigation value of the TDR was the fact that at least two other parcels in the vicinity of the Terminal were “suitable” recipients, and hence potential purchasers, of the density transfers held by Penn Central.
34. See, e.g., Penn Central, supra, 438 U.S. at 151-152 (dissenting opinion); Deltona, supra.
35. For an example of a case in which the character of the governmental agency’s regulation was viewed to constitute a “physical taking” of its property interests, see Loretto, supra, 458 U.S. 419 (1981).
36. See Concrete Pipe & Prods, Of Cal. Inc. v. Construction Laborers Trust, 508 U.S. 602, 644 (1993) (a claimant’s parcel of property cannot 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.) Dolan, supra, 114 S. Ct. at 2316 (rejecting contention that takings analysis should consider only the negative and none of the positive economic impacts of a regulation.)
37. See also, Loretto, supra, 458 U.S. at 436.
38. See Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893); United States v. Lynah, 188 U.S. 445 (1903). See also, Penn Central, supra, 438 U.S. at p. 150 (dissenting opinion).
39. See Corrigan v. City of Scottsdale, 149 Ariz. 538 (1986) (holding that TDR are not just compensation under Arizona Constitution, which requires compensation in money).
40. Del Monte Dunes, supra, 95 F.3d at 1432 (1996).
41. See Lucas, supra, 505 U.S. at 1018-120, fn, 8 (implicitly rejecting a dissenter’s view that the fact Lucas could have sold his property indicated no taking occurred); Formanek v. United States, 26 Cl. Ct. 332, 340 (1992) (offers accepted under duress for less than the value of the property prior to government action do not defeat a claim of taking without just compensation).
42. U.S. Tax Court 1985, 84 T.C. 179.
43. N.J. Tax Court (1982), 5 N.J. Tax 39.
44. 570 So. 2d 1332 (Fla. Ct. App. 1990).
45. 219 Cal. App. 3d525 (Cal. Ct. App. 1990).
46. See, e.g., Mitsui Fudosan v. County of Los Angeles, 219 Cal. App. 3d525 (Cal. Ct. App. 1990).
47. See, e.g., Suitum, supra, 80 F.2d57.
Don Berger
Partner
Finance Department
Education:
JD, Univ. of California, Los Angeles, 1982
BA, Univ. of California, Los Angeles, 1979
Experience:
Mr. Don Berger joined the Los Angeles office of Latham & Watkins in September 2003 from Morrison & Foerster, where he served as the co-chair of the firm's Real Estate Practice Group. Mr. Berger's practice primarily involves the representation of clients in the financing, acquisition, development, entitlement, construction and leasing of real property, with a particular emphasis on the representation of investment banks, real estate funds and other institutional clients. His experience in the real estate finance and capital markets area includes the origination and restructuring of numerous syndicated, mezzanine and securitized loans, and REIT, loan portfolio, capital commitments and hotel/resort financings; domestic and international secondary loan transactions involving performing and non-performing real property secured loan portfolios; initiating and supervising major real estate loan conduit programs; preferred equity and hybrid debt/equity transactions; and development and construction financing of major commercial, residential and industrial properties. Mr. Berger's transactional practice has also included the assemblage and disposition of master planned communities and mixed use projects; acquisition, leasing and disposition of corporate headquarters and major industrial and co-generation facilities; and the formation, management and dissolution of limited liability companies, joint ventures, and partnerships, including fund and institutional investment in joint development projects.
Mr. Berger also counsels property owners, developers, financial institutions and industrial companies regarding development and land use issues. He has worked extensively with local, state and federal governmental agencies in connection with the siting, entitlement and permitting of major real estate development and industrial projects. Among other areas in which Mr. Berger has developed substantial expertise is the redevelopment and re-use of large agriculture and industrial properties; the California Environmental Quality Act (CEQA); vesting of entitlements, including the establishment and transfer of development rights; and endangered species issues.
