A New, New Takings Analysis Blooms in New York

Going out on a shaking legal limb, the New York Court of Appeals on June 23 refused to overturn the historic landmark designation of New York City's Grand Central Terminal. The court decreed in Penn Central Transportation Co. v. City of New York¹ that the designation, which includes a scheme for transferring the development rights over the terminal to adjacent parcels, does not represent a deprivation of property in violation of the due process clause. Moreover, the court held — without clear support — that the publicly-created component in the value of private property should be disregarded in determining whether an owner can obtain a constitutionally-guaranteed return on the property. Heartening as the result may be for landmark preservation advocates, the decision's promise may quickly wither when taken out of the unique development of takings law in New York and the unique facts in the Grand Central controversy.

Lower Court Decisions

Grand Central Terminal opened in 1913 and was designated by the city as a historic landmark in 1967. Its owner, the Penn Central Transportation Company, which wished to improve a precarious financial position in the late 1960s, leased the terminal's air rights to a firm that planned to construct a 50-story office building over the mostly-unused waiting room of the terminal while preserving the main concourse and the famous Beaux Arts south facade. The New York City Landmarks Preservation Commission denied both this application and a subsequent one that proposed to demolish the south facade. The purpose of these proposals was to take full advantage of the current zoning regulations under which the present terminal site is developed to only 12 percent of its allowable floor space capacity. Penn Central was to receive rent of $1 million per year during construction of the building and about $3 million per year upon completion, compared to about $1 million in annual rents that Penn Central has been receiving from concessionaires who would be removed by the proposed office building.

Although it did not seek judicial review of the administrative denials of its proposal, Penn Central filed suit in 1969 to declare the landmark preservation provisions (known as the Landmarks Law) of the New York City Administrative Code² invalid as a taking of private property. After a trial, which focused on the available economic return to Penn Central from its railroad and real estate operations in and around the terminal, the trial court declared the operation of the Landmarks Law an unconstitutional taking without compensation, having deemed impracticable a proposal allowing Penn Central to shift to nearby parcels the development rights over the terminal.³ The Appellate Division reversed in a 3-2 opinion,⁴ finding that Penn Central had misapplied its railroad operating costs to its terminal operations and thus inflated its expense ledger. Using the zoning test of whether Penn Central had shown that the landmark designation had deprived it of all reasonable beneficial uses of the property, the court held that Penn Central did not meet its burden, especially in view of its failure to prove why the development rights could not have been profitably transferred to nearby sites.

Plastic Private Property

The Court of Appeals, per Chief Judge Breitel, affirmed the Appellate Division's decision using an intriguing and perhaps defensible analysis of property rights that may not bear fruit outside New York. Read narrowly,the opinion simply upheld the lower court's holding that plaintiffs had not met their burden of showing deprivation under the Landmarks Law. The more interesting point is how Judge Breitel arrived at this conclusion.

[7 ELR 10167]

The court's elastic treatment of private property seems to betray a predisposition to preserve Grand Central. Judge Breitel both contracted and expanded the private property attributes of Grand Central in order to reach his result. He stated that all private commercial property is entitled to a reasonable return but that this concept is elusive because of the circular notion that economic return is computed according to the property's value and that, conversely, value is based on the return. Of primary significance is that society has created much of the value of the terminal through operating and capital subsidies to railroads, commuter traffic into and through the terminal, and real estate tax exemptions. Without citing precedent, the court held that this vague component of "social" value must be subtracted from the terminal's value in computing the return on plaintiffs' investment. As courts have long done in the nuisance context, the Court of Appeals redefined private property so as not to include the portion subject to regulation. Plaintiffs' burden of showing no reasonable return is thus more difficult; they have a smaller amount of property on which they can receive income and therefore their absolute amount of income need not be as high in order to show a reasonable return.

Not content to contract the base of privately-created value, the court turned around and expanded the locus of the terminal to include adjacent property owned by Penn Central. This tactic was necessary in order to validate the notion that the development rights over the terminal could profitably be transferred, thereby compensating Penn Central for the burden of preservation. The court found that several nearby parcels owned by the railroad, including the Biltmore and Roosevelt hotels, could receive the development rights. Common ownership was the key that distinguished this case from an earlier decision, Fred F. French Investing Co. v. City of New York,⁵ in which the court struck down a transfer scheme because no identifiable receiving parcels existed.

Yet the court did not stop there. Although contracting the private property component for purposes of cost valuation, the court enlarged it for purposes of income. Viewing Grand Central as a loss leader, the court found that income from Penn Central's nearby real estate must realistically be imputed to the terminal because those parcels would lose value without the magnet of the terminal. This imputed income thus increased the constructive rate of return on Grand Central's private investment component.

Precedential Support and Parallel Developments

Rather than issuing an opinion bare of precedential support, the court could easily have drawn on analogous Supreme Court and state opinions to buttress its apparently novel takings theories. The Supreme Court has held in United States v. Rands⁶ that riparian values derived from a parcel's proximity to a stream are not property for purposes of condemnation because of the government's overriding navigation servitude. Similarly, United States v. Fuller⁷ held that the special value attached to private lands because of their use in conjunction with Taylor Grazing Act leases cannot be included in a condemnation award because the government as condemnor need not compensate for the value it has created.Although these eminent domain cases differ in that respect from the due process challenge in Penn Central, they nevertheless provide support for the notion that socially-imputed value may be deducted from property in determining the reasonableness of police power regulation.

Likewise, the New York court could have pointed to Supreme Court cases, such as Goldblatt v. Town of Hempstead⁸ and City of Pittsburgh v. Alco Parking Co.,⁹ for the proposition that regulation may nearly extinguish property value or even tax a business out of existence without becoming an unconstitutional taking or deprivation.

Several recent cases in state courts also provide theoretical support for the holding in Penn Central. In the far-reaching decision of HFH, Inc. v. Superior Court,¹⁰ the California Supreme Court held that a downzoning of property from commercial to residential that reduced its value by 80 percent did not constitute a taking. The court noted that part of the land's commercial value came from its proximity to residential areas and that plaintiff had no vested property right in the zoning classification. Significantly, the court held that the owners were not deprived of all reasonable beneficial uses of the property. This residuum, therefore, allowed the down-zoning to be sustained.

Historic district regulation survived in the Connecticut decision of Figarsky v. Historic District Commission.¹¹ There the court held that the Commission's refusal to allow demolition of a house in a Norwich historic district did not rise to the level of a taking. Although the case involved a historic district,¹² a circumstance from which Judge Breitel distinguished Grand Central as a single landmark, it nonetheless reveals that courts are becoming increasingly critical of claims that historic preservation regulation deprives property of all its value.

A more interesting — and perhaps more subtle — development has occurred in Pennsylvania. Traditionally, that state has lined up on the conservative judicial side in takings battles.¹³ But in a recent decision, Commonwealth v. Barnes & Tucker Co.,¹⁴ the Pennsylvania Supreme Court appears to have backed away from slavish adherence to Justice Holmes' diminution of [7 ELR 10168] value theorem in Pennsylvania Coal Co. v. Mahon.¹⁵ In upholding an order that Barnes & Tucker must prevent discharge of untreated acid mine water, the court ignored its own prior decision and Pennsylvania Coal, relying instead on an earlier Supreme Court opinion in Mugler v. Kansas¹⁶ which held that prohibiting uses of property deemed injurious to the public welfare can never be a taking.

Application of the New Takings Analysis

The novel, though arguably supportable, takings theory advanced by Judge Breitel can be viewed in several lights. On the one hand, the court's extraction of societal rights from private property may merely be a quid pro quo for condemnation proceedings in which the government generally must pay market value for the benefit a parcel receives from its location,¹⁷ such as proximity to more valuable property. That is, the government need not pay for police power regulation that reduces value that society has conferred on property through government services, subsidies, or zoning. On the other hand, future courts might properly limit Penn Central to its unique facts. It is unlikely that any other parcel in the country is identical to the Grand Central Terminal, with the historic landmark designation, the railroad subsidies, the transferable development rights scheme, and the proximity to land in common ownership. Absence of any one of these factors would be enough to distinguish other parcels.

No court has yet embraced the New York court's semantic dichotomy between eminent domain takings and due process deprivations that was first developed in Fred French. Penn Central reinforces this line of analysis but may inhibit other courts from adopting it by overextending the allowable range of noncompensable police power regulation of private property.

1. 7 ELR 20579 (N.Y. Ct. App. June 23, 1977). Briefs in this case are summarized at ELR 65480.

2. N.Y. City Admin. Code ch. 8-A.

3. Penn Central Transp. Co. v. City of New York, N.Y.L.J., Jan. 23, 1975, at 16, col. 3 (N.Y. Sup. Ct. Jan. 21, 1975).

4. Penn Central Transp. Co. v. City of New York, 50 App. Div. 2d 265, 377 N.Y.S.2d 20, 6 ELR 20251 (1975).

5. 39 N.Y.2d 587, 350 N.E.2d 281, 385 N.Y.S.2d 5, 6 ELR 20810 (1976), discussed in Comment, Losing the Battle … New York Court of Appeals Overturns Development Rights Transfer Scheme, 6 ELR 10276 (Dec. 1976).

6. 389 U.S. 121 (1967).

7. 409 U.S. 488 (1973).

8. 369 U.S. 590 (1962).

9. 417 U.S. 369 (1974).

10. 15 Cal. 3d 508, 542 P.2d 237, 125 Cal. Rptr. 375, 6 ELR 20062 (1975).

11. __ Conn. __, __ A.2d __, 6 ELR 20654 (1976).

12. See Maher v. City of New Orleans, 516 F.2d 1051, 5 ELR 20524 (5th Cir. 1975).

13. See National Land & Investment Co. v. Kohn, 419 Pa. 504, 215 A.2d 597 (1965).

14. __ Pa. __, 371 A.2d 461, 7 ELR 20394 (1977), appeal docketed, 46 U.S.L.W. 3013 (U.S. July 5, 1977) (No. 77-14).

15. 260 U.S. 393, 416 (1922): "The general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking."

16. 123 U.S. 623 (1887).

17. See United States v. Fuller, 409 U.S. 488, 494 (1973) (Powell, J., dissenting).