Ensuring “Just Compensation” for Takings of Property with Valuable Potential Future Uses

Famed property scholar Richard Epstein recently wrote an interesting post on an important Just Compensation Clause case that the Supreme Court is now considering whether to take:

[W]hen government [condemns private property] … it must pay just compensation to the landowner for the value of the property taken. That guarantee will, however, surely be eviscerated if the state is free to set compensation below actual value. To avert that evasion, the United States Supreme Court held in 1893 that in condemnation cases, “the compensation must be a full and perfect equivalent for the property taken.” In an 1878 decision, the Court had previously elaborated on this standard as follows: “The inquiry in such cases must be what is the property worth in the market, viewed not merely with reference to the uses to which it is at the time applied, but with reference to the uses to which it is plainly adapted; that is to say, what is it worth from its availability for valuable uses.”

The point here is simple enough. The value of property in all circumstances depends on the future uses to which it can be put. It is those potential uses that determine its value. To measure property values in ways that neglect that future development is to allow the government to take property at bargain prices….

Unfortunately, this lesson has been lost on the New York courts in River Center, LLC v. Dormitory Authority of the State of New York (DASNY) (2010). A petition for certiorari seeking to revisit the restrictive interpretation of the just compensation requirement in that case was filed by Harvard Law Professor Laurence Tribe. To show the broad nature of the appeal, that petition was supported by separate amicus briefs, one signed by former Attorney General Edwin Meese and a second by myself. This is an issue on which liberal, conservative and libertarian all see eye to eye.

The River Center dispute arose out of the condemnation of a valuable one-block site located in New York City several blocks south of Lincoln Center on New York City’s bustling West Side for a new dormitory for John Jay College… As Tribe wrote in his petition: “The developer at the time of the condemnation had invested years of work and many millions of dollars above the secured debt. By its legal rulings the New York Court has permitted all of this value and all of this investment in a rising market to be taken without compensation. . .”

The technique used to work this governmental sleight of hand was simple. The New York state courts treated this prime real estate site in active development as though it were “vacant land” on the ground that the arduous development progress would not come “to fruition in the near future….”

The New York courts dismissed as “speculative” all of the developer’s work in securing permits, preparing the site, obtaining interim financing and developing a viable marketing plan. That argument might make sense in those cases where there was no market indication of present value. But the real estate market is active in New York City and projects like this are always attractive to private investors who see risky, but large, returns down the road.

One of the few issues on which takings scholars across the political spectrum mostly agree on is that the Just Compensation Clause of the Fifth Amendment requires the government to at least pay market value for condemned property. There is disagreement over whether it should have to pay more than market value to compensate owners for loss of “subjective value” they attach to the property above its market price. But there is a broad consensus that the state should at least pay the market value. That’s why Richard Epstein, Laurence Tribe, and Edwin Meese all agree on this case.

And the market value of any property surely includes expected future uses, including uses that may not be 100% likely to occur. To be sure, the lower the likelihood of the future use, the less the possibility of it happening will add to the market value of the land in question. But that is no justification for excluding potential future uses from the market value calculation entirely.

If New York officials are allowed to get away with such shenanigans, they will be able to strategically time condemnations in order to lowball owners with potentially valuable future projects that have not yet come to fruition.