Endangered Species Act Conference

1
Endangered Species Act Conference

• Bennett Undue Economic Hardship
• Florida Rock Vs Stable Framework to Analyze
• Penn Centrals Particularly Significant Factors
• William W. Wade, Ph. D.
• Senior Vice President
• CLE Conference
• November 18-19, 1999
• San Francisco CA.

810 Walker Street Columbia TN 38401 ph.
931-490-0060 www.foster-tn.com
2
Bennetts Economic Policy Questions

• What will the courts measure to analyze economic
  impacts?
• When does an economic impact become undue
  economic hardship?
• How will the courts evaluate needless economic
  dislocation?

3
Pinnacle of Economic Clarity for Takings - 1928

• The master finds that no practical use can be
  made of the land in question subject to the
  change in zoning because . . . there would not
  be adequate return on the amount of any
  investment for the development of the property.
• Nectow v. City of Cambridge, 277 U. S. 72 L.ed.
  842, 844 (1928)
• Health, safety, convenience and general
  welfare . . . will not be promoted by . . . the
  ordinance.
• The invasion of the property of plaintiff . .
  . was serious and highly injurious.
• Nectow at 845.

4
Overview of Presentation

• 1. Economic Failings of Penn Central
• Penn Centrals Economic Problems - Off on the
  Wrong Foot.
• Brennan v. Rehnquist.
• 2. Florida Rock V Restores Economic Clarity
• Economic Impact.
• Reasonable Investment-Backed Expectations.
• Character of Government Action.
• Takings Computation.
• Takings Fraction.
• Takings Fraction Illustrations.

5
Overview of Presentation (2)

• 3. Economic Methods and Thresholds
• Where are we?
• What criteria to establish compensable taking?
• Takings Economics Decision rules.
• A view of takings balance.
• 4. Do you know why Parcel-as-a-Whole is the Law?
• Judicial Failings Brennan, Michelman Breitel.
• Claimants Failings.

6
Florida Rock Vs Stable Framework to
AnalyzePenn Centrals Particularly Significant
Factors

• 1. Economic Failings of Penn Central

7
Penn Centrals Economic Problems - Off on the
Wrong Foot

• Takings guidance originates with Penn Central
  (1978).
• Three particularly significant factors govern
  payment
• Economic impact on the claimant
• Interference with distinct investment-backed
  expectations
• Character of government regulation.
• Two hinge on economic theory, not legal doctrine!
• Economic impacts - measurable.
• Interference - defined by theory accepted
  practice.
• Decision at odds with economic theory and
  practice.

8
Penn Central - Brennan v. Rehnquist

• Bottom Line Economic Conflict
• Award compensation because Landmark Law precluded
  earning future returns on new permitted
  investment?
• OR -
• Deny compensation because existing terminal
  business earning a reasonable return on past
  investments?
• Decision Parcel-as-a-whole ruling eliminated
  incremental importance of future lease income.
• Bundle, not Sticks.
• No precedent for this cavalier ruling.
• See slides at end if interested in Brennans
  errors.

9
Penn Central - Brennan v. Rehnquist (2)

• Brennan looked backward and saw terminal earning
  a reasonable return.
• No evidence submitted by claimants to the
  contrary.
• Unrebutted assumption by Brennan.
• Terminal value remaining matters.
• Rehnquist looked forward and saw foreclosed lease
  income important to Penn Central finances.
• Recognized that majority had no notion of
  reasonable returns or not. (FN 13)
• Defined loss consistent with economic doctrine.
• Argued value taken matters.

10
Value Remaining or Value Taken?

• Penn Central Remaining Value economic
  (non)theory confounded takings law.
• Regulation a taking only if owner denied
  economically viable use of the whole
  property.
• Mis-focus on value remaining rather than the loss
  confounded evaluation of economic efficiency.
• Efficiency governs too little/too much
  regulation.
• Investors not compensated for change in firm
  value.
• Value taken - essential economic element to
  balance with public gain to achieve efficiency.

11
Florida Rock Vs Stable Framework to Analyze
Penn Centrals Particularly Significant Factors

• 1. Economic Failings of Penn Central
• 2. Florida Rock V Restores Economic Clarity

12
Florida Rock V Restores Economic Clarity

• Court must consider Penn Central factors. (P.2.)
• A stable framework is beginning to crystallize .
  . . how to analyze takings law. (p. 3.)
• A partial regulatory taking may be found where
  a regulation results in a deprivation of a
  substantial part but not essentially all of the
  economic use or value of the property. (p. 14.)

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Florida Rock V Restores Economic Clarity
Economic Impact (1)

• Five Considerations
• 1. Diminution in Value
• Value before Permit Denial 10,500 per acre
• Value after Permit Denial 2,822 per acre
• Magnitude of reduction 73
• Court does not rely on the magnitude of this
  diminution . . . alone . . . to determine
  severity of economic impact. (p. 20.)

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Florida Rock V Restores Economic Clarity
Economic Impact (2)

• 2. Reciprocity of advantage
• Mere diminution occurs when the property owner
  has received the benefits of a challenged
  regulation, such that an average reciprocity of
  advantage results from it. (p. 21.)
• A partial taking occurs when a regulation
  singles out a few property owners to bear burdens
  while benefits are spread widely across the
  community. (p. 21.)

15
Florida Rock V Restores Economic Clarity
Economic Impact (3)

• 3. Alternative Permitted Activities
• Are any other activities . . . still permitted
  . . . which are economically realistic? (p.21.)
• Only post regulation use of Florida Rocks land
  is a sale into a speculators market.

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Florida Rock V Restores Economic Clarity
Economic Impact (4)

• 4. Recoupment of Investment
• In determining the severity of economic impact,
  the owners opportunity to recoup its investment
  or better . . . cannot be ignored. (p. 15 and
  22.)
• Plaintiffs expert concluded that economic basis
  adjusted for inflation was 6,000 per acre,
  597,000.
• Resale as a speculative investment would recover
  barely half of its inflation adjusted investment.
• 5. Severe Economic Impact
• Yes Diminished by 73 not offset by any
  reciprocity of advantage unable to recoup its
  investment.

17
Florida Rock V Restores Economic Clarity
Reasonable Investment-Backed Expectations

• A reasonable investment-backed expectation must
  be more than a unilateral expectation or an
  abstract need. (p. 23, citing Ruckelhaus v.
  Monsanto)
• Bought 1560 acres in 1972 for 2.96 million.
• Conducted feasibility study in 1974 and commenced
  preliminary mining operations.
• Removed overburden and built a road.
• Demonstrated expectation of Florida Rock was
  mining limestone.

18
Florida Rock V Restores Economic Clarity
Reasonable Investment-Backed Expectations

• Emphasized the importance of obtaining a
  reasonable return on the owners investment,
  citing back to Penn Central. (p. 24.)
• Determined that Florida Rock had not been able
  to recoup its investment.
• Determined that the entire 98 acre parcel at
  issue had been burdened by the regulation. (p.
  24)
• Accordingly, . . . 100 of the primary use of
  the parcel was affected, which amounts to a
  very large interference with investment-backed
  expectations. (p. 24.)

19
Florida Rock V Restores Economic Clarity
Character of Government Action

• No dispute that preservation of wetlands is a a
  legitimate state interest. (p. 25.)
• The final prong of the Penn Central test argues
  for a taking i. e., Florida Rocks bundle of
  property rights were severely diminished to
  benefit the public. (p. 27.)

20
Florida Rock V Restores Economic Clarity Taking
Computation

• Fact-specific inquiry shows that
• Florida Rock lost 73 of the value of the
  relevant parcel
• The loss was not offset by reciprocity of
  advantage
• Re-sale of the parcel recoups barely half of the
  inflation adjusted investment
• No reasonable return is possible.
• Plaintiff has been made the unwilling custodian
  of the wetlands on his property for the benefit
  of the public . . ., at plaintiffs risk and
  expense. (p.29.)

21
Takings Fraction

• A permit denial that reduces property value begs
  the measurement and calculation of the percentage
  of value lost in the relevant property.
• Justice Stevens reconfirmed the Penn Central
  confusion and imprinted the Keystone Comparison
  error
• Our test . . .requires us to compare the value
  that has been taken from the property with the
  value that remains one of the critical
  questions is . . . to define the unit of property
  whose value is to furnish the denominator of the
  fraction. (Keystone, 480 U.S. at 497.)
• Value remaining should not be an issue!

22
Takings Fraction (2)

• Evaluation of economic viability begins with
  tabulating numerator items and denominator items.
  
• Numerator before and after permit denial houses
  before and after revenues from services provided
  by the relevant parcel.
• Denominator before and after houses investments
  in the relevant parcel.
• So, revenues go to numerator investments go to
  denominator.
• Value taken matters. How much are revenues
  reduced?

23
Takings Fraction (3)

• The takings fraction is the ratio of the
  revenues to the investments in the single parcel
  or aggregated parcels.
• Stand alone parcel compares revenues before and
  after denial to investment.
• Parcel as a whole compares revenues from whole
  parcel to investment in whole parcel.
• Calculation of takings fraction per se reveals
  the change in economic viability associated with
  permit denial.
• When financial calculations are properly done.

24
Takings Fraction (4)

• Economic viability is measured by the return on
  investment before and after permit denial.
• Economic viability is tautologically equivalent
  to a competitive, risk adjusted rate of return.
• If before permit denial the owners project made
  good economic sense, and after permit denial,
  earnings are too low to attract and reward
  capital, economic viability has been
  extinguished.
• Literally, present value (Net Operating Revenues
  - Investments) gt 0 is the test.

25
Takings Fraction (5)

• Parcel as a whole analysis reveals whether the
  foreclosed project is essential to the economic
  viability of the entire property.
• This is the same as asking whether the owner can
  do without the incremental income and still
  earn sufficient income to justify the entire
  investment.
• While economists can calculate the result, the
  question is not an economic question.
• The takings question hinges on the balance of the
  two economic tests with the character of
  government regulation.

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Foster Associates, Inc.
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Foster Associates, Inc.
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Foster Associates, Inc.
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Foster Associates, Inc.
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Foster Associates, Inc.
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Foster Associates, Inc.
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Florida Rock Vs Stable Framework to Analyze
Penn Centrals Particularly Significant Factors

• 1. Economic Failings of Penn Central
• 2. Florida Rock V Restores Economic Clarity
• 3. Economic Methods and Thresholds

33
Regulatory Takings - Where Are We?

• 1. Lucas Standard - Categorical Taking if all
  economic value taken. (Lucas, 1992)
• 2. Florida Rock V Standard - Partial Taking if
  regulation results in a deprivation of a
  substantial part but not essentially all of the
  economic use or value of the property.

34
Florida Rock V - Losses Matter

• Loss need not be 100 percent to justify
  compensation.
• Fifth Amendment prohibits the uncompensated
  taking of private property without reference to
  the owner's remaining property interests.
• Florida Rock V conformed the law to the Fifth
  Amendment and economic practice
• Dropped Penn Central's value remaining
  (non)theory of economics.

35
Criteria to Measure Economic Impacts

• Appropriate measure of loss
• The opportunity foreclosed by unforeseen
  regulation that prohibits the planned economic
  use of the assets.
• 1. Establish timing and amounts of invested
  capital, and property interests to demonstrate
  legitimate, reasonable investment-backed
  expectation.
• 2. Document planned activities proscribed by
  regulation.
• Show ability of the property and business to
  supply activities/uses intended
• Show market conditions that create foreclosed
  opportunity.

36
Criteria to Measure Economic Impacts

• 3. Establish time period of loss a specific
  temporary period or in perpetuity.
• 4. Estimate reduced profits caused by regulation.
• 5. Estimate tangible asset values reduced by the
  regulatory constraint
• Determine portion of property retaining any
  economic use, if any.

37
Criteria to Measure Economic Impacts

• 6. Estimate intangible asset values, including
  business goodwill, reduced by regulatory
  constraint
• How severe is economic loss as measured by change
  in net present value of ongoing and foreclosed
  enterprise?
• Does economic viability of entire enterprise
  remain, although at a lower level?

38
Takings Economic Decision Rules

• Economic value for asset in use net present
  value (NPV) of project cash flows.
• Diminution in NPV is proper measure of loss.
• If regulation reduces the NPV, but it remains
  positive, this is an "economic impact."
• When NPV swings from positive to negative,
  investment expectations frustrated.
• Difference between the calculated NPV
  before/after regulatory prohibition measures
  loss/damages.

39
A View of Takings Balance

• Foreclosed project, not the firm, is the relevant
  property, the basis for investor expectations.
• Sticks, not bundles!
• Incremental economic loss, not value remaining!
• Remaining value of firm has no bearing on
  economic impact of proscribed incremental
  project.
• The value remaining should be a moot point.
• Keystone Comparison test is meaningless.
• Loss per se measured and compared with benefits
  from regulation to achieve economic efficiency.

40
Florida Rock Vs Stable Framework to Analyze
Penn Centrals Particularly Significant Factors

• 1. Economic Failings of Penn Central
• 2. Florida Rock V Restores Economic Clarity
• 3. Economic Methods and Thresholds
• 4. Origin of Parcel as a Whole Error

41
Brennan, Michelman Breitel (1)

• Where did parcel-as-a-whole come from?
• The takings fraction dispute was born of two
  errors.
• 1. Double Misread of Michelmans 1967 HLR
  article!
• Misapplied Speculator Exception.
• Misconstrued fraction of value destroyed test
• Once having found the denominator, the thing
  affected by the imposition, the test asks what
  fraction has been destroyed.
• Test should not ask how much value has been
  destroyed, but whether . . . the regulation can
  . . . be seen to have reduced some sharply
  crystallized, investment-backed expectation.
• Michelman created the language found in Penn
  Central and applied it to the discrete twigs of
  the bundle.
• Brennan misused the words.

42
Brennan, Michelman Breitel (2)

• . . . focus on the the particular thing
  injured
• (p. 1192)
• fraction of value destroyed test . . .
  proceeds by first . . . isolating some
  thing owned . . . . (p. 1232)
• . . . Land speculator . . . unable to show . . .
  any specific plans . . . still has a package of
  possibilities, . . . though lessened. . . .
• (p.1234)

• parcel as a whole.
• parcel as a whole.
• Penn Central building development was planned and
  had no other possibilities.

43
Brennan, Michelman Breitel (3)

• 2. NY Chief Judge Breitels economic lunacy in
  the underlying decision confused the Brennan
  majority.
• Breitels agglomerated income from the vicinity
  of Grand Central to Penn Centrals owners,
  failing to recognize that prior investments laid
  claim to these revenues.
• Breitel doctrine of legal-economic gobbelty-gook
• Property may be capable of producing a
  reasonable return . . . even if it can never
  operate at a profit.
• City Tax Block in Penn Central delimited
  vicinity, but still makes no commonsense as
  denominator.
• Sunk costs are sunk!

44
Penn Central - Claimants Failings (1)

• Loss of intangible asset values not well
  presented by claimants and not recognized by the
  majority.
• No evidence of health of rails business.
• Importance of building lease income v. rails
  income to IRR not reported.
• No evidence of investment expectations w/ w/o
  building.
• Effect on shareholders/owners not reported.
• NPV of cash flows w/ w/o building not reported.

45
Penn Central - Claimants Failings (2)

• Accounting testimony looked backward.
• Couldnt afford cost of upkeep on the building.
• Claimed operating loss.
• Didnt emphasize lost income.
• Court disregarded testimony.
• Failed to impute rental values . . . .
• Improperly attributed . . . operating expenses
  and taxes . . . .
• Court ruled terminal earned a reasonable
  return.
• Brennans economic failings began with submitted
  evidence -- accounting data, without financial
  analysis.