CIENEGA GARDENS, DEL AMO GARDENS, LAS LOMAS GARDENS, BLOSSOM HILL APARTMENTS, and SKYLINE VIEW GARDENS v. UNITED STATES; CHANCELLOR MANOR, GATEWAY INVESTORS, LTD., and OAK GROVE TOWERS ASSOCIATES v. UNITED STATES
2006-5051, 2006-5052
United States Court of Appeals for the Federal Circuit
September 25, 2007
Kenneth M. Dintzer, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant in 2006-5051. With him on the brief were Peter D. Keisler,
Michael E. Malamut, New England Legal Foundation, of Boston, Massachusetts, for amicus curiae in 2006-5051, New England Legal Foundation.
William L. Roberts, Faegre & Benson LLP, of Minneapolis, Minnesota, argued for plaintiffs-appellees in 2006-5052. With him on the brief were Michael F Cockson and Martin S Chester. Also on the brief were Jeff H. Eckland, Mark J. Blando, and David S. Laidig, Eckland & Blando LLP, of Minneapolis, Minnesota. Of counsel was Jerry W. Snider, Faegre & Benson LLP, of Minneapolis, Minnesota.
Kenneth M. Dintzer, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant in 2006-5052. With him on the brief were Peter D. Keisler, Assistant Attorney General, Brian M. Simkin, Assistant Director, David A. Harrington, Kenneth D. Woodrow, and Timothy P. McIlmail, Trial Attorneys.
Appealed from: United States Court of Federal Claims
Judge Charles F. Lettow
Opinion for the court filed by Circuit Judge DYK. Dissenting opinion filed by Circuit Judge NEWMAN.
DYK, Circuit Judge.
These cases involve takings claims resulting from the enactment of the Emergency Low Income Housing Preservation Act of 1987,
BACKGROUND
These consolidated cases return to us after remands in Cienega Gardens v. United States, 331 F.3d 1319, 1324 (Fed. Cir. 2003) (“Cienega VIII“) and Chancellor Manor v. United States, 331 F.3d 891, 893 (Fed. Cir. 2003). The pertinent history may be briefly described.
I
In 1934 Congress, concerned with the declining national stock of affordable
First, the programs provided below-market-rate mortgages. Under section 221(d)(3), the owners of low-income housing projects entered into mortgage contracts with private lenders at the market rate. Once the project was completed, the mortgages were purchased by the Federal National Mortgage Association (“FNMA“). The FNMA, using government subsidies, then reduced the original rate, charging below-market rates to the owners. See
Second, to encourage lending both sections 221(d)(3) and 236 authorized the FHA to insure mortgages in order to protect lenders against default. See
Finally, the owners were entitled to a “Builder‘s and Sponsor‘s Profit and Risk Allowance” (“BSPRA“), which was a payment from HUD to the owner toward the owner‘s down payment. The BSPRA was calculated as ten percent of the “actual cost” of construction.
In addition to the direct incentives provided under sections 221(d)(3) and 236, entities who entered into these programs received substantial tax benefits. At that time, the tax laws permitted accelerated depreciation for real estate projects over the real economic life of the property, allowing the general and limited partners to take large income tax deductions in the earlier years of the investment. While these tax benefits were not particular to section 221(d)(3) and section 236 properties, the benefits were particularly significant under these programs because the properties were highly leveraged so that the tax benefits the partners received were substantial in comparison to their limited investment.
The restrictions of the regulatory agreements were effective for as long as HUD insured the mortgage on the property, i.e., until the mortgage was paid off. The exercise of the prepayment right under the mortgage agreement with the mortgage lender would thus have the effect of terminating the regulatory agreement. For example, the Chancellor Manor regulatory agreement stated that “[i]n consideration of the endorsement for insurance . . . Owners agree [to the restrictions set forth in the
The owners of these projects were typically limited partnerships. This allowed the owners to “pass through” the entity‘s tax losses primarily to the limited partners. Along with the general partners, the limited partners also received a pro rata share of the annual six percent dividend. The plaintiffs here consist of eight partnerships: Cienega Gardens, Del Amo Gardens, Las Lomas Gardens, Blossom Hill Apartments, Skyline View Gardens, Chancellor Manor, Oak Grove Towers Associates, and Gateway Investors, Ltd. The prepayment restrictions on their mortgages were set to expire between July 15, 1991, and June 6, 1995.
II
In the 1980s, Congress became concerned that as prepayment dates arrived the limited partnerships would prepay the mortgages; that the restrictions imposed during the mortgage period would expire; and that the housing stock represented by these projects would be withdrawn from the low-income market and converted to traditional apartment units, rented at market rates. Congress reacted with a carrot-and-stick approach, first enacting ELIHPA in 1988 (a temporary measure), and then superseding this statute by LIHPRHA in 1990 (initially planned as a permanent measure). In enacting these statutes, Congress sought to “balance the public policy need to preserve housing for low income families with the perceived contractual rights of the owners.”
LIHPRHA was enacted on November 28, 1990, and is the most pertinent legislation. Under LIHPRHA, Congress restricted the rights of owners by requiring them as a condition of exiting the program to offer their property for sale to owners that would preserve the rent restrictions and barring the owners from exiting the programs (by effectively barring prepayment of the mortgages) while the properties were offered for sale. See
Congress also provided a carrot to those owners willing to stay in the program. Owners could elect to receive financial incentives by signing a “use agreement” with HUD.
III
None of the plaintiffs here elected to pursue the sale option, and only four of the plaintiffs entered into use agreements after ELIHPA expired but during the period that LIHPRHA was in effect.5 All of the plaintiff owners brought suit in the Court of Federal Claims claiming, inter alia, that the enactment of ELIHPA and LIHPRHA, by restricting the owners’ right to prepay and exit the program, constituted a taking and a breach of contract. The plaintiffs filed two separate actions—one brought in part by the Cienega Gardens plaintiffs6 and one brought by the Chancellor Manor plaintiffs.7 See
On March 28, 1996, after the Cienega Gardens lawsuit was filed but before the Chancellor Manor lawsuit was filed, and after the four plaintiffs had signed use agreements, Congress enacted the Housing Opportunity Program Extension Act of 1996,
Thus, as of April 29, 1996, the statute provided that the plaintiffs that had not entered into use agreements with HUD were free to prepay their mortgages and exit the program, although HOPE provided that owners that prepaid could not raise rents for an additional two months after prepayment. See
In the course of the two litigations we established that the government, by limiting the prepayment rights, did not incur liability to the owners for breach of contract because HUD was not a party to the mortgage agreements. Chancellor Manor, 331 F.3d at 901; Cienega IV, 194 F.3d at 1234, 1246. This left only the takings claims to be resolved. After an initial decision by the Court of Federal Claims in the Cienega Gardens litigation and a further remand by this court,9 the Court of Federal Claims selected four model plaintiffs (Sherman Park Apartments, Independence Park Apartments, Pico Plaza Apartments, and St. Andrews Gardens Apartments) in the Cienega Gardens litigation. See Cienega Gardens v. United States, 38 Fed. Cl. 64 (1997) (“Cienega III“). The court entered judgment in favor of the government with respect to all plaintiffs. Cienega Gardens v. United States, No. 94-1C (Fed. Cl. Jan. 8, 2002). It did not render a detailed opinion but essentially followed its decision in
On appeal, we reversed, based on a partial record and limited arguments made by the government, finding that the four model plaintiffs had suffered a compensable temporary regulatory taking and remanding with respect to the others. See Cienega Gardens v. United States, 331 F.3d 1319, 1324 (Fed. Cir. 2003) (“Cienega VIII“). Cienega VIII decided several issues that are equally applicable to all parties in these cases.
First, regarding the character of the government action, we held that to constitute a compensable taking the statute need not “appropriate the owners’ titles or dispossess them in any way,” id. at 1339, nor does the restriction have to be permanent. Id.
Third, we rejected the government‘s argument that the plaintiffs reasonably should have expected that the prepayment right would be eliminated because “plaintiffs knew that they were entering a sensitive and highly regulated field that was subject to continuing congressional interest and attention.” Id. at 1350. We explained that “the fact that the industry is regulated [is not] dispositive” and that “all regulatory changes are [not] reasonably foreseeable.” Id. We concluded that the owners could not reasonably have expected the change in the regulatory approach. Id.
In other respects, the holdings of Cienega VIII were unique to the four model plaintiffs and based on the particular arguments that the government made. Thus, for example, the trial court assumed that the appropriate approach was to consider the taking on a year-to-year basis by comparing lost income under the regulations to a market rate of return. Id. at 1343 n.38. We stated that “the government neither argues error in the trial court‘s adoption of the plaintiffs’ expert‘s calculation of rate of return value, nor error in the trial court‘s repeated rejection of the government‘s data.” Id. at 1343 n.40. Based on this assumption, we calculated that the model plaintiffs earned a return on their equity investment in the property that was about ninety-six percent less than what they could have earned by investing their money elsewhere. Id. at 1343. Thus we found that “the Model Plaintiffs’ expert‘s calculations . . . proved sufficient financial loss on the part of the Model Plaintiffs . . ., especially in view of the lack of any
The court in Cienega VIII did not resolve the takings issue with respect to the non-model Cienega Gardens plaintiffs, and we remanded for consideration of the other plaintiffs’ takings claims. We expressly stated that the resolution of these aspects of the model plaintiffs’ case did not preclude a different result for the non-model plaintiffs based on different arguments and a different record:
The government has essentially waived any right to assert any errors in the Model Plaintiffs’ arguments. Therefore, to the extent that the government can demonstrate affirmative errors through reference to additional evidence and flaws in the arguments in future cases in which plaintiffs make the same arguments, this opinion should not be understood to bar future courts from also considering that evidence and those arguments.
Cienega VIII, 331 F.3d at 1337 n.31. Accordingly, we instructed the Court of Federal Claims on remand to “allow the [government and remaining plaintiffs] to develop an appropriate record and to rule on liability.” Id. at 1354. We noted that “[o]n remand, the court may of course consider any materials presented by either party in furtherance of its case that are relevant under regulatory takings case law.” Id.
We agreed with the Cienega VIII analysis in our decision in Chancellor Manor, 331 F.3d at 904-07. There we also remanded to the Court of Federal Claims for further factual findings pertinent to the Penn Central factors, concluding:
[i]n rejecting the plaintiffs’ and defendants arguments based on this record and by remanding for a more searching factual inquiry, we have not predetermined the question of whether the plaintiffs will be able to establish the existence of a regulatory taking under the Penn Central standards. . . . At this stage we have done no more than reject the arguments of both the United States and the Owners that this matter can be properly decided on the present record.
On remand, the Court of Federal Claims consolidated the suits of the five remaining Cienega Gardens plaintiffs with the three Chancellor Manor plaintiffs. Cienega IX, 67 Fed. Cl. at 437-38. After conducting a bench trial, the court issued an opinion on August 29, 2005, finding that the government‘s actions constituted a temporary regulatory taking. Id. at 438. On November 22, 2005, the court issued an order awarding just compensation.10
For present purposes, four aspects of the Court of Federal Claims decision are particularly pertinent. First, the court did not consider the impact of the regulation on the value of the property as a whole. The question the court asked was, for each year that the restriction was in effect, whether there was a compensable taking of income from the property. In determining the effect of the statute on the owners, the court applied a “return on equity approach,” which compared the return the owner received on its
Second, the Court of Federal Claims did not factor into the takings analysis the offsetting benefits afforded under ELIHPA and LIHPRHA. The Court of Federal Claims noted that ELIHPA and LIHPHRA provide two options that operate in lieu of the contractual prepayment right: (1) selling the property at the fair market value to a HUD-approved purchaser or prepaying the mortgage in the absence of a sale, or (2) signing a use agreement. Cienega IX, 67 Fed. Cl. at 467. The Court of Federal Claims held that these benefits should not be taken into account in determining whether a taking occurred, though they were relevant in determining the amount of just compensation. Id. at 470.
Third, the court did not include, as a factor in its analysis, the limited duration of ELIHPA and LIHPRHA, and the restrictions that these statutes imposed. The court calculated the annual return on equity for discrete periods beginning at the original
Finally, the court considered the reasonable investment-backed expectations of the property owners. Id. at 471. The court first addressed the plaintiffs’ subjective expectations in entering into the programs. Id. at 471-72. The court concluded that both groups of plaintiffs “expected to prepay when they invested in their properties.” Id. The court then found that the owners’ expectations of prepayment were reasonable “given the deed of trust notes, the existing regulations, the type of properties involved, the location of the properties, and the importance of an exit strategy in entering such a program.” Id. at 474. The court did not consider whether there was a nexus between the owners’ expectations and their investment in the property.
The government timely appealed. We have jurisdiction pursuant to
DISCUSSION
We review the Court of Federal Claims’ legal determinations without deference and its findings of fact for clear error. Bass Enters. Prod. Co. v. United States, 381 F.3d 1360, 1365 (Fed. Cir. 2004). Whether a compensable taking under the Fifth Amendment has occurred is a question of law that is based on factual determinations. Id.
The Supreme Court in Penn Central identified three factors that have “particular significance” to this “ad hoc, factual inquir[y].” 438 U.S. at 124. First, courts must consider the character of the governmental action. Id. This is the precise action that the government has taken and the strength of the governmental interest in taking that action. Second, courts must consider the economic impact on the regulated parties. Id. Finally, courts must consider whether the regulated parties had reasonable investment-backed expectations that they would not be subjected to such regulation. Id. The Penn Central test is the same whether the regulation is permanent or temporary in nature, although in the latter situation, the court must carefully consider the duration of the
restriction under the economic impact prong. See Tahoe-Sierra, 535 U.S. at 342.In addressing these questions, we must direct ourselves to the practical realities of the situation. That assessment can be difficult where there is a complex legislative scheme that, as here, is not a model of draftsmanship. But the fact that the legislative scheme is complex and confusing makes it all the more important to consider carefully the actual impact of the legislation on the claimants. Notwithstanding the Court of Federal Claims’ careful opinion, the court has in several respects committed error.
I ELIHPA
As an initial matter, we consider whether ELIHPA constituted a taking. The owners do not separately argue that ELIHPA constitutes a taking, and there is no basis for treating ELIHPA and LIHPRHA the same. ELIHPA was a temporary restriction that was enacted on February 5, 1988, and was only in effect until LIHPRHA was enacted on November 28, 1990. None of the owners’ twenty-year prepayment deadlines expired during the period that ELIHPA was in effect, and the owners that entered into use agreements all signed the agreements well after LIHPRHA was enacted.12 There has been no showing that ELIHPA restricted the plaintiff owners’ freedom of action in any meaningful way. See Greenbrier v. United States, 193 F.3d 1348, 1357 (Fed. Cir. 1999) (“In order to successfully assert a regulatory takings claim, the Owners must establish ... that the regulation has in substance ‘taken’ their property by going ‘too far ...‘“). Accordingly, we find that ELIHPA did not effectuate a taking with respect to these owners.
The more serious question is whether the enactment of LIHPRHA constituted a taking. During the period that LIHPRHA was in effect (from November 28, 1990, until the HUD appropriations statute implementing HOPE was enacted on April 29, 1996) the plaintiff owners’ twenty-year prepayment deadline expired and some of the owners, in view of the regulatory regime imposed by LIHPRHA, entered into use agreements. The question is whether these restrictions imposed by LIHPRHA resulted in a taking. In our view, in concluding that they did, the Court of Federal Claims erred as a matter of law in certain respects.
A. Need To Consider the Effect on the Property as a Whole
We think the Court of Federal Claims erred in not considering the impact of the restriction on the property as a whole. Rather, the Court of Federal Claims compared the rate of the return that the owner would receive on its investment with and without the restriction of a single year. This error impacted the court‘s Penn Central analysis.
The Court of Federal Claims applied a “return-on-equity” approach, considering the income from the project for each individual year as a separate property interest. Cienega IX, 67 Fed. Cl. at 475-76. For each owner, the court compared the return on equity that the owner received under the restrictions with the return on equity that the owner would receive absent the restrictions. The court determined that, under LIHPRHA, the owner‘s return was limited to a six percent dividend on its initial equity investment. The court found that without the restrictions the owner could receive an 8.5 percent annual return (the Fannie Mae bond rate) on the owner‘s entire equity in the property at the prepayment eligibility date. The initial equity investment was significantly
We believe that, in adopting this approach, the Court of Federal Claims erred. The Supreme Court, in cases like Penn Central, Concrete Pipe and Products of California, Inc. v. Construction Laborers Pension Trust for Southern California, 508 U.S. 602 (1993), and Tahoe-Sierra has made clear that in the regulatory takings context the loss in value of the adversely affected property interest cannot be considered in isolation.
Penn Central, 438 U.S. 104, arose in the permanent regulatory takings context. New York City had designated Penn Central station, and the city block that it sat on, as a historic landmark site, and thus restricted development of the property. The appellants argued that the taking at issue was a taking of the air space above Penn Central station. The appellants urged that the economic impact of this restriction on developing the air space should be considered in isolation, rather than considering the property as a whole. Id. at 130. The Supreme Court rejected this approach as “quite simply untenable.” Id. The Court explained:
“Taking” jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole—here, the city tax block designated as the “landmark site.”
[A] claimant‘s parcel of property could not 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. To the extent that any portion of property is taken, that portion is always taken in its entirety; the relevant question, however, is whether the property taken is all, or only a portion of, the parcel in question.
Id. at 644. The Court explained that “our test for regulatory taking requires us to compare the value that has been taken from the property with the value that remains in the property, [and] one of the critical questions is determining how to define the unit of property ‘whose value is to furnish the denominator of the fraction.‘” Id. (quoting Keystone Bituminous Coal Ass‘n v. DeBenedictis, 480 U.S. 470, 497 (1987)); see also Andrus v. Allard, 444 U.S. 51, 65-66 (1979) (“where an owner possesses a full ‘bundle’ of property rights, the destruction of one ‘strand’ of the bundle is not a taking, because the aggregate must be viewed in its entirety“); Seiber v. United States, 364 F.3d 1356, 1368 (Fed. Cir. 2004) (“The Supreme Court has repeatedly instructed that the impact of an alleged taking must be considered in terms of the ‘parcel as a whole’ . . . .“).
In Tahoe-Sierra, 535 U.S. at 331, the necessity of considering of the overall value of the property was explicitly confirmed in the temporary regulatory takings context. There the petitioners argued that a thirty-two-month moratorium on building was a per se regulatory taking because there had been a complete taking of development rights during that thirty-two-month period. The Supreme Court rejected this argument stating:
Of course, defining the property interest taken in terms of the very regulation being challenged is circular. With property so divided, every delay would become a total ban; the moratorium and the normal permit
process alike would constitute categorical takings. Petitioners’ “conceptual severance” argument is unavailing because it ignores Penn Central‘s admonition that in regulatory takings cases we must focus on “the parcel as a whole.”
Id. The Court thus concluded that “the District Court erred when it disaggregated petitioners’ property into temporal segments corresponding to the regulations at issue and then analyzed whether petitioners were deprived of all economically viable use during each period.” Id. Justice Thomas‘s dissent specifically complained that the majority had improperly compared the reduction in value resulting from the regulation to the value of the parcel as a whole, i.e., the “land‘s infinite life.” Id. at 355 (Thomas, J., dissenting). Thus we conclude that in a temporary regulatory takings analysis context the impact on the value of the property as a whole is an important consideration, just as it is in the context of a permanent regulatory taking.
The plaintiffs justify the return-on-equity approach by relying on the Supreme Court‘s decision in Kimball Laundry Co. v. United States, 338 U.S. 1 (1949), which held that just compensation for the taking of a laundry was “the rental that probably could have been obtained.” Id. at 7. However, the reasoning of Kimball Laundry does not apply here. First, as the plaintiffs recognize, the Supreme Court in Kimball Laundry applied the return on equity approach when determining just compensation and not when determining whether a taking had occurred in the first place. Second, Kimball Laundry is a physical takings case and thus does not govern the regulatory takings context. As the Supreme Court concluded in Tahoe-Sierra, “[t]his longstanding distinction between acquisitions of property for public use, on the one hand, and regulations prohibiting private uses, on the other, makes it inappropriate to treat cases involving physical takings as controlling precedents for the evaluation of a claim that
Consideration of the property as a whole is particularly important because our cases have established that a regulatory taking does not occur unless there are serious financial consequences. In Cienega VIII, we stated that “[w]hat has evolved in the case law is a threshold requirement that plaintiffs show ‘serious financial loss’ from the regulatory imposition in order to merit compensation.” 331 F.3d at 1340; see Loveladies Harbor, Inc. v. United States, 28 F.3d 1171, 1177 (Fed. Cir. 1994). We previously have explained that the requirement of “severe economic deprivation” comes from the nature of regulatory takings claims, which lack “the ‘typically obvious and undisputed’ predicate of a physical invasion or appropriation of private property by the government” and are “in essence, a claim that ‘a taking has occurred because a law or regulation imposes restrictions so severe that they are tantamount to a condemnation or appropriation.‘” Rose Acre Farms, Inc. v. United States, 373 F.3d 1177, 1195 (Fed. Cir. 2004) (quoting Tahoe-Sierra, 535 U.S. at 322 n.17).
We note that in a temporary taking situation, there appear to be at least two ways to compare the value of the restriction to the value of the property as a whole so as to determine if there has been severe economic loss. See Rose Acre Farms, 373 F.3d at 1188 (stating that “there are a number of different ways to measure the severity of the impact of the restrictions“). First, a comparison could be made between the market
B. Need To Consider the Offsetting Benefits
The second error committed by the Court of Federal Claims lies in its failure to consider the offsetting benefits that the statutory scheme afforded which were specifically designed to ameliorate the impact of the prepayment restrictions. This error affects all of the plaintiffs. The Court of Federal Claims characterized the government‘s argument as “overreaching,” Cienega IX, 67 Fed. Cl. at 470, theorizing that “Congress may not establish through an option that it will provide value equal to forty, or fifty, or sixty cents on the dollar for a taking, and thereby evade paying the constitutionally-required just compensation.” Id. The court stated that the value of any options the plaintiffs were offered should not “change the character of the governmental action or the way that the Penn Central takings analysis is applied.” Id. The court held instead that any benefits “should be addressed in the determination of just compensation,” not
The Supreme Court in Penn Central, 438 U.S. at 137, clearly held that offsetting benefits must be accounted for as part of the takings analysis itself. There, in exchange for restrictions on the development of historic properties, New York City‘s zoning laws provided developers with the right to develop nearby parcels that the developer already owned. Id. at 113-14. The Court explained that “to the extent appellants have been denied the right to build above the [Penn Central] Terminal, it is not literally accurate to say that they have been denied all use of even those pre-existing air rights.” Id. at 137. Thus, the plaintiff‘s “ability to use these rights has not been abrogated; they are made transferable to at least eight parcels in the vicinity of the Terminal.” Id. The Court concluded that these benefits “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 the regulation.” Id.
The Court of Federal Claims did not take into account this aspect of the Penn Central decision, finding support for its holding instead in our decisions in Whitney Benefits, Inc. v. United States, 926 F.2d 1169 (Fed. Cir. 1991), and Whitney Benefits, Inc. v. United States, 752 F.2d 1554 (Fed. Cir. 1985). The Whitney Benefits cases provide no support for the Court of Federal Claims’ approach. At issue in the Whitney Benefits cases was a statute that prevented a land owner from mining its property, but, in exchange, the Department of the Interior was authorized “to agree with such [land owners] to convey the fee to, or lease in exchange, other federal land embodying coal deposits.” Whitney Benefits, 752 F.2d at 1555. This court stated that the value of the
This case does not involve a transfer of new property to the owner as in Whitney Benefits, but rather an amelioration of the restrictions imposed on the existing property. There can be no claim here that the government compensated the owner by providing substitute property. The benefits must be considered as part of the takings analysis.14
The Court of Federal Claims, we think, overstated the effect of the statute when it concluded that “[n]one of the options available to plaintiffs permitted them to exercise their right to transfer their property to a purchaser of their choice.” Cienega IX, 67 Fed. Cl. at 467. As a practical matter LIHPRHA provided owners with two alternatives: (1)
With respect to the first option, the owners here do not dispute that the opportunity for a fair market value sale would eliminate any takings claim. See Florida Rock Indus., Inc. v. United States, 791 F.2d 893, 903 (Fed. Cir. 1986) (“if there is found to exist a solid and adequate fair market value [for the property] which [the owner] could have obtained from others for that property, that would be a sufficient remaining use of the property to forestall a determination that a taking had occurred or that any just compensation had to be paid by the government“). Rather the owners complain that sale to qualified buyers was unlikely, that the sale process took time during which the rent and other restrictions remained in place, that appraisal value was not adjusted over the course of the two-year sale period, and that prepayment was not possible until the sale process was complete (and unsuccessful). However, any trouble finding a buyer only increased the probability that the owner would be able to prepay if a sale was not completed.
Moreover, the sale process was not as time consuming as the plaintiffs assert. To reduce any administrative delays, LIHPRHA permitted the owners to begin the sale process by filing a notice of intent up to two years before their prepayment eligibility date.
The duration of these restrictions is an important factor in the takings analysis.
Alternatively, an owner could enter into a use agreement. The owner was required to file a “plan of action.”16
The sale and use agreement options thus conferred considerable benefits on the owners. The major effect of the statute on an owner who did not elect to enter into a use agreement and wished to prepay was to keep the restrictions in place during the sale period which might expire near the prepayment date; to compel the owner to offer the property for sale at a fair market value; and, if there was no sale (and the owner prepaid the mortgage), to restrict rent increases for a three-year period. This sale option was plainly an available alternative because many owners in fact elected to sell their property. See Cienega IX, 67 Fed. Cl. at 444 (noting that of a group of 205 to 210
The benefits to the owners electing to enter into use agreements were also considerable, as confirmed by the legislative history to LIHPRHA. “The bill authorize[d] an array of financial incentives” that “[t]he Committee believe[d] . . . . [would] provide sufficient economic incentive for the vast majority of owners of eligible low income housing to retain the current use and occupancy restrictions on their projects.” H.R. Rep. No. 101-559, at 76 (1990); see also 136 Cong. Rec. H6053-01 (July 31, 1990) (statement of Rep. Conte) (“The provision offers a package of incentives for owners to maintain their projects as low-income housing.“). When signing LIHPRHA, President Bush expressed concern that the incentives were in fact too generous:
One important preservation strategy is to provide project owners with economic incentives to maintain their properties for low-income use. I am concerned, however, that the incentives in S. 566 are more generous than are necessary, providing excessive benefits over the long term that will be paid by all taxpayers.
Statement on Signing the Cranston-Gonzalez Nation Affordable Housing Act, 26 Weekly Comp. Pres. Doc. 1931 (Nov. 28, 1990). The President‘s sentiment was echoed in the hearings leading to the enactment of HOPE, where HUD‘s Inspector General testified that the government should “[d]iscontinue paying owners windfall profits for projects that threaten to prepay their mortgages and remove the low income character of the units.” Hearing Before the Subcomm. on VA, HUD, and Independent Agencies of the H. Comm. on Appropriations, 104th Cong., 1st Sess. (Jan. 24, 1995)
In summary, we think the Court of Federal Claims erred in not considering offsetting benefits with respect to those owners who entered into use agreements and those that did not. In considering whether the owners that elected to enter into use agreements suffered a taking, available offsetting benefits must be taken into account generally, along with the particular benefits that actually were offered to the plaintiffs.
C. Need To Consider the Duration of the Legislation
In its decision, the Court of Federal Claims did not consider the duration of the legislation. We believe existing takings law requires consideration of the duration of the legislation as part of the takings analysis. See Tahoe-Sierra, 535 U.S. at 342. The LIHPRHA restrictions remained in effect from November 28, 1990, until the HUD appropriations statute, implementing HOPE, was enacted on April 29, 1996.18 Four owners did not enter into use agreements and were thus relieved of the LIHPRHA restrictions in April 26, 1996, when the HOPE appropriation was enacted.19 These
Four of the owners elected to enter into use agreements after the enactment of LIHPRHA but before the HOPE enactment: Cienega Gardens, Del Amo Gardens, Las Lomas Gardens, and Chancellor Manor. The temporary nature of the legislation is irrelevant with respect to those who had use agreements in place when HOPE was enacted since those owners acted reasonably on the assumption that the restrictions were permanent.
D. Need To Consider the Nexus Between the Investment and the Expectation
Finally, the Court of Federal Claims erred in its treatment of the investment-backed expectations prong of the Penn Central analysis. See 438 U.S. at 124. In
We find no error in the Court of Federal Claims’ conclusion that the owners subjectively expected to have the option to prepay their mortgages after twenty years. However, we do think the Court of Federal Claims erred in part in its analysis of the reasonableness of the plaintiffs’ expectations.
One important aspect of investment-backed expectations is whether, in the regulatory environment, it would be expected that the law might change to impose liability. The test in this respect was set forth at length in Commonwealth Edison Co. v. United States, 271 F.3d 1327 (Fed. Cir. 2001) (en banc).21 There we explained that
“[t]he reasonable expectations test does not require that the law existing at the time of [entering into the program] would impose liability, or that liability would be imposed only with minor changes in then-existing law. The critical question is whether extension of existing law could be foreseen as reasonably possible.”
Id. at 1357. Conducting an analysis under Commonwealth, we explained in Cienega VIII that “[w]e have no evidence that the housing programs involved here were part of” such a highly regulated field that the owners’ expectations were necessarily unreasonable. 331 F.3d at 1350. We concluded that the plaintiffs could not reasonably have expected the change in regulatory approach. Id.; see also Chancellor Manor, 331 F.3d at 904. We see no basis for revisiting this issue.
However, the reasonable expectations prong also requires that the expectations be investment backed, and in this regard further analysis is required. The first step of the analysis is to determine the actual investment that the general and limited partners made in the property. The second step is to determine the benefits that the owners reasonably could have expected at the time they entered into the investment. The third step is to determine what expected benefits were denied or restricted by the government action. (The latter two have been discussed earlier in this opinion.) In other words, it is impossible to determine whether the owners’ expectations were reasonable without knowing the total value of the investment; its relationship to the benefits available to the owners, including any tax benefits; and the anticipated benefits that were denied or restricted by the government action.22 Finally, the claimant must
In addressing this question on remand, it is particularly important that the Court of Federal Claims first determine the precise scope of the benefits denied. The owners were not, as discussed earlier, entirely denied the right to prepay; rather that right was denied for a short period, and rents were frozen for a period after prepayment. The Court of Federal Claims must determine on remand whether the rights thus denied were the primary or “but for” cause of the investment. At this stage, the plaintiffs have not established that a reasonable owner‘s expectation of an unrestricted right of prepayment after twenty years would have satisfied either standard. The substantial benefits that the owners received, other than the absolute prepayment right, may well have been such that the absolute prepayment right might not have been either the
primary or “but for” reason that a reasonable owner would have invested in the property. Indeed, it is not even clear that a reasonable owner would rely on any aspect of the prepayment right in making the investment, much less that a reasonable owner would rely on an unrestricted right to prepayment.In determining whether expectations of prepayment were reasonably investment backed, it is necessary to inquire as to the expectations of the industry as a whole. Here the expert testimony on this issue was conflicting and, unfortunately, was limited to the expectations as to the general prepayment right rather than the expectations as to the limited restrictions actually imposed by the statute. On one hand, at trial the government presented the expert testimony of Kenneth Malek, an expert in tax accounting and tax-advantaged investments. He testified that “neither the general partners nor the limited partners considered residual value [of the property] to be a significant motivation.” Chancellor Manor J.A. 102633. This was because “[t]he dividends that could be paid as operating cash flow distributions to the investors were limited, and so the benefits that made a material impact on the project from the standpoint of the present value of those benefits were the tax benefits and the . . . front end cash flow to the developers.” Id. at 102637. He concluded that the twenty-year prepayment right “was not a material incentive.” Id. at 102806. On the other hand, William Dockser, Deputy Assistant Secretary of HUD and FHA Commissioner from 1969 to 1972, testified that “the ability to discuss an exit strategy in 20 years . . . was a reason why people would undertake to do these programs and a reason why people would invest in the programs.” Id. at 500105.
The actual contemporaneous offering memoranda appear to provide more
The schedules demonstrating the tax benefits were based on the assumption that the partnership would sell the property after twenty-one years for only $1. Other private placement memoranda did not even assume that the property would be sold after twenty years. For example, the private placement memorandum for Gateway Investors only states that the property is subject to a forty-year mortgage without mentioning the prepayment date. These few contemporaneous documents suggest that the owners entered the programs without relying on the ability to prepay after twenty years.
The plaintiffs argue that the prospectus only described the expectations of the limited partners and not the partnership as a whole. This argument is unavailing. Under the securities laws the prospectuses were required to be truthful. See
On remand, it is important that the parties provide the Court of Federal Claims with sufficient contemporaneous documents for the court to determine the actual investment and the expectations of the industry at the time that LIHPRHA was enacted.
CONCLUSION
For the foregoing reasons, we vacate and remand for a new Penn Central analysis under the correct legal standard. In view of our clarification of the legal standard, we conclude that on remand the Court of Federal Claims should allow both sides to supplement the record with additional relevant evidence if they wish to do so.
VACATED AND REMANDED.
COSTS
No costs.
I respectfully dissent, for this panel has no authority to revoke our prior decision in Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003) (Cienega VIII). The threshold issues here reviewed were already decided; that decision is the law of this case.
The National Housing Act of 1968 led to the program here at issue, where the federal government provided financial incentives to private investors to construct housing to
24 C.F.R. §236.30 (1970). A mortgage indebtedness may be prepaid in full and the Commissioner‘s controls terminated without the prior consent of the Commissioner where . . . the prepayment occurs after the expiration of 20 years from the date of final insurance endorsement of the mortgage ....
As the Court of Federal Claims observed, the right to leave the program after twenty years was an “incentive [that] enabled property owners to provide low-income housing for twenty years, and then terminate the low-income housing restrictions and make a long-term profit by charging market rates for rentals at the properties.” Cienega Gardens v. United States, 67 Fed. Cl. 434, 440 (2005) (Cienega IX).
As twenty years approached, the owners invoked the right to prepay the mortgage and leave the plan. Congress then enacted the ELIHPA (the Emergency Low Income Housing Preservation Act of 1987), which prohibited leaving the plan, and then in 1990 the LIHPRHA (Low Income Housing Preservation and Resident Homeownership Act), which provided a partially mitigating arrangement after twenty years. The statutes are complex. This and related litigation followed; for these plaintiffs, the first Cienega Gardens case was filed in 1994. Prepayment rights were eventually restored by the Housing Opportunity Program Extension Act of 1996 (HOPE). The question of whether a constitutional “taking”
That decision is the law of this case, as to the four “model plaintiffs” whose facts were the premises of the takings analysis, and as to the other similarly situated plaintiffs. The Cienega VIII decision and remand to the Court of Federal Claims was with instructions to apply that law to determine whether a taking occurred on the specific facts of each plaintiff, and to assess damages. In the case now on appeal there are eight plaintiffs for eight properties, including Cienega Gardens. The trial court visited the sites, conducted twenty-two days of trial, and assessed damages. Cienega IX, 67 Fed. Cl. 434 (2005) is the decision now before us.
This court in Cienega VIII resolved that the legislative enactments that forbade removing this privately-owned housing from the low-income low-rent market after twenty years, and then restored that right, were a temporary taking of property within the purview of constitutional protection. That aspect was reached and decided. This court so recognized in Independence Park Apartments v. United States, 449 F.3d 1235 (Fed. Cir. 2006):
[In Cienega VIII] we held -- based on the factual findings made in Cienega III -- that the plaintiffs had suffered a “serious financial loss” by being deprived of the opportunity to prepay their mortgages. See Cienega VIII, 331 F.3d at 1340-45. Based on our analysis of the Penn Central factors and the extensive record already developed in the case, we ruled in favor of the plaintiffs on their regulatory takings claims.
In Cienega VIII this court reviewed the “Use Agreements” that were made available by the LIHPRHA, and explored the various mechanisms whereby owners responded to the legislative changes until Congress reversed itself via the legislation enacted in HOPE. The remand to the Court of Federal Claims was with instructions to consider these individual
My colleagues acknowledge that this court in Cienega VIII ruled that “the four model plaintiffs had suffered a compensable temporary regulatory taking,” maj. op. at 12, but state that this court acted “on a partial record and limited arguments made by the government,” apparently impeaching the parties, the trial court, and ourselves. This is as unwarranted as it is incorrect. In Independence Park Apartments, 449 F.3d at 1240, another panel of this court remarked on “the extensive record already developed in the [Cienega] case.” If there indeed were inadequate arguments by the government and an incomplete record at trial, the concern should have been raised by the panel in that appeal, not four years later when the trial court has acted on and fulfilled the remand instructions, conducted lengthy proceedings, and completed a thorough application of this court‘s decision in accordance with its terms. See Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709, 714 (1986) (if the appellate court is dissatisfied with the adequacy of the record and is unable to reach a proper resolution of the legal question, the proper course is to remand to the trial court). Review of the eight Cienega cases makes clear that the record and presentation in Cienega VIII cannot be discarded as “partial” and “limited,” for they were thorough and complete, as well as built on the seven earlier Cienega trials and decisions.
The Constitution assures that when the government changes its obligations to private entities with which it has entered into contractual and other specific relationships, the government is as responsible for its direct violation of those relationships as would be any private person. See Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 607-08 (2000) (the United States is bound by the same principles of contract law as in contracts between private persons). Legislative abrogation of property rights, albeit for public purpose, is tolerated because the Constitution assures that the contracting party is not required to bear the burdens of the public as a whole. In Winstar v. United States, 518 U.S. 839 (1996) the Court explained: “Just as we have long recognized that the Constitution ‘bar[s] Government from forcing some people alone to bear public
The issues on this appeal are limited to the application by the Court of Federal Claims of the remand instructions of Cienega VIII. Instead, this court proposes that the trial court redecide the basic question of whether a taking occurred at all.1 No new arguments have been presented, nor any previously unavailable factual information, nor any other basis for reopening what is closed. It is singularly unfair to these plaintiffs to require them to start again, after thirteen years of judicial process.
The issue of this appeal, the appropriate measure of damages, is barely touched. The trial court received extensive briefing and argument and evidence, including expert testimony from all sides. The court gave weight to the partial mitigation by those owners who accepted the “Use Agreements,” and evaluated the issues of the owners who sold their properties while the law was in effect. A serious flaw in the majority‘s analysis is its blurring of the distinction between liability and damages, resulting in its skewed approach to the takings analysis. The panel majority‘s new requirement that the owners must prove that the right to leave the program after twenty years was “the primary incentive” for their initial participation in the program is contrary to all of the rules of evaluating integrated contractual
My colleagues apply another incorrect premise, for the value of property is measured when it is taken. See First English Evangelical Lutheran Church of Glendale v. Los Angeles County, 482 U.S. 304, 320 (1987) (“the valuation of property which has been taken must be calculated as of the time of the taking“); Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 474 (1972) (“the owner is entitled to the fair market value of his property at the time of the taking.“) We need not speculate whether the government would have designed a different arrangement in 1968 had the future housing situation been foreseen, or what variation in incentives would have been needed to obtain private participation; the panel majority errs in suggesting that because some other terms might have obtained the required low-rent housing, those other terms now determine the economic consequences of legislative annulment of the terms that were actually put into place.
The creative theories propounded by my colleagues for redetermining whether a taking occurred ignore the law of this case, as well as the constitutional authority that holds the government to its obligations. I must, respectfully, dissent.
Notes
The two-year timeframe is supported by the deadlines set forth in the regulations. LIHPRHA permitted owners to file a notice of intent to sell the property twenty-four months before their original twenty-year prepayment eligibility date.
The government argues on appeal that these plaintiffs waived the right to bring a takings claim by entering into use agreements. We find no error in the Court of Federal Claims finding that there was no waiver, and therefore reject the government‘s argument. See also Independence Park Apartments v. United States, 449 F.3d 1235, 1247 (Fed. Cir. 2006) (“there is no indication in the use agreements that [the plaintiffs] were relinquishing their right to sue for damages caused by ELIHPA and LIHPRHA“).
Here the government again argues that the plaintiffs’ claims are not ripe. The government argues that: (1) plaintiffs did not petition HUD for prepayment approval, and (2) they did not pursue the sale option. We reject these arguments. In light of our holding in Cienega VI and the factual findings made by the Court of Federal Claims, see Cienega IX, 67 Fed. Cl. at 460-61, we find that it would have been futile for the owners to apply to HUD for approval to prepay. Moreover, the ripeness doctrine does not require the owners to apply for voluntary incentives such as the sale option that they did not wish to pursue. While these incentives are pertinent to the Penn Central factors, they are not relevant to the ripeness analysis.
| Plaintiff | End of Takings Period or September 30, 2005 (date of judgment) | Amount of Just Compensation Awarded |
|---|---|---|
| Cienega Gardens | Oct. 10, 2002 | $7,219,000 |
| Del Amo Gardens | Sept. 30, 2005 | $5,008,814 |
| Las Lomas Gardens | Sept. 30, 2005 | $13,017,377 |
| Blossom Hill Apartments | Feb. 17, 1997 | $2,801,347 |
| Skyline View Gardens | Feb. 17, 1997 | $2,228,032 |
| Chancellor Manor | Sept. 30, 2005 | $10,510,121 |
| Oak Grove Towers | Mar. 1, 1997 | $1,464,761 |
| Gateway Investors (Rivergate) | Mar. 1, 1997 | $1,697,241 |