New York Upholds Wetlands Restrictions as Regulatory Taking and Premium on Just Compensation Payment | Practical Law

New York Upholds Wetlands Restrictions as Regulatory Taking and Premium on Just Compensation Payment | Practical Law

The Appellate Division of New York recently held that a purchaser of property subject to wetlands restrictions is not barred from successfully pursuing a regulatory takings claim and an owner is entitled to a premium on just compensation above the property's regulated value.

New York Upholds Wetlands Restrictions as Regulatory Taking and Premium on Just Compensation Payment

by Practical Law Real Estate
Published on 15 Mar 2018 • New York
The Appellate Division of New York recently held that a purchaser of property subject to wetlands restrictions is not barred from successfully pursuing a regulatory takings claim and an owner is entitled to a premium on just compensation above the property's regulated value.
On November 15, 2017, in In re New Creek Bluebelt, Phase 3, the Second Department of the Supreme Court, Appellate Division held that:
  • A purchaser that acquires property subject to wetlands restrictions is not barred from challenging those restrictions as an unconstitutional regulatory taking.
  • Just compensation for the taking includes a premium calculated using the "reasonable probability incremental increase rule," which looks at a hypothetical purchaser's ability to challenge a property's preexisting use restriction.
    (65 N.Y.S.3d 552 (App. Div. 2017).)
This case overrules a string of 1997 New York Court of Appeals cases known as the "Kim quartet," which held that a purchaser of regulated property could not bring a regulatory takings action.

Background

Baycrest Manor, Inc. (Baycrest) purchased two unimproved lots in Staten Island in the early 1970's. The majority of the lots were subsequently designated as wetlands and remained unimproved.
In 2006, the City of New York acquired the land through condemnation as part of a project to manage stormwater, and Baycrest brought a proceeding seeking just compensation. Claiming that the reasonable probability incremental increase rule applied, Baycrest argued that:
  • The wetlands restrictions were unreasonable and, if challenged, would be overturned as an unconstitutional regulatory taking.
  • A purchaser, therefore, would pay more than the property's restricted-use price based on the reasonable probability incremental increase rule.
The trial court agreed and awarded Baycrest compensation in excess of the regulated value of the property. The City appealed, claiming that the reasonable probability incremental increase rule was no longer valid. It argued that:
  • A string of New York Court of Appeals decisions (the Kim quartet) had held that a property owner was barred from challenging a use restriction as a regulatory taking if the restriction existed at the time it acquired the property.
  • Since a subsequent purchaser could not challenge the wetlands restrictions, it would not pay more than the property's restricted-use price.

Outcome

The Second Department addressed three issues on appeal:
  • Whether a subsequent purchaser could bring a successful regulatory takings claim based on a restriction existing at the time it acquired the subject property.
  • Whether there was a reasonable probability that the wetlands restrictions on Baycrest's land would be found to constitute a regulatory taking.
  • How to calculate just compensation for Baycrest's property.

Challenging a Preexisting Restriction

First, the Second Department cited to Palazzolo v. Rhode Island where the United States Supreme Court held that a purchaser could bring a successful regulatory takings claim based on preexisting wetlands restrictions (533 U.S. 606 (2001)).
The court determined that the City's interpretation of the New York Court of Appeals cases was inconsistent with the Supreme Court's holding, and held that a subsequent purchaser could successfully challenge preexisting wetlands regulations.

Reasonable Probability of Success

Second, the court addressed whether there was a reasonable probability that the wetlands restrictions would be found to constitute a regulatory taking. The court found that the restrictions:
  • Reduced the property value by 88%.
  • Effectively prohibited all development on the property.
The court held that this deprived Baycrest of all economically beneficial use of the property, therefore there was a reasonable probability that the restrictions constituted a regulatory taking.

Just Compensation

The court held that the reasonable probability incremental increase rule may still be applied in valuing regulated properties taken in condemnation.
Just compensation is typically the fair market value of the property, or the amount that a willing purchaser would pay for it. In calculating a property's value, courts consider restrictions on the property's use that may decrease its market value, such as wetlands restrictions. The reasonable probability incremental increase rule in New York calculates an increment above the regulated value of the property for regulatory takings.
Courts will award an increment greater than the market value of a restricted-use property if it finds there is a reasonable probability that either:
  • The property will be rezoned.
  • The property's use restriction will be deemed invalid.
In either case, a purchaser may pay more for the property based on the probability that the restrictions will be removed. The court then determines both the property's restricted-use and unrestricted-use prices, and will increase the condemnation award based on a percentage of the difference of the two, taking into consideration the cost to the purchaser of challenging the restriction.
The Second Department affirmed the use of the rule, but reduced the incremental amount awarded based on a lack of sound evidentiary basis for the trial court award.

Practical Implications

The New Creek Bluebelt decision is significant because it preserves a purchaser's claim to challenge preexisting wetlands restrictions and an owner's right to seek a premium on compensation for regulatory takings. Property owners that previously could not challenge a preexisting wetlands restriction may now have a valid claim. Owners should, however, present sound evidence for the incremental amount they are claiming above the regulated value of the property.
This holding has since been followed by the New York Supreme Court, Richmond County, in Galarza v. New York City. Unlike Baycrest, though, the property owner seeking compensation had acquired the property subject to the wetlands restrictions. The court there reinforced the use of the reasonable probability incremental increase rule and awarded the property owner an increment above the property's restricted-use price. (.)
For more information on zoning and land use law, see Practice Notes, Zoning and Land Use Law for Owners and Developers: Overview and Eminent Domain: Overview.