Property Owners Get a New Legal Weapon

ROBERT BRIDGES, clinical professor of finance and business economics, USC’s Marshall School of Business

This op-ed originally appeared at Forbes on July 2.

Nearly unnoticed among the marquee decisions by this year’s Supreme Court session is Koontz v. St. John’s Water Management District. The decision granted the plaintiff the right to sue a governmental agency that required a payment – or ‘exaction’ – for public facilities miles away from his property as a contingency for approval of a building permit.

The headlines the morning after the decision heralded the ‘bolstering of property rights,’ but it’s doubly ironic that the integrity of rights in real property have been so badly eroded that it would take an act by the highest court of the land to simply grant the right of an individual to challenge a clearly confiscatory act, and that other forms of exactions – unforced, implied, or provided voluntarily – are an unfortunate but normal part of today’s real estate development process.

Many things are broken with respect to rights in real property and the process of securing entitlements to build on land in the U.S. In addition to the issues encountered by Mr. Koontz, ineffective or outdated land use and zoning plans, the propensity for elected officials to make ill-conceived changes to those plans, and the fact that so many interests and agencies can come forward to involve themselves in the permitting process, make the process unnecessarily hazardous and cumbersome. Applicants denied entitlements are forced to fight as individuals against agencies with unlimited resources. Those with the ability to work the system often receive approvals inappropriately. This is hardly a desirable situation.

Many officials believe that property rights have ‘evolved’ to the point now where they reside with the government and are only allocated back to the property on petition; usually at considerable cost to the petitioner, and on the regulator’s unhurried schedule. James Madison’s constitutional notion of ownership with all rights in real property residing with the owner, subject to good stewardship, the police power and normal restrictions on noxious uses, is sadly nostalgic.

The best system would be development according to rights guaranteed by plans that are much harder to alter, and more uniformly enforced than is currently the case. Add to it a requirement that any entity claiming the authority to affect development should be required come forward in advance and inform all affected owners of any specific requirement that might burden their property. The right to develop, consistent with the plan and consistent with any other restrictions stated in advance, should be unchallengeable and be able to proceed without delay.

Adopting land use plans with the implication of inviolability would obviously face considerable political resistance, especially in large and complex cities.

Nonetheless, it would prove a highly beneficial exercise, forcing communities to confront and resolve uncomfortable and difficult issues including future growth and costs, but also the constitutional issues of equal protection and eminent domain and free expression. Having voters revisit the plan on a periodic basis would be much preferable to the current situation of local officials designing cities administratively and ad-hoc in the cover of council chambers, subject to scrutiny only by the small group with the time and energy to attend local meetings.

American courts have long wrestled with the relationship between regulating property use and the resulting diminution in value seen in Koontz, including landmark decisions such as Pennsylvania Coal v. Mahon, in which Oliver Wendell Holmes’ majority opinion established that rights to property could not be restricted beyond a certain point of diminished value without invoking the 5th Amendment’s prohibition of taking of private property without compensation. Justice Louis Brandeis, writing for the minority, thought Holmes’ reasoning represented a threat to the ability to exercise absolute regulatory authority.

Both men, in 1922, would have agreed that some regulation of land is reasonable and proper, and some reduction in value would likely result. But neither would have envisioned that a landowner in today’s world would be told by government authorities not just what he can’t do with his property, but what he can do, in what amounts, and what price he must pay the authorities for the right to do with his land what the government allows.

American legislators have tried, as well, to restrict land rights and sidestep the consequential damage to property values. An action by the California Coastal Commission, created by Prop. 20 in 1972, burdened individual applicants for beach-front building permits with the responsibility of providing public access to a public beach when barriers to that access were created by multiple properties. In a challenge to that authority, in Nollan v. California Coastal Commission, the court found that the government cannot enforce the surrender of a portion of a person’s property to address problems not related directly to that property.

Regulators attempted to work around this restriction by creating conditions that must be pre-satisfied to qualify for permit issuance. The ubiquitous exactions as conditions-precedent are simply monetary substitutes for the dedication of property in Nollan, but this practice has now been challenged successfully in the Koontz case.

As mentioned, exactions needn’t be of the forced variety as encountered by Mr. Koontz, but they can be offered up voluntarily. Since 1979 in California, city officials have been allowed to enter into ‘development agreements’, which are individual negotiations giving zoning officials flexibility to reduce development restrictions in return for benefits offered to the public. While the legislation requires that entitlements ultimately granted must be generally consistent with wider civic zoning plans and approved by city councils, the certainty represented by a contract, and a potential enhancement to the scope of the project are sufficient incentives to motivate concessions. Development negotiated in this manner can be responsible and beneficial, but it can also result in development density far different than that allowed under zoning plans, give the appearance of special treatment for the well-connected, and encourage ‘spot zoning’ inappropriate to its context. The small city of Santa Monica, adjacent to Los Angeles, is smitten by the generosity of developers virtually falling over each other for the opportunity to be shaken down for concessions to get in on a local boom, and that city has used the opportunity of the delayed adoption of its wider downtown zoning plan to recently enter into as many as 30 current development agreement applications.

The importance of clear and secure property rights is fundamental for the function of a participatory democracy and a vibrant entrepreneurial economy. On the other hand, forced bartering with public officials wielding undefined but absolute authority in order to exercise one’s civil rights over one’s property is certainly beneath our nation’s standards.

No property owner or developer would object to reasonable regulations if the rules were known from the outset. No development opponent would object to such a plan if popularly voted on and uniformly enforced. Perhaps the Koontz case will represent an opportunity to refocus attention on property rights, and the extent to which we are extraordinarily distant from Madison’s world where property ownership and stewardship were true cornerstones of citizenship.

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