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Water Log 28.3, November, 2008

Texas Court Declares Categorical Taking:Ordinance Deprived Landowner of All Economic Use

City of Sherman v. Wayne, 2008 Tex. App. LEXIS 6267 (August 18, 2008).

Timothy M. Mulvaney, J.D.

The Texas Court of Appeals affirmed a trial court ruling that found the city’s action limiting the use of property to residential use deprived the landowner of all economically viable use in violation of the constitutional takings clause.

Background
In 1964, the City of Sherman adopted an ordinance restricting use of the relevant property to residential development. Nonetheless, until 1999, the Texas National Guard operated an armory and vehicle storage unit on the property, though the majority remainder of the property lay undeveloped.1 In 2001, James Wayne purchased the ten-acre property by bid for approximately $126,000 under the assumption that he could continue to use the existing buildings for commercial purposes in light of the continued use of the property for those purposes for the prior thirty-five years.2 Wayne unsuccessfully sought rezoning and a special use permit, and thereafter filed suit claiming the ordinance prohibited all economically viable uses of the property without the provision of just compensation, in violation of the takings clause of the Constitution.3

At trial, Wayne alleged under oath that he bought the property for commercial purposes, in light of the fact that the buildings were constructed prior to the enactment of the ordinance, were used for commercial purposes for more than three decades after the ordinance had passed, and the property appeared unsuitable for any use other than industrial or commercial. Further, Wayne presented two appraisal experts, who testified that it would cost more to develop the property as a residential subdivision than the lots would be worth.

The City asserted that Wayne’s takings allegations were not ripe for review because Wayne did not exhaust all administrative efforts to develop the property before filing the claim. Further, the City relied upon two restricted appraisal reports showing that the property retained value with enforcement of the zoning ordinance (one alleged the property was worth $250,000, the other $65,000). The City even pointed to the testimony of one of Wayne’s appraisal experts, who asserted that the property likely could sell for $10,000 with enforcement of the zoning ordinance. Still further, the City relied upon the other bids for the property at the 2001 auction and the current tax assessments in claiming that the property retained some value.

A jury found the market value of the property to be zero with enforcement of the residential zoning requirement, and $250,000 without enforcement.4 Wayne moved for an immediate judgment on the verdict.

The trial court held that the owner’s regulatory takings claims were ripe for review because further efforts to change the zoning would have been futile. Further, the court ruled that the evidence supported the finding that the property had no market value as residential property. Therefore, the court required the City to pay just compensation of $250,000, plus interest, for the lost value of Wayne’s use of the land.5 Also, the court ruled that Wayne could retain the property in its undeveloped state. The City filed this appeal.

Ruling Affirmed on Appeal
The appellate court first addressed whether the takings claim was ripe for review before addressing the merits of the claim.

Ripeness
In Palazzolo v. Rhode Island,6 the United States Supreme Court explained that a takings challenge to a land use regulation is not ripe for review unless the entity charged with implementing the regulation has reached a final decision regarding the application of that regulation to the relevant property. Once a final decision is issued, whereby it is clear that the permitted uses on the property are known to a reasonable certainty, a takings claim is ripe.

In Palazzolo, the high court found that the denial of an application to fill wetlands constituted a final decision, and the property owner need not file additional applications to fill substantially lesser surface areas when it was evident that the agency interpreted its regulations to bar the applicant from engaging in any filling of the wetlands at issue.

Here, the appellate court found that the takings claim was ripe for review. The court relied on Palazzolo in holding that Wayne was not required to apply to the City numerous times for a variety of rezoning requests or special use exceptions where such efforts would be futile, in light of the evidence that the City would approve only residential uses.7

Regulatory Taking
In Lucas v. South Carolina Coastal Council,8 the United States Supreme Court held categorically that regulations prohibiting all economically beneficial use of land exact an unconstitutional taking without compensation, unless the restrictions were never part of the landowner’s title to begin with in light of background principles of state property law.9 In Texas, determining whether or not all economically viable use of a particular piece of property has been denied “entails a relatively simple analysis of whether value remains in the property after governmental action.”10 The City claimed that the application of the zoning ordinance did not constitute a categorical regulatory taking because it did not deprive Wayne of all economically viable uses of his property.

The court expressed disregard for the City’s attempt at evaluating property based upon tax appraisals, in light of the infrequent relationship between taxes paid and actual value. The court also found that the two appraisals predominantly relied upon by the City amounted to mere speculation.

Instead, the court focused on the testimony of Wayne’s experts. These experts asserted that converting the land to residential use would cost more money than Wayne could ultimately sell the residential units for, in light of the high cost in removing the existing buildings, which contained asbestos and lead in dangerous quantities and thus could require expensive environmental remediation upon demolition.

Therefore, the appellate court did not disturb the jury’s finding that the residential use restriction prohibited all economically beneficial use of the land and upheld the trial court’s decision with respect to the regulatory taking.11 However, the court overruled the trial court decision to the extent it ruled that Wayne could retain the property upon the provision of just compensation. Instead, upon fulfillment of the judgment, the City would acquire full title and interest in the property.

The court acknowledged that the United States Supreme Court has explained that Lucas regulatory takings are limited to the “extraordinary circumstance” when no economically viable use is permitted.12 Nonetheless, de­ spite evidence in the record indicating at least some remaining value in the land with enforcement of the ordinance, the court did not address in its written opinion both United States Supreme Court and lower court opinions finding that government action that causes a substantial diminution in a property’s market value may not amount to a taking.13

Endnotes: 
1.  See City of Sherman v. Wayne, 2008 Tex. App. LEXIS 6267, *1 (Aug. 18, 2008).
2.  Id.
3.  Id. at *2.
4.  Id.
5.  Id.
6.  533 U.S. 606, 632 (2001).
7.  See City of Sherman, 2008 Tex. App. LEXIS 6267, at *4.
8.  505 U.S. 1003 (1992) (holding that when a property owner is “called upon to sacrifice all economically beneficial uses in the name of the common good, that is, to leave his property economically idle, he has suffered a taking”).
9. See id. at 1029.
10. See City of Sherman, 2008 Tex. App. LEXIS 6267, at *6.
11. See id. at *5-10.
12. Id. at *12-13 (citing Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 935 (Tex. 1998)).
13. See, e.g., Hadacheck v. Sebastian, 239 U.S. 394 (1915) (holding that zoning ban that reduced property value by 90% not a taking); Haas v. City & County of San Francisco, 605 F.2d 1117, 1120 (9th Cir. 1979), cert. denied, 445 U.S. 928 (1980) (finding 95% reduction in property value not a taking). But see, e.g., Florida Rock Indus., Inc. v. United States, 18 F.3d 1560 (Fed. Cir. 1994) (asserting that 62% reduction in property value may be a taking). When there remains some value in the land, takings jurisprudence ordinarily has relied upon the balancing test set forth in the United States Supreme Court’s decision in Penn Central Transportation, Co., et al., v. New York City, et al. to determine whether the government action unreasonably interferes with a landowner’s use and enjoyment of property. See 438 U.S. 104 (1978).

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