When The Government Takes Your Property, What Are You Entitled To?

When the government takes your property, the Constitution of the United States (and every state Constitution) requires that you must be paid “just compensation” (i.e., fair market value) for the property it has taken, as well as compensation for damages to the part it has not taken (if the taking is partial) (see Section 7 below).

Do I Have A Condemnation Claim If The Government’s Regulations “Destroy” My Property?

The answer to this question is a qualified “yes,” but it is extremely difficult to prove.

In recent years, much attention has been focused on these so-called regulatory or “de facto” takings. These are situations where the regulatory authorities place such onerous restrictions on the use of the property that the property owner claims that the government has “de facto” (as opposed to formal or “de jure”) taken the property, entitling the property owner to just compensation. Traditionally, the remedy for a de facto taking was known as an “inverse condemnation.”

A recent spate of cases from the Supreme Court of the United States, in conjunction with a number of lower state and federal court cases, gave rise to the sense that a major change in the standards of de facto condemnation was being implemented by the courts. See, e.g., First English Evangelical Lutheran Church of Glendale v. Los Angeles County, 482 U.S. 304 (1987); Nollan v. California Coastal Commission, 483 U.S. 825 (1987); Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992); and Dolan v. City of Tigard, 512 U.S. 374 (1994).

The Supreme Court of the United States seemed to be moving toward a concept of requiring compensation (or at least recognizing a de facto condemnation requiring payment of compensation) whenever local regulations resulted in substantial market depreciation in the value of the property.

The New York courts are generally not receptive to de facto condemnation claims requiring a very powerful showing that the property has been destroyed by government action. Gazza v. New York State Dept. of Envtl. Cons., 89 N.Y.2d 603, 657 N.Y.S.2d 555 (1997).

However, in certain circumstances, New York’s statutory scheme does provide some relief to recover for a “de facto” condemnation where the government’s application of the environmental rules and regulations deprive a property owner of substantial value. See, ECL 24-0705(7) which provides:

“In the event that the court finds the action reviewed constitutes a taking without just compensation, and the land so regulated merits protection under this article, the court may, at the election of the commissioner, either (i) set aside the order or (ii) require the commissioner to proceed under the condemnation law to acquire the wetlands or such less than fee rights therein as have been taken.”

The statute requires a two-step analysis. It must first be determined whether the administrative denial of the permit is rational and supported by substantial evidence. Once this is established, it must be determined whether the denial of the permit constitutes an unconstitutional taking of petitioner’s property. See, Spears v. Berle, 48 N.Y.2d 254, 422 N.Y.S.2d 636 (1979).

A precautionary note. The law on the question of “de facto takings” is changing very rapidly. Decisions have come down even as this brochure was being prepared refining and redefining the legal standards. The above review should therefore be viewed as only the broadest outline of this area and any property owner who believes that they are the victim of a de facto condemnation must consult with their counsel to be assured that they are evaluating their situation under the most recent standards.

What is “Just Compensation”?

The standard of just compensation for the taking of property (as well as determining the indirect damages — see below) is valuation at the “highest and best use” of the property. Thus, even if property is being underutilized, the claimant is entitled to the value as if it was being used to its full reasonable potential. This does not mean, however, that the potential highest and best use can be speculative or hypothetical. It must be realistic based on the zoning (or potential re-zoning — see below) or the character and history of development of the surrounding area.

Often, this can result in a zoning issue. For example, undeveloped residentially zoned property in a valuable commercial zone may still be valued at its commercial value provided the claimant can show a high probability of re-zoning. The burden, however, is on the claimant to prove this probability and proof must be clear and convincing of the probability that such zoning change or approvals would have been granted.

What Are The Income Tax Implications?

A condemnation is a taxable event at the time of vesting. Section 1033 of the Internal Revenue Code of 1954, as amended, deals with “involuntary conversions” and affects reinvesting of proceeds of the condemnation proceeding so as to accomplish a deferral of any capital gains.

THERE ARE STRICT TIME LIMITATIONS UNDER THESE SECTIONS! IMMEDIATE TAX ADVICE SHOULD BE SOUGHT WITH RESPECT TO THESE MATTERS AND AS TO ANY OTHER PROBLEMS WHICH MAY AFFECT AN OWNER AS A RESULT OF THE CONDEMNATION — WE EMPHASIZE — AT THE TIME OF TAKING. DO NOT WAIT UNTIL THE AWARD IS ACTUALLY RECEIVED, WHICH MAY BE YEARS THEREAFTER.

What About Damages To Property That The Government Has Not Taken?

The damages can be both “direct” and “indirect.” Direct damages are the value of the property physically taken. Indirect damages, which are also known as “severance” or “consequential” damages, are the loss in value to the remaining property by reason of the taking of a portion of the property (e.g., loss of frontage or access) or by reason of the use to which the condemned parcel is being put by the government (e.g., a landfill or an incinerator). [There is a technical difference between “severance” and “consequential” damages. Severance damages represent the loss in value (i.e., diminution) in the utility or potential of the remainder land by reason of the taking. Consequential damages are the damages caused to the remainder land resulting from the use of the land taken by the government. For example, if the government takes part of your property to erect an incinerator or toxic waste facility, the resulting damages are consequential.]

What Happens At Trial?

A condemnation trial is essentially a trial involving different opinions of expert witnesses. An appraisal must be filed and will be exchanged with the condemning authority which will have its own appraiser and appraisal report. Cases involving partial takings require expert engineering testimony and reports to identify the severance or consequential damages. Where the valuation question of “highest and best use” is dependent on the likelihood of a zoning change, an expert land planner and report will also be required.

All of these reports must strictly conform to specific rules and requirements and filed and exchanged within a specified time in advance of trial. See EDPL §508.

The trial of a claim involving the State is held in the Court of Claims and a trial of a taking by a local government is held in the Supreme Court in the County in which the property is located.