When Do Government Denials Become Unlawful?

The Real Estate Espresso Podcast

When Do Government Denials Become Unlawful?

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When Do Government Denials Become Unlawful?

Welcome to The Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re asking questions about property rights.

Our team has been working on a development site in Utah. The property in question has commercial zoning associated with it. The purpose of the zoning is to restrict land use to specific uses that are in line with the city’s master plan. The intent is to ensure the development of these properties are not in conflict with the state goals of the city. At this point, we presented three different site plans to the city that are consistent with the zoning. All of them were supported by the Planning Commission. The most recent site plan proposal was approved by Planning Commission with a vote of 7 to 0, but then it got to City Council where it was denied.

In this particular municipality, the roles of the Planning Commission and City Council are well defined. The Planning Commission mainly acts as the technical advisory and decision-making body on land-use matters, whereas City Council retains the ultimate legislative authority. The Planning Commission is a citizen board appointed by City Council and the mayor. Their role is to provide expert review and make recommendations or decisions on a wide range of land-use items. They review applications for significant land-use changes like subdivisions, annexations, zoning designations, and amendments. They also look at amendments of the city’s land-use ordinances and general plan. For these applications, they hold public hearings, gather input from the public, and make a formal recommendation, which then either gets approved or denied by the Council. However, unlike other municipalities, this city has delegated final decision-making authority to the Planning Commission for certain types of applications, including conditional use permits and commercial site plans, which I think this applies to our site. That means for these specific applications, the Planning Commission’s decision is final and it does not require further approval from City Council unless appealed.

So since our property is commercial, it’s unclear whether City Council should have even played a role in the application according to the city’s own rules. One of our site plan applications was strongly encouraged by the Planning Commission. The members loved the mixed-use concept, but then the City Council stated the property had enough water for commercial use, which by the way, had no quota associated with it, but since the property had a residential component and quotas, they determined the property did not own enough water shares to enable a residential component. Then the City Council declined the application. The reason they cited was that by allowing mixed-use they would be setting a dangerous precedent that could enable developers in the future to create a loophole in the zoning by adding water shares to commercial property to bring additional residential density, disregarding the fact that the property currently has a residential single-family home on it today. Thus, the question eventually becomes one of property rights. At what point does the denial of construction on a property effectively become a condemnation of the property without just compensation? We’re starting to question the legitimacy of the repeated denials.

Clearly these are risks that a developer takes, but this situation feels a bit extreme. Today, we’re going to explore the case law surrounding excessive government interference. Of course, I’m not a lawyer and I don’t play one on a podcast. We’re focusing on the so-called “takings clause” found in the Fifth Amendment to the US Constitution, which says, “nor shall private property be taken for public use, without just compensation.” This means that private property, be it land, buildings, or other owned property, is “taken” when the government seizes, occupies, or otherwise significantly interferes with property rights.

This can be an outright seizure, such as in the case of eminent domain, or regulations that are so restrictive they effectively deprive the owner of usage. These would be considered regulatory takings. These takings must serve a public use – traditionally, this included roads, schools, airports, etc., but has been broadened to include economic development or other projects that benefit the public. And as for “just compensation,” the government must pay the property owner fair market value for what they take.

The Takings Clause doesn’t just apply to physical appropriations, like eminent domain. It applies when government regulations go too far and deprive rights. The courts generally distinguish between these physical takings and regulatory takings, and there are many Supreme Court tests and precedents available.

The case of Penn Central Transportation v. New York City in 1978 established a multi-factor test, looking at the economic impact on the property owner, interference with investment-backed expectations, and the character of the government action. Under that case, if a site plan denial leaves the property still usable, even if it’s less profitable, it’s usually not considered a taking. The case of Lucas v. South Carolina Coastal Council in 1992 focused on if a regulation denies all economically beneficial or productive land use, it’s considered a categorical taking. If repeated denials of a compliant site plan mean a developer can’t build anything, that could also fall under Lucas.

The case of Nolan v. California Coastal County Commission in 1987 addresses exactions when government conditions permit approval on giving up property rights. If the Council is using denial as leverage to force concessions, it could be an unconstitutional condition, a form of taking. And then there was a case in Rhode Island in 2001 which noted even if a property faces repeated denials that can ripen into a valid claim. If the site plans comply with zoning, and they’re approved by staff and the Planning Commission, yet Council repeatedly denies them, the court might see it as arbitrary and capricious regulation. It might be considered a taking under the constitutional protections of the Fifth Amendment.

So as you can see, we’re a bit frustrated with the City Council, and it looks like consulting with a very experienced land-use lawyer is going to be our next step. As you think about the things discussed today, have an awesome rest of your day. Go make some great things happen. I’ll talk to you again tomorrow.