APPLICATION OF THE PENN CENTRAL TEST

JON HOUGHTON is an attorney in the property rights group of the Pacific Legal Foundation
(PLF), focusing on regulatory takings. Prior to joining PLF in 2022, he spent the previous 17 years as
a partner in his own firm defending the rights of property owners from large developers to home-
owners to small business owners in New York that were subjected to the government’s power of
eminent domain. It was here that Jon first developed his zeal for regulatory takings. Bucking the

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trend, Jon won numerous Penn Central cases at trial and on appeal. In the process, he also was at
the forefront of novel decisions regarding, as well as decisions strengthening, the determination of
background law and the protections afforded by the Supreme Court’s decision in Palazzolo v. Rhode Island. Jon has been
a frequent lecturer, both nationally and in New York, in the area of property rights and regulatory takings. He has been

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designated as a Counselor of Real Estate, joining an invitation-only organization of real estate practitioners recognized
for their expertise, experience, and ethics. Jon graduated from the University of Pennsylvania with a bachelor’s degree
in international relations and earned his law degree from Boston University School of Law. He is licensed to practice law
in New York, New Jersey, and Massachusetts.

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HERTHA LUND is Founding Partner of Lund Law PLLC. In 1992, while Hertha was working as

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a journalist covering Congress and the Supreme Court, she was assigned to report on one of the
most important cases regarding the Fifth Amendment, Lucas v. South Carolina Coastal Commission.
Her experience that day catapulted her into a career of fighting for private property rights. For
more than 30 years, Hertha has trial experience and has prevailed in numerous high value cases

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involving property rights at the national, state, and local levels. Hertha has appeared before the
Montana Supreme Court, the Federal District Court of Montana, the Ninth Circuit Court of Appeals,
the United States Court of Federal Claims, and the United States Supreme Court. In 1995, she clerked for the Chief Judge
of the United States Court of Federal Claims in Washington, DC. She is also a Member of Owners’ Counsel of America.

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BEN STORMES is an associate at Lund Law PLLC. He clerked for The Institute for Justice and
Pacific Legal Foundation defending property rights and other civil liberties, including eminent
domain, regulatory takings, civil asset forfeiture, and free speech. He also clerked for the Honor-

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able Ashley Harada of Montana’s 13th Judicial District. Ben’s practice emphasizes property rights
and other general litigation. He is licensed to practice in Montana and Oregon.

There are many different types of regulatory tak- In Penn Cent. Transp. Co. v. City of New York, the Court
ings, each with their own unique rules and body acknowledged it had been “unable to develop any
of Supreme Court jurisprudence. Although the ‘set formula’ for determining when ‘justice and
Supreme Court has articulated different inquiries fairness’ require” compensation for a taking and
based on the type of taking, each of the tests “aims instead created a flexible standard of review.2 The
to identify regulatory actions that are functionally Penn Central test is an ad hoc determination based
equivalent to the classic taking in which govern- upon all facts and circumstances but with particular
ment directly appropriates private property or attention paid to a set of three factors: (i) “economic
ousts the owner from his domain. Accordingly, each impact of the regulation on the claimant”; (ii) the
of these tests focuses directly upon the severity of extent to which the regulation interferes with “dis-
the burden that government imposes upon private tinct investment-backed expectations”; and (iii) the
property rights.”1 character of the government action.3 Since then, the
Court has provided little guidance on the applica-
tion of these factors.

MAY 2023 THE PRACTICAL REAL ESTATE LAWYER | 7

 Economic impact was enacted as compared to those same expecta-
tions after the regulation was enacted. Thus, reason-
Economic impact is a factual determination that is rel-
able market participants have investment-backed
atively simple to measure: an expert appraiser deter-
expectations of utilizing a property to its maxi-
mines the fair market value of the property at its high-
est and best use before the regulation was enacted, mum economic potential at its maximum permit-
as compared to the fair market value at its highest ted use. Any use other than that is not objectively
and best use after the regulation was enacted. reasonable. For example, if a regulation precluded
all development on a valuable piece of land, the
There is, however, an argument to be made that fact that the owner only intended to use it to tend

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the extent of the economic impact should not be sheep and grow grass does not make that regula-
as important. Property rights are defined by state tion constitutional.
law, not the economic value attached to them. And

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although property rights do not magically vest at Prior to Palazzolo v. Rhode Island, owners that took
certain price points or certain percentage losses, title after a regulation was passed often had diffi-
courts require a significant diminution in value to culty in claiming that the regulation was a taking

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constitute a taking. For example, in New York, 82 since they had notice of the limitation before the
percent is enough of a loss to constitute a taking,4 purchase. Courts often found that they had notice
but 64 percent is not enough.5 How does constitu- of the regulation at the time of purchase.7 However,

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tionality turn on 18 percentage points of value? The Palazzolo held that the potential regulatory takings
answer is that it doesn’t. The difference between claim runs with the land and is transferable from

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those two cases was whether the owner could still owner to owner:
use the property for economic benefit.
Were we to accept the State’s rule, the post enact-
The reality is that constitutional regulations can ment transfer of title would absolve the State of

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sometimes cause large degrees of economic suffer- its obligation to defend any action restricting
ing and unconstitutional regulations can sometimes land use, no matter how extreme or unreason-
cause very little. The Constitution is about rights; able. A State would be allowed, in effect, to put
economics are about damages. And thus, what a

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an expiration date on the Takings Clause. This
market buyer will pay for a property that is restricted ought not to be the rule. Future generations,
by a regulation reflects the extent of the regulation too, have a right to challenge unreasonable limi-
(i.e., damages), not whether there was a vesting of a tations on the use and value of land.
property right.
Nor does the justification of notice take into
Reasonable investment-backed expectations account the effect on owners at the time of
enactment, who are prejudiced as well. Should
Reasonable investment-backed expectations are an
an owner attempt to challenge a new regula-
objective determination, not a subjective one. It is
tion, but not survive the process of ripening his
not about the impact to a specific person, discon-
or her claim (which, as this case demonstrates,
nected from market realities. Rather, it is about the
will often take years), under the proposed rule
regulation’s impact upon the property, regardless of
individual preferences, and grounded in what a rea- the right to compensation may not be asserted
sonable market participant would have expected.6 by an heir or successor, and so may not be
asserted at all. The State’s rule would work a
The determination of reasonable investment-backed critical alteration to the nature of property, as
expectations is also a before-and-after comparison. the newly regulated landowner is stripped of
The court evaluates the investment-backed expec- the ability to transfer the interest which was
tations of market participants before the regulation possessed prior to the regulation.8

8 | THE PRACTICAL REAL ESTATE LAWYER MAY 2023

However, Justice O’Connor’s concurrence differenti- In contrast, the concurrence of Justice Scalia deter-
ated between the right to bring a regulatory takings mined that the proper approach was not to consider
claim and the ability to win that claim. In accord with the unconstitutional regulation:
the majority opinion, she confirmed that a post-
In my view, the fact that a restriction existed at
enactment purchaser can bring a takings claim,9
the time the purchaser took title (other than a
but suggested that with notice of the regulation, a
restriction forming part of the “background
claimant’s reasonable investment-backed expecta-
principles of the State’s law of property and nui-
tions may not have been negatively impacted.
sance,” Lucas v. South Carolina Coastal Council,
505 U.S. 1003, 1029, 112 S.Ct. 2886, 120 L.Ed.2d

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Today’s holding does not mean that the timing
798 (1992)) should have no bearing upon the
of the regulation’s enactment relative to the
determination of whether the restriction is
acquisition of title is immaterial to the Penn Cen-

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so substantial as to constitute a taking. The
tral analysis. Indeed, it would be just as much
“investment-backed expectations” that the
error to expungåe this consideration from the
law will take into account do not include the
takings inquiry as it would be to accord it exclu-

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assumed validity of a restriction that in fact
sive significance. If existing regulations do noth- deprives property of so much of its value as to
ing to inform the analysis, then some property be unconstitutional. Which is to say that a Penn

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owners may reap windfalls and an important Central taking, see Penn Central Transp. Co. v.
indicium of fairness is lost.10 City of New York, 438 U.S. 104, 98 S.Ct. 2646, 57
L.Ed.2d 631 (1978), no less than a total taking, is

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While Justice O’Conner also stated that investment- not absolved by the transfer of title.14
backed expectations are “not talismanic,”11 and are
not to be given exclusive significance,12 the damage Justice Scalia’s interpretation is a truer analysis and

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was done. comports with the principal holding in Palazzolo
(i.e., that the original owner’s right to bring a regula-
Justice O’Connor’s interpretation is both contrary to tory takings claim is transferable). If the analysis of
the majority opinion in Palazzolo and unworkable in reasonable investment-backed expectations is dif-

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practice. If someone buys property with notice of a ferent for the subsequent purchaser than it would
pre-existing unconstitutional regulation, either the be for the original owner, then it alters the analysis
owner can bring a claim, or he can’t. Notice cannot and impacts the transferability of the claim.15 It also
be both a non-factor and a penalizing factor at the follows the Supreme Court’s decision in Nollan v. Cal.
same time. Yet, that would seem to be the end result Coastal Comm. in which the Court rejected the argu-
of Justice O’Connor’s concurrence. ment that notice of a regulation stripped an owner
of reasonable investment-backed expectations.16
Evaluating investment-backed expectations under
Justice O’Connor’s view is also endlessly circular. As the focus of the inquiry is the regulation and the
subsequent purchaser is simply stepping into the
Let’s start with an owner who buys property with
original owner’s shoes to make that same deter-
notice of a pre-existing unconstitutional regulation.
mination, the court must compare the reasonable
What are the owner’s investment-backed expecta-
investment-backed expectations before the regula-
tions? They are to bring a regulatory takings action
tion versus how they were impacted as result of the
based on the regulation, the success of which will
regulation.
depend upon an evaluation of reasonable invest-
ment-backed expectations. Thus, the owner’s rea- Lastly, investment-backed expectations do not
sonable investment-backed expectations are based require any development effort or expenditure
on reasonable investment-backed expectations.13 of money by the owner. To require otherwise is

APPLICATION OF THE PENN CENTRAL TEST | 9

 tantamount to a pay-to-play scheme wherein the Had the Court stopped there, the case would have
takings claim must be purchased via money spent been over. Yet, the Court found a taking based upon
on architects, engineers, plans, and permit appli- its examination of the third factor, character of the
cations. Whether a regulation is constitutional or regulation, and the weight that was assigned to it.26
unconstitutional cannot be based upon how much
money someone spends.17 Furthermore, the result Conclusion
of such development efforts would be a valid build-
As evident from the above, both the right to use
ing permit. But a permit is a vested property right
itself and what can be subtracted from the right
and a separate and distinct property from the fee.18
to use without it being an unconstitutional taking

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have been defined by the circumstances of each
Character of the regulation case. There is no one universal determination. But
Character is more than an either/or determination at the same time, the legal principles that can arise

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about whether the regulation is a physical invasion from these ad hoc cases can substantially impact
or an adjustment to the property’s use in the name the landscape of regulatory takings cases around
of police power. Rather, it is what the regulation them. For the benefit of property owners and gov-

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does, whom it impacts, how it affects the owner’s ernment actors alike, care must be given in these
reasonable expectations of “property,” and how cases to adhere to the principles that underlie the
the burden is distributed as between the individual core Supreme Court determinations.

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owner and the public.19
Notes

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The severity of the regulation’s impact can have a 1 Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005).
substantial determination upon the takings inqui- 2 438 U.S. 104, 124 (1978).
ry.20 Character is best evaluated in accord with the 3 Id.
central tenet of Lingle, that “a valid public purpose 4 In re New Creek Bluebelt, Phase 4, 997 N.Y.S.2d 447, 451

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(N.Y. App. Div. 2014).
standing alone may not justify an otherwise prob-
5 Adrian v. Town of Yorktown, 920 N.Y.S.2d 411, 412 (N.Y.
lematic regulation.”21 App. Div. 2011).
6 See, e.g., Ruckelshaus v. Monsanto, 467 U.S. 986, 1005–06
Police power is what provides the government (1984) (“A ‘reasonable investment-backed expectation’

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with the authority to take action.22 However, sim- must be more than a ‘unilateral expectation or an abstract
need.’”) (citing Webb’s Fabulous Pharmacies, Inc. v. Beck-
ply because a regulation is a valid exercise of police with, 449 U.S. 155, 161 (1980) (“a mere unilateral expecta-
power does not also mean that it is not a taking con- tion or an abstract need is not a property interest entitled
trary to the Fifth Amendment. “A claim that action is to protection”)).
being taken under the police power of the state can- 7 Palazzolo v. Rhode Island, 533 U.S. 606, 626 (2001) (“[T]he
theory underlying the argument that post enactment pur-
not justify disregard of constitutional inhibitions.”23 chasers cannot challenge a regulation under the Takings
Clause seems to run on these lines: Property rights are
created by the State. So, the argument goes, by prospec-
Consider all three factors…and more tive legislation the state can shape and define property
Many courts fail to consider all of the Penn Central rights and reasonable investment-backed expectations,
and subsequent owners cannot claim any injury from lost
factors.24 In this regard, the Supreme Court is not value. After all, they purchased or took title with notice of
always helpful, sometimes also failing to fully con- the limitation.”).
sider all of them. And indeed, Penn Central is an ad 8 Id. at 627-628.
hoc test, with no set formula, based only on “the 9 Id., at 632 (O’Connor, concurring).
concepts of justice and fairness.” Nonetheless, all 10 Id. at 635.
Penn Central factors must be considered to give 11 Id. at 634.
effect to the test.25 The polestar for this approach is 12 Id. at 635.

Hodel v. Irving. In this Penn Central case, two of the 13 See Anello v. Zoning Bd. of Appeals of the Vill. of Dobbs
Ferry, 89 N.Y.2d 535, 540 (N.Y. 1997) (implicitly overruled
three factors weighed against the property owner. on other grounds by Palazzolo) (“Furthermore, if property

10 | THE PRACTICAL REAL ESTATE LAWYER MAY 2023

 owners were permitted to assert compensatory takings damage resulting from it, so long as the damage is substan-
claims based on enforcement of preexisting regulations, tial, that determines the question whether it is a taking”);
the traditional takings analysis articulated in Penn Cent., see also Palazzolo, 533 U.S. at 633–34 (O’Connor, concur-
and its inquiry into ‘the extent to which the regulation ring) (“the purposes served, as well as the effects produced,
has interfered with distinct investment-backed expecta- by a particular regulation inform the takings analysis”).
tions,’ would be rendered hopelessly circular. To illustrate 20 See Hodel v. Irving, 481 U.S. 704, 716–17 (1987) (finding
based on the facts of this case: If petitioner’s title was de- a Penn Central taking because of the extraordinary char-
fined without regard to the steep-slope restriction, then acter of the regulation); see also Arkansas Game & Fish
her investment-backed expectations would include the Comm’n, 568 U.S. at 39 (“Severity of the interference fig-
possibility of winning a compensatory takings lawsuit ures in the calculus as well.”); Portsmouth Harbor Land &
as a result of the Village’s enforcement of the ordinance. Hotel Co. v. United States, 260 U.S. 327, 329–330 (1922)
However, the success of her compensatory takings lawsuit (“while a single act may not be enough, a continuance of

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would depend largely on the extent to which the ordi- them in sufficient number and for a sufficient time may
nance interferes with her investment-backed expecta- prove [a taking]. Every successive trespass adds to the
tions, which would in turn depend on the possible success force of the evidence.”).
of the compensatory takings claim, and so on. This inevi-
21 Michael Lewyn, Character Counts: The “Character of the

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table circularity points up the analytical flaw in permitting
Government Action” in Regulatory Takings Actions, 40 Se-
a subsequent purchaser to assert a compensatory takings
ton Hall L. Rev. 597, 599-600 (2010) (“This rule is perfectly
claim based on a property interest that has already been
consistent with the proposition that courts may balance
defined out of the owner’s title.”).
a public purpose against the harm to a takings plaintiff.

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14 Palazzolo, 533 U.S.at 636–37 (Scalia, concur); see also Ar- Second, the “private harm/public interest” balancing
kansas Game & Fish Comm’n v. United States, 568 U.S. test is easier to apply than alternative interpretations of
23, 38 (2012) (“The determination whether a taking has the Penn Central “character” factor… Accordingly, courts
occurred includes consideration of the property owner’s

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should treat the public interest favoring regulation as part
distinct investment-backed expectations, a matter often of the ‘character’ factor.”).
informed by the law in force in the State in which the
22 Nollan, 483 U.S. at 843 (Brennan, dissenting) (“There can
property is located.”).
be no dispute that the police power of the States encom-

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15 Id. at 628 (“The State’s rule would work a critical altera- passes the authority to impose conditions on private de-
tion to the nature of property, as the newly regulated velopment.”); Nashville, C. & St. L. Ry. v. Walters, 294 U.S.
landowner is stripped of the ability to transfer the inter- 405, 429 (1935) (“It is true that the police power embraces
est which was possessed prior to the regulation. The State regulations designed to promote public convenience or
may not by this means secure a windfall for itself.”).

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the general welfare, and not merely those in the interest
16 Nollan v. Cal. Coastal Comm., 483 U.S. 825, 833, fn.2 (1987) of public health, safety, and morals.”).
(“Nor are the Nollans’ rights altered because they acquired 23 Panhandle E. Pipeline Co. v. State Highway Comm’n of Kan-
the land well after the Commission had begun to imple- sas, 294 U.S. 613, 619 (1935); Lingle, 544 U.S. at 536–37 (“As
ment its policy. So long as the Commission could not have its text makes plain, the Takings Clause does not prohibit

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deprived the prior owners of the easement without compen- the taking of private property, but instead places a con-
sating them, the prior owners must be understood to have dition on the exercise of that power. In other words, it “is
transferred their full property rights in conveying the lot.”). designed not to limit the governmental interference with
17 See Palazzolo, 533 U.S. at 634-635 (O’Connor, J., concur- property rights per se, but rather to secure compensation
ring) (“We also have never held that a takings claim is de- in the event of otherwise proper interference amounting
feated simply on account of the lack of a personal finan- to a taking.”).
cial investment by a post enactment acquirer of property, 24 See Adam R. Pomeroy, Penn Central After 35 Years: A Three
such as a donee, heir, or devisee.”). Part Balancing Test or A One Strike Rule?, 22 Fed. Circuit
18 See John J. Delaney & Emily J. Vaias, Recognizing Vest- B.J. 677, 704 (2013) (“on average, the circuit courts of ap-
ed Development Rights as Protected Property in Fifth peals utilized three factors only slightly more than one-
Amendment Due Process and Takings Claims, 49 Wash. U. third of the time (37.8%)…[and] applying Penn Central as a
J. Urb. & Contemp. L. 27 (1996) (should an owner obtain a balancing test is statistically rare... As an average percent-
vested right to develop a particular project, that right is, age of cases applying all three Penn Central factors (cases
of course, a separate “property” right also protected from that themselves are less than half of all cases reaching the
uncompensated takings, and that owner has unassailable merits), courts applied it as a balancing test less than 14%
proof of expectations). of the time.”).
19 See Lingle, 544 U.S. at 539–40 (“[T]he Penn Central inquiry 25 Palazzolo, 533 U.S. at 636 (O’Connor, concur) (“the Takings
turns in large part, albeit not exclusively, upon the magni- Clause requires careful examination and weighing of all
tude of a regulation’s economic impact and the degree to the relevant circumstances in this context. The court be-
which it interferes with legitimate property interests”); Penn low therefore must consider on remand the array of rel-
Cent. Transp. Co., 438 U.S. at 149–50 (Rehnquist, dissenting) evant factors under Penn Central before deciding whether
(“A taking does not become a non compensable exercise of any compensation is due.”).
police power simply because the government in its grace 26 Hodel, 481 U.S. at 716–17; Babbit v. Youpee, 519 U.S. 234
allows the owner to make some ‘reasonable’ use of his prop- (1996).
erty. It is the character of the invasion, not the amount of

APPLICATION OF THE PENN CENTRAL TEST | 11