Can the Government Destroy Propety Values ‘Temporarily’ Without Compensation?

This blogpost was co-authored by Trevor Burrus.

A seemingly complicated legal case that has caught Cato's attention, CCA Associates v. United States, boils down to a simple constitutional question: If the government reneges on a contract and forces a property owner to rent apartments at below-market rates for longer than originally agreed, does it constitute a taking under the Fifth Amendment (which would require the government to pay just compensation)?

In 1961, Congress amended the National Housing Act to create incentives for private builders to supply housing to low- and moderate-income families. Builders were given below-market mortgages backed by the federal government and, in return, the owners agreed to certain restrictions from the Department of Housing and Urban Development, the most relevant being limitations on raising rent. Owners were also given the right to pre-pay the 40-year mortgage after 20 years, however, freeing them at that time from their rent-control obligations.

In 1990, as one 20-year period came to a close, Congress took away the owners' right to pre-pay their mortgages. In 1996, however, Congress returned the property owners' right to pre-pay. Therefore, between 1991 (when the original 20-year period would have lapsed) and 1996, the property owners were forced to rent at below-market rates.

CCA Associates is one of many similarly situated property owners who are suing the federal government for its clear act of duplicity. CCA Associates' case, among many others, has been bouncing back and forth between the Court of Federal Claims and the Federal Circuit for many years.

One of the key questions is how to determine the degree to which the government's actions economically affected CCA Associates' property. One view is that there was substantial economic impact during the five-year period between when Congress eliminated and then restored the pre-pay right -- CCA Associates lost approximately 81% of the property's possible value during those five years. Another view looks at the impact during the five-year period as fraction of the entire life of the property, not just the diminished value during the five-year period. Under this calculation, CCA Associates only lost 18% of the total value of the property.

The Federal Circuit adopted the latter formula and held that 18% is not a substantial enough economic impact to constitute a Fifth Amendment taking. Cato has joined the National Federation of Independent Business, the Center for Constitutional Jurisprudence, and Professor Steven Eagle of George Mason University Law School on an amicus brief urging the Supreme Court to take CCA Associates' case.

We argue that adopting the Federal Circuit's answer to the so-called "denominator question" -- that is, whether the denominator in the "economic impact" fraction should be the entire life of the property or the shorter (here five-year) period during which the government temporarily took the owners' right to rent at the market price -- could preclude all possible claims that the government committed a "temporary taking." By choosing a big-enough denominator, courts can always characterize an economic impact as being below the constitutional threshold.

We also argue that, in applying the Supreme Court's factors in the famous 1978 Penn Central case (which set up the analytical framework for regulatory takings), the Federal Circuit incorrectly treated the factors as a magic formula and ignored other relevant factors. Finally, we point out how courts are obviously confused about the proper standards to apply in these cases, thus creating a perfect time for the Supreme Court's guidance.

The Court will decide this fall whether to hear CCA Associates v. United States.