Transferable development rights (TDRs) are a land-use planning tool that enables regulators to restrict the development of one parcel of property more densely than would otherwise be permitted by applicable land use regulations, while also giving the owners of the restricted property the right to “sell” their property’s development potential to owners of less-restricted land. Ever since the Supreme Court decided Penn Central Transportation v. New York City,1 a number of legal issues about TDRs have remained unanswered.
In his recent engaging essay, Penn Central Take Two, Christopher Serkin tackles the most important of these issues: Whether TDRs are themselves protected by the Fifth Amendment’s Takings Clause.
To contextualize the question, a word about Penn Central and its aftermath is in order. The facts of the original litigation are well known. In Penn Central, which Professor Serkin correctly characterizes as the “most important regulatory takings case of all time,” the Supreme Court rejected a takings challenge to a historical preservation regulation that prevented the construction of a massive high-rise structure above New York’s Grand Central Station. One of the reasons why the Court held that the “landmarking” of Grand Central did not effect a taking was that, at that time, New York City gave the terminal’s owner (Penn Central Transportation Company) TDRs enabling them to transfer at least some of the landmarked parcel’s development potential to adjacent lots.
To simplify a long story about the later developments, in 2006, the current owners of Grand Central Station—Midtown TDR Ventures (“Midtown”)—purchased the terminal in large part to acquire the TDRs granted at the time of landmarking. Midtown thereafter entered into negotiations to sell the TDRs to an adjacent landowner for $475 million, to enable the construction of one of the tallest buildings in New York City. (As a rule, TDRs are particularly valuable in NYC because they permit the construction of extra stories on buildings.) But, before the sale was finalized, the city rezoned the property to permit the construction of the skyscraper without the TDRs.
Midtown then filed a lawsuit asserting, among other things, that the rezoning of the “receiving” parcel was tantamount to a taking of Midtown’s TDRs. For a variety of reasons, the case settled before any court had the opportunity to opine on the issue.
As Serkin convincingly argues, the question posed in the litigation is a critical one, and its import extends beyond land use policy. As Serkin points out, if TDRs are protected by the Takings Clause, then other regulatory entitlements with “property-like” characteristics, such as emission allowances in cap and trade regimes, tradable fishing quotas, and taxi medallions, presumably are as well.
If the Takings Clause locks these regulatory promises into place, then there is a serious risk of regulatory entrenchment—with potentially negative consequences for both regulators and the regulated. On the other hand, if the government’s pre-commitments are too easily modified or even abandoned, then the value of devices like TDRs and emissions allowances is dramatically undermined for both regulators and property owners.
Serkin’s solution to these difficulties is to permit the government to make binding promises to entitlement holders, provided that these commitments are transparent and impermanent. This is probably the right answer as a matter of regulatory policy, and is in fact analogous to the “amortization” of nonconforming uses in zoning law, which is constitutionally permitted in most (but not all) states.
Serkin’s regulatory proposal, however, leaves many of the constitutional questions raised in the recent TDR litigation unanswered: To begin, are TDRs property at all? TDRs do have property-like characteristics (e.g., they are subject to market transfer). Serkin assumes, citing Charles A. Reich, that certain kinds of regulatory entitlements are property,2 but the concept of regulatory property remains contested and its contours remain amorphous at best.
Second, if TDRs are subject to takings protection, what is the “denominator” against which the impact of the devaluing regulation is to be measured? Serkin suggests that the “denominator” in the Midtown litigation ought perhaps to be the Grand Central parcel as a whole, but Midtown argued, à la Horne v. USDA,3 that the regulation devaluing their TDRs was a total taking of the amount of their loss. This is, as Serkin argues, somewhat circular since the government’s regulatory actions are a significant determinant of the value of TDRs, but there is a certain logic to Midtown’s argument since TDRs are intangible financial “property” if they are property at all.
And, finally, if TDRs serve the purpose of mitigating takings risks—as opposed to, as Chief Justice Rehnquist and Justice Scalia both argued, compensating owners whose property had been taken4—then should regulatory actions devaluing them trigger a reassessment of whether the original regulation, sans TDRs, would have been a taking?
These questions—each of which has far-reaching implications—persist, and will undoubtedly return in subsequent litigation.
- 438 U.S. 104 (1978).
- Charles A. Reich, The New Property, 73 Yale L.J. 733 (1964).
- 133 S. Ct. 2053 (2015).
- Penn Central, 438 U.S. at 150-52 (Rehnquist, J., dissenting); Suitum v. Tahoe Reg’l Planning Agency, 520 U.S. 725, 749 (1997) (Scalia, J., concurring in part and concurring in the judgment).