Penn Central take two.

• Author: Serkin, Christopher
• Position: Transferable development rights and takings regulation

ABSTRACT

Penn Central v. New York City is the most important regulatory takings case of all time. There, the Supreme Court upheld the historic preservation of Grand Central Terminal in part because the City offset the burden of the landmarking with a valuable new property interest--a transferable development right (TDR)--that could be sold to neighboring property. Extraordinarily, 1.2 million square feet of those very same TDRs, still unused for over forty years, are the subject of newly resolved takings litigation. According to the complaint, the TDRs that, saved Grand Central were themselves taken by the government, which allegedly wiped out their value by permissively upzoning neighboring property where they could have been used. The litigation is not only a captivating postscript to Penn Central, but also a compelling context for examining the category of regulatory property more generally. Regulatory property--such as TDRs and pollution credits, for example--is increasingly important and valuable, but raises complicated trade-offs between the need for stability in property-based entitlements and policy flexibility in governance. This Article ultimately argues that the creation of regulatory property should not prevent policy changes far into the future.

INTRODUCTION

Without any question, the most important case interpreting the Fifth Amendment's Takings Clause is Perm Central Transportation Co. v. New York City. (1) It involved the historic preservation of Grand Central Terminal, the majestic railroad terminal in the heart of Manhattan. With its landmarking, the City of New York prevented the terminal's owner--the Penn Central Authority--from developing a massive high-rise atop the ornate Beaux-Arts building. When the Penn Central Authority sued, claiming that the landmarking was a taking of its valuable development rights, the United States Supreme Court articulated the eponymous ad hoc three-factor balancing test and held that the landmarking was not a taking. (2) In reaching its conclusion, the Court focused partly on the fact that the City had enacted a regime of transferable development rights that allowed the Penn Central Authority to transfer at least some of the building's development potential to its immediate neighbors. (3) Now, extraordinarily, 1.2 million square feet of the very same TDRs from that original landmarking--unused for over forty years--are back in the news as the subject of a new round of takings litigation. (4) New York City recently relaxed the zoning restrictions in the area around Grand Central, and in so doing allegedly wiped out much--if not all of--the value of the remaining unused TDRs. (5) The owner of the TDRs sued, arguing that the City's favorable treatment of neighboring property was a taking of the original Penn Central TDRs. (6) The case has just been settled on terms that, while confidential, were characterized as de minimis by knowledgeable insiders. (7) But the poetic injustice of the situation seems striking. The TDRs that saved the original landmarking of Grand Central were themselves allegedly taken through the upzoning of neighboring property.

Even though the case has been resolved, the fact of the litigation raises a number of important substantive and conceptual issues that go to the heart of the Takings Clause and the nature of regulatory property. If the mere existence of TDRs transforms favorable upzonings into impermissible takings, then a TDR program threatens to lock in land use regulations against subsequent regulator)' change. That, in turn, is problematically entrenching and binds the hands of future governments. (8) However, if the value of TDRs can be so easily undermined, the viability of TDR programs may be in jeopardy. This Article therefore charts a careful middle path, one that balances the value of stability in the expectations of rights holders against the need for policy flexibility in the future. In particular, it argues that promises of regulatory stability should not be implied but should be subject to a clear statement rule, and that even in the presence of a clear statement, their strength should decrease over time.

This tension between stability and flexibility is inherent in regulatory precommitments. It also explains the complex stakes of the new Penn Central litigation for developers and preservationists alike, whose natural attitudes towards the Takings Clause were turned on their ear. Developers and their allies generally want looser land use regulations. (9) They are inclined to favor upzonings and regulatory changes that increase development potential. Indeed, a criticism of TDR regimes from this perspective is that they encourage governments to enact unduly restrictive zoning ordinances precisely to enhance the value of the TDRs. (10) On the other hand, developer interests also tend to favor expansive constitutional protection for property and generally advocate for interpreting the Takings Clause to protect settled expectations, whatever the source. (11) Invoking the Takings Clause to thwart more permissive land use regulations starkly reveals this tension.

Simultaneously, preservationists and others in favor of broad land use authority have come to rely on TDRs as an important tool. New York City used TDRs to build the innovative High Line Park, for example, and regularly uses TDRs to facilitate historic preservation and other limits on development. (12) While TDRs are controversial, they serve as a potent lubricant for many regulatory innovations. (13) Preservationists therefore could reasonably worry going forward that the City's decision to rezone will undermine confidence in TDRs broadly and so reduce or even remove their utility in the future. These groups should naturally be inclined to try to protect the value of the TDRs from the City's upzoning. On the other hand, they generally favor fewer legal protections for private property and a narrower conception of the Takings Clause. (14) There is something ironic about preservationists arguing for takings protection for TDRs, while arguing against applying the Takings Clause to protect development from more restrictive regulations generally, like the original landmarking of Grand Central itself.

Simply the fact of this new chapter in the Penn Central litigation is bound for fame (or infamy) and has instantly become a critical addendum to the most-studied takings case of all time. (15) Just the story behind the litigation is fascinating and worthy of attention. But the questions raised by the litigation implicate the ongoing viability of TDRs in New York City and beyond. More than that, too, the new litigation offers an unusual insight into the value and protection of "regulatory property" (16) and the entrenching effect it can have on public policy.

The concept of regulatory property is not new, and indeed has been the topic of important scholarship since at least the 1960s. (17) But regulatory property has become increasingly important and valuable in our modern economy, and includes such assets as pollution credits, fishing quotas, taxi medallions, financial guarantees, and the telecommunications spectrum, among many others. (18) Extending takings protection to these forms of property, however, can transform the regulatory regime that creates them into a kind of one-way ratchet that limits governmental power. Having created fishing rights or pollution credits, can a later government change course and regulate more directly--say by prohibiting certain kinds of fishing or pollution outright? TDRs raise precisely this problem, and so the new Grand Central litigation offers an unusually crystalized opportunity to examine these important questions. Even without a judicial resolution to the litigation, the genie is out the bottle, and the issues need to be addressed.

This Article tells the captivating story of the new Grand Central litigation, identifies the important tensions it reflects between regulatory stability and the need for change, and ultimately proposes a kind of clear-statement rule that will preserve the viability of TDRs going forward. The Article ultimately and provocatively argues that the strength of regulatory promises--here, that zoning in the receiving area for the TDRs would not change--naturally decreases over time. While the value of regulatory property depends on legal stability, there is a countervailing need for regulatory flexibility that increases as time passes. It is therefore unreasonable for investors to assume that regulatory promises will last in perpetuity. This Article concludes by identifying the self-amortizing character of such regulatory property.

1. THE SAGA OF THE GRAND CENTRAL TDRs

   In 1965, following the destruction of the original Penn Station, New York City adopted a comprehensive landmarks law that created a preservation commission with the power to protect individual buildings as well as entire neighborhoods. (19) In 1967, after public hearings, the commission designated Grand Central Terminal as one of the early landmarks. Only a few months later, the Penn Central Authority--the owner of Grand Central at the time--entered into a partnership with a developer to build a fifty-five-story office building on top of the terminal. When the landmarks commission rejected the proposal, Penn Central sued, claiming that the commission's actions amounted to a taking of the air rights above Grand Central.

   According to the Court, the landmarking of Grand Central was not a taking, in part, because of the offsetting benefits that Penn Central received from transferable development rights. (20) Those TDRs effectively allowed Penn Central to transfer its air rights over Grand Central to adjacent property. Because they were sufficiently valuable, the landmarking did not effect an unconstitutional taking. (21)

   New York (and many other cities) regularly use TDRs to minimize the harm from land use regulations, or as part of a...