John C. Stellakis

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In Joy Builders, Inc. v. Town of Clarkstown, 2018 N.Y. Slip Op. 07110, 165 A.D.3d 1084 (2d Dept 2018), a developer (“Developer”), in connection with the development of two subdivisions, challenged a provision of the Town Code of the Town of Clarkstown (“Town”) which authorized the Town to withhold the issuance of building permits for a subdivision until the applicant/owner has completed the requisite infrastructure and improvements and dedicated the same to the Town.  The Supreme Court, Rockland County, denied the Developer’s motion for summary judgment and the Developer appealed.  The Appellate Division, Second Department, reversed and declared the Town Code provision null void and struck the subdivision conditions affected by that provision.

With respect to the Developer’s projects, the Town Planning Board had approved two subdivisions of 22-lots and 55-lots, respectively.  The approvals contained a condition requiring the Developer to build certain infrastructure and post performance bonds for each project.  Town Code Section 254-18B authorized the Town to withhold the issuance of building permits for 10% of the lots of each subdivision until the Developer completed and dedicated the infrastructure and improvements.  The basis of the “holdback” was to ensure that applicants/owners complete the requisite work.  During construction, the Town relied upon the holdback provision and withheld the issuance of buildings permits for three lots in one subdivision and six in the other.  The Developer, then, commenced this action challenging the Town’s withholding and seeking a declaration that Section 254-18B was null and void.

The Appellate Division noted that towns and municipalities lack the inherent power to enact zoning or land use regulations – rather, they are creatures of statute.  As such, towns may only engage the powers conferred by the State Legislature.  The pertinent statute, Town Law Section 277(9) authorizes the Town to obtain enumerated forms of security in order to ensure the full cost of infrastructure and improvements in the event a developer abandons a project.  However, withholding the issuance of building permits is not among these.  The Court determined that Town Law Section 277 does not expressly authorized the holdback and no such authority can be implied.  Therefore, Town Code Section 254-18B was inconsistent with the Town Law and the Town does not have the power to withhold building permits to provide financial security for the completion of work.

The Court declared Section 254-18B void and struck the conditions of withholding. The Court’s ruling reaffirms strict adherence to the enumerated powers for municipalities in the land use and zoning context.

In Peyton v. New York City Bd. of Standards and Appeals, (2018 N.Y. 06870, 166 A.D.3d 120 (1st Dept 2018), Petitioners-community residents (“Petitioners”) commenced a proceeding to challenge the City of New York (“City”) Board of Standards and Appeals’s (“Board”) resolution upholding the City Department of Buildings’s (“DOB”) decision to grant a permit for the construction of a twenty-story nursing home (“Project”) on the Upper West Side.  The main issue is the City’s “open space” mandate (“Open Space Law”) and whether the Project provides enough open space to suffice the requirement.  The Court rulings and the Project’s viability hinged entirely upon how to calculate compliance with the Open Space Law.

At the outset, it is crucial to note the difference between a building-by-building calculation for open space and an open space calculation in the aggregate.  The former calculates the required open space with respect to each individual building within a zoning lot, whereas the latter considers the open space requirement for all buildings existing on an entire zoning lot together.  This distinction is at the heart of the dispute.

Procedurally, as relevant herein, the DOB made its open space calculation for the Project based upon a “building-by-building” methodology and decided to issue the construction permit.  One or more of the Petitioners appealed the DOB’s decision to the Board.  The Board resolved to uphold the issuance of the permit and the calculation methodology, which resolution the Petitioners challenged in this proceeding.  The Supreme Court, New York County, denied the petition and affirmed the Board’s resolution.  Petitioners appealed and the Appellate Division, First Department, reversed.

The Project site is within a “superblock” zoning lot known as “Park West Village” comprising 308,475 square feet, or 7 acres (“Zoning Lot”) (between 97th and 100th Streets and Columbus and Amsterdam Avenues; the complex extends to Central Park, but that portion is not at issue).  The complex on the Zoning Lot was built in the 1950s and 1960s as part of a federally subsidized middle-income urban renewal project and includes residential buildings, a school, a church, a public library, a health center and commercial buildings.  There are four residential buildings: three original sixteen-story buildings and a more recently constructed twenty-nine-story mixed commercial and residential building (“Fourth Building”).

A forty-year deed restriction had prohibited construction on the Zoning Lot through 2006 and the present owner (“Owner”) acquired the land shortly before the prohibition expired.  Approving and constructing the Fourth Building was the center of controversy between Petitioners, Owner, the City and others, which controversy also revolved around the City’s open space requirements.

Since its inception in 1961, and despite amendments in 1977, the Open Space Law had no particular design or mode to address zoning lots improved with multiple buildings.  With respect to the Fourth Building, there was a disagreement over whether its rooftop open space could count towards the open space requirement for the entire Zoning Lot.  The Fourth Building’s rooftop space included a 42,500 square feet garden, with a mosaic tile saltwater pool, sundeck and lawn.  However, the rooftop garden provided access only to residents of the Fourth Building and did not allow access to occupants of other buildings within the Zoning Lot.  If the Fourth Building’s rooftop garden was included in the open space calculation, then the project met the requirements; if not, then the project would fail.

The DOB performed a building-by-building analysis for the Zoning Lot, included the rooftop garden in its calculation and issued a building permit in 2007.  Residents of Park West Village and others challenged the DOB’s approval based upon the fact that the Fourth Building’s rooftop garden did not provide access to all residents of the Zoning Lot and, thus, could not be included in the open space calculation.

In 2009, the Board resolved to affirm the DOB’s decision (“2009 Resolution”), wherein the Board noted that the Open Space Law’s language requires open space with respect to a “building,” not the zoning lot as a whole; therefore, open space among multiple buildings need not be common, centralized space shared by all occupants of the zoning lot, and the building-by-building methodology for calculating open space suffices.  The 2009 Resolution utilized the building-by-building methodology for the first time and stated: “as each of the buildings is allocated the amount of space that is in excess of that which would be required…if they were located on separate zoning lots, it cannot be seen how those residents would be deprived of an equitable share of open space by the proposed building.”  The Board’s resolution was challenged, but the challenge was settled out of court and the Fourth Building was completed.

Two years later, in February 2011, the City amended the Open Space Law (“2011 Amendments”).  The definition of “open space” has always been: “that part of a zoning lot, including courts or yards, which is open and unobstructed from its lowest level to the sky and is accessible to and usable by all persons occupying a dwelling unit or a rooming unit on the zoning lot.”  The 2011 Amendments modified several other provisions of the Open Space Law (e.g. “open space ratio,” “minimum open space,” etc.) by substituting the words “zoning lot” and “all zoning lots” for the words “building” and “any buildings,” focusing the law and its analysis upon the actual zoning lots – as opposed to individual buildings.

After the City enacted the 2011 Amendments, the Owner sought to utilize a former parking lot within the Zoning Lot, which Park West Village residents previously used.  The Owner entered into an exchange agreement with the Project’s developer (“Developer”) to swap the parking lot for another parcel of land located north of the Zoning Lot and owned by the Developer (“New Parcel”).  The New Parcel was large enough for the Owner to construct another luxury apartment building.  The Owner agreed to pay the Developer $35,000,000 and the Developer promised to complete the project on the former parking lot.  However, this exchange was contingent upon, among other things, the Developer obtaining a permit from the DOB for construction of the Project.

In March 2011, the Developer made its applications to the DOB, which expressly noted that the open space within the Project would be accessible to all persons occupying a dwelling unit on the Zoning Lot.  Developer’s open space calculations for the Project included all of the open space on the zoning lot, including the Fourth Building’s rooftop garden.  Petitioners objected and argued that, based upon the 2011 Amendments to the Open Space Law, the Fourth Building’s rooftop garden no longer counted towards the open space calculation for the Zoning Lot (due to restricted access) and that the building-by-building methodology was invalid.

The DOB disagreed and granted a building permit for the Project.  Petitioners appealed to the Board and the Board resolved to affirm (“2011 Resolution”), relying upon the 2009 Resolution: “in the case of a multi-building zoning lot, the open space definition could be read to allow some open space to be reserved for the residents of a single building as long as the residents of each building on the zoning lot have access to at least the amount of space that would be required…if each building were on separate zoning lots.”  The Board also noted that the 2011 Amendments did not dictate a change in the DOB’s or Board’s building-by-building methodology or open space analysis.

Petitioners challenged the Board’s 2011 Resolution by commencing this proceeding and argued that, even though the Fourth Building’s rooftop garden was arguably within the meaning of open space when it was constructed in 2009, it presently was not open space by virtue of the 2011 Amendments.  These changes to the Open Space Law eliminated any ambiguity as to how to calculate open space and the Fourth Building’s rooftop garden cannot be included because the area is not available to all occupants of the Zoning Lot.

It was undisputed that the Project sufficed the open space requirement with the inclusion of the Fourth Building’s rooftop garden.  It was also undisputed that the Project failed to provide adequate open space without the rooftop garden.  The Board’s main argument was that the City’s Open Space Law is ambiguous and, therefore, the DOB and the Board have discretion to construe it.  In particular, the Board argued that the definition of open space (with accessibility and usability for all residents within a zoning lot) is irreconcilable with the definition of “zoning lot,” which contemplated multiple buildings on a single lot.  Therefore, the Open Space Law was ambiguous and the DOB and the Board were free to interpret and reconcile this ambiguity, i.e. by utilizing the building-by-building methodology.  The Supreme Court denied Petitioner’s petition and dismissed the proceeding. Petitioners appealed and the Appellate Division reversed and annulled the 2011 Resolution.

On appeal, the Appellate Division disagreed with the Board and adopted the Petitioners’ argument that the 2011 Amendments removed the contextual basis upon which the Board relied.  Judicial deference should be given to an agency’s interpretation of a statute it is charged with implementing, unless the interpretation is unreasonable or irrational.  However, where the question is one of pure statutory interpretation, an agency’s interpretation is accorded much less weight and Courts are free to ascertain the proper interpretation from the statutory language and legislative intent.  Here, resolving the dispute concerning the 2011 Amendments does not implicate the expertise of the DOB or the Board as the implementing administrative agencies; instead, the resolution is one of pure statutory analysis and does not require deference to the agencies.

The Appellate Division held that the definition of “open space” is clear and unambiguous, requiring open space to be accessible to all residents of any residential building on the zoning lot – not only the building containing the open space in question.  The Court noted this clarity is further bolstered by the 2011 Amendments, which eliminated all references to “building” and replaced the term with “zoning lot” in the relevant Open Space Law provisions.  Therefore, any space, including a rooftop, that is to be considered “open space” for purpose of satisfying the requirement must be accessible and usable by all residents of the zoning lot.  In addition, the Court expressly invalidated the building-by-building methodology: “Lest there be any doubt, we find that the 2011 [A]mendments now preclude use of [this] methodology, which has been an exception to this clear statutory import.”

The Court also noted that absence of legislative history did not evidence an intent to accept the building-by-building methodology.  Rather, the 2011 Amendments replacement of the word “building” was an unmistakable rejection of the use of this formula.  Notably, one of the four Judges dissented, which may lead the case to the Court of Appeals.

Local zoning ordinances throughout New York State incorporate the flexible “accessory use” component so as not to unnecessarily restrict one’s use of property.  Accessory uses are incidental and customary to the principal use of property. Determining whether a use is actually “accessory,” however, is often debated – especially where the use is not specifically enumerated as such or where the ordinance does not define the use.

Recently, in Brophy v. Town of Olive Zoning Board of Appeals, 2018 N.Y. Slip Op. 07388 (3d Dept), the accessory use debate engaged the Appellate Division, Third Department.  Ashokan Dreams, a bed-and-breakfast on 28-acres in the Town of Olive (“Town“), began operating in 1998.  Ashokan Dreams was zoned “residential-rural-3A,” which permitted, among other uses, “tourist homes,” “boardinghouses” and “commercial recreation.”

The proprietors of the bed-and-breakfast first sought and obtained site plan approval, without conditions, from the Town Planning Board (“Planning Board“) for a single guest bedroom bread-and-breakfast operation in 1998.  Almost two-decades later, and without further approvals, Ashokan Dreams had expanded to three guest rooms and offered weddings – upwards of 12 each year – with limited lodging.  In 2015, the Town Zoning Enforcement Officer (“ZEO“) advised Ashokan Dreams in writing that site plan review was required because the weddings had grown to affect the health, safety and welfare of the neighbors and that site plan review would be a proper remedy via the imposition of certain limitations.

Ashokan Dreams submitted a site plan application to the Planning Board, which referred the matter to the ZEO and the Town Zoning Board (“ZBA“).  After a public hearing, the ZBA determined that the weddings were a “permitted special use to a bed-and-breakfast” requiring site plan review and remitted the matter back to the Planning Board.  Notably, the ZBA also reasoned that periodic seasonal events, including weddings, could be an “accessory use” at the site.  Neighboring property owners and a neighborhood association (collectively “Neighbors“) commenced an Article 78 proceeding seeking to annul the ZBA’s determination.  The Supreme Court, Ulster County, partially granted and partially dismissed the Neighbor’s petition, holding: the ZBA correctly determined weddings were an accessory use, but erred by legislating a “new use subject to a special permit requirement.”  The Neighbors appealed challenging, inter alia, the accessory use finding and the Appellate Division affirmed.

The Third Department noted that, generally, a zoning board’s interpretation of local zoning ordinance is afforded deference and will only be disturbed if it is unreasonable or irrational.   This deferential standard was applicable “because [determining] whether a proposed accessory use is incidental and customarily found in connection with the principal use of property is, to a great extent, fact-based.  Resolution of the accessory use question depends upon an analysis of the nature and character of the principal use of the land in question in relation to the accessory use, taking into consideration the over-all character of the particular area in question.”[1]

In its analysis of whether the wedding venue accessory use was customary and incidental to the bed-and-breakfast, the Court considered the character of the use and the area in question.  The district permitted “tourist homes,” “boardinghouses” and “commercial recreation.”  Tourist homes are dwellings which offer up to four rooms for transient guests.  Boardinghouses are dwellings occupied by one family and three or more lodgers.  Each of these uses permit the provision of services of a temporary residence.  Commercial recreation is defined as making use of mountain land, including resort hotels, seasonal commercial camps resort ranches, resort lodges and bungalow colonies.  Notably, another bed-and-breakfast in the same district offered similar weddings services.  The Court found held that the ZBA’s determination was not irrational or unreasonable and its reliance, in part, on the fact that another bed-and-breakfast within the same district also offered wedding services was not in error.

[1] The Town ordinance defined “accessory use” as one that is customarily incidental and subordinate to the principal use of the premises. And, for all residential districts, the Town ordinance authorized any other accessory buildings or use considered by the ZBA to be customarily incidental to any related principal use therein.

A use variance is arguably one of the most difficult zoning approvals to obtain and is rarely granted.  Petitioners in 54 Marion Ave., LLC v. City of Saratoga Springs, 2018 N.Y. Slip Op. 04611, 162 A.D.3d 1341 (3d Dep’t 2018),  commenced a hybrid proceeding/action to challenge and annul a determination of the Zoning Board of Appeals (“ZBA“) of City of Saratoga Spring (“City”) to deny  a use variance application to allow commercial use of residential property and for Section 1983 damages based upon the theory of regulatory taking. The Respondents moved to dismiss and the Supreme Court, Saratoga County (“Motion Court“), granted the motion. Petitioners appealed and the Appellate Division, Third Department (“Appeals Court“), reversed in part and affirmed in part, and found hardship which was not self-created.

Petitioner 54 Marion Avenue, LLC (“Owner“) owns a vacant parcel of real property situated in the City’s Urban Residential-2 District, where single-family residences are permitted as of right, where other uses are allowed with a special use permit and site plan review and where commercial uses are generally prohibited. Petitioner Maple Shade Corners, LLC (“Purchaser“) contracted to purchase the subject parcel contingent upon obtaining a use variance to allow a dental practice to operate thereon. An application was made to the ZBA for a use variance to allow the dental practice in Urban Residential-2 and the ZBA denied the application because the alleged hardship was not unique and was self-created. Petitioners brought this litigation to annul the ZBA’s decision denying the use variance and to seek damages for regulatory taking. Respondents moved to dismiss based upon Petitioners’ failure to state a cause of action, which the Motion Court granted.

In order to qualify for a use variance, an applicant must meet the very difficult task of demonstrating the following four elements: (i) it cannot realize a reasonable return if the property is used for a permitted purpose; (ii) the hardship results from unique characteristics of the property; (iii) the proposed use will not alter the essential character of the neighborhood; and (iv) the hardship has not been self-created. The ZBA found that the Petitioner met the first and third elements, but failed to meet the second and fourth elements – that the hardship was unique and was not self-created. On appeal, the Appeals Court reversed the Motion Court as to the hardship issues.

In its review of the ZBA’s determination, the Appeals Court noted that the subject property lies next to the intersection of a major thoroughfare and a side street. Petitioners substantiated their claim that this location imposes a unique financial hardship because of the commercial development and increasing traffic along the thoroughfare (occurring over the prior 30 years) with statements from prior owners and real estate professionals.  These statements recounted previous failed attempts to sell the subject parcel for permitted residential use and opined its location rendered it unmarketable for residential use, among other things. In light of this proof, the Appeals Court found that the need for a use variance was not self-created because it only arose after the property was acquired and due to the gradual shift in the character of the area, which rendered the residential use requirement onerous and obsolete. Moreover, the Appeals Court noted that even the ZBA agreed the location of the parcel on the corner might impact its value; the ZBA’s ultimate conclusion that the financial hardship was not unique was contrary to that observation. On a motion to dismiss, Courts must accept the allegations presented as true and, based upon the foregoing, the Appeals Court held that Petitioners set forth a viable challenge to the ZBA’s denial and reversed the Motion Court.

With respect to the regulatory taking claim, the Appellate Division affirmed dismissal. In order for a taking claim to be ripe, a claimant must demonstrate that it has received a final decision regarding the application of the challenged regulations to the subject property from the governing entity and that it has sought compensation through the appropriate state procedures. Although the ZBA’s denial of the use variance satisfied the final decision prong, the Appeals Court found that there is no indication the Petitioners sought compensation under State law.

In Real Estate Bd. of New York, Inc. v. City of New York, Petitioner-Plaintiff Real Estate Board of New York, Inc. (“REBNY”) commenced a hybrid article 78 proceeding and plenary action against the City of New York (“City”) challenging the City’s adoption of Local Law No. 50 of 2015 (“Local Law”), which placed a moratorium on the conversion of hotel rooms to residential units.

REBNY’s article 78 claims sought to annul the Local Law and permanently enjoin the City from enacting similar legislation unless it complied with the City Charter’s Uniform Land Use Review Process (“ULURP”) and the State Environmental Quality Review Act (“SEQRA”). REBNY’s plenary claims sought compensation for taking and for due process and equal protection violations under the State and Federal constitutions.

The City moved to dismiss REBNY’s claims based on standing, among other things. The Supreme Court, New York County (“Motion Court“), granted the City’s motion and dismissed all of REBNY’s claims for lack of standing.  On appeal, the Appellate Division, First Department (“Appeals Court“) effectively reversed the Motion Court’s decision.  The Appeals Court held that REBNY had standing to bring its article 78 claims, except under SEQRA.  The Appeals Court also held that REBNY had standing to assert its plenary causes of action, but held that REBNY abandoned its claims under 42 U.S.C. 1983 because REBNY did not address them on appeal.

The City enacted the Local Law in June 2015 to allow for the study of the effect of the conversion of hotel rooms from transient guest spaces to full-time residential units on the City’s economy. Its legislative findings asserted that large hotels are essential to vacation and business travelers, important generators of well-paying jobs and anchors for surrounding economic activity. The findings also expressed concern that the conversions are occurring quickly and may be irreversible. In addition, the legislative intent noted the current market conditions, the profitability of conversions and the City’s developers’ rush to convert.

The Local Law placed a two-year moratorium (extended to four years, i.e. June 2019) on the conversion of Manhattan hotel rooms to residential units. More specifically, the Local Law applied to hotels with at least 150 units and prohibited the conversion of more than 20% of hotel rooms. The Local Law provided an exemption for conversions begun in the two years preceding its effective date and allowed owners to seek a waiver from the City’s Board of Standards and Appeals (“BSA”), which waiver was not as-of-right.

REBNY, a non-profit corporation comprised of 17,000 members (property owners, developers, lenders, managers, architects, designers, appraisers, attorneys and brokers), asserted that 175 hotels, including 29 REBNY members, were affected by the Local Law. REBNY argued that by restricting the rights of affected hotels, the Local Law reduced the value of the properties, among other things.

The City moved to dismiss on the basis that REBNY lacked organizational standing.  To have organizational standing to challenge the enactment of the Local Law, REBNY must satisfy three elements : (i) one or more of its members must have standing; (ii) the interest it asserts must be germane to its purpose; and, (iii) neither the claim asserted nor the relief sought requires the individual members’ participation (ensuring the organization is the proper petitioner/plaintiff). Standing requires injury-in-fact which falls within the zone of interests and which is different in kind or degree from the public at-large.

The Appeals Court ultimately held that REBNY sufficed the injury requirement. Owners of property subject to new zoning restrictions are presumptively affected by the change. REBNY member hotels were negatively affected by the Local Law, including but not limited to, the diminution of property value and the costs associated with applying for a waiver. These negative effects satisfied the injury-in-fact requirement.

One of the bases cited for this finding was the Local Law’s own legislative intent, which noted that the Local Law would not be necessary if conversions were not so profitable. Thus, with respect to first part of the three-prong test for organizational standing, the Appeals Court held one or more member’s sustained sufficient injury-in-fact within the zone of interests and different in kind from the public at-large.

However, REBNY satisfied the second and third prongs for organizational standing on only some its claims.  Pertinently, with respect to the article 78 claims, the Appeals Court held REBNY had standing for all claims, except under SEQRA. REBNY focuses on the economic and political health of the real estate industry. The Court rejected REBNY’s argument that it sought to protect its member’s environmental interests in air quality and traffic. REBNY’s only “environmental” focus is on the economic environment.  Economic interests – alone – are insufficient to confer SEQRA’s zone of interests. While economic interests are germane to REBNY’s purpose to the extent it is a real estate industry advocacy group, environmental interests are not.  Therefore, REBNY is only a proper petitioner for the non-SEQRA claims.

Notably, the sole dissenting Judge opined, among other things, that REBNY did not have standing for any claim. The dissent argued that REBNY’s allegations of potential future economic harm were amorphous and did not suffice an injury-in-fact. REBNY’s members have neither attempted to convert nor sought exemption by waiver form the BSA. REBNY did not provide competent proof, e.g. appraisals, evaluations, etc. Additionally, the waiver application fee is de minimis and does not constitute an injury.

In opposing Crossroad Ventures, LLC’s (“Crossroad Ventures“) endeavor to construct a vacation resort partially within the Town of Shandaken, (“Town“), grassroots preservation organization Catskill Heritage Alliance, Inc. (“Alliance“) commenced two consecutive Article 78 proceedings challenging certain approvals.  The Court addressed multiple appeals from both proceedings in Catskill Heritage Alliance, Inc. v. Crossroads Ventures, LLC, et al., 161 A.D.3d 1413 (3d Dep’t 2018).  In its opinion, the Court reinforced the principle that a board of appeals is the sole interpreter of its ordinance and that interpretations by other boards or bodies may be fatal to municipal approvals and determinations.

In this case, the Town’s zoning ordinance allowed a resort with a special permit and site plan approval from the Town Planning Board (“Planning Board“).  However, the ordinance did not define “Vacation Resort.” In 2000, Crossroads Ventures requested an interpretation and definition of the term to determine what uses are allowed as part of a resort. The Town Zoning Board of Appeals (“Zoning Board“) responded to the request by analogizing a vacation resort to a hotel, motel or lodge development and determined the term included all uses integral to the hotel, motel or lodge development and clearly accessory to it, as well as other uses allowed in the area, either as of right or by permission. After receiving the interpretation, Crossroads Ventures undertook a prolonged environmental review and developed a plan for the resort: two hotels, a conference center, community centers and additional lodging scattered among several duplexes and multiple unit buildings.

In 2013, towards the end of its environmental review, Crossroads Ventures made an application to the Planning Board for a special permit and site plan approval. The Planning Board issued the special permit and conditionally approved the site plan. The Alliance commenced its first Article 78 proceeding challenging these determinations. The Supreme Court, Ulster County, issued a decision in October 2016 denying Crossroad Venture’s motion to dismiss and granting the Alliance’s petition, in part. The Court found that, although the Planning Board properly determined that non-habitational structures fell within the clear definition of permissible accessory uses to the resort, it improperly resolved an ambiguity in the ordinance as to whether detached duplexes and multiple unit buildings were permitted uses in the area. Accordingly, the Court annulled the determinations and remitted the matter to the Zoning Board to address the propriety of residential structures. The parties appealed the October 2016 decision.

On remittal, the Zoning Board interpreted the ordinance and clarified that detached residential units were permitted “lodges.” Thereafter, the Planning Board, again, granted Crossroads Ventures’ application, issued a special permit and conditionally approved the site plan. The Alliance commenced its second Article 78 proceeding challenging both the Zoning Board’s interpretation and the latest Planning Board approvals. The Supreme Court dismissed the petition by decision dated July 2017 and the Alliance appealed.

On appeal, the Appellate Division, Third Department, decided both appeals. With respect to the October 2016 decision, the appellate Court affirmed both the denial of the motion to dismiss and the granting of the petition, in part. The Court noted that zoning boards of appeals are the bodies with the authority to interpret ordinances – not planning boards. To the extent any ambiguities exist in the pertinent ordinance, a planning board must request an interpretation thereof from its board of appeals. In 2000, the Zoning Board interpreted the “Vacation Resort” term to include conference centers and community centers as integral, accessory uses, but it did not opine on detached duplexes and multiple-unit buildings. This was problematic because the latter structures are habitations and could be viewed either as permitted lodges or as new multifamily dwellings prohibited under the ordinance affecting the project area. The Planning Board should have requested another interpretation from the Zoning Board, rather than resolving the ambiguity itself. Therefore, the appeals Court affirmed the lower Court’s October 2016 decision to annul the Planning Board’s approvals for the resort and to remit the issue to the Zoning Board.

Next, the appeals Court reviewed the July 2017 decision. This later decision addressed both the Zoning Board’s interpretation of the duplexes and multiple-unit buildings and the Planning Board’s subsequent (second set of) approvals. The appeals Court found the Zoning Board’s interpretation deserved deference because it was not a purely legal interpretation – it was rendered upon the facts of Crossroads Ventures’ proposal. The Town ordinance defined “multiple dwellings” as structures within three or more dwelling units, but stated that rooms in a boardinghouse, dormitory, motel, inn or other similar building do not constitute dwelling units. Although the Town ordinance did not define the term “lodge,” the Zoning Board noted that a lodge is commonly defined as a transient residence, such as an inn or similar building having rooms that are excluded from the ordinance’s definition of dwelling unit. Ultimately, the permanence of residency was determinative.

The Zoning Board concluded that a lodge includes structures containing one or more units of lodging and sleeping accommodations for transient occupancy in connection with the special permitted use of a hotel, lodge development or vacation resort held under common ownership – so long as the users had primary residence elsewhere. And, the Zoning Board determined that the proposed structures at the resort were intended for transient occupancy, as rentals or timeshares; therefore, these were permitted lodges, as opposed to prohibited new multifamily dwellings. The Court found this interpretation to be rational. The Court also found that the Planning Board, relying upon the Zoning Board’s 2000 and 2017 valid interpretations, rationally determined to issue the special permit and conditional site plan approval for the resort. Therefore, the Court affirmed the July 2017 decision.

Last month, the Appellate Division, Second Department, issued four decisions[1] in a series of hybrid proceedings challenging local laws in the Town of Riverhead (“Riverhead”). Plaintiff/Petitioner Calverton Manor, LLC (“Calverton Manor”), in connection with a site plan application, sought to annul several resolutions adopted by Defendant/Respondent Riverhead Town Board (“Town Board”). These resolutions: (1) established a new comprehensive plan; (2) implemented a new agricultural protection zoning district (“Agricultural District”); (3) implemented a new rural corridor district (“Rural District”); and (4) enacted a new transfer of development rights law (“TDR Law”). Each of the challenges was based upon the Town Board’s failure to comply with N.Y. General Municipal Law Section 239-m (“Section 239-m”), among other things. In addition, Calverton Manor argued that the “special facts exception” required Riverhead to apply the preceding zoning district laws to its application, rather than the new Agricultural District and Rural District laws.

In these cases, the Court held that some circumstances allow revisions to be made to proposed laws or actions referred to the county planning agency pursuant to Section 239-m even after the referral is made. As the Court analyzed Calverton Manor’s Section 239-m challenges to the various Town Board resolutions, its holdings illustrate the distinction between valid post-referral modifications and invalid modifications which violate Section 239-m and render the entire act void. Additionally, the Court analyzed the special facts exception in light of Riverhead’s treatment of Calverton Manor’s application.

Calverton Manor’s Site Plan Application versus a New Comprehensive Plan

Calverton Manor owns an undeveloped parcel of land (“Property”) in Riverhead and submitted a site plan application in 2001 to construct numerous commercial and residential buildings thereon (“Application”). For approximately two years, Calverton Manor worked with Riverhead on its Application to satisfy the applicable zoning laws in effect at the time. Riverhead, however, had been developing a new comprehensive plan since 1997. The new comprehensive plan sought to protect open space and farmland, while concentrating development into certain specified areas. Riverhead’s new comprehensive plan also proposed eliminating certain permitted uses on the Property that were crucial to the Application.

Calverton Manor submitted the last revised Application in September 2003. The Town Board adopted the new comprehensive plan on November 3, 2003. The new comprehensive plan derailed the Application and development of the Property. Calverton Manor brought its challenges in Suffolk County Supreme Court. Calverton Manor was largely unsuccessful and appealed; the Town Board cross-appealed concerning the special facts exemption.

Amendments Subsequent to a Section 239-m Referral: Embraced in the Original

With respect to Calverton Manor’s Section 239-m challenge to the Town Board’s resolutions enacting the comprehensive plan, the Agricultural District and the Rural District, the trial court denied the petition, dismissed the proceeding and declared theses local laws legal and valid.[2] Section 239-m, in many instances, requires a municipality to submit to the county planning agency a “full statement” of the proposed action. In pertinent part, the trial court found that the Town Board made the appropriate Section 239-m referrals. Calverton Manor appealed and the Second Department affirmed. The Court held that despite changes made to the comprehensive plan, Agricultural District and Rural District after the Town Board referred these local laws to the Suffolk County Planning Commission (“Commission”), the revisions were “embraced within the original referral” such that the Town Board did not fail to refer a full statement of its proposed action.

Calverton Manor also presented a Section 239-m challenge to Riverhead’s new TDR Law. Transfer development rights allow landowners whose development rights have been adversely affected or limited in one place to transfer these rights to another place and build in excess of certain limitations in that other, buildable place. The parcel from which rights are transferred is the “sending parcel” and the parcel to which rights are transferred is the “receiving parcel.” Riverhead’s new TDR Law designated the Property as a “sending parcel” so that development rights could only be transferred away from it, as opposed to towards it.

With respect to this challenge, the trial court also denied Calverton Manor’s Section 239-m challenge to the TDR Law based upon the same rationale. The Second Department, however, reversed the trial court, granted the motion for summary judgment and declared the TDR Law void for failure to comply with Section 239-m. The Town Board’s submission of the TDR Law to the Commission was effectively rejected because it was missing the complete text of the law. The Commission, upon receipt of the proposed law, advised the Town Board by letter that it would not review the TDR Law until it received a complete revised text of the amendment. And, nothing in the record contradicted the Commission’s position that it did not receive a complete text of the law. Therefore, the Court found that the Town Board failed to refer a “full statement” of the proposed TDR Law to the Commission prior to enacting the same in violation of Section 239-m.

The Town Board sought the same “embraced within the original” protection the Court applied to the other local laws. Specifically, the Town Board argued its referral of prior drafts of the TDR Law sufficed Section 239-m and obviated the need for the subsequent referral. The appeals court disagreed. A new referral is not required only if “the particulars of the [changes] were embraced within the original referral.” Unlike the changes made to the comprehensive plan, Agricultural District and Rural District, subsequent to their referrals, the amendments to the TDR Law were not embraced within the referred version.

The TDR Law ultimately passed by the Town Board, among other things, mapped the sending and receiving districts and specified the degree to which density limitations could be exceeded. The prior versions of the TDR Law reserved these details for future consideration. Highlighting the significance of the changes made to the TDR Law post-referral, the Town Board’s own resolution declared that the final TDR Law contained “significant modifications” from the prior versions. In addition, the Town Board even prepared a supplemental generic environmental impact statement over the course of several months to evaluate the changes in the final TDR Law. Accordingly, the Court held that the Town Board failed to comply with Section 239-m, the adoption of the resolution enacting the TDR Law was of no effect and the TDR Law is void and unenforceable.

Special Facts Exception Permits “Grandfathering” Site Plan Applications

In addition to its Section 239-m, Calverton Manor argued “special facts” required that the zoning district laws preceding the Agricultural District and Rural District apply to its Application. Ordinarily, courts apply the current zoning laws in effect when they render decisions. Under the special facts exception, however, courts may apply the law in effect at the time the application was made. This exception applies where the landowner “establishes entitlement as a matter of right to the underlying land use application [and] extensive delay indicative of bad faith….unjustifiable actions by municipal officials…or abuse of administrative procedures.”

The Town Board sought to dismiss this claim, but the trial court held triable issues of fact existed sufficient to permit the claim to proceed. The Town Board cross-appealed and the Second Department denied its appeal.[3] The Court found that triable issues of fact exist as to whether special facts warranted the application of the prior zoning laws to Calverton Manor’s Application.

The record contained inconsistencies as to whether Calverton Manor’s last revised Application was “complete” in September 2003. On the one hand, evidence in the record showed that Calverton Manor needed to make further revisions before the Application could be deemed completed under Riverhead’s rules. In this scenario, Calverton Manor is not entitled to the exception. On the other hand, evidence also showed that the Town Board determined the Application was “completed” upon submission in September 2003. This latter circumstance indicates the Town Board may have delayed processing the Application in bad faith until the new laws went into effect. Because triable issues of fact exist, summary judgment on this claim was inappropriate.

—ENDNOTES—

[1] Calverton Manor, LLC v. Town of Riverhead, 160 AD3d 829 (2d Dept 2018); Calverton Manor, LLC v. Town of Riverhead, 160 AD3d 833 (2d Dept 2018); Calverton Manor, LLC v. Town of Riverhead, 160 AD3d 838 (2d Dept 2018); Calverton Manor, LLC v. Town of Riverhead, 160 AD3d 842 (2d Dept 2018).

[2] Although these are hybrid proceedings, for the purposes of simplicity, the petition/complaint will be referred to as the petition and the proceeding/action will be referred to as the proceeding.

[3] The Town Board cross-appealed “from so much of the order as did not search the record and award them summary judgment and, in effect, make a declaration in their favor” on Calverton Manor’s special facts exception claim. The Second Department “dismissed” the cross appeal based upon the premise that the Town Board was not entitled to make such an appeal because it was technically not aggrieved. The Court noted that a party is not aggrieved by an order which does not grant relief that the party did not request. Here, apparently, the Town Board did not ask the trial court to award summary judgment on the special exceptions claim. Therefore, it cannot be aggrieved by this aspect of the order and is not entitled to appeal it. Despite having “dismissed” the cross-appeal, the Second Department heard, analyzed and denied the Town Board’s arguments seeking summary judgment on the special facts exception.

In Fichera, et al. v. New York State Dep’t of Envt’l Conserv., et al., decided last month, Petitioners commenced an Article 78 proceeding seeking to void actions taken and determinations made by the New York State Department of Environmental Conservation and the Zoning Board of Appeals of the Town of Sterling (“Sterling ZBA”) and to enjoin the advancement of a mine project (“Mine Project”). Below, the Supreme Court, County of Cayuga, denied the petition and granted various motions to dismiss. On appeal, the Appellate Division, Fourth Department, held that (1) the petition was timely and (2) the Supreme Court erred by dismissing the cause of action based upon a violation of  New York General Municipal Law section 239-m (“Section 239-m”) and by not granting the petition thereupon. The appeals court remitted the matter back to the Sterling ZBA.

As pertinent to the appeal, the Article 78 petition claimed that the Sterling ZBA violated Section 239-m when it granted the Mine Project owners’ original application for an area variance without referring the matter to the appropriate county planning agency or regional planning council. Therefore, petitioners argued, the Sterling ZBA’s action in granting the area variance application was deemed null and void. Petitioners further argued that the Sterling ZBA’s sua sponte decision to grant the Mine Project owners an amended area variance based upon its previous determination on the original application was also null and void.

In opposition to the petition, respondents argued that the challenge to the determination granting the initial area variance was time-barred because petitioners failed to commence their challenge within 30 days of the original determination, as required by New York Town Law section 267-c(1). In addition, respondents contended that the determination granting the subsequent amended area variance was made by the Sterling ZBA after it made the appropriate referrals required by Section 239-m.

The appeals court agreed with the petitioners and emphasized the jurisdictional importance of complying with Section 239-m in declaring the Sterling ZBA’s approvals null and void. In many instances, Section 239-m requires a municipal agency to refer an application to a county or regional planning board for its recommendation prior to the agency taking final action on an application for land use approval. The Sterling ZBA did not refer the initial application for an area variance to the Cayuga County Planning Board before taking final action with respect to that application. Failure to comply with Section 239-m is not a mere procedural irregularity; rather, it is a jurisdictional defect involving the validity of a legislative act. Accordingly, the Sterling ZBA’s failure to refer the initial application to the county planning board renders the approval null and void.

Moreover, the appeals court held that the Sterling ZBA’s determination in granting the subsequent amended area variance was also null and void. “Inasmuch as the determination granting an amended area variance was based on the initial, void determination, we further conclude that the [Sterling] ZBA’s approval of the amended area variance is likewise null and void.”

Notably, if the county or regional planning board recommends modifications or disapproves an application, then the referring body cannot act otherwise – except by a vote of majority plus one of all members. Here, the Sterling ZBA unanimously approved the grant of the amended area variance and the respondents argued that the unanimous approval of the amended area variance was sufficient to override any recommendation by Cayuga County Planning Board to disapprove or modify (had the Sterling ZBA referred in the first place). “[T]he subsequent vote cannot retroactively cure the jurisdictional defect in granting the original area variance upon which the [Sterling] ZBA relied in granting the amended area variance.”

Lastly, the appeals court found that the Article 78 petition was timely, despite having been brought well-after the Sterling ZBA’s determination respecting the initial area variance application. The filing of a jurisdictionally defective document does not commence the statute of limitations. Therefore, the statute of limitations never ran and the petition was timely.

The Appellate Division modified the Supreme Court’s judgment in conformance with its opinion (discussed above) and remitted the matter to the Sterling ZBA for a new determination on the area variance application.

Early this year, the Supreme Court of New York, Richmond County issued a comprehensive opinion in Galarza v. City of New York, 58 Misc.3d 1210(A), reaffirming and clarifying the nuances of condemnation, takings and just compensation principles as they relate to wetlands restrictions.  The court held that the owner of a 21,000 square-foot vacant lot (“Property”) condemned by the City of New York (“City”) as wetlands was entitled to just compensation in the amount of $669,000, where the fair market value of the undevelopable land was approximately $200,000.

In awarding upwards of 335% of the Property’s apparent value, the court found that the owner was entitled to an incremental increase in just compensation.  This finding was based upon the nature of the wetlands restrictions vis-à-vis takings precedent.  And, it is significant that the court awarded the higher value despite the owner having purchased the Property after it was already designated as wetlands and known to be undevelopable.  This decision follows a late-2017 decision of the Appellate Division in In re New Creek Bluebelt Phase 3 (Baycrest Manor), 156 A.D.3d 163 (2d Dep’t 2017), where the Second Department affirmed, as modified, an increased award as just compensation for wetlands condemnation.

Claimant Ivan Galarza (“Owner”) purchased the Property at a tax lien foreclosure auction in 2003.  At the time the Owner purchased the Property at auction, the Property was already designated as wetlands.  The City later acquired the Property by condemnation as part of its New Creek Bluebelt Phase 4 project.  The Owner and the City both agreed that the wetlands designation precluded the Owner from obtaining a permit to improve the Property and that the highest and best use of the Property, as regulated, would be to remain vacant.  The parties disagreed, however, as to whether the wetlands restrictions constituted a regulatory taking.  The regulatory taking issue is relevant and forms the crux of this entire case because it is precisely the finding of a “reasonable probability of success” in bringing a hypothetical regulatory taking claim to challenge regulations, e.g. wetlands restrictions, that entitles a property owner to the incremental increase in just compensation.

The Threshold Question: Whether the Regulation Is a Background Principle of New York State Law on Property and Nuisance

First, the court addressed the threshold issue of whether the Owner was barred from bringing a takings claim in the first place, because the Owner purchased the Property subject to the wetlands designation.  Relying on Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), Galarza stated that the “logically antecedent inquiry” into a takings claim is whether “the proscribed use was part of the title to begin with.”  Thus, before any owner can claim deprivation of economically beneficial uses of property, courts must first determine whether the right to use the property in the manner prohibited was actually part of the “bundle of rights” acquired with title.

In Lucas, the U.S. Supreme Court held that in order for a regulation not to constitute a taking where it prohibits all economically beneficial use of land, the regulation cannot be newly legislated or decreed, but must inhere in the title itself; the restriction must be a background principle of a state’s law of property and nuisance – already placed upon the ownership of property.  After Lucas, the New York Court of Appeals issued four opinions simultaneously in 1997 known as the “takings quartet.”[1]  These four cases established the “notice rule” in New York, whereby any owner who took title after the enactment of a restriction was barred from challenging the restriction as a taking because the use prohibited was not part of the bundle of rights acquired with title by a buyer.

Almost a decade after Lucas, the U.S. Supreme Court’s decision in Palazzolo v. Rhode Island, 533 U.S. 600 (2001), up-ended New York’s “notice rule.”  The high Court held that a per se notice rule was untenable and altered the nature of property because an owner would be deprived of the right to transfer an interest acquired with title (prior to the regulation).  Moreover, the Court held that simply because an owner acquired property after the enactment of regulations does not transform those regulations into background principles of state law on property and nuisance.

In determining whether New York State’s wetlands restrictions affecting the Property are part of the background principles of New York’s law on property and nuisance, the Galarza court answered in the negative.  Interestingly, the City argued, among other things, that protection of wetlands was grounded in common law and cited to medieval England’s use of wetlands restrictions.  The court noted, however, that these restrictions pre-dated the creation of fee estates and that as individual ownership rights began to take shape, wetlands regulations were abandoned in favor of development.

In addition, the Galarza court distinguished the Palazzolo decision issued by Rhode Island Superior Court after remand from the U.S. Supreme Court.  The Superior Court found that wetlands designations were part of the background principles of Rhode Island’s state law.  Conversely, the Galarza decision found that “[w]hile development of wetlands constitutes a nuisance under Rhode Island law, development of wetlands was not a nuisance under New York law.”  The court chronicled the filling and draining of wetlands and the history and treatment of land development in the City from its inception until the 1970s, at which time conserving wetlands became a concern.  “Given this history, it is clear the New York wetlands regulations did not simply make explicit a prohibition on activity that was always unlawful, and therefore the wetlands regulations are not part of New York property and nuisance law.”

The Galarza court also distinguished a 2016 Second Department ruling in Monroe Eqs. LLC v. State of New York, 145 A.D.3d 680, which held watershed regulations constituted background principles of New York law.  Unlike wetlands regulations, watershed regulations prohibit a nuisance by preventing poisoning and pollution of water supplies and drinking water.  Based upon this analysis, the court found the Owner in Galarza was not barred from bringing a takings claim.

The Regulatory Takings Analysis: Per Se, Partial or Not at All

After having found the Owner’s regulatory taking claims were not barred, the court proceeded to the crux of the case: whether there was a reasonable probability that the wetlands regulations constituted a regulatory taking.  If not, the Owner’s just compensation is limited to the value of the Property as regulated.  If so, then the Owner is entitled to an incremental increase in value as just compensation, i.e. the value of the land as restricted plus an increment.  The increment reflects the premium a hypothetical buyer would pay for the Property in light of the probable success on a takings challenge.  (In other words, the Property would be worth more and, thus, entitled to greater value as just compensation for condemnation.)  To show a reasonable probability of success on a takings claim, the claimant must demonstrate that the regulation renders the property “unsuitable for any economic or private use, and destroy[s] all but a bare residue of its value.”

To determine whether there was a reasonable probability of a successful regulatory takings claim, the court considered Lucas, Tahoe-Sierra Preserv. Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002) and Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978).  Under Lucas, a regulation constitutes a taking per se “only in the extraordinary circumstance where no economically beneficial use of the land is permitted and the regulations have extinguished all of the property’s value.”  In this scenario, no further analysis is necessary.  Galarza highlighted the distinction between “economic use” (returns from actual use or development) and a “property’s value” (market value as regulated or otherwise), but noted that Lucas used these terms interchangeably.  Later, the U.S. Supreme Court clarified Lucas in Tahoe-Sierra : “compensation is required when a regulation deprives the owner of all economically beneficial uses of his land…[and] is limited to the extraordinary circumstance when no productive or economic beneficial use of land is permitted.”  Anything short of 100% loss of value is not a regulatory taking per se and requires additional analysis by the factors enumerated in Penn Central.

Specifically in Galarza, the Property had value as regulated because there is a market for wetlands in Staten Island (discussed below), but the Property had no economic beneficial use.  The court considered two other cases in this respect, namely Lost Tree Vill. Corp. v. United States, 787 F.3d 1111 (Fed. Cir. 2015), and Florida Rock Indus., Inc. v. United States, 18 F.3d 1560 (Fed. Cir. 1994), to determine whether having value without any beneficial or economic use(s) precludes a taking per se.  The court in Lost Tree, on the one hand, held that residual non-economic value (i.e. market value) does not preclude a per se taking because there are no longer any underlying economic uses and the market value (selling the property) is not an underlying economic use.  Florida Rock, on the other hand, held that the value of property as a speculative investment is a proper consideration and that the associated market value precludes finding per se taking.[2]

The court in Galarza agreed with Florida Rock, holding that there is an established market for wetlands in Staten Island (for reasons that are not entirely clear) and that these parcels are bought and sold with an expectation that the restrictions may eventually be changed, waived or modified, or that the parcels might be sold at a profit.  Regardless of the motives and intentions, this market exists for parcels without permissible uses and this market must be considered in the takings analysis.  The Property was found to have a market value of $200,000.  Accordingly, because the Property has value in this market, the wetlands designation does not deprive the Property of all of its economic value (although it does deprive economic use entirely).  Therefore, it cannot qualify as a regulatory taking per se under Lucas.

Having failed to meet the Lucas test, the court then turned to a partial regulatory takings analysis under Penn Central.  This analysis is an “ad hoc, factual inquiry” and considers three factors: (1) the regulations’ economic impact upon the claimant, (2) the extent of interference with “reasonable” investment-backed expectations and (3) the character of the regulation as governmental action.

Penn Central Test Part 1: Economic Impact

First, in evaluating the economic impact, courts must compare the value that the regulation has taken from the property with the value that remains with the property.  Here, the court analyzed precedent set by four previous Second Department cases in wetlands taking cases (ranging from 1984 through 2017).[3]  Based upon these cases, the Galarza court found there was a reasonable probability of a successful regulatory takings challenge where regulations deprived the claimant of all rewarding uses of the property, e.g. development prohibition, and reduced the property’s value upwards of 80-90%.

In contrast, the court cited two other Second Department cases: Adrian v. Town of Yorktown, 83 A.D.3d 746 (2d Dep’t 2011), and Putnam County Nat’l Bank v. City of New York, 37 A.D.3d 575 (2d Dep’t 2007).  In Adrian, the court did not find a regulatory taking where the property value was reduced by a 64% reduction and the claimant sold the 15-acre parcel for $3,600,000, although contended it was worth $10,000,000.  In Putnam County Nat’l Bank, the court also did not find a regulatory taking.  There, watershed regulations reduced the value by 80%, and although the claimant was denied a building permit for a 36-lot subdivision because a sewer could not be built within the watershed, approval was granted for an alternative 17-lot subdivision.  The property was ultimately sold for $1,400,000.  That court found this realization was a “reasonable return”, and the economic impact of the watershed restrictions was not sufficient to constitute a taking.

Here, after various arguments and evidence presented by the parties, the court found the Property to have the following set of values: $200,000 as regulated and undeveloped and $1,701,000 as fully developed.  The court also found that it would cost $469,507 to develop the Property and, when the costs are deducted from the fully developed value ($1,701,000 less $469,507), the value of the return would be $1,231,493.  The difference, then, between the regulated value ($200,000) and the developed value, after costs ($1,231,493), is $1,031,493.  This figure is 84% of the fully developed value.  Another way to view the calculation is that the regulated value ($200,000) is 16% of the fully developed value.  Accordingly, the regulations reduce the Property’s value by 84%.

Penn Central Test Part 2: Extent of Interference with Expectations

Penn Central’s second factor is the extent of interference with investment-backed expectations.  Initially, courts must determine whose expectation to use.  In the regulatory takings context, the expectation of the owner is used because it is his or her land that suffers from the restraint.  To determine just compensation in the condemnation context, the expectation of the hypothetical buyer is used because this perspective determines the owner’s realization upon a sale.

Considering the hypothetical buyer’s expectations, the court must view the reasonableness of the expectation as an objective test: whether the regulation embodied a background principle of New York property and nuisance law.  This is the same consideration in determining whether a regulatory claiming is barred at the outset.  Essentially, it is unreasonable to expect to use property in such a manner prohibited as a background principle of law.  Finding guidance from the U.S. Supreme Court in Palazzolo, Galarza concluded it is reasonable to expect to utilize property as if the regulations did not exist – unless the regulations are background principles, the analysis cannot begin by limiting expectations to only those uses allowed by the regulation if the regulation is not a background principle.

As noted above, the Staten Island wetlands market exists and contemplates that regulations may be changed, waived or modified in favor of future development.  The court here ultimately determined it is not unreasonable for a hypothetical buyer to expect to develop the Property at some future date because, among other things, the wetlands restrictions are not background principles of law.  Accordingly, because any development was totally prohibited by the wetlands designations, then the regulations substantially interfered with reasonable expectations to develop the Property.

Penn Central Test Part 3: Character of the Regulation

The third factor under Penn Central is the character of the regulation.  Courts consider whether it amounts to a physical invasion or, instead, merely affects property interests.  Additionally, courts consider “reciprocity of advantage,” i.e. whether the regulation is part of a general scheme that provides some benefit to the regulated parcel, like a comprehensive zoning plan.  The singling-out of a parcel with a disproportionate burden is indicative of a taking.  The Galarza court found that while wetlands restrictions provide a benefit to the public in general, their burden falls disproportionately on a small group of owners, especially those whose entire parcels are classified as wetlands (as opposed to portions of parcels or parcels that are wetlands adjacent).  Here, the wetlands regulations approach a physical taking because they prohibit development entirely and force the Owner to leave the Property vacant.

Concluding Penn Central

In concluding its Penn Central analysis, Galarza found: (1) the wetlands regulations diminished the value of the Property by 84%, (2) interfered with the reasonable expectations of the Owner or a hypothetical buyer to develop the Property and (3) the character of the regulations is disproportionately burdensome and prohibits all economic use of the Property.  Moreover, the court found that the diminution of value was so great and the prohibitive character so invasive that, even if a hypothetical buyer did not have an expectation to develop, the regulations themselves “nearly approximate a physical appropriation as to constitute a taking under a Penn Central analysis.”

Therefore, the court held just compensation valuation must include the regulated value plus the incremental value to reflect the hypothetical buyer’s likelihood of successfully challenging the wetlands regulations as a regulatory taking.  This increment is a portion of the difference of the valuation over-and-above the regulated value.  Here, the regulated value was $200,000 and the developed value, after costs was $1,231,493; the difference between these figures is $1,031,493, and the increment is a portion of this difference.  (The Owner already receives the regulated, fair-market value as just compensation, so this value is not included in increment calculation).

In determining the actual incremental value, courts consider the time, effort and expense in “de-regulating” the affected land, including without limitation exhausting administrative remedies, prosecuting the takings challenge and the financial cost of “carrying” the affected property.  Here, the court found that the deregulation costs would be $391,882 and deducted these costs from $1,031,493, resulting in a “present day value” figure of $639,611.  The present day value figure must be discounted for inflation and opportunity costs, among other things.  The court determined that the present day value after the applied discount was $469,380 – and this is the incremental value to be applied.  Finally, the court completed its calculation for its award of just compensation: it added the regulated value ($200,000) together with the increment ($469,380), resulting in an award of $669,380 (rounded to $669,000).

—ENDNOTES—

[1] The four cases are as follows: Gazza v. New York State Dep’t of Envt’l Conserv., 89 N.Y.2d 603 (1997), Basile v. Town of Southampton, 89 N.Y.2d 974 (1997), Anello v. Zoning Bd. of Appeals, 89 N.Y.2d 535 (1997), and Kim v. City of New York, 90 N.Y.2d 1 (1997).  Gazza and Basile addressed wetlands restrictions.In determining the actual incremental value, courts consider the time, effort and expense in “de-regulating” the affected land, including without limitation exhausting administrative remedies, prosecuting the takings challenge and the financial cost of “carrying” the affected property.  Here, the court found that the deregulation costs would be $391,882 and deducted these costs from $1,031,493, resulting in a “present day value” figure of $639,611.  The present day value figure must be discounted for inflation and opportunity costs, among other things.  The court determined that the present day value after the applied discount was $469,380 – and this is the incremental value to be applied.  Finally, the court completed its calculation for its award of just compensation: it added the regulated value ($200,000) together with the increment ($469,380), resulting in an award of $669,380 (rounded to $669,000).

[2] The court addressed the nuances of speculation:

The cases that hold that one cannot consider speculative uses in valuing property in condemnation cases refer to non-current uses where it is not probable that the property would be put to such a use in the reasonable near future.  This is different from investors who speculate in property by purchasing it on the possibility of expectation that it will increase in value at some point in the future.  In this [latter] sense, speculative purchases represent investment backed expectation.

In addition, the court noted that dollars are fungible and that the land-speculation market provides owners with monetary compensation the same way as any other market.  Moreover, the key inquiry for purposes of just compensation for condemnation is whether there was a reasonable probability of successfully bringing a takings challenge as of the date of vesting – not whether any expectations of future value might be met.

[3] The cases are as follows: Chase Manhattan Bank v. State of New York, 103 A.D.2d 211 (2d Dep’t 1984), Baycrest Manor, Matter of New Creek Bluebelt, Phase 4 (Paolella), 122 A.D.3d 859 (2d Dep’t 2014), and Friedenburg v. State of New York, 3 A.D.3d 86 (2d Dep’t 2003).

In December 2016, Norwegian developer Statoil won a bid to lease 79,000 acres of underwater land from the federal government for wind energy development.  Statoil’s  wind energy project will be located approximately fourteen miles south of Long Beach and the Rockaways and will extend out to a distance of 30 miles.  The project, to be known as Empire Wind, contemplates erecting 80 to 100 turbines and anticipates producing up to 1,000 megawatts – enough energy to power upwards of one million homes.  Statoil anticipates commencing construction in 2021 and completing construction in 2024.

As part of New York’s plan to reach 50% renewable energy sources by 2030, the State has continued to research, test and identify off-shore areas for wind energy development.  In October 2017, New York identified more than one million acres for the development for future wind farm projects.

Empire Wind hopes to join another wind energy project currently in the planning stages, a 90-megawatt wind farm project located off Long Island’s east end.