New Ninth Circuit Opinion Finds Regulatory Takings Claim Fails Where Economic Impact of Manufactured Home Park Zoning Ordinances Was Minimal

November 1, 2012

By Matthew Hinks

A new opinion from the Ninth Circuit out of the State of Washington -- Laurel Park Community, LLC v. City of Tumwater -- offers an interesting application of the Supreme Court's regulatory taking jurisprudence.

Background

Citing increasing closures of manufactured home parks, the City of Tumwater in the State of Washington enacted two ordinances and amended its Comprehensive Plan and Zoning Map in an effort to preserve the parks. The ordinances created a new Manufactured Home Park ("MHP") land use designation and a new Manufactured Home Park zone district. The ordinances designated 6 of the 10 existing manufactured home parks in the City under the new MHP land use designation and included them -- and no other properties in the City-- within the new Manufactured Home Park zone district. The remaining 4 parks were excluded due to their small size and/or unique circumstances. Previously, the City's zoning code permitted a wide range of uses on the newly-designated sites, including multi-family housing and other dense development.

Permitted "by right" uses in the new MHP zone included (unsurprisingly) manufactured home parks, single family residences and certain recreational and child day care uses. Conditionally permitted uses, allowable upon obtaining a discretionary conditional use permit, included churches, schools, community centers, agriculture and bed and breakfast establishments. Use exceptions could be granted if the property owner demonstrates "they do not have a reasonable use of their property under the MHP zoning" or "the uses authorized by the MHP zoning are not economically viable".

The owners of 3 of the 6 affected parks sued in Federal District Court alleging federal and state takings claims and a state substantive due process claim. The District Court granted the City's motion for summary judgment disposing of all claims. The Ninth Circuit affirmed.

The Court's Analysis

In respect to the federal takings claim, plaintiffs did not contend that the ordinances amounted to a per se taking, but rather a regulatory taking, which is governed by the well known and oft-maligned Penn Central factors from the seminal Supreme Court case, Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1975). The Penn Central test instructs courts to evaluate regulatory takings claims by analyzing: (1) the economic impact of the regulation; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the government action.

Before applying these criteria, the court noted a "general rule" that "zoning laws do not constitute a taking, even though they affect real property interests: The court quoted Penn Central: "[T]his Court has upheld land-use regulations that destroyed or adversely affected recognized real property interests. Zoning laws are, of course, the classic example, which have been viewed as permissible governmental action even when prohibiting the most beneficial use of the property." Turning to the Penn Central factors, the court found that plaintiff offered "very little evidence of [adverse] economic effect"; that plaintiffs' investment-backed expectations of redeveloping their parks to more profitable uses if market conditions made it attractive to do so "are no different than the assertions that could be made by property owners adversely affected by any zoning law"; but that the final factor slightly favors plaintiffs in that the intent of the ordinances was to require a small class of persons -- the owners of the 6 affected parks -- "to continue to provide the public benefit (manufactured home parks), when the benefit could be distributed more widely". Being that the first two factors weighed heavily in favor of the City, the Court held that plaintiffs' facial challenge to the ordinances failed.

Some Thoughts on the Opinion

Several aspects of the court's analysis bear mention.

First, plaintiffs' inability to offer anything more than "very little evidence" of an adverse economic effect of the ordinances upon their parks is, at once, surprising, but also all but determinative in a takings case. The court indicated that, "[a]t best, [p]laintiffs have presented information that reflects an economic loss of less than 15%" with respect to one of the three properties and "no effect" on the remaining two. In particular, the court was presented with three valuations of one park, which showed decreases of value as a result of the ordinances ranging from 11.1% to 13.4%. The other two parks showed no change in pre-ordinance and post-ordinance valuations. Given the Penn Central test's central focus upon the economic effects of the challenged regulation -- the Ninth Circuit refers to the first two Penn Central factors as the "primary" factors to consider -- it is little wonder that plaintiffs' takings case failed.

Second, the court's opinion offers yet another example of the departures of the post-Penn Central courts from the Supreme Court's actual holding. In a recent seminar I had the pleasure of attending and the honor of co-chairing, one noted speaker illustrated quite brilliantly the divide between the Court's holding -- which instructs lower courts to take account of property owners' "distinct investment-backed expectations" -- and the lower courts' application of that factor, which have tended to overlay a "reasonableness" standard upon the Court's analysis and find takings only where they interfere with "reasonable" investment-backed expectations. In that vein, the Laurel Park court noted a prior Ninth Circuit opinion, which held that "'[d]istinct investment-backed expectations' implies reasonable probability, like expecting rent to be paid, not starry eyed hope of winning the jackpot if the law changes." Considering that the law before the ordinances were enacted permitted conversions of the plaintiffs' properties to dense multi-unit development, the expectation that they could do so could hardly be characterized as a "jackpot" hoped for by a "starry-eyed" plaintiff. The court, however, sidestepped that point by noting how little economic effect the ordinances had upon plaintiffs' properties.

Finally, it is also interesting to note that the court also rejected plaintiffs' state law claims. Because those claims were governed by Washington law, I have not gone over the court's analysis here. However, it is worth mentioning that the court rejected plaintiff's allegations that the ordinances amounted to "spot zoning". Plaintiffs' contentions on this point were raised in the context of their state substantive due process claim. A recent similar claim in California, raised by the plaintiff and analyzed by the California Court of Appeal, as a regulatory taking claim, was successful as I pointed out in my March 7, 2012 blog post, Spot-Zoning and Regulatory Takings: Developer Succeeds in California Court of Appeal - Avenida San Juan Partnership v. City of San Clemente. A similar claim in this case would likely have met the same fate as the principal taking claim given the minimal adverse economic effects of the ordinance; nevertheless, it is interesting to note that the uncertain and uneven application of "spot-zoning" principles continues.

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Matthew Hinks is a litigator with a wide-ranging practice that focuses primarily on the representation of real estate developers in difficult land use cases. Matt has extensive experience litigating complex mandamus actions and other claims involving signage disputes, governmental takings, CEQA challenges, planning and zoning law, civil rights violations, eminent domain issues, title disputes, lease disputes and community redevelopment and density bonus law. He has extensive experience in both federal and state courts, including trial courts and courts of appeal, as well as in arbitration, mediation and administrative settings. Contact Matt at MHinks@jmbm.com or 310.201.3558.