An Important Case on Compensation for Takings

In recent years, the Supreme Court has addressed many cases on property rights issues. But it has done very little with the Just Compensation Clause of the Fifth Amendment, which requires that owners be compensated when their property is condemned by the government. The longstanding rule has been that owners deserve “fair market value” compensation. Unfortunately, studies show that the government often pays much less than the market value. One of the most egregious examples of such undercompensation is the use of the so-called “undivided fee” rule, which holds that the value of a property must be estimated as if it had just one owner, even if in reality it contains multiple property interests. This leads to severely inadequate compensation for leaseholders who pay below-market rents. The value they get for their below-market leases is not captured in the market value of the property as a whole. In the many states that use the undivided fee rule to estimate compensation, such leaseholders often get little or no compensation for the loss of their property rights. The rule, therefore, grossly undercuts the core principle that all owners of condemned property rights deserve “just compensation” under the Fifth Amendment.

The constitutionality of the undivided fee rule is addressed in the recent case of City of Milwaukee Post No. 2874, Veterans of Foreign Wars v. Redevelopment Authority of the City of Milwaukee. The cert petition is available here. I have written an amicus brief urging the Supreme Court to grant cert, on behalf of the Institute for Justice, the public interest law firm that litigated Kelo v. City of New London and many other major property rights cases.

The facts of VFW (described in greater detail in the cert petition) well exemplify the constitutional flaws of the undivided fee rule. In 1961, a local VFW post in Milwaukee sold a property that it owned. As part of the deal, they retained a 99 year lease on the ground floor of the building at a nominal rent of $1 per year, with an option to renew for a further 99 years. They continued to hold meetings and other functions there. In 2001, the City of Milwaukee decided to condemn the property. But the city refused to pay any compensation to VFW for the loss of its valuable leasehold. In a closely divided 4-3 decision, the Supreme Court of Wisconsin upheld the city’s actions because Wisconsin courts follow the undivided fee rule.

In my view and that of IJ, this application of the rule violates both the general constitutional principle of just compensation, and the Supreme Court’s specific formula regulating compensation for the taking of leaseholds. The latter requires that “[t]he measure of damages is the difference between the value of the use and occupancy of the leasehold for the remainder of the tenant’s term, plus the value of the right to renew [if any] … less the agreed rent which the tenant would pay for such use and occupancy.” United States. v. Petty Motor Co., 327 U.S. 372, 381 (1946). Under that measure, Wisconsin courts estimated that the value of the VFW’s interest was $300,000 or more.

As I explained in detail in Part II of the amicus brief, numerous nonprofit organizations, small businesses, and low-income renters find themselves in the same position as VFW. Many of them have leases with below-market value rents. And property occupied by such groups is often targeted for condemnation under “economic development” takings of the kind the Court upheld in Kelo.

Because of the widespread nature of this problem, and the fact that numerous state supreme courts and federal circuit courts have ruled on the issue without coming to any kind of consensus (see Part I of the amicus brief), I hope that the Supreme Court will agree to hear this important case.

CONFLICT OF INTEREST WATCH: I should note that my work on the IJ amicus brief was pro bono, so this post is not an adjunct to a profit-making venture on my part. This was in fact the pro bono project that helped cause my blogging hiatus.

UPDATE: Property rights mavens and blogosphere aficionados might be interested to know that one of the lawyers for VFW is Gideon Kanner, a highly respected property scholar and litigator, and author of Gideon’s Trumpet, an excellent blog focusing on property issues. Gideon has a post about the case here.

UPDATE #2: the Inverse Condemnation Blog has a summary of another amicus brief supporting VFW filed by the National Association of Home Builders and the Wisconsin Building Association.