Monthly Archives: June 2012

Housing Cost Revisited

From the Wall Street Journal. No comment appears necessary:

“At the peak of the housing bubble, loan payments were the only cost that borrowers had to consider given the ability to take out no-money-down loans. But today, loan payments constitute roughly 50% of the total cost of ownership ‘and are rather modest by historical standards,’ . . .. “This explains why the record-low interest rates do not impress borrowers and do not propel home prices up.”

Nick Timiraos, Why Housing Affordability Is a Mirage, Wall Street Journal, June 14, 2012.

Lowball Watch — Texas

We just came across a Texas Court of Appeals decision in an eminent domain case in which the bone of contention was the reduction in the rental rate of the remainder of the subject property in its “after” copndition. There was no controversy as to the value of the part taken ($385,524).

The figures were as follows: Commissioners’ award was $1,748,000. Condemnor’s trial evidence, in the court’s words, was “$847,857 or $1,114,576, depending on which method of valuation was used.” The jury award was $385,424 for the part taken, plus $3,229,745 for damages to the remainder. After adding prejudgment interest, the award came to $3,747,651.27.

The condemnor appealed. Held: affirmed. State v. State Street Bank & Trust Co. (Tex.App. 2012) 359 S.W.3d 375.

The Federal Rails-to-Trails Disaster Rolls On

We mentioned in the past the bizarre pattern of conduct of the Justice Department which has been obdurately resisting property owners’ claims in the so-called rails-to-trails litigation. In a nutshell, these controversies arise when railroads abandon their rights-of way on which they no longer operate trains. When this happens, the preexisting railroad right-of-way easements end, and the land covered by them reverts to the owner of the underlying servient estate, free and clear of the easement. But local government types and their environmentalist allies want some of those old rights-of-way preserved as public hiking and biking trails. But the problem is that since there are no longer any railroad easements over the subject land, the establishment of these trail easements permits the public to trespass over privately-owned land and is a thus taking of property. And since this occurs under the authority of the federal Rails-to-Trails Act, it means that Uncle Sam is the party doing the taking and as such is liable for paying just compensation.

But for reasons we don’t comprehend, the feds have been stubbornly resisting payment which is plainly due as a matter of now settled law, so owners of these strips of land have to file inverse condemnation actions againsty Uncle Sam in the U.S. Court of Federal Claims, where they have been winning consistently — in some thirty cases — click here.

Thor Hearne, the author of the linked post on inversecondemnation.com is a leading advocate for property owners in these cases, and has won a number of them. Do click on the above link and read what he has to say.

What strikes us as amazing is that the feds can simply work out a financial settlement with the owners who — as we noted above — are entitled to compensation as a matter of law. Instead, the feds try every one of these cases and lose in every one. The result is that in addition to the fair market value of the easements that would be payable in direct condemnations of these properties or in negotiated settlements with the owners, the feds have to pay not only the fair market value, but also interest and the owners’ attorneys” fees, as required under federal law in successful inverse condemnation cases. Why do they do it? Beats us.

But do click on the above link, and do read Mr. Hearne’s description of what hsd been going on. Amazing.

 

The Price of the “Free Lunch”

Have you noticed how, whenever some new redevelopment project is unveiled, the folks in city hall tell us that it won’t cost the taxpayers anything — that it will only add to public and private revenues, and then all will be well. It always reminds us of the immortal words of California Court of Appeal Justice Macklin Fleming who, in one of his opinions noted that proponents of these projects tell one and all that what they are about is the baking of a bigger economic pie, so that everybody’s slices will be bigger, although often, what they produce is pie in the sky.

We were reminded of all that while perusing our copy of today’s Los Angeles Times over our morning cup of Starbuck’s finest. See David Zahniser, Marriott Developer Seeks Tax Subsidy, L.A. Times, June 12, 2012, 2012, at p. AA1. It seems that the new, new, new, rebuilt and expanded Los Angeles convention center (which has not yet begun its environmental review process, much less construction, but which, we are assured, will be a thumping success, unlike its two earier iterations that are producing a net loss to the city of $30 or $40 million annually, depending on who you are listening to) will attract so many folks that a new hotel to accommodae them is an urgent necessity.

That sounds just swell, but it turns out that there is a snake in paradise. The would-be developers of that new hotel aver that it will be such a grand success that without a hefty city subsidy it can’t be built. So they seek a deal whereby they would receive from the city “half of the sales taxes, business taxes, room taxes, utility taxes, propert taxes and parking taxes generated by their 392-room project once it opens. . .” all of which, absent this deal, would go into the city’s “general fund, which pays for police, parks, and other services.”

But the developers also say that unless the city crosses their palm with silver in the aforementioned manner, they will “reevaluate” their committment to this project and take a walk.

Which leaves your faithful if puzzled servant with a question: if that new, proposed hotel is going to be such a great success, why does it need a $67.3 million subsidy from the public?

Quote Without Comment

From the June 11, 2012, column of Dale McFeatters, The Highway Bill to Nowhere:

“The highway trust fund will run out of money sometime around September. The fund is financed by an 18.4 cent-per-gallon gas tax, but cars are getting better mileage and motorists have been driving less.”

Further your affiant sayeth naught.

The Latest in Eminent Domain: They’re Coming After the Banks

The latest trendy shtick being discussed, is the idea that eminent domain be used to take the mortgages of “underwater” homes. Under this approach, those mortgages (or perhaps more accurately, the notes secured by them) would be acquired at their depressed current market values, and the homeowner-motgagors would then be able to repay their mortgage debts at the lower levels, i.e., the true, lower market value in the current market rather than the inflated prices at which they bought them during the real estate “bubble.” See Tom Braithwaite, Investors Invoke Law to Solve Housing Crisis, Financial Times, June 10, 2012. The California city of Hesperia is actively considering suc h a scheme. Beau Yarborough, Hesperia Considers Using Eminent Domain on Underwater Mortgages, High Desert Daily Press, June 6, 2012,. Click on http://www.vvdailypress.com/news/hesperia-34861-mortgages-underwater.html.

While this would, in our opinion, be a lousy idea for a number of policy reasons, we are surprised it took so long for somebody to figure this out. After all, there is a market in mortgages, and when the mortgagees’ interest is taken by eminent domain there is no reason why they should not receive their secured notes’ fair market value as their “just compensation,” the same as holders of all other interests in the taken property, rather than the nominally outstanding loan balance which in the case of those “underwater” homes may not be collectable in the foreseeable future, or at all. Would such eminent domain takings be deemed a permissible “public use” within the meaning of the Fifth Amendment? Probably, given the current state of the right-to-take law. This would not be much of a stretch after Hawaii Housing Authority v. Midkiff which redistributed land titles from landowner-lessors to homeowner-lessees.

However, there are two obvious problems with such a scheme — at least they are obvious to us. First, the condemnor (envisioned as some sort of public-private entity) will have to come up with the money with which to pay for the reduced-value notes secured by those mortgages, before the affected homeowners will be able to pay off the new (reduced) debt in installments. Where will that money come from? Our hunch is that some sort of TIF-like revenue bonds will be issued (this is where the “public” part of that public-private partnership comes in) and sold to raise that money. Which may or may not be a good idea, being that everybody, including local government, is in hock up to the eyeballs, and what this may accomplish would be the creation of another, albeit smaller “bubble.” No one is going to do this as an altruistic gesture, and certainly the private end of any public-private partnership will want to make a profit. Why else do it? There are so many unknowns to all that — at least by our lights — that we don’t want want to go there right now. Just stay tuned and see what happens.

But there is another aspect to this idea that can have calamitous consequences. Remember that, though lots of mortgaged homes may be “under water,” the loans secured by them are carried on the banks’ books at levels of the original loans — this may be a fiction, but it is our admittedly inexpert understanding that this is how it is done. So when those mortgages are taken by eminent domain, and the prices paid to the banks for them are toted up, their value (now reduced to cash) will be much smaller that what the banks have been carrying on their books as the value of those loans. Will that development abruptly cause some banks at least to wind up with assets valued below the legally required minimum? Could be.

And don’t think that this is mere speculation on our part. We remember the S & L crisis of some years ago, where some perfectly sound S & Ls held large amounts of junk bonds that were paying interest at high rates like clockwork. And then, one day Uncle Sam changed the rules and demanded that those junk bonds not be deemed acceptable as S & L capital, so they had to be sold at fire-sale prices then and there. Result: some  otherwise sound S & Ls went under because after being forced to dump their junk bond holdings all at once in a depressed market, they wound up with insufficient capital.

Could that happen to some banks when the loans secured by mortgages on their books are abruptly re-valued downward in eminent domain proceedings? By our lights it could. When what up to then was carried on the banks’ books at their “bubble” values is abruptly down-valued to their shrunken, post-bubble values, there is no telling what the bottom line will be.

And remember that the end of our troubles in that field is not yet in sight. It could get worse. As we note from time to time, home prices out here in la-la land are still way too high, given what people are paid as wages and salaries, so a further downward “adjustment” in home prices is a distinct possibility. What then?

Remember that public economists and tycoons have enormous incentives to conceal or at least minimize the extent of coming bad news because being candid could cause a panic, and this is something no one wants. So it’s a good idea that all positive forecasts be taken with a bit of skepticism. At least that’s the way we see it.

In the meantime, if this scheme proceeds, we can look forward to more lucrative employment by condemnation lawyers many of whom could use the work.

Follow up. It turns out that Fannie Mae and Freddie Mac own or guarantee some 29% of underwater mortgages, but — guess what? — most of these borrowers continue to make their scheduled  payments, evidently hoping to hang in until the market recovers. But if you make a reduction in loan balance available, whether by eminent domain or otherwise, these people will be provided with a powerful incentive to stop making payments on their mortgages, hoping to get bailed out by the government. Which makes the proposed scheme a very bad idea.

For another point of view, explaining why such a bailout (albeit one without use of eminent domain) would be a bad idea, ranging from the cost to taxpayers (what else?), the limited number of benefitted homeowners, and the moral hazard of it, click here.

Second update. The academy has now weighed in on this subject. See Robert Hockett’s Cornell Law School Research Paper No. 12-12 — click here. We confess that our eyes glazed over when we came across the following passage in Professor Hockett’s paper abstract: “I argue  that ongoing and self-worsening slump in the primary and secondary  mortgage markets is rooted in a host of recursive collective action  challenges structurally akin to those that brought on the real estate  bubble and bust themselves.” Got that?

For a more detailed description of how this scheme would work (the restructured mortgages would be sold to — who else? — hedge funds) see the Huffington Post piece on this subject – click here.

Be Careful What You Wish For . . .

A tip of our hat to Robert Thomas, our colleague who runs the blog www.inversecondemnation.com and who informs us in his post of today that www.SCOTUSblog.com, the premier Supreme Court watcher, has put the petition for certiorari in Redevelopment Authority v. R. & J. Holding Co., No. 11-1234, on its watch list  (petition of the day of June 7, 2012) — which means that the SCOTUSblog folks believe it has a more than an average chance of being taken up by the court for review on the merits. Maybe. Then again, maybe not. Even if that were to happen, it would only open the door to an adverse holding, as we know from personal experience.

We were involved in two inverse condemnation cases in which the Supreme Court granted petitions for certiorari, but then when time came to a ruling on the merits, ruled against the petitioners in both of them. One was City of Monterey v. Del Monte Dunes, which turned out to be something of a big deal for property owners claiming a taking, when it held that under 42 U.S.C. Sec. 1983, property owners are entited to a trial by jury on the factual issues underlying the question of liability. The other one was Tahoe-Sierra Preservation Council, where the court held that a moratorium is not a taking when it is challenegd as a per se taking, though it may be such when it is presented and tried as an as-applied taking.

Why is R. & J. Holding a candidate for a similarly disappointing result for the petitioner? Though R & J comes from the 3rd Circuit, what is at issue in that case are the ramifications of the 9th Circuit’s San Remo Hotel v. San Francisco case on which the redevelopment agency relies, and in which the Supreme Court granted certiorari on the owner’s petition, but held that inasmuch as the California state courts had tried and adjudicated the owner’s federal taking claim, it followed under the doctrine of “full faith and credit” that the federal courts were required to accept the state courts’ no-liability holding. In the R & J case, the 3rd Circuit gave effect to the owner’s reservation of federal rights which were not adjudicated in the Pennsylvania state courts, and held that they could be pursued in federal courts. Of course, the owners’ problem in San Remo was that although they purported to reserve their federal issue for decision by federal courts while they were trying their case in state court, they nonetheless submitted it for decision there, so — held the Supreme Court — they were bound by the resulting decision.

But all that, and the Supreme Court’s holding does not change the fact that in its application of the Williamson County case, San Remo was a weird case. Don’t take our word in harshly assessing the San Remo Hotel mess. Four Supreme Court Justices joined in a separate concurring opinion expressing the view that Williamson County was so bizarre — our word, not theirs, but applicable anyway — that it should be reconsidered by the Court. So why didn’t they do that? Because the owners did not challenge the soundness of Williamson County in their San Remo submission. Maybe they should have, as Justice O’Connor who was then still on the court observed, but they didn’t, so Williamson County went unchallenged.

Now, if the Supreme Court grants the Redevelopment Agency’s petition, it will have before it a much better record (from the owner’s point of view) than did San Remo, and — who knows? — perhaps the battle of Williamson County will be re-fought with more rational results. As numerous commentators have noted, the present state of pertinent law has earned for itself a torrent of scholarly and judicial invective. See Michael M. Berger and Gideon Kanner, Shell Game:  You Can’t Get There From Here.  Supreme Court Ripeness Jurisprudence in Takings Cases at Long Last Reaches the Self-Parody Stage, 36 The Urban Lawyer 671 (2004) — see particularly pages 702-704, and note that much of this harsh language comes, not from property-minded advocates, but from commentators who take the government’s side in takings cases.

Anyway, that’s the situation as we see it. While we know and admire the work of counsel for the Redevelopment Agency, it seems to us that he is playing a dangerous game. Wouldn’t it be poetic justice if the Supreme Court took this case and straightened out the Williamson County/San Remo Hotel mess — and a mess it is — and removed the stigma from American property owners who as of now are de facto deemed to be legal pariahs — the only species of litigants known to us, who are forbidden to litigate their federal constitutional claims in federal courts. Surely the Court can do better than that.

Follow up. During the weekend we have had a chance to read the Respondents’ Brief in Opposition [to the Petition for Certiorari] and it seems clear to us that the Redevelopment Agency hasn’t a leg to stand on. Overlooked in its briefing is the fact that what the Agency did was to try and take by eminent domain a piece of property, but the Pennsylvania courts held that it lacked the power to do so, But it took it anyway (while litigation was pending) and had to give it back. But what it didn’t do is to pay just compensation to the owners for the temporary, five-year taking that was in place while the matter was being litigated. When the owners sued in state court, as they were supposed to do under the Williamson County case, the state courts denied relief on the grounds that state law permitted no such recovery. But the taking was incontestable (it was five-year, de jure taking) , so this was a clear-cut case of violation of the Just Compensation Clause of the federal Constitution, because Williamson County was crystal-clear that the sue-in-state-court-first procedural rigmarole applies only when there is a clear remedy under state law. When there isn’t, the federal courts are open to grant relief. In fact, that was the case in the Del Monte Dunes case in which SCOTUS upheld damages awarded by a federal district court. Why federal? Because at that time California courts refused to grant compensatiory relief, so it was perfectly proper for the aggrieved owners to seek it in the federal courts. Which is precisely the situation in R & J case. So what’s the fuss all about?

So what the Agency and its amici are trying to do is to distract the court by waving the old, tattered bloody shirt about how expensive it will be for them (and others like them) to have to pay damages to people who were damaged by their attempted illegal action. That’s BS. SCOTUS has held long ago that it is no defense to charges of constitutional violations that it is cheaper to deny relief than to afford it. [We are still on the road, but will have the citation for you in a day or two]. Moreover, at least here in la-la land, it is reversible misconduct of counsel to argue to a trial court that an award should be kept down because of the assertedly impecunious nature of the liable party (Hoffman v. Brandt). The entitlement to compensatory relief depends on the facts and the law, not the financial condition of the bad guys being called to task. We see no reason why the rule shoud be anyy different when a similarly morally icky argument is made to an appellate court.

But don’t take our word for anything. The owners’Brief in Opposition is available on line. Read it! Click here.

Second Follow up. We were right to conclude that the Agency did not have a leg to stand on. SCOTUS denied certiorari in this case today, June 18, 2012.

Latest Meshuggas from New York Landlord-Tenant Law

There is a lady in New York who has been a tenant in a loft, but has paid no rent since 2003. How come? Didn’t the landlord try to collect rent and failing that evict her? That would seem to be the rational view of the world anywhere but in New York where ownership of residential rental property is not quite a criminal activity, but isn’t deemed entitled to serious legal protection either. See No Eviction After Renter Didn’t Pay for Nine Years, N.Y. Times, June 7, 2012.  Click here.

In 1982, New York enacted a law allowing the rent of lofts for residential purposes, provided the landlords brought them up to proper fire and safety standards. Seems fair enough. But some landlords — including the one in this case, according to the Times — haven’t done so. So you’d think that the city would enforce that law and make sure that lofts failing to meet those fire and safety standards could not be rented. Right? Wrong. It appears that they are being rented and that law is not really being enforced by the city. So in this case, the enterprising tenant moved into a loft, and later stopped paying rent because of the aforementioned landlord failure to bring her loft up to code. That was in 2003, and that, according to the Times, enabled her to save herself a tidy $60,000 in forgone rents while continuing to live in that loft while obligated to pay a mere $600 per month (which she hasn’t paid for nine years). What a deal!

But when the landlord sued, the New York Court of Appeals held that she could not be evicted for nonpayment of rent.

So let’s pause for a moment, and see what’s going on here. The purpose of these fire and safety regulations is to protect the lives and property of inhabitants of lofts. No compliance with the law — no certificate of occupancy. But here, the court’s ruling perpetuates the opposite: it assures that the tenant will live in what according to New York law is an unsafe loft. Weird, man.

We have no sympathy for landlords who won’t bring up their premises to minimal levels of safety prescribed by law. But how does it make sense to require the landlord to continue exposing his tenants to the very hazards that the law bans and plainly intends to abate?

Follow up. For another N.Y. Times story on this case — this one of the human interest variety — click here . We learn from it that the landlord’s jutification for the long delay in bringing the lofts up to code has been the tenants’ “nitpicking” of everything he tried to do. True? We don’t know. But what if it is?

SCOTUS Reputation With the People Sinking. Did the Kelo Eminent Domain Case Have Something to do With That?

Check out the story in the New York Times concerning the sinking public stature of the Supreme Court. Adam Liptak,  Approval Rating for Justices Hits Just 44% in News Poll, N.Y. Times, June 6, 2012. Click here

Only 44% of Americans approve of the job the Supreme Court is doing. “Those findings,” says the Times, “are a fresh indication that the court’s standing with the public has slipped significantly in the past quarter-century, . . . Approval was as high as 66 percent in the late 1960s, and by 2000 approached 50 percent.”

What has caused this decline in the court’s stature?  A “growing distrust in recent years of major institutions in general and the government in particular,” says the Times. And here comes the ideological pitch. Howsomeever, says the Times, this “could reflect a sense that the court is more political, after the the ideologically divided 5-to-4 decisions in Bush v. Gore, . . .and Citizens United, . . .” (Emphasis added). But no mention of the wretched 5-to-4 Kelo decision which resulted in a higher rate of public disapproval (and anger) than any other decision in recent decades. Oh sure, there have been several decisions that were and remain highly controversial, but in those the citizenry was split wide open on the issue — Roe v. Wade comes to mind on that score — but in no SCOTUS decision other than Kelo, to the best of our knowledge, were the public disapproval figures so lopsidedly one-sided. If you think we’re wrong on that one, point out to us another SCOTUS case decided in the last 100 years, where the rate of public disapproval ran around 90% and inspired some 30 states to change their laws, presumably — or at least ostensibly — to prevent Kelo-style takings in their respective jurisdictions.

Of course, none of our remarks are meant to suggest that the court should shape its interpretation of constitutional provisions to appease public opinion, Finley Peter Dunn’s celebrated, fictional Mr. Dooley to the contrary notwithstanding — it was Mr. Dooley who famously oberved “I don’t know if the Constitution follows the flag, but I know that the Supreme court follows election returns.” But humor aside, when interpreting an explicit constitutional provision, the court has no option other than to follow it, no matter how unpopular its decision may be. That is in the best tradition of an independent judiciary. But when the court starts inventing constitutional rules that are nowhere to be found in the text of the constitution, or ignores constitutional provisions that are plainly there, that’s another story.  This is something that goes back to Confucius who counseled that the most important function of government is to see to it that things are called by their proper names because otherwise, among other things, judgments are unjust and the people are at a complete loss.

For example, when Justice Stevens opined in Kelo that “public purpose” is a more accurate meaning of “public use,” he not only confused the bases of two distinct modes of government operation — the noncompensable regulatory police power serving public purposes, with the acquisitory, compensable power of eminent domain that is limited to public uses — but he also uttered a liguistic absurdity. Why? Because it is a total certainty that should Justice Stevens drop in on his neighbor to borrow a lawnmower, he would not deem it more accurate to say “May I purpose your lawnmower?” No way. He would say “May I use your lawnmower.” Why? Because use is not the same as purpose — e.g., the purpose of redevelopment may be the elimination of slums, as in Berman v. Parker, but  the use of the taken property was private, not public; i.e., construction of privately owned and privately controlled office buildings, condos, and commercial facilities. Maybe that arguably served a public purpose, but it wasn’t a public use. And the Constitution limits eminent domain takings to public uses.

Bottom line: ideas have consequences. When the Supreme Court sets out to govern — to set public policy on controversial issues — it should expect that this will embroil it in public controversies, the same as in the case of all political, policy-making institutions. That’s the way it is.

Finally, it cannot go without mention that when it comes to eminent domain being used for redevelopment — as in Kelo — the New York Times has a conflict of interest. The Times operates out of a building in midtown Manhattan, that was built on land taken from local property owners, and turned over to the Times and its developer at friendly prices that smell of a sweetheart deal.

This post was amended at 11:50 am, Eastern Time.

Lowball Watch — New York. Revisited.

Remember the Gyrodyne case? That was the one decided by the New York Appellate Division last November, where the state of New York took 245.5 acres for expansion of the Stony Brook campus of the NY State University. Quick summary: The State deposited $26,315,000, but the trial court (that’s the New York Court of Claims) awarded an additional $98,685,000. The State appealed but the New York Appellate Division affirmed. The State then petitioned the New York Court of Appeals (that State’s highest court) for review which was denied on June 6, 2012. So adding this up, and including the interest which is still accruing, the State got hit for a total of $164,000,000.

Also, the court awarded $1,474,940 to Gyrodyne as reikmbursement for its litigation expenses.

For Gyrodyne’s press release reporting these latest events, click here.

What we find fascinating is that with boxcar figures like that being involved, you’d think that this case would be noteworthy news. But we haven’t found much in the general press on that one. Wonder why? We don’t know how you feel about that one, but it seems to us that if, in some inter-corporate dispute,  a court were to award and affirm a judgment representing an upward “bump” of nine  figures, surely that would make the newspapers. Don’t you think so?

Follow up. We are reliably informed that interest in this case started accruing in 2005 when the State took the subject property, and is running at some $30 million per year, and, roughly speaking,  has accumulated as of now to somewhere north of $150 million.