Lowball Watch — California

This one’s a doozy. We are informed that a federal jury in California has just brought in a whopping verdict for the taking of 1000 acres of iron ore bearing land with a mining permit. The subject land is out in the Mojave Desert near Twenty Nine Palms. The feds’ evidence of value was $5.6 million. The owners’ evidence was $38.6 million, and the jury verdict was $30,283,750, delivered after only three hours of deliberation. The case is United States v. 1005.58 Acres, etc., Case No. 5-16-cv-1014 VAP (SPx), Central District of California.

The smiling owners’ counsel id Ed Burg of Manatt, Phelps and Phillips.

Whatever Happened to Taking “Underwater” Mortgages?

A funny thing about the press and media. Sometimes they pick up an idea and go on about it, assuring us that it is important and bids fair to influence public events in a profound way. But then poof! After a period of pontificating about it, the news item sort of vanishes from the printed page never to be heard about again.

For example, whatever happened to the bright idea of taking mortgages on “underwater” homes by eminent domain, restructuring the debt secured by those mortgages, and then selling the subject homes for a new, lower price that would still put a buck in the pockets of the city hall promoters of this goofy idea. But in spite of a flurry of articles by out-of-it professors and their press followers, it didn’t happen. The problem with this wacky scheme was that a condemnor acquiring property by eminent domain has to pay fair market value, which would leave no room for making a profit — someone would have to subsidize such a scheme and no one was willing to do so.

So, to the best of our knowledge, it didn’t happen.

California Choo-Choo Meets Condemnation Blight

On top of its other problems, the infamous California “bullet train” project has run into another, familiar problem which comes in two varieties. First, once word gets out what land is to be taken for a project, its inhabitants become short-term occupants, and this motivates them to neglect maintenance, and start moving out ahead of being evicted, making conditions worse. In some cases the government encourages this process hoping to pick up the subject land at bargain prices. The second variant of this problem is what happens after land in the path of a project is acquired but the project construction is delayed. This gives rise to what one observer called “linear ghettos” — long strips of land projected as the coming right-of-way become effectively abandoned, with structures located there becoming fair game for squatters, vandals and scavengers. The result then becomes what’s called “condemnation blight.” Back in the 1960s, particularly in the Midwest cities would give this destructive process a helping hand by withholding or delaying trash pickup or even in some cases, police protection.

This went on until the U.S. District Court in Detroit put a stop to it Foster v. City of Detroit, 254 F.Supp. 655 (1965), aff’d. 405 F.2d 138 (1968), with other courts following suit. In California, the leading case on this subject is Klopping v. City of Whittier 8 Cal.3d 39 (1972). Check it out.

Now, along comes the Los Angeles Times with a report that what in the past was a problem associated with urban redevelopment is now occurring across the state along the strip of land designated as the “bullet train” right of way.
Quoth the Times:

The problem that vacant properties create when the government takes private land is not new, but the massive scope of the bullet train project has birthed a problem unprecedented in recent California history: The current construction program is creating a corridor 100 feet or more wide through the Central Valley. Many of the land takes are stuck in protracted litigation, creating a patchwork of property ownership and leaving lots vacant for a long time.

Ralph Vartabedian, Vacant Lots, Empty Homes and Dying Orchards on Bullet Train Route Attract Squatters, Vandals, and Thieves, L.A. Times, Feb. 4, 2018.

Note however that this article’s assertion that delays are caused by “protracted litigation” is inaccurate. In eminent domain law possession of the subject property can, and often is taken immediately, while the determination of compensation is tried later.

Finally, if your interest in condemnation blight runs deeper than the news, we suggest our law journal article on that subject — Condemnation Blight: Just How Just Is Just Compensation? 48 Notre Dame Law Review* 765 (1973). An oldie but goodie that one. That article received the Shattuck Prize from the American Institute of Real Estate Appraisers (now the Appraisal institute).

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* The Notre Dame Law Review was then called the Notre Dame Lawyer.

California Choo-Choo — (Cont’d.)

We haven’t had much to say about the supposedly abuilding high speed train line between San Francisco and Los Angeles, or at least its initial 119 mile segment running from Madera to Fresno (aka the middle of nowhere), because there hasn’t been much news on that subject. But news came with a bang on the front page of today’s Los Angeles Times (Cost of State’s Train Surges, Jan.17, 208, p. A1) bringing the dispatch that the financial condition of the train project is parlous. The now conceded increase in the cost of that segment jumped from an estimated $2.8 billion to — are you ready? — $10 billion. This, we are told, is the worst-case scenario that was “long forewarned” but the warning was rejected by the railroad project’s management. Now it is coming to pass.

So much for the news which, as it turns out, is no news at all. Overruns of this kind, that belatedly try to raise the excuse of “higher cost of land acquisition” are old hat. Our own files contain an old article in a conservationist magazine called Cry California. The Spring 1966 issue contains an article by Joseph C. Houghteling, then member of the California Highway Commission, entitled Confessions of a Highway Commissioner at p. 29. In it the author reveals that “Actual costs were an average of 32 percent above estimates, most of the increment coming from additional right-of-way costs.” (at p. 30). That was a half century ago, and evidently not much has changed since then.

If you want an insight into how this happens, take a look at 40 Loyola L.A. L. Rev. at 1108, footnote 162, for an extensive collection of studies indicating that underpaying property owners for land taken from them is common in California as well as in other states. In a nutshell, appraisers of thousands of parcels constituting a major right-of-way are under pressure to come in with low opinions of value to impress their condemnor-clients and because unsophisticated and unrepresented property owners believe that “you can’t fight city hall” and accept those lowball offers in disproportionate numbers. For an explanation of this process by a prominent appraiser, see Ibid, at pp. 1106-1107, footnote 158. In other words, lowballing by condemnors is common and property owners who refuse condemnors’ pre-condemnation offers and try their cases, whether before judges or juries, usually recover compensation quite a bit higher than those offers, often higher by millions of dollars. For some outstanding examples of the stunningly higher awards granted by courts, or even agreed to by condemnors once the weaknesses of their own appraisals are exposed, see Ibid, at pp. 1146-1148.*

So if the California high speed railroad builders are experiencing unanticipated costs of right-of-way acquisition, they are only treading an old beaten path of their own making. California law requires explicitly that condemnees be paid the highest price that their property would bring in a voluntary market transaction. So it should not come as a surprise that when instead condemnors try to lowball condemnees, the compensation they have to pay is higher than their hopes.

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* Our favorite case of that sort is People ex rel. Dept. of Transp. v. Southern Calif. Edison Co (2000), where California DOT deposited $245,000 as its good faith estimate of “just compensation” for a partial taking of a major electrical transmission line, but at trial (a) the jury awarded some $49.5 million, and (b) on appeal the California Supreme Court affirmed and ordered the State not to brief the issues of valuation because the court would not consider them.

Ed McKirdy — R.I.P.

It took us a few days to recover from the shock, but reality must be faced. Our friend and colleague Edward McKirdy has passed away. He was a gentleman and a super lawyer whose presence enhanced any gathering.

We could at this point go on and launch into a string of complimentary adjectives, but it somehow seems unnecessary. If you knew Ed you must know what a gentleman, a scholar and a mensch he was, and what a privilege it was to work with him. And of course there was Ed the man. If nothing else, it was a unique pleasure to dine with him, and just to sit with him and Laura, his charming, one-of-a-kind wife and engage in the lost art of intelligent and witty conversation over a good meal.

Our profession is poorer for his passing, and we will never see the likes of him, his talents and his wit again.

The Fish that Ate Manhattan

Los Angeles Daily Journal

Jan. 3, 2018

THE LITTLE FISH THAT’S KILLING MANHATTAN
Gideon Kanner
Professor of Law Emeritus, Loyola Law School

Being old isn’t all bad. If you’re lucky, you remember things and you gain perspective. Case in point, the abysmal traffic conditions in Manhattan recently reported by the New York Times which reports that Midtown Manhattan traffic has reached a near-gridlock condition. Winnie Hu, “App-Hailed Cars Clog Streets. Should Riders Pay for the Jam?” Dec. 27, 2017 (front page, no less).

Current average car speed in midtown Manhattan is 4.6 mph, down from 6.5 mph only five years ago. (Walking speed is 3 mph — which means that a jogger can beat Midtown traffic.) The Times attributes these conditions to the presence of Lyft, Uber and Juno ride-hailing app vehicles looking for fares. Adding insult to injury, “more than a third of ride-sharing cars and yellow taxis that clog the streets are empty at any given time during weekdays in Manhattan’s main business district.”

Today, there are 103,000 for-hire vehicles plying New York streets, as opposed to only 47,000 as recently as 2013. Uber alone puts 65,000 cars on Manhattan streets. The upshot is that you can easily get a ride when you want one, says the Times, but once you get in the car, you’re stuck.

But another way of looking at this problem is that Manhattan streets are unequal to the task of accommodating modern traffic. So the question virtually asks itself: Weren’t New York traffic engineers smart enough to see what was coming and what to do about it? Yes, they were, but these days, planning and building are two different things once environmental concerns are brought to bear on the problem at hand.

The story of the old decrepit Manhattan West Side highway that was torn down back in the 1970s, but never replaced is instructive. Why? Oh, they tried, and therein lies a tale. What stopped the would-be highway rebuilders was a lawsuit brought by environmentalists who persuaded a local federal judge, Thomas F. Griesa, to bar the construction of a new replacement West Side Highway on environmental grounds.

By an odd coincidence, the same issue of the Times that tells us about the impending Manhattan gridlock also carries an obituary of Judge Griesa, and brings it all back to mind. Griesa found that the plans for the proposed replacement highway violated environmental laws, and barred its construction. The plan was that the new West Side Highway would permit much of the local traffic to bypass the congested mid-Manhattan streets, and keep it moving. It would run from the southern tip of Manhattan to 42nd Street, using a tunnel for a part of its route. It was projected to cost some $2 billion (in 1970s dollars, or $5.7 billion adjusted for inflation).

So was the proposed new highway environmentally bad by increasing air pollution, as claimed by the environmentalists? No. Judge Griesa, according to the Times, rejected that argument, and based his highway-killing judgment on the proposed highway’s adverse impact on fish. Fish? In Manhattan? Yes, fish. Specifically, the Hudson Striped Bass which was not even endangered. It was, according to the judge, “one of the nation’s most popular and commercially lucrative fish,” and it still is. So the new highway was not built, even as Manhattan traffic grew worse and is now approaching gridlock conditions.

As far as I know, the Hudson River has been cleaned up to some extent, but that was largely due to removing industrial waste accumulated on the river bottom in the industrial area way upstream, near Poughkeepsie. It had nothing to do with automobile traffic in Manhattan. Swimming in the Hudson remains hazardous in places. And so I fail to see how improving the river water quality for fish does much of anything for embattled New Yorkers stuck in traffic, waiting for the red light to change so they can move forward another few feet. To say nothing of wasted energy and air pollution caused by all those idling cars (recall that, ironically, air pollution was what the environmentalists claimed to be defending New Yorkers from).

Which brings us to the moral of this story — actually two morals. First, judicial rulings have consequences, even when there is a time lag between their promulgation, and a visible manifestation of their effects. Some judicial rulings can be terrific, but others are unsound, or even disastrous, like the misbegotten judicial notion of bussing kids from good schools to decrepit, dangerous inner city ones, a feat that helped empty the cities of their middle class populations and in some cases transformed them into urban wastelands, as middle-class families fled to the suburbs.
Second, a legal question: How come, in eminent domain cases, the same judges who wield a heavy hand in environmental review litigation — such as killing entire public projects on environmental grounds — hold that condemnors’ findings of public use are “well-nigh conclusive” and disclaim any power to deal on the merits with land owners’ defenses alleging that condemnors’ findings of necessity for the proposed public works, their efficacy, safety, location, layout, etc. are defective?

In the notorious Chevalier case, the California Supreme Court went so far as to hold that in eminent domain cases, state compliance vel non with statutory criteria of public necessity was altogether nonjusticiable, not even where the condemnors’ determination was obtained by fraud, bad faith and abuse of discretion. The California Legislature repealed that rule in 1976 but the court never retreated from it, and even now review of these matters is available only in cases of a condemnors’ “gross abuse of discretion” or bribery. New York federal courts did the same over there, when in the Rosenthal & Rosenthal case they upheld a condemnation, refusing to inquire into allegations that a redevelopment project’s boundaries were corruptly drawn to benefit the mayor’s friends.

Conclusion: Ideas do have consequences, and as this saga illustrates, in time seemingly unconnected court rulings can have a profound impact on people’s lives. The parties who fought it out before Judge Griesa almost a half-century ago could have no idea that their wrangling over the comfort levels of an abundant fish would come at the expense of people’s life quality affecting their daily lives.

Lowball Watch — Virginia

The Martinville Bulletin, 12-29-17, reports that the Virginia DOT deposited $6.28 million for the taking of a truckstop, but settled for $7.2 million, an increase of close to $1 million. Laurence Hammond, VDOT to pay $7.2 million for truck stop closed by Batentout Highway project, for an increasr of $920,000.

http://www.martinsvillebulletin.com/news/region_and_state/vdot-to-pay-million-for-truck-stop-closed-by-botetourt/article_69d43010-3fcf-5034-882a-8de569ae0695.html

They’re Singin’ Our Song at the Times — Sort Of

No sooner has the ink dried on our last post, that The New York Times, no less, has chimed in with the same tune — sort of. See Californians Brave Fires, but Flee Cost of Living, NY Times, Dec. 13, 2017, front page. The times, sure enough, dwells on the outward flow of Californians (of which more presently) but it keeps mum on the causes of this huge out-migration.

Says the Times:
“[S]ince 2000 the state has lost more than two million residents 25 and older, including 220,000 who moved to Texas, according to census data. Arizona and Nevada have each welcomed about 180,000 California expatriates since the start of the decade.” Which is like writing about a drought by informing the readers that water won’t come out the wall when you turn on the spigot. In other words, the Times describes the phenomenon but tells us nothing about the causes.

And as we explained in our previous post, the causes include an obdurate California government policy preventing the construction of badly needed dwellings in numbers that are capable of meeting the prevailing housing needs of the state’s population. The Times studiously ignores the cold fact that if a municipality zones land for commercial uses that will accommodate, say, 20,000 workers, and then zones land as residential for only 5000 people, all you do is guarantee a housing shortage and its economic Siamese twin, a steep and rapid rise in home prices and rents.

But why are the California land-use regulators doing that? We see two answers to that question. First, it’s the NIMBY phenomenon — existing homeowners have got theirs and they now mean to keep things that way, as home prices and rents keep soaring, transforming too many existing homeowners into paper millionaires. Second, cities yield to NIMBY demands because they can. California courts, instead of serving their traditional role as a restraining force that keeps regulations and government conduct reasonable, or even constitutional, rubber-stamp whatever comes out of city planning and zoning departments. As Richard Babcock, the late dean of the American land-use bar put it in one of his books, “In California, the courts have elevated government arrogance to an art form.” And so they have.

So it’s hardly surprising that more and more Californians are selling their suburban homes for a half a mil or so (now the median price of a Golden State home) and head out to where the grass is greener and the living more lucrative.

What happens now? We can’t really say because we follow the wisdom of Yogi Berra who said, “Prediction is very difficult. Especially about the future.” So there is nothing to do but to wait and see how it all turns out. But to quote the phrase of Gretchen Morgenson, our favorite New York Times financial reporter, predicting the 2008 bursting of the real estate bubble, “It won’t be pretty.”

Remember Justice Clark, the Prophet

The good book tells us that a prophet is without honor in his own country, but he is still a prophet. A prime example of that verity can be found in the aftermath of the California Supreme Court’s decision in Agins v. City of Tiburon, 24 Cal.3d 266 (1979). There, the court’s majority held that (notwithstanding the U.S. Supreme Court’s earlier decisions to the contrary), there would now be no such thing as a regulatory taking of property in California. An aggrieved owner’s remedy for confiscatory regulations would no longer be the just compensation specified in the Fifth Amendment. The only remedy would now be a petition for a writ of mandate invalidating the offending regulation, or perhaps declaratory relief where the unconstitutionality of the regulation appeared on its face. But no compensation. Needless to say, that message of extremism in land regulation was received in city halls across the state: would-be builders were now fair game.

The Agins holding was at first upheld by the U.S. Supreme Court on other grounds (lack of ripeness), but in 1978 it was expressly overruled in First English etc. Church v. County of Los Angeles, 482 U.S. 304 (1987) which held that the California Supreme Court had decided Agins incorrectly. That much is no news for takings law mavens. But in addition to the Agins majority opinion, there was a dissent by Justice William P. Clark, Jr.. In addition to disagreeing with the majority’s substantive holding on remedies, he also gave us a glimpse of the future. He predicted that if judicially tolerated, the kind of extreme land-use regulations exemplified by Agins would lead to a housing disaster in California.

As Clark put it, “Perhaps of greater concern is the consequence that Tiburon — and many other governmental agencies enacting similar land use plans — will price properties within their control out of reach of most people. Only the most wealthy will be able to afford purchase of and construction on lands in such areas. The environment which Tiburon seeks to preserve will disproportionately benefit that wealthy landowner, whose home will be surrounded by open space, unobstructed view and unpolluted atmosphere.” 24 Cal. 3d 283-284.

Justice Clark wrote in 1979, and the passage of time has proven him right – the California Agins majority holding was expressly overruled by the U.S. Supreme Court in 1987 – and Clark’s economic prediction has come true as well. According to Zillow, during the elapsed time, even with the 2008 recession, the median price of a California home soared to $585,000. And housing prices in disfavored inland areas are also moving up dramatically – as I write, the Los Angeles Times reports that in Stockton, home prices have risen by 92% in the past five years. Median homes in San Francisco have gone over the top — literally and figuratively — and now go for over $1,000,000. And remember, “median” means that half the homes in “Baghdad-by-the Bay” now go for more than a million dollars apiece.

Two Presidential Commissions on Housing studied the problem and concluded that excessive cost of regulation and selfish demands of NIMBY suburbanites, in which local regulators acquiesce, lie at the root of California’s dizzying housing costs. Things have come to such a state that even the proposed construction of as few as three small, single-family houses in a residential area can become a protracted litigational nightmare; Conor Dougherty, Getting to Yes on Nimby Street, N.Y. Times, Dec. 1, 2017, Sunday Business Sec. p.1. And it took 30 years and hundreds of thousands of dollars in municipal fees for the unfortunate Bonnie Agins to get permission to build three homes on her 5-acre parcel.

But what about the legislature? Oh, it passes seemingly pertinent laws said to address the problem, but actually do not accomplish much. Land-use and housing regulations are administrated locally, and as a practical matter state legislation does not carry much weight there. The latest batch of legislation is advertised as a solution to our housing crisis; it imposes new taxes on real estate transactions, which will inevitably increase overall housing costs. In other words, the legislature cannot repeal the law of supply and demand. Michael M. Berger said it all in one of his columns in this newspaper when he characterized such legislative efforts as All Yak, No Shack. Daily Journal, March 2, 2005.

What is unfolding in California are the harsh effects of the laws of economics, and of an unspoken policy choice by local governments and courts to limit population growth by using harshly restrictive land-use regulations that drive housing prices above most people’s ability to buy. One result is a growing homeless population. All this fattens the home equities of existing home owners (read, local voters), and increasingly drives ordinary folks to migrate to other states. In North Carolina, for example, to which members of my family have migrated, you can buy a 3000 square foot, four-bedroom suburban home on a sizable plot of land, for about $250,000. So you can sell your half-million dollar California shack, move to a nice Charlotte suburb, buy a home free and clear, and still stash a quarter million dollars as a kitty for your retirement. Sounds like an economic no-brainer, and many departing Californians agree.

But be careful. For if you like living in the California foreshadowed by Justice Clark almost 40 years ago, where home price trends are set by appetites of conspicuously consuming, big-buck techies and movie folks, you may get what you wish for. Actually, you are in the process of getting it, ready or not, so enjoy it if you can.

This post appeared as a column in the Los Angeles Daily Journal on 12/6/17

Enjoy Your Thanksgiving and be Grateful — That’s What Thanksgiving is All About

The Thanksgiving holiday is upon us, and it’s time to give thanks for all that we have, that the rest of the world is envious about. It’s not about fixing and eating turkey etc. It’s to take time out to reflect on how fortunate we are to live here, in the United States of America. To give thanks.

If you don’t embrace that view, name one country in the world where you would rather live. You can’t. And if you think you can, explain to us why you haven’t moved there to enjoy whatever it is about personal, economic and civic life you contend is better over there. Millions of people all over the world understand that, and millions of those who do, strive to leave their homes and come here to live among us. If nothing else, this should tell you a lot.

So enjoy your holiday, and don’t forget that turkey feast or whatever floats your boat gastronomically.