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Final Report: Corridor Reservation - Implications for Recouping a Portion of the "Unearned Increment" Arising From Construction of Transporation Facilities
Click HERE for graphic. Click HERE for graphic. FINAL REPORT CORRIDOR RESERVATION Implications for Recouping a Portion of the "Unearned Increment" Arising From Construction of Transportation Facilities Robert J. Borhart Graduate Legal Assistant (The opinions, findings, and conclusions expressed in this report are those of the author and not necessarily those of the sponsoring agencies.) Virginia Transportation Research Council (A Cooperative Organization Sponsored Jointly by the Virginia Department of Transportation and the University of Virginia) Charlottesville, Virginia January 1994 VTRC 94-Rl5 SAFETY RESEARCH ADVISORY COMMITTEE W.H. LEIGHTY, Chairman, Deputy Commissioner, Dept. of Motor Vehicles J.D. JERNIGAN, Executive Secretary, Senior Research Scientist, VTRC D. AUSTIN, Transportation Engineering Program Supervisor, Dept. of Rail &Public Transportation, VDOT J.L. BLAND, Chief Engineer, Dept. of Aviation R.J. BREITENBACH, Director, Transportation Safety Training Center, Virginia Commonwealth University J.L. BUTNER, Traffic Engineering Division Administrator, VDOT MAJ. J. K. COOKE, Assistant Chief of Law Enforcement, Dept. of Game and Inland Fisheries V.L. CROZIER, Associate Specialist, Driver Education, Virginia Dept. of Education W.S. FELTON, JR., Administrative Coordinator, Commonwealth's Attorneys' Services and Training Council P.D. FERRARA, Ph.D., Director, Division of Forensic Sciences, Dept. of General Services D.R. GEHR, Assistant Commissioner-Operations, VDOT J.T. HANNA, Assistant Professor, Transportation Safety Training Center,Virginia Commonwealth University T.A. JENNINGS, Safety/Technology Transfer Coordinator, Federal Highway Administration SGT. P.J. LANTEIGNE, Operations & Tactics Bureau, Virginia Beach Police Dept. W.T. McCOLLUM, Executive Director, Commission on VASAP S.D. McHENRY, Director, Division of Emergency Medical Services, Dept. of Health MAJ. R.P. MINER, Commander, Traffic Division, Fairfax County Police Dept. LT. S.E. NEWTON, Commander, Patrol Division, Albemarle County Police Dept. J.T. PHIPPS, Director, Roanoke Valley ASAP LT. COL. C.M. ROBINSON, Director, Bureau of Field Operations, Dept. of State Police J.A. SPENCER, ESQ., Assistant Attorney General, Office of the Attorney General E.W. TIMMONS, Director of Public Affairs, Tidewater AAA of Virginia A.R. WOODROOF, ESQ., Manakin-Sabot, Virginia ii ACKNOWLEDGMENTS The author gives special thanks to the many officials in the Virginia Department of Transportation who labored through the initial drafts of this report and offered many helpful suggestions in a very short period of time, despite their normal work duties and schedule: Claude D. Garver, Assistant Commissioner-Planning and Programming; James S. Givens, Secondary Roads; Richard C. Lockwood, Transportation Planning; and Stuart A. Waymack, Right of Way. The author also thanks Linda Day Evans who, despite her main duties at VTRC, worked tirelessly to edit the draft report. Thanks also go to Wayne Ferguson, Safety Group Leader at VTRC, for giving the author wide latitude in his research and many hours of time to bring it to fruition. Last, but certainly not least, many sincere thanks go to all of those at VTRC, including the ever insightful law student assistants from the University of Virginia School of Law. Of course, any errors or omissions in this report are the author's own. iii TABLE OF CONTENTS ACKNOWLEDGMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . iii EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . vii INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 PURPOSE AND SCOPE. . . . . . . . . . . . . . . . . . . . . . . . . . 3 METHODS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 PART I: A BRIEF HISTORY OF THE UNEARNED INCREMENT. . . . . . . . . . 6 Federal History . . . . . . . . . . . . . . . . . . . . . . . . 6 Virginia History. . . . . . . . . . . . . . . . . . . . . . . . 9 PART II: CORRIDOR RESERVATION LAWS . . . . . . . . . . . . . . . . .11 Constitutional Issues . . . . . . . . . . . . . . . . . . . . .12 The Pennsylvania Coal Opinion. . . . . . . . . . . . . . .12 The Lucas Opinion. . . . . . . . . . . . . . . . . . . . .14 Questions Concerning Lucas and Its Applicability . . . . .14 Lucas and Corridor Reservation . . . . . . . . . . . . . .17 "Economic Viability": The Variance Procedure . . . . . . .17 "Economic Viability": Divisible Property Rights. . . . . .19 Divisible Interest and Transferable Development Rights (TDRS) . . . . . . . . . . . . . . . . . . .20 TDRs in Action . . . . . . . . . . . . . . . . . . . . . .21 "Economic Viability": A Summation. . . . . . . . . . . . .22 "Legitimate State Interest: The Second Prong . . . . . . .22 "Facial" v. 'As-Applied' Challenges. . . . . . . . . . . .23 A Note on Corridor Reservation and Federal Requirements . . . .24 Virginia Courts and a Corridor Law. . . . . . . . . . . . . . .25 Legal Concerns: A Summary . . . . . . . . . . . . . . . . . . .27 Case Study: Florida and Advance Notification . . . . . . .28 Case Study: North Carolina . . . . . . . . . . . . . . . .29 Critique . . . . . . . . . . . . . . . . . . . . . . . . .30 PART III: FINANCING MECHANISMS TO RECOUP THE UNEARNED INCREMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . .31 Special Assessment Districts. . . . . . . . . . . . . . . . . .33 Legal Issues . . . . . . . . . . . . . . . . . . . . . . .33 Federal Law . . . . . . . . . . . . . . . . . . . . .33 Virginia Constitutional Law . . . . . . . . . . . . .35 Virginia Statutory Law. . . . . . . . . . . . . . . .35 v Experiences of the Assessment Districts. . . . . . . . . .37 Assessment of the Virginia Improvement District Acts . . .41 Zones for Proffers: Increased Potential for Use . . . . . . . .43 Impact Fee Districts. . . . . . . . . . . . . . . . . . . . . .45 Statutes in Virginia . . . . . . . . . . . . . . . . . . .45 Assessment of Impact Fees in Virginia. . . . . . . . . . .46 Case Study: Impact Fees in New Jersey. . . . . . . . . . .47 Excess Condemnation . . . . . . . . . . . . . . . . . . . . . .48 The Public Use Requirement . . . . . . . . . . . . . . . .50 Public Use: A Historical Perspective. . . . . . . . .51 The Modem Era . . . . . . . . . . . . . . . . . . . .52 Public Use and the States . . . . . . . . . . . . . .53 Public Use in Virginia. . . . . . . . . . . . . . . .54 Assessment . . . . . . . . . . . . . . . . . . . . . . . .55 PART IV: ALTERNATIVES FOR VIRGINIA . . . . . . . . . . . . . . . . .55 The Corridor Reservation Alternative. . . . . . . . . . . . . .56 Revenue Enhancement Mechanisms. . . . . . . . . . . . . . . . .57 Special Assessment Districts . . . . . . . . . . . . . . .57 In Stand-Alone Districts. . . . . . . . . . . . . . .57 In the Context of Corridor Act Legislation. . . . . .58 Impact Fees. . . . . . . . . . . . . . . . . . . . . . . .59 In Stand-Alone Districts. . . . . . . . . . . . . . .59 In the Context of Corridor Act Legislation. . . . . .60 APPENDIX A: THE CORRIDOR RESERVATION CONCEPT . . . . . . . . . . . .61 APPENDIX B: SPECIAL TAX DISTRICTS IN VIRGINIA. . . . . . . . . . . .63 vi EXECUTIVE SUMMARY Transportation needs in Virginia are quickly outstripping the state's ability to pay, and projections indicate that the financing gulf will continue to grow. A recent Virginia Department of Transportation (VDOT) study indicated that the state's 1989 modal needs over the subsequent 20 years would total almost $49 billion, of which more than $24 billion would not be available under current funding programs. This study explores methods to increase revenues for transportation projects and focuses on recouping portions of the 'unearned increment,' the substantial increases in the value of private land located near a transportation facility that is newly created or improved by a governmental entity. Land values near such facilities increase in value due to the land's proximity to the facility and the likelihood that such land will be rezoned to allow commercial development or dense residential development. At this time, the increased land values accrue to the benefit of the property owner and, at a lower monetary level, to the local government through property taxation. The state government, as the main transportation financier and builder in Virginia, receives little if any of the unearned increment. This study identifies several mechanisms that can be used to recapture a portion of the unearned increment. The main focus is the transportation corridor, forms of which are now employed in several states. A transportation corridor as used in this report is a legislatively defined geographic area focusing on a transportation facility and includes two parts: (1) the primary area, which consists of the necessary rights-of-way for the facility, including cleared widths, medians, buffer zones, etc.; and (2) the secondary area, which consists of the adjoining area impacted by the transportation facility at its full capacity, including surrounding land areas likely to undergo private commercial development or redevelopment as a result of the construction or enhancement of the transportation facility. (See Appendix A for an illustration of the primary and secondary areas and their relationship to the transportation facility.) The Primary Area and Corridor Reservation Within the primary area, the corridor can contain a designation of the rights-of-way required for the construction or improvement of the facility itself Within those rights-of-way and before government acquisition of the land begins, a rigid development ban can apply: land cannot be developed for up to 3 years after designation unless the property owner can show undue hardship or lack of profitability with the land in its current condition. The governmental entity undertaking the facility's construction would have to be notified of any requests for variances to the building moratoria. Because the legislature designates the corridor and declares it a valid public use, the governmental entity should then be able to acquire land parcels through its eminent domain power in situations where the owner would vii otherwise be allowed to develop the land due to the undue hardship exceptions. In effect, the designation of a transportation corridor slows significant appreciation in land values and reduces subsequent acquisition costs. An important communication function is also served: local land planners are given clear warning of major transportation projects, and the state transportation authorities are notified of requests for building permits within a corridor. The latter can then take informed, affirmative action to prevent the development or acquire the land in question. In addition, land designated within the corridor's primary area can receive transferable development rights, or TDRS. TDRs are alienable rights to develop that can be sold to others or used by the original owner to develop at density levels above the zoned rate in areas designated by the government as TDR receiving areas. The number of TDRs granted to the property owner should be based upon the amount of acreage reserved and its developmental potential. The use of TDRs would serve two purposes: (1) the government may be able to avoid "takings" challenges from owners affected by the corridor reservation statutes because the TDRs compensate for diminution in land value caused by the government's action; and (2) a TDR program can be viewed as an equitable solution that compensates owners overly burdened by government action. The legality of corridor reservation as a planning technique is unknown at this time. Part I of this report examines takings analysis in both the U.S. and Virginia Supreme Courts in order to attempt to predict the legality of a reservation statute. Both courts recognize a government's right to place restrictions on land development in furtherance of the government's police powers (i.e., to protect the public safety, welfare, economy, etc.); however, both courts also require the government to compensate a property owner when a restriction becomes unduly burdensome or amounts to a "total taking.' The legal analysis concludes that a reservation statute may survive a takings attack if (1) the primary area corridor is designated by the legislature after opportunity for public participation, (2) the primary area corridor includes only the rights-of-way reasonably expected to be necessary for the facility, (3) property owners whose land is affected by the primary area reservation are provided a variance procedure to obtain the exceptional building permit or a "buy out' by the state if undue hardship would otherwise result from the development restrictions, and (4) property owners are issued TDRs to compensate for the delay between the time their land is designated as reserved and the land is actually purchased by the state. The Secondary Area Adjoining the Reserved Corridor The second part of the corridor concept as conceived in this report can provide a framework in which to implement various other land use and financing techniques. When designating a corridor, the legislature should act upon transportation research and analyses performed by VDOT or a local government viii to predict transportation needs and identify areas benefitted by proposed and existing facilities. Such studies are routinely performed by VDOT in order to assess and predict present and future transportation needs. The land that is deemed benefitted by the transportation facility will compose the secondary area adjoining the reserved corridor. (Please see Appendix A for a depiction of the secondary area.) The secondary area serves as a ready-made 'district" within which many novel financing techniques can be used in order to recoup portions of the unearned increment created when the transportation facility is completed within the primary area. It should be noted that the secondary area does not include land within the reserved corridor (a.k.a. the primary area). It seems unduly burdensome to restrict development of a piece of land and at the same time impose additional taxes or fees upon the landowners. Next, it is important to note that the financing mechanisms analyzed for use in the secondary area provide a plethora of choices for state and local governments, with the support of VDOT, to implement. In other words, many devices exist that could permit the government to raise revenue from land deemed specially benefitted by transportation facility development. In addition, the various methods do not need to be, and probably should not be, applied to the same piece of land; hence, a plot of land may be deemed worthy for a special assessment tax but should not also be subject to rigid impact fees and exactions. Last, while the financing mechanisms addressed in Part III of the report are geared toward their implementation alongside a reserved corridor, the mechanisms can be adopted without the concomitant adoption of a reservation statute. Some of the methods described have already been implemented in portions of Virginia and across the country in the absence of reservation statutes for the land required by the transportation facility. This report views a reservation corridor statute working in conjunction with financing mechanisms in a secondary area in order to fully integrate a legal and financial mechanism that recoups as large a portion of the unearned increment as possible, although any one portion of this report can be adopted to stand alone. The emphasis should be on the flexibility of the state legislature and VDOT to explore various financing mechanisms depending upon local conditions. The financing mechanisms for the secondary area are as follows: 1. special assessment districts 2. impact fee districts 3. zones for proffers 4. receiving areas for TDRS. ix Special Assessment Districts A special assessment or tax can be charged on commercial land or residential complexes built after the tax district is created. Virginia law currently authorizes a form of this district, but only if the designation process is begun by a majority of the commercial property owners in a proposed area; even then, the special assessment district is limited to a very few cities and counties within the Commonwealth. To make the assessment district more feasible for local governments and to aid in the recoupment of the unearned increment, the law could be changed to allow the local government to designate a district as long as it lies within a designated secondary area, or the legislature itself could designate areas within the secondary area that are pre-approved or self-instituting. In sum, there are numerous methods to structure the decision-making process at the state, local, or administrative level, or a combination of the three, in order to institute a special assessment tax on commercial real estate and new residential development that accrues special advantages from a transportation facility otherwise financed in large part by general user taxes. Impact Fee Districts The area within the secondary area corridor can provide the basis for assessing impact fees against new development. At present, Virginia law allows a small number of cities and counties to assess impact fees only after an extensive, laborious, and expensive study is performed to determine the precise needs created by the development. To make impact fees more reasonable in order to recoup portions of the unearned increment, the statutes could be changed to require a less formal study before implementation, as is the practice in most other states that allow the imposition of impact fees. At best, boundaries within the secondary area could be designated through legislative action as areas appropriate for impact fees according to predetermined formulas. This would alleviate the huge burden now placed upon localities that attempt to charge developers for the externalities created by their new commercial and residential development. Zones for Proffers The secondary area serves as a well-defined district within which the government can exact proffers for new development for any increased burden placed upon the local infrastructure by a developer. Virginia currently authorizes the use of proffers throughout the state; a transportation corridor with a designated secondary area may help to make the institution of proffers more efficient and predictable than is currently possible. x Receiving Areas for TDRs Areas within the legislatively determined secondary area could be designated as 'receiving areas" for TDRS. TDR legislation would permit governments not only to reserve transportation corridors in the primary area but also to zone sensitive environmental areas, agricultural land, and other areas at low development levels in return for TDRS. The TDRs could then be used only in pre-approved areas, namely those areas where transportation facilities and government services are capable of efficiently handling the new development. Segments of land within the secondary area adjoining a reserved transportation corridor can serve as precisely such receiving areas, especially where transportation systems intersect within a corridor (providing an ideal location for multistory office towers, shopping centers, and multi-modal transportation facilities). Summary Transportation corridor reservation legislation, in tandem with other innovative financing mechanisms, could provide numerous mechanisms to recoup large portions of the unearned increment and aid the Commonwealth in bridging the huge funding gap projected to occur in Virginia in the 2 1 st century. This report examines the legal foundations of the various mechanisms, the benefits and burdens involved, and possible alternatives for Virginia and other state governments to implement in areas specially benefitted by transportation improvements. xi FINAL REPORT CORRIDOR RESERVATION Implications for Recouping a Portion of the "Unearned Increment" Arising From Construction of Transportation Facilities Robert J. Borhart Graduate Legal Assistant INTRODUCTION Transportation needs in Virginia and throughout the country are quickly rising to levels that governments are unable (or unwilling) to meet through traditional revenue collection methods. As a result, attention has been given to new methods to raise revenues, and in particular to methods that place more of the financial burden on those parties that reap special benefits from transportation facilities. This report analyzes taxation of the 'unearned increment, a catch-all term referring to the often substantial increase in private land values that result when a transportation facility is constructed or renovated. The increase occurs for many reasons, including the fact that land adjoining the facility becomes more accessible and desirable, especially for commercial development or office complexes. In one study alone, land prices near a newly completed subway system rose as much as 32%1 Since the price increase results from government activity using taxpayer money, it is plausible to believe that the government should be able to recoup a portion of the increased value in order to finance the very project that created the price increase in the first instance. The fact that owners of land adjoining transportation facilities earn a windfall from the facilities is no secret. A recent example from Northern Virginia provides candid insights into the thoughts of developers and property owners alike in the context of facility development. A private company is presently constructing the 'Dulles Greenway" in Loudoun County to connect Dulles International Airport with Leesburg, Virginia. The present route for the Greenway is bucolic and rural; in fact, only one standing residential structure needs to be 1. David J. Hayes, Note, Rapid Transit Financing: Use of the Special Assessment, 29 Stan. L. Rev. 795, 803 n.54 (1977). The creation of the San Francisco subway caused the increases in land value. 1 leveled2 to build the four-lane tollway at interstate standards with enough clearance to be expanded to six lanes at a future date (a total width of 250 feet and a length of 14 miles)3. Under such conditions, one might expect that the owners of quiet rural property would vehemently oppose a highway that would destroy the isolated nature of the property. Exactly the opposite occurred, due in large part to expectations of huge financial rewards by virtue of the unearned increment effect. One landowner sold a portion of his land at a "fair value" +because he expects the land he owns along the tollway to be rezoned for commercial purposes.4 Another landowner was more specific: "Without this toll road we were like a back-door piece of property. With the toll road we become a front-door piece of property."5 A third landowner gave perhaps the biggest understatement, saying that "Having three major interchanges on the toll road value."6 on our property is going to enhance the v Already, developers near inter-changes are going ahead with plans to build hundreds of millions of dollars worth of commercial and residential complexes7, all thanks to the creation of a roadway by an entity other than themselves.8 A second area of concern addressed in this report relates to the lengthy amount of time involved between the planning of a transportation facility and its actual completion. Property owners often are unsure of the precise location of a given facility (as is the transportation department engaged in the planning process) and may engage in expensive development of their land. When the government finally reaches the point where land acquisition begins, acquisition costs include the new development. Similarly, speculators will often drive up land prices near proposed transportation facilities, and once again acquisition costs will include the price increases.9 Hence, not only does government action create an unearned increment for private property holders, but the government must pay for the added price increase when it acquires land for facility development. _________________________________ 2.William F. Powers, Loudoun's Road to Opportunity, Wash. Post, Oct. 23, 1993, El, at E6. 3.Id. at E1. 4.Id. 5.Id. at E6. This landowner held out and made a "tough bargain," enabling him to reap a buy out for his land at a price higher than the current land value. This phenomenon also contributes to the unearned increment and is addressed in the next paragraph. 6. Id. 7.See for specific examples. 8.It is fair to note that the Dulles Greenway was financed privately, but the same phenomenon occurs time and again near facilities built by VDOT or local governments. The property owners near the Greenway, who are not part of the private consortium paying for the tollway, are exceptional in that their expectations for future profit are so candidly expressed. 9.The Dulles Greenway provides just such an example: a private developer purchased 41 acres of land in anticipation of the tollway's development. He then stonewalled in the negotiations for the acquisition price with the Greenway builder; as a result, the developer received $4.6 million for the land, a price that was 'higher than current land values' and much higher that the $2.18 million paid for 51 acres from a much less recalcitrant property owner. Powers, supra note 2, at E6. 2 Although the concept of the unearned increment is readily accepted in the literature, it is less clear what steps if any should be taken by the government to recoup it. Fluctuations in land values occur whenever the government acts, including for the worse. If actions are taken to recoup increases in land value, some believe that the government should also compensate owners whose land values decrease (especially residential owners who are burdened with roadway expansion that substantially diminishes the value of their homes and land). Next, unearned increments are taxed at some point, such as when the gain from the sale of land is included as taxable income. Critics may argue that the increase in value should be treated as an increase for most other investments: taxes should be paid only when the good is sold so that reliable numbers exist upon which taxes can be imposed. This report begins with the premise that the unearned increment accruing to property owners near a transportation facility can be treated differently. First, recoupment would not be attempted in each and every instance of transportation improvement. There is no question that extremely large increases in land values are the exception and not the rule. Care must be taken to identify those facilities that tend to produce the increment, which include urban highways, subway or light rail stations, and airport facilities. Second, measures analyzed in this report to recoup the increment do not suggest that government should even attempt to recoup the entire increase in value. Most options included herein aim to recoup only a small, reasonable portion of the expected increases in land value. Third, recoupment is rational even while the land is held because (1) the government has legitimate short-term needs to finance the projects (e.g., when bond payments need to be made), and (2) the taxes imposed at the time of sale continue to be only a partial recoupment of an increase that the government action created. Last, as will be out- lined in detail in Part 11 of this report, the view that government needs to compensate landowners for every decrease in value caused by government action is readily rejected by both the Virginia and U.S. Supreme Courts; hence, a legal argument that the state will need to compensate for diminutions in land value if it taxes the unearned increment does not necessarily follow. PURPOSE AND SCOPE This study has its roots in a previous VTRC study, Coordination of Transportation Planning and Land Use Control: A Challenge for Virginia in the 21 st Century, by Robert D. Vander Lugt and Salil Virkar. The authors of that study briefly encountered the concepts of corridor reservation and the unearned increment; however, the scope of their research precluded an in-depth treatment. This study expanded on those two areas and had several objectives: 3 1. to identify the history of and the current thoughts concerning the unearned increment and where, when, and why it is likely to occur 2. to explain the planning technique known as corridor reservation and how it can be accomplished 3. to identify the legal and constitutional concerns associated with reservation statutes and state legislation currently in use that may minimize these concerns, or to find new devices that may help reservation statutes survive legal attack 4. to investigate other financing devices that may be used in conjunction with a reserved corridor to directly finance the facility to be constructed 5. to identify the legal issues associated with those financing mechanisms and locate the legislation used in other states that minimize legal infirmities, and to provide the pros and cons for each mechanism. Part I provides the theoretical underpinnings of the increment, the situations in which it is created, and its historical roots and treatment. The study did not attempt, however, to engage in a philosophical discussion concerning the normative desirability of recouping the increment; instead, it took as its baseline the proposition that the government finds the increment worthy of recoupment, and the focus became one of identifying methods to achieve that recoupment. Part II explains the mechanics of corridor reservation and provides an extensive legal analysis under the U.S. and Virginia constitutions to determine whether reservation statutes require immediate compensation under "takings" clauses. The analysis continues with recommended laws and regulations that can minimize the risk that immediate compensation will be required, including a defined variance procedure and the inception of a TDR program for property owners with reserved land. Corridor legislation in North Carolina and Florida is then examined in light of the legal analysis to assess possible legal infirmities. Part II concludes with an assessment of the two states' legislation along with ideas for improved corridor reservation legislation. Part III analyzes the methods that can be used to directly recoup portions of the unearned increment in land areas adjoining transportation facilities. These methods are the direct means by which revenue may be raised (as opposed to reducing acquisition costs by the state) to finance transportation facility construction. They include: 4 1. special assessment districts 2. impact fee districts 3. zones for proffers 4. receiving areas for transferable development rights (TDRs). Part III also includes an analysis of excess condemnation and concludes that excess condemnation as a device to raise revenue for transportation projects is fraught with legal difficulties and is most likely unconstitutional. Part IV illustrates the alternatives available to governments that wish to recoup portions of the unearned increment or p-event its creation on lands needed for transportation facility construction. The section does not contain specific recommendations for the state but instead is meant to provide a concise "road map" of steps that can be taken together or piecemeal to recoup the unearned increment. METHODS This study is almost exclusively the product of literature review and case law analysis. First, literature concerning the unearned increment was examined. Next, the methods by which the increment could be recouped were examined. The examination began with an extensive literature review of corridor reservation concepts, followed by a review of federal and state case law to determine their legal implications. In addition, state statutory law was researched to identify those states using some form of reservation legislation. Similar steps were undertaken with respect to each of the methods analyzed in Part III: special assessment districts, impact fees, proffers, and TDRS. Then, the legal implications of each device were identified and researched in scholarly publications, and federal and state case law was reviewed to identify legal concerns and outcomes. In addition, several state laws were examined for each method to analyze the legal regimes necessary to withstand attack, as well as to provide practical examples of any required legislation and the effects of its implementation. Next, an extensive computerized search of newspaper and journal articles was conducted to identify transportation trends in Virginia, with close attention being paid to special tax assessment and proffer use in Northern Virginia. The search aided in the report's discussion of political and practical problems associated with those methods capable of recouping the unearned increment. 5 Last, transportation officials in VDOT were contacted to obtain information concerning the planning requirements associated with roadway development in Virginia. Many state officials also reviewed the draft of this study to offer suggestions or improvements within the context of the state's planning and budgetary requirements. PART I: A BRIEF HISTORY OF THE UNEARNED INCREMENT Federal History The concept of the unearned increment was catapulted briefly onto the national stage by Franklin Roosevelt and his cabinet in 1939. The now defunct Bureau of Public Roads prepared a report for Congress entitled Toll Roads and Free Roads,10 one part of which dealt with possible means of finance for an extremely expensive proposal concerning superhighways.11 In the letter of transmittal, Roosevelt suggested that Congress "pay special attention" to the use of excess taking of land for highway rights-of-way in order to reduce greatly the ultimate cost to the government. The President took aim at the chance associated with highway placement: We all know that it is largely a matter of chance if a new highway is located through one man's land and misses another man's land a few miles away. Yet the man who, by good fortune, sells a narrow right-of-way for a new highway makes ... a handsome profit through the increase in value of all of the rest of his land. That represents an unearned increment of profit-a profit which comes to a mere handful of lucky citizens and which is denied to the vast majority.12 The report recommended that the government utilize the concept of excess taking to buy a wide strip of excess land on each side of the highway to rent to concessions or to rent and sell to home builders and others who would directly benefit from living near a major travel artery. The President predicted the government could recoup the unearned increment and reimburse itself "in large part" for the road building.13 ___________________________ 10. Bureau of Public Roads, Toll Roads and Free Roads, H.R. Doc. No. 272, 76th Cong., 1st Sess. (1939). 11. For a concise, cogent history of the interstate system and its attendant political and financial problems, see Gary T. Schwartz, Urban Freeways and the Interstate System, 8 Transp. L.J. 167, 182-208 (1976). 12. Bureau of Public Roads, supra note 10, at vii. 13. Id. The constitutionality of excess taking or "excess condemnation" is highly questionable. For a thorough discussion, see pages 48-55. 6 Unfortunately, World War II largely. diverted congressional attention away from the roads issue until 1944, and the concept of the unearned increment had seemingly disappeared. By 1956, Congress with regard to the interstate system had set the stage for alternate financing schemes and oversight guidelines that provide an excellent case study of how and why the unearned increment was lost at the national level. As with most federal programs, the question of financing held center stage as both President Eisenhower and the Congress attempted to create a badly needed interstate highway system. Eisenhower appointed a blue-ribbon committee headed by General Lucius Clay to study the cost question. The Clay Committee's report estimated the total cost for the system at $27 billion, and the President wrote Congress in the report's letter of transmittal that the highway program 'can and should stand on its own feet, with highway users providing the total dollars necessary for improvement and new construction.,"14 The President believed user financing should be based on new gasoline, diesel, oil, and rubber taxes; very limited toll roads; and special bond issues financed exclusively with the expected stream of income from the increased excise taxes.15 Neither the report nor Eisenhower's recommendations mentioned any attempt to capture the unearned increment created by state governments, nor was attention focused on the land or business owners directly and specially benefitted by the road building (i.e., an attenuated concept of the 'user). Indeed, the Commissioner of Public Roads in the Commerce Department fully supported the Clay Committee's findings and its complete emphasis on the automobile and truck users.16 Determining recoupment of the unearned increment became more' unlikely due to the organizational framework of the Interstate Act. The Eisenhower administration insisted that almost all control over the program remain with the individual states. Commerce Secretary Weeks advised Congress that states should have the responsibility for planning, construction, and maintenance, as well as control over speed, highway marking, and other aspects of highway use.17 Congress for the most part agreed, requiring the ___________________________ 14. President's Advisory Committee on a National Highway Program, A 10-Year National Highway Program, H.R. Doc. No. 94, 84th Cong., 1st Sess. vi (1955) [hereinafter Clay Committee Report](emphasis added). 15. Id. 16. Commissioner of Public Roads, Department of Commerce, Needs of the Highway Systems, 1955-84, H. R. Doc. No. 120, 84th Cong., I st Sess. (1 955). See also A. D. LeBaron, The 'Theory" of Highway Finance: Roots, Aims and Accomplishments, 16 Natl Tax J. 307 (1963) (describing the inefficiencies inherent in a user-based tax for the interstate system, e.g., the lack of a nexus between a gasoline purchase and the likelihood that such gasoline will be used on an interstate). 17. National Highway Program,, Federal Highway Act of 1956: Hearings Before the Subcomm. on Roads of the House Comm. on Public Works, 84th Cong., 2nd Sess. 10 (1956). 7 states to acquire the necessary rights-of-way; to control access to the highways; and to integrate the workings of the state, city, and county agencies concerned with street and highway research, planning, and construction. The federal government did very little to help states acquire land after monies had been appropriated. The federal power of eminent domain was to be used only in cases where the state was unable to acquire the land or to do so with sufficient promptness. As a result, many states became overwhelmed and progress was anything but orderly or well planned for the long term. The experience of California provides a good example. In the 1959-60 fiscal year, only 3 years after the interstate program was approved, the California Division of Highway Right of Way had the responsibility for appraising, acquiring, and managing approximately 10,000 parcels of land per year. The budget amounted to $151 million (including the compensation for the land itself, allowing a staff of only 450 people to determine the fate of 70,000 property owners per year. As one high-level highway official wrote, the department had excellent engineers and right-of-way personnel, but there was almost no concern for working with the general public, studying the long-term effects of the massive building effort, or developing land use programs to handle new development near the interstates.18 The state's main concern was keeping its head above water and spending available federal monies on schedule, even when no reliable data or studies existed on the economic impact of the new controlled-access highways or the "before and after" effects.19 Indeed, in 1959, attorney and land use specialist David R. Levin predicted problems that exist today in relation to interstates and state roadways alike: [The] approaches to expressways and expressway interchange areas may render these facilities obsolete in a few years unless proper balance is achieved between the design standards of the access facilities and the pattern of land development in these key areas.20 Levin also recognized that a gaping hole existed in the areas of cooperation between federal, state, and local governments in areas of "planning, research, financing, land acquisition, construction, maintenance, operation, traffic control, policing and others."21 Many states were altogether incapable of __________________________ 18. Dexter D. McBride, The Highway Program-Problems of Right-of- Way Acquisition, 34 Title News 109, 112 (1960). McBride was a supervising right-of-way agent in the California Division of Highways and the National Secretary of the American Right-of-Way Association. 19. Id. at 113. 20. David R. Levin, Problems in Highway Condemnation, 1959 Wis. L. Rev. 561, 563 (1959). At the time of the article's publication, Levin held the positions of Chief, Highway and Land Administration Division, Bureau on Public Roads, Department of Commerce, and Chairman, Committee on Land Acquisition, Highway Research Board. 21. Id. at 562-63. 8 handling such areas, according to Senator Moynihan22 Last, the legality of acquiring land in advance of construction (even if only 5 years beforehand) was not definitively known at the federal level or in the vast majority of states, further hampering comprehensive planning and cost-efficiency.23 It is important to note that the advance acquisition of land continues to be clouded in mystery to this day. It is not difficult to understand why the concept of acquiring even more land along rights-of-way, then renting or reselling it at higher values along with extensive land-use regulation, was not used. (This is also evident in view of the fact that the federal government provided 90% of the highway costs,24 leaving little incentive for the states to develop more efficient long-term financing schemes.)25 Virginia History26 The funding of transportation projects in Virginia has remained largely the same throughout this century. Due to the economic burdens that were placed on the Commonwealth as a result of the Civil War, bond issues for public works were feared by a majority of the state's citizens. In order to create an alternative funding method for transportation financing, the General Assembly in 1923 created a pay- as-you-go financing scheme by imposing a gasoline tax for the first time in the Commonwealth's history. Transportation projects were to be financed only from the revenues that had been gained through taxes. Thus, the state could build roads only to the extent that tax revenues existed. By 1932, the depression had hit Virginia, causing a fiscal crunch. State Senator Harry F. Byrd sponsored the Secondary Roads Act of 1932 (also known as the Byrd Road Law). The Byrd Road Law left in place Virginia's pay-as-you- ____________________________ 22. Daniel P. Moynihan, New Roads and Urban Chaos, Reporter, April 14, 1960, at 16. 23. Levin, supra note 20, at 566. Interestingly, Levin recognized the need to control high-way access, to use set-back zoning requirements to facilitate future road widening, to restrict development immediately upon roadway corridors, and to utilize advance acquisition in order to keep costs to a minimum and remove roadblocks in the way of future transportation planners. See Levin, Highway Zoning and Roadside Protection in Wisconsin, 1951 Wis. L. Rev. 197 (195 1). Such ideas came before massive spending on highways in the late 1950's, and Levin now seems to have been a lone voice crying out in the wilderness. 24. Act of June 29, 1956, ch. 462, 108(b), 70 Stat. 378 (codified at 23 U.S.C. 120(c) (1988)). 25. Indeed many states agreed to build and finance their share of the interstate system because they did not want to turn down the 90% federal share; sound investment took a back seat to the certainty of federal monies and the concomitant boost for local economies. Schwartz, supra note I 1, at 217 (quoting R. Goodman, After the Planners (1971)). Taxation problems at the state level are becoming critical, however, because states are required to provide for the "maintenance" of the system. 23 U.S.C. 116 (1988). Such maintenance may exceed the state's original 10% contribution. See Schwartz, supra note 11, at 188 n. 164. 26. This section contains excerpts from Robert D. Vander Lugt and Salil Virkar, Virginia Transportation Research Council, Coordination of Transportation Planning and Land Use Control: A Challenge for Virginia in the 21 st Century 5-6 June 1991). 9 go financing system, but it also placed under state control all 'public roads, causeways, landings, and wharves" that had been under local control.27 The county feeder road system was included in the roads that were taken over by the state. And the Byrd Road Law created a highway trust fund that would serve as a fund raising and allocation mechanism for the state. Shortfalls in revenue once again returned to the Commonwealth in the 1950's to the extent that the pay-as-you-go financing scheme was becoming insufficient to meet the state's transportation needs. The influx of funds from the federal interstate highway program alleviated the problem somewhat, but by 1965 it was clear that the amount of money required to meet the state's transportation needs did not exist. In addition, the pay-as-you-go system came under fire from those who claimed that it did not provide an alternative to debt financing. Critics focused on the heavy debt incurred by cities to pay for ser- vices not funded by the state as proof of the failure of the system. In effect, critics argued, the pay-as-you-go scheme transferred debt burdens to cities instead of avoiding their accumulation entirely. Although the legislature has allowed local governments to experiment with new methods to raise revenue for roadways on a very limited scale, the state continues to work within the funding framework adopted in the 1930's for the vast majority of transportation projects. Meanwhile, Virginia's transportation needs are outracing the state's ability to pay at an incredible rate. A recent VDOT study indicated that Virginia's 1989 modal needs would be almost $49 billion over the subsequent 20-year period, of which more than $24 billion in funds would be unavailable under current funding formulae.28 The need to distinguish between local and state taxation powers is essential as well. The Constitution of Virginia vests the power to tax real property and other personal property exclusively with local government (i.e., cities and counties).29 The Commonwealth government, on the other hand, bears responsibility and power for the creation and maintenance of the primary and secondary road systems throughout the Commonwealth.30 A true dilemma results:. the Commonwealth pays for the highways and creates the unearned increment for adjacent landowners, but the local government reaps the increases in property taxes due to increased land values. ______________________________ 27. The law did not apply to independent cities, and the counties of Arlington and Henrico chose to exercise an escape clause in the law to retain control over its roadways. 28. Virginia Dept. of Transp., A Study of Transp. Trust Fund Allocation Formulae (SJR 188); 1993 Final Report, at 2 (March 1993). The funding numbers include federal, state, local, and other funds. Id. 29. Va. Const. Art. X, 4. The section is an explicit restraint on the imposition of state taxes on real estate and personal property. See C & P Telephone Co. v. City of Newport News, 196 Va. 627, 85 S.E.2d 345 (1955); Fallon Florist, Inc. v. City of Roanoke, 190 Va. 564, 58 S.E.2d 316 (1950). 30. Exceptions to this general rule include cities and the counties of Arlington and Henrico, which bear the cost of maintaining roadways within their borders. 10 PART II: CORRIDOR RESERVATION LAWS Corridor reservation laws are aimed at preserving rights-of-way for future transportation facility development at minimal cost. Often, government is constrained from purchasing land for highway development until late in the planning process-after the precise rights-of-way have been determined, the state legislature has appropriated money for actual land acquisition, and public hearings have taken place. By that time, the proposed corridor may have been in the planning process for a dozen years or more, and commercial or residential development occurs that necessitates large increases in the acquisition costs. And, closely related to the issue of the unearned increment, development often occurs near a proposed corridor in anticipation of future roadway development. When changes have to be made in the proposed route for environmental or engineering reasons, the new land routes include the new development and land that has appreciated significantly in value.31 'Reservation laws" seek to prevent development in a proposed corridor or along existing roadways requiring expansion, thereby controlling land prices and greatly reducing costs when acquisition is required for facility construction. In addition, the reservation laws seek to prevent the development without requiring massive compensation by the government, in other words, without the need for easements or takings from the affected landowners. As used in this report, a reservation law would allow a governmental entity to designate precise land areas in which new development is denied or severely restricted. The types of laws often included (but by no means exclusive) are official map acts, set-back restrictions, and building moratoria or zoning laws. In each, the aim is not to recoup increased land values created by transportation facility development but to reduce the development costs themselves by preventing the increment from accruing on needed lands. ___________________ 31. The United States Congress recognized the need to preserve corridors for future transportation facility rights-of-way by ordering the Secretary of Transportation to prepare a national list of rights- of-way identified by the states. The list is to include the total mileage involved, an estimate of the total costs, and "a strategy for preventing further loss of rights-of-way including the desirability of creating a transportation right-of-way land bank to preserve vital corridors." Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), Pub. L. No. 102-240, 10 17 (c), 105 Stat. 1914, 1948 (199 1) (to be codified as a note under 42 U.S.C. 108). Under ISTEA, states are obligated to undertake a planning process that considers the "[p]reservation of rights-of-way for construction of future transportation projects, including identification of unused rights-of way which may be needed for future transportation corridors...." Id. 1025, 105 Stat. at 1963-64 (amending 23 U.S.C. 135). 11 The first tool holds the most promise and will serve as the focus in this report: a legislatively enacted official map32 or reserved corridor. The map or reserved corridor is a comprehensive plan detailing all current and predicted land uses, along with the infrastructure required to support those uses. Included in such maps are anticipated transportation needs, usually composed of proposed new roadways and the expansions needed to meet future demand. The most potent reservation law would either bar property owners from building in designated transportation corridors or allow development but deny governmental compensation for that new increase in development value when actual land acquisition is undertaken. This highly restricted area is referred to in this report as the "primary land area" within a designated transportation corridor. Constitutional Issues The near absolute denial of development envisioned in the primary land area of a highway reservation law will face challenges to its constitutionality.Such challenges can be raised under the Takings Clause of the U.S. Constitution.33 The Fifth Amendment states: No person ... shall be ... deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.34 The theory would be that a landowner's "property" is effectively taken when otherwise valid uses are restricted, usually because the land value decreases substantially or the land's developmental profitability is diminished. The Pennsylvania Coal Opinion Current Supreme Court doctrine on takings law in situations where the government has not physically invaded the property but has regulated its use has its roots in the landmark case Pennsylvania Coal v. Mahon.35 The Pennsylvania legislature felt it necessary to prevent subsidence caused by unregulated and careless subsurface mining and passed a statute under its police power _____________________________________ 32. The designation of corridors could also occur through local government designation if such power is granted to the locality by the state government. The most practical method would envision cooperation between the local government and state transportation department to carry out the planning study and proposed corridor boundaries. That plan would then be presented to the General Assembly for approval, with or without amendment. Virginia statutes currently require localities to develop official maps, but the inclusion of proposed roadways on the maps does not create a legal bar on development within the corridor. See Va. Code Ann. 15.1-458 to 15.1-463 (Michie 1989 & Supp. 1992). 33. A taking challenge may also be brought under the Constitution of Virginia. The state law discussion begins on page 25. 34. U.S. Const. amend. V. 35. Pennsylvania Coal v. Mahon, 260 U.S. 393 (1922). 12 requiring landowners to leave a certain amount of the coal underground. The law made it "commercially impracticable to mine certain coal [and had] very nearly the same effect for Constitutional purposes as appropriating or destroying it."36 The holders of the mining rights sued, claiming the government had to compensate them for the "taking" of their rights to exploit private property for economic gain. The Court adopted a two-pronged analysis to decide the case, weighing the magnitude of the public interest at stake against the cost to private landowners. As Justice Holmes noted in the Court opinion, "government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law."37 However, when that diminution "reaches a certain magnitude, in most if not all cases there must be an exercise of eminent domain and compensation to sustain the act."38 The Court did not set a strict definition of that "certain magnitude," rather it decided that the determination had to be based on the particular facts of each case.39 The law at issue in Pennsylvania Coal was very poorly drafted, preventing the removal of great quantities of coal that were completely safe and allowing mining in areas prone to subsidence; hence, the public interest at stake was minimal. The Court weighed that against the extreme diminution in value of the challenger's property and declared the law to be an unconstitutional taking. 40 This balancing-test approach to takings questions still holds sway. The Court stated in Agins v. Tiburon41 that a regulation is a taking if it "does not substantially advance legitimate state interests . . . or denies an owner economically viable use of his land."42 The Court has made it clear that the owner's "investment- backed expectations" must be taken into account when courts determine the economic viability of the land in question.43 A reservation law would have to pass the Agins test: Can a government almost completely prohibit the development of a portion of a person's land in order to serve the very important public interest of providing an adequate trans- _______________________ 36. Id. at 414. 37. Id. at 413. 38. Id. 39. Id. The Court has consistently upheld this ad hoc approach. See, e.g., Lucas v. South Carolina Coastal Commission, 112 S. Ct. 2886, 2893 (1992). 40. Pennsylvania Coal, 260 U.S. at 413-14. 41. Agins v. Tiburon, 447 U.S. 255 (1980). 42. Id. at 260 (1980) (internal citations omitted). See also Lucas v. South Carolina Coastal Commission, 112 S. Ct. 2886 (1992); Keystone Bituminous Coal Association v. DeBenedictis, 480 U.S. 470 (1987). 43. Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 127 (1978). 13 portation network? Unfortunately the Court has never addressed the transportation corridor reservation concept; however, a recent taking case involves a comparable fact situation. The Lucas Opinion The plaintiff in Lucas v. South Carolina Coastal Commission44 purchased two ocean front lots in 1986, intending to build single- family homes similar to the developments on adjoining parcels. Laws in effect at the time of purchase permitted the development Lucas had in mind. Eighteen months later, South Carolina enacted the "Beach front Management Act," which barred the plaintiff and all similarly situated landowners from building any new permanent habitable structures on the beach front. Lucas immediately brought suit (before applying for a permit to build), alleging that the law deprived him of all economically viable use of the property and hence effectuated a 'taking" that had to be compensated.45 The Supreme Court agreed, ruling that regulations that deny an owner all "economically viable use of his land" are a discrete category of deprivations that require compensation without case- specific inquiry to determine the public interest necessitating the regulation. The government can resist compensation only by demonstrating that the "proscribed use interests" were not a part of the owner's title even before the regulation took effect. This means that the state must point to an existing common law rule or a pre- existing easement or condition upon the owner's fee simple (i.e., "title") in order to justify any new regulation that prevents all economically beneficial use of the land. The law must ... do no more than duplicate the result that could have been achieved in the courts-by adjacent landowners ... under the State's law of private nuisance, or by the State under its power to abate nuisances ....46 Questions Concerning Lucas and Its Applicability The Lucas opinion leaves many questions unanswered. First, the Court explicitly refrained from determining when land becomes economically nonviable. The majority opinion, in a footnote, "regrettably" recognized the lack of a clear-cut rule, writing that the answer may lie in how the owner's reasonable expectations have been shaped by the State's law of property-i.e., whether and to what degree the State's law has accorded legal recognition and protection to the ______________________________ 44. 112 S. Ct. 2886 (1992). 45. Id. at 2889-90. 46. Id. at 2900. 14 particular interest in land with respect to which the plaintiff alleges a diminution in ... value.47 As the Blackmun dissent indicates, the determination of a total taking is the threshold inquiry under this category of taking cases, yet there is no objective way to define what the "denominator" should be.48 For example, a highway reservation law may deny development on 10% of a landowner's estate. A court could rule that, based upon the regulated portion alone, the owner's land is no longer economically viable and compensation is required. Or a court could use the owner's entire tract of land as the baseline and find only a 10% diminution in the total value, hence not the "total taking" as recognized in Lucas.49 Previous case law cited in Lucas only clouds the picture. In Keystone Bituminous Coal Assn v. DeBenedictis,50 a statute almost identical with the one in Pennsylvania Coal was challenged, and the public interest claimed remained the same as well. The unexploitable coal amounted to approximately 2% of all deposits. The Court, using the value of all coal deposits in the state as the baseline, ruled the diminution minimal and did not require compensation.51 In Nollan v. California Coastal Commission,52 cited by the Lucas court as a total taking case, a beach front landowner applied for a building permit to remodel his home. The Coastal Commission premised the issuance of the permit on the dedication of an easement over the plaintiff's land so that citizens could access the beach. The easement caused a small reduction in the overall value of Nollan's estate, but of course a total diminution in value of the immediate land burdened by the easement because all development on it was prohibited. The regulation was ruled a taking and could not be treated as a quid pro quo for the issuance of a building permit.53 _________________________________________________________________ 47. Id. at 2894 n.7. 48. Id. at 2908 (Blackmun, J., dissenting). 49. For an interesting and prescient discussion of the valuation problem written almost 30 years ago, see Sax, Takings and the Police Power, 74 Yale L. J. 36, 60 (1964). 50. 480 U.S. 470 (1987). 51. The Keystone Court addressed the new subsidence statute in a different procedural posture, however. The owner in Keystone mounted a facial attack, alleging the statute could never be applied in a constitutionally sound manner. The Court did not agree with the claim. For a complete discussion of facial versus as-applied challenges in the takings context, see discussion on pages 23-24. 52. Nollan v. California Coastal Commission, 483 U.S. 825 (1987). 53. In fact, the stated premise of the Nollan decision was that the required dedication had no relation to the work the plaintiff wished to perform on his home. The Court required a nexus between the permit condition (i.e., the forced dedication) and the original purpose of the building restriction (i.e., the need to allow access to the sea). Nollan, 483 U.S. at 831-37. "Unless the permit condition serves the same governmental purpose as the development ban, the building restriction is not a valid regulation of land use but "an out-and-out plan of extortion."Id. at 839 (internal citation omitted). 15 A second area of concern after Lucas involves the meaning of "value" itself. The Lucas Court accepted the lower state court's judgment (due to federal/ state judicial relations) that the plaintiff's land was rendered valueless, though the accuracy of that assessment remains in doubt. It is clear Lucas could not develop the land in a manner to maximize its profitability, but the South Carolina courts did not look to other inherent land values previously rec- ognized by courts: the right to exclude others from the land; the ability to picnic, swim, camp in a tent, or live on the property in a mobile home; or the right to alienate the land to neighbors or others desiring proximity to the ocean.54 State and federal courts may cite these "non-developmental" values in order to expand the definition of "property" and avoid the Lucas rule, thereby rarely finding total takings.55 Third, the decision may have the effect of freezing a state's common law and impairing the ability of a legislature to respond to new crises in the transportation arena. The South Carolina legislature had an abundance of evidence demonstrating the dangers posed by continued development upon the state's sand dunes, evidence that mimicked findings reported by the U.S. Congress 20 years before. The Court responded: "Any limitation so severe cannot be newly legislated or decreed (without compensation) . . . ."56 Deference was not given to a legislative determination that a new type of hazard existed that threatened public safety and hence required state intervention under its police powers-emphasis was placed on the previously existing common law alone. Last, it is unclear how the balancing test so fundamental to taking cases will be affected. In dicta near the end of the Lucas opinion, the majority wrote that the total taking inquiry will ordinarily entail the same analysis as state nuisance law, meaning an examination of the degree of harm to public lands and resources, or adjacent private property, posed by the [landowner's] proposed activities . . ., the social value of the ... activities and their suitability to the locality in question . . ., and the relative ease with which the alleged harm can be avoided through measures taken by the [landowner] and the government (or adjacent private landowners) alike ....57 In addition, courts could determine whether the proposed activity had been engaged in for a long period of time before the regulation, or if nearby landowners are permitted the use denied to the claimant, in making their ultimate _____________________________________ 54. Lucas, 112 S. Ct. at 2908 (Blackmun, J., dissenting). 55. Id. at 2919. (Stevens, J., dissenting). 56. Id. at 2900. "We stress that an affirmative decree eliminating all economically beneficial uses may be defended only if an objectively reasonable application of relevant precedents would exclude those beneficial uses in the circumstances in which the land is presently found."Id. at 2902 n.18. 57. Id. at 290 1. 16 taking determinations.58 Hence, a balancing may still occur within the common law nuisance/ property rights framework. Lucas and Corridor Reservation The potential applicability of Lucas to the corridor reservation concept is great. First, the denial of all development rights within a corridor in the absence of any variance procedure is most analogous to the fact situations in both Nollan and Lucas and would require immediate compensation or physical appropriation by the government. Second, a court could reasonably find that a reservation law removes all economic "value" from the land; while other non-economic uses remain, courts will probably frown upon government lawyers that contend the right to "enjoy nature" on own's land leaves enough value to ignore severe and/or complete diminutions in economic values. Third, the government would be hard pressed indeed to attempt to argue that any background nuisance law exists to prevent what is otherwise legal and ordinary development within a designated corridor simply to reduce transportation costs. Hence, even though ambiguities remain after Lucas, a rigid, complete ban within a corridor is not a realistic option. Better results can be obtained, however, when the reservation laws or statutes do not completely remove all economic value or when the government provides variance procedures or benefits to property owners (other than through cash payments) in an attempt to compensate for diminutions in land value caused by regulation. Further examination of several key areas in takings law should further illuminate the legal underpinnings of corridor concepts. "Economic Viability": The Variance Procedure One prong of the Agins test59 results in a taking if an owner is denied economically viable use of his or her land.60 In Agins, the city adopted a low-density open space ordinance and began eminent domain proceedings to acquire the plaintiffs land. One year later, the city ended the proceedings and the landowner sued alleging, inter alia, that the city must compensate a landowner for the reduction in land value incurred during the acquisition process under the Takings Clause. The Court rejected the argument, ruling that "(mere) fluctua- tions in value during the process of governmental decision-making, absent extraordinary delay, are "incidents of ownership." They cannot be considered as a "taking" in the constitutional sense.'"61 __________________________________ 58.Id. 59. Agins v. Tiburon, 447 U.S. 225 (1980); see supra notes 41-43 and accompanying text. Discussion of the second prong, the legitimate state interest, begins on page 22. 60. Lucas dealt with the complete removal of economic viability under this prong. 61. Agins, 447 U.S. at 263 n.9 (1980), quoting Danforth v. United States, 309 U.S. 271, 285 (1939). 17 Several years later, however, the Court opened the door to a new class of takings cases involving "temporary takings." The plaintiff in First English Evangelical Lutheran Church v. County of Los Angeles62 alleged that the government had squandered opportunities to exercise its eminent domain power and created several years of uncertainty concerning the value of his land. The Court did not agree with the plaintiff on the facts of the case, but it did rule that temporary takings that deny a landowner all use of his or her land "are not different in kind from permanent takings, for which the Constitution requires compensation."63 The Court limited Agins to the proposition that property must be valued at the time of the taking and need not take into account any depreciation that occurs during preliminary activities of the government.64 The Lucas decision reaffirmed the validity of a temporary taking challenge, holding that Lucas had standing to sue because the state prevented any development of his land for a 2-year period without compensation and without a variance procedure.65 The Agins/ First English line of rulings applies directly to a highway reservation law. If the government attempts to restrict all development within a corridor, it must either pay the market value for that "easement," acquire the land, or include a well-defined variance procedure. Under a variance procedure, a landowner that is denied a certain use of his or her land by a zoning law or a reservation statute can petition the government agency responsible for restricting the use. The agency must then review the particular fact situation of the owner and make an individual determination of whether the use can be allowed or whether it would be against the public health, safety, or welfare (i.e., whether it is capable of being restricted under the police power). If the proffered use is allowed, a court under Agins/ First English should rule that the delay inflicted upon the property holder was a normal and acceptable part of the government decision-making process. If the use is denied, the government must buy an easement to prevent the use, buy the land itself, or be able to defend the restriction under the police power in a court action. A good example of a variance procedure presently in use involves a set of Florida statutes that temporarily prevent localities from granting building permits to landowners within a restricted transportation corridor." The locality, upon a petition by a landowner to make any changes to his or her property, ______________________ 62. 482 U.S. 304 (1987). 63. Id. at 318. 64. Id. at 320. 65. Lucas, 1 12 S. Ct. at 2 89 1. The First English decision, written by Chief Justice Rhenquist, attempted to limit the holding to the "facts presented" and noted that the owner had been denied all use of his land. Specifically, variances were held to be outside the holding. First English 482 U.S. at 321. 66. Fla. Stat. ch. 337.243 (199 1). The Florida statute is designed first and foremost to foster communication between the local zoning and planning boards and the state Importation department in order to prevent the approval of development permits by the local entities in corridors designated"for future highway development by the state. See discussion on pages 28-29 for a more detailed treatment. 18 must first alert the state transportation department. The department in turn has the option to acquire the land within 120 days or allow the proposed development to occur. In the event the department does not exercise its option to buy, the local government has the authority to act upon the landowner's petition as it would any other zoning or development decision. The inclusion of the variance procedure changes a taking case from the line of reasoning in Lucas to that in Agins: development is not completely restricted without an administrative appeal mechanism, and the delay in the variance procedure can be attributed to normal delays in the decision-making process. "Economic Viability": Divisible Property Rights A very important aspect of the economic viability test and of takings jurisprudence in general is the concept that interests in land are divisible. Government regulation may affect one aspect of land value while having no impact on other aspects of value. As such, courts often will not declare a taking when a valid commercial use or some other identifiable economic use remains. Legal commentators note that the government regulation at issue in the total taking case of Lucas was uncharacteristic in that "extremely few jurisdictions have the unmitigated gall" to regulate property by limiting any alternative uses for it.67 One way to approach the divisibility concept is to view property ownership as the legal possession of a "bundle of sticks.68 Owners of property are able-to sell certain sticks to others while maintaining ownership of the surface land, and government can take away other sticks through regulation via valid use of the state police power. One example familiar to most is the possible split in ownership involving mineral deposit rights: one person may hold title to a plot of land above ground, while another owns the rights to any mineral deposits below ground. A third person can hold the separate right to actually extract ore and a fourth may have legal ownership of the air deposits from the ground,69 rights. The Supreme Court explicitly recognizes the divisibility of land ownership and has refused to find takings in situations in which government regulations effectively eliminate one 'stick." In Keystone,70 an anti-subsidence law prevented the owner from mining portions of his coal deposits, but the Court found no taking because the owner's property contained extractable deposits. Similarly, in Penn Central Transp. Co. v. City of New York,71 the owner of the Grand Central Station railroad terminal alleged that a taking occurred when the city __________________________________ 67. See H. Jane Lehman, Property Rights Drive Picks Up More Ground, Los Angeles Times, Oct. 11, 1992, at K6 (quoting Los Angeles land-use attorney Gideon Kanner). 68. Lucas, 112 S. Ct. 2899. 69. Pennsylvania is one state in which the right to extract mineral deposits is severable from actual ownership of the ore itself. 70. See supra notes 50-51 and accompanying text. 71. 438 U.S. 104 (1978). 19 refused to issue building permits up to the level normally allowed within the building's zoning grid because the terminal had been designated a historic landmark. The Court found no constitutional taking because the property owner could still realize an appreciable profit from his commercial enterprises even though he could not develop as intensively as he had expected.72 As such, the government may be able to restrict development rights within the primary area without compensating the owner if other facets of the owner's property rights remain intact and allow identifiable value.73 This interpretation depends upon the magnitude of the restriction in relation to the economic possibilities remaining in the fee simple and upon the baseline used in the valuation determination. Divisible Interests and Transferable Development Rights (TDRS) The view of divisible property rights outlined poses a large problem for transportation financing: a subjective balancing test is required that will be different for every property owner and will be costly to implement in the context of a corridor reservation program. The ultimate key to success for corridor legislation may lie in the following ingenious concept borne out of land divisibility: transferable development rights, or TDRs.74 The legal idea is that the right to develop one's land is as alienable as the rights to air, water, or underground minerals above, within, and below the same plot of land. If the government imposes a regulation on the land that substantially restricts its developmental capacity, the government should also be able to create severable rights or credits to develop that can be used by the property owner at another location. The development rights are also transferable, or salable on the open market, so that many small, divided property owners can sell their rights to developers that are more likely to be able to afford and use them more efficiently. The owner of the TDRS, in turn, can use them only in predesignated areas, ideally sites that contain the infrastructure needed to support dense development and near multimodal connection points. The true attractiveness of the concept lies in the fact that the "hit-and-miss" aspects of zoning and government regulation can be reduced to some degree. For example, the corridor reservation proposals and the concomitant financing ideas in this study are aimed at recouping a portion of the increase in land value that accrues to the lucky property owner due to government activity. In the TDR context, the aim is to offset the decrease in land value that often strikes a property owner due to government regulations and restrictions under _________________________________________________________________ 72. See infra notes 75-76 and accompanying text. 73. For example, the government could disallow all commercial building if the property owner still earned a profit from renting his or her farmhouse. 74. Known variously as "transfer of density rights," "transfer of density credits," and the like. The terms are limited only by the creativity of legislators and land-use attorneys. 20 the police power. Indeed, the property owner whose land is immediately needed for the transportation facility in most cases sees a diminution in his or her property values because regulations prevent the landowner from pursuing the most profitable land use possible and yet do not require compensation. TDRs would alleviate that burden by creating a market for the landowner's otherwise unusable development capacity. The U.S. Supreme Court specifically recognized the legality of the TDR concept in Penn Central. The Court cited the existence of the TDRs granted to the plaintiff as demonstrable proof that substantial value remained "in the 75 land," and hence the defendant city's preservation laws did not effect a taking. At the federal constitutional level, commentators describe the creation of TDR programs as "a safety valve for situations in which portions of properties are subject to restrictive treatment."76 TDRs in Action Successful use of TDR programs can be found in Maryland. The purpose of the Maryland programs has been to preserve agricultural farmland from the sprawl of urban development. Since 198 1, a state program has paid farmers $97 million to obtain permanent preservation easements on more than 98,000 acres of land.77 More interesting, the Montgomery County government allows farmers in areas zoned for one house to every 25 acres to sell TDRs to developers. The developer is then allowed to use the rights to build in predesignated areas closer to metropolitan Washington. The effect is to permanently exclude certain land areas from development while at the same time allowing building to occur in greater densities in urban areas that are more prepared to handle the development (i.e., where infrastructure can handle the added growth). And the property owners (i.e., the farmers) are indirectly compensated by the government for the loss of development rights on land they personally own. New York City has also adopted a TDR framework in order to preserve historic buildings within the city limits. The most visible and expansive example involves the Grand Central Station Terminal. The city denied to the developer the right to demolish the historic terminal or to substantially change its character (which included a denial to construct high-rise office towers). In return, the city calculated the number of stories that would normally be permitted within the terminal's zone and computed the total square footage of office space that ________________________________ 75. 438 U.S. 104 (1978). 76. Anne E. Mudge, The Law of the Land, The Recorder, July 29, 1992, at 9; see also H. Jane Lehman, Property Ruling Prompts Shift in Legal Attacks, Wash. Post, July 4, 1992, at E1 (citing land-use attorney Katherine E. Stone for the proposition that "[L]ocalities should always allow some reasonable use of regulated property ... by providing for variances or transfers of development rights. . . ."(emphasis added)). 77. Paul W. Valentine, A Vanishing Act Slows, State Preservation Program Stems Loss of Farmland to Development, Wash. Post, Sept. 10, 199 2, at M1. 21 was "denied." The city then credited the developer with TDRs equal to approximately 1.7 million square feet. The TDRS, in the form of "air rights," may be used in a designated subdistrict surrounding the terminal .78 -The TDR concept is used in various other states and localities for numerous purposes, including environmental preservation, historic preservation, and the maintenance of low-income housing in urban areas. "Economic Viability": A Summation In the context of the corridor reservation proposal, the issue of residual value is critical. Hoping that most property owners will still retain some residential use or other economic benefit from the land, and then that courts will continually recognize the legality of the process, is tenuous. The adoption of new legislation that can compensate the property owner without the need for huge monetary consideration is essential, and a TDR program may be an option to achieve that end equitably for most parties concerned. "Legitimate State Interest": The Second Prong It will be recalled that the Court in Agins balanced the property owner's interest of economic viability with the "legitimate state interest." As Justice Stevens wrote in Keystone, "the nature of the state's interest in the regulation is "79 a critical factor in determining whether a taking has occurred . In Keystone, the court explicitly recognized the legitimate governmental interest of preserving the public welfare and maintaining the fiscal integrity of large areas of the state. Compared to the rather minuscule 2% reduction in value to the state's coal deposits, the state interest outweighed the loss to the landowners and no taking was found.80 The court in Nollan has explicitly made the purpose test more stringent. The court stated that a regulation had to substantially advance a. legitimate governmental interest and disallowed a rational basis test. Hence, the defendant's requirement that the owner of beach front property dedicate an easement over his land to allow public access to the ocean when the improvements the owner wished to make to his home had no impact on public access to the beach was more akin to a "plan of extortion" than a valid regulation of land use. The grant of the easement was a taking that had to be compensated.81 The state interest in creating a transportation corridor can be considered both substantial and legitimate. The Keystone decision explicitly recognized ________________________ 78. Michael H. Cottman, Manhattan Neighbors, Newsday, July 7, 1992, at 25. 79. Keystone Bituminous Coal Assn v. DeBenedictis, 480 U.S. 470, 488 (1987). 80. Id. at 493. 81. Nollan v. California Coastal Commission, 483 U.S. 825, 837 (1987). 22 that preserving the fiscal health of a community is an important public interest, and the immense costs associated with transportation development (both the construction costs themselves and the effects upon a community without sufficient facilities) should be recognized by a court. On the other hand, courts do not place much emphasis on a government's need to be economical when a citizen's property rights are at stake; hence, the need to create alternate forms of compensation such as TDRs becomes critical. And the use of highway reservation laws within a designated corridor may fall into the same category as the required dedication of an easement in Nollan: a complete prohibition on the development of reserved land without compensation is an unconstitutional taking.82 The Court has also added a gloss in cases where the government is acting in an 'entrepreneurial" manner. The plaintiffs in Penn Central claimed the city had appropriated parts of the railroad terminal to engage in an "enterprise capacity" for a 'strictly governmental purpose," thereby effecting an unconstitutional taking. The Court did not reject the argument out of hand but instead ruled that the preservation law allowed the defendants to continue to use the terminal and did not facilitate any entrepreneurial operations of the city-the regulations preserved historical aspects of the station. It is important to note that the Court recognized the enterprise capacity argument, and laws that further the creation of transportation facilities may be viewed as government acting solely in its entrepreneurial capacity. "Facial" v. "As-Applied" Challenges An overriding concern in takings cases involves the procedural stance of the plaintiff. A challenge to a government regulation under the federal or Commonwealth takings clauses can be brought either facially or as-applied. In a facial challenge, the landowner must prove that the regulation or law in question can never be implemented in a constitutionally approved manner. Neither the U.S. nor the Virginia Supreme Court views facial challenges kindly, the former having written that a plaintiff "face[s] an uphill battle in making a facial attack on [a regulation] as a taking."83 Courts prefer to review laws that have been applied to a specific fact situation and adjudicated in all available administrative proceedings, resulting in an allegedly insufficient remedy for the plaintiff. There is no reason to believe a transportation corridor statute would be an exception, and any such statute that includes a well-defined variance procedure should survive a facial challenge. ____________________________ 82. See Annette B. Kolis & Daniel R. Mandelker, Legal Techniques for Reserving the Right-of-Way for Future Projects Including Corridor Protection, in 2 Selected Studies in Highway Law 936-N249, 936-N261 (Ross D. Netherton, ed., 5th ed. 1991). The use of a variance procedure could avoid this problem. See discussion supra pp. 17-19. 83. Keystone, 480 U.S. at 495. The Supreme Court of Virginia will allow a facial challenge only when there is no administrative remedy equal to the relief sought. See Board of Supervisors of James City City. v. Rowe, 216 Va. 128, 133, 216 S.E.2d 199, 205 (1975). 23 An as-applied challenge involves a plaintiff that challenges a statute's constitutionality as it was applied to his or her permit application. As-applied challenges must meet the same exhaustion requirement of facial challenges, meaning the landowner must obtain a final (negative) decision from the governmental body that enforces the regulation, such as a zoning or planning board. Only then can he or she seek judicial review.84 Lawsuits challenging a corridor statute that includes a variance procedure should be allowed by a court only after the property owner has applied for a permit to develop, exhausted all administrative proceedings, and been denied the right to develop. Some commentators, in view of the high hurdle in place for facial challenges and the requirement of exhaustion for as-applied challenges to statutes with variance procedures, believe successful challenges to reservation laws in a federal court are limited.85 A Note on Corridor Reservation and Federal Requirements State transportation authorities must comply with numerous federal requirements when building facilities that use federal funds. Of central concern are the requirements under the National Environmental Policy Act of 1969 (NEPA),86 in which corridor reservation in advance of environmental studies may violate laws requiring a "neutral" study of various alternatives for a trans- portation facility. State agencies examine various alternatives for a transportation facility during the planning process, yet the Federal Highway Administration (FHWA) does not allow federal funds to be used on new facilities until a study of various alternatives for the project is also performed at the preliminary engineering phase. If the state begins to acquire or reserve land before the environmental analyses are performed during the engineering phase in order to obtain "Corridor Approval," the FHWA may view the action as a "pre-selection" of a corridor in violation of NEPA. These concerns in fact may not pose a critical problem to the corridor reservation technique addressed in this report. Authorities in North Carolina examined the possibility of reserving land and/or dedication of rights-of-way in advance of programming and construction in 1986.87 The FHWA prepared a document for NCDOT, cleared by the FHWA's state, regional, and Washington _________________________________ 84. See, e.g., HMK Corp. v. County of Chesterfield, 616 F. Supp. 667 (D.Va. 1985). 85. See, e.g., Kohs & Mandelker, supra note 82, at 936-N265. This assertion is all the more powerful because federal courts often require a landowner to apply for several "levels" of zoning requests with varying developmental intensities, and not simply the most "grandiose" and economically profitable. The plaintiff must then be turned down for all such reasonable uses. at 936-N264-65. 86. 83 Stat. 852, 42 U.S.C. 4321 et seq. (1988). 87. See Marion R. Poole, Consideration of Environmental Factors in Transportation Systems Planning: The North Carolina Experience, in Transportation Research Record No. 1283; Transportation Systems Planning and Applications 1990 15. Dr. Poole is the Head of the State Planning Unit in NCDOT. 24 offices, that sought to answer many of NCDOT's concerns. The FHWA document stated that [a]n Environmental Impact Statement ("EIS") need not be completed before right-of-way can be protected. However.... a protected corridor may carry little weight in the selection of an alignment for federal funding once appropriate environmental studies [are] completed. If the protected corridor has serious environmental problems when compared to other alternatives, federal funds may not be available for construction in the protected corridor.88 The FHWA recommended that the state perform a preliminary environmental screening prior to designation of an alignment for protection in order to minimize potential problems.89 Officials in NCDOT concluded that "if all "problem"uses are avoided, there should be no problem with right-of-way protection through dedication, reservation, or advance acquisition prior to EIS studies."90 Virginia Courts and a Corridor Law Property owners can bring takings challenges against state or local government entities under the Commonwealth's taking clause. The Constitution of Virginia, Article I, Section 11, states: That no person shall be deprived of his life, liberty, or property without due process of law; that the General Assembly shall not pass any law ... whereby private property shall be taken or damaged for public uses, without just compensation, the term "public uses" to be defined by the General Assembly ... (emphasis added). Takings challenges under this section may be brought in two related ways. First, a plaintiff may allege an outright government taking, a challenge very similar to that brought under the U.S. Constitution. The Virginia case law in this situation does not add much new gloss to that of the U.S. Supreme Court decisions. The most important doctrine for our purposes is very similar to the Lucas ruling. The Virginia Supreme Court ruled that "a zoning ordinance which [has] the effect of completely depriving the owner of the beneficial use of his property by precluding all practical uses [is] unreasonable and confiscatory and, therefore, illegal."91 _________________________________________________________________ 88. Id. at 20. 89. Id. 90. Id. 91. Fairfax County v. DeGroff, 214 Va. 235, 198 S.E.2d 600, 602 (1973) (summarizing Boggs v. Board of Supervisors, 21 1 Va. 488, 178 S.E.2d 508 (197 1)). 25 A second challenge may be brought under the state constitution alleging that the government "damaged" the plaintiffs property and must provide compensation. The Virginia Supreme Court, in its first decision defining the term "damaged"92 limited severely the scope of the provision in two ways. First, the court ruled that the clause was intended only to create a new right of action for landowners whose property was physically damaged by some governmental activity.93 Before 1902, the constitution and the common law of the Commonwealth allowed the legislature to grant municipalities the right to engage in activity that damaged private property (e.g., the felling of trees, runoff damage from roadways) without requiring compensation.94 The - new provision, the Court wrote, changed that practice and required payment to the landowner. Second, the Court ruled that the definition of damage had not been enlarged by the constitutional provision, but that it retained its common law definition and applied to cases in which the corpus of the owner's property itself, or some appurtenant right or easement connected therewith ... is directly (that is ... physically) affected, and is also specially affected (that is, in a manner not common to the property owner and the public at large); and such direct and special inquiry must be such as to depreciate the value of the owner's property.95 Not included were damages to the feelings, tastes, or sentiments or to a reduction in market value attributable to such emotional considerations.96 "The mere fact that private property is rendered less desirable for some purposes ... or may affect the sentiments of prospective purchasers and thereby render the property less desirable and even less salable, does not constitute damage within the meaning of the [constitutional provision]."97 Virginia courts continue to uphold the Lambert reasoning. In 1971, the Virginia Supreme Court further defined "damage" to emphasize that it must not be given its ordinary rather than its legal meaning. The right must be identifiable as a common law right; if not, any market-based reduction in value is a risk to be borne by the property owner.98 _________________________________________________________________ 92. The current takings clause was first incorporated into the state constitution in 1902. Va. Const. of 1902, 58. 93. Lambert v. City of Norfolk, 108 Va. 259, 264, 61 S.E. 776, 778 (1908). 94. See generally Myers v. City of Richmond, 172 U.S. 82 (1898); Home Building Co. v. Roanoke, 91 Va. 52, 20 S.E. 895 (1895). 95. Lambert, 108 Va. at 268, 61 S.E. at 779. 96. Id. at 263, 61 S.E. at 777. 97. Id. at 259, 61 S.E. at 776. 98. Potomac Electric Power Co. v. Fugate, 211 Va. 745, 749-50, 180 S.E.2d 657, 660 (1971). 26 A recent Virginia Supreme Court damage clause decision, handed down in 1989, denied compensation in cases where there is no direct interference with an owner's right to use and dispose of his or her land and where there are only allegations of a potential diminution in property value resulting from the state action. The court wrote the "impairment of the market value of real property incident to otherwise legitimate government action ordinarily does not result in a taking."99 It must be noted that in Bartz the government had not physically possessed the owner's land or regulated it-it had only begun eminent domain proceedings. Hence, the state takings case law requires compensation under the "damage" clause whenever a government agency physically interferes with or eliminates a property right recognized by law. This is very similar to the reasoning in the recent U.S. Supreme Court decision of Lucas v. South Carolina Coastal Council,100 in which the government could avoid giving compensation only when an owner's land had already been subject to the restriction at common law, to which the regulation merely sought to enforce (e.g., a law that prevents a public nuisance). The Virginia courts' interpretation of damage requires the owner to demonstrate a right he or she possesses, naturally inhering in the fee simple, that has been taken or otherwise negatively affected by the state. A complete denial of development rights under a reservation law would almost certainly qualify as damage to a property owner's common law rights-the right to develop one's land to build a home is the quintessential right of the fee simple,101 and zoning restrictions on commercial development must be made in order to preserve the public health, safety, or welfare. Strict reservation laws tend to violate both principles. On the other hand, the use of a variance procedure should qualify as a normal part of the decision- making process and deny a damaged property claim by a property owner. Second, a TDR program as outlined in the federal constitution section should act to leave a residual value in the land and should also be recognized as a form of compensation by the government to the property owner. Legal Concerns: A Summary The survival of a reservation statute appears to depend upon an express time limit placed upon the government before which land acquisition or compensation must occur. Both the state and federal supreme courts recognize a planning period when land is designated as likely for acquisition, during which time the land's value may drop substantially. Compensation is not necessarily _________________________________________________________________ 99. Bartz v. Board of Supervisors of Fairfax County, 237 Va. 669, 673, 379 S.E.2d 356, 358 (1989) (citing Kirby Forest industries, Inc. v. United States, 467 U.S. 1, 15 (1984)). 100. 112 S. Ct. 2886 (1992). See discussion supra notes 44-58. 101. See Lucas, 1 12 S. Ct. at 290 1. Common law principles "rarely support prohibition of the "essential use"of land."Id. at 2901 (citing Curtin v. Benson, 222 U.S. 78, 86 (191 1)) (referring to the right to erect a habitable structure on the land). 27 required if the time elapsed is reasonable. In addition, a variance procedure in which property owners can dispute a development ban can strengthen the planning nature of a limited corridor statute. Next, the implementation of a TDR program is a form of compensation that can alleviate the harsh effects of a development ban and can avoid the finding of a taking by the courts. Last, by designating the corridor through legislative action using transportation and planning studies performed by VDOT and/or the localities involved, a valid public use can be declared and the government should be able to acquire land through advance acquisition procedures in order to prevent expensive development from occurring within a corridor. Statutes in Florida and North Carolina provide excellent examples of limited reservation statutes that appear likely to pass constitutional muster in those states. Case Study: Florida and Advance Notification Florida has experienced tremendous population growth and suburban development in the last 30 years, creating a dynamic in which state and local governments chase growth to provide basic services, including transportation. Of late, however, the state has implemented a far-reaching growth management program that places it in the forefront of the national effort to control and regulate development. Included in the program is a state statute allowing the transportation department or any expressway authority to create and preserve transportation corridors. Florida's first attempt, a very strict version of a highway reservation bill, included an official map statute that forbade any governmental entity from issuing building permits within a mapped, duly designated transportation corridor.102 The map was binding for 5 years and could be extended for 5 more years after a public hearing was held. The Florida Supreme Court struck down the statute mainly on the grounds that it included only a very narrow variance procedure for disaffected landowners. The court believed the law simply froze property values at a low level in anticipation of eminent domain proceedings,103 rather than regulating use as a valid police power, and hence was an uncompensated taking. The court clearly recognized an acquisitory intent on the part of government: the land would be needed, but the government wanted to do all in its power to reduce the acquisition costs with little regard for the rights of the property owners.104 The Florida legislature continued to recognize the virtues of a reservation law. Heartened by the court's recognition that the economizing of expenditures _________________________________________________________________ 102. Fla. Stat. ch. 337.241 (1991). 103. Joint Ventures, Inc. v. Department of Transp., 563 So.2d 622, 626 (1990). 104. Id. 28 of public funds can be a valid government objective under the police power,105 the legislature amended the corridor statute.106 A landowner can apply for a building permit or for subdivision plat approval, and if the permit involves land within the right-of-way limits on an official map, the local government must notify the transportation department at least 60 days before granting the permit. The department then has 45 days after notification to inform the property owner of its intent to acquire the land in question. The department has up to 120 days after notifying the owner to initiate efforts to purchase the property or begin eminent domain proceedings. If the department allows any time limit to expire without acting or notifies the local government that it does not want to purchase the land, the local governmental entity is free to proceed with its permit process.107 Case Study: North Carolina In 1987, North Carolina passed a series of statutes intended to lower the state's costs for highway development and at the same time to protect landowners affected by future transportation facility development. The Roadway Corridor Official Map Act allows local governments or the North Carolina Board of Transportation to designate a highway corridor in a recorded official map. Within the first full year following designation of the corridor, work must begin on an environmental impact statement or preliminary engineering; if not, any protection that could be afforded the corridor under the Map Act is withdrawn. After designation, restrictions are imposed upon private property within the designated corridor, including the denial of building permits or subdivision plats, for up to 3 years. Key exceptions are allowed: (1) permits may be issued for buildings and structures that existed prior to the passage of the act provided that the size of the building is not increased and the occupancy code does not change; and (2) for proposed changes not included under (1), property owners can petition the Department of Transportation (NCDOT) or the city that initiated the corridor official map for a variance. The Code states that "A variance may be granted upon a showing that: (1) Even with the tax benefits authorized by this [Act], no reasonable return may be earned from the land; and (2) The requirements ... result in practical difficulties or unnecessary hardships."108 Hence the statute may avoid a temporary takings attack in that a property owner is not completely and definitively denied use of his or her land, and the statute does not arbitrarily apply to every landowner within the corridor regardless of impact. _________________________________________________________________ 105. Id. 106. Fla. Stat. ch. 337.243 (1991). 107. In addition, Florida is moving to capture the unearned increment through a variety of techniques. The state is not restricting its focus to the corridor statute itself. See discussion on page 32 for an extended treatment. 108. N.C. Gen. Stat. 136-44.52 (1992). 29 Next, North. Carolina authorizes advance acquisition of the rights-of-way within official corridors. The initiating authority may purchase specific parcels of property "to protect the roadway corridor from development" or to relieve "undue hardship" imposed upon a property owner due to the restrictions on development within an official corridor.109 The interests of property owners desiring subdivision plat approval are advanced by a statute allowing a city or county (1) to require an owner to dedicate land that lies within a roadway corridor in exchange for a transfer of the density credit attributable to the dedicated right-of-way to contiguous land owned by the selfsame landowner; or (2) the right to allow a landowner to willingly dedicate land in exchange for transferring the density credits attributable to the dedicated land to a location previously approved to receive density credits (i.e., a designated "high-density" or "high-growth" area).110 Critique The two states" statutes have man advantages. First, both enable local governments to create official maps and allow them to use eminent domain and other tools to preserve rights-of-way. In Florida, the legislature has encouraged all localities to participate so that the entire state can be mapped and transportation needs can be assessed on a statewide scale. Next, the statutes require notification of the public regarding approximate locations of the roadway very early in the planning process, but transportation planners retain the flexibility to respond to unforeseen problems involving rights-of-way. A landowner retains his or her right to exploit the economic opportunities of the land unless the state purchases the property in rather quick fashion, thereby eliminating some uncertainty on the part of property owners. This process also demonstrates the government's intensity of prefer- ence for the land in question and reduces the likelihood of excessive corridor designations on official maps. Third, acquisition costs are reduced since the state does not continually find itself purchasing property that has recently been developed, as is often the case in urban settings. The embargo on local government action pending a state assessment of need opens lines of communications, and the respective departments of transportation should not be caught off guard by expensive new development in a planned corridor. The North Carolina law, which bars new development for 3 years, is a much stronger ban than that currently in force in Florida, and it may survive a court challenge similar to the lawsuit that nullified the old Florida ban on building because the time limit is shorter (3 years versus 5 to 10 years) and a variance procedure is mandatory. The effectiveness of _________________________________________________________________ 109. Id. 136-44.53. 110. See pages 20-22 for extended discussion of transferable development rights. 30 advanced acquisition will be limited by the amount of funds the state sets aside for such purposes.111 Last, both states' corridor protection statutes do not stand alone: other measures are allowed that should help to funnel growth and make long-term planning easier. The transfer of density (a.k.a. development) rights will encourage commercial builders to site new development in locations that are better able to handle congestion, including multi-modal connection points. The Florida statutes also encourage localities to use the designated corridors as a basis for assessing impact fees or requiring exactions. These multiple uses of the corridor concept are excellent ways in which to coordinate various local tools to recoup portions of the unearned increment and increase communication between local and state governments and agencies; an assessment of each method is discussed in depth later in this report. For alternatives and options for the creation of corridor reservation statutes, see Part IV of this report. PART III: FINANCING MECHANISMS TO RECOUP THE UNEARNED INCREMENT Introduction The reservation aspect in the primary area of a corridor statute is intended to preserve land that will be physically necessary for a transportation facility. The legislative declaration of a public use, combined with the restricted time period during which land is reserved, should allow the government to acquire land through eminent domain much earlier than heretofore possible. Yet reservation is only one step toward reducing costs; more intensive financing schemes exist that can be coupled with the primary reservation area to directly recoup portions of the unearned increment. The legislative or local government action necessary to designate a reserved zone of land can also include a secondary area. The secondary area includes land that is specially benefitted by a facility, land that traditionally increases in value due to its proximity to the facility. VDOT, in conjunction with local government, can be required to perform studies and establish projections for transportation needs near the facility. Armed with such a study, the legislature itself can establish zones along or near an existing or planned facility or the _______________________________________________________________ 111. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) will help in that federal funding authorizations to each state are established through 1997, allowing states to plan around the future revenues and possibly begin land acquisition sooner. 31 legislature can allow the locality to establish or "activate" special zones within the secondary area if the latter so chooses in order to fund improvements more rapidly. The map in Appendix A illustrates the differences between the primary and secondary areas. As an introductory illustration, Florida is a leading state in the move to reduce land acquisition costs through the use of corridor legislation. The state is also moving to capture portions of the unearned increment near corridors and to channel growth into predetermined areas. The Florida legislature allows the transportation department to lease the use of department property, including rights-of-way, for joint public-private transportation services "to further economic development ... and generate revenue for transportation."112 The department is allowed to lease the airspace and subsurface rights of transportation facilities for commercial purposes,113 and all generated revenue is deposited in the state's Transportation Trust Fund. Last, state statutes encourage localities to allow the transfer of development rights, incentive and inclusionary zoning, impact fees, and performance zoning in conjunction with or separate from designated corridors.114 Among the types of areas that are considered in this study are zones for special tax districts, proffers, and impact fees. The three revenue-raising mechanisms are meant to be three alternative methods to raise revenue for one parcel of land. The special assessment applies to property zoned for commercial use and may also be applied to residential units that are built after the creation of a special district. Proffers are payments made by developers to local govern- ments in order to receive zoning changes and building permits before the actual development occurs. A property owner on an existing structure would not make payments under a proffer system unless he or she desired a change in zoning to develop the land more intensely. Last, impact fees would be assessed against new development for the estimated impact the new development will have on the transportation infrastructure. As such, it is highly unlikely that one parcel of property would be subject to all three revenue mechanisms, and the author strongly discourages the imposition of proffers and impact fees for identical parcels of property. The last section in this part of the report discusses excess condemnation, or the taking of more property than is physically needed for the creation or. improvement of a transportation facility. The excess land would then be leased by the government to private entities or would be resold at prices that reflect the creation of the unearned increment. All funds collected would be used to offset the construction costs for the targeted transportation facility. The constitution- ______________________________________________________________ 112. Fla. Stat. ch. 337.251 (1991). 113. This idea is very similar to joint public-private development undertaken by the Washington Metropolitan Area Transit Authority, whereby office towers are built in the airspace over subway corridors and leased to private entities. 114. Fla. Stat. ch. 163.3202(3) (1991). 32 ality of excess condemnation in Virginia is very unlikely, but the author outlines the concepts involved and recommends further study of its possible use. Special Assessment Districts The creation of a special assessment district (or a special tax district) provides an excellent opportunity to recoup a portion of the unearned increment. The special assessment has a long pedigree in municipal government history, beginning with the funding of roads and canals in the 19th century. It is used most often today to partially finance the improvements of local roadways, sidewalks, and water and sewer lines. The assessment is a statutorily authorized levy on land (or land and improvements thereupon) that a local government imposes to offset the cost of a public improvement. It is based upon the theory that the property receives a disproportionate benefit from the improvement, above and beyond the benefit accruing to the general public. It is believed that the owners of that land should contribute an additional sum of money to fund the project.115 The assessments are similar to property taxes in that they are usually a predetermined percentage of the property value of each lot affected (for example, $.10 per $100 of assessed value ).116 The difference between a special assessment and a general tax is critical, however. Under the former, the property owner must be specially benefitted by the improvement. General taxes are not based upon a promise of a specific return to the taxpayer, but upon the idea that a citizen may be required to make contributions at rates equal to those of similarly situated citizens in return for the general benefits of government.117 Legal Issues Federal Law A special assessment must meet two interrelated requirements before it can be levied.118 First, the improvement must be for a public use, and second, it must confer a special benefit upon the assessed property. The U.S. Supreme Court has ruled that a highway meets the first requirement: "Undoubtedly, _______________________________________________________________ 115. In a perfect world, the property owner would pay the government the exact amount of the benefit accrued. Due to the impracticality of assessing intangible benefits, this is rarely the ultimate goal of the assessment determination. See David J. Hayes, Note, Rapid Transit Financing: Use of the Special Assessment, 29 Stan. L. Rev. 795, 798 (1977). 116. Governments may also assess benefitted land by the frontal footage, disregarding property value. Tonawanda v. Lyon, 181 U.S. 389 (1907). 117. See generally Norwood v. Baker, 172 U.S. 269, 279 (1898); City of Richmond v. Richmond-Petersburg Turnpike Authority, 204 Va. 596, 132 S.E.2d 733 (1963). 118. For an excellent article on the special assessment and its theoretical and practical underpinnings, see Hayes, supra note 115, at 798. 33 abutting owners may be subjected to special assessments to meet the expenses of opening public highways in front of their property."119 The legislature's power to determine and define a public use in the special assessment context is very broad as well and includes such transportation-related projects as subways, railroads, and airports.120 The second requirement of a valid special assessment is that the assessed properties must be specially benefitted by the improvement, and the levy cannot be substantially greater than the estimated benefit. The Supreme Court has given great deference to legislative determinations of the precise property benefitted by given projects, concluding that such decisions should be left to the legislature "unless palpably unjust."121 The Court has gone so far as to state that the boundary drawn by the legislature "is conclusive upon the owners and the courts, and the owners have no right to be heard. upon the question whether their lands are benefitted or not, but only upon the validity of the [individual] assessment[s]."122 As one commentator wrote, "in determining the boundaries of the special assessment district, local officials use common sense judgment as to the extent of the special benefit. No rule of thumb guides these efforts, nor have the courts provided meaningful standards: Boundary drawing is left to official discretion."123 Likewise, the determination of the individual assessment is left largely to local governments. The crucial factor is the level of benefit that each land parcel receives. The Court in Norwood disallowed special assessments levied under a law that made it possible for an assessment to exceed the expected benefit to the property, ruling that the principle underlying the assessment is that an owner is paying only for the additional benefit and should come out even after the fact (i.e., benefit minus assessment equal to zero).124 Yet precise cost/benefit analysis is not required, owing to the impossibility of definitively assessing an improvement's benefit to a piece of property and to the fact that assessments are usually levied before the improvement is made (and before its effects on land value can be gauged).125 The Norwood Court ruled that only a 'substantial excess" of assessment greater than the benefit received would create an unconstitutional taking.126 ______________________________________________________________ 119. Norwood, 172 U.S. at 278. 120. See, e.g., E. McQuillen, 11 Municipal Corporations 32.39 (3d ed. 1964 & Supp. 199 1); Southern California Rapid Transit District v. Bolen, 822 P.2d 875 (Cal. 1992) (recognizing the use of special assessments to partially finance an urban subway system in the Los Angeles metropolitan area). 121. Parsons v. District of Columbia, 170 U.S. 45 (1886). 122. Spencer v. Merchant, 125 U.S. 345, 356 (1888). 123. Hayes, supra note 115, at 800. 124. Norwood, 172 U.S. at 278-79. 125. See generally Hayes, supra note 115, at 800-01 (discussing the impracticality of deter-mining benefit by using market-based land values before and after the completion of the improvement). 126. Norwood, 172 U.S. at 279. 34 Virginia Constitutional Law The Virginia Constitution allows the General Assembly to "authorize any county, city, town, or regional government to impose taxes or assessments upon abutting property owners for such local public improvements as may be designated by the General Assembly; however, such taxes or assessments shall not be in excess of the peculiar benefits resulting from the improvements to such abutting property owners."127 The Assembly, acting directly under that grant of power, allows cities, counties, and towns to assess levies on property in order to fund walkway, alley, sewer, and curb construction. The cities of Newport News, Norfolk, Richmond, and Virginia Beach are also authorized to impose assessments for the "initial improving and paving of an existing street" provided that 50% or more of the abutting property owners request the improvement.128 And the General Assembly has granted to localities the power to use special assessments in order to finance, inter alia, fire protection services, sanitary districts, drainage projects, and the addition of private roads into the state highway network.129 Virginia Statutory Law Virginia Transportation Service District Act. More promising in the transportation context, however, are statutes that allow certain counties to create "transportation service districts" or "transportation improvement district@." The Virginia Transportation Service District Act, passed in 1987, allows certain counties130 to form special tax districts in order to raise revenue for transporta- tion projects, including highways, mass transit systems, and related buildings, structures, and equipment.131 To create a district, the owners of at least 51 % of either the assessed value of land or the land area of real property within the proposed district must petition the county board of supervisors within which the district is to be located. The petition must include (1) proposals for the definitive district boundaries; (2) the transportation facilities needed; (3) changes in zoning and density allowances required by the proposed transportation-related changes; _______________________________________________________________ 127. Va. Const. Art. X, 3. It should be noted that state constitutions, including the Commonwealth's, are limits upon state power and are not grants of power. The power to tax is deemed a sovereign power, and the constitutional section cited should not prevent assessments on non-abutting lands as long as the General Assembly passes the enabling statute for local governments. 128. Va. Code Ann. 15.1-239 (Michie 1989 & Supp. 1992). The statute authorizes cities with populations of 170,000 or more to use the assessment for street improvement. As of 1990, only the cities listed in the text qualified. 129. Id. 15.1-360, 21-127.1, 21-305, 33.1-72.1, respectively. 130. The statute's definition of "county" authorizes the Service District Act for Arlington, Fairfax, Fauquier, James City, Loudoun, Prince William, Pulaski, Smyth, and Stafford counties. See Va. Code Ann. 15.1-79 1.2 (Michie 1989 & Supp. 1992). 131. Id. 15.1-791.16. 35 and (4) the expected benefits from the proposed facilities. After public hearings and review, the board of supervisors can approve the plan in toto or make amendments to ensure that the plan benefits the public welfare. The board must also"list a description of all zoning classifications that will be in effect while the district operates, including the term of years in which each classification will remain in effect without elimination, reduction, or restriction. Thereafter, zoning can be changed only upon a request by the landowner or in order to comply with the Chesapeake Bay Preservation Act or other state laws. Board approval is the only government