Valuing Wetlands in Condemnation Proceedings

By Joshua H. Rikon

May 12, 2011

Valuing wetlands property in a de jure condemnation proceeding requires some familiarity with the Freshwater Wetlands Act, codified as Environmental Conservation Law (“ECL”) § 24 and the Tidal Wetlands Act, codified as ECL § 25. This is because, in valuing the property acquired, the court must be guided by the principles established for challenging the denial of a permit to develop regulated property. See, Matter of City of New York (Staten Island Bluebelt System – Phase 2), Sup Ct, Richmond County, July 13, 2007, Gerges, J., Index No. 4012/04 at 6. In the absence of a de jure condemnation proceeding, the Wetlands Act is shown to be confiscatory based on a judicial review of the denial of a permit to use the property in accordance with the Wetlands Act. The two-step process involved with the judicial review was explained by the Court of Appeals in St. Aubin v Flacke, 68 NY2d 66, 70 (1986) as follows:

If the court finds that the permit denial is supported by substantial evidence, then a second determination is made in the same proceeding to determine whether the restriction constitutes an unconstitutional taking requiring compensation. The taking determination is made on the basis of a full evidentiary hearing and if the landowner prevails the Commissioner [of Environmental Conservation] is directed at his [or her] option, to either grant the requested permit or institute condemnation proceedings.

A condemnee in a de jure proceeding should not be entitled to have his or her property valued as if there has already been a successful judicial challenge to the Act, however. That is why the wetlands property is valued as restricted by the Act, with an increment added only if the Wetlands Act is shown to be confiscatory. Matter of City of New York (Staten Island Bluebelt System – Phase 2), supra. The increment represents a value for the likelihood that a condemnee would have been able to prove that the Wetlands Act would have constituted a regulatory taking if the de jure taking did not occur. In Berwick v State, 107 AD2d 79, 84 (2d dept 1985), this was explained as follows:

The law follows the realities of the marketplace, which are that a knowledgeable buyer would adjust his [or her] purchase price to offset the cost in time and money of applying for a permit and challenging its denial in court as confiscatory. Certainly, a knowledgeable buyer would not pay claimants the full unrestricted residential values of their properties on the day of taking, when the wetlands restrictions were still legally in effect. He [or she] would pay only the value of the property as so restricted, plus some increment representing its enhanced value at such future time when he [or she] is successful in nullifying the wetlands restrictions in court.

This is consistent with Chase Manhattan Bank, N.A. v State, 103 AD2d 211, 219 (2d Dept 1984), where the court wrote:

The cost in time and money of applying for a permit and challenging in court any denial as confiscatory would naturally be taken into account by any purchaser even if there appeared to be an excellent chance of ultimate success. Hence, a showing that a challenge to the application of the Tidal Wetlands Act as confiscatory would have, at least, a reasonable probability of success in court should beget only an incremental increase in the value of the appropriate property as restricted.

The condemnee has the burden to prove that a constitutional challenge to the Act as confiscatory would have, at least, a reasonable probability of success in court. Berwick v State, 107 AD2d at 93. The Act is shown to be confiscatory by comparing the market value of the property without regard to the development restrictions of the Act with the market value of the property as so restricted. This requires a before and after analysis. The Act is confiscatory in nature if the “dollars and cents” evidence establishes that no permitted use under the regulation would produce a reasonable economic return. The question that must be answered is: has the regulation destroyed the economic value of the property, or all but a bare residue of that value? See, Chase Manhattan Bank, NA, v State, supraat 223. (If it be shown that the economic value of the parcel, or all but a bare residue of that value, has been destroyed by application of the wetlands regulations, the uncompensated taking cannot stand). One must consider all of the permitted uses that the New York State Department of Environmental Conservation would permit with the regulation in place. Spears v Berle, 48 NY2d 254 (1979);Friedenberg v NYSDEC, 3 AD3d 86 (2d Dept 2003). And, the uses should be supported by credible evidence. Matter of City of New York (Staten Island Bluebelt System – Phase 2), supra. The author of this paper imagines that a wetlands expert will be required to provide an opinion on the permitted uses. If the evidence establishes that a permitted use under the regulation would produce a reasonable economic return, then, presumably, the property should be valued as regulated without the benefit of the additional increment. But if the regulation is confiscatory, then the property owner is entitled to have the property valued as regulated with the benefit of an increment.

Two cases provide some guidance on the issue of whether the Act is confiscatory. In Chase Manhattan Bank, NA, v State, supra, the property at issue was worth $53,781 as a residential property without any development restrictions in place but worth only $7,400 for a recreational use that was permitted under the restrictions of the Act. The 86% reduction in property value established that the Act was confiscatory. Similarly, a 95% loss of value constituted a compensable taking in Friedenburg v NYSDEC, supra.

In Estate of Berwick v State, 159 AD2d 544 (2d Dept 1990), the Appellate Division provided an example of how the increment is calculated. In that case, various properties at issue were first valued as unrestricted by the Act with adjustments made to the properties. For example, downward adjustments were made to reflect the costs that would be associated with developing wetlands property. An upward adjustment was made to one of the properties because it had subdivision potential. Typical appraisal adjustments were also considered. The net adjustments were then applied in a comparable sales valuation analysis in order to produce a net unrestricted value. The value of the property as restricted by the Act was then deducted from the net unrestricted value. Presumably, typical appraisal adjustments were also considered in the appraisers’ restricted value analysis even though the decision did not specifically address the adjustments. The result was then discounted by a percentage that was selected by the appraiser to reflect the time, cost, and risk that would be involved with establishing that the wetlands restrictions are confiscatory. The analysis produced the value of the increment, which was then added to the value of the property as restricted by the Act. According to the court, this reflected what a knowledgeable buyer would pay for the property in light of the reasonable probability of a successful court challenge of the Act as confiscatory.