DM Arbor Court, Ltd. v. The City Of Houston
Filing
315
FINDINGS OF FACT AND CONCLUSIONS OF LAW(Signed by Judge Keith P Ellison) Parties notified.(arrivera, 4)
Case 4:18-cv-01884 Document 315 Filed on 07/11/23 in TXSD Page 1 of 52
United States District Court
Southern District of Texas
ENTERED
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
DM ARBOR COURT, LTD.,
Plaintiff,
VS.
THE CITY OF HOUSTON, TEXAS,
Defendant.
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July 11, 2023
Nathan Ochsner, Clerk
CIVIL ACTION NO. 4:18-CV-01884
FINDINGS OF FACT & CONCLUSIONS OF LAW
The Court submits the following Findings of Fact and Conclusions of Law pursuant to
Rule 52(a)(1) of the Federal Rules of Civil Procedure.1
I.
BACKGROUND
This cause was brought pursuant to the Takings Clause of the Fifth Amendment of the
U.S Constitution. Plaintiff DM Arbor Court, Ltd. (“DMAC”) owns and operates the Arbor Court
Apartments. During Hurricane Harvey, Arbor Court was damaged. DMAC applied for repair
permits, and the City of Houston denied those permits.
DMAC then brought this suit. DMAC’s Third Amended Complaint alleged various
causes of action. See ECF No. 106. On October 21, 2021, Judge Miller, to whom the case had
previously been assigned, granted in part and denied in part the City’s Motion to Dismiss. ECF
No. 137. He found that DMAC plausibly alleged takings and equal protection claims.
On August 17, 2022, the Court granted summary judgment to the City on DMAC’s equal
protection claim, but denied both parties’ cross motions for summary judgment on DMAC’s
takings claims. Specifically, DMAC contended that the denial of repair permits constituted an
1
Any Finding of Fact that should be a Conclusion of Law shall be deemed such, and any Conclusion of Law that
should be a Finding of Fact shall be deemed such.
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unconstitutional taking because (1) it deprived the DMAC of all economically beneficial use;
and (2) alternatively, constituted a taking under the three-part balancing test set forth in Penn
Central Transportation Co. v. New York City, 438 U.S. 104 (1978). The Court found that factual
disputes precluded granting summary judgment to either party.
On February 6, 2023, this Court commenced a bench trial on DMAC’s takings claims.
Over the course of the four-day trial, the Court received exhibits and heard sworn testimony.
Having considered the evidence, testimony, oral arguments presented during the trial, post-trial
filings, and the applicable law, the Court sets forth the following Findings of Fact and
Conclusions of Law.
II.
FINDINGS OF FACT
A. Flood Ordinance
1.
During all times relevant to this case, Houston had a Flood Ordinance, located at
Chapter 19 of the Houston Code of Ordinances. As described in this Court’s prior Orders, the
Flood Ordinance, which was adopted in 1985, “has helped to ensure that development within
Houston complies with the development standards the Federal Emergency Management Agency
(“FEMA”) mandates for property owners to participate in the National Flood Insurance Program
(“NFIP”).” ECF No. 252 at 2 (quoting ECF No. 137 at 1); see DX 4 § 19-1(c). The Ordinance
lists five purposes: (1) to “[p]rotect human life and health”; (2) to “[m]inimize the need for
rescue and relief efforts associated with flooding and generally undertaken at the expense of the
general public”; (3) to “[m]inimize prolonged business interruptions”; (4) to “[m]inimize damage
to public facilities and utilities”; and (5) to “[p]rovide for the sound use and development of
floodprone areas in such a manner as to minimize the future flood-blight areas.” DX 4 § 19-1(a).
2
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2.
The Flood Ordinance creates a regulatory system for permits. DX 4, Art. II.
Building permits may only be issued pursuant to the Flood Ordinance. Id. § 19-11. The Flood
Ordinance charges the city engineer “with exercising best engineering judgment in the
administration and implementation of this chapter.” Id. § 19-12. The city engineer’s duties
include “[r]eviewing, approving, or denying all applications for development permits required by
the adoption of [the Flood Ordinance].” Id. § 19-12(2).
3.
“Approval or denial of a permit by the city engineer shall be based on compliance
with the applicable provisions of [the Flood Ordinance].” DX 4 § 19-19(a). These provisions
include, among other requirements, requirements that permit applications include certain forms
and information when submitted, id. § 19-17, and requirements that applicants submit follow-up
documentation as required, id. § 19-18.
4.
Further, “the city engineer may deny a permit application if the issuance of the
permit could result in” one of five factors: (1) “[d]anger to life or property due to flooding or
erosion damage in the vicinity of the site”; (2) “[s]usceptibility of the development and the
contents of any structure to flood damage and the effect of such damage on the individual
owner”; (3) “[d]anger that materials may be swept onto other lands to the injury of others”; (4)
“[i]mpairments of the access to and exit from the site in times of flood for ordinary and
emergency vehicles”; or (5) “[u]nusually high costs of providing governmental services during
and after flood conditions, including maintenance and repair of streets, bridges, public utilities
and facilities such as sewer, gas, electrical and water systems.” Id. § 19-19(a).
5.
The Flood Ordinance also imposes certain standards for Flood Hazard Areas,
including elevation requirements. Id. §§ 19-32, 19-33. These standards apply only to new
construction or substantial improvements, so pre-existing structures are exempt from these
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requirements. Id.; ECF No. 296 at 85:2-14. However, the category of “substantial
improvements” includes situations in which a building sustained “substantial damage” 2 and need
to be repaired. Id. § 19-2.
B. Arbor Court Apartments
6.
The Arbor Court Apartments (“Arbor Court”) is a 15-building multi-family
apartment community located at 802 Seminar Drive in Houston Texas. It is fully located in a
100-year floodplain, and is largely in the floodway ECF No. 298 at 10:22-24.
7.
Plaintiff DMAC is an entity that has a general partner, DM Arbor Court GP, and
eighteen limited partners. ECF No. 298 at 73:19-22. Those limited partners include the
individuals Douglas Hickock and Morgan Cox. Id. at 73:21-22; 163:11-13.
8.
DMAC purchased Arbor Court in January of 2016 for $11.85 million. ECF No.
298 at 9:10-14. DMAC spent an additional $1.4 million on improvements to the property. Id. at
9:14-15.
9.
To finance the acquisition of Arbor Court, DMAC borrowed $10.8 million. ECF
No. 298 at 9:18-22.
10.
DMAC operated Arbor Court under a Housing Assistance Payment Contract
(“HAP Contract”) from the U.S Department of Housing and Urban Development (“HUD”). ECF
No. 298 at 11:23-12:4. Pursuant to the HAP contract, HUD subsidizes the apartments, and
DMAC must use these units as affordable housing for low-income residents.
11.
In September 2016, HUD and DMAC renewed the HAP Contract for an
additional twenty years. Id. at 35:1-3, 114:18-24. The Court finds that those HAP contract rates
were somewhat inflated, reflecting a higher-than-market rent. See ECF No. 296 at 215:10-20;
The flood ordinance determines whether a substantial damage by looking to whether “the cost of restoration of the
structure to its before damaged condition would equal or exceed 50 percent of the market value of the structure.”
DX 4 § 19-2.
2
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ECF No. 299 at 14:18-15:25; PX 72 at 3. Nevertheless, DMAC was entitled to receive these
rates pursuant to the HAP Contract.
C. Tax Day Flood, Rebuilding, and the LAN Report
12.
In April 2016, a storm hit Houston, causing widespread flooding (the “Tax Day
Flood”). Arbor Court flooded, and the buildings sustained damage.
13.
After the Tax Day Flood, DMAC sought repair permits from the City pursuant to
the Flood Ordinance PX 4.
14.
As part of the permit application to rebuild after the Tax Day Flood, DMAC
submitted Proofs of Loss for the damaged Arbor Court buildings. DX 33. These Proofs of Loss
indicated that the cost to repair or replace each Arbor Court Building (excluding the office
building) ranged from $205,5978 to $409,234, and the actual cash values of the building
structures (again, excluding the office building) ranged from $687,234 to $984,303. Id. Dor the
purposes of the Flood Ordinance’s Substantial Damage Determination,3 the buildings (excluding
the office building) were between 27.1% damaged and 54.3% damaged. DX 33. Only two
buildings—Building 3 and the office building—were more than 50% damaged. Id.
15.
On April 27, 2016—less than two weeks after the Tax Day Flood—Houston
issued the repair permits for Arbor Court after the Tax Day Flood. ECF No. 298 at 134:8-9, 1416; PX 4. DMAC repaired Arbor Court and, as discussed above, renewed the HAP Contract on
the Property that September—just five months later.
Recall that a building is substantially damaged if “the cost of restoration of the structure to its before damaged
condition would equal or exceed 50 percent of the market value of the structure.” DX 4 § 19-2. Thus, to determine
the percentage damage from the Proofs of Loss, the Full Cost of Repair or Replacement (Row 5) is divided by the
Actual Cash Value of Building Structures (Row 2). See ECF No. 298 at 263:20-264:1.
3
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16.
Following the Tax Day Flood, the North Houston District—an entity that is
separate from and independent of the City of Houston4—contracted with the engineering firm of
Lockwood, Andrews & Newman, Inc. (“LAN”) to determine the root causes of flooding in the
Greens Bayou watershed (which includes Arbor Court). PX 10.
17.
LAN used simulations to determine water flow during 100-year flood events. ECF
No. 299 at 140:18-22. The Report found that flooding would likely reach as high as seven feet in
certain areas of Arbor Court—particularly near the entrance and exit. ECF No. 299 at 144:5-18.
It also found that the water around Arbor Court would likely travel at a high velocity, up to 3.4
feet per second. ECF No. 299 at 144:19-145:7. Because of the relative elevations of the land,
water would flow in the opposite direction of people attempting to evacuate, meaning that
residents trying to leave Arbor Court would have to fight against the flow of the water. ECF No.
299 at 146:20-147:7. Together, the water’s depth and velocity made flood situations particularly
hazardous. ECF No. 299 at 145:8-146:8.
18.
The Report included five recommendations, one of which was “the pursuit of
buyouts of repetitive and severe repetitive loss properties.” PX 10 at 3. These properties were
ones that “have filed multiple flood insurance claims,” but no properties are specifically
mentioned in this recommendation. Id. Nevertheless, it seems clear that all relevant actors
understood that Arbor Court and Biscayne (a nearby complex) were among the properties
referred to in the Report’s buyout recommendation. The Report further recommended that “[i]f
buyouts are actively pursued, the cleared buyout property could be repurposed for a multiuse
park and localized detention facility,” to mitigate the impact of flood risk. Id. The LAN Report
was completed in November 2016. Id. at 1.
4
ECF No. 296 at 185:18-22.
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19.
In the months following the LAN Report, the North Houston District made some
efforts to convince the City to pursue a buyout of Arbor Court. On June 20, 2017, Robert
Fiederlein, who worked for the North Houston District, emailed several City of Houston
employees, including Karun Sreerama (then the Public Works director for the City), and Stephen
Costello (the City’s Flood Czar). Id.; see ECF No. 296 at 106:1-4, 9-11.
20.
Fiederlein proposed a three-phase approach to drainage updates in the Greens
Road area. PX 10A. Fiederlein stated that “[t]he first phase would be acquisition and demolition
of Arbor Court Apartments,” which “has been the focus of the Housing Director for some time,”
and “[t]he second phase of the project would be to construct a local detention pond on the Arbor
Court site.” Id. Fiederlein indicated that he was meeting the following day with Tom McCasland
(then, the City’s Director of Housing5) to “follow up on his current thoughts” and to ask him to
recommend to the Mayor to proceed along these lines. Id.
21.
After this meeting, McCasland did not recommend to the mayor that the City
purchase Arbor Court. ECF No. 296 at 281:12-18.
22.
Still, McCasland seemed to agree that Arbor Court needed to be relocated.
Relocation typically happens in one of two ways. It could occur through a City buyout, like
Fiederlein advocated, or by funding the current owner to move the property to a safer location.
ECF No. 297 at 212:24-213:12, 214:24-2:15:2, 276:20-277:9. On September 9, 2016,
McCasland, sought information about potential additional relief funds, noting that “[g]etting
Arbor Court relocated should be one of our highest priorities and ensuring sufficient funding for
that in addition to any other recovery activities is key.” PX 8.
5
The Housing Department manages HUD grants, housing funds, and other programs, including disaster recovery
funds. ECF No. 296 at 64:9-1, 65:21-25.
7
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23.
This aftermath is indicative of continued concern among City officials about
potential safety issues at Arbor Court in the event of flooding. Nevertheless, in the following
months, the City did not pursue the relocation of Arbor Court.
D. Hurricane Harvey
24.
Hurricane Harvey struck Houston on August 25, 2017. The first-floor units were
flooded with three to four feet of water. PX 43. As a result of the flood damage, these first-floor
units became uninhabitable. PX 67. The residents of Arbor Court were forced to evacuate.
25.
Although the water in the apartments reached three-to-four feet, water around the
apartments, including near the exits, likely reached a greater depth. This is because the entrances
and exits are at a lower elevation than other areas of the complex, and are thus have deeper
waters when the property floods. PX 32, Exs. 2, 3; ECF No. 299 at 143:1-144:18. Compared
with shallower waters, the deeper water near entrances and exits would have made it more
difficult and dangerous for residents to evacuate during the flood.
E. Communications in the Immediate Aftermath of Harvey
26.
After Hurricane Harvey, there was a flurry of communications between
governmental entities and other interested parties. As discussed below, the Court finds that these
communications did not impact on the permit denial at issue in this case. Nevertheless, the Court
briefly summarizes these communications to provide a fuller context. As part of this context, the
Court observes that these emails are rather rushed and harried, reflecting the fact that City
officials were urgently responding to a medley of time-sensitive and significant crises.
27.
A central figure in these communications was Andy Icken. Icken was the chief
development officer for the City of Houston. ECF No. 296 at 58:4-8. In this position, he does not
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play a role in permitting. ECF No. 296 at 64:13-65:5. Rather, he focuses on economic
development, including jobs and other economic projects. ECF No. 296 at 58:13-17.
28.
On August 31, 2017—less than a week after Hurricane Harvey—Robert
Fiederlein of the North Houston District emailed Icken. PX 13; DX 20. Fiederlein’s email stated
that maps for 2000, 2007, and 2017 all show Arbor Court in the floodplain or floodway. PX 13;
DX 20. Fiederlein stated that he had access to DMAC’s HAP contract, including the August
2016 renewal. Id. Essentially, Fiederlein sought to bring the flooding at Arbor Court to Icken’s
attention.
29.
Just after midnight, Icken responded, cc-ing Carol Haddock (the City’s director of
public works, ECF No. 296 at 69:5-9) and Christon Butler (who worked at the permitting center,
ECF No. 296 at 198:21). DX 21. Icken’s email stated in full “And I would think that permits for
any property that has repeatedly flooded and are in the flood way should be considered very
carefully in the context of FEMA regulations.” Id. The Court finds credible Icken’s explanation
that he sought to explain to Fiederlein that the City applied equal scrutiny to all repetitively
flooded properties in the floodway, including Arbor Court. ECF No. 296 at 186:9-187:1.
30.
Separately, Icken forwarded Fiederlein’s email to Neal Rackleff. PX 16. Rackleff
had previously worked for the city but worked for HUD at the time of these emails. ECF No. 296
at 191:16-192:7. Icken and Rackleff had previously worked together on projects constructing
homes using HUD money, where they learned that they could not use federal funds for projects
in the floodplain. Id. at 192:17-24.
31.
When forwarding Fiederlein’s email, Icken wrote to Rackleff: “This will boil your
blood. It did mine. Shut him down. And find a way that buyouts of units like this can happen
asap.” PX 16. This email stemmed from Icken’s frustration that HUD money was subsidizing
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low-income housing in the floodway, whereas normally federal funding could not go even to
housing projects in the floodplain. ECF No. 296 at 192:17-193:6.
32.
No action occurred as a result of this email. Id. at 192:7-19. Rackleff did not take
any significant or impactful action in response to this email. ECF No. 307-2 at 20:8-23:11.
33.
The next morning, September 1, 2017, Fiederlein responded to Icken. PX 15; DX
21. Fiederlein stated that he “[w]ould love to visit with [Icken] in detail on Arbor Court when
time allows,” and noted that DMAC “ha[s] indicated to us they have started a claim and will
begin rebuilding.” Id. Fiederlein advocated for the City to put pressure on Marquis or HUD to
“do something” regarding the HAP contract or to consider condemnation. Id. With respect to the
condemnation suggestion, Fiederlein stated that “[p]rice is going to be a challenge” because “the
per door price of recent transactions in the area have been . . . in the $30k-$35k range,” but,
“because the HAP contract pays so generously, the per door value is 2x-3x this.” Id.
34.
At 1:34 p.m. on that same day, Fiederlein sent a third, separate email to Icken, this
time about the Biscayne property, which is located near Arbor Court. ECF No. 22. Fiederlein
suggested buying out Biscayne in exchange for dedicating affordable units to other of the
owner’s complexes in the area. Id. In support of this suggestion, Fiederlein points to the LAN
Report after the Tax Day Flood, which according to Fiederlein, “recommended buying out both
Arbor Court and Biscayne to allow for the construction of the detention ponds.” Id.
35.
Fiederlein did not work for the City. ECF No. 296 at 185:23-24. His emails did
not reflect the view of any City official. Further, there is no evidence that any of his emails had
any impact on any permitting decision, which are the challenged government action in this case.
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36.
In fact, the City officials involved in these communications—Icken and
McCasland—had no role in or influence over the permitting process. ECF No. ECF No. 296 at
198:14-199:1, 213:15-20; 299 at 173:17-22.
37.
As before, City officials took no action on pursuing a buyout at this time. ECF
No. 296 at 185:7-10. This makes sense—long term buyouts were “not a priority” because, at this
time, the City was in the midst of a crisis as City officials tried to relocate 10,000 individuals
who had been displaced in the immediate aftermath of Harvey. ECF No. 296 at 185:3-8.
38.
On September 12, 2017, Tom McCasland reached out to Neal Rackleff at HUD
“to request HUD’s assistance with coordinating with the owner of Arbor Court, Morgan Cox, to
ensure that the units are not rehabbed.” PX 18. McCasland explained that it was “a priority for
both [him] and the Mayor that low-income families not be placed once again in the way of storm
water given that Arbor Court is in the floodway.” Id.
39.
On September 18, 2017, Rackleff responded that the “City may have to use other
funds to move quicker” and that “the key to getting this done will be the economics.” PX 20.
Rackleff suggested talking to “come up with a game plan” before Rackleff met with Arbor
Court’s owners. PX 20.
40.
On September 18, 2017, Rackleff then forwarded to Icken and McCasland
correspondence about Arbor Court among HUD officials. PX 21. He asked McCasland to
confirm that the information HUD had received from Morgan Cox—that the city was “ready to
move forward” in purchasing Arbor Court—was correct. Id.
41.
McCasland responded that the City awaited certain funds, but “[i]f those funds
could be expedited, this property would be a priority for the City.” Id. Put differently,
McCasland was attempting to get money from HUD to find a solution. See ECF No. 296 at
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218:15-20. McCasland and Rackleff subsequently met, again with McCasland attempting to find
money, which was the first step in any relocation effort. Id.
42.
Icken also responded to Rackleff’s email. He clarified that the “Mayor has been
very clear on likely use of 2016 funds,” and that the City was “carefully considering the
application of chapter 19 to repetitively flooding properties” and that “[n]o permits will be issued
until that review is complete.” Id. Icken was not giving a directive—merely communicating the
City’s decision that permits would not issue until the city engineer had made a decision about
chapter 19, substantial damage determinations, and repetitively flooding properties. ECF No. 296
at 155:23-156:18; 198:7-11.
F. Permit Application
43.
On September 22, 2017, DMAC applied for permits to repair Arbor Court. PX 27;
DX 5. The permit applications sought to replace cavity insulation, replace electrical outlets, and
replace the flooring. Id.
44.
After DMAC submitted its applications, the City did its own substantial damage
calculations. PX 34; see PX 26. Jamila Johnson was the City’s floodplain manager at the time,
meaning that she managed the flood office for the permitting center and regulated development
of the city’s floodplain, including dealing with permitting, inspection, and making substantial
damage determination. ECF No. 298 at 254:16-18, 255:5-17. She testified that her office
performed more than 1100 substantial damage determinations in the wake of Harvey. ECF No.
298 at 255:23-25.
45.
With respect to the substantial damage determinations for Arbor Court, the City
calculated the cash value of the building, as well as the total estimated damages using FEMA’s
Substantial Damage Estimator software. Id. The City determined that the buildings were
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substantially damaged because the cost to repair each building exceeded 50% of each building’s
value. Id. In particular, the City found that each building was between 72.8% and 74.1%
damaged. Id. Jamila Johnson credibly testified that this application was treated the same as
every other substantial damage determination. ECF No. 298 at 259:7-13.
46.
The City communicated this determination to DMAC in a letter dated October 6,
2017, and informed DMAC that, as a result of these substantial damage determinations, DMAC
was required to bring the buildings into compliance with Chapter 19. Id. The letter explained that
there were “several aspects that must be addressed to achieve compliance,” including, “most
significant[ly], . . . that the lowest living floor must be elevated to one foot above the base flood
elevation.” Id.
47.
On January 10, 2018, DMAC appealed the City’s substantial damage
determination and permit denial. DX 1. In the appeal, DMAC represented that the market value
of the structure was $16,633,222, and the total cost of repair was $3,402,586. Id. Based on these
numbers, percentage of damage would be 20.46%, which would mean that the buildings were
not substantially damaged. Id.6
48.
On March 28, 2018, Choyce Morrow, then a Supervising Engineer and the City’s
Floodplain Management Office, emailed Morgan Cox to let him know that the City had
completed the Substantial Damage Determination Appeal process for Arbor Court. PX 41. Two
6
Whether the Arbor Court was actually substantially damaged does not impact the resolution of this case. As
discussed below, the City found that it could not come to a conclusion as to whether Arbor Court was substantially
damaged and ultimately relied on a separate justification to deny permits. The Court’s findings and conclusions
would be the same regardless of whether the buildings in fact had been or had not been substantially damaged.
Nevertheless, the Court observes that there are at least some reasons to doubt DMAC’s representations about the
extent of the damage that Arbor Court sustained. The estimated repair costs on the substantial damage appeal, DX 1,
were less than the amount that DMAC was paid out by insurance, see DX 8. Further, Wayne Milam, a FEMA
adjustor who worked with DMAC’s contractor prepared draft proofs of loss that estimated the cost of repair to be
significantly higher than what DMAC represented to the City. PX 6. Again, this issue need not be resolved. But the
Court notes these concerns to further underscore the Court’s finding that it was reasonable for the City to be unsure
of the precise substantial damage determinations.
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letters (dated March 18, 2018) were attached. Id. The appeal for Buildings 7-9 and 12-15 was
approved; in other words, the City found that these buildings were not substantially damaged. Id.
The appeal for Buildings 1-6 and 10-11 was denied, meaning that the City found that these
buildings were substantially damaged. Id.
49.
On April 4, 2018, an administrative hold was placed on the permits.
50.
On April 10, 2018, consistent with the City’s policy allowing property owners to
pursue an unlimited number of substantial damage determination appeals, DMAC appealed
again. PX 43. This letter explained that “[t]he roof and structural elements are and have been
intact” and represented that “[o]ur damages are in the 2% range nowhere near the 50% threshold
established by the City of Houston and related FEMA guidance for substantial damage.” Id.
51.
On April 23, 2018, inspectors from the City’s Flood Management Office
conducted a field investigation of the first-floor units in Buildings 1-6 and 10-11. DX 28.
DMAC’s contractor accompanied them. Id. It is common practice for the City to send out
inspectors when completing a substantial damage determination. ECF No. 299 at 166:4-6.
52.
On May 1, 2018, Choyce Morrow emailed Pat Casey, the City’s Senior Assistant
City Attorney. PX 45. Morgan Cox from DMAC was copied, but the email was neither an
official City of Houston communication nor a final substantial damage determination. See ECF
No. 298 at 277:15-17; ECF No. 299 at 165:3-5. The Court finds that Cox was likely cc-ed by
mistake. This email reads in full: “Ms. Casey, I have re-reviewed Chapter 19’s definition of
Substantial Damage and it does not specifically state that, “repair costs should be at fair market
value. Arbor Court has provided cost estimates prepared and sealed by a State of Texas Architect
that show that repairs will cost less than 50% of building values, therefore all buildings will be
classified as non-substantial…” PX 45.
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53.
As a result of this email, DMAC believed that the permits were going to be
approved and it was going to be able to repair the units in Arbor Court. ECF No. 298 at 29:1718. The Court understands why DMAC had that subjective impression from the email. But that
subjective understanding, even if reasonable, does not mean that the permits had been approved
or that DMAC was entitled to approved permits. Rather, the Court finds that the informal email
does not constitute an approval of the permits, nor does it indicate that the City has reached a
final decision.
54.
Two days later, on May 3, 2018, Morrow emailed Morgan Cox, cc-ing Pat Casey.
DX 28. This email was a standard part of the back and forth between the City and a property
owner regarding a substantial damage determination. ECF No. 299 at 167:5-9. Morrow informed
Cox that in the April 23, 2018, inspection, City inspectors found several items that were not
included on the proposal that DMAC had submitted. DX 28. Morrow listed nine specific items,
including damage to the foundation, the first floor framing, and other aspects of the building. Id.
Morrow requested a revised cost estimates that included repairs for the listed items, as we’ll as
“any other cost estimates you have received as well as your NFIP Proof of Loss Statement.” Id.
55.
DMAC never provided any of these materials to the City in response to this email.
56.
The failure to submit this information created a problem under the Flood
PX 60.
Ordinance, which provides that “an applicant may be required to submit . . . [a]ny other relevant
information requested by the city engineer.” DX 4 § 19-18(7).7 Thus, the substantial damage
determination issue remained unresolved. PX 60.
57.
On May 31, 2018, Morgan Cox of DMAC emailed several officials expressing
two concerns. PX 54. First, the fire marshal said that it was going to place stickers on the
7
The requested information was relevant to the substantial damage determination. ECF No. 299 at 167:23-168:6.
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upstairs apartments at Arbor Court because the units were not up to code due to the damaged
downstairs units. Id. Second, Cox said that he believed the City improperly withheld the permits
and said that DMAC would “proceed with firing up [its] litigation team” if it had not heard back
from the City. Id.
58.
Cox’s email kicked off a back-and-forth of emails between various City officials.
During this exchange, Tom McCasland the Director of the Housing and Community
Development Department, clarified that this impacted the department because they “are usually
the responsible party when the current 100+ units of low income individuals lose their homes”
and “are the party with the funding to buyout this property owner to ensure that the long-term
solution of moving this facility is achieved.” Id. Subsequently, Harry Hayes, the City’s Chief
Operating Officer, told McCasland: “You should crank up your role right now and not wait.
Assume as of today that the residents will need to be relocated and we will purchase the property
from the floodway.” Id.
59.
On June 8, 2018, DMAC brought this suit. ECF No. 1.
G. Permit Denial
60.
On July 17, 2018, Carol Haddock, the City’s Director of Public Works, emailed
Cox. PX 60. The letter states that the City reviewed the repaired permit applications and
determined that they should be denied. Id.
61.
The letter explained that the City could not finalize its substantial damage
determination because Arbor Court did not provide the requested information in response to the
City’s May 3, 2018, request. Id. As a result, the letter explained, “[t]he City is pursuing other
means to obtain the requested information to make a final determination whether any or all of the
buildings are substantially damaged.” Id.
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62.
Nevertheless, the letter explained that the City Engineer, using his judgment
pursuant to sections 19-1(a)-b) and 19-19 of the Flood Ordinance, “has reviewed information
submitted thus far and publicly available data and has concluded that there is danger to both life
and property due to flooding in the vicinity of the site.” Id.
63.
The letter offered several rationales. First, the property is right on the Greens
Bayou and mostly in the floodway. The data reviewed by the engineer showed that past flooding
had exposed residents to danger when the Greens Bayou rose out of its banks. The letter pointed
to the LAN study following the Tax Day Flood as well as FIRM data to show that flood depths at
Arbor Court may have been as high as six feet during the Tax Day Flood. Further, it pointed to
media photos from both the Tax Day Flood and Hurricane Harvey, showing “residents wading in
water as high as chest deep,” which is “dangerous,” both “because of the risk of injury or
drowning” and because of pests like snakes and ants in the waters. Id. The letter also pointed to
the models from LAN showing velocities of 5.5 to 7.5 feet per second, which pose further
dangers. Last, the letter pointed to the development’ susceptibility to flood damage and the
impairment of access to the site during flooding, making it difficult for rescue and emergency
vehicles. Id.
64.
Although Carol Haddock sent the letter, the letter’s author was Joe Myers, the
City Engineer. ECF No. 299 at 159:8-11, 162:8-15. Myers made the decision to deny the permits
pursuant to Chapter 19-19 (health and safety) due to the reasons outlined in the letter. Nobody—
such as the mayor, Icken, McCasland, or anybody else—directed Myers to deny Arbor Court’s
permits or influenced Myers in his decision. ECF No. 299 at 173:14-174:2; see ECF No. 296 at
213:15-20, 275:9-23.
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65.
The effect of the permit denial was that the requested repairs could not be made.
Other uses for the property would still be permitted, so long as those purposes complied with the
Flood Ordinance. ECF No. 296 at 202:4-8.
66.
Because the repairs could not be made, all of the tenants had to be moved out of
Arbor Court. The last tenant moved out in December 2019. ECF No. 298 at 113:11-12.
67.
The Court credits the explanation of City employees that health and safety
concerns motivated the denial of the permits. The Court does not find that any prior discussion of
possible buyouts or relocation of Arbor Court undercuts this explanation. Rather, there was a
widespread concern about health and safety issues at Arbor Court, and that concern manifested
in various departments in various ways.
68.
DMAC nonetheless argues that the City’s stated rationale was pretextual, and that
the City improperly targeted Arbor Court. DMAC offers several points to support its claim that
the City’s rationale was pretextual. None is persuasive.
69.
First, DMAC argues the City kept changing rationales. First, the City denied the
permits because it found that the properties had been substantially damaged. PX 34. After an
appeal, the City found that only buildings 1-6 and 10-11 were substantially damaged. PX 41.
Choyce Morrow then sent an email indicating that the buildings may not be substantially
damaged (based on the cost of repairs). PX 45. Then, Morrow emailed Morgan Cox noting that
City inspectors had found damage not listed in DMAC’s Proposal. DX 28. Finally, the City
abandoned the substantial-damage rationale and denied permits on the grounds that repair posed
a danger to health and safety. PX 60.
70.
But the Court cannot agree that this sequence of events is evidence of any pretext.
Rather, there were perfectly reasonable explanations for the City’s shifted rationale. As part of
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the appeals process, city inspectors conducted a field investigation (a standard part of the
process) and found damage not mentioned in DMAC’s submission. DX 28. But when the City
asked for more information from DMAC, DMAC never responded. In the absence of this
additional information, the City could not finalize any substantial damage determination. PX 60.
Thus, it was perfectly reasonable for the City to rely instead on a different rationale. Without
sufficient information, it could not make a decision about substantial damage, so it instead turned
to a metric—health and safety—for which it did have enough information to reach a decision.
71.
Nor does the May 1, 2018, email from Choyce Morrow change this analysis. In
this email, Morrow indicated that the buildings were not substantially damaged. DMAC argues
that this email shows the City had made a substantial damage determination. This is incorrect.
Read in context, the email specifically addresses repair costs and shows that the City was willing
to accept DMAC’s costs of repair, even if those costs were below a fair market value. PX 45.
72.
But this email was sent just a week after inspectors from the Flood Management
Office conducted their field investigation, and the City had not yet incorporated the findings
from the field investigation into its analysis. In fact, the subsequent May 3 email shows that,
once the City did consider the investigators’ findings, it was concerned about additional damage
that DMAC had not reported. DX 28.
73.
Put differently, there are multiple factors that go into a substantial damage
determination, including, most significantly, the fair market value of the property, the extent of
the damage, and the cost of repairs. The May 1 email addressed how to calculate the cost of
repairs given the damage listed. The May 3 email addressed whether the extent of the damage
was what DMAC had claimed. It is reasonable for the City to address these two separate issues
separately.
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74.
DMAC further argues that the City improperly applied Chapter 19 because
granting a permit would not increase flooding danger. This argument misconstrues the
Ordinance. The Ordinance provides that it aims “to reduce the likelihood that development
within this City will increase the dangers of flooding.” DX 4 § 19-1(b). Granting the permits—
thereby placing low-income residences in a repetitively flooding property in the floodway—
increases potential dangers from flooding when compared with not granting the permit to rebuild
in this area. This is a proper application of the Ordinance.
75.
DMAC also argues that it was treated differently from Biscayne and that this
discrepant treatment shows that the City unfairly targeted Arbor Court. This argument, too,
falters.
76.
Biscayne was located near Arbor Court and experienced similar flooding. But
fatal to DMAC’s argument is that Biscayne, like Arbor Court, never got repair permits to rebuild.
Rather, Biscayne—seemingly unlawfully8—rebuilt their units without first getting the requisite
permits. Eventually, the City and the Flood Control District purchased Biscayne jointly, with
each contributing half of the funds (the City’s portion came from disaster relief funds). ECF No.
296 at 220:24-222:14. DMAC is understandably frustrated that the City nonetheless bought the
Biscayne property after Biscayne violated the Ordinance.
77.
But the fact that the City did not want residents living at either Biscayne or Arbor
Court actually lends credence to the City’s statement that the permit denial was motivated by
genuine health and safety concerns. And, at any rate, DMAC’s takings claim is based on the
permit denial, not the failed negotiations over a buyout. Thus, the Court finds that the City did
not unfairly target Arbor Court when it denied the permits.
City officials testified that repairs done without permits were in violation of the City’s Flood Ordinance. ECF No.
298 at 270:11-17; ECF No. 299 at 178:18-179:2.
8
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78.
Even if the City had targeted Arbor Court specifically—and, to be clear, the Court
finds that it did not—the City still offered a valid reason for being especially concerned about
Arbor Court. Arbor Court was HUD-subsidized housing. Not only is it funded by taxpayers, but
residents who live in this type of housing cannot simply pick up and move in the same way that
residents of other buildings may. Thus, these residents are uniquely vulnerable. So, even if the
City had paid more attention to Arbor Court than to other properties, any extra attention would
have been for a legitimate reason.
79.
In sum, the Court is not persuaded by DMAC’s argument that the City’s reliance
on Chapter 19 was pretextual. Rather, the Court finds that the City denied the permits due to
health and safety concerns created by the substantial risk of flooding at the Property.
H. Sale Discussions between DMAC and the City
80.
While the permitting appeals process was ongoing, DMAC and the City were
separately negotiating a potential sale of Arbor Court to the City.
81.
While Jamila Johnson, Choyce Morrow, and Joe Myers were the main City
employees involved with the permitting decision, the buyout discussions involved entirely
different City officials. Specifically, the main individuals involved in the buyout considerations
were Tom McCasland (the Housing Director), and Ray Miller, an employee who focused on
multi-family properties and assisted McCasland. ECF No. 296 at 67:25-68:5, 227:16-21.
82.
On February 20, 2018, Ray Miller indicated that he “ha[d] some irons in the fire
to try to come up with a proposal for a buyout, but that will be a long term project at this point.”
PX 39.
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83.
On March 9, 2018, Miller and Derek Sellers prepared a “Decision Request
Memorandum” for Tom McCasland regarding a potential Arbor Court project. PX 40.9 The
memorandum explained that “[t]he owner of Arbor Court has indicated on multiple occasions
that he is willing to sell or swap Arbor Court,” but that “he would like the value of a fully leased
repaired Arbor Court.” PX 40. The top was the use of DR 16 funds, and the memorandum listed
three options: (1) a buyout of Arbor Court; (2) a “swap” to facilitate relocation of Arbor Court;
or (3) pursuing other projects. Id. The memorandum recommended using the funding for other
projects because DR16 has limited funding, the timeline presented an issue, and Harvey funds
may be available. Id.
84.
On March 15, 2018, Miller emailed Janet Golrick, who worked for HUD, asking
for information about the HAP contract. PX 39. He explained that his “department is considering
providing an unsolicited bid to purchase the property,” but was “limiting [their] conversation
with the owner” because the permitting issue had created “a sensitive situation.” PX 39. Miller
sought information that would help the City to determine the value of the property. Id.
85.
At DMAC’s request, the City asked DMAC to submit a proposal for a potential
buyout of Arbor Court. ECF No. 296 at 209:1-7, 256:17-22.
86.
On July 30, 2018, DMAC sent a proposed option contract for the sale of Arbor
Court. PX 61. DMAC’s proposed purchase price for Arbor Court was $24.4 million, plus or
minus 4% based on a subsequent appraisal. Id. at 7 (Contract at 6). If the appraisal was not
within 4% of this $24.4 million figure, the proposed contract would have allowed either party to
terminate the contract within three business days. Id.
87.
At this point in the summer of 2018, the City did not have disaster relief funds
from either 2016 or 2017 available. ECF No. 296 at 238:24-239:16. Those funds did not come un
9
The memorandum is dated 2019, but that is a typo. ECF No. 296 at 232:24-233:4.
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until roughly the first quarter of 2019. Id. at 239: 17-23. This is significant because without
funding, the City “do[es]n’t do anything,” and it is relatively rare for the City to pursue buyouts
in the first place. ECF No. 296 at 277:11-20, 278:22-25
88.
In response to DMAC’s July 30, 2018, proposal, the City did not purchase Arbor
Court for this price. ECF No. 296 at 210:16-17; 271:18-23.
89.
The City did not offer a counterproposal to DMAC’s proposed purchase price.
90.
As discussed above, there are two main ways to relocate a property: (1) a buyout;
and (2) relocation. DMAC did not submit an application for the City to contribute money to
relocate Arbor Court. ECF No. 296 at 244:7-17. Thus, the City did not provide money for
DMAC to purchase another property where the HAP budget authority could be moved. Id.
I. Communications between the City and HUD
91.
As discussed above, DMAC operated Arbor Court as subsidized housing under a
HAP contract from HUD. Under this contract, HUD provided payments to DMAC, which
substantially increased the value of Arbor Court.
92.
While the City was looking into the possibility of purchasing Arbor Court, it had
several communications with HUD related to Arbor Court’s HAP contract. The purpose of these
communications was twofold: (1) to understand what was happening from HUD’s perspective;
and (2) to understand what would happen to the HAP contract under various scenarios.
93.
The Court finds as a factual matter that these communications did not cause HUD
to revoke the HAP contract. Nevertheless, for the sake of completeness, the Court briefly
describes these communications between HUD and the City.
94.
On June 15, 2018, Tom McCasland sent a letter to Brian Montgomery at HUD
about Arbor Court. PX 56. DMAC had communicated to the City that HUD wanted Arbor Court
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rebuilt. Id.; ECF No. 296 at 251:6-12. Thus, McCasland asked Montgomery to clarify whether
HUD wished for Arbor Court to be rebuilt at its current location regardless of flood risk, and
whether HUD intended to maintain the HAP contract with DMAC at that location. PX 56.
McCasland explained that (1) Arbor Court flooded significantly during both the Tax Day Flood
and Hurricane Harvey; and (2) the City’s Flood Plain ordinance applied to the location, meaning
that rebuilding at the same location poses public safety concerns. Id.
95.
HUD responded, but its response was not particularly clear one way or the other.
ECF No. 206 at 251:3-15.
96.
Further, to inform any discussions related to the City potentially purchasing Arbor
Court, Tom McCasland from the City reached out to HUD to find out what would happen if
HUD terminated the HAP contract. ECF No. 296 at 266:2-267:7, 268:22-269:7, 274:1-24. PX
61B.
97.
HUD informed the City that, if termination occurred, vouchers and relocation
services would be provided to eligible families. PX 61B. HUD also explained, in response to
McCasland’s inquiry, that pursuant to the 8bb process, a property owner could voluntarily
arrange for the HAP budget authority to transfer to another property, subject to HUD approval.
PX 61B.
J. HAP Contract Transfer
98.
Several months later, on October 18, 2018, HUD sent DMAC a Notice of Default
of the HAP contract. PX 65. This letter said that DMAC “is now in default of the property’s
HAP contract” and “must take” three “corrective actions.” Id. Those were: (1) completing
negotiations with the City about permitting issues; (2) showing that the permits have been
received; and (3) providing a plan for the rehabilitation of the buildings. Id. The letter stated that
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if DMAC fails to take the corrective action, then the HAP contract could be reduced, suspended,
or terminated. Id.
99.
On November 6, 2018, Morgan Cox, writing on behalf of DMAC, wrote to HUD
stating that DMAC was “actively seeking an acquisition of another apartment complex in the
State of Texas and, through an 8bb will request The Department to transfer the Budget Authority
from Arbor Court to the newly acquired asset.” DX 13.
100.
On December 17, 2018, Monica Sussman, on behalf of DMAC, requested the
HUD transfer the budget authority for the HAP contract to DM Cullen Park. DX 17; See ECF
No. 298 at 179: 14-19.
101.
On February 14, 2019, HUD sent a letter to DMAC approving the transfer of
budget authority to Cullen Park. DX 15.
102.
DM Cullen Park is a separate entity from DMAC, but the two are closely related.
DMAC has eighteen limited partners, including principals Douglas Hickock and Morgan Cox..
ECF No. 298 at 73:19-22. DM Cullen Park has only two partners: Douglas Hickock and Morgan
Cox. Id. at 74:1-7.
103.
In fact, DMAC itself has acknowledged its close relationship with DM Cullen
Park. This is clear from the letter that Sussman sent to HUD on behalf of DMAC asking HUD to
transfer the budget authority for the HAP contract to Cullen Park. DX 17. The letter explained:
“Marquis Acquisition, Inc., who controls Owner A [DMAC] is in the process of acquiring
Project B, which will be owned by a single—purpose entity affiliate (“Owner B”) [DM Cullen
Park].” DX 17 at 2. So here, DMAC represents that Marquis Acquisition, Inc. both “controls”
DMAC and “acquir[ed]” Cullen Park. The letter also attached a document titled “Certification
Re: Acceptance of Budget Authority,” signed by Morgan Cox, stating that “Marquis
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Acquisitions, Inc., and/or a special purpose entity affiliate” would accept the transfer of budget
authority.” PX 17 Ex. 10.
104.
Thus, Hickock and Cox—DMAC’s principals—benefited from the transfer of the
HAP contract to DM Cullen Park. But DMAC itself did not benefit. No benefit was transferred
to DMAC as a result of transferring the HAP contract budget authority to DM Cullen Park. ECF
No. 298 at 75:12-76:5.
K. Valuation of the Property: Before Permit Denial
105.
A central issue in this case relates to the valuation of property. The parties dispute
the valuation of the property both before and after the taking.
106.
Richard Marchitelli testified as DMAC’s expert on the valuation issue. See ECF
No. 297 at 12-149 (Marchitelli testimony); PX 73 (Marchitelli report).
107.
The City’s expert on these same issues was Joseph Torzewski. ECF No. 299 at 4-
133 (Torzewski testimony); DX 30 (Torzewski report).
108.
The first question is how to value Arbor Court before the taking. Both experts
relied on the income capitalization approach. PX 73 at 52-57; DX 30 at 57-63. Very basically,
this approach takes the net operating income (calculated based on rents, vacancy rates, operating
expenses, and other factors) and divides the net operating income by the “capitalization rate” to
determine the value of a property. Id.
109.
Marchitelli testified that, in his view, the market value of Arbor Court before the
taking was $24.2 million. ECF No. 297 at 65:14-15; PX 73 at 5. This is based on his view that
“[t]he highest and best use” of Arbor Court “was its existing use as a 232-unit garden apartment
complex with a HAP contract in place. ECF No. 297 at 31:7-9. He valued the property with the
HAP contract in its fully stabilized state. Id. at 32:6-8.
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110.
Torzewski arrived a different “before” valuation than Marchitelli. He valued
Arbor Court at several different stages and under different conditions: in Torzewski’s view, the
Property was worth $18 million based on HAP contract rent rates before Harvey struck, $12.1
million based on market rent rates before Harvey struck, and $5.9 million based on the income
method on the morning of July 17, 2018, just before Houston issued the permit denial letter. ECF
No. 299 at 18:9-10, 18:22-19:2, 21:14-20. To arrive at his “before” valuation of $5.9 million,
Torzewski valuated the net operating income using the value of the second-floor apartments
only, since only those apartments were operable on July 17, 2018, as a result of Hurricane
Harvey. ECF 299 at 21:5-13.
111.
Both parties point to additional sources to lend credence to their expert’s “before”
valuation. First, DMAC points to an Appraiser’s Report from February 2017 that was conducted
in relation to the refinancing of the property. PX 72. This appraisal estimated that the value of
the property was $21.1 million. Id. at 140. This appraisal occurred after the Tax Day Flood but
before Harvey.
112.
The City points to other numbers. DMAC bought Arbor Court in January 2016 for
$11.85 million, ECF No. 297 at 96:6-9, and the City argues that it is unlikely that the Property
doubled in value in just over two years. Further, in DMAC’s first substantial damage appeal,
which it filed with the City on January 10, 2018, DMAC represented that the market value of the
structure was $16,633,222. DX 1. A year earlier, DMAC submitted to FEMA signed proofs of
loss following the Tax Day Flood represented that the total cash value of the Arbor Court
buildings was $12.5 million. DX 33. Finally, the City points to DMAC’s sworn tax protests,
sworn on both October 25, 2016, and July 27, 2018, swearing that Arbor Court was worth “no
more than $6,500,000.” DX 18. The discrepancies among these valuations and between these
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valuations and the one that DMAC now offers cast doubt on DMAC’s claim that the property is
worth as much as it now says.
113.
To be clear, the Court finds that the experts for both DMAC and the City rely on
flawed assumptions to calculate the value of Arbor Court before permit denial. Marchitelli,
DMAC’s expert, calculates the value of Arbor Court as though Hurricane Harvey had never
happened, and Arbor Court had not been damaged in any way. This methodology is not
persuasive. But neither is the Court persuaded by the methodology of Torzewski, the City’s
expert, who calculated the “before” value of Arbor Court as though it would be kept in its state
of disrepair forever. Thus, the Court declines to adopt the “before” valuations of either party’s
expert.
114.
As a threshold matter, this Court finds that the “before” valuation must be
calculated using the value of rents with the HAP contract. The parties agreed that the HAP
contract was tied to the property; although HUD could (and subsequently did) agree to transfer
the property, absent that action from HUD, the HAP contract applies to one property specifically.
This is because the owner agrees to use the property for low-income apartments, and, in return,
HUD subsidizes those apartments and provides the owner with a steady stream of income. The
effect of the HAP contract is to increase the value of each unit. Although the HAP contract
reflects inflated rents, the fact remains that DMAC had recently secured a twenty-year extension
of the contract. So, if DMAC remained in compliance, it was entitled to those inflated rents.
Thus, the net operating income should be calculated using rents that account for the HAP
contract.
115.
Nevertheless, the Court agrees with the City’s expert Joseph Torzewski that an
inflated HAP contract rate increases the risk of the property because the rents undergo five-year
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readjustments. ECF No. 299 at 29:5-16. As discussed below, this increased risk is reflected in a
higher capitalization rate, which reduces the value of the property.
116.
The Court further finds that it is inappropriate to value the net operating income
of the “before” valuation using only the second-floor apartments. It is true that the first-floor
apartments were inoperable before the permit denial. This was due to the storm, not to any action
taken by the City. Nevertheless, Torzewski’s approach using income from only the second-floor
apartments assumes that the first-floor apartments would have remained inoperable indefinitely.
However, but for the City’s action in denying the permits, it would have been possible to bring
these units back into operation.
117.
That is not to say that Hurricane Harvey has no impact on the valuation of the
property. Rather, Harvey substantially reduced the value of Arbor Court. Before the storm, Arbor
Court had flooded only once in the last thirty years. But, after Harvey, Arbor Court was a
repetitively flooding property that had flooded twice in a sixteen-month period. The Court finds
that the valuation of DMAC’s expert, Richard Marchitelli, fails to account adequately for the
impact of the hurricane.
118.
Specifically, Harvey impacted the property’s value in at least three ways. First,
the capitalization rate reflects the amount of risk in a property. ECF No. 299 at 28:24-29:3. The
Court agrees with Torzewski’s assessment that Hurricane Harvey made the property riskier
because now the property had experienced two instances of significant flooding in a sixteenmonth period. Id. at 29:3-5. The effect of this risk is to increase the applicable capitalization rate.
See ECF No. 299 at 94:3-16.
119.
Second, the net operating income includes a number of factors. But if tenants are
not in units, then those units are not generating that same income. And tenants are displaced from
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units when flooding requires those units to be repaired. So, a situation where flooding is more
frequent involves greater displacement and lower net operating income. And that became more
likely after Hurricane Harvey made Arbor Court a repetitively flooding property.
120.
Thus, the Court finds that Marchitelli’s 6.5% capitalization rate is not appropriate.
A higher capitalization rate appropriately reflects the increased risks due to repetitive flooding
and the risk of a readjustment of HAP contract rates to more accurately reflect the market value.
121.
Third, the property needed repairs. Even under DM Arbor Court’s own estimates,
the cost to repair Arbor Court was $3.4 million. DX 1. And DMAC had received $3.4 million
from insurance (the policy maximum) to rebuild. ECF No. 298 at 80:16-18. Marchitelli’s
evaluation appraised the property as if it had already been repaired. But it had not been. So,
although Torzewski’s valuation—assuming that the property could never be fixed before the
taking—is incorrect, the “before” value of the property has to deduct the cost of repairs, which
are, at minimum, $3.4 million (money that DMAC had, at any rate, received from the insurer).10
122.
The Court does not make a precise finding as to the “before” valuation of the
Property. It nevertheless concludes that the “before” valuation is likely somewhere between $12
million and $18 million.11
L. Valuation of the Property: After the Permit Denial
123.
The next question is how to value Arbor Court after the taking. Here, too, the
parties substantially disagree.
The Court’s analysis here deducts the value of the property damage (and cost of repairs that had not yet been
made) from the “before” valuation. Another way of doing this calculation would be to include this amount in the
“before” valuation, but also include this amount in the “after” valuation because the cash value of the repairs was
not spent and so was not taken. Either way, the analysis is the same.
11
This ranges from, at the high end, a calculation using Marchitelli’s net operating income number and a 7%
capitalization rate for a result of $22.5 million, which is then downward adjusted for the reduced income due to
flooding, and further downward adjusted for property destruction that occurred. At the low end, the calculation
accounts for Marchitelli’s calculation using the HAP contract rate, downward adjusted to reflect the possibility of
HAP rent-rate adjustment or contract nonrenewal and the effect of the $3.4 million property damage.
10
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124.
For DMAC, Marchitelli’s Report opined that “[d]enial of the permits to repair the
hurricane damage results in a complete loss of economic us of the property, also depriving the
owner of achieving any return on its investment.” PX 73 at 57.
125.
Marchitelli relied on a February 2017 Report conducted by David Pallante &
Associates to suggest (1) that rents would need to be between $1.15 - $1.50 per square foot to
justify a multifamily development given the characteristics of the immediate area; and (2)
development of the property into a market rate apartment without subsidies would not be
feasible. ECF No. 297 at 38:2-39:2. Marchitelli testified as to his view that “the cost of
demolition, and the cost of site preparation, and the cost of construction render the proposed
project infeasible.” ECF No. 297 at 39:12-14; accord id. at 44:17-25.
126.
Marchitelli further testified that he thinks the value of the land is zero due to the
costs of construction, site preparation and demolition. ECF No. 297 at 39:19-40:13, 44:10-16. He
testified that he concluded that all of the value was lost “[b]ecause the property could not be
operated like it was intended, and it was impossible to tenant the property without the repairs.”
ECF No. 297 at 65:22-24. To support its estimate of the demolition costs, DMAC also points to
the March 2018 Decision Request Memorandum prepared for Tom McCasland by Derek Sellers
and Ray Miller, which estimated the cost of demolition to be “up to $615,000.” PX 40. Douglas
Hickock of DMAC estimated that the cost of demolition was between $500,000 and $1 million.
ECF No. 298 at 103:24-104:3.
127.
The Court is not persuaded that Marchitelli’s analysis adequately captured the
“after” value of the Property. Marchitelli’s report stated that the permit denial “results in a
complete loss of the economic use of the property.” PX 73 at 57. To reach this conclusion, he
explained that: (1) the units became uninhabitable; and (2) the buildings will need to be razed
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and will be responsible for holding costs. Id. But Marchitelli never conducted a highest and best
use analysis. ECF No. 252 at 29. He testified that he “considered highest and best use” but
“didn’t do a detailed analysis.” ECF No. 297 at 99:11-12. But there is no indication that
Marchitelli’s consideration amounted to much more than recognizing that the prior highest and
best use was no longer feasible.
128.
Torzewski’s analysis took a different approach. He estimated that the underlying
value of the land is $1.07 million. DX 30 at ii. He also performed a series of calculations at
different dates, using the income capitalization approach as though the upper floor could be used
(and alternative calculations using the income stream of the entire complex). Id. Torzewski also
testified that, in his view, the highest and best use of the property was to hold it for future
development, but he did not specifically analyze whether there was any possible future
development of the property. ECF No. 299 at 107:4-5, 107:24-108:1. The City points to
DMAC’s July 15, 2021 sworn tax protests, swearing that Arbor Court was worth “no more than
$1,529,121.” DX 18.
129.
But the Court is also not persuaded by Torzewski’s estimate. It is unreasonable to
assume that DMAC could continue using the upper-level apartments when the lower level units
remained in disrepair. The unreasonableness of this assumption is clear when the Court considers
that the fire marshal considered these units not up to code due to the lower level’s disrepair.
130.
The Court finds that the property lost most of its value but nonetheless retained
some value. Specifically, the Court finds that the remaining value of the land was likely between
$500,000 and $ 1 million, which accounts for both the underlying cost of the land and the cost of
demolition.
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131.
On top of that, the Court finds that DMAC retained the value of the HAP contract.
Torzewski, the City’s expert, valued the HAP contract at $5.9 million, which accounts for the
difference between the value of Arbor Court with the HAP contract and the value of Arbor Court
without the HAP contract. ECF No. 299 at 19:10-15. DMAC does not offer a valuation of the
HAP contract and seems to dispute whether it has independent value alone and, whether if it did,
DMAC retained that value after the permit denial.
132.
DMAC contends that it lost the value of the HAP contract when it could no longer
use the HAP contract at the Arbor Court location because it was effectively forced to default on
the contract. It thus asked HUD to transfer the HAP contract to DM Cullen Park. DMAC
received no consideration in exchange for this transfer.
133.
According to DMAC’s telling, the City deprived DMAC of the HAP contract, so
HUD transferred it—under this theory of events, the City caused DMAC’s loss, and the transfer
of the HAP contract resulted in an unrelated windfall to DM Cullen Park. This Court has
previously observed that “a fair bit of evidence suggests that Plaintiff was not injured by the
transfer of the contract.” ECF No. 252 at 33. This remains true. Morgan Cox and Douglas
Hickock are the sole partners in DM Cullen Park. They are also principals of DMAC. Hickock
worked hard to ensure that the HAP contract remained within a group under the umbrella of
Marquis Acquisitions, Inc., Hickock’s umbrella group of companies. It defies reason to suggest
that DMAC would have worked so hard to achieve this transfer if, in fact, DMAC gained nothing
as a result. Framed differently, Hickock and Cox—who were principals at both DMAC and DM
Cullen Park—inarguably gained a windfall via DM Cullen Park when that property received the
HAP contract. The fact that Hickock and Cox retained the HAP contract’s value though a
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different entity undoubtedly reduced the incentive for them to find ways for DMAC to retain the
HAP contract’s value.
134.
Could DMAC have retained the value of the HAP contract instead of receiving no
consideration for its transfer to DM Cullen Park? Could a willing buyer who owned multiple
properties have purchased Arbor Court, including the HAP contract, and requested that HUD
transfer the HAP contract to another of its properties? This seems likely for two reasons: (1)
HUD told the City that, if it bought Arbor Court, it could transfer the HAP contract to another
property; and (2) HUD ultimately allowed DMAC to transfer the HAP contract to DM Cullen
Park. On top of that, no rule prohibited DMAC from purchasing Cullen Park and transferring the
HAP contract budget authority from Arbor Court to Cullen Park. ECF No. 307-1 at 129:1130:12; ECF No. 298 at 181:10-182:2. Rather, the reason that DMAC could not buy another
property and ask HUD to transfer the budget authority there was because DMAC lacked the
money to do so. ECF No. 298 at 250:16-25.
135.
If a potentially transferable HAP contract impacted the value of the property, then
that HAP contract could not have been taken. The Court is skeptical of DMAC’s claim that it
was impossible for it to have retained any value of the HAP contract. And, at any rate, DMAC
has not met its burden to prove this claim.
136.
Accordingly, the Court finds that the City did not take the HAP contract’s value.12
Rather, DMAC retained the HAP contract and the associated value until after HUD agreed to
transfer the contract to Cullen Park. The Court further finds that the value of the HAP contract
after the permit denial was likely between $3 million and $5.9 million.
As discussed below, however, this finding does not change the outcome of the Court’s analysis, either for
DMAC’s Lucas claim, or under the Penn Central factors.
12
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137.
Thus, the total value of Arbor Court, including the remaining HAP contract, after
the permit denial was between $3.5 million and $6.9 million.
III.
CONCLUSIONS OF LAW
1.
The Takings Clause of the Fifth Amendment provides that private property shall
not “be taken for public use, without just compensation.” U.S. Const. amend. V.
2.
The “paradigmatic taking” involves the “direct government appropriation or
physical invasion of private property.” Lingle v. Chevron U.S.A., Inc., 544 U.S. 528, 537 (2005).
However, a taking can occur even in the absence of such a direct appropriation. “[W]hile
property may be regulated to a certain extent, if regulation goes too far it will be recognized as a
taking.” Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).
3.
Although a taking occurs when regulation goes “too far,” the Supreme Court “has
generally eschewed any set formula for determining how far is too far, choosing instead to
engage in essentially ad hoc, factual inquiries.” Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l
Pan. Agency, 535 U.S. 302, 336 (2002) (cleaned up). Significantly, however, this inquiry “aim[s]
to identify regulatory actions that are functionally equivalent to . . . classic takings.” Lingle, 544
U.S. at 539.
4.
The Supreme Court has identified three categories of takings. First, and not
relevant here, is a direct physical taking, which occurs when the government “requires an owner
to suffer a permanent physical invasion of her property.” Id. at 538. It is “inappropriate to treat
cases involving physical takings as controlling precedents for the evaluation of” a regulatory
taking claim. Tahoe, 535 U.S. at 324.
5.
Second, “regulations that completely deprive an owner of all economically
beneficial use of her property” likewise constitute a “categorical” taking, except where principles
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of nuisance and property law “independently restrict” the owner’s use. Lingle, 544 U.S. at 538
(cleaned up). This category “[i]s limited to ‘the extraordinary circumstance when no productive
or economically beneficial use of land is permitted.’” Tahoe, 535 U.S. at 330 (Lucas v. South
Carolina Coastal Council, 505 U.S. 1003, 1017 (1992).
6.
Third, government action may effect a taking even if there is neither a physical
taking or the complete elimination of all economically beneficial use. This category “is
characterized by essentially ad hoc, factual inquiries, designed to allow careful examination and
weighing of all the relevant circumstances.” Id. at 322 (cleaned up). Although there is no “set
formula” for this third category of taking, courts apply the three factors outlined in Penn Central
Transportation Co. v. New York City, 438 U.S. 104 (1978). Those factors examine: (1) “[t]he
economic impact of the regulation”; (2) “the extent to which the regulation has interfered with
distinct investment-backed expectations”; and (3) “the character of the governmental action.” Id.
at 124. Importantly, even under the Penn Central framework, “regulatory restriction on use that
does not entirely deprive an owner of property rights may not be a taking.” Horne v. Dep’t of
Agric., 576 U.S. 350, 364 (2015).
7.
These three inquiries “share a common touchstone” in that they each “aim[] to
identify regulatory actions that are functionally equivalent to the classic taking” and, thus, “each
of these tests focuses directly upon the severity of the burden that government imposes upon
private property rights.” Lingle, 544 U.S. at 539. If the burden is too severe, a taking has
occurred. At the same time, however, the Supreme Court has cautioned against defining takings
too broadly: “Land-use regulations are ubiquitous and most of them impact property values in
some tangential way—often in completely unanticipated ways. Treating them all as per se
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takings would transform government regulation into a luxury few governments could afford.”
Tahoe, 535 U.S. at 324.
8.
Thus, “[a] central dynamic of” in how the Supreme Court has approached
regulatory takings is “flexibility.” Murr v. Wisconsin, 582 U.S. 383, 394 (2017). Flexibility is the
“means to reconcile two competing objectives”: (1) “the individual’s right to retain the interests
and exercise the freedoms at the core of private property ownership”; and (2) “the government’s
well-established power to adjust rights for the public good.” Id. (cleaned up).
A. Threshold Considerations
9.
Before turning to the merits of DMAC’s takings claims, the Court first addresses
some threshold considerations. First, the City urges that, as a categorical rule, a permit denial
pursuant to a valid flood regulation can never be consider a taking. This argument is unavailing:
the Court finds that no such categorical rule is warranted, although that a permit was denied
pursuant to a valid flood ordinance is a factor that weights strongly against any finding that a
Taking has occurred. Second, the Court observes that, in its Taking Clause analysis, it must
make every effort to disaggregate the impact of the governmental action taken in response to
Hurricane Harvey from the impact of the hurricane itself..
1.
10.
Impact of a Valid Flood Ordinance
The City argues that, as a categorical rule, any permit denied pursuant to a valid
flood regulation can never be a taking. The City is incorrect.
11.
To support its argument, the City relies on Adolph v. Federal Emergency
Management Agency of the U.S., 854 F.2d 732 (5th Cir. 1988). There, the local parish council
“passed building ordinances in conformance with FEMA regulations that required that new or
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additional structures meet certain elevation requirements.” Id. at 734. The plaintiffs in Adolph
argued that those measures constituted a Taking under the Fifth Amendment. Id. at 733.
12.
The Fifth Circuit rejected that challenge, finding it “legally unsupportable.” Id. at
735. The Fifth Circuit observed that “state flood-management authorities have frequently been
sued on allegations that their building restrictions constituted takings,” and those claims have
been “almost uniform[ly] reject[ed].” Id. at 738. For example, Adolph favorably cited decisions
by the Supreme Court of North Carolina, the Washington Supreme Court, the Connecticut
Supreme Court, and the Georgia Supreme Court, concluding that flood ordinances did not
constitute takings, even when those ordinances were either more restrictive than FEMA’s
measures or when they prohibited all residential development. Id. at 738-39 (collecting cases).
Ultimately, the Fifth Circuit concluded that “[e]ven assuming that the cost of complying with the
land-use regulations is prohibitive (and we do not decide that it is) and recognizing that the
market value of plaintiffs’ properties has diminished (a fact found by the trial court), these
factors are of no consequence here” because there was no taking regardless. Id. at 739-40.
13.
As this Court has previously explained, Adolph is distinguishable from this case
in one key respect: the plaintiffs in Adolph brought a facial challenge to the ordinance as a
whole, whereas here, DMAC brings an as-applied challenge to the denial of one specific permit.
ECF No. 252 at 39-40.
14.
Recently, the Texas Court of Appeals considered how Adolph might impact an as-
applied takings claim. City of Houston v. Commons of Lake Houston, Ltd., No. 01-21-00369-cv,
2023 WL 162737, at *9-10 (Tex. App. Jan. 12, 2023). The court concluded that Adolph is not
limited to only facial challenges—“rather, it indicates only that where a local regulation states on
its face that it tracks NFIP criteria, courts do not need to look any further to find that the
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regulation does not amount to a taking.” Id. at *10. But, although that case involved an asapplied challenge, the plaintiffs there still challenged the overall ordinance, not a specific permit
denial. That is a different question from the one here because here plaintiffs challenge the denial
of permits, not the ordinance itself.
15.
In the Court’s view, it would go too far to say that the denial of a permit pursuant
to a Flood Ordinance can never constitute a taking. “One of the principal purposes of the Takings
Clause is to bar Government from forcing some people alone to bear public burdens which, in all
fairness and justice, should be borne by the public as a whole.” Dolan v. City of Tigard, 512 U.S.
374, 384 (1994) (citation omitted). A blanket rule as advanced by the City would undermine this
purpose. For example, reliance on the Flood Ordinance could be merely a pretextual way of
targeting a property for other motives (indeed, that is what DMAC alleges here). A Flood
Ordinance could be unfairly or improperly applied. In such cases, the government would be
improperly forcing some individuals to bear public burdens.
16.
Nevertheless, that a permit is denied pursuant to a valid Flood Ordinance enacted
to comply with FEMA’s NFIP is a relevant consideration. It weighs strongly against finding that
a permit denial is a taking. Primarily, it significantly impacts the third prong of the Penn Central
analysis, which looks to the character of the government action. Further, it may be difficult to
show that a permit denial pursuant to such a local flood ordinance could significantly disrupt
reasonable investment-backed expectations, given the regulatory landscape. These considerations
are discussed in more detail below.
17.
Suffice it to say, however, that while the Court could envision a situation where
denying a permit due to a flood ordinance would constitute a taking, such a situation would
likely be quite rare and only occur in extreme cases where a city abused or improperly applied
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the ordinance. Otherwise, the Fifth Circuit’s decision in Adolph would be meaningless because
plaintiffs could simply recast a facial challenge to a flood ordinance as a host of as-applied
challenges to permit denials. Cf. Robles v. San Patricio Cnty., No. 2:21-CV-00180, 2022 WL
2619850, at *4–5 (S.D. Tex. June 6, 2022), appeal dismissed, No. 22-40420, 2022 WL
18228326 (5th Cir. Aug. 5, 2022).
2.
18.
Impact of Hurricane Harvey
When a plaintiff suffers loss after a government action, that alone does not create
a taking. Rather, “[t]he plaintiff bears the burden of proving that the government’s actions were
the direct and proximate cause of the [loss].” Cox v. Tennessee Valley Auth., 989 F.2d 499 (6th
Cir. 1993) (table); accord Esplanade Props., LLC v. City of Seattle, 307 F.3d 978, 984 (9th Cir.
2002) (“[U]nder both federal and state law a plaintiff must make a showing of causation between
the government action and the alleged deprivation.”); Love Terminal Partners, L.P. v. United
States, 889 F.3d 1331, 1343 (Fed. Cir. 2018). In the context of permitting, “because it is the
permit denial that can effect a regulatory taking, this court must examine the effect of that denial
on plaintiffs’ property interests.” Res. Invs., Inc. v. United States, 85 Fed. Cl. 447, 484 (2009).
19.
This means that the Takings Clause analysis considers only the impact of the
governmental action on the property. Here, that analysis is someone more complicated because it
is difficult to disentangle the effects of the permit denial from the effects of Hurricane Harvey.
Hurricane Harvey significantly damaged the property, causing flooding and dangerous
conditions. As a result, the property was rendered unusable. In an effort to make the property
once again usable, DMAC applied for a permit. That application was denied. These two events—
one right after the other—each undoubtably impacted the property. The Taking Clause inquiry,
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however, requires the Court to disentangle the effects of these two events which are inextricably
interconnected.
20.
As a practical matter, this has the greatest impact on two aspects of the Taking
Clause analysis. First, it impacts the economic-impact prong of the Penn Central test. This
inquiry requires the Court to compare the property’s value before the permit denial with the
value after the permit denial. But, significantly, the hurricane too reduced the property’s value
because it turned the property from one that had flooded only once in the last thirty years to a
repetitively flooding property that had flooded twice in a sixteen-month period. This reduced the
property value. This consideration is discussed in more detail below. See Section IV.C.1, infra.
21.
Second, this consideration impacts DMAC’s reasonable investment-backed
expectations. It is reasonable for governments to respond to natural disasters, including floods.
And it is reasonable for governments to respond with stronger measures where, as here, a
property has flooded twice in such a short time span. As discussed below, the Court must
consider the effect of Hurricane Harvey and the ensuing flooding when considering whether
DMAC’s investment-backed expectations were reasonable, and the extent to which the
governmental action—as opposed to the hurricane—interfered with those expectations. This
consideration is also discussed in more detail below. See Section IV.C.2, infra.
22.
Having addressed these preliminary matters, the Court now turns to the substance
of DMAC’s claims.
B. Total Taking Claim
23.
First, DMAC contends that the permit denial constituted a categorical taking
under Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). “[C]ategorical treatment
is appropriate . . . where regulation denies all economically beneficial or productive use of land.”
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Lucas, 505 U.S. at 1015. “[T]he categorical rule in Lucas was carved out for the ‘extraordinary
case’ in which a regulation permanently deprives property of all value; the default rule remains
that, in the regulatory taking context, we require a more fact specific inquiry.” Tahoe, 535 U.S. at
332; see Bridge Aina Le’a, LLC v. Land Use Comm’n, 950 F.3d 610, 626 (9th Cir. 2020) (“This
is a relatively narrow and relatively rare taking category[.]” (cleaned up)).
24.
Lucas did not fully define what constitutes “the denial of all economically
beneficial or productive use” such that the categorical rule is triggered. Still, Lucas gave some
initial guidance. First, the “typical[]” case in which there has been a total taking involves a
situation in which the government “require[es] land to be left substantially in its natural state.”
Lucas, 505 U.S. at 1018. Second, the “total deprivation of beneficial use” must be so severe as to
be “from the landowner’s point of view, the equivalent of a physical appropriation.” Id. at 1017.
25.
Although Lucas speaks of economic use, not value, courts often look to a
property’s value when determining whether there is a taking.13 Indeed, the Supreme Court has
subsequently stated that “[i]n the Lucas context, of course, the complete elimination of a
property’s value is the determinative factor.” Lingle, 544 U.S. at 539; see Tahoe, 535 U.S. at 332
(“[T]he categorical rule in Lucas was carved out for the extraordinary case in which a regulation
permanently deprives property of all value.”).
26.
Thus, courts have found that where there is a significant—but not complete—
reduction in the value of property, no categorical taking has occurred. See, e.g., Tenn. Scrap
There appears to be some inconsistency as to whether a land’s use or its value is the primary inquiry. Compare,
e.g., Del Monte Dunes at Monterey, Ltd. v. City of Monterey, 95 F.3d 1422, 1433 (9th Cir. 1996), aff’d, 526 U.S.
687 (1999) (“Although the value of the subject property is relevant to the economically viable use inquiry, our focus
is primarily on use, not value.”) with Bridge Aina Le’a, 950 F.3d at 627 (“[A]lthough value is determinative, use is
still relevant.”). At least one court has reconciled this by explaining that “it is the lack of economically viable use,
rather than impact on property values, that triggers categorical treatment for an alleged taking,” but that “the
complete elimination of a property’s value” may nonetheless “be sufficient to establish a categorical taking under
many circumstances, given the obvious correlation between uses and their market values.” Res. Invs., 85 Fed. Cl. at
486-87.
13
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Recyclers Ass'n, LLC v. Bredesen, 556 F.3d 442, 456 & n. 6 (6th Cir. 2009) (noting that the
Supreme Court has upheld diminutions in value of 75% and 92.5%); Iowa Coal Mining Co. v.
Monroe Cnty., 257 F.3d 846, 853 (8th Cir. 2001) (75% diminution in value); Bridge Aina Le’a,
950 F.3d at 627-28 (83.4% diminution); Appolo Fuels, Inc. v. United States, 381 F.3d 1338,
1347 (Fed. Cir. 2004) (92% loss in on part of land’s value and 8% loss in another part); Cienega
Gardens v. United States, 331 F.3d 1319, 1344 (Fed. Cir. 2003) (Lucas requires loss of “100% of
a property interest’s value”).
27.
That being said, Lucas may still apply even if some nominal property value
remains. “Assuming a taking is otherwise established, a State may not evade the duty to
compensate on the premise that the landowner is left with a token interest” Palazzolo v. Rhode
Island, 533 U.S. 606, 631 (2001). Thus, courts have occasionally found a Lucas taking even
when the property was worth some amount that slightly exceeded zero. E.g., Lost Tree Vill.
Corp. v. United States, 787 F.3d 1111, 1117 (Fed. Cir. 2015).
28.
Thus, when a property retains only a tiny residual value, “the relevant inquiry . . .
is whether the land’s residual value reflected a token interest or was attributable to noneconomic
use.” Bridge Aina Le’a, 950 F.3d at 628. “[A] parcel will typical[ly] retain some quantum of
value even without economically viable use.” Res. Invs., 85 Fed. Cl. at 488. “Indeed, it is not
difficult to identify other circumstances, such as purchasing a parcel to preserve developmentfree open space or natural land, in which a parcel may have some value despite its lack of
economically viable uses.” Id. Thus, if the residual value is due to a non-economic use, a Lucas
taking may nonetheless have occurred. But if the residual value results from a possible economic
use, then there is no Lucas categorical taking.
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29.
Put differently, “[w]hen there are no underlying economic uses, it is unreasonable
to define land use as including the sale of the land.” Lost Tree Vill. Corp., 787 F.3d at 1117.
“[T]he mere fact that there is one willing buyer of the subject property, especially where that
buyer is the government, does not, as a matter of law, defeat a taking claim.” Del Monte Dunes
at Monterey, Ltd. v. City of Monterey, 95 F.3d 1422, 1433 (9th Cir. 1996), aff’d, 526 U.S. 687
(1999). But when “there are other underlying economic uses,” courts “consider the plaintiffs’
ability to sell the properties in determining whether there has been a total taking.” Nekrilov v.
City of Jersey City, 45 F.4th 662, 671 n.3 (3d Cir. 2022),
30.
Thus, “[t]he crucial inquiry” is “whether the property use allowed by the
regulation is sufficiently desirable to permit property owners to sell the property to someone for
that use.” Park Ave. Tower Assocs. v. City of New York, 746 F.2d 135, 139 (2d Cir. 1984)
(cleaned up); accord Nekrilov, 45 F.4th at 671.
31.
That being said, a property may have an economically beneficial use even if it is
not profitable. “[T]he central question for a total taking is not ‘whether the regulation allows
operation of the property as a profitable enterprise for the owners, but whether others might be
interested in purchasing all or part of the land for permitted uses.’” Nekrilov, 45 F.4th at 671
(quoting Park Ave. Tower, 746 F.2d at 139); see MacLeod v. Santa Clara Cnty., 749 F.2d 541,
548 (9th Cir. 1984) (“We are unwilling to equate immediate overall profitability with the
requirement of ‘economic viability.’”). A plaintiff must show that “across all potential
purchasers,” there is no economically viable use of the property. Nekrilov, 45 F.4th at 671.
32.
For example, in Nekrilov, 45 F.4th 662, plaintiffs challenged a regulation barring
short-term rentals. One set of plaintiffs had a monthly mortgage payment of $3,300, but could
only earn $2,600 per month once the regulation too effect (down from $4,500 per month absent
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the regulation). Id. at 668. The Third Circuit nonetheless concluded that the property retained
economic value. Id. at 670-71. The fact that, for one set of plaintiffs, the rental income was less
than the mortgage payment did not undermine this conclusion because the property was still
being put to economic use. This application is a logical outgrowth of Lucas’s admonition that
there is no categorical taking even when there is a 95% reduction in value. 505 U.S. at 1019 n.8.
33.
Likewise, a property does not have to immediately have value to still have some
economically beneficial use. Instead, “[h]olding property for investment purposes can be a ‘use’
of property.” MacLeod, 749 F.2d at 547 n.7.
34.
Applying this standard here, it is clear that DMAC has failed to show that no
economically beneficial use of the property remained. It is true that the former use of the
property as a multi-family HUD subsidized apartment complex was no longer possible. But the
Court is not persuaded that no other economically beneficial use remains.
35.
The Court also notes the narrow scope of the City’s permit denial. The City
denied one specific permit application: to repair Arbor Court so that it could function as it
previously existed. The City did not deny permits for any other use. And the Court is persuaded
by testimony from City officials explaining that an owner may use the property in any way that it
chooses, as long as the use complied with the ordinance. The Court did not hear testimony
indicating that DMAC ever looked into any way to comply with health and safety.
36.
At some points, DMAC seems to suggest that the property was in a total loss state
because there was debt on the property, and the payment on the debt would far exceed the
income that the property could generate after the permit denial. But the fact that DMAC had
taken out loans to finance the property does not impact the total taking analysis. As discussed
above, the question is whether any owner could use the property for an economically beneficial
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use. See Nekrilov, 45 F.4th at 671. So, even if DMAC suffered a heavy loss, and even if DMAC
could not use the property, that alone does not create a Lucas taking. Rather, if it could sell the
property for a fraction of what it had originally paid, and the buyer could then use it for an
economically beneficial use, there has been no total taking, even if DMAC cannot repay its
debts.
37.
In sum, Lucas categorical takings are limited to the extraordinary circumstances
in which no economically beneficial use of the property remains. This is not such a
circumstance. Thus, no categorical taking occurred.
C. Penn Central
38.
When “a regulation places limitations on land that fall short of eliminating all
economically beneficial use, a taking nonetheless may have occurred, depending on” how it fares
under the Penn Central framework. Palazzolo, 533 U.S. at 617 (citing Penn Central, 438 U.S. at
124. Thus, the next question is whether DMAC has shown that it suffered a taking under Penn
Central.
39.
As discussed above, the Penn Central inquiry is a factual inquiry “require[s]
considering factors such as the economic impact of the regulation, its interference with
reasonable investment-backed expectations, and the character of the government action.” Horne,
576 U.S. at 360. Although courts typically address all three of these factors, when “the force of
[one] factor is so overwhelming,” that one factor alone may dispose of the taking question.
Ruckelhaus v. Monsanto Co., 467 U.S. 986, 1005 (1984).14 The Court considers each factor in
turn. This inquiry “necessarily entails complex factual assessments of the purposes and economic
effects of government actions.” Yee v. City of Escondido, 503 U.S. 519, 523 (1992).
This is not true of the first factor because the Supreme Court has explained that “a mere diminution in the value of
property, however serious, is insufficient to demonstrate a taking.” Concrete Pipe, 508 U.S. at 645.
14
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1.
40.
Economic Impact
First, the Court must examine the economic impact of the permit denial. Although
diminution in value along cannot establish a taking, Penn Central, 438 U.S. at 131, a greater
diminution in value weighs more heavily in favor of finding that a Taking has occurred. “[I]t is
not proper to measure economic impact based on a “hypothetical economic result” that assumes
a state of affairs that did not exist.” Bride Aina Le’a, 950 F.3d at 631 (quoting MHC Fin. Ltd.
P’ship v. City of San Rafael, 714 F.3d 1118, 1127 (9th Cir. 2013)). Put differently, the Court
must consider only the diminution in value that resulted from the governmental action—here, the
permit denial. The Court cannot consider the diminution in value that resulted in other factors
that reduced the value of the property—here, reduction in value that resulted from repetitive
floods at the property.
41.
Here, the economic impact of the regulation cuts in favor of finding a taking. As
discussed above, the economic impact of the permit denial was to reduce the property value from
between $12 million and $18 million to somewhere between $3.5 million and $6.9 million,
including both the land and the HAP contract.15 This is a reduction in value between 42.5% and
80.5%. The loss of millions of dollars of property value, amounting to as much as 80% of the
land is significant. The Court recognizes the significant economic detriment that DMAC endured
as a result of the permit denial.
To be clear, the Court does not credit the City’s argument that the Taking Analysis cannot count the HAP contract
because the HAP contrast was lost in October 2018—several months after the permit denial. “Because it is the
permit denial that can effect a regulatory taking, this court must examine the effect of that denial on plaintiffs’
property interests.” Res. Invs, 85 Fed. Cl. at 484. Put differently, causation requires a showing of what “would have
occurred if there had been no government action at all.” St. Bernard Par. Gov’t v. United States, 887 F.3d 1354,
1363 (Fed. Cir. 2018) (cleaned up). So, if the permit denial had caused DMAC to lose the value of the HAP
contract, then the Court would consider that loss in value even if that value occurred after the permit denial because
the Court’s analysis looks at the effects of the permit denial. However, because the Court found that DMAC retained
the HAP contract’s value, it need not delve further into this issue.
15
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42.
But that economic impact alone is not sufficient to create a taking. Indeed, this
diminution in value is less than other situations in which courts have routinely found that no
takings occurred. See, e.g., Pulte Home Corp. v. Montgomery Cnty., 909 F.3d 685, 696 (4th Cir.
2018) (assuming 83% reduction in value); MHC, 714 F.3d at 1127 (81% reduction in value);
Colony Cove Props., 888 F.3d at 451 (diminutions ranging from 75% to 92.5%); CCA Assocs. v.
United States, 667 F.3d 1239, 1246 (Fed. Cir. 2011) (“[W]e are aware of no case in which a
court has found a taking where diminution in value was less than 50 percent.” (cleaned up));
Hadacheck v. Sebastian, 239 U.S. 394 (1915) (value reduced by 92.5% from $800,000 to
$60,000).
43.
Thus, the Court finds that this prong of the Penn Central analysis cuts in favor of
a finding that a taking occurred. As discussed below, however, this prong is outweighed by the
other two factors, which together clearly indicate that no taking occurred.
2.
44.
Reasonable investment backed expectations
The next prong of the Penn Central analysis asks the court to consider the extent
of the government’s inference with reasonable investment-backed expectation.
45.
Typically, the reasonable investment-backed expectations are evaluated at the
time that the owner purchased the property. Love Terminal Partners, 889 F.3d at 1345. Thus,
“‘what is relevant and important in judging reasonable expectations’ is ‘the regulatory
environment at the time of the acquisition of the property.” Bridge Aina Le’a, 950 F.3d at 634
(quoting Love Terminal Partners, 889 F.3d at 1345) (internal quotation marks omitted). That is
because “those who do business in the regulated field cannot object if the legislative scheme is
buttressed by subsequent amendments to achieve the legislative end.” Concrete Pipe & Prods.,
508 U.S. at 645 (cleaned up). Indeed, the Supreme Court has explained, “[a] reasonable
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restriction that predates a landowner’s acquisition, however, can be one of the objective factors
that most landowners would reasonably consider in forming fair expectations about their
property.” Murr, 582 U.S. at 398. Thus, the existence of the Flood Ordinance must be factored in
to whether DMAC’s expectations were reasonable.
46.
In addition to the existing regulatory regime at the time of acquisition, “courts
must look to the physical characteristics of the landowner’s property,” including “the physical
relationship of any distinguishable tracts, the parcel’s topography, and the surrounding human
and ecological environment.” Id. The Supreme Court has noted that “[i]n particular, it may be
relevant that the property is located in an area that is subject to, or likely to become subject to,
environmental or other regulation.” Id. For example, “[c]oastal property may present such unique
concerns for a fragile land system that the State can go further in regulating its development and
use than the common law of nuisance might otherwise permit.” Lucas, 505 U.S. at 1035
(Kennedy, J., concurring). Here, this means that this prong of the analysis must account for the
fact that the Property was in a flood plain, largely in a floodway, and had been repetitively
flooded.
47.
For example, in Flint v. County of Kauai, 521 F. Supp.3d 978 (D. Haw. 2021),
another district court analyzed the effect of a year-long emergency rule limiting access to an area
after flooding caused widespread destruction and triggered a number of landslides. The court
explained that “Plaintiffs’ expectation that they could utilize their property as a vacation rental
with absolutely no limitations or restrictions is not reasonable.” Id. at 991. “By contrast, it is
objectively reasonable that the government would act to protect the public in response to a major
natural disaster.” Id. Put differently, when there is a major natural disaster, reasonable
individuals expect the government to take steps to respond. That the government subsequently
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did take those steps can hardly disrupt reasonable expectations. This also aligns with a principle
recognized by the Fifth Circuit in Adolph, 854 F.2d at 738: tightly managed flood regulations are
an important part of the overall regulatory landscape.
48.
DMAC argues that they reasonably expected the City to issue repair permits after
Hurricane Harvey for a few reasons. First, the City quickly issued repair permits after the Tax
Day Flood. DMAC’s reliance that the permits would be granted again because they had been
granted in the past was misplaced. Cf. Concrete Pipe, 508 U.S. at 646 (reliance on original
limitation was “misplaced, there being no reasonable basis to expect that the legislative ceiling
would never be lifted”). Moreover, DMAC itself view the Tax Day Flood as “an isolated
incident.” ECF No. 298 at 13:2-3. After Harvey, the flooding was repetitive, not isolated.
49.
Second, the DMAC notes that the City had not ever previously relied on the
section of the Flood Ordinance that allowed it to deny repair permits when there is a danger to
life or property. But this too is not enough. Hurricane Harvey—hitting Houston and Arbor Court
just a year after the Tax Day Flood—was hardly expected. It is reasonable that the City would
use new tools in response to a disaster of this magnitude.
50.
Put simply, DMAC’s investment-backed expectations were disrupted. But nature,
not the City, was the primary disruptor of those expectations. In particular, when DMAC bought
Arbor Court in 2016, it bought a property that had not flooded in 30 years. It could not have
known that DMAC would shortly flood twice in a sixteen-month period with three-to-four feet of
water each time. Once this significant flooding had happened, the City’s response was
reasonable. So, the repetitive flooding events—not the city—disrupted DMAC’s investment
backed expectations. Put differently, if DMAC had known, at the time that it purchased Arbor
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Court, there would have been two such flood events in such a compressed time frame, it would
not have been reasonable to expect the City to continue as though nothing had happened.
51.
Thus, this prong of the Penn Central analysis cuts against finding that the permit
denial amounted to a taking.
3.
52.
Character of government action
Finally, the Court must consider the character of the government action. “The
character of the governmental action factor requires a court to consider the purpose and
importance of the public interest underlying a regulatory imposition, by obligating the court to
inquire into the degree of harm created by the claimant's prohibited activity, its social value and
location, and the ease with which any harm stemming from it could be prevented.” Maritrans
Inc. v. United States, 342 F.3d 1344, 1356 (Fed. Cir. 2003) (cleaned up).
53.
“There is little doubt that it is appropriate to consider the harm-preventing
purpose of a regulation in the context of the character prong of a Penn Central analysis.” Rose
Acre Farms, Inc. v. United States, 559 F.3d 1260, 1281 (Fed. Cir. 2009). “Interference with
property is less likely to be considered a taking when it arises from some public program
adjusting the benefits and burdens of economic life to promote the common good.” Clayland
Farm Enterprises, LLC v. Talbot Cnty., Maryland, 987 F.3d 346, 355 (4th Cir. 2021) (cleaned
up). And, again, referring back to the Fifth Circuit’s decision in Adolph, 854 F.2d at 738, flood
management is the type of government action that is typically permissible under the Taking
Clause analysis.
54.
Here, the character of the government action is a highly significant factor that
weighs heavily in the City’s favor. As a factual matter, the Court has found that the rationale for
the City’s permit denial was properly focused on health and safety. The Court has rejected the
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arguments that this rationale was pretextual or that the City improperly targeted Arbor Court.
Because the character of the government action related to flood management and was to ensure
health and safety, this prong of the analysis strongly undercuts any argument that a taking
occurred.
55.
In sum, although the economic impact of the permit denial cuts in favor of finding
that there was a taking, the other two factors—interference with reasonable investment-backed
expectations and character of the government action—substantially outweigh the first factor. No
taking occurred.16
IV.
CONCLUSION
For the foregoing reasons, the Court finds that DMAC has not established that the permit
denial at issue amounted to an unconstitutional taking under either Lucas’s categorical rule or the
Penn Central balancing test. Judgment is entered in favor of the City. DMAC shall take nothing.
IT IS SO ORDERED.
Signed at Houston, Texas on July 11, 2023.
_______________________________
Keith P. Ellison
United States District Judge
16
For the same reason that there was no permanent taking, there was also no temporary taking.
52
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