520 E. 81st St. Assoc. v. State of New York, 99 N.Y.2d 43 (2002)

When a temporary regulatory taking delays an imminent sale of property, just compensation requires awarding the lost use of sale proceeds from the time of the taking, not merely the interim decline in the property’s value.

Summary

520 East 81st Street Associates sued New York State for a temporary regulatory taking of 39 apartment units due to a law benefiting Lenox Hill Hospital. The Court of Claims determined the highest and best use of the apartments was for condominium sales. The court awarded damages for the decline in the property’s value between 1985 (when the sale would have occurred) and 1994 (when the taking ended), plus operating losses, with statutory interest. The claimant argued it should receive interest on the 1985 sale value to compensate for the lost opportunity to earn a return on those proceeds. The New York Court of Appeals modified the lower court’s decision, holding that just compensation requires awarding the lost use of sale proceeds from the time of the taking.

Facts

Lenox Hill Hospital leased 39 apartments in the claimant’s building, subletting them to employees. These apartments became subject to New York City’s Rent Stabilization Law. In 1981, the claimant began converting the units to condominiums. In 1983, changes to the Rent Stabilization Law limited subletting. Lenox Hill Hospital continued subletting without the claimant’s permission. Claimant intended to terminate the leases on July 31, 1985, and sell the apartments as condominiums. However, the enactment of Chapter 940 of the Laws of 1984 allowed not-for-profit hospitals to sublet rent-stabilized apartments without restrictions, preventing the claimant from selling the units as planned.

Procedural History

The claimant sued the State for a temporary regulatory taking. The Court of Claims found a taking occurred and determined the value of the apartments in 1985 and 1994. The court awarded damages based on the difference in value, plus operating losses, and statutory interest. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

Issue(s)

Whether just compensation for a temporary regulatory taking that delays the imminent sale of property should be measured by the lost use of sale proceeds from the time of the taking, or by the interim decline in the property’s value.

Holding

Yes, because just compensation requires putting the property owner in the same position it would have been in had the taking not occurred; in this case, that means compensating the claimant for the lost opportunity to invest and earn a return on the proceeds from the sale of the condominium units in 1985.

Court’s Reasoning

The Court emphasized that just compensation aims to put the property owner in the same relative position as if the taking had not occurred. When the best use of the property during the taking period would have been sale as condominium units, damages should reflect that intended use. The court found that the lower court erred in calculating damages based solely on the diminution in value between 1985 and 1994, as this did not account for the lost opportunity to earn a return on the sale proceeds. The Court stated, “[W]e assume a person who received the money value of his or her property as of the date of the taking has a beneficial use available for these funds. Interest in this context is not an award of prejudgment interest on a liquidated sum in the traditional sense, but is a measure of the rate of return on the property owner’s money had there been no delay in payment.” The Court directed the Court of Claims to determine and apply the appropriate rate of return on the 1985 sale proceeds over the nine-year taking period. It noted that the statutory interest rate would be presumptively reasonable unless the claimant could prove a higher prevailing market rate. The Court distinguished this situation from cases where the property’s best use was as rental property, where compensation is typically based on lost rental value and any diminution in value. The ruling provides a practical guide for determining damages when a regulatory taking prevents a planned sale, underscoring the importance of considering the property owner’s intended use and lost investment opportunities.