The Takings Clause of the Fifth Amendment provides that government may not take private property without just compensation. The courts have held that this clause requires government to compensate landowners for losses caused by government regulation in certain situations- most notably when regulation leads to a permanent physical invasion of property (1) or makes property worthless (2).
But even very restrictive land use regulations often reduce, rather than eliminating, the value of land to a developer. In this situation, courts consider the following factors in deciding whether a taking has occurred: (1) the economic harm caused by a government regulation, (2) the effect of the regulation on the landowner's investment-backed expectations, and (3) something called the "character of the government action." (3)
The first two factors are relatively easy to understand, at least in principle: the "economic harm" factor means the extent to which regulation diminishes the value of land, and the "investment-backed expectations" factor refers to whether a plaintiff should have reasonably foreseen such harm before acquiring land or making development plans (4). Thus, both factors essentially address the question: to what extent has regulation harmed a landowner?
But the third, "character" factor is less clear. The Supreme Court has stated that this factor addresses whether regulation "amounts to a physical invasion or instead merely affects property interests through ‘some public program adjusting the benefits and burdens of economic life to promote the common good'."(5) State courts and lower federal courts are divided as to the meaning of this language.
Some courts hold that the "character of the government action" means the strength of the state interest favoring regulation. Under this "public purpose" interpretation of the character factor, (6) courts weigh the two "harm to landowners" factors against the strength of the policy favoring regulation. If the state has a really good reason for regulation and the landowner's losses are small, the state wins. If the landowner's harm is severe and the argument for regulation is weak, the landowner wins.
Other courts hold that the "character" factor is relevant only when government conduct "amounts to a physical invasion." (7). Where government has not physically invaded property, the "character" factor favors the government; thus, takings plaintiffs rarely win under this theory.
A third set of courts hold that the "character" inquiry relates to whether "the burden of the regulation falls disproportionately on relatively few property owners." (8) For example, in one Minnesota case, the court found a compensable taking where the plaintiff was one of only a few landowners to be in a "parks and recreation" zone. (9). On the other hand, if plaintiff and his neighbors are all affected by the same regulations, takings liability is less likely.
Because most state and lower federal courts have not yet decided which test to follow, the result of any given takings claim is unclear- which means that planners and developers proceed at their own peril.