Pay up, Uncle Sam!

As Irene Dieter reported Thursday in the Alameda Sun, a federal district court judge has upheld the U.S. government’s “taking” of McKay Avenue, the street that connects Central Avenue and the 3.899 acres of land located on the shoreline at Crab Cove that the feds refer to as “Neptune Pointe.”

For purposes of resolving the remainder of the dispute between the State of California and the federal government over the use of the Neptune Pointe parcel, which is zoned for open space and which the East Bay Regional Park District wants to buy in order to expand Robert Crown State Beach, the most important sentence in the judge’s opinion may be the last:

“The issue of just compensation remains to be resolved.”

The “takings clause” of the Fifth Amendment to the U.S. Constitution provides that private property – which includes property owned by another governmental entity – shall not “be taken for public use, without just compensation.”

As interpreted by the courts, this clause imposes two constraints on the government’s exercise of its power of eminent domain.  First, the government’s taking of property must be for “public use.”  Second, the government must pay the owner of the condemned property “just compensation.”

U.S. District Judge William Alsup held that the federal government’s seizure of McKay Avenue from the State was done for a “public purpose” and thus satisfied the first requirement.  (More on the judge’s opinion later).  But the second requirement remains to be met:  the feds still must pay “just compensation” to the State.

And this is where it could get interesting.

The U.S. Supreme Court has interpreted the “just compensation” mandate to mean that the government must pay the property owner the “fair market value” of the property “at the time of the taking.”  The “fair market value,” in turn, is the price that a willing buyer would agree to pay and a willing seller would agree to accept.

In this case, the federal government took title to McKay Avenue when it filed a “Declaration of Taking” on April 9, 2014.  Although the Declaration stated that the property was being taken for the “the continuing operation of the federal building known as the ‘Alameda Federal Center,’” no one, including Judge Alsup, was fooled.  “The only real reason the United States seeks to obtain title to McKay Avenue in fee simple,” the judge later wrote, “is to secure easements for a prospective private development of the vacant federal parcel [i.e., Neptune Point].”

And everyone likewise knew in April 2014 that “prospective private development” was not just a hypothetical possibility.  In October 2011, the federal government entered into a contract to sell the Neptune Pointe parcel to Tim Lewis Communities, a Sacramento-based housing developer, which announced plans to build 48 single-family homes on the site.  Then, in July 2012, in connection with the adoption of a new Housing Element, the City of Alameda re-zoned the parcel to permit residential development at Neptune Pointe. Thereafter, Tim Lewis paid – 33 times – to extend the closing date of the sale.

McKay Avenue highlighted

The property seized by the feds (in yellow)

How did McKay Avenue fit into this scheme?  The street provides the only access for utilities and vehicles to the Neptune Pointe parcel.  And the current owner of McKay Avenue – the State – wasn’t willing to grant an easement that would allow a private developer to use the street for this purpose.

When the State acquired McKay Avenue in 1961, the feds retained easements for utility- and street-use access to the federal property on the west side of the street extending from Central Avenue to the shoreline, which included the parcel the feds later dubbed “Neptune Pointe.”  But the State maintained that the utility easement lasted only as long as the federal government owned the land.  If any portion of the federal property was sold, the State insisted, the easement would not run in favor of the buyer.

Taking title to McKay Avenue was the federal government’s solution to this problem.  Once the feds owned that property, they could grant the easements that would allow Tim Lewis the access it needed to the Neptune Pointe parcel.  Ownership of McKay Avenue, and the ability to grant the access easements, thus was key to the deal between the federal government and Tim Lewis.  And so the “just compensation” issue can be phrased as:  As of April 2014, what would a willing buyer have agreed to pay, and a willing seller have agreed to accept, for property that would enable the long-delayed sale of Neptune Pointe to go through?

We don’t know the answer to that question, but we are pretty sure that it’s more – far more – than the $10 the federal government deposited with the court when it filed its Declaration of Taking.

Consider this:  The contract between the federal government and Tim Lewis obligated the developer to make progress payments toward the purchase price.  It also allowed Tim Lewis to obtain extensions of the closing date by making additional payments.  Between October 2011 and October 2014, when the feds terminated the contract, Tim Lewis paid a total of $617,000 to the federal government to keep the deal alive.

During most of those three years, the only obstacle to closing the transaction was the federal government’s inability to ensure access to the Neptune Pointe parcel via McKay Avenue.  Arguably, the amount paid by Tim Lewis during that period reflects how much the developer thought the access right it was relying on the feds to obtain was worth.  If so, it can be seen as one measure of “fair market value,” and thus it would form the basis for determining the“just compensation” to which the State is entitled.

Alternatively, it should be possible for a real estate appraiser to estimate the value of the Neptune Pointe parcel as a housing site with and without the access provided by McKay Avenue.  Arguably, the difference represents what control of the street was worth in April 2014.  If so, this would be another measure of the “fair market value” of McKay Avenue, and thus it, too, could support a determination of the “just compensation” owed to the State.

Necessarily, the sum the federal government will have to pay the State will reduce the net proceeds it receives when and if sells the Neptune Pointe parcel.  But, thanks to the citizens’ initiative adopted by a reluctant Council in July 2014 – after the taking occurred – that parcel is now zoned for open space.  It is now worth far less than it would have been had it retained its residential zoning.

It would be ironic indeed if the amount the feds receive from the eventual sale of the Neptune Pointe parcel, based on its current value as open space, turns out to be less than the amount they have to pay the State for McKay Avenue, based on its past value for providing access to a parcel intended and zoned for residential development.

If our analysis is right – and we defer to the State’s and EBRPD’s lawyers’ expertise in eminent domain law – we can see the makings of a settlement to resolve this dispute once and for all.  When the federal government put the Neptune Pointe parcel up for auction, EBRPD offered $1.5 million.  Suppose EBRPD was willing to put that cash – or something close to it – back on the table.  The State would agree to allow the federal government to continue to own McKay Avenue (with access easements granted to the State and EBRPD), and to waive its right to “just compensation” for the taking.

Under these circumstances, it might make sense for the federal government to declare victory, take the money, and run.  If the feds want more cash to cover their “relocation costs,” they can always sell the portion of the federal property located closer to Central Avenue to a private developer.  We understand that there are those who consider this site perfect for a resort.

We can’t leave this topic without a few comments about Judge Alsup’s opinion (which we know the judge won’t hold against our client the next time S&H appears before him).

Newsworthy as it was, the judge’s opinion was foreshadowed months ago by his ruling on the federal government’s motion to strike the State’s affirmative defenses to the complaint.  True, the State defeated the motion, but the grounds stated in the opinion were that the complaint failed to cite a federal statute authorizing the taking.  The opinion went on to say, in what the judge conceded was dictum, that “this order sides with the United States on the next issue of ‘public use.’”  Prior decisions, Judge Alsup wrote, “support the proposition that the United States may condemn property pursuant to a disposal statute in order to secure access by the buyer to the disposed property and in doing so may also consider the condemnation’s effect on the value of the disposal property.”

The order thus gave the federal government the road map to ultimate victory.  Find a relevant statute, the judge was telling the feds.  If you do, I’ll buy your argument that you can condemn property in order to make other property more saleable.  The feds followed the road map, and the judge kept his word.

The last two points may be of interest primarily to lawyers, but since this is a town in which even non-lawyers feel free to make legal pronouncements, usually with the utmost confidence, we’ll offer them anyway.

First, the opinion imposes a very low hurdle for the federal government to justify taking private property.

All the federal government needed to show, Judge Alsup held, was that the condemnation of McKay Avenue was “rationally related” to a “conceivable” public purpose.  It didn’t matter that, even though “prospective private development” was the “only real reason” for the condemnation, the GSA had terminated its contract with Tim Lewis and it was unlikely ever to be able sell the Neptune Pointe parcel to a private developer.  Nor did it matter that, even though the statute authorizing condemnation required a “favorable” ratio between the proceeds from the sale of the property and the costs of relocating the government offices, the GSA “may have miscalculated” that ratio.

We don’t quarrel with Judge Alsup’s legal scholarship – he cited a U.S. Supreme Court case in support of his standard – but the test still strikes us as extremely lenient.  In constitutional law, “rational basis” is the weakest standard used to determine the validity of a statute.  Almost any law enacted by a legislative body can withstand that level of scrutiny.  But even then, the court looks to the actual goal the statute was intended to achieve.  A merely “conceivable” purpose won’t do.  Apparently, when it comes to eminent domain, the only limit on the exercise of the government’s power is the extent of the GSA’s imagination.

Second, the opinion allows the government to seize property even though the taking creates no benefits for the public — just more money for the government.

As his earlier ruling portended, Judge Alsup held that condemning McKay Avenue in order to facilitate a potential future sale of the Neptune Pointe parcel was a legitimate “public purpose.”  Or, as he put it, “Interpreting the condemnation authority with liberality and incorporating the consideration of advantageous liquidation, … this order finds that GSA’s single integrated effort to dispose of surplus property is rationally related to a conceivable public purpose though no buyer is yet lined up.”  Again, the judge cited prior cases supporting his holding, but its implications strike us as scary.

As it happens, Ms. Dieter’s article reporting the case appeared just after we had finished our column on Council’s approval of Site A at Alameda Point.  There, we discussed the parcel known as North Housing, 37.36 acres currently owned by the U.S. Navy on the northern waterfront.  Once a Finding of Suitability for Transfer is issued, the federal government intends to put this land up for sale to a private developer.

And you know what you’ll find right across Willie Stargell Avenue from the North Housing parcel?  We believe it’s something called “Bayport.”

The North Housing parcel now contains 282 units of vacant, dilapidated housing.  But what if the federal government was able to add to the package it puts on the market an existing development containing already built expensive homes?  Wouldn’t that make the deal more attractive to a prospective buyer?

You might laugh at the prospect that the feds really would condemn Bayport to make it easier, and more profitable, to sell the North Housing parcel.   But the government could argue that it was part of a “single integrated effort to dispose of surplus property.”  And if Judge Alsup got the case, who knows?  He could rely on the precedent he established in the McKay Avenue matter.

All we can say is that, if we lived in Bayport, we wouldn’t be applauding the judge’s decision too loudly.


Order denying motion to strike: DCt opinion denying motion to strike

Order granting motion for summary judgment: DCt opinion granting s.j.

Declaration of Taking: Declaration of Taking

Law review articles on “just compensation”: Columbia L. Rev. article on just compensation (113 Col. L. Rev. 593 (2013));  UC Davis article on just compensation (41 U.C. Davis L. Rev. 239 (2007))

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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19 Responses to Pay up, Uncle Sam!

  1. Keith Nealy says:

    Can the Federal government overrule the present open space zoning?

    • No — but my understanding is that municipal zoning laws do not apply to the use by the federal government of federally owned property.

      • Keith Nealy says:

        So if the Feds sell it to a private developer is there any way they can force rezoning? If they can’t, why would any developer want it. The only ones who would would be EBRPD.

      • Re-zoning would require approval by the voters.
        I agree with your conclusion that no private developer would want to buy the Neptune Pointe parcel under these circumstances, and so did Judge Alsup, who called it the State’s “best point.” “Nevertheless,” he went on to rule, “the Court remains of the view that the government is entitled to clear up this thicket of problems one at a time and, right now, it is trying to clear up the problem of access to the parcel via McKay Avenue.”

  2. David says:

    “You might laugh at the prospect that the feds really would condemn Bayport to make it easier, and more profitable, to sell the North Housing parcel”

    I do laugh. This is ridiculous. Bay port is already built out and subdivided. If it was green or brownfield as one parcel then just perhaps, but what developer would want to purchase some 400 existing, occupied, bay port homes? To do what with?

    • David,
      You are laughing at the Bayport seizure scenario, but the owners of South Shore might not laugh at this scenario: A brand new post office is built somewhere else in Alameda. The land on which the post office sits, which is not owned by South Shore Center, is turned over to the GSA for disposal. The highest land value for that parcel would obviously be for a multi-story residential building. But in order to comply with new building codes and provide adequate ingress and egress for residents and the fire department, and thereby make the property marketable, the GSA seizes the roadway between the post office and the parking lot, along with part of the parking lot to meet street code widths. Plus, the street leading from Shoreline Drive into the center would add value to the property if it were a gated private entrance.

      But why stop there? They could also seize the Superior Court next door.

  3. When the feds gave 90 acres to the state in 1961 for what was to become a state beach, they included McKay Avenue. It was a package deal. The feds retained easement rights so they could conduct their own business, including tearing up the street if necessary.

    And it would be fair to assume that a park is forever and government offices can come and go. If the feds had been concerned about future marketability of their property in 1961, they would have retained ownership of McKay Avenue and simply granted easement rights to the state. But they consciously chose not to do that. Now the feds want to renege on the deal, and the judge has become a compliant functionary.

  4. Lauren Do says:

    Actually across Willie Stargell from Bayport is existing and occupied Coast Guard housing, and not the North Housing parcel.

  5. Steve Gerstle says:

    Bayport flashback:

    I remember participating in the candlelight march that began at Saint Barnabas to save the housing.

  6. Steve Gerstle says:

    One other note about Bayport. When push comes to shove in Alameda, it is clear who gets shoved.

    From my perspective, this appears to be government policy. When Webster Street was redeveloped about 15 years ago, that redevelopment ended at Pacific Avenue. The area between Pacific Avenue and Atlantic Avenue was left a treeless expanse of fast food, liquor stores, gas stations and tire shops — clearly delineating the boundaries of Alameda’s low income area.

  7. Irene says:

    I always learn something from your writing and research. Your contribution to our community is truly appreciated.

  8. No one has mentioned this lately, but the GSA never produced the letter demanded by the Bay Conservation and Development Commission (BCDC) that would explain how the taking of McKay Avenue is consistent with state policies and thus not a violation of the Coastal Zone Management Act. The BCDC letter is here:

    McKay Avenue is part of a Priority Use Area as described in the San Francisco Bay Plan, which is a state plan, or policy, with which federal projects have to be consistent. The taking of McKay Avenue constitutes a project under the CZMA. Originally GSA argued to BCDC that the taking of McKay Avenue was pursuant to a plan (Neptune Pointe housing) that BCDC approved. BCDC said they never approved the taking of the street. But now, even that argument is moot.

    Now the taking of McKay Avenue is related only to the potential sale to an unknown future owner for unknown future purposes. How can that possibly be consistent with the San Francisco Bay Plan?

  9. David says:

    If there’s anything we, as a community, could and should do with the Coast Guard and the feds, it’s get them to re-locate Coast Guard Island to Alameda Point, and build more/use existing deepwater piers there.

    The current location at CGI prevents the construction of any bridges west of the island, because USCG cutters aren’t going to wait for a bridge to left to get out of the estuary. So, as long as USCG is at CGI, there will never be a bridge west of Park Street.

    Now, there is still no place to *land* a bridge on the Oakland side of the estuary, and it’s doubtful the Port of Oakland would yield any territory for one, but moving USCG at least opens the possibility of building a bridge.

  10. Memo to commenters:

    Given the number of comments about Bayport, it appears that some readers took the last part of the column as seriously suggesting that the federal government would condemn the homes there in order to enhance the sales value of the North Housing parcel. Instead, all I was trying to do was to offer an absurd example of what the reasoning in Judge Alsup’s opinion could lead to. And, although I can’t speak for Richard Bangert, I suspect he was doing the same in his comment about condemning the Superior Court building in order to improve the marketability of the Post Office. Let me state for the record that I don’t think the feds in fact are considering taking either action, and, since I doubt the GSA reads the Merry-Go-Round, I hope neither Richard nor I has planted any ideas in their minds.

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