Federal Circuit finds potential taking of property when federal statutes denied developers the right to prepay mortgages to escape limits on rent increases

The Federal Circuit held that two federal statutes may have effected takings of property without just compensation by preventing owners from exercising contractual rights to prepay government-insured mortgages on their housing projects which would have the effect of terminating government rent restrictions designed to keep the housing affordable by low-income families. Anaheim Gardens, L.P. v. United States, 953 F.3d 1344 (Fed. Cir. 2020). The Federal Circuit distinguished between owners who purchased the properties after enacted of the statutes from those who had purchased before the statutes were enacted.


The initial agreements involve promises by developers to limit rent increases in exchange for obtaining low-cost mortgages insured by HUD (Department of Housing and Urban Development). The mortgages lasted 40 years but the developer/borrower was entitled to prepay the mortgage after 20 years and be freed from the restrictions on raising the rents. The federal "preservation statutes" were passed to eliminate the prepayment option because Congress was worried that too many borrowers would exercise the prepayment optin and thus remove many units from the affordable housing market earlier than anticipated.


The court divided the developers into three groups.


The first group owned their properties before passage of the preservation statutes and sold them after the enactment of those statutes to buyers who promised to preserve the rent restrictions. The Federal Circuit court held that application of the preservation statutes to this group could not constitute an unconstitutional taking of property without just compensation because they bought the property knowing that the prepayment option was not available; they therefore could not have an reasonable, investment-backed expectations. While this is not a rigid rule, the court found it to be applicable in these circumstances because "a sophisticated investor voluntarily purchased its property with knowledge that it had no prepayment option" and therefore "the complete lack of investment-backed expectations overwhelmingly outweighs the other Penn Central factors."


The second group owned its property before passage of the preservation statutes and agree with HUD to keep existing rent restrictions in return for financial incentives. The third group bought the property after enactment of the preservation statutes and sold the property to a buyer who promised to preserve the rent restrictions. As to these groups, the Federal Circuit rejected the conclusion of the trial court that the right way to measure economic impact was the difference in the fair market value of the property with and without the restriction. It held that an alternative reasonable measure was the lost net income due to the restriction, and remanded to allow the trial court to do a new analysis of the economic impact of the regulation, and then to do a full Penn Central analysis, given that economic impact, along with the character of the government action, and the extent to which the preservation statutes interfered with reasonable, investment-backed expectations.

See also: Takings