The New York Wrecking Ball

Tuesday, February 25, 2020

New York City’s dicey legal system has garnered some more unwelcome publicity lately. In January 2019, Judge W. Franc Perry held that the building permit issued for the construction of the high-rise on 200 Amsterdam Avenue had been issued illegally, even though the developer had complied with all the applicable rules that the City’s Department of Buildings (DOB) required for a permit. The shoe dropped when thirteen months later he ordered the developer to lop off the top half of the 52-story building in order to bring it in compliance with the zoning code.

Just how did this sorry spectacle come to pass? As my NYU colleague Roderick Hills wrote in City Journal, the permit had been issued in 2017 pursuant to a 1978 guidance of the DOB, known as the Minkin Memo, which stated “a single zoning lot… may consist of one or more tax lots or parts of tax lots.” In ordinary English, this cryptic ruling was universally understood to allow a developer to assemble one buildable lot out of many separate tax lots, which developers had done successfully 28 times since 1978.

Before the 2019 ruling, numerous community groups challenged the legitimacy of that 1978 Memo as part of their opposition when 200 Amsterdam’s building application was before the DOB. These groups may well have been correct that the Minkin Memo interpretation of the zoning law was legally flawed. Nonetheless, the developer’s reliance interests were huge, so the DOB sought to keep the old ruling in place, postponing any prospective changes to affect only new projects. That middle path was rebuffed by Perry, who had held in 2019 that he owed no deference to City administrators. One year later that initial ruling allowed him to disregard entirely the Minkin Memo, which left the developer wholly unprotected from the retroactive invalidation of the permit, after which came the draconian order to chop off its top floors.

As Hills notes, it is beside the point who is right and who is wrong on the validity of the antiquated Minkin Memo. The critical issue is that to maintain stability in the real estate market, a developer with an issued permit should not have the rug pulled out from under him after having invested millions of dollars in a project. The opposing groups—the Committee for Environmentally Sound Development and the Municipal Art Society of New York—insisted that the developer was reckless to start construction given the political and legal attacks. Like Judge Perry, they insisted that official acts of the City never create a legal estoppel that protects the builder. Hence, in their view, any new project should be enjoined from initiating construction until all legal issues are put to rest. After all, no one is owed any deference on questions of law, no matter how uniform the past practice.

It should be evident that if affirmed on appeal, Judge Perry’s order with respect to the Amsterdam building will create chaos. It is no simple matter to lop off the top of a building while trying to leave everything else intact. At a minimum, count on huge expense, noise, confusion and congestion, danger of serious accident, contractual spats with contractors and pre-completion unit purchasers, and a fresh round of zoning and traffic disputes. Architects will have to reconfigure every internal system—heat, air conditioning, plumbing and more. The developer, therefore, is back at square one. If some penalty to the developer is needed, a hefty fine is surely preferable to this administrative and logistical nightmare.

However, the legal mess transcends this case. A general principle of zoning law holds that rights to build only vest after the builder has made substantial expenditures on the site pursuant to a “valid permit.” But then what constitutes a “legally issued permit” in the first instance? If it takes forever to find out, preconstruction expenditures on land acquisition, building plans, loan commitments, and architect fees are all wasted. At the very best, then, modern zoning law imposes a large retroactive liability that necessarily deters major investment in a City with a chronic housing shortage. As a matter of first principles, avoiding retroactive application of the laws was once a fixed feature of both political theory and modern constitutional law.  But that’s clearly no longer the case.

In The Morality of Law (1964), the famous legal philosopher Lon Fuller stated flatly that “a retroactive law is truly a monstrosity” by preventing ordinary people (developers included) to plan their lives. Indeed, Fuller quite correctly recognized that some retroactive laws are “curative” in that they shield individuals who failed to observe some formality (say in a deed) from losing their property rights. But New York’s retroactive laws do precisely the opposite by stripping individuals of the legal protections that their government officials explicitly and repeatedly told them they enjoyed.

Before the modern progressive era, the prohibition against retroactive legislation was universally regarded as a major constitutional protection of liberty and property that cut across all subject matter areas. In Railroad Retirement Board v. Alton Railroad (1935), the Supreme Court struck down retroactive legislation that required railroads to fund pensions both for workers dismissed for cause and for those retirees who were not covered by the system when their employment ended. Alton harshly denounced legislation that “resurrects for new burdens transactions long since past and closed.”

Likewise, the 200 Amsterdam case, like all other real estate transactions, closed when the permits were issued. Notably, known legal protections are embedded into the price of land, so that any purchaser of unbuilt land will see his or her investment largely wiped out even if the new zoning regime is introduced before they build. It is therefore wrong for the law to delay “vesting”—which is needed to protect the right to complete the project—until substantial construction has begun, given that commercial reliance occurs far earlier. Indeed, the new rules should only apply to lots that have not been subdivided in reliance of the 1978 Minkin Memo. Unfortunately, that position is not likely to win in today’s antidevelopment era, even as the costs of this nation-wide inefficiency run into the hundreds of billions of dollars.

Nonetheless, for forty-four years, the United States Supreme Court has refused to offer any protection against retroactive legislation. Usery v. Turner Elkhorn Mining Co. (1976) sustained federal legislation that imposed extensive taxes on coal companies to pay for the black lung disease their employees incurred on the job, even though the companies had not violated any law, nor incurred any liability, when the recipients were in their employ. The correct position is not that no provision could be made for these workers. It is that the costs should be covered by public funds, not some manufactured new liability for past conduct. Alton Railroad was distinguished (and hence forgotten) because it only involved a “generalized need for funds” that was unrelated to any workplace hazard.

It quickly became clear that Turner Elkhorn was not a limited holding. Under the Employee Retirement Income Security Act of 1974 (ERISA), the United States set up the Pension Benefit Guaranty Corporation, which charged its members premiums designed to protect all members from loss when private pension plans failed. To get companies to join, ERISA originally gave employers the right to withdraw at any time. But when these programs became underfunded just six years later, Congress passed a new law that required any employer who withdrew from these multi-employer pension plans to pay an exit fee equal to its share of the “unfunded vested benefits”—a fancy way to renege on the exit option by forcing them to pay future liabilities in advance.

When challenged as retroactive legislation, the United States Supreme Court first rejected due process claims in Pension Benefit Guaranty Corporation v. R. A. Gray & Co. (1984) and then rejected takings challenges in Connolly v. Pension Benefit Guaranty Corp. (1986), giving full judicial imprimatur to this transparent legislative maneuver.

All retroactive liability marks an inexcusable reversal of established constitutional principle. Protections against unfair process and property seizure were intended to protect parties against government abuse. But now, as stated in Federal Housing Administration v. The Darlington, Inc. (1958), once a pattern of abuse becomes apparent, all protection is seemingly lost because people who enter into a regulatory maze “cannot object if the legislative scheme is buttressed by subsequent amendments to achieve the legislative end.” After all, they are on “notice” that these actions could take place, just as ordinary citizens are on “notice” that they could always be robbed on public streets. Seemingly any advanced government warning of bad behavior voids all previous contractual assurances.

It is just this attitude that led to disaster on Amsterdam Avenue. Sadly, the dangerous principle of retroactive illegality goes beyond any single building. In 2019, the New York State Court of Appeal in Kuzmich v. 50 Murray Street Acquisition LLC asked  “whether plaintiffs’ apartments, which are located in buildings receiving tax benefits pursuant to Real Property Tax Law § 421-g, are subject to the luxury deregulation provisions of the Rent Stabilization Law.”

In other words, former owners of rent stabilized units could charge market rate rents for a vacant unit whose authorized rent exceeded a fixed amount, last set at $2,774 per month—before New York’s 2019 legislation repealed the program.  Once decontrolled, a unit could rent for as much as three or four times the stabilized rate. Given the then-existing spread, the developers had relied on the repeated and explicit statements of both state and local officials that the receipt of the tax benefit let developers to also receive the benefits of vacancy decontrol. Nonetheless, New York Court of Appeals read the applicable statute to keep stabilization in place even after the tax subsidies expired, denying the developers the rental increases that made their investments viable.

An effort to revive the case (in which I coauthored an amicus brief) fell on deaf ears in the United States Supreme Court, whose consistent refusals to take up any of these egregious property cases has the makings of a national tragedy. But unless the United States Supreme Court enters the fray, progressive state legislatures and progressive state courts will continue to make mincemeat of the Constitution as they destroy the housing markets in our once great cities, brick by brick.


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