Penn Central Transportation Co. v. New York City

Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), was a landmark United States Supreme Court decision on compensation for regulatory takings.
Events leading up to the case.
New York City Landmarks Law.
The New York City Landmarks Law was signed into effect by Mayor Robert F. Wagner, Jr., in 1965. This law was passed after New York citizens grew concerned over the loss of culturally significant structures such as Pennsylvania Station, demolished in 1963. The Landmarks Law's purpose is to protect structures that are significant to the city and still retain their ability to be properly used. This law is enforced by the New York City Landmarks Preservation Commission.
Railroad decline.
Use of railroad systems saw its peak in the 1920s and began to falter in the mid-to-late 1930s. World War II revitalized use of the railroad systems in the early 1940s and brought the industry back to prior success. While this period saw nearly half of Americans using the railroad systems, by the late 1940s, there was once again a steep decline in railroad use. That put many of the railroad companies out of business and left others to find new ways to increase revenue.
Early proposals to replace Grand Central Terminal.
In 1954, the New York Central Railroad began to look at proposed plans to replace Grand Central Terminal. Early designs by William Zeckendorf and I. M. Pei included an ambitious 80-story, tower that would be over taller than the Empire State Building. None of the early designs ever made it past the sketch phase and, for the time being, all plans to replace Grand Central Terminal were abandoned.
The Pan Am Building.
In 1958, Erwin S. Wolfson created proposals to replace Grand Central Terminal's six-story office building just north of the Terminal. Erwin S. Wolfson developed the project in the early 1960s with the assistance of the architects Emery Roth and Sons, Walter Gropius and Pietro Belluschi. The Pan Am Building was completed in 1963 and bought Grand Central Terminal more time away from proposed reconstructions.
New York Central Railroad merger with Pennsylvania Railroad.
Despite increased office space, the New York Central Railroad found itself facing bankruptcy in 1967 because of continued decline in railroad use. The Pennsylvania Railroad found itself in a similar position after the offices that were built following the demolition of Pennsylvania Station were no longer bringing the company sufficient income.
In 1968, the New York Central Railroad merged with the Pennsylvania Railroad to create the Penn Central Railroad company. The newly formed Penn Central began to look into updating the uses of the Grand Central Terminal to increase revenue and save the company from financial straits.
Plans to build on top of Grand Central Terminal.
In mid-1968, the Penn Central Railroad unveiled two designs by Marcel Breuer, one of which would potentially be built atop Grand Central Terminal. The first design (Breuer I) was a 55-story tall office building to be constructed on top of Grand Central. That building was to be cantilevered above the existing structure allowing Grand Central to maintain its facade. The second design (Breuer II) called for the demolition of one of the sides of Grand Central in order to create a unified facade for a new 53-story office building. Both designs were submitted to the New York City Landmarks Preservation Commission after the structures met city zoning laws.
Landmarks Preservation Commission's rejections.
Upon reviewing the submitted designs for Grand Central Terminal, the Landmarks Preservation Commission rejected the plans on September 20, 1968. Penn Central then filed for a Certificate of Appropriateness for both proposals but was again denied. The Landmarks Preservation Commission summarized their reason for rejecting both plans:
Breuer I 
Breuer II
The Landmarks Preservation Commission offered Penn Central the Transfer of Development Rights (TDRs) to allow them to sell the air space above Grand Central Terminal to other developers for their own use. Penn Central felt this was not enough to be considered just compensation for the loss of their land use.
State case.
Penn Central files suit.
After the New York City Landmark Preservation Commission rejected Penn Central's proposals for construction of a high rise building atop Grand Central Terminal, Penn Central filed suit against the city, arguing that under the New York Historical Preservation Law, it was entitled to a reasonable return on the value of its property, whereas in the existing condition, Grand Central Terminal could not break even and because (a) as a regulated railroad it could not go out of business, and (b) it was in bankruptcy, it could not cease the deficit-causing operations, thus suffering a taking of its property, for which it was entitled to compensation. The trial court agreed.
On appeal, the New York Appellate Division reversed, holding that Penn Central did not use proper accounting methods to demonstrate that it was suffering an ongoing deficit, but it afforded Penn Central no opportunity to rectify these evidentiary shortcomings on remand and retrial. On further appeal, the New York Court of Appeals affirmed the decision of the Appellate Division, but on an entirely different legal theory: it never addressed the decision of the Appellate Division concerning proper accounting methodology.
In a novel opinion that revisited some of Henry George's ideas, it ruled that in New York, a property owner was entitled to a return only on that increment of the property's value that was created by private entrepreneurship, not on the entire property's value. The court then affirmed the Appellate Division but, unaccountably, also granted Penn Central the opportunity to try the facts that would have to underlie the newly minted Court of Appeals holding.
Since this would have been impossible (Chief Judge Breitel later, in an extrajudicial statement, likened it to a search for the Holy Grail), and since the Court of Appeals conceded that such a task presented "impenetrable densities" and would require Penn Central to separate the inseparable, Penn Central sought review by the U.S. Supreme Court on a different legal theory.
Supreme Court decision.
In the United States Supreme Court, Penn Central changed theories. Instead of arguing that it was not receiving a reasonable return on its property because of the city regulations, it argued that the regulation took its air rights above Grand Central Terminal, which had been designed to accommodate a twenty-story building on top of it. The Supreme Court disagreed and held that under a new taking test that it formulated in this opinion, the economic impact on Penn Central was not severe enough to constitute a taking because Penn Central conceded that it could still continue with its present use whose return was reasonable. Thus, the regulation did not interfere with its reasonable investment-backed expectations. The court therefore found that the city's restrictions on Grand Central Terminal did not amount to a taking.
The case is perhaps best summarized in Section II-C of the Opinion of the Court.
The dissent argued that in this case there was a net transfer from Penn Central to the city. The dissent argued that it was not fair to have the entire burden of preserving Grand Central fall on its owners. That cost is the opportunity cost of not developing the airspace over the terminal.
Aftermath.
Penn Central lost its trial, but was in bankruptcy by this time and lacked the funds to maintain Grand Central Terminal, which fell into disrepair. Eventually, the Metropolitan Transportation Authority assumed responsibility and restored it at public expense.