“A brighter tomorrow is only a day away.”

So held the U.S. Court of Appeals for the Fifth Circuit in an important case, DM Arbor Court, Ltd. v. City of Houston, No. 23-20385 (Aug. 12, 2025). 

The issue was whether the City of Houston’s denial of a rebuilding permit after a flood was a Lucas taking. De facto taking, regulatory taking, involuntary regulatory servitude. Call it what you will, the theory is the same. You mavens understand what that means: a regulation or other government action has deprived the property of all economically-beneficial uses. So even though the owner retains title and ownership, the lack of such uses means that from the owner’s perspective, the government might as well have taken the property by eminent domain.

The appraisers for the parties agreed that the denial of the permit “ended Arbor Court’s economic life.” Slip op. at 7. The owner’s expert testified that “there is no economically viable, or feasible, or beneficial use of the property.” Id. Similarly, the City’s expert testified that there is “no identifiable economically feasible redevelopment[.]” Id. That might seem to be the end of the game, no?

Not quite. The City’s appraiser also testified that the highest and best use of the property “was to hold it ‘for future development’ until development becomes ‘feasible.’ In other words, the property should sit idle until some unknown point in the future.” Slip op. at 7-8. Or what we call “speculation value.” 

In other words, someone might buy the property in the hope that somewhere down the road, the government might loosen its restrictions on use, and the property again become economically productive. 

We’ve seen this before. The Hawaii Supreme Court has embraced this theory. Other courts, including the Federal Circuit and the Florida District Court of Appeals, hold otherwise, because takings is about loss of use, not merely value. And the mere fact that a property might have some kind of value or someone might buy it does not insulate the government from a takings claim. 

The district court bought the city’s theory of “investment use.” The Fifth Circuit said no:

First, the court suggested that one economically beneficial use could be “holding [Arbor Court] for investment purposes.” Ibid. We disagree. The court’s idea was that, while DMAC can do nothing with Arbor Court now, some future development might make it economically viable again. The same thing could be said, though, for any regulation that erases a property’s present economic viability: a brighter tomorrow is only a day away.

Slip op. at 9. 

The Fifth Circuit concluded that Lucas held otherwise, because there, the Supreme Court had a problem when an owner is forced “to leave his property economically idle.” And “[s]aying that a property’s only remaining use is to hope for future development is the same as saying that the property must remain idle today.” Id. 

The Fifth Circuit also rejected the argument that the ability to sell the property was enough to escape Lucas‘s gravity:

In Nekrilov, a regulation curtailed short-term property leases but left available long-term uses. Id. at 670–72. As the Third Circuit explained, if an owner could not use the property long-term, he could sell to someone who could. Id. at 671 & n.3. This is true, the court emphasized, only where the regulation leaves “other underlying economic uses” for the property. Id. at 671 n.3. “When there are no underlying economic uses,” however, “it is unreasonable to define land use as including the sale of the land.” Ibid. (quoting Lost Tree Vill., 787 F.3d at 1117). These principles from Nekrilov plainly point in DMAC’s favor. As explained, the permit denial leaves Arbor Court with no viable economic use. So speculating about a sale—indeed, one that would have to be at fire sale prices—cannot defeat a Lucas taking claim.

Slip op. at 10.  

And the Fifth Circuit was kind enough to include a roadmap for how to plead and prove a Lucas-theory taking:

DMAC was charged with the burden of proving that the City’s permitting decision denied it all economically viable use of the property. Price v. City of Junction, Tex., 711 F.2d 582, 591 (5th Cir. 1983). It met that burden by presenting evidence including the testimony of (1) its own expert, (2) the City’s expert, (3) its own principal, and (4) the City’s director of housing that any other redevelopment of the property at present would not be economically feasible. The City failed to present evidence to rebut that testimony, and indeed, neither the City nor the district court ever identified any economically viable use for the property. DMAC thus met its burden under Lucas.

Slip op. at 11-12.

The panel was not unanimous, however. Judge Dennis dissented, on the grounds that the district judge got it right. The dissent here simply block quoted the lower court’s opinion, adding nothing extra to the analysis. We thus conclude that there’s not a great chance of en banc review, should the City seek it. 

Stay tuned. 

DM Arbor Court, Ltd. v. City of Houston, No. 23-20385 (5th Cir. Aug. 12, 2025)