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520 E. 81st St. Assocs. v. State - 19 A.D.3d 24, 799 N.Y.S.2d 1 (App. Div. 2005)

Rule:

While compound interest ordinarily does not run against the government without its consent, this prohibition does not apply in Fifth Amendment takings cases. Simple interest cannot put the property owner in as good a position pecuniarily as he would have occupied if the payment had coincided with the appropriation. The economic reality is simply that if the full value of just compensation had been put in escrow contemporaneously with the alleged taking, the landowner would have been able to earn compound interest. Thus, prohibiting the landowner from recovering compound interest acts to retroactively reduce the value of just compensation at the time of taking by undervaluing its present worth. In some cases, compound interest is not only proper, but its denial would effectively undercut the protections of the Fifth Amendment to the Constitution. 

Facts:

Plaintiff 520 East 81st Street Associates ("Owner") owned an apartment building. In 1995, about 10 years before the Owner filed suit, it was determined that the legislature's enactment of 1984 N.Y. Laws 940 constituted a regulatory taking by the State of those units of the Owner's building that were leased to a hospital, which in turn subleased the units to its employees. Because the Owner's building was affected by the statute, the owner filed a lawsuit in the state court of claims seeking  money damages due to a regulatory taking by the State. The court of claims determined that the Owner entitled to an award of compensation for the taking pursuant to U.S. Const. Amend. V and N.Y. Const. art. I, § 7(a). The court awarded the Owner simple interest at the rate of 11 percent on the value of the property on Aug. 1, 1985, for the period from 1985 to 1994, and awarded it 9 percent interest on that amount for the period from 1994 to 2000. The Owner appealed, arguing that a nine-year delay in obtaining just compensation warranted an award of compound rather than simple interest. 

Issue:

Did the court of claims properly calculate the amount of interest owed to the Owner?

Answer:

No.

Conclusion:

The appellate division ruled that the court of claim's judgment should be modified, on the law, so as to award the Owner a money judgment representing a calculation of compound interest at the rate of 11 percent on the value of the property on Aug. 1, 1985, for the period from Aug. 1, 1985 to Oct. 20, 1994. The court held that the calculation of interest should have been compounded for the takings period because in order to put the Owner in the position it would have been in had the apartments been sold in 1985, it must be awarded compound interest calculated on the 1985 value of the property for the nine-year period during which it was prohibited from terminating the leases and selling the property. The court accepted the 11 percent figure for determining the yearly interest rate that would have been earned on the property's sale.

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