The three-factor balancing test is the workhorse of regulatory takings litigation, and how courts weigh each factor — especially parcel definition and investment-backed expectations — largely determines whether a plaintiff succeeds or fails.
I. Doctrinal Framing
Most regulatory takings claims do not involve permanent physical occupations or total economic wipeouts. They involve the more common — and more contested — situation: a regulation that diminishes property value significantly, imposes restrictions on previously contemplated uses, or alters the regulatory environment in ways that harm an owner's investment. These cases fall into the Penn Central framework, which remains the default mode of analysis for regulatory takings claims that do not qualify for per se treatment.
Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978), rejected a challenged New York City landmark designation that prevented Penn Central from building a multi-story office tower above Grand Central Terminal. The Court declined to find a taking and, in the process, articulated the three-factor balancing framework that has governed regulatory takings doctrine ever since.
Understanding how the three factors function in practice — and where defendants win and plaintiffs lose — is the analytical prerequisite for evaluating any regulatory takings claim outside the per se categories.
II. The Three Factors
A. Factor One: Economic Impact on the Claimant
The first factor asks how significant the economic harm is. This is not, as some practitioners assume, a simple before-and-after diminution-in-value calculation — though that calculation is the starting point.
The Supreme Court has consistently refused to adopt a specific diminution threshold below which no taking can occur. A 50% diminution in value has been held not to be a taking in some cases; a 90% diminution has been held insufficient in others (e.g., Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002)). The percent-diminution figure is a data point, not a rule.
What matters is the relationship between the economic impact and the other two factors. Courts weigh the magnitude of the economic harm against the character of the regulation and the extent to which it frustrated investment-backed expectations. An enormous economic loss caused by a regulation that the owner should have anticipated, applied to a large parcel where the affected portion is a small denominator slice, will still likely fail Penn Central analysis.
Practical implication: Commission an appraisal early that identifies the before-regulation value and after-regulation value, with the denominator parcel properly defined. Control the appraisal inputs — particularly parcel definition — before the defendant frames them.
B. Factor Two: Interference with Investment-Backed Expectations
The second factor is, in many cases, the decisive one. The Court asks whether the regulation interfered with the claimant's "reasonable investment-backed expectations" — not every hope, aspiration, or speculative plan for the property, but the objectively reasonable expectations the owner formed at the time of acquisition.
This factor cuts both ways. Where an owner purchased property after a regulatory scheme was already in place, courts are skeptical of claims that the regulation frustrated investment-backed expectations: the owner took the property subject to the existing regulatory environment. Where an owner purchased property before a significant regulatory change and made investments in reliance on the pre-change regime, the interference argument is much stronger.
The expectations analysis is particularly hostile to claims brought by investors who purchased the property specifically to exploit a regulatory loophole or at a discount because of regulatory risk. Penn Central protects those who reasonably invested in specific uses; it does not protect speculative real estate arbitrage on the theory that regulations might not be enforced.
For plaintiffs: The factual record should establish what uses were lawfully contemplated at acquisition, what investments were made in reliance on the pre-regulatory regime, and the sequence of regulatory change relative to investment decisions. Contemporaneous documents — purchase agreements, development plans, financing applications, environmental impact applications — are the best evidence of what expectations were reasonable and when.
C. Factor Three: Character of the Governmental Action
The third factor asks about the nature of the governmental action. The Penn Central Court identified a spectrum: a physical invasion of property for public benefit is more readily characterized as a taking than a regulation that adjusts the benefits and burdens of economic life for the common good.
Government actions most likely to weigh in the plaintiff's favor under this factor include:
- Actions that single out one parcel or one owner for a burden not borne by similarly situated owners;
- Actions that appropriate a specific benefit for the government or a private third party at the owner's expense;
- Actions taken in response to the specific owner's conduct that would otherwise be addressed through other legal means.
Government actions most likely to weigh against the plaintiff include:
- Broad zoning or land use regulations applicable to a class of properties;
- Environmental protection regulations that benefit the public generally;
- Regulations responding to genuine public health or safety concerns.
III. The Parcel-as-a-Whole Rule — The Most Contested Issue
The most litigated aspect of Penn Central is not the three factors themselves but the denominator problem: how do you define the "parcel" against which economic impact is measured?
Penn Central itself announced the rule: "Taking jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated." The economic impact must be measured against the parcel "as a whole." But what is "the whole"?
A. Murr v. Wisconsin (2017)
Murr v. Wisconsin, 582 U.S. 383 (2017), directly addressed how to define the relevant parcel when contiguous parcels are held in common ownership and one parcel's development has been restricted. The Murrs owned two adjacent waterfront lots under a Wisconsin regulation that prohibited sale or development of the lots as separate parcels, requiring them to be treated as one.
The Court, in an opinion by Justice Kennedy, held that the relevant parcel for Penn Central analysis is determined by considering three factors:
- State and local law treatment: How does the law treat the parcels — as one or multiple? Zoning designations, tax lot lines, and regulatory merger rules are relevant.
- Physical characteristics: Are the parcels contiguous? Do they share common terrain, access, or physical characteristics that make separation impractical? Are they separated by roads, waterways, or other physical barriers?
- Prospective value with and without the regulation: Does the owner have a legitimate claim of entitlement to use the parcels separately, or does the regulatory restriction reflect a background constraint on the land's use?
The Murr majority held that the two lots, viewed together under these factors, were the relevant denominator — and that the regulation did not constitute a taking of the whole parcel.
Plaintiffs' counsel must fight the denominator battle. A government defendant will always seek to expand the denominator — include more acreage, combine parcels, treat adjacent parcels as one — because a larger denominator means a smaller percentage diminution. Plaintiffs must argue for the smallest legally defensible parcel. Murr provides a three-factor framework for that argument; the outcome is fact-specific.
IV. Temporal Dimension
Penn Central analysis is typically applied to a snapshot: the regulation as of the date of the claim. But the temporal dimension matters in two specific contexts.
Pre-acquisition regulations. Where the regulatory restriction predated the plaintiff's acquisition, courts generally hold that the owner had notice and no reasonable investment-backed expectations were frustrated. This is not an absolute rule — an owner may have purchased property in contemplation of a specific variance, permit, or regulatory exception that was later withdrawn — but the pre-acquisition timeline is unfavorable.
Regulatory moratoria. Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002), addressed a 32-month moratorium on development in the Tahoe Basin. The Court declined to apply Lucas total wipeout analysis to temporary deprivations of all economic use, holding instead that such temporary moratoria are analyzed under Penn Central. The Court emphasized the "parcel-as-a-whole" rule extended to time as well as space: a 32-month deprivation of all use within a decades-long ownership period does not constitute a total deprivation of economic value when the property is viewed across its entire ownership span.
V. Practice Notes
Developing the economic impact record. Engage a qualified real estate appraiser early and ensure the appraisal addresses both the economic impact factor and the parcel definition issue. Defense experts will challenge every assumption. A joint pretrial brief on parcel definition before the damages expert phase can sharpen the issues.
Pre-litigation preservation of the regulatory record. Penn Central claims require an administrative record. Document every permit application, every denial, every communication with regulators, and every development plan rejected or withdrawn in response to regulatory pressure. The administrative record is often the factual foundation of both the economic impact and reasonable expectations factors.
Investment-backed expectations witnesses. The expectations factor requires evidence of what the owner actually planned to do with the property, not just what was theoretically possible. Contemporaneous board minutes, internal memoranda, engineering studies, and financing records document reasonable expectations. The owner's own testimony is not sufficient without corroborating documentary evidence.
*The Penn Central package. In complex regulatory takings cases, the plaintiff rarely wins on a single factor. The strongest Penn Central* claims combine large economic impact (80%+ diminution), clear pre-regulatory investment reliance, and regulation that singles out the plaintiff or appropriates a specific benefit for the government or third parties.
VI. Open Questions and Where the Law Is Moving
Penn Central has survived decades of doctrinal pressure, but recent Supreme Court decisions — Cedar Point (2021), Knick (2019), Sheetz (2024) — consistently expand property rights protections at the margins. The three-factor test itself has not been overruled, but several of its applications are under pressure: the reasonable investment-backed expectations factor has been criticized for giving too much weight to regulatory history rather than vested legal rights; the "character of the action" factor has been criticized as circular; and the parcel-as-a-whole rule — now formalized in Murr — has been attacked as favoring governments by expanding the denominator.
A future court with different majority preferences could restructure Penn Central to place more weight on the magnitude of economic deprivation and less on the reasonableness of investment expectations — moving the doctrine closer to the categorical rules and further from balancing. Practitioners should watch Penn Central petitions carefully.
VII. Closing
Penn Central analysis rewards preparation. The three factors do not operate independently — they interact, and courts weigh the record as a whole. Practitioners who control the denominator (parcel definition), develop a strong contemporaneous record of investment-backed expectations, and frame the character of the governmental action as one that appropriates a specific benefit rather than adjusting general regulatory burdens have the strongest platform for a successful regulatory takings claim.
Talk to Yates Anderson
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Informational only. Not legal advice. No attorney-client relationship is created by reading this post. Consult a licensed attorney in your jurisdiction.