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DAN OLSON: Today, Minnesota Public Radio presents the fourth in its series on the role of the courts in a changing society. This series is sponsored in part by the Minnesota Bar Foundation and The Nash foundation. Today's program looks at one particular lawsuit, which successfully challenged the Cedar-Riverside housing project in Central Minneapolis. The court's decision in this case shows us how the National Environmental Policy Act sometimes works. The case gives a rare glimpse at how tax laws and government money attempt to supply inner city housing and the final result shows how intense community organizing can drastically change the profile of a large urban area.

[AUDIO PLAYBACK]

- Hear ye, hear ye. This federal court of the District of Minnesota is now in session. Judge Miles W. Lord presiding. On today's docket is the case of Cedar-Riverside Environmental Defense Fund versus Cedar-Riverside Associates and the Department of Housing and Urban Development. Please be attentive and conduct yourselves with proper respect for the law.

[END PLAYBACK]

KEITH HELLER: In about 1960, several tax clients and I--

DAN OLSON: Keith Heller is considered by some to be a real estate genius.

KEITH HELLER: Investments in real estate in the University area to improve the housing supply for appreciation and to some extent for tax shelter opportunities. In looking at this property, we recognize that development would have to take place there someday because of the condition of the buildings and we thought it might--

DAN OLSON: In 1961, Keith Heller and a partner bought their first piece of property in the University area. Less than 10 years later, his network of business associations began one of the largest private urban housing developments in the country. By then, they owned almost the entire West Bank area of Minneapolis. They won the support of the city government and of the Housing and Redevelopment Authority, and the consortium had attracted an increasing number of wealthy investors who wanted to secure a tax shelter.

KEITH HELLER: We encouraged others in Cedar-Riverside to work on land assembly programs as well. Most of these we subsequently acquired or bought out. But during the mid-'60s, there was substantial land acquisition in the area. Land acquisitions at that time were primarily directed towards keeping the area intact for a larger scale development. There had been conversation and encouragement of high density construction in Cedar-Riverside since 1950 and it was assumed that whatever would happen in Cedar-Riverside would involve high density construction. Some work had--

DAN OLSON: During this massive planning and land assembly period, Heller and his associates thought that most community residents supported the project.

KEITH HELLER: The goals for Cedar-Riverside promulgated by the Cedar-Riverside Area Council were included as a basic part of a city planning commission report in August of 1967 and subsequently became basic to the city's urban renewal plan for Cedar-Riverside which was adopted in the fall of 1968.

DAN OLSON: However, the presumption of community support turned out to be woefully wrong. Mary Lange of the Cedar-Riverside Project Area committee.

MARY LANGE: Possibly a little before '68 but definitely in '68 when the public hearings were held on the urban renewal project at Augsburg, it was very obvious. There were like 400 residents there and there wasn't a resident speaking in support of the project. And although they continued the deliberations later at the city council, we weren't-- the citizenry was not given a chance to speak in opposition to the project until after midnight that night and it was sort of as though the city council had, regardless of all the testimony opposing the project, gone ahead with it because of other kinds of interests.

They were basically arguing that they needed a stronger tax base and their approach to it was to develop a very, very high density housing project in this area regardless of whether it met other kinds of criteria in terms of the kind of housing that needed to be developed in the metro area.

At first, our approach I think was we attempted an aldermanic campaign in 1969, which we lost. And in 1970, then some of us got together and we formed what was called the Cedar-Riverside Community Union. It was the first attempt that we made to really structure some kind of organization in the neighborhood to oppose the urban renewal plan.

KEITH HELLER: In early 1969, we formed Cedar-Riverside Associates, Cedar-Riverside Properties and Affiliated Entities and brought in outside investor capital and also acquired some of the land in Cedar-Riverside that had been assembled by others. At that point, we saw ourselves as possibly developing some of the land under the provisions of the urban renewal program, which called for high density housing.

We formed our organizations anticipating return to investors in the form of appreciation and cash flow and not so much in the form of tax shelter. It appeared as we went on, however, that there were more initial returns in the form of tax shelter and that appreciation and cash flow would be deferred some time in the future.

DAN OLSON: Jack Cann is a West Bank resident who was one of the first opposed to Heller's plans.

JACK CANN: From the time that it became clear that Cedar-Riverside Associates was contemplating the kind of very large scale development which eventually got new town recognition, there was very widespread and virtually unanimous opposition to that development scheme in the neighborhood. And that opposition took a variety of approaches prior to the filing of the environmental lawsuit.

So first of all, the lawsuit did come out of a context of neighborhood struggle against a development which most people in the neighborhood perceived as inimical to their interests. And also it was clear that the lawsuit came out of a kind of movement that was happening in the city and around the country as a whole of people trying to redirect the ways in which housing and redevelopment projects were being carried out so that those projects better met their interests rather than the interests of planners, politicians, bankers, and so on.

And we definitely saw winning this particular lawsuit because of the kinds of issues that were involved as a way of furthering those efforts. In other words, we saw this lawsuit as a kind of precedent that could be used as a very useful tool in a wide variety of other situations.

KEITH HELLER: In February of 1970, we were encouraged to apply for federal assistance being the first recognized new town in town by HUD. A pre-application was accepted in the summer of 1970 and our application was formally approved in June of 1971. Construction was timed somewhat in regard to the new town in town approvals inasmuch as the subsidized--

DAN OLSON: That new town in town program he is talking about was brand new legislation. It would supply federal assistance for large scale housing development in the inner city. And the vision of Cedar-Riverside Associates was certainly large scale. These private developers proposed to build a high rise, high density community for over 30,000 people on about 83 acres of Midtown, Minneapolis land.

But central to their construction plan was massive federal subsidies. The new town in town legislation gave them the subsidy they were looking for. Through this new town program, Cedar-Riverside Associates received a $24 million loan guarantee from the Department of Housing and Urban Development, HUD. However, just about the time these high finance arrangements were being negotiated between Minneapolis and Washington, Congress in 1969 passed the National Environmental Policy Act. The Act is called NEPA or NEPA.

Congress passed the Act in reaction to the sudden realization that civilization was gradually strangling itself with unchecked consumption and waste of the world's resources. NEPA went beyond the Clean Air and Clean Water Acts. It focused attention on population growth, high density urbanization, industrial expansion, and resource exploitation. The Act said the government is the trustee of the environment for future generations to maximize recycling of depletable resources and to attain the widest range of beneficial uses of the environment without undesirable or unintended consequences.

To those ends, NEPA mandated that all federal agencies must scrutinize the impact of and alternatives to any major action they might take which significantly affects the quality of the human environment. The requirement for the scrutiny developed into federal policy. Before any such action could be taken, an environmental impact statement had to be written. As the name implies, the environmental impact statements, called EIS's, are supposed to fully investigate, describe, and weigh all adverse human environmental effects of the government spending at issue.

In addition, all possible alternatives to the proposed project must be similarly scrutinized and described. While that may sound logical and simple, it's actually quite complicated. NEPA is a short piece of legislation. It is written in broad and vague language. The Clean Air and Clean Water Acts, by contrast, are long and specific. The lack of clarity in the National Environmental Policy Act necessitates constant interpretation by the courts.

A great deal of the environmental litigation of the last six years has centered on environmental impact statements, especially important have been the issues of when an EIS is required and what it must contain. It was an EIS that became the focus of litigation concerning the massive housing development in the Cedar-Riverside area of Minneapolis and which provides part of the focus of this program.

The demands of NEPA paralleled many of the objections raised by Cedar-Riverside residents to the project taking over their community. It didn't take long for them to find out that HUD had not prepared an adequate EIS before it began to underwrite that development with its $24 million loan guarantee. So in 1973, some residents organized the Cedar-Riverside Environmental Defense Fund, sometimes called CREDF for short.

CREDF joined with other local groups and residents and went to court. Their suit was filed in front of federal district judge Miles Lord in December 1973. There were many defendants but the main ones were HUD, the Minneapolis Housing and Redevelopment Authority, and the private developer. The developer is a network of business associations controlled by an entity called Cedar-Riverside Associates, or CRA.

By the time this court action was filed, stage one of the new development had already been completed. The first of 10 planned stages, stage one is three buildings containing 1,299 dwelling units with housing for as many as 2,600 residents. Once they got into court, the defendants readily agreed that an environmental impact statement on the entire 20-year 10-stage project was legally required. That task fell on HUD. And in the meantime, the developers voluntarily suspended further construction. That was in March 1974.

11 months and 1/4 of $1 million later, an impact statement was released. That study by HUD concluded that the project as designed was good, that on balance, the detrimental human environmental effects of this high rise, high density project were outweighed by the housing and financial benefits, which would result. But the Cedar-Riverside Environmental Defense Fund wasn't satisfied. It scrutinized HUD's EIS and decided it wasn't adequate, that it didn't fulfill all the requirements of the law.

So the Defense Fund went back to court and filed another challenge. Technically, these plaintiffs were not legally challenging whether or not the CRA project was a good idea. That was one of their motives certainly, one which we'll discuss later. Their legal challenges at this point were that the HUD administrator had made many serious mistakes in the preparation of the EIS and that HUD had begun the study with such prejudice in favor of the development that it was unable to fulfill the law's requirements for an objective review and balancing of the project's environmental costs.

This promised to be especially complicated and controversial litigation so Judge Lord appointed former municipal Judge Edward Parker to act as a special master in the case. A special master is a temporary assistant to a judge. Judge Parker admits that he was initially predisposed against the plaintiffs in this case.

EDWARD PARKER: I might say when I first came into the matter, I thought it quite possible that I might end up granting summary judgment for the defendants. From what I had read in the newspapers, as a general-- as a citizen, just generally, it didn't sound to me like there was much of a-- that the plaintiffs probably had very solid ground. It sounded like a group of people who were just dissatisfied and disagreed with the judgments.

So I thought it likely that the summary judgments might have to be granted. Well, after I got into them, I realized that it certainly was not a case for summary judgment and it became quickly apparent that there was a genuine lawsuit here, that there were some real issues about whether or not the environmental impact statement had in fact faced the issues in the way dictated by the statute and the case law that's been developing so quickly pursuant to that new statute. I mean, it's very recent legislation.

DAN OLSON: The motions for summary judgment he's talking about are motions where one side tries to get the other kicked out of court before the litigation even begins. It's a claim that the merits of the case are so obviously in their favor that the judge should dismiss the other side and not waste everybody's time and money with further proceedings. Eventually, Judge Parker decided not only that the plaintiffs had solid ground upon which to bring a legal challenge but also that they were correct in their claim that the EIS was inadequate.

Supporting that conclusion, he wrote an 86-page opinion, which in turn convinced Judge Lord as well. The result was that Judge Lord ordered the preparation of a new environmental impact statement before the development could continue. The developers and HUD strongly opposed that decision and appealed most of the findings of fact and conclusions of law which make up the decision. Later, we'll look at some of the unusual results of that appeal, but first we'll look at Judge Lord's decision to see some of the complicated legal issues involved.

The entire decision is too long to discuss completely in this program so we'll look at just two of Lord's findings. Those findings concern first something called open space in the project and, second, the financial feasibility of the project itself. The findings illustrate how the National Environmental Policy Act works procedurally to assure that all relevant factors are considered before an important decision is made.

As the word implies, procedural matters deal with the mechanics of how the EIS is prepared and written rather than with the substance of its conclusion. Procedural questions would be, did the EIS authors talk to all the right people? Did they consider all the important data? Did they present an adequate record of all their work so that later on someone else could read what they did in order to figure out if any errors were made?

If one or more such procedural errors is uncovered, the question then arises whether they are important enough for a judge to reverse a major decision of a federal administrator. These minute administrative matters are the kinds of things lawyers love to flyspeck and play games with. Here's what happened with the open space plan for the Cedar-Riverside development.

Open space is crickets on a summer night. Open space is a playground during recess.

[BACKGROUND NOISE]

But in a city, by definition, you can have only a limited amount of open space.

[BACKGROUND NOISE]

Air hammers, buses, buildings, crowds, concrete, sometimes they threaten to eliminate open space altogether.

[CAR CRASH]

Congestion, of course, is unavoidable but it doesn't have to be complete. The inner city ideally contains a healthy portion of open space. The Twin Cities probably have more than any comparable Metropolitan area in the country. We have lots of parks, playgrounds, boulevards, and single family homes with yards. Keeping that quality became a major concern with the Cedar-Riverside development. In view of the plan to house 30,000 people on 83 acres of land, HUD's guidelines include open space in its definition of environmental considerations so the issue had to be scrutinized in the EIS.

But HUD itself did not study the open space plan. Rather, it deferred to a study made by the city, which had been written after consulting many people, including some of the plaintiffs in the lawsuit. Steve Parliament has been a West Bank community organizer for years.

STEVE PARLIAMENT: When you've got small concrete cement sandboxes with sharp edges running all around them and then elaborate wooden structures in the middle, that's not the kind of play area for children. When the rest of the area is designed entirely in cement, there's a forest in the middle of the Plaza, which is a cement sculptured area that received the state's share of open space money and they're calling it open space.

There are a bunch of poles, cement poles there that are supposed to look like trees and they're calling that open space. There's a difference between real usable recreational open space, which is not available, and technical acreage, which runs along boulevards mostly that they're counting is open space in this project, and usable open space, which is a playground, that sort of thing.

[JONI MITCHELL, "BIG YELLOW TAXI"] They paved paradise and they put up a parking lot. With a pink hotel, a boutique, and a swinging hot spot. Don't it always seem to go. You don't know what you've got til it's gone. They paved paradise and they put up a parking lot. They took all the trees, put them in a tree museum.

DAN OLSON: Those were the substantive concerns of the residents. But in court, the plaintiffs didn't just attack specific conclusions of the EIS writers. They also pointed out inadequacies in the way the decision was made. John Herman, attorney for the Environmental Defense Fund, argued a procedural objection. He argued that the draft version of the environmental impact statement, the version upon which commentary must be sought before any final conclusions are reached, didn't even discuss the issue of open space.

JOHN HERMAN: Then later, the open space plan of the city was appended to the final EIS and constituted in effect the only discussion of open space therein. There were a few generalized statements that it was an adequate response and that open space was a purely local concern. However, that doesn't respond to the requirement of NEPA itself for circulation and comment to agencies with expertise and example of the lack of circulation.

So the Department of Interior's comments on the draft that they were incapable of saying anything about open space because the EIS doesn't discuss it. And of course, the comprehensive open space plan was not circulated to them as a draft EIS. So consequently, they were unable to respond and make comments on it.

DAN OLSON: He also pointed out that there were factual errors. The tardy comprehensive open space plan had parks where the rest of the EIS had some 900 units of housing. Because of such procedural and factual problems, he argued that those people who had substantial disagreements with conclusions in the final EIS, people such as his clients, were not given a chance to air their complaints.

JOHN HERMAN: That kind of substantive concern about open space, which should have been evaluated in the EIS and probably would have been raised by comments-- I know it would have been raised by the comments of our open space expert because he indicated these concerns in his own testimony-- was not available to HUD, was never evaluated and so the general consideration of open space in the EIS was procedurally inadequate.

DAN OLSON: Mel Dickstein disagrees. He is an Assistant United States Attorney who worked on the trial for the Department of Housing and Urban Development. He outlines the government's response on this issue.

MEL DICKSTEIN: If I'm correct, it wasn't one city agency but a group of 19 entities which were involved in the development of the open space plan. These groups included not only HUD and Cedar-Riverside Associates but the City of Minneapolis, the Housing Authority, consultants, the University of Minnesota, the Metropolitan Council, and various other groups, including the plaintiffs themselves, the Cedar-Riverside Environmental-- pardon me. The Cedar-Riverside PAC.

And NEPA provides for a 30-day period after the final environmental impact statement is released for interested individuals or groups to make further comment. And during that 30 days, no comment concerning the open space plan was made by the plaintiffs in the suit.

DAN OLSON: It was a close call but Special Master Parker agreed with the plaintiffs that the comprehensive open space plan as developed by HUD for the Cedar-Riverside development was inadequate.

EDWARD PARKER: They adopted the Minneapolis standards generally. And those standards are developed for a city that's peculiarly well-situated with the lakes and all the open space that we have and the foresight, of course, of the park planners of long ago who maintained so much of the land here for public purposes and for open space. But Cedar-Riverside is atypical of the city of Minneapolis. It's more like an area of Philadelphia or Detroit or New York with several freeways surrounding it virtually and the only natural open area being the river.

It really-- to apply those standards which are necessarily or which are, as a practical matter, fairly loose, which were developed for a city that already has such an abundance of open space and lakes to an area that's atypical of it seems to me to be short-sighted. Or in fact, not just short-sighted, it seems to me to miss the point rather widely.

DAN OLSON: That's a quick look at how NEPA and the courts deal with the traditional urban environment issue, the issue of how much open space will exist in an inner city development. In this case, other common urban environment issues, such as carbon monoxide levels, were dealt with similarly. But this case is most interesting because of the way it dealt with another issue, one which is less traditionally environmental, the issue of the project's finances, where the development money came from and how it affected the profile of the entire project.

[TYPEWRITER CLACKING]

Money. Financing. Economics. Economics is important in this development because with the involvement of HUD, the project became a joint venture of government and private capital.

The Cedar-Riverside project was first and foremost high finance. But what does that have to do with the environment or an environmental impact statement? Now obviously, dollars and cents questions are not directly environmental questions, but at a certain point, project finances have a great deal to do with how a development finally looks and, therefore, with how that development ultimately affects the human environment.

Environmental impact statements must investigate all possible alternatives to and ramifications of a proposed project. Courts have interpreted this requirement very strictly and alternatives must be looked at even though the federal agency involved hasn't the ability to implement them. This requirement serves two purposes. First, so the federal administrator involved may choose the course of action which provides the best balance between project benefits and human costs. And second, so that everyone making decisions can understand the full effects of any proposed federal action.

In this case, the Environmental Defense Fund argued that HUD did not fully scrutinize financial and construction alternatives to the project, alternatives which would have provided a better cost benefit balance in the end. Rather, they claimed HUD simply rubber stamped plans already made by Cedar-Riverside Associates. Since a particular financing design was central to those plans and to the final cost benefit balancing, the issue of finances became an important part of this litigation. This issue raises many complex questions. We'll briefly look at just four of them.

First, to what extent, if at all, does the Environmental Policy Act envision consideration of project finances? Second, did the financing structure permit only high rise, high density construction? Third, did HUD's involvement in the project make realistic other less controversial development plans? And fourth, did the delay of the project caused by this lawsuit put such a burden on the developers that, no matter what the final legal resolution, the original project had been totally frustrated, if not driven into bankruptcy?

[TYPEWRITER CLACKING]

The first and perhaps biggest hurdle the court had to confront was to what extent economic feasibility factors are even relevant in environmental litigation. Mel Dickstein argued the issue on behalf of the Department of Housing and Urban Development.

MEL DICKSTEIN: Regardless of what the economic considerations were, our concern, when we're talking about the National Environmental Policy Act, is with the result of the decision. Now the decision may have been based in part on economic considerations but that's not our concern in the National Environmental Policy Act. It's really a separate area.

Not to say that the two don't play upon one another, but when we're talking about the environmental concerns, we're talking about the effect of the project, again, upon the air, upon the water, upon the flora and fauna of the area and the sewage disposal and these types of concerns and we're not talking about whether or not the project is economically feasible and what effect that feasibility had on the project as it was finally planned.

DAN OLSON: John Herman, the attorney for the plaintiffs, disagrees.

JOHN HERMAN: In the testimony at the trial, Richard Brown, who runs environmental programs for HUD, made very clear that economic factors did have to be considered when they were so substantial as to affect the type of project that could be built and the feasibility of different alternatives. He made clear that economic certainly bounded the range of reasonable alternatives.

Just a couple more things that are relevant here. One is that HUD's own regulations on the content of impact statements clearly requires the consideration of major economic changes when they significantly affect the feasibility of different alternatives or result in changes or result in the feasibility of changes in the project that have environmental effects.

And at least two other circuits, the first and the second, have already decided cases which, in many respects, are analogous to Cedar-Riverside in requiring some amount of consideration of-- well, for example, in the language of the First Circuit, why a lesser aggregation of housing on this particular site would be uneconomic.

DAN OLSON: Ed Parker wrote the court's decision on this issue. In this case, he agreed with the plaintiffs. This leads to the second question. To what extent did the financing structure predetermine what the development finally looked like? Earlier, Keith Heller acknowledged that high rise, high density construction had been agreed to in 1968 and that the financing mechanism was designed for use as a tax shelter. Later on, he emphasized these reasons for the project design.

KEITH HELLER: There seemed to be some mandate for a high density development in Cedar-Riverside as a result of institutional demand and the need for having a realistically mixed population so the area did not become a university-oriented ghetto. Density does not seem to always yield maximum land values and one can find oftentimes higher profitability in a rapid development of low density than of a long-term development with high density.

This would have been the case in Cedar-Riverside, we think, but the high density requirements were too substantial to be overlooked. If there was not provision for a high amount of University housing in Cedar-Riverside that could walk to the University or to the other institutions in the area, the parking problem would be compounded, the circulation problem would be compounded, and Cedar-Riverside would then better consists entirely of parking lots for the people commuting in.

JACK CANN: It seems to me that that image is largely been created by public relations people.

DAN OLSON: Jack Cann of the West Bank Tenants Union.

JACK CANN: One of the principles in the thing may have had good intentions from the start. I think there's very little doubt that none of the investors are interested in anything except obtaining some very lucrative tax benefits and that when you come right down to it, they're nothing but real estate speculators. Those tax shelters are based on depreciation of buildings.

Land itself doesn't depreciate for tax purposes so you have to build-- in order to maximize the tax benefits, you have to build as much as possible on a given amount of land. And I think all of the parties wound up admitting after months and months of studying that there was no way out of the situation, that Cedar-Riverside Associates financial needs in terms of tax shelter and being able to pay for these enormous land costs prevented the project from going ahead.

And the only way to deal-- the only thing that could possibly happen would be either that the whole project would go bust and the developers would be down the tubes and HUD would sell off the land for as much as they could get or, and this is I assume what everybody hoped from the start would happen, some public agency or another would pump an enormous amount of public funds into the project to keep it going.

DAN OLSON: The government did pump money into the project. In fact, it was HUD's $24 million loan guarantee which created the need for a project environmental impact statement in the first place. That made it a major federal action, which significantly affected the human environment within the meaning of NEPA. And it was the project EIS which in turn gave these plaintiffs a handle for their lawsuit. We'll get back to that item in a moment.

First, we want to outline the financial structure which is being discussed. Offsetting of real estate losses against other income is important to someone in a high tax bracket. And the tax mechanism for real estate investment, which people are talking about here, is a classic tax loophole, one which Congress retained in the 1976 Tax Reform Act. In its early years, the costs of a real estate development substantially exceed its income. Expenses for land purchase, construction, taxes, interest, and depreciation on the buildings are very high.

This last item, depreciation, is most important for tax benefit purposes. Most other items are cash outlays which must be paid for by invested or borrowed capital, but a significant portion of the original real estate developers loss is depreciation, which isn't a cash loss at all. It's merely an accounting mechanism which reflects the fact that a building eventually wears out. With this type of investment, however, the tax laws permit what's known as accelerated depreciation. That's where deductions which would otherwise be taken in the future over the life of the building are telescoped into the earlier years of the project.

Therefore, project income in early years is small compared to this deduction so that a tax loss is created. This, of course, is not a loss at all. It's merely an accounting mechanism whereby future depreciation of the investment itself is reflected on the tax books as a current expense. It is this tax loss, which is the core of the tax shelter investment process. These losses then show up on the investor's tax returns as dollar for dollar deductions from taxable income.

Now these investors are people in the high tax brackets, in the 50% to 70% range. So for every dollar of artificial loss which they get from the project, their taxes are reduced $0.50 to $0.70. The artificial loss in effect shelters other income. It eliminates the tax liability for income earned elsewhere. Theoretically, the government gets this money back in the later years of the project, but these high bracket taxpayers have in effect been given an interest-free, non-recourse loan without collateral for the intervening years. And in later years, their income is generally taxed at favorable capital gains rates, which is one half the tax rate they normally pay on their income.

The effects of this tax shelter are multiplied many times over by the fact that the project is leveraged, that means that the project is paid for mostly with borrowed funds. The investors themselves may put up only 10% to 15% of the total cost. Banks or insurance companies provide the rest with the government guaranteeing the loan and often paying most of the interest. However, even though the investors have only paid 10% to 15% of the project's cost, they are not limited to 10% or 15% of the depreciation deduction. They get it all so the amount of their other income, which is sheltered from taxes, is similarly multiplied.

There are other even more esoteric aspects of subsidy and tax advantage which characterize this type of project. We've outlined three of the major aspects: accelerated depreciation, leverage, and capital gains. This tax shelter mechanism when applied to a low income housing project can turn an otherwise unattractive 4% before tax return into a 40% return for an investor in the highest tax bracket.

It is precisely this tax shelter quality which motivates investors in projects such as Cedar-Riverside Associates. Investors bought into the Cedar-Riverside project at $25,000 per unit and many people put in well over $100,000. But if all this outlines the tax shelter motivation, it does not explain why CRA was so firmly committed to high rise rather than low rise construction. That is explained by another peculiarity of the depreciation laws.

The law permits depreciation of the cost of the building, but not the cost of the land. So the greater the proportion of the investment dollar spent on the building, the greater proportion of the investment, which can be depreciated, therefore deducting from other income for tax purposes. Let's say you have $1 million to invest. If you build low rise apartments, you may spend half of the million on the land so you'll have only the other half million, which may be deducted over the years as depreciation. But if you build high rise, you spend a smaller percentage of your investment on buying the land.

For example, you invest 10% of the $1 million. That leaves $900,000 which may be depreciated. $900,000 of deductions which doesn't require cash flow outlay but which is deductible from investors' taxable income. Normally, this favorable disparity can be engineered even with low rise construction. But CRA had very high land assembly costs. So in order to retain the necessary land building cost ratio, they had to put more building on the more expensive land, which meant they had to build high rises.

With the massive government subsidies, which CRA was getting in various forms, low rise housing might still have been feasible were it not for the fact that the entire project was designed for use as a tax shelter. To a high income person, such tax loopholes considerations are more important than long run gain on the investment. By investing in a project such as Cedar-Riverside, a person in effect buys a tax shelter.

[THE BEATLES, "TAXMAN"] One two, three, four. One, two. Let me tell you how it will be. There's one for you, 19 for me. Cause I'm the taxman. Yeah, I'm the taxman. Should 5% appear too small. Be thankful I don't take it all.

This is an incomplete outline of the entire financing structure for CRA but it does highlight one important fact in this litigation, the project's financing mechanism itself had a great deal to do with a high rise, high density nature of the development. Congress planned the tax laws to encourage investment in housing and CRA merely utilized those laws to take maximum advantage of them.

[THE BEATLES, "TAXMAN"] Don't ask me what I want it for

Ah, ah, Mr. Wilson

If you don't--

So CRA had built an organization directed toward high rise, high density construction. Then along comes the Department of Housing and Urban Development with a truckload of money. This leads to the next question. In spite of CRA's initial preference for high rise, did HUD's participation now make alternative construction methods financially feasible? That question is answered by Wayne Popham, the attorney in this lawsuit for Cedar-Riverside companies.

WAYNE POPHAM: The financial feasibility of the project is achievable at any level of density, depending upon the amount of public subsidy.

DAN OLSON: This is the point Judge Parker was making a few minutes earlier. As soon as substantial direct government subsidy is involved, lesser density alternatives become realistic, even with the tax shelter financing structure. In turn, the increased feasibility of lower rise construction alternatives affects the very cost benefit analysis of them demanded in the environmental impact statement. In this case, the plaintiffs had claimed that the EIS ignored the feasibility and desirability of lesser density alternatives and that the cost benefit analysis of such alternatives was necessarily inadequate.

The trouble for HUD was that they had stepped into this project because it was a large high rise, high density development. HUD involvement came right on the heels of brand new legislation called the new town in town program, which was designed for exactly this kind of project and which some people think was written precisely with Cedar-Riverside Associates in mind.

One of the prime movers of CRA before his death was Henry McKnight. He had already been deeply involved with the rural new town project in Jonathan and he was anxious to see similar programs in the inner city. He also had close relations with people in the Department of Housing and Urban Development. Many people speculate that it was his influence which made such subsidies available for urban areas right at the time when CRA was looking for government monies. For whatever reasons, it is a fact that at that time HUD was actively promoting the same project upon which it was later to write an environmental impact statement. Keith Heller recounts how friendly HUD was years back.

KEITH HELLER: There have been a number of administrators, the new communities program. Already each administrator with a different point of view on it. Points of some of that, the original Bill Nicholson point of view was here was a program that we're going to make work and it was a case of inviting the developers back to his office to have them tell him how it could work and his then instructing his staff to proceed and doing things along lines which would implement something.

DAN OLSON: Unfortunately, Heller said, that enthusiasm has not remained consistent over time. And even though in this case, it was decided that the EIS was written with undue enthusiasm for the CRA project, the fact remains that governmental goals do change over time. The National Environmental Policy Act is precisely an example of such change.

NEPA was passed by Congress right at the time that CRA was beginning to rely on government subsidy. NEPA is a statement of governmental goals and was designed to affect the decision making of all government agencies, including HUD. The legislative purpose for the act included substantive goals in addition to the procedural kinds of items we've been highlighting. While this kind of new criteria for administrative decision making was just what Congress wanted, it can make things uncomfortable for a developer whose project was essentially planned before the full impact of NEPA was realized. Don Jacobson, Vice President of Cedar-Riverside associates.

DON JACOBSON: Therefore, the private developer was in a dilemma where he had developed 20-year financing, had his first stage of development underway, was applying for his second stage of housing, his first phase of commercial, and was geared up to accomplish this program and found out that his public financing was frozen on a federal funds and in turn was challenged legally on an environmental matter, was also he was confronted with a changing policy in his local government funds.

DAN OLSON: But whatever the considerations, the court decided that HUD had made a decision without objectively considering all the alternatives. As Judge Parker and Lord point out, HUD's financial involvement had merely affirmed previously made decisions, whereas, according to NEPA, it should have opened up objective scrutiny of specific alternatives to the project development.

EDWARD PARKER: It seemed to me that it assumed its conclusion. Who knows they might come out to the same result conceivably, but the decision making process was-- it seemed to me that the scales were weighed on one side if you don't consider all salient evidence.

JUDGE MILES LORD: But you see, the whole plan taken together shows just how much thought went into it.

DAN OLSON: Federal district Judge Miles Lord.

JUDGE MILES LORD: --symptoms are credibility gaps, as you may say, just to take all that federal money and jam it into that one project. Going as high as possible, leaving as little park land or playground or open areas or recreation areas as possible. We see the motive for that to be that the price of the land was too high.

Once it was decided that somebody wanted to build on there and they drew a plan, the whole environmental impact statement was drawn to accommodate that purpose. They had for environment, they projected only a few children and yet they expected a lot of young singles and young marrieds in there. They didn't even look at biology to see that young people have babies.

Then their top-- they got variances from the cities so that the top eight or 10 floors of those buildings are without fire protection except in the halls. There is no sprinkler systems. They paid no attention to the fact that little children should have a little park or some green area to run in. In order to handle the investments of the various people who wanted to put money in there and get a tax shelter out of it, they didn't want to go public by way of condemnation of the land. So they went buying land piece by piece. They had given out their plans earlier.

And as a consequence, they ended up bidding against themselves. Lawyers would go and other private investors would go leapfrogging ahead of them, buying up land knowing that later Cedar-Riverside would have to have it. The deeper they got in, the more dear was the price of the land. They got the price of the land so high that it was impossible to build on land that expensive, to build any housing units.

DAN OLSON: Testimony in this lawsuit was taken on dozens of law and fact questions. We've looked at a couple on the open space plan and a few more about the financial structure of the project. Witnesses and lawyers in this suit also talked of the adequacy of fire lanes around the buildings, projected carbon monoxide levels, the social and psychological effects of high rise living, how many children were anticipated, congressional intent in passing NEPA, and much, much more.

The clerk of court keeps a list of all of the motions, affidavits, and court orders filed in such cases. For this lawsuit, the list is 10 pages long and contains 167 entries. It was a long, complicated arduous case. In the end, Judge Lord decided that HUD had made so many mistakes in preparing the EIS and had not objectively considered its decision that HUD's final determination to proceed was, quote, "arbitrary and capricious," unquote.

He said that it gave insufficient weight to environmental values and it provided such an inadequate cost benefit analysis that an impartial outsider would not be able to look at the EIS and properly understand the project. After making that decision, the court gave the litigants time to work out some compromise solution to the dilemma facing the court. They could not. So in March of 1975, the court ordered CRA to stop building until an adequate EIS was written. Construction had already ended much earlier. This order merely formalized the stalemate.

Needless to say, both HUD and CRA were dissatisfied with the decision and appealed it to the Eighth Circuit Court of Appeals. HUD wrote a 70-page appeal brief in which they took minute issue with many of the factual conclusions and legal determinations of the court. A couple of those have been discussed in this program.

Cedar-Riverside Associates, however, handled the appeal quite differently. For their appeal, CRA attorneys merely incorporated by reference the entire brief written by the government. In other words, they said, whatever they said, that goes for me too. Then in their own brief, they presented only one question for the appellate court to consider. Quote, "Did the district court in not considering the individual plaintiff's intentions to use this suit to delay the project and thereby financially destroy the developer in order to acquire control over the development of the area?" Unquote. Wayne Popham, the attorney for the developer.

WAYNE POPHAM: They have brought out in the case the fact that representatives of the plaintiffs have made public statements on a number of occasions that one of their objectives was to delay the project and cause the bankruptcy of the Cedar-Riverside companies, believing that in the process of doing this, they would gain control over what future development would occur in Cedar-Riverside. It's the position of our clients that Congress did not intend in NEPA to permit the environmental laws to be used for these kinds of purposes.

DAN OLSON: Federal district Judge Miles Lord.

JUDGE MILES LORD: I think that if you go on the theory that even the environmentalists, those who are for the birds and the bees, have a selfish motive. That selfish motive may just be to breathe clear air or to have some acreage to walk around, or just to have an existence value to know even while they might be in the city that someplace there is a place that's nicer because they built it. The court's job is not to look at who's going to make a buck on it but does the project meet the requirements of NEPA? Have they considered all aspects of it, has the administrator?

DAN OLSON: This issue is part of the fourth financial question we raised earlier. Did the delay caused by this lawsuit drive the project into financial ruin? Is this an abuse of the courts and of our environmental laws? Some say yes, some say no, but certainly this possibility raises the question of whether the Cedar-Riverside lawsuit caused the ruin of the financial developers.

The fact is that CRA is in deep financial trouble. Because of loan defaults by the developers, HUD for two years has had to pick up the cost of interest payments approximating $20,000 per day. John Herman, the attorney for the plaintiffs, strongly asserts that it was not the lawsuit which put CRA in this position.

JOHN HERMAN: Before the case even went to trial, the default on the new community note. Second, you have again before the case went to trial, the default of the affiliate of Cedar-Riverside that runs stage one on their FHA mortgage guarantees. And that project-- that part of the project was never involved in the litigation whatsoever.

And then finally you have a whole series of HUD memorandums and consultant reports, also all of them occurring before the case went to trial and all indicating the impossibility of the project proceeding regardless of its shape at the kind of land costs that were ascribed to it in the new community financing plan and the large loans HUD made originally to get the project started. I think it's simply a case of crass real estate speculation, which probably would have come to light anyhow but may have come to light before they got to build the second stage because of the lawsuit.

DAN OLSON: We asked Keith Heller, one of the people most familiar with the financial problems of CRA, whether it was the lawsuit, which has caused all their financial difficulties.

KEITH HELLER: Undoubtedly, there was some desirability in re-examining the environmental situation and possibly in re-examining the entire project as originally planned. Over the last 10 years, the plans of the University for development on the West Bank have changed somewhat and it is likely that the projected demand figures in Cedar-Riverside as of 1965 do not exist at the present time. In planning a development, one should keep in mind that there is need for flexibility for changing plans.

The economic downturn in the 1972 to 1974 period and the tremendous increase of construction costs and the increase in interest rates during that time probably gave additional reasons to take a further look at the plans that we had made.

DAN OLSON: In other words, even those who stand to lose the most money on this deal hesitate to blame all their troubles on the lawsuit, but there is one more important aspect to this problem. Alan Freeman teaches land use planning at the University of Minnesota Law School. He sees the Cedar-Riverside controversy as more than environmentalists versus developers.

ALAN FREEMAN: The third side that tends to get left out is really the interest of people, especially poorer people who haven't got it in getting new housing. That's as long as we rely on private developers, even with government assistance but basically private developers as the primary source of new housing. To stop them or slow them down means less housing is going to be available.

And I have a lot of trouble with a sort of paternalistic social science perspective coming in and saying, we want to protect the people who are going to live in these houses from getting into a lousy situation. I wish the prospective residents would have a great deal more role in the decision making process. Let's find out what they want. I think there's at least a plausible assumption that many people, people who are living in really shitty housing, would rather have housing even imperfect, then wait, then tolerate the delays associated with this environmental review.

What it comes down to for me is that I don't think we can afford to worry about subtle environmental problems until we've solved the hard physical problem of provision of housing on an equal basis. Then we can get more sophisticated and worry about the environment. But it's somewhat ironic to tell people who are living in New York or Detroit or Baltimore or Cleveland or any of the other rotting downtowns in the country that you're going to have to slow down on your demand for housing while we make sure we're going to preserve the environment around us.

I don't find that very credible from the perspective of the choiceless inner city resident, and that is all exacerbated by the fact that in our society, economic deprivation tends to correlate with race and it just ends up reinforcing the perspective of racism.

DAN OLSON: This points up how interrelated these types of legal problems can be. Although Cedar-Riverside Associates is basically in it for the money, the fact remains that their project as designed would contain more low income housing than in most of the rest of the state combined. Judge Lord, however, claims that the interest of these third parties was not ignored in his decision rather he implies the interests of decent housing were paramount.

JUDGE MILES LORD: I can't see what kind of a family of small children you're going to raise 14 stories up or 15 stories up in a building that doesn't have adequate fire protection. With no green grass to play on, no decent neighborhood to live in, these were instant slums as I see them, and there's no justification in this day and age for using federal funds to build slums.

DAN OLSON: That's just a taste of the many complex legal issues involved in this lawsuit. Miles Lord made some unique decisions in the case and the defendants thought there was a good chance that he would be reversed. So extensive arguments were made to the Eighth Circuit Court of Appeals in Saint Louis. But during the appeal, a rather unusual legal maneuver took place. The plaintiffs' move that the case be declared moot.

A legal question is moot when facts surrounding the controversy have so changed since it was first raised that the question is purely academic. No matter how the court decided it, it could not affect the rights of the litigants in the case. The court decides that the whole controversy is over so it washes its hands of the affair by vacating whatever findings and orders may be in effect concerning the litigants. In most litigation, the party which loses at the district court level wants the appellate court to declare the questions moot. That way, the loser gets an adverse decision vacated without risking another adverse decision on a touchy legal issue.

Usually, the winner doesn't want the action dismissed. The winners usually want their victories to be affirmed. But in this Cedar-Riverside case, it was the winners, the plaintiffs, who wanted the controversy declared moot. They cited the fact that Cedar-Riverside Associates and its affiliated entity in stage one had been in default on loans since June 1975. They cited evidence of changed intentions by HUD in the housing project.

They pointed out that the Minneapolis City Council, the local Housing Authority, and community groups had all combined in opposition to the plan as originally conceived. In fact, HUD was about to foreclose on the whole project and a fight was brewing between some locals and the feds over density levels. Final density will now fall between 2,000 and 5,000 dwelling units far below the 12,500 units originally planned and the plaintiffs were fearful of losing their victory on appeal.

Miles Lord is an environmentalist and several judges at the Eighth Circuit are not. So they move that the questions at issue be declared moot. The defendants thought they'd win at the Eighth Circuit. They wanted to win and didn't even want to participate in a discussion on mootness. In fact, the district court chastised HUD for its striking arrogance in refusing to provide information on the issue. HUD felt the decision imposed impossible guidelines on the writing of environmental impact statements. HUD argued that they could still build 12,500 units if they wanted to so the case was still alive.

The developers saw vindication at the Eighth Circuit as being their best defense against foreclosure. Foreclosure could have the effect of dissolving all the tax benefits thus far accrued, so they've indicated a willingness to proceed with the project and argued that the questions at issue were still alive because the exact same questions would be relevant no matter how dense the final development was and no matter who the developer was.

In fact, the decision does touch upon questions basic to how decisions are made about the profile of the Metropolitan area. Environmentalists, developers, investors, politicians, community organizers, government bureaucrats, labor unions, residents, and academics have all taken an active interest in the controversy. But the Eighth Circuit Court of Appeals tabled the issue. On August 31, 1977, it declared the case moot. It pointed out that even though nothing could be done without HUD's approval, neither could anything be done without the city council's approval. In other words, HUD and the city council had to work it out between them.

The court hinted that if the city council was to reverse its position again, the whole thing could pick up where it's been left. Of course, not to decide is to decide. The court washed its hands of the matter. In effect, the court decided that the decision about what happens in the Cedar-Riverside area of Minneapolis should be made in the community.

As this program was prepared, there still existed an uncertain balance of power within that community. No matter what happens, HUD will have to put out tons of money to make up for the huge land acquisition costs. The mayor and the city council are in the midst of an election. Community groups want to plan and run the project. The developers want to avoid bankruptcy. The Metropolitan area needs good, cheap housing. Workers want jobs and the city needs a tax base.

Although the case is officially moot, the controversy is still alive and so the lower court decision remains alive as one federal judge's opinion of how some of the legal aspects of the controversy should be resolved. The role of the courts in a changing society remains significant even when the controversy is officially being decided elsewhere. And for the present, Minneapolis has another major development project still in limbo.

[MUSIC PLAYING]

Today's program was produced and engineered by Bill Tilton. Funds for this pilot series were provided by The Nash Foundation and the Minnesota Bar Foundation. We'd like to Thank law professor JJ Cowen for his advice. I'm Dan Olson.

[EVERTON BLENDER, "WHERE DO THE CHILDREN PLAY"] When you crack the sky

Scrapers fill the air

But will you keep on building higher

Till there's no more room up there?

Will you make us laugh?

Will you make us cry?

Will you tell us when to live?

Will you tell us when to die?

I know we've come a long way

We're changing day to day

But tell me, where do the children play?