Eminent domain: wrong fight, Part 4

March 6, 2005 | Uncategorized

[Go back to Part 1]

[Go back to Part 2]

[Go back to Part 3]

H. The city’s takings action, scored against our ‘public use’ checklist

Having examined the ground, let’s review the facts of this case to see how they square with the principles I posited above as necessary to justify an eminent domain taking for ‘public use’ (Part 1 of the two-part test):

  1. The decision must be disinterested. Connecticut has an urban revitalization eminent domain statute of some years’ duration. (Of course, Connecticut has a self-interest in grating itself powers, so this is not dispositive.)
  2. The decision must be principled. The City of New London is following Connecticut‘s statute.
  3. The development must deliver ecosystemic benefit. This is an easy one: turning 90 old World War II 2 acres into a combined mixed-use facility that reclaims waterfront, increases jobs, and adds to the overall housing stock will definitely benefit the ecosystem economically, culturally, and visibly.
  4. Benefits must be credibly demonstrable. The briefs go on and on about this; plaintiffs’ briefs and those of their amici (including Jane Jacobs, hauled out of retirement to lend her new urbanist voice athwart the bulldozers) argue that developers always tout non-binding visions of sugarplums and economic growth, only to disappoint consistently. A tight adherence to the truth has seldom been a developer hallmark, and in any case their special talent is envisioning futures and selling those visions. So there is certainly some level of risk that promised benefits will not be fully achieved … but the weight of public investment, the proximity of the established Pfizer facility, and the parallel improvements (e.g. Fort Trumbull State Park) all give the vast weight of evidence to the City.
  5. Benefits must be a large multiple of costs. This too seems easy: the land needing redevelopment is 90 acres, and it is almost certainly in unappealing condition that will be expensive to remediate. The aggregate property is 35 times the property being contested. That certainly seems a very large multiple.
  6. Government must show there was no good non-taking alternative. While it’s certainly conceivable that New London could develop around Parcel 4A, leaving it an island, the use will be incompatible and the property comparatively unattractive. Anyone even glancing at the plot plan would say that of course Parcel 4A should be included.
  7. Negotiations must be exhausted. I didn’t read the record in depth, but the case has been pushing four years now. Sure seems like the City of New London has been trying.
  8. Government must have ‘clean hands’. Ooh, this one gets very tricky, because New London‘s hands aren’t clean. New London has dressed up its motivations in the purest civic spirit, and that’s all true … but the city will also benefit economically, and in a big way. Once the entire property is redeveloped, the aggregate will be more a whole lot more than just all those redevelopment costs. Somebody — or some bodies — will be making money from the synergy that flows from the integrated plan. The city will get some of it (higher real estate taxes, more jobs and the taxes and economic growth that flow therefrom), and the developer will get some of it. Ms. Kelo and her neighbors will get none of that — she gets fair market value today.

I. Urban renewal and ‘unclean hands’: who wins and who doesn’t?

The plaintiffs’ briefs are full of dire warnings about government run amok — let New London takes Ms. Kelo’s home, and anybody’s home anywhere is vulnerable, provided that somebody thinks a new use will be more valuable.

 

This was brought out with his usual briskness by Justice Antonin Scalia, whom one can safely assume will not be finding for New London:

Wesley Horton, representing New London, said governments need the flexibility to allow private development in areas that could produce more tax revenue.

“So if you took away a Motel 6 and replaced it with a Ritz Carlton,” asked O’Connor, “More taxes. That’s okay?”

“Yes it’s okay,” Horton replied quietly.

“So if B pays more than A, that’s acceptable?” countered Justice Antonin Scalia.

Again Horton answered “Yes.”

 

If you will allow me a moment of clairvoyance, what may bother Justice Scalia – - it would certainly bother me –

 

Antonin Scalia 2

“So if B pays more than A, that’s acceptable?”

– is the ‘unclean hands’ element, and the nagging suspicion that maybe, just maybe, the city is dazzled by the dollar signs and is using its power to run over small owners’ rights.

 

When I mentioned above that all stakeholders benefit when cities develop and become economically more valuable, that was a slight oversimplification, because there are greater and lesser winners, and even some non-winners.

 

· If I own a house and the government puts in a shiny new development right next door, my house appreciates in value, and I capture 100% of that appreciation (maybe government gets 10-20% of it through higher taxes, figuring 1-2% taxes annually at a 10% cap rate).

 

· But if, when government is drawing its boundaries, it loops my property in to the redevelopment rather than out of it, I get nothing.

Where government draws that line — who’s in, who’s out — determines who wins and who doesn’t.

 

In the case at hand, Ms. Kelo and her neighbors can’t really benefit from this argument, because they’re landlocked, but other abutters could (and indeed, a neighboring Italian Dramatic Club was not included, and thus will benefit).

The city attorney’s hunker-down response may be logical given the plank onto which he strode, but in giving it he did his case few favors; indeed, it invites a classic slippery-slope argument. Given the evolving complexity of cities and urban environment, some amount of movement is inevitable, as new technologies enable higher living densities in ever-greater-interdependency.

 

J. A better solution: redefine ‘just compensation’

If we want to allow government’s eminent domain power to take property in an urban renewal context, we therefore need two things:

  1. A set of boundary preconditions, such as those I’ve listed in Sections F and H above.
  2. An economic disincentive for localities to get piggy (that’s a real estate term) by grabbing big swaths of property.

How about this? If the city thinks Ms. Kelo’s property is so integral, in addition to paying her and her neighbors their fair market value today, give them a ratable share of the development’s upside. Make her and the other homeowners a 2.5% partner (2.4 acres out of 90).

So yes, the city may take, but it pays:

“Just compensation” in eminent domain

+ Cash now, at the property’s fair market value today

+ A ratable ownership share in the development (worth cash in the future)

= Total “just compensation”

This approach has several handy features:

· Internal tension. If a city really wants a property, if it really thinks the property will integrally boost the development’s value, then it must share that upside with the lucky landowner. This would be self-limiting and self-adjusting and would brake all those slippery slopes.

· Doesn’t require reducing complex valuation issues. Nobody has to put a crystal ball on the future; Ms. Kelo and her friends own 2.5% of the deal, for good, bad or otherwise. If they want to re-trade that interest back into cash, they can; if not, they can hold on to it indefinitely. And it will empower them with the full body of minority-shareholder rights, equalizing the big-little asymmetric leverage that the plaintiffs’ briefs so decry.

· Consistent with the general case. If a city knocks down a house for a non-urban renewal use — like a highway — there’s no development, no profit, and the second component is demonstrably zero. So by adding this element in urban renewal, we have not violated established law, any more than Einsteinian mechanics violated Newtonian; we have just refined it in a special case not normally encountered.

Indeed, such an argument is sketched out, although not fully calculated, in an intriguing non-lawyerly brief filed on behalf of John Norquist, former mayor of Milwaukee and now President and CEO of the Congress of New Urbanism:

 

“III. Allowing existing landowners to participate in economic development projects is a common practice in many countries, and is a viable alternative top condemning out existing property owners.

Though land assembly in partnership with existing landowners has become more common in other countries, the United States is not without some precedent for it. President George Washington resourcefully accomplished the land assembly needed to develop our nation’s capital by involving landowners in the process and allowing them to share in the economic rewards.”

 

Though Norquist’s brief itself peters out into homilies, it in fact invites our proposal above.

 

K. Conclusion

Lawyers aren’t developers, nor are they financiers. Which makes reading these briefs so exasperating: citation is piled on speculation and topped with hyperbole, all of it, in my humble opinion, misdirected. So, were it up to me to decide, I’d make the law by ruling:

· For the City on ‘public use’

 

· But remanding with an expanded and explicit definition of just compensation.

And the principle I would be seeking to enshrine in law is simply this:

 

Land may be taken for urban renewal, but if it is taken for economic redevelopment, then the landowner’s just compensation must include a component of the expected increase in property value, preferably in an ownership share or its ‘indubitable equivalent.’

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