Is blight, like beauty, in the eye of the beholder?

Houses to be condemned to make way for Atlantic Yards in Brooklyn. Look blighted to you?

Or is blight just a planner’s word for a city’s natural messiness?

Does this look blighted to you?

Though the question is metaphysical, the answer is anything but.  On that finding of judicial ‘fact’ hinges the most contentious issue in eminent domain for economic development (ED4ED) today, as explored in a protracted City Journal editorial essay by Nicole Gelinas.

Spot the blight: Atlantic Yards

Indeed, what seems an intractable policy problem – when is ED4ED permissible, and when must it be prohibited? – can be reduced to a problem of boundary –what is blight?  In turn, the entire problem, over which so many hours of legal wrestling have been held, can be solved easily – the fuzzy boundary has to be construed against the party with power, so either define blight objectively and observably, or eliminate it as a valid reason.

To see why, we must descend the rabbit hole of current jurisprudence, in particular the way ‘blight’ has been redefined out of all observable meaning (Part 1 of this post), and then resurface elsewhere to see how ED4ED is requisite for urban improvement (Part 2), and hence how to reconcile the competing pressures.

1. If property is ‘blighted,’ government can take it.  Lost in the political uproar that followed the Supreme Court’s Kelo v. New London 5-4 decision is that the jurisprudence on ED4ED is half a century old, as laid down in a landmark 8-0 decision in 1954 [Same year as Brown v. Board of Education of Topeka, another landmark – Ed.], Berman v. Parker.  Under Berman, a Supreme Court enraptured with the promise of economic development allowed the District of Columbia Redevelopment Authority to demolish and rebuild a large chunk of southwestern Washington, based on the finding of ‘blight’, which in the 1954 decision was concluded to exist because:

“64.3% of the dwellings were beyond repair, 18.4% needed major repairs, only 17.3% were satisfactory; 57.8% of the dwellings had outside toilets, 60.3% had no baths, 29.6% lacked electricity, 82.2% had no wash basins or laundry tubs, 83.8% lacked central heating.”

I think anyone today would agree that even in 1954, properties without indoor plumbing, central heating, or running water, constituted blight.  Indeed, under today’s laws – absent in 1954 – those buildings could be condemned as unsanitary. 

 The court that gave us Brown v. Board of Education also gave us Berman

As Justice William O. Douglas, writing for the unanimous court, put it:

Miserable and disreputable housing conditions may do more than spread disease and crime and immorality. They may also suffocate the spirit by reducing the people who live there to the status of cattle. They may indeed make living an almost insufferable burden. They may also be an ugly sore, a blight on the community which robs it of charm, [p33] which makes it a place from which men turn. The misery of housing may despoil a community as an open sewer may ruin a river.

Unfortunately for Justice Douglas’s defenders, the greatest blight now inflicted on many northern urban communities are the slums inside, the high-rise public housing properties such as the French banlieues, all of which should be torn down, and many of which have been torn down or are being torn down.

We’re not sorry to see you go

Justice Douglas was doing more than penning a manifesto.  (No one ever accused Justice Douglas of lacking in legal imagination, as when in Roe v. Wade he found that a right to privacy ‘emanates from the penumbra of the Constitution’ – in other words, that were was no Constitutional language to support it.)  Here he was grounding the decision in an expanded concept of ‘public health’ so as to argue that blight goes beyond the optical:

In the present case, the Congress and its authorized agencies have made determinations that take into account a wide variety of values. It is not for us to reappraise them. If those who govern the District of Columbia decide that the Nation’s Capital should be beautiful as well as sanitary, there is nothing in the Fifth Amendment that stands in the way. ["Nor shall private property be taken for public use without just compensation," the 'takings' clause. -- Ed.]

Berman proved to be the opening salvo in a half-century of ever-expanding municipal authority and judicial deference to local findings.  In 1984 the Supreme Court even expanded municipal discretion through the Midkiff decision, so that when in 2005 the court upheld New London’s taking of Suzette Kelo’s house, the remarkable point was not that the city won, but that it won ‘only’ 5-4, and in winning provoked an impressive and sustained voter backlash.  As the City Journal essay put it:

In 2005, in Kelo v. New London, the Supreme Court decided that these “public purposes” could even include economic development. But New York’s constitution theoretically holds the state to a higher standard. In 1967, Empire State voters voted not to add a “public purpose” clause to their constitution, preferring to stick with the stricter requirement of “public use.”

2. Once ‘blight’ is found, the state can flip property to a private developer.  In parallel with the thread of government having a police power to take small parcels and aggregate them into more rational urban uses ran another thread, that the state can contract these basically technical functions to a private third party.  Here too it was the supremely confident Douglas who wrote the sweeping apologia:

The firebrand justice: William O. Douglas

Here, one of the means chosen is the use of private enterprise for redevelopment of the area. Appellants argue that this makes the project a taking from one businessman for the benefit of another businessman. But the means of executing the project are for Congress, and Congress alone, to determine once the public purpose has been established. See Luxton v. North River Bridge Co., supra; cf. Highland v. Russell Car Co., 279 U.S. 253.

The public end may be as well or better served through an [p34] agency of private enterprise than through a department of government — or so the Congress might conclude.

We cannot say that public ownership is the sole method of promoting the public purposes of community redevelopment projects. What we have said also disposes of any contention concerning the fact that certain property owners in the area may be permitted to repurchase their properties for redevelopment in harmony with the over-all plan. That, too, is a legitimate means which Congress and its agencies may adopt, if they choose.

Now enters the worm of self-interest, for if the state can gobble up small parcels from small and politically unconnected holders, and bestow them in a bundle on a politically connected private redeveloper, then both the redeveloper and the municipality have a selfish interest in doing so.  Land that is redeveloped becomes more valuable.  Land that is rezoned becomes more valuable.

Raise the height, raise the value, raze the incumbents

None of this bothered Douglas, taken as he was by a vision of the city council as philosopher-kings:

Subject to specific constitutional limitations, when the legislature has spoken, the public interest has been declared in terms well nigh conclusive. In such cases, the legislature, not the judiciary, is the main guardian of the public needs to be served by social legislation.

Evidently they trusted their government more back then.

3. By now, the practical definition of ‘blight’ has been diluted into ‘economically underperforming’.  If finding a word translates into giving someone more money, then the word is increasingly found.  With ‘blight’ the key to unlock potent government power to take property from A and then to give it to B, why then will develop, in short order, an active marketplace in finding blight.  [The same thing has happened, on a multi-billion-dollar global scale, in the counterfeiting of certified emission reduction (CER) certificates, otherwise known as carbon credits … but that's another story, about which I may post in the context of India. – Ed.]

You cannot outreach the long arm of the law

Kelo highlighted this and empowered other opponents of ED4ED, such as in Brooklyn, with its billion-dollar battle over Atlantic Yards, which has been going on for more than half a decade.  As City Journal puts it:

Brooklyn’s Prospect Heights, industrial and forlorn for much of the late twentieth century, was looking better by 2003.  Government was doing its proper job: crime was down, and the public-transit commute to midtown Manhattan, where many Brooklynites worked, was just 25 minutes. That meant that the private sector could do its job, too, rejuvenating the neighborhood after urban decay. Developers had bought 1920s-era factories and warehouses and converted them into condos for buyers like Daniel Goldstein, who paid $590,000 for a place in a former dry-goods warehouse in 2003.

My $590k says my home isn’t blighted

These new residents weren’t put off by the Metropolitan Transportation Authority’s railyards nearby, and they liked the hardwood floors and airy views typical of such refurbished buildings. They also settled in alongside longtime residents in little houses on quiet streets. Wealthier newcomers joined regulars at Freddy’s, a bar that predated Prohibition. Small businesses continued to employ skilled laborers in low-rise industrial buildings.

Two questions are entangled here:

1. From an urban-vibrancy perspective, would we ‘like’ to see redevelopment?

2. Is the neighborhood ‘blighted’ today?

It’s entirely possible to answer Yes to the first question – making us wish we could assemble the land – and No to the second, meaning we cannot do it, tempted though we may be.

I can resist everything but temptation

Except that it is all too easy to substitute “I am entitled to” for the phrase “I want to” – especially if one is adjudicating for oneself.

The state hasn’t let this inconvenience derail its plans for Prospect Heights, however. For seven decades, courts have let New York seize and demolish slum housing if it’s blighted—which New York State defines as “substandard” and “unsanitary.” So the Urban Development Corporation (UDC), a public entity of New York State, decided that the “public use” of Atlantic Yards would be blight removal. The city had already designated part of the neighborhood as “blighted” 40 years earlier, long before its resurgence. As for the rest, the UDC commissioned consultants—previously employed by Ratner—who soon returned the requisite blight finding.

I applaud the commission’s consultants

4. When courts confront a blight dispute, they tend to defer to the public agency.  Judicial deference to legislative or executive decision-making is generally a sound principle for separation-of-powers. 

Property owners have looked to the judiciary to check the overweening grasp of the legislative and executive branches.

Yet the courts seem to have difficulty grappling with the municipality’s economic conflict of interest:

In Brooklyn, Goldstein and his neighbors have lost their lawsuits—most recently, in New York’s highest court, the court of appeals. In November, the court decided 6–1 that “all that is at issue is a reasonable difference of opinion as to whether the area in question is in fact substandard and insanitary. This is not a sufficient predicate for us to supplant [the state’s] determination.”

Goldstein’s got his dander up

Except that the harm is unbalanced, because either way, the decision is irrevocable.  If a court finds blight, then owners are dispossessed of their property – uprooted.  With that dispossession goes their entire way of life.  I’m especially sensitized to this by all my global South experience, where slum dwellers are routinely dispossessed of land, once it has become valuable.  The slumdwellers lack legal title – they gained their occupancy rights by squatting – so their claim is weaker, but the principle is the same: occupancy vests political legitimacy.

The court essentially abdicated its duty to protect property owners from the governor and the Legislature.

I choose to abdicate my duty

That’s City Journal’s conclusion, not ours, but it’s in line with the factual record.

[Continued tomorrow in Part 2.]

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By: David A. Smith

Yesterday we encountered sad New London, Connecticut, whose expansionist dream has died with Pfizer’s announcement it is closing its plant and moving the jobs to nearby Groton.  Some, like The Washington Examiner, see in this a redemptive tale of brave and plucky small property owners standing athwart the powerful’s bulldozers.  Others, like the New York Times (in Times New Roman indigo), cannot make up their minds.

The New York Times, long a fan of eminent domain among other big-government tools (after all, the paper had recently scooped up its Times Square property through eminent domain) –

Touche!

A touch, a touch!  I do confess it.

– applauded the ruling as “a setback to the ‘property rights’ movement,” (note the scare quotes)

True enough point.

– and explained: “New London’s development plan may hurt a few small property owners, who will, in any case, be fully compensated.”

We cannot lose sight of this; eminent domain pays fair market value, and that appraisal/ condemnation process is stacked in favor of the property owner.  The issue’s not fair value, it’s displacement – an issue that resonates powerfully, by the way, in the slums of the global south.

“But many more residents are likely to benefit if the city can shore up its tax base and attract badly needed jobs.”

That too is true.  It’s why the Supreme Court deferred to NLDC’s judgment.

In that deferral lies the root of the Institute For Justice’s complaint.  (For much more on AHI’s perspectives, see the posts listed in the inset box.)

ED4ED is an essential tool.  It is also a powerful tool.  Being powerful, it is subject to exploitation and abuse.  Kelo shows a modern audience what Poletown showed twenty-five years ago – political power asymmetries make it too easy to dispossess the small semi-formal neighborhoods in exchange for an ethereal and often unrealized shining city on the hill. 

Cleared away were 16 churches, 144 businesses, 1,500 homes, and 4,200 people … and it

If local bodies can make these decisions and confiscate people’s property, even ‘just compensation’ may not be enough.  Uprooting the neighborhood destroys the city’s cryptobiotica, its social fabric, and provides an easy means to shove ‘those’ people to the sidelines. 

”We all need to sacrifice,” Ms. Gaudiani said, adding, ”If this city can become a lively, diverse hub of activity that improves life for people of color, for poor people, for middle income, for working poor and for upper-income people, then it is going to be a great American city.”

If we all need to sacrifice, why is it that only some are uprooted?  Who decides who is uprooted and who is not? 

A woman who didn’t want to be shoved: Susette Kelo

Opponents of ED4ED believe – and the evidence supports them – that when those in power are weighing benefits and costs, they undervalue costs on ‘those people’ and overvalue gauzy promises:

Conservative justices, including Clarence Thomas, dissented. Justice Thomas called New London’s plan “a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue, but which is also suspiciously agreeable to the Pfizer Corporation.”

Since the harm is visible and irreversible, shouldn’t the burden of proof be high, higher still when confronted with a private beneficiary that finds the plan ’suspiciously agreeable’?

The decision was widely criticized, and spurred lawmakers across the country to adopt statutes to prevent similar uses of eminent domain.

Representative of many people’s reaction

Make no mistake; New London’s civic leaders were convinced that unless they did something dramatic, the town could continue to leak jobs. 

The city had created the New London Development Corporation to buy up the ninety-acre neighborhood and find a developer to replace it with an “urban village” that would draw shoppers and tourists to the area.

In December, 2000, the New London Development Corporation was within an ace of finishing its parcel assembly, having cleared the site and relocated most of the residents:

Already, the development corporation has bought 65 properties in the 90-acre neighborhood and is in the process of seizing 21 more from owners who have refused to sell, said Chris Riley, a spokesman. Some of those owners, like Ms. Kelo, have already received orders to move out.

New London’s commitment was matched by a substantial and irrevocable capital commitment by Pfizer:

Economic development officials in Connecticut used that plan — and a package of financial incentives — to lure Pfizer to build a headquarters for its research division on 26 acres nearby. With an agreement that it would pay just one-fifth of its property taxes for the first 10 years, Pfizer spent $294 million on a 750,000-square-foot complex that opened in 2001.

Bought with the promise of eminent domain: Pfizer’s research facility

NLDC’s promises had borne fruit: $300 million in new money, and the promise of substantial additional jobs.  They were so close, and then:

Seven property owners in the Fort Trumbull neighborhood, including the Cristofaros, filed a lawsuit today [December 21, 2000 – Ed.] in State Superior Court here seeking to prevent the condemnation of their homes and businesses. Their efforts are being backed by the Institute for Justice, a nonprofit public interest law firm in Washington that specializes in helping property owners fight confiscation under eminent domain.

Supreme Court notwithstanding, ED4ED does not have strong enough checks in place to counterbalance the power advantage held by local government and its private-beneficiary ally.

“It’s a fair fight, isn’t it?”

That also makes it a potential source of abuse:

New London was really another example of political cronyism and politicians using the might of government in order to benefit well-connected big business at the expense of those poorer and less influential.

Consider that the head of the New London Development Corporation was Claire Gaudiani, who was married to David Burnett, the Pfizer executive who wanted “a nice place to operate.”

According to her Web site, “Claire Gaudiani is an idealist and an activist. Her writings call on colleagues, students, and fellow citizens to leave the world a better place.”

Not exactly a conflict of interest, but a cozy propinquity.

Pfizer vice president George Milne also sat on the development corporation’s board.

So he should have!  Pfizer is an enormous employer and there was nothing hidden about Pfizer’s interest in expanding the site. 

In the courtroom, former development consultant Jimmy Hicks called Pfizer the “10,000-pound gorilla” in the planning process, and said “the entire municipal development plan – it was related back to Pfizer.”

Color me unimpressed by that.

The connections may be fishy but I’m still unimpressed

So Pfizer got its loot – free land, special tax breaks, and government-funded cleanup of the neighborhood (including clearing out the unsightly neighbors) – and the area prepared for economic “rejuvenation,” as Justice Stevens put it.

What loot did Pfizer get?

It didn’t work out that way.

Why not?  Because it took so long to assemble the sites and clear away the legal roadblocks that by the time they had done so, the economic case for expansion was gone, and Pfizer did what it had always feared it would have to do – it consolidated away from New London.

Those delays were occasioned by the plaintiffs’ invocation of their right to challenge the eminent domain, a challenge they could not have mounted on their own (money asymmetry leads to power asymmetry).  Instead, the Institute For Justice, primus inter pares, picked Kelo as the ideal test-case to challenge the expansion of ED4ED and litigated it cleverly, ferociously, and protractedly, all the way to the Supreme Court:

They’re my lawyers, and they worked for free

The litigation totaled five years from filing to decision and another two years to complete site clearance, during which time the ice cream cone melted, as Dharavi’s ice cream cone is melting. 

After Pfizer completed its $67 billion acquisition of Wyeth, another drug giant, in October, [Pfizer spokeswoman Liz]. Power said, “We had a lot of real estate that we had to make strategic decisions about.”

Can there be much doubt that, had New London completed its redevelopment, Pfizer’s decision would have been different?  Imagine that waterfront area with retail shops, a hotel, apartments, and high-end condos?  Even if we assume that the condos would be partially unsold, the apartments cutting rents, and the hotel struggling with occupancy, there would have been all that massive co-investment, and the visual and physical landscape of shoreline New London would have been permanently altered for the better.  Now Pfizer’s facility stands as lonely as unoccupied Fort Trumbull:

Another monument to an outdated mission

She said Pfizer would try to sell or lease its buildings in New London and would “continue to pay our taxes to the city as scheduled.”

ED4ED depends on economic circumstance.  It is premised on the judgment – right or wrong – that a neighborhood is in decline, and that unless something dramatic is done to revive the neighborhood, it will sink into profound blight.  Delay the relief for nearly a decade and you stop the revitalization, but you do not stop the decay – and you allow the business cycle to swing against you.  You don’t get the co-investment.

Nobody has built the high-rise hotel or the luxury condos the city’s planners had envisioned. The credit crunch and housing collapse took the air of out of that grand plan.

Correct.  Also the delays added costs.

Pfizer’s sparkling R&D facility that was supposed to anchor the city’s “rejuvenation?”  It’s being shuttered as a cost-saving measure following Pfizer’s merger with Wyeth. Some of the 1,400 jobs there will move across the river to Groton. Some will be terminated.

After the merger, Pfizer called the shots

Had NLDC done it, then the merger might have brought Wyeth jobs to New London.  Cities compete on their business-friendliness, and New London lost – in large part because it was unable to use ED4ED.

The best-laid plans of central planners, it seems, have once again gone awry – unless you look at it from Pfizer’s perspective.

Nonsense.  Pfizer’s no winner either.

The complex is currently assessed at $220 million, said Robert M. Pero, a city councilman who is scheduled to become mayor next month. The company pays tax on 20% of that value and the state pays an additional 40%, Mr. Pero said. That arrangement is scheduled to end in 2011 [When Pfizer will have to pay 100% taxes – Ed.], around the time Pfizer, which is currently the city’s biggest taxpayer, expects to complete its withdrawal.

New London is no winner:

But for New London? No more R&D jobs. No development of Fort Trumbull. Just some rubble where families once lived.

New London now has a wasteland where a neighborhood once stood, and no jobs or business to show for it. It’s another travesty of central planning.

Or just as much a travesty of litigation.  No medicine works if it is withheld from the patient for a decade.  No redevelopment strategy can survive a decade’s delays.

Crossing the legal no-man’s land is expensive

So who won in New London?  As far as I can tell, nobody.  New London lost: the jobs crossed the river to Groton.  Pfizer lost: it spent $294 million on a property that is now vacant and on which it will lost $75 million or more.  Ms. Kelo lost:

“In all honesty, I’m not happy about what happened to me,” Ms. Kelo said. 

Financially, she would have been better off selling when NLDC came calling.

But, she added, “With 43 states changing their laws, in that sense I feel we did some good for people across the country.”

Everybody lost.

The little house that became a symbol: relocated and refurbished

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The soaring plans for New London’s revitalization finally died last week [November 11, 2009 – Ed.], and in failure’s aftermath the opponents of eminent domain for economic development (ED4ED) cannot resist gloating, as illustrated by this story in The Washington Examiner:

Pfizer deserts its monument to corporate welfare

No spin there, surely.

The little house that focused the ruckus:

Susette Kelo’s home in New London

Susette Kelo’s little, pink house in New London, Conn. – like the houses of all her neighbors – is now a pile of rubble, overgrown with weeds.

But the story has quite a different side, as revealed in this contemporaneous New York Times feature (in Times New Roman indigo).  The Kelo house wasn’t demolished:

Ms. Kelo, a nurse who works in New London and Norwich, Conn., said she was still bitter about the loss of her house, which she sold for $1 to Avner Gregory, a preservationist. Mr. Gregory dismantled the house and moved it across town.  [He also upgraded it – Ed.] It now stands as a bright-pink symbol of the divisive dispute that drew so much attention to New London.

I am fairly certain that it was, in fact, moved to the Fort Trumbull site previously.  So the house whose immovability figured at the center of a landmark eminent-domain case proved its movability afterwards.

Perched on the rock, ready to creep away?

But Pfizer, the company that called for the demolition in order to build a new research and development plant, announced Monday it is packing up and leaving town in order to cut costs after its merger with fellow drug-giant Wyeth.

Yes, because the eminent domain failed. 

Pfizer said it would pull 1,400 jobs out of New London within two years and move most of them a few miles away to a campus it owns in [nearby] Groton, Conn., as a cost-cutting measure.

New London loses; Groton wins.

It would leave behind the city’s biggest office complex and an adjacent swath of barren land that was cleared of dozens of homes to make room for a hotel, stores and condominiums that were never built.

The Examiner sees one thing; we see quite another.

What do you see here?

“I’m not surprised that they’re gone,” said Susette Kelo, who moved to Groton from New London after the city took her home near Pfizer’s property. “They didn’t get what they wanted: their development, their big plan.”

Jobs are mobile; cities are static.  Cities represent a massive investment in permanent infrastructure that goes to waste unless that infrastructure produces jobs.  Cities are like plants, needing the pollinating bees of employers to fertilize and propagate their economies.  Flowers compete for bee attention with bright colors and appealing scents; cities compete for employer attention with tax breaks and eminent domain offers.

Looks like a great place to settle, doesn’t it?

In fact, that’s just what New London did, luring Pfizer into settling:

The city had created the New London Development Corporation to buy up the nine-acre neighborhood and find a developer to replace it with an “urban village” that would draw shoppers and tourists to the area.

The power relationship is unbalanced and fluid.  When the economy is good, cities have the power of levy.  When the economy is bad, companies have the power of mobility.

Economic development officials in Connecticut used that plan — and a package of financial incentives — to lure Pfizer to build a headquarters for its research division on 26 acres nearby. With an agreement that it would pay just one-fifth of its property taxes for the first 10 years, Pfizer spent $294 million on a 750,000-square-foot complex that opened in 2001.

In terms of site appeal, Fort Trumbull is a jewel: on the Thames River, views of Long Island Sound, proximity to downtown. 

The redevelopment area is scraped

Pfizer’s research facility is in far low left, almost out of the picture

Yet it lacked accessibility or a reason to stop.  I-95, the interstate from New Haven to Providence and Boston, runs alongside, crossing the Thames on a high bridge and giving passers-by only fleeting glimpses of the waterfront.

If you got off the highway, you’d be home now

Nor is there an economic base.  Not enough jobs, not enough reasons to invest or spend money.

In the late 1990s, New London’s politicians were desperate to fix up their aging and ailing town.

Had the elected and appointed officials done nothing, Ms. Kelo’s little house would still be there, true enough, but the neighborhood around her would still have deteriorated.

The city revved up a private, non-profit entity called the New London Development Corporation, which went to work drawing up a plan of a new New London.

Imagining its future: New London City Hall

Was NLDC a Mission Entrepreneurial Entity?  No, because it was vested with government proxy powers, namely eminent domain for economic development.  NLDC was an instrumentality of New London.

Eminent domain has always existed for public-use developments – highways, bridges, parks.  ED4ED differs in that the redevelopment is intended to be a private use, undertaken by a private party.  Eminent domain is a use of government power to override normal private-property rights, and while it’s potent enough when the property taken is used publicly, when the transfer is private-to-private ED has enormous potential to favor the powerful at the expense of the powerless.

The central planners decided that their white knight would be Pfizer, already operating a plant across the river in Groton, but looking to build a massive research and development facility.

Groton, the Istanbul of this story: with Fort Trumbull the orange bulge on the Thames’s West Bank

Like competing apothecaries across a village green, Groton and New London face each other across the wide Thames River.  Southeastern Connecticut has long been an economic backwater, and unless the state grows its jobs broadly, there will not be enough of an employment base to support both cities.  Groton had the edge, through its US Navy connections with Electric Boat (the submarine builders), and New London needed to do something dramatic if it was to compete.

So the politicians picked a 24-acre lot and sold it Pfizer for $10, adding on special tax breaks.

Sounds like a giveaway, except that sometimes land has negative value – as in when it’s contaminated.

Also, state and local governments promised $26 million to clean up contamination on the lot and a nearby junkyard.

Without which nobody would develop anything – particularly not a pharmaceutical company, for can you imagine the headlines?

But Pfizer executive David Burnett thought New London needed to do some more cleaning. “Pfizer wants a nice place to operate,” the Hartford Courant quoted Burnett in 2001. “We don’t want to be surrounded by tenements.”

I’m sure he could have been better coached, but his point is legitimate.

The old Victorian houses in the Fort Trumbull neighborhood next door did not match Pfizer’s vision – a high-rise hotel or luxury condominiums would be more fitting.

The issue wasn’t their quality, but their density (or lack thereof) and their suitability to making Pfizer’s installation into a research campus.  If you bring people to work in your big research plant, you want a place for them to stay, and to eat out, and to tour your town.  Fort Trumbull was and is isolated; the Pfizer plant would have been an enclave.

The few homes sprinkled in had been excised

So, the development corporation, empowered with eminent domain by the city government, cleared out the Fort Trumbull neighborhood, condemning the homes of anyone who wouldn’t sell at its appraised value. Kelo, and other residents who didn’t want to move, sued to block the condemnation.

Nothing left but weeds and a shuttered warehouse, awaiting redevelopment

Eminent domain protects property owners in two ways: with just compensation for the taken property, and even before that, by requiring the government to demonstrate that this particular taken property is necessary to be taken.  When a highway is involved, necessity is geographically demonstrable.  For economic development, the finding is abstract – that the neighborhood is ‘blighted’ (a term cooked up in the mid-1950s’ cases of Berman and Midkiff), which as many commentators have pointed out, is a very slippery slope.

They lost, but they fought all the way to the U.S. Supreme Court.

There, the four liberal justices joined with moderate Anthony Kennedy to rule in favor of the developers — the takings were perfectly legal.

Deferring to municipal government: Kennedy

As I’ve discussed, it was a questionable decision, although it is the logical culmination of the line of reasoning in Berman and Midkiff and others.  Recognizing politically that ‘blight’ could be a code-word for ‘poor,’ advocacy groups kicked up a substantial political backlash that is still ongoing.

The Court cited the redevelopment plan’s “comprehensive character” and the politicians’ “thorough deliberation.”  

Reading the judicial record, I agree with critics who thought the NLDC’s approach was sketchy and roseate. 

Justice John Paul Stevens wrote, “The city has carefully formulated a development plan that it believes will provide appreciable benefits to the community, including, but not limited to, new jobs and increased tax revenue.”

And I believe the city

This isn’t the place to rehearse all the complexities, issues, and policy risks of eminent domain; I’ve covered them in many other blog posts [See box – Ed.].   

For Kelo, we need only that, as Poletown and similar developments have showed, and as Atlantic Yards in Brooklyn continues to demonstrate, elected officials go all dewy with visions of new jobs.  Along the way, they are dazzled by insubstantial promises, and they tend to steamroll small property holders.  This trampling on property rights they justify as incidental damage, small costs for the greater good.  ED4ED gives elected officials moral cover for using their power to benefit those pollinating bees they so desperately wish to attract.  Here’s a quote from 2000, when the Institute for Justice’s lawsuit was filed:

‘Going back to John Locke, the concept of private property, after due remuneration, being transferred to public benefit is a longstanding tradition in the United States,’ said Claire Gaudiani, the president of the New London Development Corporation, a private nonprofit group authorized by the city to direct the redevelopment plan.

Ms. Gaudiani, who will step down in June after 13 years as president of Connecticut College here, has led the economic redevelopment effort and is largely credited with persuading Pfizer to put its new research headquarters on a formerly polluted site. Her husband, David G. Burnett, is a Pfizer executive, the director of Pfizer Research University.

That was the hope.  What changes a decade wrings.

[Continued tomorrow in Part 2.]

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Vacancies even in my tony neighborhood?

That concerns me.

Leave it to the Wall Street Journal to peep through Mayfair’s lace curtains:

LONDON — At an abandoned home with yellowing newspapers on its front stoop, Paul Palmer peeks through a mail slot to find letters and leaves carpeting the entryway. The house next door has a dead plant chained to its porch, which is covered in faded utility bills.

Mr. Palmer investigates abandoned homes for a living. But his turf isn’t a poverty-stricken corner of this financial capital. It’s the Mayfair district, home to wealthy financiers, celebrities, the U.S. Embassy — and a few squatters.

Who owns it, and why don’t the owners live here?

In the city of Westminster, where Mayfair is located, homes can cost up to £50 million ($81 million). Yet Westminster is fifth among London’s 33 boroughs in the number of unoccupied properties. In 2008, 1,737 homes had been vacant six months or more, the third highest number among all London boroughs, according to the Empty Homes Agency, a nonprofit group that seeks to put empty homes back into use.

Not confined to the bad neighborhoods: red means vacant

Unlike our recently-profiled case of no landlord at all, the problem isn’t loss of equity leading to economic abandonment:

Unlike people facing foreclosures in other neighborhoods around the world, Mayfair’s homeowners aren’t down on their luck. Rather, the properties serve as investments for owners who pay the bills to keep them empty — something the neighbors and city object to when the homes fall into disrepair.

Real estate, particularly well-located and well-built real estate, has long been a ‘brick safety deposit box’ for the world’s rich people.  More durable than gold or gems, it also can serve as a bolthole should things get too hot in the home country (as in Dubai, where defaulters on condo loans buy a one-way plane ticket and leave their Mercedes at the airport, escaping to avoid being thrown into debtors’ prison):

[New York Times, 12 Feb 09.]  With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

The owner fled, leaving the Merc behind

People are economically rational, so when you see a perplexing behavior, look for a missing incentive – which in this case is easy enough to find:

Many owners decline to rent the homes due to local council tax rules [Local real estate taxes – Ed.], which tax properties at a lower rate if they are empty and unfurnished.

As we saw in the case of California’s economic teardowns, where plowing a brand-new home under was less costly than securing it and holding it for eventual sale, localities can miscalibrate the relative incentives of different property types and tenure configurations and induce perverse outcomes.

So it is here in London, for the unseen owner’s equation probably looks like this:

Net benefit (cost) of renting a luxury owned flat in Mayfair

+ Rent from the unknown possible new tenant

– Leasing commissions to the estate agent

– Operating costs of heating and maintaining the apartment

– Unrecoverable damages (wear and tear) done by the tenant during the occupancy period

– Inconvenience of having the property rented/ needing to move the occupant out

– ‘Brain damage’ of having to think about it

– Loss of privacy/ anonymity by having to report the rent and expenses

– Increased council taxes resulting from being rental rather than vacant

= Net benefit (cost) of renting rather than holding securely vacant.

The optics – one positive, seven negatives – are deceiving, because this equation is conceptual rather than numeric, and we cannot assign accurate weights to each factor.

I don’t think so

Notice though that the richer you are, the more the intangible risks (inconvenience, brain damage, loss of privacy) rise in value relative to the quantifiable and probably minor (as a percentage of property value) net operating income from the rental.

Well bred and well concealed

The unseen owner’s caution makes more and more sense – which partially explains its frequency:

The high concentration of rundown, empty homes is striking for a posh neighborhood like Mayfair, with its ornately gated manses. The hub of aristocratic society before World War II, Mayfair’s modern-day image is demonstrated by its prominent place on the British Monopoly board.

The highest-rent color group on the board? Mayfair

Some locations, being psychological trophies, attract more than their share of interest.  How many luxury flats in Cairo, London, Miami, New York City, Los Angeles, Paris and Seattle are sitting empty, havens for jet-set plutocrats who think it’s worth taking out insurance against political or economic chaos at home?

In real life, the empty-home phenomenon touches some of the UK’s more famous residents. A few years ago, Mr. Palmer met comedian Tracey Ullman and her husband, Allan McKeown. They wanted to know why the house next door to theirs was derelict, recalls Mr. McKeown.

Proudly British, and proudly funny: Tracey Ullman

Former Prime Minister Tony Blair’s home is adjacent to a crumbling property that’s been vacant for more than a decade. The owner keeps up on its payments, according to Mr. Palmer. But one look inside indicates they likely haven’t visited in years.

It’s an economic sanctuary – and London is the beneficiary, at least financially, since whoever owned the house before made a large profit selling it, and today London collects taxes on it without having to provide any services.

That loophole frustrates Mr. Palmer.

Is it a loophole? 

Depends on what you think is behind the door

To me, a loophole creates an unintended option, something that is exploited by program participants to achieve outcomes that lawmakers would have prevented had they through of the possibility.

“We shouldn’t be rewarding these people,” he says.

Palmer doesn’t believe in rewarding absentee non-landlords

It’s not being rewarded – or is Mr. Palmer chafing at the real estate tax differential treatment?

As the Westminster City Council’s empty-property officer, Mr. Palmer strolls the area’s streets six hours each day to identify vacant homes and track down their owners.

Actually, Mr. Palmer has no interest in finding the missing owners, he can coax them from their foreign rabbit holes simply by seizing their property.

Once he identifies a vacant house, Mr. Palmer consults property records.

Because one cannot move property, it can be taken economic hostage.  Further, because property is immobile, one can mandate transparency in its ownership through a registry of title.

To claimownership, you need your name on the deed

After that, he often finds himself sending letters to the British Virgin Islands, a known tax haven for foreign companies, and a place where many of the property owners in question have mailing addresses.

Above we speculated on the value of anonymity; BVI and Netherlands Antilles addresses are a further clue that these are the discreet rich, who want to conceal either the source of their wealth, or its uses.

He says he rarely receives a response back. Except, that is, when a court action is about to begin.

Court action?  What court action?

Under British law, local authorities have the power to seek an order to claim ownership of the ghost properties and put them up for sale.

If a property is still empty after six months, with no effort on the owner’s part to occupy, rent or renovate it, Mr. Palmer begins a “compulsory purchase” — a process that forces an owner to relinquish possession.

‘Compulsory purchase’ is British for ‘eminent domain.’

Not as strong as the Fifth Amendment, but similarly evolved

Real estate, being immovable, makes a Tocquevillean asset in two ways:

1.  Its possession depends on a property-rights-respecting citizen-responsive government, so those who possess real estate property are invested in making their government work.

2.  Its value realization requires being physically present to claim the property, so municipalities and citizens who want better communities have a means of making their neighbors shape up.

As I posted nearly four years ago, tax liens act as the housing finance ecosystem’s anaerobic bacteria:

In this real estate taxes and their corollary, tax liens and tax lien takings, act like anaerobic bacteria, breaking down decayed dead organisms and turning them into a nutrient-rich environment that sprouts new growth.

And this is how we return it to its essence ….

That’s how London is using compulsory purchase:

After assessing the value of the property, officials typically sell the house.

If the owner fails to occupy/ maintain the house, even if minimally – then the municipality treats it as provisionally abandoned property, and returns the property to more active use and occupancy, by compelling its sale to someone who presumably will live in it (or actively rent it).

London doesn’t steal the property, however:

If the original owner hasn’t come forward, funds are paid to a local court where they remain for up to seven years.

The city forces the sale, but sequesters the proceeds.  The issue is use, not confiscation.

Most owners eventually turn up to claim the cash.

However, even this approach has a sharp edge in the boundary between private property rights and public-use imperatives:

And the bridge is out too …

The compulsory purchase, says Mr. Palmer, is a “tool we use as a last resort to take empty property away from owners who refuse to do anything to it.”

Isn’t the right to do nothing with my own property one of my fundamental rights?

I have the wight to be idle

If you tried this in New London, you’d have a major legal and political fight on your hands.

Wouldn’t it be better – and simpler – just to eliminate the favorable taxation of vacant property?

Now that you’re PM, Gordo, would you take care of that for me?

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