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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Two days ago, we looked at Santa Rosa’s Country Mobile Home Park, whose owner wants to condo the land (at least as reported in the San Francisco Chronicle; the owner wouldn’t talk to the newspaper), and yesterday we saw that in a forced condo conversion, land value would be a tussle.  Yet why the choice of condo rather than co-op? 

It has to do with optionality.  Who can force or block what?

I’m blocking your conversion attempt

To sell to a co-op, by definition the land owner must persuade at least a majority of the residents – often a super-majority – that the proposed purchase is a good deal.  With a condo, evidently the owner can act unilaterally through a subdivision procedure, putting the residents to a Hobson’s choice: pay the owner’s price – which can include a premium equal to the home owner’s sunk costs lost on relocation – or move.

Like it or lump it

Nor are mobile homes insignificant.  According to the Chronicle, California hosts 4,707 private owned mobile home parks with 365,382 lot spaces (an average of 78 per lot), home to 700,000 residents.  One Californian in fifty lives in a mobile home park.

The legislation’s sponsor echoes this post’s themes:

“We’re trying to make sure that people whose lives are going to be affected have a voice,” said Assemblyman Pedro Nava, D-Santa Barbara, the bill’s sponsor. “Mobile home parks are affordable housing. The notion that you could have the land sold out from under you is just abhorrent.”

The proposed legislation (text in pdf) opens with a policy statement, then quickly gets to a procedural solution:

SECTION 1. Section 66427.5 of the Government Code is amended to read:

66427.5. At the time of filing a tentative or parcel map for a subdivision to be created from the conversion of a rental mobilehome park to resident ownership, the subdivider shall avoid the economic displacement of all nonpurchasing residents in the following manner:

(a) The subdivider shall offer each existing tenant an option to either purchase his or her condominium or subdivided unit, which is to be created by the conversion of the park to resident  ownership, or to continue residency as a tenant.

No one can be forced to buy or evicted for failure to buy.

 (d) (1) The subdivider shall obtain a survey demonstrating support of a majority of the residents of the mobilehome park for the proposed conversion.

This equity-balancing procedure – the large landholder having to persuade at least a majority of the small landholders – dates back to the English Enclosure Acts, about which I posted by borrowing from Jack Aubrey:

Most of what I know about the Enclosure Acts, I learned in Aubrey-Maturin

Harry glared about him, scribbled sums on a piece of paper, and then said to Griffiths, ‘God’s my life, sir. You have the effrontery to present this with just the barest majority by value, when you know perfectly well that three quarters or four fifths is the usual figure. And to make matters worse, far, far worse, you do so against the will of the lord of the manor, your natural superior. I have never heard of such a thing. I wonder at it, sir. I wonder at it.’ (Pages 74-75)

Back in Santa Rosa, the survey requires procedural democracy:

(3) The survey shall be obtained pursuant to a written ballot.

(4) The survey shall be conducted so that each occupied mobilehome space has one vote.

Voting about future use or sale is core to group ownership of property, as we saw in Florida’s Briny Breezes, and similarly core to land-use policy decisions, like the UK’s stock transfer.

After the condo conversion – assuming it goes through – the minority non-purchasing residents would receive extra protection akin to that they now have under the state’s mobile-home park ordinance:

(f) The subdivider shall be required to avoid the economic displacement of all nonpurchasing residents in accordance with the following:

(1) As to nonpurchasing residents who are not lower income households, as defined in Section 50079.5 of the Health and Safety Code, the monthly rent, including any applicable fees or charges for use of any preconversion amenities, may increase from the preconversion rent to market levels, as defined in an appraisal conducted in accordance with nationally recognized professional appraisal standards, in equal annual increases over a four-year period.

More fingers, Mr. President

(2) As to nonpurchasing residents who are lower income households, as defined in Section 50079.5 of the Health and Safety Code, the monthly rent, including any applicable fees or charges for use of any preconversion amenities, may increase from the preconversion rent by an amount equal to the average monthly increase in rent in the four years immediately preceding the conversion, except that in no event shall the monthly rent be increased by an amount greater than the average monthly percentage increase in the Consumer Price Index for the most recently reported period.

Assuming this legislation were to pass, one can expect it to be challenged by park owners, who have shown a consistent predilection for litigating mobile-home statutes, particularly at the county or local level.

In response [to ordinances barring mobile home park condo conversions in the name of affordable housing preservation], park owners have filed more than 15 lawsuits against the municipalities.

Though the home owners have a strong case in policy equity, particularly given the unique history of mobile homes and their netherworld status as an asset class, the park owners have a strong legal point: preventing subdivision and sale to the residents, regardless of price, materially compromises their rights as landowners.

The only one that made it through the appellate process was decided for the park owner, said Richard Close, a Santa Monica attorney who represents owners in many of the lawsuits.

Close to the owners? 

Mr. Close has been on these issues for a quarter-century, and has successfully represented owners trying to condo their parks:

Mr. Close co-authored “Downward Mobility” (Los Angeles Daily Journal 2007); “Conversion to Resident Ownership: Does it make sense for you?” (WMA Reporter June 2007); “County Leaders Missing Point on Park Conversions” (Santa Cruz Sentinel 2007)

In several of these pieces he cites what seems a critical potential fact:

How can low-income residents afford to become homeowners? For low-income residents who elect to purchase their lots, the state provides 3% financing in an effort to preserve affordable housing and to promote affordable purchase housing.

Mr. Close’s assertion is not documented by a hyperlink, and it’s inherently suspect.  Three percent financing is well below market, meaning there’s an implicit subsidy involved, which further implies finite resources, which implies competition for those resources … which implies they won’t be much help to mobile home owners.  As negative confirmation of these deductions (beyond Mr. Close’s unsubstantiated assertion), the only reference I can find is to CalHome, a state program for which mobile homes are eligible but clearly neither preferred nor encouraged:

Grants to local public agencies or nonprofit corporations for first-time homebuyer downpayment assistance, home rehabilitation, including manufactured homes not on permanent foundations …

Assistance to individual households will be in the form of deferred-payment loans, payable on sale or transfer of the homes, or when they cease to be owner-occupied, or at maturity.

Note: CalHome does not loan directly to individuals.

If I have this straight, CalHome wouldn’t work in a condo situation, it would apply only if a non-profit rode to the rescue and bought the whole park.  If I’m right about this, then Mr. Close’s claim is a red herring.

Something fishy?

Can’t blame a guy for trying

Financing is available through banking institutions, Cal-Vet loans and local governments often offer financial assistance through redevelopment funds/first-time home buyer programs.

Furthermore, most park owners offer financial assistance in an effort to facilitate sales and encourage resident ownership in the parks.

Translation: We’ll set the price out of your reach, then offer you a discount to swing your approval.

Remember: residents lack optionality, as in practical economic terms, they cannot move:

“In the old days, if you didn’t like a park, you unhooked and drove to another location,” said Sam DiGiacomo, who lives in a mobile-home park in the town of Sonoma and runs the local chapter of the Golden State Manufactured-Home Owners League, which represents residents. “But now they’re not really mobile; my home sits on a cement foundation, the wheels are removed.”

Cover of the most recent GSMOL publication

“People think we’re nomads that travel from place to place,” said Suzanne Angeo, a resident of Santa Rosa’s Country Mobile Home Park. “But we live here; these are our homes. Many of us have invested our life savings into them.”

Suzanne Angeo waters in front of her manufactured home at Country Mobile Home Park in Santa Rosa. (Brant Ward / The Chronicle)

Many residents worry that going condo will wipe out that investment.

Potential buyers will heavily discount the value of the homes if they have to pay a big premium for the lots, said Will Constantine, a Santa Cruz attorney who represents park residents fighting condo conversion.

“When a park owner converts, the mobile-home owners lose about 95% of their homes’ value,” he said.

That has to be hyperbole.  It’s likely to be bad but not that bad.

“If a resident wants to sell, the person buying has to buy the lot. If you have to pay $200,000 for a lot, you won’t have much left over to buy the mobile home.”

Mr. Constantine’s numeracy seems no better than Mr. Close’s; in fact, the whole Chronicle piece is missing that crucial element.  What price would the owner think equitable? 

[Mr. Close's Downward mobility article offers as an example a favorable land purchase in Palm Springs, $88,000 spaces now worth $139,000, which sounds good, except that the cited home owner is now paying $190 in monthly association fees and $100 in taxes, plus a minimum of $440 per month in capital costs (6% x $88,000), for a total occupancy cost of $730 monthly versus the $500 he paid before in monthly rent.]

Let’s play our game, with your home on the line

What price is affordable? 

The right price for a mobile home, not a trailer!

What price is financeable?  Since we have no information on any of this, we fall back on procedure. 

The owner wants all the optionality with none of the restrictions; the residents are rightly terrified that with such a power imbalance, if they lack legal standing they will lose their affordability. 

“For many of us, this is our last home; we’ll go from here to the grave or a nursing home,” said Jean Warnes, 74, who chairs the homeowners association at Sequoia Gardens, a Santa Rosa mobile home park that has applied to go condo. It has the same owner as the Country park.

For most of us, housing is not only a comfortable haven for our declining years, it’s also a source of inflation-hedged wealth to be monetized for ourselves or our children:

You should have listened to me when I recommended buying the lot

“When we pass away, our heirs cannot inherit our homes if they must buy the air-dirt underneath. If we go to a nursing home, we will have nothing for our keep.”

“As many years as we’ve paid rent, we could have bought this lot over and over,” said Joan Allen, who has lived in Santa Rosa’s Country for 29 years.

Probably not, actually.  And your rent’s likely been cheaper than the cost of owning a home would have been.

“I feel it would be more advantageous to buy the lot. If we had the opportunity and the price was right, it would be a good investment.”

Once again, it’s back to the question of price – and the related question, at least in the unique asset class of mobile homes, of who has what optionality.

The bill passed the Assembly in May on a 41-31 vote and is eligible for a vote on the Senate floor Aug. 17.

Wonder how they’ll vote?

I predict it will be enacted.

I make laws with my right hand

Then it’ll be litigated.

So sue me

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Yesterday we encountered Country Mobile Home Park, an estate in Santa Rosa whose park owner is adamant about converting the land to condominiums, and selling the individual plots to those whose homes rest atop those plots.

Plots? I love plots!

[Editorial note: park owners persist in calling the land 'spaces', as if to emphasize the transient nature of home occupancy, when plots is a much more appropriate word, for once the manufactured home is installed on the site, few if any of them ever move again. – Ed.]

Given the property’s good location and attractive construction, you’d think residents would be eager to buy, but as presented by the San Francisco Chronicle, they’re not:

“If it went condo, my wife and I would … have to abandon our unit and leave,” Dion said. “We’d have no place to go.”

If you owned a home here, wouldn’t you want to own the land under that home?
From left, Roger McConnell, Phil Dion, Mickie Dion, and Dick Root.

(Photo by Brant Ward, San Francisco Chronicle)

The couple paid $50,000 for their two-bedroom manufactured house about seven years ago. The monthly rent for their space is $515.

Those facts raise the question: what’s a fair price for the land?

In the ideal world of unfettered and undistorted Lockean capitalism, both buyer and seller are free actors with an infinity of possible actions. In such a case, fair market value is easy to derive: put the land up for sale, give it exposure in the marketplace, pick the highest offered price, and if the seller accepts, then that’s the value. Actual buyer-seller bargaining is the pure procedural value, hence the classic appraiser’s definition: ‘independent parties dealing at arm’s length, neither under undue compulsion …”

Just preserving my bargaining rights

The problem here is that the Lockean ideal is impossible to achieve. Manufactured housing or even longstanding mobiles homes get rooted to the soil; relocating them is at least expensive, and often totally destructive. When the land occupancy cost spikes, it’s the home owners who suffer. They have a substantial capital investment tied to a place – the Dions paid $50,000 – an investment that cannot economically be moved. The power imbalance is self-evidently visible and frequently exploited.

The home owners lack optionality; facing ruinous relocation costs, they’ve got to buy their land or lose their implied home equity. So they’re vulnerable to having a coercive or even punitive price premium squeezed out of them, and in a non-market transaction – you must buy at the price I set – the land could be valued in any of four ways:

Choose the one that’s best for you

1. Land rents. Take the current stream of land rents, treat them as an annuity, and capitalize them at a market cap rate.

2. Comparable sales. Find similarly zoned and situated parcels, and calculate a per-acre or per-space-equivalent price. This gets tricky because density adds value, especially in California’s better counties.

3. Highest-and-best use. Imagine the land vacant (because the mobile home owners would be legally obligated to remove them) and available for development. What is that urban land worth?

4. Pain threshold. The maximum price where a mobile home owner would still be better off staying than moving. This calculation would start with the home owner’s alternative tenure – could the home be moved? What would it cost for an equivalent site, plus the home’s relocation?

The last three of these offer no prospect of continued affordability. How much protection might the first approach provide?

To cook up a valuation, follow the right recipe

For convenience, assume that today the landlord pays real estate taxes [How would a condo conversion be treated under Proposition 13? – Ed.] and park infrastructural maintenance costs. Upon sale to the residents, they rather than the park owner will have to pick up these costs, so from their perspective they need to substitute $515 of monthly debt service for $515 of land rent payments, or else they’ll be economically worse off.

Multiply the $515 monthly rent times 12 to annualize it, then cap $6,180 at 6% – even in a nasty recession, this is still California, and as noted yesterday, I like the location – and you have an ‘affordable’ price for the land of $103,000 a space.

Although I can’t tell precisely how many spaces there are per acre, a random comparable in Redding, California, has 11.5, so what with the interior streets and driveways/ breezeways, let’s make it an even 10. That’s $1,030,000 per acre, and while I can’t tell exactly what land in Santa Rosa costs, a quick search suggests even this would be a terrific price for the land owner.

Is it affordable?

“We couldn’t afford to move our home, and we couldn’t afford to buy the lot underneath,” [Phil Dion] said. “I contacted 13 finance companies, and only one would finance the lot purchase – at 18% interest.”

The Dions are caught in a rate whipsaw. Their monthly rent capitalizes up into value at 6.0%; their land-purchase financing would be at 18.0%, three times as much.

Reconstituted, you’ll be worth one-third as much

Yet if the manufactured home plus the newly bought land were treated as real estate, then they could certainly be financed at something in the 6-7% interest range. So once again, the legacy of having been constructed as a mobile home leads to a financing impairment that destroys affordability for the owned-land-mobile-home asset class – absent government pump-priming of the credit market, that is.

The park’s owner, Country Mobile Investments of Walnut Creek, could not be reached for comment.

Actually, we needn’t hear from this owner, since another Google search reveals that the owner is well aware of the residents’ legal protections, and is litigious about preventing their expansion, as this 2007 article shows:

MOBILE HOME PARK SUES CITY

The owners of Country Mobile Home Park in Santa Rosa sued the city Friday, seeking $23.1 million in damages because the city in May enacted restrictions on condo-style conversions.

One suit, filed in Sonoma County Superior Court, claims the city “unlawfully stymied” Country Mobile Investments’ attempt to sell land at the park on Fulton Road when they passed the ordinance last month.

A second suit, also filed Friday, seeks to overturn the city’s new ordinance.

That for your ordinance!

While there’s no further reference that I could find [Based on ten seconds' search? – Ed. It's a blog post, not a legal brief – Auth.], suggesting that the lawsuit went away as did the proposed county-wide legislation, the following further tidbit caught my eye:

The county law requires park owners to secure the approval of 20% of their residents before filing an application to convert and then getting support from more than 50% once the application has been processed.

Thus we already have two levels of government involved – county and local. The locality’s also trying to strengthen the implied warrant of habitability:

Instead, it requires that park owners prove their parks meet building codes and that their roads, sewer, water and utility systems are in good condition prior to conversion.

Setting aside the procedural questions – how does the owner prove this? – this statute is based on sound public-policy principles. Yesterday I observed that the mobile home park operator – that is, the land owner – stands relative to the residents much as a municipality does to a homeowners’ association, as the infrastructure provider. This is clearly the case at Country Mobile, with its interior roads and association amenities like the visible clubhouse:

Who’s responsible for upkeep on the in-site infrastructure?

As long as we’re in that 2007 scenario, some additional detail is worth citing:

When a park undergoes conversion, individual mobile home lots can be sold to current tenants.

Naturally – and at the right price, desirable for all concerned.

Once converted, local rent control laws no longer apply, although a state rent control law protects low-income residents.

But those protections would be wiped out if those low-income tenants move, purchase a lot or die, according to city officials.

Selling the underlying land as a condo thus both (a) eliminates rental protections for all non-low-income residents, and (b) creates a ‘vacancy decontrol’ elimination of rental protection even for the low-income residents. A nice finesse around resident protections phrased in terms of rental.

You thought I had to trigger the protections, didn’t you?

Sale of the underlying land turns the unofficial affordable housing into officially unaffordable housing.

Even the apparent protection for low-income residents is less than it seems, as the 2009 San Francisco Chronicle adds:

Low-income residents who don’t want to buy have lifetime rent-control protection. But as soon as one unit in the park sells, all the moderate-income and above residents get switched from local rent control – which ties annual increases to inflation – to state rent control, which allows rents to increase to market rate over four years.

There go your rent protections

With multiple levels of government are involved, protections are always going to differ, and it’s no wonder the owner would like to slide into whatever form of regulation is most favorable. In a case like this, the less pro-tenant law is almost certainly going to be from farther away, the more-removed unit of government – if the state law were stronger, the local law would have no reason for existence. (Supremacy principles would generally pre-empt a locality’s efforts to negate a stronger state law.)

In recent years, many cities and counties have barred mobile home parks from going condo, saying they want to preserve affordable housing.

Striking here is the leverage difference in occupant ownership forms between going condo – every owner individually for himself – and co-op, where we all reside in a living club.

Are we?

[Continued tomorrow in Part 3.]

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