fedgazette

Condemned prosperity

The use of eminent domain for private development may benefit district communities, but it blights the overall economy.

Phil Davies - Senior Writer

Published March 1, 2006  |  March 2006 issue

"Speak softly and carry a big stick."
—President Theodore Roosevelt

IllustrationRoosevelt was describing his approach to foreign policy, but his statement might just as well sum up the City of Minnetonka's negotiations with a nonprofit group that stands in the way of redevelopment plans for the city's Glen Lake neighborhood.

The organization's modest two-story building sits on a parcel of land slated to become condominiums and shops—part of a large development encompassing 180 condos and over 25,000 square feet of retail space in this affluent Minneapolis suburb. West Suburban Alano, an affiliate of Alcoholics Anonymous that hosts daily meetings for A.A. members and other clients, is reluctant to move. But it's acutely aware of the big stick that the city wields: the power of eminent domain. If West Suburban refuses to come to terms, the city council can condemn the property, evicting the association from its home of 14 years. The building must be vacant by May so that it can be demolished on schedule.

West Suburban board member Chris V. (who requested anonymity, per A.A. policy) said that the organization as a whole hasn't decided whether to fight or accede to the condemnation threat. "A portion of our group wants to chain itself to the front door and let the bulldozer run over them," he said. "Others of us are more realistic, realizing that the city can [use eminent domain to] take our building. We're trying to work with the city to get the best deal we can."

For its part, the city has taken pains to speak softly, insisting that it would invoke its right of eminent domain only as a last resort. City Attorney Desyl Peterson said that the city is trying to identify an existing building for West Suburban to move into, or a plot of land suitable for a new building. "On the Alano property, we are going to do everything we can to avoid eminent domain, absolutely everything," she said. "We are committed to finding them another location."

It's hardly surprising that the city should try to avoid confrontation in its efforts to clear the way for redevelopment. Last summer, in the widely noted case of Kelo v. City of New London, the U.S. Supreme Court ruled that local government has the right to take private property for economic development. The decision ignited a firestorm of protest across the country, with property-rights advocates portraying the ruling as an assault on the working class by tax-hungry politicians beholden to developers.

The backlash to Kelo, as the case is widely referred to, has stiffened the resolve of residents and businesses in the path of redevelopment and pushed what champions of property rights call "eminent domain abuse" to the top of the political agenda. Last fall, the U.S. House passed a bill that would withhold for two years all federal economic development assistance from local governments that use eminent domain to facilitate private development. The Senate was expected to take up the measure early this year. More than 30 states have either enacted or proposed restrictions on using eminent domain in this way. In the district, every state except Montana has some kind of restriction or outright ban on eminent domain in the works (see "Challenging the big stick").

In this environment, what city official wants to be seen dispossessing a nonprofit group serving recovering alcoholics? "Certainly, everyone here at the city is aware of the public response to the Kelo decision," Peterson said.

The intense controversy swirling around eminent domain raises questions about the appropriate role of government in economic development. Is it OK, as the Supreme Court ruled in Kelo, to take someone's house or business for what's believed to be the greater good, even if private developers and investors also benefit from the taking? Or is eminent domain an abuse of governmental power whose avowed ends fail to justify its means?

The debate is usually framed in legal terms, with both sides arguing over exactly what the Fifth Amendment to the U.S. Constitution means when it says that government can take property for "public use," as long as landowners receive just compensation. Property-rights defenders such as the Institute for Justice, a public-interest law firm based in Arlington, Va., vehemently disagree with Kelo and previous federal and state court rulings that sanction the use of eminent domain for private development as well as traditional public uses such as roads, sewers, schools and parks.

But this incendiary issue can also be viewed from an economics perspective. What, if anything, is gained when government wields (or merely brandishes) its big stick? At the end of the day, after the land has been cleared and the new development opens for business, is society richer or poorer because political pressure helped make it happen?

A persuasive case can be made that eminent domain benefits communities by making it easier for local governments to revitalize underutilized or blighted land-thereby raising property values, creating jobs and generating more tax revenue. A ban on government takings for private development "would just bring redevelopment in Minnesota to a screeching halt," said Laura Harris, a lobbyist for the League of Minnesota Cities.

The weight of evidence, however, suggests that public, mostly localized benefits of using eminent domain to nudge along private development don't justify the costs imposed on the overall economy. By forcibly taking private land—or pressuring owners to settle out of court—government distorts markets and reduces the efficiency of businesses. Interfering with free markets also distracts local government from what it does best—producing "public goods" such as highways, schools and libraries that benefit society at large and contribute to economic growth.

As for blight—the most common rationale for exercising eminent domain—its prevalence and severity in the district has been greatly exaggerated. Cleaning up the neighborhood doesn't necessarily require evicting its residents.

Minnesota: A green light for takings

For all the attention that eminent domain has garnered nationally, it's a nonissue in much of the district. In the region as a whole, local governments have shown remarkable restraint in seizing land for economic development, restricting condemnations to unambiguous public uses such as highway and bridge construction, sewer projects and flood control.

No local government in Montana or South Dakota has condemned private property for private development in the past 30 years, and in North Dakota, only one community has taken that step in recent memory—Jamestown, which condemned land in 1996 to make way for a supermarket. A dearth of condemnations in those predominantly rural states is understandable. Large, densely populated cities on the coasts and in the industrial heartland face much stronger pressures to redevelop older neighborhoods and commercial areas. Local governments in Florida, for example, invoked the power of eminent domain for private development 67 times between 1998 and 2002, according to a survey by the Institute for Justice. Ohio jurisdictions used it 90 times during that period.

If there's a hotbed of eminent domain activity in the district, it's Minnesota, and the Twin Cities metro area in particular. The Institute for Justice survey found nine instances of condemnations for private development during the study period. It also found 83 instances of "threatened" use—cases in which a local government declared its intent or willingness to condemn, but didn't follow through.

A recent survey of eminent domain use by the League of Minnesota Cities corroborates those findings. The League's survey makes no attempt to distinguish among actual takings, voluntary settlements and municipal saber rattling. But the results, tracking the actions of more than 600 member cities from 1999 through last June, show that at least the threat to condemn is used fairly frequently to expedite redevelopment projects. As a group, the Minnesota cities called upon their condemnation powers 175 times in six and a half years to transfer land from one private party to another. Minneapolis, St. Paul and 25 other municipalities in the Twin Cities area invoked eminent domain during that time.

Over the past two decades, local governments in Minnesota have pushed the constitutional boundaries of eminent domain, aided by courts that interpreted public use broadly to apply to redevelopment of private land. Perhaps the most notorious example of condemnation for private development in the state is the Walser-Best Buy case in the Minneapolis suburb of Richfield. In 2000, the city's Housing and Redevelopment Authority condemned three automobile dealerships so that electronics retailer Best Buy could build a $118 million corporate campus. Walser Auto Sales, owner of two of the dealerships, challenged the condemnation in a lawsuit. Ultimately, the state Supreme Court affirmed a district court ruling that taking the dealerships was "necessary and convenient in furtherance of a redevelopment project."

That decision and other court rulings giving the green light to government takings for private development have made the state a battleground in the national war over eminent domain. Last year, the Institute for Justice, the firm that represented New London property owners in the Kelo case, opened an office in Minneapolis. Staff attorney Nicholas Dranias said that the institute intends to challenge legal precedent in a test case. "We're going to advance the creative arguments that need to be advanced to ask courts to restrict the use of eminent domain to its original meaning, which meant public uses in the sense of public agencies, public facilities, public roads," he said.

Meanwhile, despite the chilling effect of the backlash to Kelo, some local governments in Minnesota continue to play their trump card when property owners balk at selling. In January, the St. Paul Housing and Redevelopment Authority was pressing ahead with plans to condemn an adult bookstore and liquor store on University Avenue to clear the way for commercial development. The owner of R&R Books has sued the city, objecting to the use of eminent domain and accusing the city of targeting an adult-oriented business.

Last August, a few weeks before the City of New Brighton was scheduled to go to court to condemn an asphalt plant in the path of a $250 million residential and office development, the owners of the plant agreed to sell their land and business assets. They were among the last holdouts in a 100-acre redevelopment zone that once contained a restaurant, bowling alley and rendering plant—all acquired and demolished earlier by the city.

Other communities in the Twin Cities region that have either condemned or threatened to condemn property for redevelopment in the past year include Anoka, Chaska, Brooklyn Center, Champlin, Minnetonka (in addition to West Suburban's building, a vacant residence was slated for taking if the owner refused to sell) and Rosemount.

Condemnation with a purpose

Putting the squeeze on landowners in order to build a shopping center or marina may seem harsh, defenders of the use of eminent domain for private development admit. But they maintain that it's an essential tool for community revitalization, a means of reshaping shopworn inner cities and suburbs to meet new economic exigencies.

If local governments didn't have recourse to eminent domain, recalcitrant property owners could hold cities and developers hostage, demanding payment far in excess of fair market value, the legal standard for just compensation. Or "you could have an individual who at any cost, any price would not sell," observed Sherman Malkerson, a Twin Cities real estate broker who has served as a court-appointed commissioner in condemnation cases. "That may not be in the best interest of the community as a whole."

Condemnation powers make it easier for built-up communities to assemble large redevelopment tracts from multiple, individually owned parcels. If a few holdouts jeopardize the comprehensive plan, a condemning authority can acquire their property at fair market value (under state laws, landowners may also receive compensation for relocation costs), then resell it to a developer.

Such takings fulfill a legitimate public purpose, say proponents of eminent domain. Yes, for-profit companies—the developer, property management firms and corporate tenants—reap much of the benefit from government intervention in redevelopment projects. But putting land acquired by eminent domain to a higher, better use improves the welfare of city residents: Property values in the project area and surrounding neighborhoods rise; additional office workers and new homeowners buy groceries, shoes and DVDs from local merchants; increased tax revenues may help pay for public services and amenities that the city might otherwise be unable to afford.

The argument for the salutary effects of redevelopment is particularly compelling when property is blighted. By eradicating a "public bad," condemnation-aided redevelopment promotes the public good. Clearing run-down, hazardous structures and building anew raises average income, reduces the strain on police, fire and social services, and may provide jobs for poor residents.

"Even those who believe the power of eminent domain should be limited would concede that there are circumstances in which blight should be addressed by government, and if that means [acquiring land] and putting it back in the hands of the private sector, that's OK," said David Sellergren, a real estate attorney with the Minneapolis law firm Fredrikson & Byron.

Many states enshrine in law the notion of eminent domain as a weapon against urban decay. Minnesota's economic development statute permits the use of eminent domain to "clear and redevelop blighted areas," as well as to provide affordable housing. To varying degrees, laws in Montana, Wisconsin and Michigan also allow blighted property to be condemned. Most of the legislative measures and proposed constitutional amendments that would rein in the power of eminent domain make an exception for blight.

Hey, blight happens

Is the use of eminent domain for private development critical to the continued vitality of communities? If municipalities and port authorities no longer had a big stick, would frayed downtowns and dowdy inner-ring suburbs go into decline, starved of private investment and consumed by blight?

That's difficult to say, although recent history in Seattle, where a statewide ban on condemnation for economic development is in effect, suggests that cities can indeed prosper without resorting to eminent domain.

One thing is certain, however: Property targeted for taking is almost never as run-down and in need of redemption as condemning authorities say it is. Findings of blight are often a smoke screen for a local government's true motivation in moving to condemn private property—increasing employment and expanding the tax base. Under current law in most district states, it's easy for local officials to declare viable neighborhoods and commercial areas blighted and ripe for redevelopment.

Where true blight exists—acres of severely dilapidated buildings, crumbling streets and sewers, or other conditions that depress property values and scare off private investors—condemnation may be the only way to wipe the slate clean so that redevelopment can occur. But eminent domain isn't being applied in the district to clean up the equivalent of the Cabrini-Green housing projects in Chicago or New York City's South Bronx slums in the 1970s. Under broad legal definitions of blight, local governments can condemn properties that may be outdated and scruffy, but hardly beyond reclamation by private markets.

In the Walser case, the Richfield Housing and Redevelopment Authority successfully argued that noise, bright lights and constant traffic created by the auto dealerships constituted a blight on an adjacent neighborhood. Homeowners mostly supported the city's taking of Walser's dealerships and Wally McCarthy Oldsmobile for the Best Buy campus, said Bruce Palmborg, Richfield's director of community development. "The idea behind using eminent domain was that there was a public purpose, and part of the public purpose was [to improve] the conditions that existed in that part of the community," he said.

The city also had to establish blight in order to form a tax-increment financing (TIF) district, which allowed Best Buy to leverage future tax payments to pay for land, demolition and construction.

Bruce Malkerson (brother of real estate broker Sherman) is the Minneapolis lawyer who represented Walser. He contends that the blight designation was simply a means to an end—bringing a big employer to town that would pay more taxes than the auto dealerships and modest homes on the site. "The city had to call it blight in order to have authority to condemn, and that's what they did," he said.

West Suburban Alano's building in Minnetonka cannot by any stretch be described as blighted; the association has extensively renovated it so that it meets all city health and safety codes. But it can be legally condemned because it's blighted by association-located on a stretch of Excelsior Boulevard that the city plans to designate as a renovation and renewal district, a type of TIF district. Some neighboring buildings are vacant or in disrepair. Under state law, "not every building in a TIF district has to be blighted," Peterson explained. "In order to renovate the whole district, you take some of the buildings that may not in fact be blighted."

Other questionable blight designations in Minnesota include Midwest Asphalt Co. in New Brighton, a going concern in an industrial area that had been rezoned for mixed-use development; R&R Books' building in St. Paul, grim and windowless but located in an area near University Avenue and Dale Street that is experiencing a commercial revival; and a logging implement business in Bemidji, threatened with condemnation in 1998 because prospective new tenants of a city development district objected to its untidy presence along the highway.

Zero-sum game

Real or imagined blight was not an issue in the Kelo case; in condemning working-class homes to make way for a waterfront hotel, housing, marinas, and retail and office space, the City of New London never claimed that the neighborhood was dilapidated or even slightly seedy. City planners simply saw an opportunity to create more than 1,000 jobs and boost tax revenues in an economically depressed community. By a narrow 5-4 majority, the Supreme Court ruled that economic rejuvenation, in and of itself, fulfills a "public purpose."

The case confirmed what has been true on the ground in many cities in the district and around the country for at least 25 years: Local government can take private property for redevelopment virtually at will, as long as it can demonstrate some benefit to the community.

In North Dakota, local officials don't even have to go to the trouble of declaring property blighted; the state's urban renewal law permits municipalities to condemn "unused or underutilized" industrial and commercial property for redevelopment. The City of Jamestown justified the taking of a disused parking lot for a new supermarket in 1996 by explaining that the store would help revive the city's struggling downtown by providing jobs and fostering spin-off development. Minnesota's Housing and Redevelopment Act can also be interpreted as allowing the condemnation of underutilized land.

So what's wrong with that, given the benefits of redevelopment to local communities? Nothing, from the vantage point of the condemning authority. There's no question that Richfield has gained from the Best Buy project. Before the Walser dealerships, other businesses and dozens of homes were razed, the area generated $768,000 a year in property taxes; last year, Best Buy paid $3.2 million in taxes, although not all of that money flows into city coffers (more on that below). In addition, Palmborg said, the development brought 4,400 new jobs to the city, contributed to rising housing values and burnished the image of an aging bedroom community. "Best Buy had a huge impact," he said, transforming the city into "a more competitive community than it was in the past."

Likewise, New Brighton stands to gain from its Northwest Quadrant project, which will include 1,000 town homes, condos and senior housing units as well as some retail and office space. Once fully developed, the city estimates that the property will be worth over $250 million—almost 15 times its assessed value before the city acquired the land.

But from a regional or national perspective, using eminent domain to grease the wheels of private development is at best a zero-sum game and at worst a loss for the economy as a whole. The inescapable economic truth about government takings for private development is that without condemnation, the development would almost certainly have occurred somewhere else.

If Walser had won its court fight and kept its Richfield dealerships, for example, Best Buy could have found a home in Minneapolis or Hopkins, both of which aggressively wooed the company before it picked Richfield for its new headquarters. And if the City of New Brighton had let Midwest Asphalt stay in business—scuttling the ambitious mixed-use project—the developers would have built elsewhere. In both cases, another community would have gained the new jobs and increased tax revenue—and the impact on the state economy would be exactly the same.

In practice, condemnation often results in a net economic loss, because eminent domain is routinely used in conjunction with TIF, tax abatements and other tax incentives designed to entice developers and major employers to build in a particular community.

The City of Richfield collected $1.9 million in incremental taxes from Best Buy in 2005—revenue that wouldn't exist if the campus had not been built. But only about $1.1 million of that money was actually spent on infrastructure and services that benefit city residents. Under the terms of the TIF agreement, the rest flowed back to Best Buy to pay off debt incurred in developing the campus. The city won't capture its full share of taxes levied on Best Buy's headquarters until 2026.

Giving away a portion of property tax revenue to local businesses means that cities have fewer resources to spend on law enforcement, snowplowing, schools and other public services that have been shown to stimulate private investment and business activity. In contrast, unsubsidized private development contributes fully to the local tax base. Assuming that civic leaders allocate resources wisely, the additional revenue finances public services that benefit city residents and the overall economy.

True public purpose

Basic economic theory states that markets operate most efficiently without government interference, and for many economists, that premise extends to the use of eminent domain to further redevelopment. Private businesses and investors, not politicians, are in the best position to decide when and where development should occur, said V. V. Chari, a professor of economics at the University of Minnesota and consultant to the Minneapolis Fed who has done research on eminent domain.

"We have learned through painful experience that in lots of situations, markets—individuals acting in their own self interest—lead to better outcomes than the outcomes that we can attain if governments or central planners undertake those kinds of activities," he said.

Like government subsidies such as TIF, tax abatements and free land, condemnation distorts real estate markets and reduces the operational efficiency of businesses by influencing their location and investment decisions. For example, the availability of condemned property—acquired by a city for a lower price than a landowner might negotiate in a free market—may induce the CEO of a manufacturing plant to build in a less than optimal location, far from key suppliers or established transportation corridors.

Where government shines is in the provision of public goods—services and amenities such as roads, sewers, fire protection and neighborhood parks—that private companies can't deliver as efficiently. Those things have long been recognized as legitimate public uses under the Constitution. By acting in the public arena—including, if necessary, exercising the power of eminent domain—local governments upgrade the basic public infrastructure that makes it possible for private enterprise to prosper.

That formula also applies to land that has been labeled blighted, or underutilized. Market forces can reclaim those areas without recourse to eminent domain if government makes the right investments in public services and infrastructure, Chari said.

Under nuisance ordinances, government can temporarily board up dilapidated structures (as was done in devastated areas of New Orleans after Hurricane Katrina) and require landowners to make repairs and remove refuse. Tighter policing, renovated streets and sidewalks, and financial assistance for pollution cleanup can encourage new construction as well as reinvestment and renovation by property owners who don't want to sell.

Formerly down-at-heel areas that have seen a renaissance—without the aid of condemnation for large-scale redevelopment projects—include University Avenue in St. Paul, Canal Park in Duluth, Minn., Broadway Street in Fargo, N.D., and downtown Pierre, S.D. Conversely, redevelopment through eminent domain has often not turned out as city officials envisioned. In Jamestown, the supermarket that was built on a condemned parking lot has been successful, but spin-off development has failed to materialize.

"Our hope was that a strong store downtown would stimulate other people to open shops down there, but it didn't really do that," said Charlie Kourajian, the city's mayor. "We still have several empty stores downtown, and we're struggling like heck to get them filled."

Until state legislators, voters and the courts weigh in definitively on eminent domain, its use in the district will remain highly controversial, provoking soul-searching at all levels of government. Some cities, like Minnetonka in its dealings with West Suburban Alano, will swing the big stick tentatively, leery of giving themselves a black eye. Landowners opposed to redevelopment are already invoking the specter of eminent domain (whether it exists or not) to make local officials and developers squirm: A company that owns commercial property in the Twin Cities suburb of Roseville has sued the city and the developers of a proposed $225 million housing, office and retail complex, claiming that a "cloud of condemnation" hanging over the business has scared off prospective tenants and buyers.

Other local governments will forge ahead despite the groundswell of opposition to the Kelo decision. Bruce Malkerson sees the reaction to Kelo as a potential spur for more Minnesota condemnations by local officials eager to push through redevelopment projects "before the Legislature can change the law to reflect the will of the people."

Whatever lawmakers and judges ultimately decide, the economic case against using eminent domain to facilitate private development is strong. Taking someone's property—"blighted" or not—for condos, offices or shops may help a community pull ahead of its competitors in the economic development sweepstakes. But the broader public gains little or nothing-and loses economic ground in some instances—when the enormous power of eminent domain fails to serve a true public purpose.

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