The U.S. Supreme Court on February 22 heard oral arguments in a case that could have far-reaching implications for cities and for private citizens' property rights.
In Kelo v. New London, a small band of property owners is challenging the city of New London, Connecticut's authority to seize their homes and businesses for the sole purpose of redeveloping the land to generate higher tax revenues. If the Supreme Court sides with the city, private property rights may effectively become non-issues for local governments, as cities plow under neighborhoods in the name of redevelopment to boost the tax base.
Eminent domain is the government power to forcibly confiscate, or "take," private property for a "public use." Property owners are supposed to receive "just compensation." Traditionally, public use has meant services and programs for the use of the public at large with equal access. The power was reserved for government use, under specific circumstances, and was not intended as a tool for wielding by private individuals and businesses to compel others to sell their land.
A February 2005 analysis of takings cases for redevelopment purposes, conducted by this author for the Reason Foundation, suggests this distinction is fuzzy at best.
Michigan Case Created Precedent
The New London case is a direct outcome of the judiciary's tendency, going back several decades, toward a "hands off" approach to eminent domain. Case law, including the groundbreaking 1984 decision by the Michigan Supreme Court in Poletown v. the City of Detroit, broadened the power of local governments and gave them license to effectively void individual property rights as long as they say it is for a public benefit.
The Poletown case, in particular, was important because the Michigan Supreme Court allowed a city to raze an entire neighborhood to accommodate a new General Motors plant to meet an explicit economic development goal.
Although Poletown was a state court decision, it had nationwide impact. Building on federal law that granted increasingly broad authority to state and local governments, cities and states across the nation have used eminent domain to seize property from some private owners and hand it over to others, with economic development as a justification.
The Michigan Supreme Court overturned Poletown in July 2004, however, when it ruled against use of eminent domain for a private business and office park in County of Wayne v. Edward Hathcock. The effects of this reversal are unclear because eminent domain has become so pervasive in urban redevelopment. The U.S. Supreme Court's decision in Kelo v. New London thus carries even more significance.
Governments Avoid Fair Compensation
The Kelo case hinges on a decision by New London officials to target the 90-acre Fort Trumbull section of the city for redevelopment. They condemned 115 properties in the neighborhood to clear the way for new offices and luxury apartments to complement a research facility developed by Pfizer, Inc.
The Institute for Justice, a Washington, DC-based public interest law firm, is defending Fort Trumbull property owners and others in eminent domain cases. The institute estimates eminent domain was used to threaten or "take" more than 10,200 properties nationwide between 1998 and 2002 for the primary benefit of another private property owner.
Although governments are still responsible for paying "just" compensation when private property is seized, they often don't. Local officials often attempt to minimize payments. Many of these and other abuses were chronicled in a 2004 book by Steven Greenhut, Abuse of Power. He noted cities will:
- hire appraisers to low-ball property valuations;
- use the threat of eminent domain to intimidate property owners to sell at below-market rates;
- compensate property owners at assessed valuation even though market values are significantly higher;
- avoid paying relocation costs for businesses and homeowners;
- ignore the value of "good will" and other intangible value implicit in a business's reputation or location; and/or
- underestimate start-up and marketing costs involved after a business moves.
Planners Eyed Old Neighborhood
The city of Lakewood, Ohio, a suburb immediately adjacent to Cleveland, provides a telling example of how eminent domain has become a cornerstone of city redevelopment initiatives.
Lakewood isn't mired in decline. The average home sells for $146,605, 15.9 percent higher than the average Cuyahoga County home and almost on par with other suburban Cleveland communities. Lakewood's assessed valuation increased by 15 percent between 1994 and 2000, according to the Cuyahoga County auditor, significantly faster than the average for Cleveland's suburbs. By all significant indicators, Lakewood has a robust economy.
Not all Lakewood neighborhoods, however, fare equally well. The community's West End neighborhood, consisting of 1,700 housing units and some 3,000 residents spread across 31 acres overlooking the Rocky River, was built between 1897 and 1925. The area exhibits the structural limitations common to older buildings and roads.
During the summer of 2002, planning consultant D.B. Hartt and architectural consultant Square One, Inc. surveyed buildings in the West End. They concluded the neighborhood had "sufficient deficiencies ... which together are detrimental to the public health, safety, and welfare and which impeded the sound growth, planning, and economic development of the City of Lakewood." They also said "substantial portions" of the community development area met the definitions of blight in the city's ordinances.
Character Redefined as Blight
The consultants' report, however, does not provide evidence that most structures in the West End neighborhood meet the criteria for blight. The report's conclusions rest on inferences from small samples of buildings and a fundamental belief that older buildings are inherently inferior to new, comprehensive development.
The consultants presented virtually no evidence regarding ill health, transmission of disease, infant mortality, juvenile delinquency, or moral hazard in the West End. Almost all the evidence presented highlighted features of buildings and sites typical of neighborhoods 80 years old outside the primary growth path of a region.
While significant differences appear to exist in different areas of the West End, these differences would be expected when some areas are characterized by very high densities and others by lower densities.
Moreover, this kind of diversity is part of the natural evolution of neighborhoods. It should be expected in a neighborhood more than 80 years old. In short, homes and buildings built in the early twentieth century did not conform to the city of Lakewood zoning code in 2002, and those discrepancies became evidence for the consultants that the homes and businesses should be razed and redeveloped according to plans created by the city.
Neighborhood Was Quite Healthy
The Reason Foundation analysis showed contrary trends, including:
- property values in some parts of the West End were increasing faster than for the city as a whole, suggesting a strong real estate market;
- residential vacancy rates were falling faster in the West End neighborhood than for the city as a whole;
- homeownership rates had increased in the West End neighborhood between 1990 and 2000; and
- the West End neighborhood was healthy, growing, and stable using standard criteria of neighborhood development.
The city's primary motivation for redeveloping the site, it appeared, was the potential for substantially increasing its tax base. The city's redevelopment plan recommended transforming the area from an older, affordable, residential neighborhood to a mixed-use "lifestyle center" with offices, high-end restaurants, luxury apartments, and movie theaters.
Potential Taxes Attracted Attention
Significantly expanding the commercial mix of the land and replacing the existing affordable homes with upscale housing would increase the total value of real estate in the West End neighborhood from $31.3 million to between $79.8 million and $131.1 million. Real estate taxes would triple, and income taxes would double. Redevelopment could boost city tax revenues from the West End from $638,694 to as much as $1,657,733.
In the end, the West End was saved at the ballot box. Grassroots opposition to the project arose, and in November 2003 voters rejected the redevelopment plan, despite heavy lobbying for it by local politicians and financial support from the business establishment.
But a political solution can be overturned in the next election cycle, and no judicial precedent was set by the West End matter.
Redevelopment Alternatives Exist
Eminent domain destabilizes the investment climate for everyone except those negotiating directly with the city for a piece of the development project. And even in those cases, investors cannot be certain their investments and property are safe. If the neighborhood or commercial area continues to decline, or if it fails to achieve the investment objectives established by the redevelopment plan, their property rights will be at risk as well.
Few people will invest in homes or small businesses with such uncertainty hanging over them. Yet this is the climate created by the broad use of eminent domain for redevelopment purposes.
Cities increasingly think of redevelopment as large-scale, comprehensive projects. An incremental approach to redevelopment is discouraged--even when a project's timetable for completion may be 10 or 15 years.
An alternate approach is to look for more incremental and property-rights-friendly approaches to redevelopment. Dozens of alternatives exist, including:
- upgrading roads, sewers, public transit, and other infrastructure;
- implementing zoning regulations that restrict land uses to certain types and densities;
- employing tax rates, tax abatements, and tax incentives to promote certain types of development;
- reforming zoning codes to allow faster and streamlined project approvals;
- employment of incentive zoning to encourage private-sector development of specific types of projects;
- landscaping and streetscaping;
- offering loans, grants, and direct subsidies to developers and builders; and/or
- voluntarily purchasing land.
Fresh Look Required
Citizens and local policymakers must take a fresh look at how the economy repositions itself in an information-driven, globally competitive world market and what, if anything, public policy can do to influence those shifts. The following key observations and principles may help redefine how public officials approach redevelopment in urban areas.
1. Focus on the achievable. Vision is not enough. A practical key to successful economic development policy is the ability of local leaders to be realistic in their expectations and in the programs they create to achieve them.
2. Provide core services efficiently for long-term success. Government investment does not create long-term job growth. Certain types of investments, such as road and sewer infrastructure, help lay a broad-based foundation for private investment.
3. Create sustainable economies through private investment. The vast majority of jobs come from local small businesses starting up, expanding, and diversifying over time. These are the businesses hurt most by eminent domain proceedings and large-scale redevelopment plans catering to large developers.
4. Lead with focus, drive, and simplicity. A more effective strategy has been for local leaders to identify two or three key areas and goals, and then develop a timed, phased action plan to achieve them. The results are easier to measure, and implementation is more likely to succeed.
5. Respect the rights of all citizens. Government should focus on providing core services that serve the broad-based citizenry and avoid the trap of believing the biggest or wealthiest citizen has more rights or more to offer than the hundreds of homeowners and businessmen that make up the city's foundation.
6. Encourage voluntary investment and redevelopment. Cities should work with developers to accommodate property rights protections to create a business climate more supportive of property rights, greater investment certainty, and a more cohesive community. Most redevelopment projects are implemented in phases, and few projects depend on all properties being acquired in order for them to be successful.
7. Evaluate the process rigorously. A more rigorous definition of "blight" or "deteriorating" would provide guidance regarding which neighborhoods do in fact degrade community welfare. Public officials should be required to consider the feasibility of accomplishing the project's goals by less-aggressive means.
Samuel Staley is director of urban and land use policy at Reason Foundation and co-editor of the book "Smarter Growth: Market-Based Strategies for Land-Use Planning in the 21st Century."