Eminent Domain as a Tool for Urban Revitalization

The Other Side of Kelo

By Les Shaver

Bernie Glieberman has seen the potential of eminent domain firsthand. In notoriously blighted Detroit, he’s built two vibrant multifamily communities in neglected neighborhoods using parcels of land assembled from eminent domain takings. He built two more similar properties in the Detroit suburbs of Monroe and Wyandotte. He knows that despite the public’s outcry, eminent domain can be an effective and much-needed tool for urban revitalization.

“Eminent domain has helped us rebuild cities,” says Glieberman, president of Crosswinds Communities, a residential developer in Novi, Mich. “We raised the values all around us when we built in an urban area.”

That’s a side of eminent domain that’s often overlooked. The issue, after all, is a thorny one: Eminent domain, which involves taking a condemned or derelict piece of land for the purpose of private or public development, is often criticized by consumer advocacy groups that claim the fair-market price paid to the landowner by the government is neither fair nor adequate. Eventually, these opposing interests came to a boiling point in the Supreme Court’s Kelo v. City of New London decision. In the landmark 2005 case, the high court ruled that the town of New London, Conn., could transfer land from a citizen to a private developer so long as the economic benefits from the deal served the greater community as a whole.

The case set a national precedent. But it didn’t open the door for liberal eminent domain policies, as many developers had anticipated. The decision led to a far different outcome. Fear of the government swooping in and seizing private property polarized land owners and citizens, who had given little thought to eminent domain in the past. In response to this groundswell of opposition, state legislatures crafted a number of bills designed to curb the power of eminent domain and, in return, protect their administrations from public outcry.

These proposed bills—combined with the uproar over the Court’s decision—have paralyzed local governments as they face eminent domain decisions. For many politicians, there is the fear that if they approve eminent domain action, they could be voted out of office. And that situation has left developers such as Glieberman looking for new ways to circumvent the eminent domain dilemma and provide a much-needed injection of development into blighted neighborhoods.

KELO BACKLASH

Almost immediately after the Supreme legislation handed down its 5-4 decision in favor of New London, the backlash began. It started with the federal government. A handful of bills were introduced in the House of Representatives in 2005 to limit the scope of economic development from eminent domain by tightening the flow of federal funds to those cities that used condemnation. But those bills never generated enough bipartisan support to pass.

States had more success—43 states passed eminent domain-related legislation in 2006 and 2007. “The backlash was substantial,” says Roger Platt, senior vice president and counsel for the Real Estate Roundtable, a Washington, D.C.-based forum of U.S. real estate and political leaders.

The legislation differed greatly from state to state. “New York, which relies on eminent domain to provide low- and moderate-income housing and achieve other redevelopment goals, decided not to tamper with eminent domain laws,” says John D. Echeverria, executive director of the Georgetown University Environmental Law & Policy Institute. “Other states, like North Dakota, that don’t need eminent domain took strong positions against it.” Likewise, Florida, Minnesota, and Virginia sharply reduced the use of eminent domain for private development.

Such decisions didn’t win the support of developers but satisfied groups such as the Castle Coalition, a project to fight eminent domain for the Institute for Justice, a nonprofit Libertarian law firm based in Arlington, Va. The coalition argues that Kelo opened the door too far for private development and that fair market price isn’t enough to justify someone’s property being taken for private development. “Many states decided to close that door, but the ones that didn’t are seeing a huge amount of eminent domain abuse,” says Dana Berliner, senior attorney at the Institute for Justice.

For the most part, this wave of legislation has subsided. “I haven’t seen as many bills in the past six months as I saw after Kelo,” says Lora Lucero, an attorney for the Chicago and Washington, D.C.-based American Planning Association. This state legislation seems to have addressed the initial outcry because eminent domain is no longer making headlines.

Still, California has two eminent domain measures on the ballot in June. The first measure would protect homeowners and churches from eminent domain takings, while the second, broader bill would bar eminent domain for economic purposes, ban restrictions on rent levels, suspend local governments’ planning and zoning authority. Both measures face a rocky path to gaining passage.

TOUGH ROAD AHEAD

Just because the ruckus caused by the Kelo case has been quieted doesn’t mean that the repercussions of Kelo don’t still hit developers hard. The Kelo backlash continues to paralyze many local governments, even those desperately looking for ways to jump-start redevelopment efforts.

“More and more municipalities are hesitant to use eminent domain unless it’s for public purposes, like schools, a road widening, or something like that,” says Jeff Gault, a former KB Home executive and current CEO of Los Angeles-based Land-Cap Partners, a national residential land company providing capital for residential land transactions.

But others don’t see a major change in the way governments handle eminent domain. They say governments have always been wary of the backlash associated with seizing private property. “We haven’t seen a significant change in how governments use eminent domain, except for a little more caution in some environments,” says Pat Clancy, president and CEO of The Community Builders, a Boston-based nonprofit affordable developer.

So, what does a developer do when trying to obtain a property through eminent domain in today’s challenging environment? First, get to know the local politicians. If the politicians aren’t on the developer’s side, it’s probably best to just look for the next opportunity, says David Snyder, who represents people on both sides of the eminent domain issue as an attorney for Fox Rothschild in Philadelphia. “I’ve always counseled developers to be sensitive to the politics of eminent domain and to keep [politics] at the top of things of which they are concerned,” Snyder says.

Your best shot of winning an eminent domain case is in a city where the politicians and public are accustomed to the development strategy. For instance, a New York location helped Forest City win an eminent domain case for the development of its Atlantic Yards project in Brooklyn. Opponents of the project argued that the use of eminent domain violated the Public Use Clause of the Fifth Amendment. In other words, the entire project didn’t provide enough legal use to meet the eminent domain threshold. Forest City did not return requests for comment from Developer.

Glieberman says his decision to pursue a deal is often based on whether he identifies troublesome property owners. If an owner is asking for an exorbitant price and is hunkering down for a three- or four-year fight, he may pass on the development opportunity altogether. What’s more, many land speculators know that it’s a hard political pill to swallow for a city or county to condemn a piece of land for private use. “Eminent domain is not protecting legitimate property owners that want to get value,” Glieberman asserts. “It’s protecting the land speculator who went in and bought something for almost next to nothing in an urban area and is holding out for a ridiculous price.”

Consider this: The owners of a 60-foot lot in Brush Park, Mich., are asking the city to pay $300,000 for the land, says Glieberman, who wants to build a 12-unit building on the site, which he claims is worth $120,000 at most. “It has made the sellers of these spec properties able to getmore money because they’re laughing at the city unless they get a ridiculous price,” he says. “It’s going to stop a lot of development and cause blight.”

Homer Williams, chairman of Williams & Dame Development, has developed a number of sites taken by eminent domain in its hometown of Portland, Ore., and always looks to negotiate with holdouts so he can do friendly condemnations (which gives property owners extra time to reinvest the money from the condemnation). He’ll also look for ways to design around holdouts. One way is to build a public park as part of the development.

Glieberman has considered this strategy as well. “If you want to make it a park, there’s a loop hole,” Glieberman says. “That’s a public purpose. They can’t stop it for a public purpose.”

MIXED PREDICTIONS

But Glieberman acknowledges that none of these solutions are really ideal. Most of the time, developers can’t design for open space in a project, and ponying up extra money for a holdout land owner often isn’t possible either with the difficult residential real estate market. Developers probably won’t touch the project because of these limitations —ultimately to the detriment of the entire community.

“You’ll have property lay fallow in the middle of a downtown area that needs to be developed because of this,” Glieberman says. “That’s what’s going to happen.”

Not everyone agrees, though. Berliner of the Institute for Justice thinks eminent domain does just the opposite. “By designating huge parts of cities as blighted, and thus authorizing eminent domain, cities discourage private development in those areas,” she says. “No one wants to make huge private investments when a city can come along and take it from the owner as soon as those investments look like they might pay off .”

But others, of course, see the potential of eminent domain. And some say the landscape will eventually change to allow eminent domain in areas that really could benefit from it. Roger Williams, a senior fellow with Annie E. Casey Foundation, a Baltimore-based advocacy group for the underprivileged, says he sees local policies in place that will allow eminent domain for properties that continue to provide a public benefit.

“The fury will die down over this,” Williams says.

Seize and Conquer

Know the facts before tackling eminent domain.

David Snyder, an attorney with Fox Rothschild in Philadelphia, has seen a lot of eminent domain cases. And despite the public outcry against the development tactic, Snyder thinks it can still be an effective tool in blighted areas. But developers need to know a few things before taking on a project with land seized through eminent domain.

■ Know blight. Snyder says that in the wake of the Kelo decision, a lot of cities and states have defined blight and the areas that can be certified as blighted. “If you are a redeveloper and redefine the geographical footprint of your project, you need to be mindful to make sure you comply with the legislation,” he says.
■ Know sensitivities. Post-Kelo, there’s a greater chance that condemnation will be challenged. “You need to make doubly sure you’ve dotted your I’s and crossed your T’s on the legal process before you move ahead,” Snyder says.
■ Know the costs. Much of the new legislation after Kelo didn’t just define blight and where and how eminent domain can be used. It also armed those fighting it with extra funding. “Some legislation has given property owners more money for legal fees and moving expenses,” Snyder says. “Those are the costs a developer needs to be mindful of.”