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Life After Kelo

Until last year, eminent domain was a (grudgingly) accepted fact of American life. From the mid-1800s when the federal government used eminent domain to help make way for the railroads to the 1960s when cities used the power of condemnation to clear slums, Americans accepted the idea that, for the greater good, government would sometimes have to obtain private property for highways, dams or other projects. They didn't like it and they often fought tooth and nail to stop these “takings,” but they accepted eminent domain.

But on a single day last June, the U.S. Supreme Court recast the argument over eminent domain in a way that has tremendous consequences for the real estate industry: In a five-four decision, the justices ruled in favor of the city of New London, Conn. In Kelo v. New London, a suit that attempted to prevent what the plaintiffs said was a bold new leap in the power of imminent domain: wiping out Fort Trumbull, a neighborhood of tidy seaside homes, to make way for a higher economic use of the property — a corporate office park.

New London argued successfully, that the condemnation of 15 cottages on the Long Island Sound was in the public interest because the office park would bring Pfizer and approximately 2,300 jobs and $1.2 million a year in taxes to a city that has been in a steep decline since the naval base closed in 1996, eliminating 1,500 jobs.

The city had acquired 98 percent of the land with voluntary sales, but homeowners on 1.54 acres refused to sell. Writing for the majority, Justice John Paul Stevens agreed with New London that economic development could be seen as fulfilling the “public purpose” requirement laid out in eminent domain statutes.

From coast to coast, people were shocked. Even retail real estate developers thought the Kelo ruling went too far. A poll of Retail Traffic readers showed a vast majority opposed Kelo on the grounds that it was an attack on private property rights. “What is sauce for the goose is sauce for the gander,” says Scott Bullock, senior attorney with the Institute for Justice in Arlington, Va., a libertarian advocacy group and co-counsel for the homeowners in Kelo v. New London. “If the government can take somebody's property and give it to another property owner, they can just as easily take one developer's land and give it to another developer.”

Developers say they have always been wary of condemnation. “It's just not something you want to do even when it's necessary,” says William Hammer, development vice president with Simon Property Group Inc. of Indianapolis.

Since the Kelo ruling, a wide-ranging backlash has emerged not just to eminent domain, but to real estate development in general. It has brought more support to the anti-sprawl that has been building in many parts of the country and has derailed or complicated commercial development. Forty-seven state legislatures have considered legislation limiting eminent domain. Twenty-one have actually enacted tougher laws, according to a Web site of the Castle Coalition, an Arlington, Va., group working for restrictions against eminent domain.

Some local governments have adopted regulations limiting eminent domain or sworn it off entirely. Where cases are in process, local officials and developers are walking on eggshells.

“The emotional reaction to the Kelo decision is like nothing that those of us in economic development have ever seen,” says Neil Fritz, director of downtown redevelopment for Hollywood, Fla.

Pre-Kelo, that city filed a condemnation case against a single-story retail building to remove it and proceed with a project it had been planning for years — 231 condominiums, renovation of a historic hotel's facade and 25,000 square feet of retail space. Arguments were completed on May 1 and a judge's ruling is expected shortly.

That was then. Post-Kelo, neither the city nor its development agency have tried to use eminent domain.

Kelo brought emotions over eminent domain to a boil. “The Kelo ruling made a lot of people understand that their property is up for grabs,” says Steven Anderson, the Castle Coalition's coordinator.

The ruling redefined eminent domain. Rather than allowing states to seize homes for public use, say, to build an onramp, Kelo changed the concept to public benefit. In New London, the idea that bringing in a major employer to create jobs and generate tax dollars is a public benefit.

“Any small business, any farm, ranch — it can make more money if it's turned into an office park,” says Anderson — or a shopping center, for that matter.

Kelo also exposed a dirty little secret.

In the past, developers assembling sites used the threat of eminent domain as leverage in negotiations with holdout residents or small-business owners. The threat alone was enough to force landowners to the bargaining table and save developers from having to pay exorbitant prices to get the last piece of the puzzle. “Frequently property owners will hold out waiting for the lottery ticket — being the last person to sell,” McIlwain says. “The fact that the city will take it by eminent domain and pay fair market value focuses their attention on actual negotiation.”

Now, in states that have enacted post-Kelo restrictions on eminent domain, that last owner will be able to hold out longer or refuse outright to sell, forcing a developer to pay more, change designs — or kill the project. (See sidebar, p. 37.) “It's going to thwart development in certain situations,” says Steve Hopkins, president of Hopkins Real Estate Group in Irvine, Calif. The net effect, says Hammer of Simon, will be to raise costs and leave developers to develop around parcels they can't control — raising the risks.

Necessary evil

Luis Valenzuela, executive vice president and retail broker with NAI Capital in Los Angeles, says he wishes that the industry could educate the public about the need for condemnation. Politicians certainly can't. In Los Angeles, speaking in favor of eminent domain “jeopardizes your political career,” Valenzuela says.

How can you convince the public that eminent domain is a good thing? For one, invoking its past — its use in removing urban blight can be a compelling argument. Even now, the City of Sacramento plans to use eminent domain against two convenience stores that predated a residential zoning law that forbade commercial development in a particular area and were grandfathered. The stores, the city argues, have become a public nuisance, drawing too many police calls, litter and loitering, says the city's Housing and Redevelopment Agency.

It wants to replace the stores with single-family homes — in keeping with the neighborhood's zoning. The HRA earlier this year received authority to seek condemnation but is still negotiating with the store owners.

In another case, Yolo County, Calif., is condemning a property to prevent development. The county wants to buy the 17,300-acre Conaway Ranch, farmland now in the hands of private developers who plan housing, office and retail on part of the property. Yolo County wants to preserve the area for agriculture. It fears the current owners will sell water rights crucial for farmers. The rallying cry: The water should stay with Yolo County farmers, not fill Los Angeles swimming pools. A judge has ruled that the county can buy the ranch. A trial is pending to set the value of the property.

“We simply do not want this ranch and its valuable water resources to wind up in the hands of a group of people who are committed to changing the basic nature of the county,” says Mike McGowan, a West Sacramento, Calif., attorney and member of the Yolo County board of supervisors.

Kiss it goodbye?

New laws coming on the books across the country limit eminent domain.

Minnesota's new law limits the power of local governments to use eminent domain for public uses such as parks, bridges, roads and schools. That means “the private sector has been shut out of any kind of development where eminent domain is used,” says Rick Packer, an Edina, Minn., developer whose housing projects sometimes include retail. “You can kiss refreshing cities goodbye.” He's exaggerating, but only a little. Governments could still condemn land for public uses or to redevelop blighted or contaminated land, but any use deemed non-public woud run afoul of the new law.

Under Florida's rewritten statues, not even blight or public nuisance will suffice as reasons to condemn. And the law strikes at the heart of Kelo — forbidding local governments from transfering private property from one individual to another.

Florida state legislators are going a step further: In November, they will ask voters to decide whether to enshrine these new property protections in the state constitution. If that amendment passes, exceptions to the constitutional language would require a three-fifths majority vote in both the state House and state Senate

Redevelopment official Fritz of Hollywood characterizes the measures as “bad law” and “overreaction.” Writing the restrictions into the state constitution would mean “we won't be able to adjust it if we make a mistake,” he says. “And we've made a mistake.”

The emotional debate frames a ticklish question: who decides what's best for the community? Local government? The people? Or local property owners? Congress has begun to consider national restrictions on eminent domain, meaning the political ramifications could get multiplied very quickly. Should Washington tell city hall it can't finish that Main Street redevelopment because Mom and Pop won't sell the old store?

Politicians are tending to side with Mom and Pop — but those decisions should be made locally, argues Andy Frank, executive vice president with Baltimore Development Corp., the city's development arm. “The state, or in this case, local government, is the most appropriate body to determine what constitutes a public purpose,” says Frank.

New York City real estate consultant Jay Kriegel agrees. “If you're the mayor of New York you should be able to take property in the core of your own city,” says Kriegel. Eminent domain, he adds, “is a major engine for a city's economic development. Why does federal legislation want to prevent you from being able to revive that environment?”

Developers plead for objectivity in the emotional debate. “Forget about Granny's house,” says developer Hopkins — properties taken by eminent domain are often industrial or commercial. “It could be a retail center that is functionally obsolete that would be acquired and scraped,” says Hopkins.

City officials argue that state and local law already build in protections against abuse. Carson, Calif., forbids use of eminent domain on residential property, for example.

Anaheim, Calif., has drawn attention for redevelopment in its Platinum Triangle area near Angel Stadium. The 886-acre mixed-use urban village will support greater density. Anaheim's elected officials cut red tape and altered zoning to allow existing as well as new uses — so landowners are adding housing and other projects on their own with minimal city help in assembling land. Result: no eminent domain cases. Existing owners sold willingly, or else were able to redevelop their own properties under the city's relaxed zoning measures. Business owners can expand in place with ease.

Picking up the pace

Such success notwithstanding, local officials fear a long-term chilling effect on development. So cities and developers are trying to keep one step ahead of the backlash. In California, while legislators and voters mull restrictions the City of Carson is speeding up redevelopment plans. “We've accelerated some acquisitions just to make sure it's done before any changes occur,” says Ron Winkler, Carson's general manager for economic development. Among the hurry-up land assembly initiatives is a residential project with some affordable housing and a brownfield on which the city hopes to encourage development.

Some developers are agnostic in the eminent domain battle. In the end, they say, the market will support best and highest use.

Developers face that situation on Thousand Oaks Boulevard in Thousand Oaks, Calif. There, a lonely building supply yard stands as a last holdout against the spread of high-end retail properties. Rick Moses, senior vice president and chief development officer with Caruso Affiliated of Los Angeles, however, sees no need for the city to try forcing it out, even though it sits just two blocks from Caruso's 50,000 square feet of retail and restaurant space.

Let the market take care of it instead, Moses says. As redevelopment continues, the value of the building-supply property “will rise to where it won't make sense for that type of low-density use,” he says, “the owners will elect to do something else.”

Will the market correct the frenzy of anti-condemnation laws? Wait and see as developers adapt to life without eminent domain.

What happens if a developer can't get that last parcel because the owner won't sell? “Modify the plan or walk away,” says Simon's Hammer. “If one project doesn't work, just go on to the next.”

Missing Pieces

Are you ready for some project footprints that look like a puzzle with a piece missing? That may be the legacy of the prevailing fury against eminent domain.

A Mercedes dealership in Arcadia, Calif., is expanding around a long-established grill that sits on a 13,000-square foot lot. The grill's new owner won't sell. The result: You can have a burger and coffee before you decide whether to buy that new car.

“It may not be as ideal from a site-planning standpoint,” sighs Don Penman, Arcadia's assistant city manager. “It's just the reality of this situation.”

In other cases, no eminent domain may prevent a project entirely. In Hollywood, Fla., a family that owns a 2,900-square-foot single-story building is resisting sale to the city. The parcel would make way for vehicle and pedestrian access to the proposed Young Circle Commons — 231 condominium units and 25,000 square feet of retail space. The city's plan would develop the area while preserving the facade of an adjacent historic hotel. Final arguments were May 1, with a decision expected soon.

Baltimore's development corporation wants to go ahead with Chesapeake Square, a mixed-use project renovating an abandoned restaurant and adding a 91-unit residential tower, with 20,000 square feet of street-level retail plus 15,000 square feet of office, a 190-space parking garage, five artists' lofts and 11 townhouses.

The owner of the abandoned restaurant, however, is trying to sell the property to a different developer. The four-story, 20,300-square-foot Chesapeake Restaurant building has been vacant since 1989. The eminent domain case is headed for trial.

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