A wave of public indignation and anger against the use of eminent domain for economic development purposes now threatens the renewal of our nation’s downtowns, Main Streets and neighborhood shopping areas. However, evidence suggests that the use of eminent domain for economic development purposes can be salvaged if universally acknowledged abuses are avoided AND the property owners and tenants dislocated through the use or invocation of eminent domain are paid a meaningful “premium.” The characteristics of the premium may differ case by case, with resulting variation in cost. However, it can be anticipated that the cost often will be significant, with considerable consequences on the financial feasibility of downtown redevelopment projects. Savvy downtown organizations will be finding ways to finance these new redevelopment project premiums.
Downtowns obviously cannot wait until blighted conditions appear before undertaking serious redevelopment projects. Doing so just makes redevelopment riskier, more costly and burdensomely complex. A way to make the use of eminent domain again palatable must be found. The future of
Fair market value and the case for premiums. While the Kelo decision focused on the issue of public purpose, in my view the real challenge with eminent domain projects is political rather than legal and centers around the issue of fair market value. As things now stand, an eminent domain project will usually have potential victims from the getgo — the people who must give up the properties they own and who have not asked for the project to be initiated. While the project may indeed have results that will enhance the general good, the best that the property owners can do is get “fair market value.” Such victims can politically nullify a project’s public benefits and become the rallying point for political opposition.
HUD standards are often cited as exemplary when it comes to the use of eminent domain. They are based on an appraiser determining a property’s fair market value, which according to one of HUD’s publications can be understood in the following manner:
“Fair market value is sometimes defined as that amount of money which would probably be paid for a property in a sale between a willing seller, who does not have to sell, and a willing buyer, who does not have to buy. In some areas a different term or definition may be used….The fair market value of a property is generally considered to be ‘just compensation.’ Fair market value does not take into account intangible elements such as sentimental value, good will, business profits, or any special value that your property may have for you or for the Agency.”
My own family’s experience indicates that property owners do not always feel that they have received a munificent amount of money from the governmental entity taking their property — or threatening to do so.. Furthermore, the whole experience can be quite complex and its true impacts may take years to emerge.
Back in the early 1950’s, the New York City Housing Authority used the threat of eminent domain to purchase a brownstone and tenement owned by my maternal grandmother in order to build a high rise “housing project.” My grandmother, four of her children and their spouses and children occupied apartments in these two buildings. We all lived in a warm and closely knit family environment. While the neighborhood was changing and family members had considered moving, there was a lot of inertia caused by the fear of the family being dispersed. When the city invoked eminent domain the family could not really judge whether the financial offer was fair or not. Most importantly, the family felt that it did not have the power to fight the city. Family members felt they had no choice but to make the moves to other neighborhoods that they had long contemplated. The money might have made things a little easier, but it was not viewed as a bonanza. The fact that we were forced to move left a somewhat bitter taste. I wonder how we would have reacted if the city had showed that it was paying us 25% above fair market value and explained “We are forcing you to move and the extra money is our way of trying to make up for it.”
Ironically, the diverse manifestations of redevelopment premiums are amply demonstrated by the types of final settlements made by the families involved in the Kelo litigation.
A state official involved in the negotiations claims that giving the property owners more money was a key to the settlements. Also, according to an article in the New York Times, one of the settling owners said “When you look at my property, put these on,” as he fiddled with a pair of sunglasses with dollar-sign holograms on the lenses. Susette Kelo, a lead plaintiff, agreed to have her house moved to a new lot. Another homeowner said the difference was a number of small concessions the city made:
- While his house will be torn down, his family has an option to buy property in the new development at an agreed price.
- The city also agreed to move the rhododendrons, yews and other plants his father planted 30 years ago and to install a plaque in the development to honor his mother, who fought the condemnation of her home until she died in 2003.
- Provide the property owner or tenant with some of the increased wealth that the new redevelopment project will generate. This will require the involvement of a shrewd financial deal-maker
- Compensate, financially or otherwise, for “intangible elements” lost by the relocation (e.g., the rhododendrons, yews and plaque mentioned above). This will benefit from a negotiator with superior inter-personal skills.
Where is the money going to come from? The relatively high costs of downtown land already require that financial incentives such as tax increment financing, payments in lieu of taxes, land write-downs, etc., be made available if many redevelopment projects are to be financially viable. The costs of redevelopment premiums — especially in small and medium-sized projects having limited density and hence limited income potential — may require the use of new financial tools.
One of these may be giving current property owners equity stakes in the redevelopment projects that will be built on their properties. The ability to reach a timely agreement on the current values of their properties will likely be critical to the success of such ventures.
Many downtown districts have the capacity to issue bonds through their municipality which are paid off from the districts’ assessments. For example, a district paying about $45,000/yr for 20 years might bond for about $500,000 at a 6.5% interest rate. While $500,000 is not a princely sum, it often can be leveraged and might help make three or four redevelopment projects viable.
Also, there are what some call “exactions.” A community might find that hefty redevelopment projects capable of generating large revenues and big increases in municipal tax revenues are occurring along the municipality’s periphery or in very solid sections of the downtown. The local government might negotiate for such a project to donate $50,000/yr for 20 years — which adds up to $1,000,000. For a shopping center with annual revenues over $100,000,000 a $50,000 exaction should be more than affordable.