7/04/2005

Eminent Domain A New Tool for Business to Use? San Diego (CA) Business Journal, 7/4/05

By Pat Broderick

San Diego businessman Ed Plant is still bitter over losing his land and business to Petco Park.

Predictably, Plant was not heartened when the U.S. Supreme Court recently gave local governments even more authority to seize private property.

“It’s what’s been happening in San Diego already with the (Centre City Development Corp.) the past few years,” said Plant, who owned a cold storage facility in the ballpark’s footprint. “They were just ahead of their time, I guess.”

On June 23, the high court, in a 5-4 split decision, ruled that local governments have the right to take land and, in turn, give it to private developers to spur economic development and tax revenues for the community. The case in question, Kelo v. the city of New London, Conn., involved a group of local homeowners who resisted the taking of their property for commercial development to revitalize the economically depressed East Coast city.

California’s eminent domain law is stricter, requiring that seized property must be designated as blighted. Still, the ruling has stirred mixed reactions among a variety of camps.

Encinitas City Councilman Jerome Stocks on June 29 — alarmed by the ruling — proposed an ordinance that would grant more power to property owners.

Under his plan, Encinitas could not transfer private property to another private owner without first calling for a public vote in a regularly scheduled election, which would need a two-thirds majority to pass. The measure is scheduled to go to the City Council on July 13.

Steven S. Wall, a partner in Luce Forward’s San Diego office and an expert in condemnation and real estate litigation, is especially concerned about the definition of blight.

“In California and San Diego, you will see redevelopment agencies feeling comfortable flexing the power they have under California law to do redevelopment projects, saying, ‘We are able to broadly interpret the word blight, to include inadequate parking, not enough big parcels that can be used for shopping centers or big-box projects,’ ” he said. “ ‘We’re going to redevelop the area, and buy or condemn, and it doesn’t matter whether businesses or homes there are clean or well-kept.’ That is what the decision really means.”

Plant agreed.

“Who is going to be safe?” he said of the ruling. “Basically, all they have to do is say ‘blighted.’ What is the definition of blight? If someone has a home or business, the city can say ‘blighted,’ because it’s not making enough tax revenues. But everything can’t be about revenues going to the government agency. What happened to individual rights?”

Doug Barnhart, the chief executive officer and chairman of the board of the San Diego-based Barnhart Inc., whose firm is among the largest educational facilities builders in the nation, says the ruling will be good for business.

“Yes, I do,” said Barnhart, whose firm recently completed UC Riverside’s digital library. “I’m a Republican and sensitive to property rights. But the problems we have in public facilities in California in general, and San Diego in particular, is ‘not in my neighborhood.’ I think this will work against that. We will be able to put in facilities for the greater public good and locate them where they should be located. Property owners will get fair market value, or they can go to court.

“In any of these things, there is a lot of heartburn,” Barnhart said. “Even with Petco Park, you had some of the companies who relocated not really happy. They’d been there for years and years and years. But now, you’d be hard-pressed to say it wasn’t a benefit.”

Plant doesn’t disagree with that sentiment — up to a point.

“They did a good job Downtown,” said Plant, who continues to run another business, Harborside Refrigerated Services at the 10th Avenue Marine Terminal. “It’s done more for more people in the long run, but I think the city and CCDC isn’t looking for the individual, but the end of the rainbow. I think in the way I was treated, eminent domain has a tendency to be a bully.”

Plant, who contested the seizure of his property in court, ended up with $11 million, although he estimated that his property and business was worth $20 million. Then he was charged $1.6 million to clean up underground storage tanks that, “I didn’t put there” and eventually got about $800,000 of that back. But he was never relocated, said Plant. Instead, he reinvested the money into expanding his Harborside operation, which brings in from 60,000 to 100,000 tons of perishable goods a year. But, said Plant, it hasn’t made up for the demise of his Downtown business and the exodus of some of his customers to new competitors.

“You work most of your life building something, and it’s taken away,” he said. “I had controlled about 80 percent of the market, and now I probably have 30 percent of the market. It derived me a good living, and my property was appreciating Downtown. I planned on putting two high-rises down there. We had people interested.”

There were other ramifications of the seizure, Plant said.

“It messed up my credit rating,” he said. “When you go into eminent domain, the banks go crazy. We had a big moving expense. I am bitter because the CCDC tells half-truths. They tell you they’re going to help you, but in the meantime, they don’t. They just go their merry way. I’m not against the city. I just wish they would have a little more warm and fuzzy feeling for individuals.”

The CCDC is a city-run nonprofit corporation that coordinates redevelopment projects in the Downtown area. David Allsbrook, the manager of contracting and public works for the CCDC, has been involved in many of the city’s major developments, including the venerable Horton Plaza.

“There was a feeling that Ernie Hahn (Horton Plaza developer) wasn’t going to build the center when we were acquiring the property, that we didn’t know what we were doing and wouldn’t get it done,” Allsbrook recalled of the project that is credited with revitalizing the Gaslamp Quarter in the mid-1980s.

“The ballpark is the biggest example of where we had to use our power,” said Allsbrook of another project credited for transforming Downtown.

The Petco Park project resulted in 56 condemnation cases being filed, with all but six settled before trial and one during trial.

“Everybody thinks their property is worth more,” said Allsbrook. “People want to play it out, getting more money. That’s just the way it is.”

Some of the money paid during an eminent domain action is for “loss of good will,” he said.

“You go back and look at tax returns for the previous three years, and you come up with a number of what is the loss of business,” said Allsbrook. “Most businesses will make a claim for loss of good will, and ultimately they get compensated for it.”

While Allsbrook says Plant and all the others affected by the ballpark were treated fairly, he also sympathizes with those targeted through eminent domain.

“Eminent domain is probably the most misunderstood, and is kind of frightening to people,” he said. “We all have property rights, and when we give government that power, it’s a little scary. We’ve always used it as a last resort for projects that have public purposes. Ninety percent of the development has been done without using the power of eminent domain. We have to pay fair market value.”

As for the Supreme Court ruling, Allsbrook said he doesn’t think it will make much difference locally.

“The opinion will have little, if any, impact on how property is acquired in the state,” said Allsbrook. “In California, the law is very clear that in order to take property, it must be in a redevelopment project area.”

But, said Allsbrook, that’s not to say that there is no potential for abuse.

“I would never say that,” he said. “Years ago, National City declared its golf course blighted. They wanted to build a shopping center. That is a stretch, and it was overturned. But the likelihood of it being abused is very small. There are enough checks and balances. When we acquire property, it goes through a community advisory group before it gets to the redevelopment agency.”

No Threat
State Sen. Christine Kehoe, D-San Diego, chairs the Senate committee on local government, which includes redevelopment agencies. She said she doesn’t view the Supreme Court ruling as a particular threat to San Diegans’ property rights.

“California law requires a finding of blight in order to execute eminent domain at the local level,” she said. “You have to go through an open process of public hearings.”

While new development resulting in added taxes would be considered a public benefit, “There world have to be a finding of blight,” Kehoe said. “Simply saying that you would be making more money on a shopping center than a house is not enough. I think that it would have to include areas that are severely underdeveloped or stagnant.

“Where Petco was built, the general area was not experiencing the kind of growth many areas of San Diego were,” she said. “The ballpark became an impetus for spectacular developments — restaurants, hotels, residential. The ballpark is a classic example of how redevelopment should work.”

Kehoe said that, as a homeowner, she feels for the property owners in the New London case.

“I think states that don’t have protections that California has should consider that kind of legislation to protect against local abuses. I think that eminent domain is a tool that should never be abused, and every government body considering eminent domain should be careful to respect private property rights.”

Boon Or Bane?
Jerry Livingston, staff counsel for the Building Industry Association of San Diego, considers the ruling “more of a boon to cities than developers.”

“Rarely do you benefit from this kind of ruling,” he added.

While more doors might now be opened to private developers under the ruling, Livingston said the downside is that those who already have built projects — paying considerable sums for permits and infrastructure improvements — also stand to lose if they’re on the other side. The National Association of Home Builders filed a brief with the Supreme Court in the Kelo case, arguing that a ruling against the property owners could lead to abuses on the part of local governments.

As for local impact, Livingston said, “I don’t know if it will happen immediately in communities here. The right of eminent domain is a two-edged sword for most politicians these days. I think the city will pay close attention to creating redevelopment areas and what the political implications are with eminent domain.”

Pointing to the city’s dire financial straits, Livingston said there could be a temptation “to take advantage of economic development to increase money in city coffers.”

“We will watch what happens at the state level for any proposals to change the redevelopment law,” he said.

But, Kehoe said, for now at least, there is nothing in the pipeline to change the law.

Donna Jones, special counsel in the real estate, land use and environmental practice group for Sheppard Mullin’s San Diego office, has her hand in many of the major projects being developed in the county, including Black Mountain Ranch, a 4,700-acre mixed-use master planned development on the city/county boundary in North County.

“It’s rare that agencies try to condemn property and turn it over to private business,” she said. “I don’t think it will be used routinely. Politicians won’t want to do something where their constituents say, ‘You are in the hands of development,’ but only when it’s necessary and in the community’s best interest.”

The potential for abuse exists, said Jones, especially in San Diego today with so much mistrust of the City Council and government in general.

“Some will be concerned about abuses, that somebody makes a larger contribution, and they decide to do something in favor of that person,” Jones said. “But I trust City Council more than most people. I think they’re trying to do what’s best. They will be careful, knowing that the media will be looking.”

Mitch Mitchell, the vice president of public policy and communications for the San Diego Regional Chamber of Commerce, agrees that the ruling will spur more scrutiny against potential abuses.

“Everybody’s saying, ‘Property rights, property rights, property rights,’ ” he said. “We have a lack of land to build on and cities are always going to be looking at more tax opportunities. With all that, there will be scrutiny.

“It’s guaranteed, because of this ruling, that the watchdogs would be more vigilant. In the end, the government will be scrutinized and that public scrutiny is the best check-and-balance you can ask for.”

Attorney Wall added: “The bigger issue here is: What will we see in the way of social changes? Will it encourage redevelopment agencies to go beyond and take a more aggressive stand in the future in terms of a broad definition of public purpose and what is blight? There are challenges. It will come back to taking a hard look at officials elected to public office.”

But the public won’t be the only sector keeping an eye out, predicted Wall.

“The condemnation bar will be watching closely to see what happens,” he said.


San Diego Business Journal: www.sdbj.com