9/18/2005

When is The Use of Eminent Domain Appropriate? Inside INdiana Business, 9/15/05

Commentary

By Larry Gigerich

The use of eminent domain by governmental entities has always been a very emotional and challenging issue for all parties involved.

Recently, the United States Supreme Court ruled that governmental entities can seize private property for economic development purposes when elected officials decide it would benefit the public. The eminent domain case which brought about this ruling, Kelo vs. City of New London, initiated in Connecticut and ultimately made its way through the local, state and federal court process to Washington D.C. In the case, Ms. Kelo argued that her Fifth Amendment rights had been violated due to the actions of the City of New London.

The Fifth Amendment to the Constitution prohibits the taking of property by the government except for “public use.” Most citizens disagree about what the term “public use” truly means. For some people, “public use” is thought of as constructing public schools, buildings or highways, but for others “public use” means completing a redevelopment project which results in the creation of new jobs and collection of new tax (income, property and sales) revenues.

When a piece of property is acquired through the eminent domain process the property owner must be compensated based upon the appraised value of the property. Laws in some states require a property owner to be compensated at the appraised value, plus an additional amount of money, if the property is being used for private development purposes. The recent ruling by the Supreme Court states that economic development activities can be considered a “public use” for the purposes of using eminent domain to acquire property.

Citizens whose homes are being bulldozed, however, do not think that building a hotel, mall or office space should be considered “public use.” For example, Ms. Kelo extensively remodeled her house and enjoyed her water view, but she was told her house would be acquired and demolished so the city could complete a new waterfront development project. The project includes office buildings, residential units and a new marina - not exactly a “public use” in the eyes of many folks, particularly Ms. Kelo.

Hearing about situations such as Ms. Kelo’s, where homes are being acquired and demolished makes one wonder about the appropriateness of using eminent domain to spur economic development. Most people would agree that redevelopment activities that result in the creation of new jobs and tax base are positive things for a community, but they tend to be overshadowed by the human interest and emotion of related issues. Very often, people do not make the connection between redevelopment activities and the use of eminent domain. More importantly, when eminent domain is used in an appropriate manner, it benefits the vast majority of citizens in the community where the project is being completed. Most people in a community are pleased with the results of redevelopment projects when they are completed, but often the steps that must be taken to achieve the desired goals of a project create distress among certain individuals and groups.

In most cases, elected local officials act responsibly when deciding what, if any, properties must be acquired through the use of eminent domain. It only makes sense for these officials to make these types of decisions on behalf of the greater community because they can evaluate the opportunity in terms of the impact on the entire area. These officials must decide whether the negative impact on a relatively small group of individuals is worth the benefits created for most of the residents in an area. If citizens do not like how these elected officials handle these types of matters, they have the ability to vote them out of office during the next election. This form of accountability is an important factor in the process.

The village of Lake Zurich, Illinois, has been involved in a dispute regarding the use of eminent domain. The village board decided it was in the community’s best interest to revamp the downtown area, which has few stores and shops, limited public parking spaces and does not currently attract visitors to the area. The local elected officials determined it was in the community’s best interest to complete a redevelopment project and transform their downtown area into a multi-use environment.

As a part of this initiative, the village needs to acquire a handful of older apartments in the downtown area to complete the redevelopment project. The owners of the apartments have not been willing to sell the property, even though the community has made several efforts to compensate the property owners for more than the appraised value of the property, an amount which is now higher due to other redevelopment efforts already completed nearby.

The redevelopment of downtown Lake Zurich is very important to the livelihood of the community. Most of the citizens in the local community support the project, even though it adversely impacts a small number of individuals. The local community needs to complete the redevelopment project in order to generate new tax dollars to fund their local schools, public safety and construction of a new public library. Without this redevelopment project, the local community risks the loss of population and tax base, and more importantly, cannot fund important community needs.

Clearly, the redevelopment of this land is of more significance to the community as a whole, and it should not be stopped because a handful of property owners do not want to sell their apartments. It appears as if the local elected officials have been quite reasonable in their approach to this issue, and the use of eminent domain seems appropriate.

As a result of working in economic development for over 15 years, I have clearly seen the “public benefit” of the limited and appropriate use of eminent domain to create jobs and expand the local tax base. It is irresponsible for critics of the use of eminent domain to say that it should be banned. At the same time, it is reckless for proponents of the use of eminent domain to think that eminent domain should be used in all situations where the governmental entity wishes to acquire real estate in support of economic development projects.

So how should the potential use of eminent domain be approached by governmental entities? First and foremost, common sense should always be employed when considering the use of eminent domain. Every proposed economic development project is different in some way from another project. It is very important for the local community to truly understand the economic impact of a proposed project prior to taking any action that may adversely impact any individuals and/or organizations.

Clearly, a case must be built in order to justify the use of eminent domain. Every effort must be made to acquire the property through a traditional real estate transaction. Only after this, should eminent domain be considered as a vehicle to acquire property, if circumstances merit this type of action.

A critical step in the eminent domain process is to determine what is the best way to establish value for someone’s property. Today in most states, governmental entities secure independent appraisals and then make an offer for the piece of property in question. If the property owner decides to reject the offer, then the local community may begin the process to acquire the property through the use of eminent domain.

In most states the governmental entity is required to go through a deliberate, public process to acquire property. Very often, this process leads to several public meetings and in some instances, court hearings where both parties have an opportunity to present their respective cases. The acquisition of real estate by governmental agencies is usually completed without ever going to a courtroom.

Understanding the appraised value of real estate is an important component of the property acquisition process; however, there are other key factors that should be considered when constructing a purchase offer for a property owner. In almost every example of property acquisition, the current property owner will incur some relocation costs. If the acquisition of real estate impacts a business, often there is also an operational disruption cost impact. Another consideration is what, if any, additional amount of money should be paid for property that the owner was not previously interested in selling.

One potential solution to this difficult issue is to structure a formula to determine the amount of money that should be paid to a property owner when the property is acquired through the eminent domain process. First, the process of establishing an independent appraised value of the property in question must be completed. A minimum of two appraisals should be completed in order to establish value. Second, the costs of relocation (whether it is a residential or commercial property) should be determined by an independent firm and paid for by the governmental entity. As an example, the costs of moving personal property for a home owner or business can be quite expensive.

For commercial properties, an independent evaluation of the operational disruption costs for the business should also be established and included in the government’s purchase offer. Often, a company has to set-up its new operations prior to closing down existing operations. This duplication adds costs for the company during this period of transition. For residential properties, the costs associated with securing a mortgage or lease for a new place for a resident to live should be paid by the governmental entity. While this type of an approach may not represent a perfect solution, it provides a starting point for policy makers to debate the issue on a local and state level.

Some communities and states have already placed limits on the use of eminent domain. Several more are considering new restrictions due to the recent Supreme Court ruling, which many Americans felt was unfair. While this issue is a very important one for policy makers to discuss, it is critical that elected officials avoid a knee-jerk reaction that significantly limits the ability of governmental entities to complete redevelopment projects.

In the vast majority of cases, the acquisition of property by governmental entities is handled in an appropriate and fair manner. There are certainly cases where government has overstepped its bounds in this area, but it does not mean that elected officials should lose the ability to use this vital redevelopment tool when necessary. In the case of eminent domain, the tool needs to be honed, not reinvented or eliminated.


Inside INdiana Business: www.insideindianabusiness.com

Larry Gigerich serves as Managing Director of Ginovus, an Indianapolis-based economic development advisory services firm. Ginovus is a leading provider of national site selection, community comparative analysis and economic development incentive procurement services to private sector organizations throughout Canada, Mexico and the United States.