8/16/2007

Corporate Takings: The Weekly Standard, 7/26/07

Why retail giants love eminent domain

By Duncan Currie

IN NOVEMBER 2001, long before the Kelo ruling threw the floodlights on eminent domain abuse, Susan Watson sent a distressed letter to James D. Sinegal, the president and CEO of Costco. She owned several hundred shares in the retail giant -and, as she put it, had been "a loyal customer and ardent fan" for many years - but now feared the company "may be violating the rules of our free market economy" to swell its business.

"I recently learned that Costco has been or will be the beneficiary of at least four pending eminent domain actions, where private property was or may be condemned so that Costco could build or expand a warehouse," Watson wrote, ticking off examples in New York, Missouri, and California. "If Costco had benefited from eminent domain once, I might regard it as a lucky break. Twice would be a happy - albeit unlikely -coincidence. But the list is long, and it appears to be a strategy of Costco Wholesale Corporation to deprive others of their private property rights. To bully small business with the power of eminent domain is wrong." For that matter, she added, "among Costco's most valuable customers are small business owners."

Watson received a prompt reply from Joel Benoliel, a senior vice president at Costco and its chief legal officer. He robustly defended each of the four projects in question, assuring Watson that Costco "will not profit by violating the law, and like you, we firmly believe in the free market economy." The four cases were not anomalies, and Benoliel didn't pretend they were.

"In truth," he wrote, "there are probably dozens of other Costco projects where eminent domain or the threat of it has been involved in acquiring land for redevelopment. In some states, the constitution or laws prohibit this from happening. But, in places like California, Redevelopment Districts with bonding authority and powers of condemnation have been the norm for many decades. Much of urban America has been built using this tool. We don't see any legal or moral wrong in this. The fact is, if we refrained from participating in these deals, our competitors for these sites like Target, Home Depot, K-Mart, Wal-Mart, BJ's, Sam's Club, and many others would take advantage of our reticence, and our shareholders would be the losers. In short, we are not violating laws or any rules of the free market economy. We would be doing exactly that if we refused to participate in these deals when they are offered, while other retailers continued to do so."

However self-serving his argument, Benoliel was correct that eschewing eminent domain would hamstring Costco in relation to its fellow retailers. Such corporate behemoths had long benefited from "economic development" takings, often at the expense of smaller proprietors and homeowners. Keeping up with the competition also meant keeping up with ever-evolving definitions of "public use."

"Desperate for tax revenue, cities and towns across the country now routinely take property from unwilling sellers to make way for big-box retailers," the Wall Street Journal reported in December 2004. "Condemnation cases aren't tracked nationally, but even retailers themselves acknowledge that the explosive growth of the format in the 1990s and torrid competition for land has increasingly pushed them into increasingly problematic areas - including sites owned by other people."

The controversial 2005 Kelo decision, whose second anniversary passed last month, affirmed that economic development was a constitutionally valid "public purpose" to justify seizing land via eminent domain. But it also sparked a nationwide backlash to tighten the boundaries of eminent domain and curb some of the worst abuses. More than 40 states have amended their laws, though some of the reforms have been toothless. The ongoing debate has confirmed that, despite its reputation, the business lobby is hardly a consistent champion of small-government economic policies.

Indeed, state and local Chambers of Commerce have been notably resistant to the tide of post-Kelo legislation. In Oklahoma, for example, the state Chamber, the Greater Oklahoma City Chamber, the Oklahoma Association of Business and Industry, and the Oklahoma Professional Economic Development Council all urged the state Supreme Court to reject an eminent domain reform initiative. The business lobby fears that many redevelopment schemes could not move forward without the exercise, or at least the credible threat, of eminent domain by city governments.

In that sense, Benoliel was wrong about Costco's adherence to free-market principles. Eminent domain only becomes necessary when market forces are insufficient to compel the sale of property. A true market-driven project would not depend so heavily on government largesse. For that matter, when cities play such a large financial role in acquiring the property, developers have less of a stake in seeing their original projects through to fruition. As Institute for Justice lawyer Dana Berliner observed in a 2003 report on eminent domain abuse, "One of the problems with corporate welfare projects supported by the government is that developers are not as committed to the plans as when they have invested their own money."

It is no coincidence that the states where economic development takings are most rampant - such as New York, New Jersey, and California - tend to be littered with densely packed population clusters. Between zoning parameters and the stubborn space crunch, it can be tricky to plunk down a new megastore in such areas. Building a new Home Depot or Target outlet in, say, the North Jersey suburbs often means razing existing homes and businesses. Most retail powerhouses have relied on municipal condemnation powers as a last resort, when negotiations with property owners have failed. Yet few have done so as frequently as Costco. (The 2004 Wall Street Journal article noted that Costco was "the most outspoken of the big retailers in defense of the practice.")

Consider just one example, cited by Watson in her 2001 letter to the Costco CEO. When a Costco store in Lancaster, California, began agitating to expand its warehouse onto land occupied by 99 Cents Only, a smaller retailer, and then threatened to vacate the city if its wishes weren't granted, Lancaster officials chose to use eminent domain to force 99 Cents Only off the property. "It would be derelict and irresponsible to be faced with the loss of Costco and do nothing," Lancaster redevelopment director Stafford Parker told the Los Angeles Times in June 2000. "There would be a loss of jobs, additional business closure, and a substantial loss of sales tax."

In response, 99 Cents Only sued to prevent the condemnation; and, in June 2001, a federal district court ruled in their favor, claiming that Lancaster acted unconstitutionally in order to "appease Costco." As Berliner put it in her 2003 report, the condemnation had been "for the benefit of one of two rival discount stores" - a stunning blend of corporate welfare and corporate favoritism.

More recently, the village of Arlington Heights, Illinois, condemned properties in its International Plaza shopping center to make way for a Target superstore. In May, after local business owners and their allies waged a lengthy public campaign to prevent the bulldozing and reverse the "blight" designation, the village board scrapped its contract with Target, claiming it was a mutual decision. (Village officials did say, however, that they would be seeking alternative development plans for the site.)

Especially since Kelo, eminent domain has tended to produce quirky political bedfellows. (How often does left-wing firebrand Maxine Waters find common cause with right-wing Republicans?) When one considers the benefits reaped by big-box retailers, and the consequences borne by small businesses and the less privileged, it's easy to see why many anti-corporate populists and liberal Democrats have echoed conservative calls for reform.


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