Eminent Domain, Private Property, and Redevelopment: The Reason Foundation, 1/05

Eminent Domain, Private Property, and Redevelopment: An Economic Development Analysis

Executive Summary

By Samuel R. Staley and John P. Blair
Eminent domain is the power governments have to confiscate, or take, private property as long as it is for a legitimate “public use” and property owners receive “just compensation.” Whereas eminent domain was initially intended to ensure that public services, such as roads and highways, were available to the public, local and state governments often use eminent domain for any project that is considered economically beneficial. Public use, as a practical matter, has morphed into a more ambiguous “public benefit.”

An estimated 10,000 cases between 1998 and 2002 involved projects where private parties benefit substantially from government seizures of property under the banner of economic development or urban redevelopment.

The result of this broadening discretion may be exemplified by Kelo v. City of New London, a case before the U.S. Supreme Court in which property owners are challenging the decision of New London, Connecticut to seize their homes because the city decided redevelopment for commercial purposes would generate higher property values and taxes.

Eminent domain in urban development projects tends to be:

1. Arbitrary, driven by local politics rather than standards and objective criteria;
   
2. Inequitable, giving large and well-connected property developers an advantage over existing homeowners and businesses;
   
3. Serving private purposes, effectively becoming a legal way private developers can circumvent the conventional real estate market and force other property owners to sell their property to developers while reaping substantial financial gains;
   
4. Without substantive limits, because statutory criteria for blight determinations are so broad they fail to constrain eminent domain’s use for redevelopment purposes.

Economic development planners and city officials claim that redevelopment could not happen without an ability to consolidate property and comprehensively redevelop it. They also claim that eminent domain is only used as a last resort after less intrusive and aggressive approaches have failed.

Two Case Studies: Mesa and Lakewood
The two cases studied here — Mesa, Arizona and Lakewood, Ohio — show that eminent domain is not treated as a last resort, but as just another strategy in the redevelopment tool box.

In Mesa, Arizona, eminent domain was used by the city to promote downtown redevelopment. A detailed analysis of city procedures involving a redevelopment project intended to encourage the expansion of a local hardware store revealed:

• Eminent domain was a tool of first resort, not last resort.
  
• Properties targeted for redevelopment were identified by potential private investors, and the city then proceeded to condemn the properties in order to sell them to the private developers.
  
• The city’s redevelopment agreement with private developers would have amounted to effective subsidies ranging from $176,000 to $592,000 dollars.
  
• Existing small business owners and homeowners were effectively shut out of the negotiations and redevelopment decisions.
  
• Many properties seized were viable and growing. Property values in the neighborhood increased by 19.3 percent between 2000 and 2002.

In Lakewood, Ohio, the city’s redevelopment plan for the area estimated that the total tax value of real estate in the West End could increase from $31.3 million to $131.1 million by transforming the area from an older, affordable residential neighborhood to a mixed-use “lifestyle center” with offices, high-end restaurants, luxury apartments, and movie theaters. To use eminent domain the City had to declare the entire West End neighborhood “blighted” or “deteriorating.” An analysis of trends in the neighborhood found:

• Property values in some parts of the West End were increasing faster than for the city as a whole, suggesting a strong real estate market.
  
• Residential vacancy rates for homeowners were falling faster in the West End neighborhood than for the city as a whole.
  
• Homeownership rates had increased in the West End neighborhood between 1990 and 2000.
  
• The West End neighborhood was healthy, growing, and stable using standard criteria of neighborhood development.

Policy Implications
The study recommends urban policymakers refocus urban redevelopment policy by:

1. Focusing on the achievable, not grand visions for change, transformation and redevelopment;
   
2. Using the private sector whenever possible, but ensuring projects with local government involvement serve a legitimate public purpose (not net fiscal benefit);
   
3. Focusing on core competencies, such as providing key public services well to lay a foundation for broadbased investment and economic development;
   
4. Creating sustainable economies through private investment;
   
5. Providing leadership that is focused and transparent to create accountability;
   
6. Respecting the rights of all citizens, not just those able to access the political process;
   
7. Encouraging voluntary and incremental redevelopment to build a strong foundation for future development by securing property rights for a broad-based citizenry and business community, not those with political access to economic development initiatives;
   
8. Rigorously evaluating blight determinations to limit the arbitrary and often capricious use of eminent domain to serve narrow public and private interests.

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The Reason Foundation: www.reason.com

A complete copy of the report is online at www.rppi.org/ps331.pdf