redevelopment

Since the U.S. Supreme Court’s 2005 Kelo v. New London decision, significant attention has been paid to the way government interacts in the property development realm. The case centered on a comprehensive redevelopment plan meant to augment pharmaceutical giant Pfizer’s new research and development campus (Pfizer announced construction in 1998 and decided to close the facility in 2009). The city devised a plan, financed in part by $15 million in bonds, which included financing for the Fort Trumbull State Park and a mixed-use development adjacent to the Pfizer campus. City planners estimated that the project would create 1,000 jobs and bring in new tax revenue.

After several homeowners refused to sell, the city of New London, Connecticut, initiated eminent domain condemnations through a public development corporation set up to complete the plan. The private developer of the mixed-use property was to receive a 99-year lease at $1 annually in exchange for developing the property in a manner consistent with the city’s plan.

The U.S. Supreme Court—in an unfortunate 5-4 decision—upheld the Supreme Court of Connecticut’s ruling. The lower court found that projected increased tax revenues and job creation resulting from potential economic development satisfied the requirements of the Fifth Amendment’s Takings Clause, which restricts private property condemnations by government only when the land is taken for “public use” and that the owner is given “just compensation.” This ruling, many scholars fear, has essentially rendered the Takings Clause meaningless in terms of its ability to actually protect individual property owners from unnecessary and unjust seizures. Justice Sandra Day O’Connor went as far to write in her dissent that the U.S. Supreme Court’s decision was “to wash out any distinction between private and public use of property—and thereby to effectively delete the words ‘for public use’ from the Takings Clause.”

Fundamentally, property development is an area where government has very little positive to contribute. Government cannot accurately forecast future economic conditions, as the New London-Pfizer situation demonstrates, and public officials have far less expertise in real estate development than private sector investors. Moreover, land-use restrictions such as zoning distort the real estate markets and are often used to justify public-sector involvement in real estate, as the private sector isn’t capable of fighting city hall—or so the story goes.

A recent study on New York City rezoning found that upzoned areas (those where zoning restrictions were eased to allow more types of development) were predominately populated by lower-income minorities outside of “high growth areas.” While upzoning will have beneficial effects on the neighborhood and the city as a whole, eliminating burdensome land-use restrictions such as zoning altogether should be preferred. Removing these restrictions would also neutralize the red-tape cutting argument for more government involvement in real estate development.

Real estate development policy nationwide has also become more beholden to ideological planners. The so-called “smart growth” and “New Urbanism” movements, which aim to promote “sustainable” and “livable” urban development, have begun to dominate urban development policy discussions across the country. These ideological movements have also received support from government bureaus such as the Environmental Protection Agency. Proponents desire to limit “suburban sprawl” and attempt to create denser developments closer to the urban cores, supported by expensive public “livability” projects and transit systems. A new method of promoting and enforcing this ideology is the form-based code.

Form-based codes, which have become quite popular as zoning alternatives in the southeastern United States, go far beyond the government invasiveness of Euclidian zoning regulation. Unlike traditional zoning, form-based codes specify regulatory compliance and land-use requirements that go beyond broad separation of uses restrictions. While they are touted as an improvement over zoning, form-based codes are in reality considerably worse. Public-sector meddling (and the resulting distortions) is increased across the board, which includes new requirements on green space (e.g., shade trees on private property and public parks), accessibility to public transit, and construction guidelines. In essence, form-based codes further undermine the spontaneous order that largely characterized the real estate market prior to the Euclid v. Ambler Reality decision by greatly enhancing the ability of central planners to dictate the terms of development.

Government in recent years has grown more interested in “aiding” the private sector in real estate development through public-private partnerships. The justifications generally given are that markets alone can’t bring about redevelopment—although, if true, policy makers rarely try to understand why that is the case (perhaps consumers don’t want them in the first place?)—and the existing public institutions are inadequate or counterproductive. Most often, this entails either a comprehensive redevelopment plan as was seen in Kelo or the development of large single-purpose structures such as stadiums and indoor shopping malls.

Unfortunately, these are merely symptoms of the disease: the command-and-control urban planning mindset. Planners presumably get the same rush that the political class feels when it “democratically” exercises its authority over the unwashed masses, and have convinced themselves (and much of the rationally ignorant public) that they produce significant social returns. This is not the case. In reality, they are merely misdirecting taxpayer dollars and private investment into development projects that no one desires enough to privately provide—another example of the road to Hell being paved (a bit more literally in this case) with good intentions.

Today–this June 23–marks the fifth anniversary of the U.S. Supreme Court’s wrongheaded ruling in Kelo v. New London. Here’s my piece on Kelo+5 in The Daily Caller. The reasoning behind the opinion relied primarily on three past (although modern) Supreme Court decisions involving definitions of “public use”:

  1. Berman v. Parker (1954) — This case upheld the right of municipalities to declare entire areas blighted, even if the property in question isn’t blighted. It also accepted Washington, D.C.’s argument that the area condemnation was necessary to prevent future blight. An all around terrible decision.
  2. Hawaii Housing Authority v. Midkiff (1984) — This case involved redistribution of land titles in Hawaii. When the state moved to seize the properties, 49 percent of land in Hawaii was controlled by government and 47 percent was controlled by 72 owners. The Court failed to recognize the central problem with land distribution in Hawaii at the time: almost half of the property was controlled by government, which created massive real estate market distortions–in addition to Hawaii’s odd economic history. While Justice Sandra Day O’Connor wrote the majority opinion in Midkiff, she also wrote a scathing dissent in Kelo, where she regretted her broad language in the Midkiff ruling that opened the door for a terrible opinion like Kelo.
  3. Ruckelshaus v. Monsanto Co. (1984) — This case involved chemical industry trade secrets. While it was solely about intellectual property, the Court argued that this case was relevant because it dealt with public use in a purely economic context. The enormous distinctions between intellectual property and real property were lost on the majority in Kelo.

While the ruling itself was terrible, the events of New London demonstrate the fallibility of the municipal planner world view–that they somehow possess more market information than actual market players, and can in essence predict the future. In 2009 of last year, Pfizer announced it was closing the research facility that spawned New London’s redevelopment pipe dream, which in turn led the city to seize and demolish the petitioners’ homes. The land where their homes once stood is now largely vacant, with waist-high weeds supporting a thriving community of feral cats. Just another sad example of how economic development by fiat is bound to fail.

In [dis]honor of the 140th anniversary since pinko pin-up Vladimir Ilyich Lenin spawned, I’d like to present the Lenin Prize for the Reification of Destructive Ideologies to ACORN CEO Bertha Lewis. Ms. Lewis has taken a lot of heat since the ACORN-appearing-to-aid-and-abet-child-prostitution scandal broke, but remains incredibly committed to her organization–one based on a particularly vile and inane form of bureaucratic socialism. As the leader of a group that can claim more credit (excluding government) for perpetuating urban poverty than any other, the following should not be surprising.

Earlier today, Reason‘s Damon Root posted an e-mail authored by Lewis disparaging a Brooklyn man whose home was condemned through eminent domain:

Finally, the itch that was Daniel Goldstein has been scratched and scratched out.   After almost seven years of flawed strategies, smear campaigns, stupid tactics, disingenuous rhetoric and total disregard for people who have lived in the downtown Brooklyn community for years before he even thought about coming here; finally he got what he really wanted.  A Deal.  Not for the community he claimed to love so much, but for the only beneficiary of his community of one, himself, Double Dealing Danny Goldstein.

Her cranky little missive is in response to Goldstein’s announcement that he has agreed to vacate his home next month. Goldstein lives/lived in the Atlantic Yards area of Brooklyn, which is currently undergoing forced redevelopment. Naturally, as with most comprehensive redevelopment plans, this one entails kicking many low- and middle-income residents and business owners to the curb in order to transfer the property to a wealthy private developer.

But why, you might ask, would ACORN, an organization with a stated mission to “[help] those who have historically been locked out,” support wealthy private developer Bruce Ratner’s land grab over the rights of residents? Because even for committed socialist dupes, money talks. Ratner quietly funneled money into the group in 2008 following a funding panic in the wake of a multi-million dollar embezzlement scandal involving high-ranking ACORN officials. It is also alleged by a former ACORN official-turned-whistle-blower that ACORN and Lewis were promised kickbacks from Ratner in the form of control of new affordable housing units, an arrangement that could net the organization tens of millions of dollars in the coming years.

For more on Atlantic Yards, the state’s land grab, and the Ratner plan, visit Develop Don’t Destroy Brooklyn.

Yesterday, Pfizer announced it was closing its research and development facility in New London, Connecticut. This is the same complex that was at the center of the redevelopment plan at issue in Kelo v. New London. From the Castle Coalition:

This was the same bogus development plan that five justices of the U.S. Supreme Court refused to question when the property owners of New London pleaded to have their homes spared from the wrecking ball.  Justices mentioned that there was a plan in place, and that so long as lawmakers who are looking to use eminent domain for someone’s private gain had a plan, the courts would wash their hands.  Now, more than four years after the redevelopment scheme passed constitutional muster—allowing government to take land from one private owner only to hand that land over to another private party who happens to have more political influence—the plant that had been the magnet for the development is closing its doors and the very land where Susette Kelo’s home once stood remains barren to all but feral cats, seagulls and weeds.

This turn of events underscores the argument, often employed by eminent domain opponents, that government-sponsored development corporations lack the economic foresight to efficiently make long-term development investment decisions. Those decisions are best made by economic actors in an open marketplace, not by bureaucrats hungry for additional tax revenue and rent-seeking private developers who have no problem promising the moon to said tax-dollar-sign-eyed officials.

The poorly-reasoned Kelo decision did do some good in galvanizing a nation-wide property rights movement, which resulted in the majority of states enacting additional property protections. While the movement has lost a little steam recently, Texas voters just approved a constitutional amendment (with 81 percent support) that will outlaw several more egregious development takings practices.

For more on moving forward on the eminent domain front, see my previous post which outlines four practical reforms for curtailing eminent domain abuse.

Popular outrage over eminent domain abuse may have waned a bit since the Supreme Court’s poorly-reasoned Kelo ruling in 2005, but economic development takings remain incredibly unpopular throughout the country. Public opinion polls indicate that more than 80 percent of Americans oppose eminent domain for economic development, which is surprising when one considers the relative inaction on the part of state legislatures to meaningfully protect their citizens’ property rights.

However, there are reasons to be optimistic. Brooklynites fighting the proposed Atlantic Yards development filed a lawsuit today challenging the legality of the Metro Transit Authority’s land handout to the private developer. In Texas, citizens will soon vote on widely-supported Proposition 11, which would amend the Texas Constitution to prevent area blight designations and condemnations, and prohibit takings for purposes of economic development. If it passes, which seems likely, Texas property owners will have some of the strongest protections against eminent domain abuse in the nation.

But there is a lot of work to do. Many in this country are still largely defenseless against development takings, so the question arises: What can property owners do to take back their rights from revenue-hungry municipalities and rent-seeking developers? The law, as it stands, is against them in most respects, but there are legislative avenues worth pursuing.

A few of the most politically-feasible are:

  1. Enacting state legislation mandating the creation and maintenance of a public eminent domain database accessible via the Internet. Currently, data on development takings are difficult to obtain due to the fact that eminent domain condemnations are ordered at the local level. Right now, an empirical analysis of takings within a state would require contacting every county clerk and requesting specific filings. A central state database would allow social scientists, journalists, and the public to examine the economic effects of eminent domain use and abuse.
  2. Enacting state legislation defining “public use” as “use by a government body,” which would deny municipalities the opportunity to claim that their takings deals with private developers serve the “public purpose” because they will ostensibly increase tax revenue at some future date.
  3. Enacting state legislation mandating that blight be determined on a parcel-by-parcel basis.
  4. Enacting state legislation mandating that Tax Increment Financing (TIF) be limited to the length of time required to complete public infrastructure improvements within a given TIF district. This would reduce the ability of rent-seeking private developers to collude with local officials to subsidize development projects.

These proposals could also be enacted through ballot initiatives, if the state allows them. As eminent domain is primarily a local issue, Congress is a less likely venue for legislative relief. However, it is possible for Congress to tie federal development and highway funding to takings behavior (as they presently do for myriad other “carrot-and-stick” purposes). For example, a bill was introduced in the previous legislative session that would cut off federal development grant money for 10 years to any state that permitted an eminent domain condemnation for the benefit of a private developer.

With the five-year anniversary of Kelo coming up next summer, a renewed interest in the harm caused by eminent domain abuse will hopefully materialize.

Yesterday, U.S. District Court Judge Frederick Scullin dismissed the majority of a lawsuit filed by J.C. Penney against the owner of the mall where it leases retail space.  The Carousel Center, located in Syracuse, New York, is currently undergoing a [doomed] expansion project–the largest commercial development to break ground in Syracuse in 20 years. The project is in part bolstered by public support in the form of generous tax breaks and ridiculous green giveaways (the planned hotel will be “powered by rainwater, solar,” and construction vehicles by biofuel), which has become a contentious issue in local Syracuse politics. But the development is also supported by questionable eminent domain condemnations.

In its complaint, J.C. Penney alleged that the mall owner violated the terms of its lease agreement, including provisions that required the retailer’s consent before any significant alteration to the mall was allowed to take place.  The court found that the mall was not liable because–at the insistence of the mall’s owners–the Syracuse Industrial Development Agency had condemned the property through eminent domain, which stripped all rights J.C. Penney had to its retail space per the original lease agreement. However, there appears to be some evidence that the takings were pretextual and that the developer violated the terms of the lease prior to the condemnation. This means it is possible that J.C. Penney will get some relief, despite New York’s notoriously biased and antiquated eminent domain statute. (And where exactly is the blight in this case justifying the takings? It seems difficult to apply the over-broad definition that came out of Berman v. Parker, as the condemnee is not a lone department store surrounded by “slums [and] blighted areas that tend to produce slums” in an economically-depressed inner city neighborhood, but an anchor store in a large, secure, modern shopping center.)

Unfortunately, the same cannot be said for Syracuse taxpayers, as the expansion project has also run into serious financial problems and completion of the expansion is now in jeopardy. In June, Citigroup, the primary construction lender, halted funding for the expansion project after it came to light that no tenants have agreed to lease the new space and that massive cost overruns now require drastic changes to the financing plan (specifically, Citi now wants the developer to contribute more cash). The case is currently tied up in appeals court, and the construction jobs and other benefits touted by cheerleading politicians have yet to materialize.

Develop Don’t Destroy Brooklyn (DDDB), a group opposed to the taxpayer-financed development project Atlantic Yards, filed a motion with the New York Court of Appeals alleging that the environmental impact statement authored by the Empire State Development Corporation was illegally biased and predetermined in a manner that favors the property developer.

Specifically, according to DDDB, the latest brief filed in the case that challenges the environmental review asks the Court of Appeals to hear its case and address the following:

“1. Whether ESDC’s purposeful denial and mischaracterization of the uncontroverted economic conditions and trends in the project area, and its knowing misrepresentations of crime data in the project area, to support its ‘blight’ determination, demonstrate a degree of bias and corruption on the part of ESDC which warrants invalidation of its determination that the area is ‘substandard and insanitary’ for purposes of designating the project a ‘land use improvement project’ under the Urban Development Corporation Act (UDCA).

2. Whether ESDC’s purposeful denial and mischaracterization of the uncontroverted economic conditions and development trends in the project area, in order to justify its rejection of project alternatives, demonstrate a degree of bias and corruption on the part of ESDC which warrants invalidation of its rejection of project alternatives under State Environmental Quality Review Act (SEQRA).

3. Whether ESDC was required to consider the economic conditions and development trends in the project area in order to exercise its authority to designate and undertake the project as a ‘land use improvement project’ under the UDCA.

4. Whether a sports arena leased for one dollar per year to a private, for-profit entity to be operated as a professional sports facility, with trivial civic benefits, may nevertheless be designated a ‘civic project’ under the UDCA.

5. Whether the standard of review of an agency action under CPLR Article 78 is the same as the standard of review in a taxpayer action under section 51 of the General Municipal Law.”

The proposed Atlantic Yards project is financed in part by $1.6 billion+ in government subsidies. Forest City Ratner, the developer, is attempting to seize many of the affected parcels through eminent domain in order to construct high rise commercial and residential towers, along with a 20,000-seat arena. As noted by Daniel B. Kelly in the forthcoming Supreme Court Economic Review 2009 (ungated working paper available at SSRN), illegal pretextual takings–use of eminent domain when a deal between government and preferred private developer has already been reached–are far more common when development agencies author environmental impact statements and undertake “blight” determination studies. These analyses typically ignore current local economic trends and attempt to paint the economic landscape in the bleakest terms possible in order to convince the appropriate bureaucrats that a state-run, public-private “economic rehabilitation” plan is neccessary.

But, largely due to the poorly-reasoned majority opinion in Kelo v. New London, property owners now often face a Sisyphean task when they are forced to confront an unholy alliance between government bureaucrats and rent-seeking private developers.