FEATURE: The Great Debates

Real estate in peril

BY ROBERT FREEDMAN

Note: During 2006, REALTOR® Magazine is exploring some of the great debates in organized real estate. This month: The movement to shore up property rights in the face of government takings. See the entire “Great Debates” series to date at REALTOR® Magazine Online.

It’s not easy for Georgia city governments to seize private property for economic development—not since April, when a new law regulating takings was signed by Gov. Sonny Perdue.

To stop municipalities from applying the term blight too broadly in making eminent domain decisions, the Georgia law sets a highly specific definition of blight and puts the onus on municipalities to show that a property—and not just the neighborhood it’s in—is blighted and needs to be condemned to address imminent health and safety concerns.

Georgia now has one of the strictest property rights laws in the nation, and voters in the state will get a chance to take the law one step further. In a statewide ballot later this year, they’ll vote on whether to limit eminent domain decisions to elected officials, taking that power away from government agencies such as redevelopment corporations.

The effort to strengthen property rights in Georgia is just one sign of growing public concern nationwide that municipalities are overstepping their eminent domain authority. Eminent domain gives governments the right to take private property for public use—to build roads and schools, for example. But governments have increasingly used their authority in ways that have made people question whether there’s a healthy balance between the public good and the rights of property owners.

One Georgia case that caught property rights advocates’ attention was that of Mark and Regina Meeks, owners of a flower shop in Stockbridge. The Meekses’ shop faced the threat of condemnation because it sits in a parcel of land that municipal officials wanted as part of a redevelopment project.

To pave the way for the project, the city had been systematically buying out owners in a 22-acre part of an older business district, but acquisitions stalled at the Meekses. Earlier, the shop owners had received a $750,000 offer for their property from the big retail drug store company Eckerd Corp., which liked the shop’s location fronting a high-traffic street. The city made a lower offer, around $420,000, and at the same time rezoned the property to prohibit the kind of large-scale retail that Eckerd specializes in.

With the property no longer suitable for its needs, Eckerd pulled its offer, leaving the Meekses with a tough choice: either take the city’s offer or fight the attempted takings in court. They fought and won.

Still, “some people thought the city was acting pretty aggressively,” says Keith Hatcher, senior political consultant for the Georgia Association of REALTORS®, which provided input on the new law.

Widespread action

Spurred by such stories, including last year’s Kelo vs. City of New London case—which galvanized opposition to the use of eminent domain for private development—property rights advocates across the country have been working for bills that would create curbs similar to those in Georgia.

In Kelo the U.S. Supreme Court affirmed the right of New London, Conn., to condemn non-blighted property in a part of town it had targeted for redevelopment. The decision has been controversial because, in principle, it opens the door for municipalities to condemn well-maintained private property and turn it over to private-sector owners if the new owners can put the property to a higher and better use.

Reaction to the court decision was swift. In all, lawmakers in 47 states took up eminent domain reform legislation in 2005 and 2006. By April, about a dozen had passed laws and others were promising to keep working for reform.

“Basically every state that’s been in session has been considering legislation to cut back on eminent domain abuses,” says Dana Berliner, a senior attorney with the Institute for Justice, a private nonprofit group that represented the home owners in Kelo. “That shows just how far-reaching Kelo was. Its impact is reverberating to this day.”

In truth, controversial government takings were an issue well before the Kelo case. A 1954 Supreme Court decision in the case of Berman v. Parker gave governments latitude to use eminent domain for economic redevelopment purposes. Since then, property rights advocates charge, municipalities have been eating away at the rights of property owners. In a 2003 Institute for Justice report, Public Power, Private Gain, Berliner documented 10,000 instances of threatened or actual condemnation for private development nationwide from 1998 through 2002. Berliner’s report gained national attention after a CBS News “60 Minutes” report on a controversial Lakewood, Ohio, takings case. (REALTOR® Magazine covered the case in “Tug of war over land," /> ” February 2004.)

The NATIONAL ASSOCIATION OF REALTORS®’ policy on property rights calls on local governments to justify condemnations “by proving that real and substantial community benefits can accrue from the taking of private property,” and REALTOR® associations throughout the country have been on the front lines of recent legislative initiatives. But the national and state associations walk a fine line in their advocacy efforts because REALTORS® are far from united on the issue. A poll NAR commissioned shortly after the Kelo decision found that a majority of REALTORS®—just over 65 percent—opposed the Supreme Court decision because the property involved wasn’t blighted. But a sizable minority, almost 35 percent, supported the move.

Beneath the surface, the differences are more nuanced than stark. Both sides share a belief in the inviolability of private property rights; disagreement crops up over the conditions that justify governmental taking of property. REALTORS® also come together on the need for government to provide just compensation to owners when it does exercise a taking, one of the basic rights enumerated in the U.S. and state constitutions. But what’s just? There, too, differences arise. Most believe compensation should amount to something above the fair market value because of the relocation expenses owners are forced to incur and because owners may face a big drop in their property value, a common occurrence once government starts making offers in an area. Others say compensation should be limited to fair market value to avoid opening a Pandora’s box of what constitutes costs for which owners should be compensated.

The general public’s view of takings isn’t quite so mixed. Separate polls by Monmouth University in New Jersey and the University of New Hampshire found anti-Kelo sentiment closer to 90 percent. “There’s a consensus,” says Berliner. “Everybody who’s not in the eminent domain business [meaning those with a stake in redevelopment projects] agrees that the authority shouldn’t be used for private development projects.”

Focus on goals, not means

Those who have a stake in redeveloping communities say the issue’s not black- and-white, so it’s important that new eminent domain laws aren’t overly restrictive.

“The challenge is to keep tools in the hands of local governments to deal with pockets of poverty on a meaningful scale while ensuring governments exercise the awesome powers of eminent domain responsibly,” says Roger Platt, senior vice president and counsel of The Real Estate Roundtable, a Washington, D.C.–based advocacy group representing mainly owners and developers.

To achieve that kind of outcome, Platt says, lawmakers must allow municipalities flexibility to use eminent domain to acquire non-blighted properties for the kind of major projects that can have a transformative effect on an area, such as Baltimore’s Inner Harbor project. In that instance, the city replaced an impoverished pocket with a vibrant mixed-use development.

“You need a large enough planning area to make these projects work—the open space, the parks, the residential units, the offices, the retail projects, and the opportunity for people to walk to their jobs, because that’s the kind of development people want these days, and that’s the kind of scale it takes,” says Platt. “And that often requires some taking of non-blighted property.”

Taking away government’s ability to include non-blighted property in assembling these large tracts of land will force development out to the suburbs, which could leave impoverished urban areas to further deteriorate. “I can find you farm land to build on all day long,” says Jeff Finkle, president and CEO of the International Economic Development Council. “But is that what we want to do? We’ll be giving urban areas up for dead.”

On the other hand, it’s neither necessary nor desirable to use eminent domain for small-scale projects for which land assembly isn’t necessary, says Platt. “You don’t want to see municipalities coming in and condemning a Motel 6 just so they can put in a Ritz Carlton.”

If developers of these small-scale projects can’t get owners to sell, than the appropriate response is to find another parcel, not have the locality condemn the property.

“Condemnation is the easy way out,” says Berliner. “Municipalities just say, ‘This developer wants this real estate, so, OK, we’ll take it.’ But there are other ways to do it.”

Not the least of which is to make more generous offers, say experts on both sides of the issue. At least in some cases, they say, one of the reasons developers ask municipalities to unsheathe their eminent domain sword is so they can hold the threat of condemnation over the owner’s head while they go in with a modest offer. Platt and others say localities should instead make it economically feasible for developers to go in with more generous offers. How? Governments can aid projects with tax increment financing and other incentives, including economic development funds.

But tapping these tools won’t help in every situation. Developers are sometimes confronted with an owner who, either through emotional attachment or greed, simply won’t sell. That’s where lawmakers can come in with well designed legislation that makes a distinction between genuinely sympathetic owners like the Meekses and hard-nosed businesspeople who, for purely economic gain, are determined to hold up a project that otherwise has broad public support. “You want to be able to deal with the person who just wants to be the last one standing to leverage the situation,” says Pratt.

Keep it local

Whatever is done legislatively in the post-Kelo environment should be done at the state and local level and not taken up in Congress. That’s a view Platt’s Real Estate Roundtable shares with NAR.

“Everybody has forever agreed in Washington that local land use is a risky area for the federal government to get involved in,” Platt says. “No matter how well crafted a federal proposal is, you’ll still end up dealing with unintended consequences, because state and local officials are the ones who really understand their area.”

Notwithstanding that concern, Congress in the weeks following Kelo jumped into the fray with several bills, and the House has since passed a bill, the Private Property Rights Protection Act of 2005 (H.R. 4128), by Rep. F. James Sensenbrenner Jr., R-Wis. The bill would take a stick approach to localities using eminent domain on non-blighted properties for economic development by withholding for two years any federal economic development–related funds they receive. That’s a big stick, because the embargo could impact funds that localities rely on for many of their development programs, including popular community development block grants.

NAR weighed in early on the Sensenbrenner and other House bills, recommending that lawmakers step back and let the states and localities sort through their own solutions. “An appropriate federal role might be to provide technical assistance grants to the states to help them get the job done,” 2005 NAR President Al Mansell told House lawmakers last year.

Even with House passage of the Sensenbrenner bill, Congress is unlikely to vote on legislation this year. Until the Senate acts on the issue, the House bill has nowhere to go. A bill introduced in late 2005 by Sen. John Cornyn, R-Texas—the Protection of Homes, Small Businesses, and Private Property Act of 2005 (S. 1313)—isn’t making any headway at the committee level. The bill would limit eminent domain to public-use projects and define “public use” as not including economic development.

Despite the unhurried pace in the Senate and cautions from NAR and other industry groups, the possibility of congressional action still looms. Later this year the U.S. Government Accountability Office is due to release a study commissioned by Congress to look at what the states are doing on eminent domain and identify cases of condemnation abuse. Once that’s out, Congress might take that as a road map for reform, say NAR analysts.

Assistance to states

For now, the battleground remains in the states, and NAR has been making support available to REALTORS® to help them work with their state lawmakers on reforms.

With REALTORS® divided on the issue, many associations are seeking the middle ground. “We went to our state legislature after Kelo with a goal of protecting against abuses while making sure lawmakers retained tools for using eminent domain for true public purposes,” says Kit Hale, GRI, president of the Virginia Association of REALTORS®.

Virginia lawmakers haven’t yet passed new rules. “Lawmakers decided it was better not to do reform if they couldn’t do it right,” meaning in a balanced way, says Lisa Noon, CAE, VAR’s vice president of marketing and communications.

More than a dozen state associations have tapped NAR’s Land Use Initiative to help them analyze eminent domain bills in their state and determine whether to support any of them. Under the initiative, NAR makes expert analyses of the legal, planning, economic, and environmental issues in land-use proposals available to state and local associations at no charge.

Three other associations have tapped NAR’s customized legislation program. Through the program, associations split costs with NAR to have legislation drafted by legal experts who are on retainer with NAR. The Georgia Association of REALTORS® was one of the three, and the legislation ultimately signed by Gov. Perdue took a lot from the REALTORS®’ draft legislation, which GAR had given to the governor’s legislative counsel. “The governor’s own version included a lot of the same points we made,” says Hatcher, GAR’s political consultant. “We were an integral part of the outcome.”

Among other things, GAR wanted to make sure blight was narrowly defined. The governor’s bill took that one step further, requiring municipalities to look at blight on a property-by-property basis rather than on an area basis. That prevents municipalities from defining a perfectly good property as blighted if it’s located in or near a blighted area. From a developer’s perspective, the law makes the assemblage of large tracts of land more difficult but not impossible. For example, the government could still condemn a non-blighted parcel for a public-use project, which would aid the larger project.

To provide further help to associations, NAR has released a set of core principles on eminent domain and a detailed analysis of blight. The core principles, which cover the proper role of government in land decisions and the degree of accountability governments should exercise before condemning property, among other things, are intended to give REALTORS® guidance as they engage in the continuing legislative debate over eminent domain in their states.

That guidance will surely be needed. Given the continued contentiousness of the eminent domain issue, as lawmakers try to balance private property rights on the one hand and municipalities’ need to transform impoverished areas on the other, REALTORS® are well positioned to be the voice of workable solutions.

MORE ONLINE

Supreme Court Rules for Property Seizures, including analysis of Kelo vs. City of New London

NAR Working Principles on Use of Eminent Domain (April 2006)

NAR’s position on private property rights

Castle Coalition: An Institute for Justice Web site on Eminent Domain

Text of CBS News/“60 Minutes” report: