Commercial Real Estate Finance

A recent Wall Street Journal Article titled Pfizer and Kelo’s Ghost Town reports that Justice Paul Stevens supported the City’s use of eminent domain because:

“The city has carefully formulated a development plan that it believes will provide appreciable benefits to the community, including, but not limited to, new jobs and increased tax revenue.”

So has the City of New London made good on its promises? Not exactly, according to the same article:

“While Ms. Kelo and her neighbors lost their homes, the city and the state spent some $78 million to bulldoze private property for high-end condos and other “desirable” elements. Instead, the wrecked and condemned neighborhood still stands vacant, without any of the touted tax benefits or job creation.”

The outcome of the Supreme Court case Kelo V. City of New London made it much easier for local governments to take private property through the use of eminent domain. Historically, the use of eminent domain was strictly limited by the Takings Clause in the Fifth Amendment to the U.S. Constitution which stated “…nor shall private property be taken for public use, without just compensation.”

The Kelo case has been in the news a lot since Monday because Pfizer, who was suppose to have built offices by now, announced that it was leaving New London altogether. How has the use of eminent domain transformed from a specific understanding of public use, to a broader, more aggressive interpretation?

Throughout most of US history, eminent domain was utilized for tangible public use, like railroads, schools, roads, and power. Not anymore. The following is adapted from a DCBA brief on eminent domain to specifically highlight the progression of eminent domain over time.

1954:

Berman vs. Parker: Supreme Court allowed the government to take and raze blighted structures in DC, and then transfer that land to private developers to build condos, offices, etc. Also allowed non-blighted property to be taken because “the project should be judged on its plans as a whole, not on a parcel by parcel basis.”

- Logic: It was in the public’s interest to have the blighted neighborhood redeveloped.

1984:

Hawaii Housing Authority vs. Midkiff: Supreme Court approves the use of eminent domain to transfer a land lessor’s title to its tenants who owned and occupied homes built on the leased land.

- Logic: It was in the public’s best interest because the case broke up a housing oligopoly and thereby would lower or stabilize home prizes. In reality, home prices doubled within a few years.

2005:

Kelo vs. City of New London: The Supreme Court sided with New London, CT and allowed them to take non-blighted private property through the use of eminent domain, and then sell it to a private developer for a dollar.

Clearly the use of eminent domain has broadened over time, and has increasingly been used by private developers and politicians. However, it seems that the expansive use of eminent domain is being rightfully reigned in. Over 40 state legislatures have introduces laws that specifically limit the government’s use of eminent domain to some form of specific “public use” instead of the more liberal idea of “public benefit.” Both Berman and Midkiff were unanimous decisions, while Kelo was a split court. Interestingly, the author of the Midkiff decision led the charge of dissent. This trend suggests that the government will have a more difficult time justifying that its use of eminent domain to acquire private land for subsequent private use satisfies the Public Use Clause of the Fifth Amendment.

I guess if a developer truly has a great idea, he will have to induce people to sell their property through the use of economic incentives instead of the strong arm of the government. This is good news for every property owner in America.