Partners (Number 1, 2006)

Eminent Domain and Economic Development: Striking a Balance

Eminent domain is a long-standing and powerful tool of local governments. It is also one of the most controversial, particularly in minority and low-income communities.

Some critics of eminent domain argue that it allows local governments to ignore private property rights, and others contend it provides an opportunity for government to take from those who have the least and give to those who have money and power, all in the name of economic development. A 2005 Supreme Court decision has made eminent domain one of the hottest topics across the country, and one that is of particular importance in the current debate surrounding rebuilding the City of New Orleans.

The power of eminent domain: what is it and how is it used?
Eminent domain is the power of government to take private property for public use. The Fifth Amendment to the U.S. Constitution grants government the authority to take private property for a public use, provided that the property owners receive just compensation. The debate arises over the different interpretations of “public use” that justify recourse to eminent domain. The courts have held that “public use” should be defined broadly to include improvements that are publicly owned, used by the public or for public benefit.

Eminent domain has most frequently been used by local governments to acquire land for such purposes as new roads, infrastructure improvements, civic buildings or schools. Government has also used the power of eminent domain to cure blight and for other economic development purposes, including the transfer of property to private owners to encourage revitalization. The use of eminent domain for economic development purposes relies on the broadest definition of public use. This interpretation argues that new investment, while possibly benefiting private interests, provides a public benefit by improving the economic conditions in a city.

According to the National League of Cities, land acquired through eminent domain for economic development is usually designated for one of four purposes: to cure blighted conditions; to clear title of vacant property; to resolve compensation disputes; or as part of an overall redevelopment plan for an area. Most governments have used eminent domain to acquire land for economic development purposes as a last resort.

Is economic development a sufficient public benefit?
Numerous examples illustrate the use of eminent domain for economic development, including the revitalization of Times Square in New York City, the redevelopment of the Inner Harbor in Baltimore, and the construction of Centennial Park in Atlanta. All of these projects have met the “public use” test for eminent domain and are considered successful revitalization projects from the perspective of increasing tourism to the area and sparking new development. However, these redevelopments also required the displacement of existing residents or businesses.

These projects raise the question of whether economic development is a sufficient public benefit, and if it is, how can this benefit be quantified? Such questions are particularly relevant if the benefit is derived at the expense of lower-income or minority property owners who tend to have fewer resources and less political capital than the new private owners who stand to gain from developing the property.

Thus the question surrounding eminent domain is not whether it can be applied for a clearly public use, such as a new roadway or airport, or for the purpose of eliminating a dilapidated structure. Instead, it arises in the significant gray area between explicit applications that meet the narrowest and most obvious definitions of public use, and uses for economic development that meet the broadest definition of public benefit. The latter justification for eminent domain can be very controversial.

The Kelo case
The 2005 Supreme Court ruling in Kelo v. New London has ignited an intense public debate about the use of eminent domain for economic development purposes. In the Kelo case, the Supreme Court ruled that the City of New London, Conn., could invoke eminent domain to take private property currently occupied by homeowners to make way for a new waterfront development, even though the properties in question would be transferred to a new private owner.

The public purpose stated for recourse to eminent domain was increased tax revenues that would be generated by the project. The city had experienced decades of disinvestment and its fiscal health was in jeopardy. It desperately needed new development to generate funding for basic public services.

The Supreme Court ruling in favor of the city sparked an immediate backlash from a wide range of groups. Anti-government forces who want to limit all government powers view the ruling as a direct attack on personal property rights. Advocates for low-income and minority communities are also concerned because they have seen the damage to these communities through use of eminent domain for urban renewal projects in the past. These groups fear that the Supreme Court’s decision will give local governments the “green light” to pursue new development for economic development purposes at the expense of poor and minority communities.

Supporters of the Court’s decision believe it only confirmed that economic development is a valid public use for eminent domain, and thus protected a critical tool for the revitalization of blighted communities.

In the aftermath of Kelo
Although eminent domain is an essential tool for governments, it can be dangerous because of the potential for abuse. Consequently there is an ongoing effort to define the limits of its use. The Kelo case was seen by some as an opportunity to set those limits, but the legislative and public response to the Supreme Court decision has stymied much thoughtful discourse.

Developing a clearer definition of “blight,” evaluating the methodology for determining just compensation, setting uniform standards for assessing public benefit, and providing for public input on reasonable limits for the use of eminent domain are options that could be considered to reform eminent domain. However, states across the country are bypassing the discussion of reform in a rush to adopt new legislation that significantly restricts the use of eminent domain for economic development purposes.

The legislation proposed by the states varies widely. Some states are considering legislation that only allows eminent domain for a recognized public use or to acquire blighted property. Other states would like to require more public involvement in redevelopment planning and in the decision to use eminent domain. Still other states are proposing a ban on eminent domain for certain purposes, including residential, retail or commercial development, when the primary purpose for the project is to generate tax revenues.

Response at the state and federal level
In the Sixth District, constitutional amendments and legislation are currently being considered in all states to address the use of eminent domain. Alabama and Georgia have already passed legislation to restrict the use of eminent domain, and lawmakers in Tennessee, Florida and Mississippi are also considering limits to applications of eminent domain.

The U.S. Congress is also considering legislation to restrict eminent domain for economic development. One bill proposes to deny federal economic development funding to any jurisdiction that invokes eminent domain for economic development purposes. Even financial institutions have reacted to the Kelo decision: BB&T Corp stated it would no longer provide financing to commercial developers for projects that have used eminent domain.

Proponents of eminent domain for economic development are concerned that the public outcry over acquisition of private property is driven by a lack of knowledge about the use of eminent domain. They fear that in the rush to respond to the vocal critics, legislators will enact unnecessarily severe restrictions on one of the few tools available to cities to draw private investment to economically distressed communities. Proponents believe if cities employ this power judiciously, they can encourage private activity that will generate substantial public benefits. Nowhere is this balancing act between private investment and public benefit going to be more important than in rebuilding the devastated city of New Orleans.

Rebuilding New Orleans in a post-Kelo environment
Hurricane Katrina exposed the tremendous social and economic problems that exist in neighborhoods with concentrated poverty. The flooding disproportionately affected neighborhoods where the city’s poorest and most vulnerable residents lived. The flooded neighborhoods were home to over 80 percent of the city’s minority population. As the city begins the process of rebuilding, it has a tremendous opportunity to address the problems associated with concentrated poverty by creating more diverse, sustainable and economically vibrant communities.

Public-private partnerships will be critical to augment the city’s resources for rebuilding.

The Brookings Institute, the Urban Land Institute and many other national organizations involved in redevelopment planning are encouraging the city to create economically, racially and socially integrated “neighborhoods of choice.” They believe the city has the opportunity to plan for new neighborhoods with affordable housing options for different income levels located near jobs and public transportation. Public-private partnerships will be critical to augment the city’s resources for rebuilding.

Most of the redevelopment plans proposed to date suggest that although eminent domain is a tool available to the city for rebuilding, it should only be used as a last resort. Eminent domain can be used to get clear title on land targeted for redevelopment and to acquire blighted properties. The city could theoretically use property acquired through eminent domain to encourage the development of neighborhoods of choice, using the land for the construction of affordable housing or commercial space for small business owners displaced by the hurricane.

However, the use of eminent domain in rebuilding the city has already become controversial. Because it is most likely to be applied in the flooded areas, it would have a disproportionate impact on the city’s poor and minority communities and those residents who have already been displaced. There is widespread concern that the city will not use eminent domain to promote a more integrated city, but will instead use it to separate poor residents from their property in order to focus resources on higher-end development that will increase the city’s tax base. Many are concerned that because the need to rebuild is so urgent, government will be tempted to use eminent domain to draw private investors without requiring that new development provide housing or commercial space that is affordable for the city’s existing residents.

Thus, in the aftermath of the Kelo decision, New Orleans is likely to become a critical testing ground for whether eminent domain can be used judiciously in the rebuilding of a city. Given the widespread devastation, the city will need all of the tools legally available to generate sorely needed economic development activity. However, with so many urgent and conflicting interests, the city must be held accountable to ensure that poor and minority communities are not further marginalized in the name of economic growth.

Nonprofits Use Eminent Domain to Develop Affordable Housing in Georgia

Much has been written about the use of eminent domain by cities for the benefit of private investors to encourage development in struggling communities. However it is less well known that eminent domain is also an important tool for nonprofit organizations working to build affordable housing and revitalize economically depressed communities.

The use of eminent domain by nonprofit organizations has been recently documented by the Georgia State Trade Association of Nonprofit Developers (GSTAND). The study was commissioned to inform state legislators in the policy debate surrounding the use of eminent domain for economic development purposes.

The study surveyed GSTAND members and found that eminent domain was an essential tool for neighborhood revitalization as well as for the creation and preservation of affordable housing in urban areas across the state. In this context, eminent domain has primarily been employed to acquire vacant or dilapidated structures or to obtain clear title on property. Without the opportunity to work with local housing authorities to acquire land through eminent domain, nonprofits would have a difficult time obtaining the critical mass of land needed to revitalize a distressed community, the report states.

Macon, Ga., is one of three cities recognized in the GSTAND report for effective use of eminent domain in neighborhood revitalization and affordable housing development. The Macon Housing Authority partnered with In-Fill Housing Inc. and several other nonprofit organizations to develop a neighborhood-based, inner-city redevelopment strategy. The plan increased single-family homeownership in targeted urban neighborhoods and created new affordable housing opportunities for low- and moderate-income homebuyers. This innovative project received the Georgia Department of Community Affairs Magnolia Award for Excellence in Affordable Housing in 2004.

The city targeted for redevelopment its worst communities, where the housing stock was dilapidated and crime was rampant. Eminent domain was required to acquire some of the properties identified for redevelopment. Surprisingly, Macon’s use of eminent domain not only benefited the city’s redevelopment efforts, but it also proved beneficial to some existing property owners. Owners of dilapidated structures or of property encumbered by many heirs were able to turn a low-value asset into one of substantially higher value. The city and nonprofit organizations thus invoked the power of eminent domain to address a problem the private market was unable to solve.

Bruce Gerwig, executive director of In-Fill Housing, is a strong proponent for protecting the use of eminent domain. According to Mr. Gerwig, “The Macon Housing Authority and In-Fill have been able to build more than 40 houses in inner-city Macon through a partnership with the City of Macon and the Macon-Bibb County Land Bank. That’s at least $3.5 million in new investment in the inner city. None of this—none of it—would have happened without the use of eminent domain. In a city that is competing with suburban growth and growth headed toward other counties, we need all the redevelopment help we can get for our inner-city areas.”  For more information on the GSTAND report, see the Web site.

The City of Macon, the Macon Housing Authority, the Macon-Bibb County Land Bank and In-Fill Housing Inc. used eminent domain to turn dilapidated structures into an award-winning development.

 

This article was written by Jessica LeVeen Farr, regional community development manager in the Atlanta Fed’s Nashville Branch.

  Return to Index | Next Article