Wrecking property rights: how cities use eminent domain to seize property for private developers.

THE CORNER OF Country Club Drive and Main Street in Mesa, Arizona, doesn't look like much, but this dusty plot of land is at the center of a growing debate over property rights. Just a stone's throw from downtown, the corner has touched off a potentially precedent-setting legal tug of war whose implications extend far beyond Arizona. The case illustrates dramatically how the effort to redevelop America's cities has transformed eminent domain--the government's power to seize private property--from a narrowly construed last resort into a widely, almost routinely used development tool.

On one side of the legal tangle is the city of Mesa, angling every way it can to broaden its discretionary power to seize private property for whatever purpose it pleases. In this case, on land bureaucratically labeled "Site 24," the city wants to give five acres to local businessman Ken Lenhart and his associates.

Lenhart wants to expand his hardware store, and the five acres that make up Site 24 are an ideal location. The expansion, he claims, would boost his sales by $8 million in the first year. But Lenhart didn't want to pay the full market price for the land. He didn't even want to bother negotiating with the property owners. After buying a few parcels at auction, he asked the city to condemn the rest and "sell" it to him at $4 per square foot. At the time the agreement was made, the full cash value of the properties averaged more than $8 per square foot, according to the Maricopa County tax assessor. The deal could net Lenhart a direct subsidy of at least $150,000 (and probably much more). The city of Mesa has decided that Lenhart's hardware store, a discount TV and electronics shop, and a few other small retailers and offices would be a better use of the property, so it's eager to make the deal.

Randy Bailey doesn't think it's such a great idea. Bailey is the sole proprietor of Bailey's Brake Service, a thriving enterprise that's been located on Site 24 for more than three decades. The family business has been around for more than 40 years, and Bailey has run it for 32. He doesn't even advertise; his customers just know to go to the brake shop at the corner of Country Club and Main.

Apparently, the city doesn't think Bailey's Brake Service contributes enough to the local economy to justify letting him stay. Now Bailey is hoping the courts will stop the city from using its power of eminent domain to improve Lenhart's bottom line. When the case first went to court, Bailey and his attorneys--Clint Bolick and Tim Keller of the Institute for Justice, a Washington, D.C.-based public interest law firm--were optimistic. After all, the Arizona Constitution states that "private property shall not be taken for private use." And Mesa's redevelopment director, Greg Marek, has admitted at trial and in official government documents that the city decides which properties to condemn based on whether someone in the private sector wants the land and has a project for it. That concession seemed to be a clear indication that private interests were driving redevelopment policy in Mesa.

Yet Bailey lost the first round, with Maricopa County Superior Court Judge Robert Myers ruling against him on April 30,2002. (Full disclosure: I provided expert testimony for Bailey at the trial.) Myers stayed his ruling pending Bailey's appeal. At press time Bailey is waiting for a decision by the Arizona Court of Appeals, which heard oral arguments in June. "The three judges were very concerned about the trial court's decision not to apply the constitutional standards," notes Tim Keller, Bailey's attorney. "We hope to get a positive decision."

The U.S. Constitution, like Arizona's, attaches an important restriction to the taking of private property: It has to be "for public use." Yet cases like Randy Bailey's are becoming more and more common. Eminent domain is becoming a primary tool for promoting urban development. In the case of Mesa, it's the only tool. That's why attorneys throughout the nation are watching this case.

A Tool of First Resort

Lenhart targeted Bailey's property in 1996, when Wayne Balmer, at that point the city's community development manager, sent a memo to Charles Luster, then the city manager, noting that his department had received several inquiries from private companies to develop land near the downtown area. "Unfortunately," he wrote, "all of these sites are outside our Town Center Redevelopment Area" (emphasis in the original).

Not to worry. Working with other high-level officials, Marek, the redevelopment manager, simply rewrote the rules to accommodate the developers. Once Lenhart decided that Bailey's property was suitable for the expansion of his hardware store, the city redrafted Mesa's redevelopment plan to include the land at Country Club and Main. They designated the property "Site 24" and issued a request for proposals to redevelop the site.

Three development companies submitted plans. One was Redstone Development, owned by Lenhart. Another was Palm Court Investment, owned by Mesa Discount. The third was Watt Commercial Properties, a national operation, which proposed a complete redesign of the property, including 50,000 square feet of new retail and office space. The city decided to consolidate the proposals submitted by Palm Court and Redstone and to reject Watt's bid altogether. It then negotiated a development agreement that included the terms for sale of the property to Lenhart and Mesa Discount once it was acquired by the city. It also agreed to acquire Lenhart's old building and land as part of a land swap.

At the request of Palm Court and Redstone Development, the city proceeded to condemn 21 of the site's 26 parcels, including Randy Bailey's business, representing half the assessed value of the land. Lenhart is asking the city to acquire property worth two-thirds of the assessed value of his share of the development project.

It was a sweet deal for Lenhart. For the hapless property owners living and making their living on Site 24, the taste was decidedly sour. Bailey and his father approached Lenhart to see if the brake service could be incorporated into the development project. No deal: Lenhart dismissed them out of hand, telling them they had to talk to the city of Mesa.

The Baileys had never been approached by Lenhart, the city of Mesa, or any of the other investors about selling their property before or during the process in which the city issued its request for proposals to redevelop the site. To add insult to injury, Lenhart bought a property adjoining Bailey's building and proceeded to board it up. The set of small office spaces has gone unused for years, contributing to the run-down character of the corner. Lenhart, as landlord, was contributing to the blight that the city cited to justify condemning Bailey's property.

Eminent Domain Abuse and the Courts

Eminent domain has a long history, and it isn't likely to go away. After all, it's enshrined in the U.S. Constitution, not to mention the constitutions of all 50 states. What distinguishes the current era is the degree to which local governments are willing to use this power to achieve all manner of public policy goals. Sometimes they succeed, and sometimes they're driven back by public protest or the courts. But they're unquestionably pushing the boundaries.

Jeff Finkle is president of the International Economic Development Council, a trade association representing development and redevelopment organizations and agencies. Not surprisingly, Finkle feels that eminent domain is critical to the revitalization of cities. Few projects in urban areas occur on small, isolated lots, and the costs of negotiating with dozens of property owners are simply too high, he argues. In addition, some property owners refuse to sell or set an unreasonable price, scuttling projects with large benefits for the community. "Lose eminent domain in urban settings," Finkle says, "and the only land that will be developed is green space on the edge of cities."

That said, Finkle doesn't defend eminent domain's recent form; he recognizes that the power should have limits. Taking private property, he says, "should be the last possible tool. If negotiations fail, if the bully pulpit fails, then you go to a takings case."

In the current climate, many of the traditional constraints on public takings of private property seem to have disappeared. Most redevelopment laws, including Arizona's, explicitly acknowledge that land can be taken even if the beneficiaries will be other private parties. This principle is even articulated in federal law, through the 1954 Supreme Court decision Berman v. Parker, which allowed local governments to condemn land for urban renewal and then transfer title to private parties. Even then, local governments didn't have carte blanche; they had to justify the taking as a way to mitigate "urban blight." But over the years that term has become little more than a name for property a government wants to take. Today redevelopment agencies enjoy more discretion than ever, and eminent domain is becoming their tool of choice:

* In 1993 the Las Vegas Redevelopment Authority condemned Carol Pappas' apartment building as a "blight" so a consortium of eight casinos could demolish it to build a parking garage. No one ever surveyed the block on which Carol's apartment building stood to assess whether it was actually blighted.

* In 1999 the mayor of New Rochelle, New York, decided that a neighborhood housing almost 200 residents and dozens of businesses would be better used for a retail-oriented development anchored by the Swedish furniture giant IKEA. The city offered to condemn 15 acres of land for the company.

* In 2000 the mayor and city council of Pittsburgh tried to condemn an entire downtown neighborhood in the Fifth and Forbes area and transfer title to a Chicago developer who intended to create an upscale shopping mall.

* In 2001 the State of Mississippi condemned some property to accommodate a new Nissan plant. While many of the property owners were willing to sell, one family, the Archies, had deep roots in their home and wanted to stay. The state continued to pursue the condemnation even though officials admitted publicly that Nissan didn't need the Archies' land to build its plant.

Then there's the case of Gateway International Raceway, near St. Louis. Built in 1997, the track hosts several major events, including auto and drag racing, almost weekly. Gateway opened with 50,000 seats, drawing 400,000 race fans into the stands in its first year. Its owners hoped to expand to as many as 100,000 seats, a size large enough to attract a highly coveted Winston Cup NASCAR race date.

To do that, Gateway had to solve a problem: traffic congestion. With 50,000 seats, the raceway couldn't accommodate the traffic generated by throngs of patrons clogging the roads on race day. Moreover, various development projects were quickly eating away at the land available for parking around the raceway. So on February 20, 1998, Gateway asked the Southwestern Illinois Development Authority (SWIDA) to condemn 148.5 acres owned by National City Environmental and the St. Louis Auto Shredding Company and transfer them to Gateway to accommodate new parking.

In this case, the taking was prevented: The Illinois Supreme Court invalidated SWIDA's effort. But the case revealed a system that barely respected property rights at all. Anticipating requests like Gateway's, SWIDA had adopted a "Quick-Take" program. All applicants had to do was fill out a form, pay a fee, add a commission to SWIDA based on the value of the property, and voila, the redevelopment agency would condemn someone else's land and hand it over, Of course, it wasn't quite that simple--the St. Clair County board had to approve the transfer--but the message was clear: "If you need land, we'll get it for you." The Illinois Supreme Court said as much: "It appears SWIDA's true intentions were to act as a default broker of land for Gateway's proposed parking plan." The agency hadn't done a traffic study, or even included the project in an economic development plan.

Arizona Dust Bowl

As for Randy Bailey: Judge Myers ruled in April that Mesa could take his property and hand it to Ken Lenhart simply because the government had decided that a hardware store was a more valuable use than a brake shop. The city's redevelopment plan calls for improving its image and making it more economically and socially attractive. It also calls for putting land to its highest and best use to maximize its retail potential. In 2000 the city estimated that the Country Club and Main deal would generate one-time revenues of more than $95,000 through impact fees and sales taxes, an annual increase in sales tax revenue of $168,000, and increased utilities revenue of $69,000. Alternative ways of achieving the same ends were not even considered.

Although "the Court is sympathetic to Mr. Bailey's position," Myers wrote, the city "properly" used its eminent domain power to take his property. Mesa could effectively close down Bailey's business because it had presented, in court, "some reasonable support in the facts, even though those findings may be reasonably doubtful and fairly debatable." In essence, Myers concluded that the city could take just about anyone's property in town as long as it conducted the right number of public hearings and talked enough about the property in a public forum.

Myers' unwillingness to question Mesa's determination that it was necessary to take Bailey's property is rooted in a 1983 decision by the Arizona Supreme Court, City of Phoenix v. Superior Court, Maricopa County. That ruling separated takings decisions into two components. The first considered "necessity," which the court considered a legislative decision. The second component was "public use," which the court determined was subject to judicial review. The Arizona courts, unfortunately, have typically avoided applying judicial scrutiny to the public use aspects of a project, ruling against cities only if the owners could demonstrate fraud or "arbitrary and capricious conduct." Apparently, Mesa's policy of enabling well-established private businessmen to covet their neighbor's property and use the city's power of eminent domain to seize it is not arbitrary or capricious.

Myers' approach is not unique to Arizona or his courtroom. On the contrary, it's the rule. Property rights do not get the same level of protection as other fundamental liberties, such as free speech, the right to assemble, or the right to an impartial jury. Restrictions on other rights have to meet a "means-ends" test: There has to be a compelling government interest to justify them. "In eminent domain," notes Notre Dame law professor Nicole Garnett, "there is no means-end scrutiny at all. [The courts] don't even bother to check to see if the government is advancing a public use. They wash their hands of it. They don't ask if economic development could be done another way."

Not surprisingly, the entire Arizona bar is watching this case. No "cleaner" case is likely to be found that tests the words of the Arizona Constitution or the Phoenix decision, notes Bailey's attorney Tim Keller. If the city's taking of Bailey's property is upheld on appeal, it will be open season on private property in Arizona.

Turning Tide?

Supporters of eminent domain disagree. "The fact is that in the average community in the typical state, the system is working well," claims the American Planning Association's policy guide to takings. "Property rights advocates are waging a guerrilla war of soundbites, misleading 'spin doctoring' and power politics which characterizes government at every level as evil empires of bad intent."

Finkle, the president of the International Economic Development Council, echoes this sentiment. The Institute for Justice in particular, he argues, has "done a great job of taking the absolute horror cases and publicizing them." For the most part, Finkle and other redevelopment advocates claim, eminent domain is used reasonably and appropriately.

Nevertheless, a few recent court cases may signify a trend toward stricter scrutiny of local government decisions. "Courts are getting involved because they are seeing abuses," says Scott Bullock, an attorney at the Institute for Justice. "A fundamental lesson of history is that power is abused. First it's urban renewal as a part of an effort to redevelop cities. Soon it becomes a way for developers to get land on the cheap and well-connected developers to do projects in their particular area."

Not every court has been as amenable to eminent domain abuses as Myers'. As we saw, the Illinois Supreme Court invalidated a development authority's attempt to seize private property for a racetrack parking lot. In Las Vegas, Carol Pappas lost her apartment building and livelihood, but the Nevada Supreme Court has been harshly critical of the city's handling of the case, which it is reviewing.

Garnett, the law professor, questions whether such cases really indicate a shift in judicial attitudes. "What might be happening," she notes, "is we are cycling back into the 'too much' use of eminent domain. Now that economic development incentives are everywhere, cities and states are using eminent domain as another incentive. We are seeing an uptick in takings challenges because we are seeing more eminent domain cases, and we are seeing more cases reining in abuses."

"I see a modest increase in the [eminent domain] cases largely because the door to the federal courthouse is slightly ajar, and plaintiffs would like to pry it open," says William Fischel, a Dartmouth economist who has written extensively on the issue. "The Supreme Court clearly does not like most of these cases and is leery of giving plaintiffs a federal forum. They want to keep the cases in the state courts."

There is an important potential downside to curbing eminent domain, Finkle warns. Local governments are pragmatic. They will do what seems practical at the time, and they rarely make decisions in the context of broad policy issues or goals. Without the ability to transfer property seized through eminent domain to private developers, local governments might instead choose to take property and keep it. Rather than assemble land for private redevelopment, Finkle argues, local governments will own shopping centers, office buildings, and factories. "Communities will just use alternative means for achieving economic development ends," he says.

That may already be happening. In Chester County, Pennsylvania, near Philadelphia, the city of Coatesville, population 11,000, has decided it's going to revitalize itself with a 230-acre recreation center. Plans include two ice rinks, bowling alleys, a go-cart track, rock climbing walls, a 270-room hotel and conference center, an 18-hole golf course, miniature golf, pitch 'n' putt, and a driving range, among other attractions. The city manager, Paul Janssen, thinks the project will attract corporate executives to the former steel town once they see the downtown (which will "soon" be revitalized). The average home in Coatesville is worth $56,000. Local homeowners are resisting the attempts by the city to condemn their land, but their prospects are dim. Dick Saha's farm has been condemned even though it's located outside the city limits. He can't even vote for or against the people who are taking his land.

Beyond the Courts

Despite recent victories, the courts are unlikely to be much help in reining in abuses of eminent domain. The courts "don't feel comfortable saying, 'We know better than the government' on public use," observes Garnett. When they intervene, they usually "pick up procedural aspects of the implementation of the law." This was the case even in Illinois, she notes. The Illinois Supreme Court objected to the government's "offering its services for eminent domain. It wasn't saying that economic development was not a public use."

"The constraint on local governments has seldom been the courts," agrees Fischel. "Local politics and public opinion discourages unprincipled takings because using eminent domain for arguably private purposes is often unpopular."

In fact, many of the recent victories against eminent domain abuse have resulted from nonjudicial remedies. Pittsburgh backed off its plans to oust 125 local businesses through eminent domain after a well-orchestrated protest campaign made the issue too risky politically and the key anchor--a Nordstrom's department store--pulled out of the project. (See "Death by Wrecking Ball," June 2000.) Similarly, IKEA backed out of the New Rochelle plan after it found itself facing negative coverage in the local media and public demonstrations (including one outside the Swedish consulate in New York). In Baltimore County, Maryland, condemnation for redevelopment purposes went to the ballot and was rejected by more than two-thirds of voters. The county had planned to condemn 100 properties, including three apartment complexes, and replace them with upscale homes, retail businesses, and restaurants.

The Castle Coalition, a grassroots group founded in early 2002 to help property owners fight eminent domain abuse, aims to organize such popular resistance. Most property owners, after all, don't have access to attorneys, and many tend to assume that local governments are acting in the public interest--even when their property is being condemned.

Protest, alas, is not always enough. The city of Mesa has suffered a barrage of negative press over the Randy Bailey case. Yet the city government has refused to back down from its position that virtually anyone's property in Mesa can be seized and handed over to his neighbor as long as enough people on the city council vote for it. The city of Coatesville shows little willingness to back down on its taking of the Saha's property and even placed a two-page ad in the local paper supporting its decision and criticizing the Saha's and other property owners' opposition. In the end, it will be up to the judiciary to determine how far eminent domain can go--and whether property ownership is simply a temporary condition subject to the whims and pleasures of local officials.

Sam Staley ([e-mail]) is president of The Buckeye Institute for Public Policy Solutions in Columbus, Ohio, and a senior fellow at the Reason Public Policy Institute. He is the author of many books and studies on urban development issues, including Smarter Growth: Market-based Strategies for Land-Use Planning in the 21st Century (Greenwood, 2001).