Retail chains and the big business of eminent domain

This June the Supreme Court handed down one of its most important property-rights decisions in decades. In Kelo v. New London, the Court ruled that the city of New London, Connecticut, could use eminent domain to seize homes–properties, the Court agreed, that were not “blighted or otherwise in poor condition”–from a handful of owners who refused to make way for a massive private redevelopment plan. The 5-4 decision confirmed the right of local governments to forcibly take property from one private owner and give it to another if the handover would presumably result in economic development–an affirmation of cities’ redefinition of the “public use” clause of the Fifth Amendment, which traditionally limited the taking of property to instances that benefited the larger public good. Indeed, throughout the nineteenth century and much of the twentieth, states invoked eminent domain primarily for these public uses, seizing smallholder land to build roads, parks, railroads, hospitals, and military bases.

In New London, however, the homes will not be replaced by a waterfront park or a school; they’ll make way for a conference center and hotel, an upscale office complex, and other structures designed to lure pharmaceutical giant Pfizer to the area–developments, it was successfully argued, that would bring increased tax revenue to economically distressed New London .

It was the Supreme Court’s more liberal jurists who voted in favor of New London , with Justice John Paul Stevens writing in the majority opinion that there “is no basis for exempting economic development from our traditionally broad understanding of public purpose.” Left-leaning editorial pages came out strongly in favor of the decision. The New York Times wrote that the ruling was “a welcome vindication of cities’ ability to act in the public interest.” “The court’s decision was correct,” agreed the Washington Post. Democratic leaders either touted the ruling or remained silent. Conservatives, on the other hand, quickly condemned the decision, with Florida Governor Jeb Bush calling it “horrible” and the Wall Street Journal opinion page, normally known for championing corporate interests, caustically noting that the Court’s liberals had given local governments “more or less unlimited authority to seize homes and businesses.” In her dissent, Justice Sandra Day O’Connor warned, “Nothing is to prevent the state from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

This political divide, perhaps, shouldn’t be surprising. Liberals have historically supported government’s right to use broad powers to promote the greater social good–from protecting minorities and the poor to revitalizing faltering communities–and have had to defend this position against increasingly vituperative attacks from conservatives, who decry government programs as “not the solution to our problems” but “the problem.” Are liberals right, however, in claiming that eminent domain remains more solution than problem? Between 1998 and 2002, according to a study by the Institute of Justice, a public-interest law firm specializing in property rights, more than 10,000 properties in forty-one states were taken or threatened by eminent domain so that the land could be given to another private interest. And these numbers may actually be understated. In Maryland alone there were 1,237 of these private-interest threats or seizures. Of the more than 5,500 condemnations filed or threatened in California between 1998 and 2002, 858 are known to be on behalf of other private parties; it is impossible to know how many of the remaining thousands were as well.

What these numbers reflect is not some noble effort to revitalize America ‘s cities but a concerted campaign by city governments, on the one hand, and large real-estate developers and “big-box” retailers, on the other, to exploit eminent domain for their own gain. The developers and retailers–stores such as Wal-Mart and Target, which build numerous warehouse-style outlets on vast swaths of land to keep costs down–already enjoy immense advantages, including huge tax breaks, over smaller competitors; and yet increasingly they are urging cities to condemn property to serve their own interests, and employing lobbyists and donating large sums to local officials to help this effort. Cities, hoping to generate greater tax revenue, have been eager to comply, mostly to the detriment of homeowners and small businesses. To defend eminent domain as it is now practiced, therefore, is not a defense of our social compact with government, of the need for individuals to make sacrifices in the face of progress; it is an endorsement of a municipal-corporate collusion that now operates like a machine.

“The idea that you can invoke eminent domain is absolutely essential,” the mayor of Long Branch, New Jersey, Adam Schneider, explained to me. “Without that tool developers are not going to get on board.” And because companies now expect land seizure as part of their deal with cities, they will leverage the power of their tax revenues if city officials, their sizable economic redevelopment departments, or their hired private-public development corporations do not readily bend to their whims. In Long Beach , California, which has undergone extensive redevelopment of its waterfront and many commercial areas, the “developers are very well-versed in the legalities” of eminent domain, Councilman Frank Colonna told me. “The developers that get in are fully aware the city is committed to delivering the property, and would use eminent domain if we have to.” In the New London case, the president of Pfizer’s research department openly informed the city that if the company was to consider locating in New London, condemnation and redevelopment of adjacent areas would be vital. When megapharmacy chain CVS wanted to build a new drugstore in Ambridge, Pennsylvania, its local developer simply asked the government to seize the land and give it a lease; the town complied. In a more obscene flouting of public use, the city of Cypress, California, prevented a local church from building on property it had legally acquired in order to give the land to Costco.

Although cities and their development professionals at times select the land that they hope retailers will fill, in many cases retailers themselves find the choicest parcels of land, which they then ask cities to hand over. When Best Buy identified desirable land in Richfield, Minnesota, for the relocation and expansion of its corporate headquarters, Richfield guaranteed the company that it would use eminent domain to take property from the area’s existing businesses. In New Rochelle, New York, Ikea said it wanted to build a 300,000-square-foot store on fifteen acres of an existing neighborhood; the city agreed to clear the land, although public outcry later led Ikea to pull out of the deal. In fact, seeking sites with the idea of condemning them has become so routine that developers and retailers aren’t shy about their aims. A Costco vice president, in a frank letter to a shareholder in 2002, acknowledged that this was now normal operating procedure–that the company had initiated “dozens” of projects utilizing or threatening eminent domain to take away enough land from former tenants for its 148,000-square-foot stores. If Costco “refrained from participating in these deals,” the VP wrote, “our competitors for those sites, like Target, Home Depot, Kmart, Wal-Mart, BJ’s, Sam’s Club, and many others, would take advantage of our reticence.”

Even when a municipality’s economic-redevelopment agency is on board, developers and retailers must convince city councils and other elected officials that the condemnations are warranted. Consequently, developers and retailers have begun deploying, in unprecedented numbers, local lobbyists to win land concessions. According to the Center for Responsive Politics, the retail sales industry more than tripled its political contributions between 1990 and 2004; the real-estate industry’s contributions grew more than sevenfold during that same period.

In New York State alone, spending on municipal lobbying has grown from some $6 million per year in 1978 to $144 million in 2004, and the number of registered lobbyists has risen to over 3,800. In some cases the lobbying is blatantly venal. In Newark, New Jersey, for example, the city council was initially opposed to a redevelopment plan that involved seizing nine city blocks and 166 properties and building high-end condominiums in their place; when a coalition of developers contributed funds directly to two municipal councilmen, they suddenly changed their stance and allowed the proposal to go forward. In Lancaster, California, Costco repeatedly threatened to leave the city unless the municipality condemned a neighboring business, 99 Cents Only. Under pressure, the local government tried to entice the smaller store into leaving, then began proceedings to condemn its land. “99 Cents produces less than $40,000 [a year] in sales taxes,” the Lancaster city’s attorney reasoned. “And Costco was producing more than $400,000. You tell me which was more important.”

Cities and their officials have used eminent domain in other ways to line their pockets. The Southwestern Illinois Development Agency charged a commission fee for condemnations allotted for private use, in essence raising money directly from eminent domain. In Mesa, Arizona, and in Cincinnati, city council members or redevelopment-corporation board members either owned property that likely would have increased in value due to redevelopment or were themselves the contractors bidding on the lucrative construction projects.

Once the local government makes a decision to condemn, it still has to demonstrate to the public that the seizures are warranted. But this has turned out not to be difficult. It has become an accepted part of the process that a private developer can pay for a study showing the property is worthy of condemnation, and can pay the attorneys’ fees involved in seizing the land. (By comparison, the idea that pharmaceutical companies should pay a part of the Food and Drug Administration’s reviews of new medicines, a similar conflict of interest, has proven extremely controversial.) In St. Louis, Target and the city commissioned a blight study that showed a site’s electrical system was deteriorating. Yet the study failed to mention that Target was responsible for upkeep of the electricity at the site, where it already had one store, so the company itself had created the “blight” it then decried.

When such studies designate land as “blighted,” they make it easier for condemnation to proceed. But “blighted” is a subjective term, and definitions of blight vary widely from state to state. The city of Pittsburgh seized a neighborhood in which some 95 percent of the buildings were reportedly occupied. According to state redevelopment law, property can be declared blighted in New York if it lacks off-street parking. San Jose has marked a tenth of the entire city as blighted. After land is designated as blighted, the public is supposed to have a chance to respond. Yet cities and developers can essentially cut the public out of this process as well. In the St. Louis Target case, the city sent notice of the public hearing on condemnation to Target but not to the property holder. In other cases the municipality published these notices in the legal classifieds of local newspapers rather than sending information directly to property owners who stood to lose their land. When the government of Port Chester, New York, wanted to obtain parcels of land for a private developer, it published its notice of condemnation in the paper, without mentioning that landowners had only thirty days to challenge the order.

With a blight designation in hand, the city and the developer have considerable leverage. Most small landholders sell, since they rarely have the resources to fight the decision. Although states require the developer to pay “just compensation” for the land, this may not take into account the difference between what the city determines is fair market value and the property’s true open market value. Redevelopment officials in Port Chester offered one landowner less than half what local tax authorities said his property was worth. In Garden Grove, California, where the city wanted to redevelop large expanses of land, the municipal government offered only $16,000 for a successful auto business; a court later forced it to pay $950,000.

As this procedure has become increasingly routine, governments and developers have formed permanent partnerships, dangerously blurring the line between the public and private sectors. Almost all cities now have economic-development professionals, and these in turn have engendered their own trade associations. The National Congress for Community Economic Development, for one, has grown from a membership of forty development corporations in the early 1970s to over seven hundred today. And these development pros now have their own meeting and junket circuits, where they can rub shoulders with and woo retailers and developers. At one of the largest of these events, the International Council of Shopping Centers, held in Las Vegas, armies of retail executives, economic-development specialists, and officials from cities across the country mingle at booths designed to advertise a city’s appeal to big retail. A contingent from Fontana, California, at the 2005 International Council exposition included the mayor, his entire economic-development team, and several city councilors. “We want the private developer to show good faith in acquiring land,” Ray Bragg, Fontana ‘s redevelopment and special-projects director, told me. “And if you run up against a stumbling block, if you find a landowner unwilling to sell, come to us and then we’ll talk about eminent domain.”

In his majority opinion, Justice Stevens wrote, The City [of New London] has carefully formulated an economic-development plan that it believes will provide appreciable benefits to the community, including–but by no means limited to–new jobs and increased tax revenue.” It was the development plan, and its promise that the seizure of homes would result in positive change–in progress–that clinched the decision for the five consenting judges. Yet these plans, according to the Court’s ruling, need not provide “reasonable certainty” that the “expected public benefits will actually accrue.” Indeed, evidence suggests that cities’ efforts at redevelopment rarely bear fruit. A comprehensive study conducted in California in 1998 shows that cities spend roughly two dollars–on condemnations, the luring of companies, and other aspects of redevelopment–for every dollar gained in growth. In three out of every four of the areas it examined, the study found that redevelopment projects had brought no net increase in tax revenue.

This study is perhaps less surprising than it seems: in neighborhoods filled with small businesses, a few can close and the area will retain its economic center. But if a municipality condemns land and gives it to a big-box retailer and that chain doesn’t move in, or moves in and closes, a wide swath of land is left vacant. This history of condemnation or potential condemnation, moreover, discourages businesses from improving their stores, or new owners from moving in, since they never know when the city might take their land. In one case in Hampton, Virginia, the city condemned homes to build a project anchored by Kmart; then, in 2002, Kmart declared bankruptcy, itself a victim of even more pervasive big-box competitors. At the time, Kmart’s demise left the Hampton space an unused shell. In another case, in Phoenix , the city condemned a small tobacco shop for new development but ultimately found no takers, leaving the land vacant.

Kelo v. New London does include a proviso that may protect homeowners and small businesses from unproven redevelopment plans, with their alluring promises of greater revenue and profit: it sends the issue back to the states, which have the power to set their own standards on seizures. And eleven states already have put forward legislation that would significantly limit the Supreme Court ruling. Republicans in both the Texas House and Senate have proposed amendments to the state constitution prohibiting almost all instances in which eminent domain can be used for economic development or private gain. Tom McClintock, a conservative senator from California, has introduced a similar bill in his state. “No one should have to worry about losing your home to some politically connected developer,” he recently said. “There are 6,000 public agencies in California that now have the power to seize your home, pay you pennies on the dollar for it, and then give it to somebody else for their own personal gain and profit.” Libertarian groups have even proposed using eminent domain to seize the homes of Justices David Souter and Stephen Breyer, both of whom voted with the majority in the New London case.

Although condemnations fall most heavily on Democrats’ key constituencies–the poor and minorities-Democrats at the federal level have done little to try to ensure that eminent domain is used judiciously and constructively. By lending implicit if not explicit support to a flawed enterprise, Democrats are defending a principle–the government’s right to act on behalf of the greater good of its citizenry–that has been abused into obsolescence. And this support only confirms many voters’ fears (and the Republicans’ incessantly pushed portrayal) of the minority party as haughtily paternalistic, unresponsive to individual rights, uncaring about the needs of the little guy. In a pending Senate bill that would prevent all seizures for economic development, only two of the twenty-five cosponsors were Democrats; this summer, 157 Democrats in the House voted against a successful amendment to a bill that restricts transportation funds from being used for eminent domain takings. House Minority Leader Nancy Pelosi, one of the country’s most prominent and admittedly liberal Democrats, supported the New London decision, even saying, strangely, that the Court’s ruling was “as if God had spoken.” Apparently, these days, even God shops at Wal-Mart.

© 2005 Harper’s Magazine 

Related feature on corporate exploitation of eminent domain: Wal-Mart, the Abuse of Eminent Domain and Corporate Welfare