FORBES MAGAZINE - NOVEMBER 25, 2002

"Domain Game"

- Ira Carnahan

Local polls think nothing of grabbing land from one private owner to give to another. Can they be stopped?

Arnold Hatters has sold fedoras and derbies from its store on Eighth Avenue near Times Square for 42 years. But it is about to be ousted so that a mightier New York institution can occupy a new 52-story headquarters to be built in its place. In the name of economic development the Empire State Development Corp., a state agency, has condemned 11 properties housing dozens of small businesses and is handing the land over to the New York Times Co. and a private developer.

"When we first heard rumors this deal might be coming, we said there's no way the government is going to permit that to happen," recalls Mark Rubin, general manager for the hat store founded by his great-uncle in 1926. "Well, we've learned. It can happen, and there's really not a damn thing a small company like us can do."

The U.S. Constitution provides that the government can use its power of eminent domain to take private land for "public use," so long as the owner gets fair compensation. How would roads of other public works get built if the government could be stymied by a single holdout landowner?

"The power of eminent domain is to be exercised with restraint, not abandon."

-Illinois Supreme Court

But since the U.S. Supreme Court ruled that in 1984 that eminent domain could be used for any project "rationally related to a conceivable public purpose," states and cities have stretched the definition of public use beyond recognition. Now, in the name of curing blight or promoting economic development, they routinely condemn land owned by one private party to sell (or give) it to another. The new owners have a way of being better connected and wealthier than the evictees.

Big swaths of land and large numbers of residents are at risk in the domain game. This summer San Jose, California's city council, as part of its "Strong Neighborhoods Initiative," approved the designation of areas housing an astonishing third of the city's 900,000 residents as subject to possible condemnation for private use. Last December the Riviera Beach, Fla. city council approved a plan that could lead to the condemnation of 1,700 houses and apartments, displacing 5,100 residents. The redeveloped area will feature luxury shops, a hotel, the conference center and new yacht slips.

Scott Bullock, an attorney at the Institute of Justice, a Washington group that has helped landowners fight dozens of such takings, concludes: "Our cities and states have become like real estate speculators, securing land owned by their own citizens on behalf of politically connected private interests."

Case in point: Forest City Ratner, developer of the new Times building, is headed by Bruce Ratner, a fundraiser for former New York Mayor Rudolph Giuliani. The firm is also the city's second biggest spender on local lobbyists, according to a 2000 study. Number one on that list? Blumenfeld Development Group, which has been assembling land for an East Harlem shopping center with the aid of a government condemnation threat.

It's not only in New York that fortunes are built on property wrested from private owners. Arlington, Tex. condemned private land so the Texas Rangers could build a new stadium there. That helped George W. Bush turn a $600,000 Rangers investment into $15 million.

But since the U.S. Supreme Court ruled that in 1984 that eminent domain could be used for any project "rationally related to a conceivable public purpose," states and cities have stretched the definition of public use beyond recognition.

There are few signs, however, that public officials may have finally overplayed their condemnation hand. In Iowa the state legislature passed a law in 1999 that stops revenue-hungry municipalities from condemning farmland for private development.

And landowners who challenge condemnations in court have recently won a few battles. In April the Illinois Supreme Court blocked a landgrab by the Southwestern Illinois Development Authority, which offers condemnations services for a 6% to 10% commission. The agency had seized the property of a recycling plant just east of St. Louis to sell a neighboring racetrack for an expanded parking lot. "The power of eminent domain is to be exercised with restraint, not abandon," the court lectured in its 5-to-2 decision.

Meanwhile federal judges from the Central District of California have stymied two separate condemnations designed to benefit discount retailer Costco. Last year a judge blocked the city of Lancaster, Calif. from condemning a 99 Cents Only Store and then selling the property to an adjoining Costco for $1.

The city acted after Costco threatened to shut down its own store if they city didn't hand it the land - conveniently owned by its competitor - for expansion. City officials, fearful of losing the high-volume of Costco, put aside any thoughts of fair play and complied. Now they are appealing the judge's decision.

In August a judge issued a preliminary injunction blocking Cypress, Calif. from condemning an 18-acre parcel owned by the Cottonwood Christian Center so that it could be sold to Costco. Cottonwood had patiently assembled the land through open market purchases, aiming to build a new home for its burgeoning membership. The city's stated "public purpose" for the land grab? It would get more tax revenue from a retailer than from a tax-exempt church. The judge wasn't much impressed by that rationale and also questioned the condemnation for its encroachment on religious freedom.

"Everybody's home would produce more taxes as a Costco or a high-rise office building," Institute of Justice attorney Dana Berliner tartly observes. She offers an absolutist antidote to abuse of eminent domain: Officials should not be allowed to use condemnation to take property from one private owner and hand it to another.

Sounds reasonable. But it's unlikely to happen. And it certainly won't happen in time to help Leonard J. Weiss, one of the small property owners who is being booted out to make way for the New York Times. The Times and its developer didn't even try to negotiate a voluntary deal but wen straight to government officials and are getting the land at a discount, Weiss and others complain. The Times insists it is paying full freight for its 99-year lease on the land and that the land has long been scheduled for condemnation by the state anyway.

"I never believed that the government could take away property from somebody and just arbitrarily give it to somebody else," says Weiss. "That never made sense to me. And it still doesn't."