Monday, January 30, 2006

Tax Benefits?

Joe Kristan:
"Section 1033 of the federal tax code allows sellers to avoid gain on property sold 'under threat or imminence' of condemnation, as long as they re-invest the proceeds no more than two years after the year in which the sale is made. It's not necessary for the city to actually institute condemnation proceedings; just a credible threat triggers the tax break. The Tax Court has stated the rules so:

A “threat of condemnation” exists if (1) the body threatening condemnation possesses the power of eminent domain, (2) the property owner is told by an official of the threatening body that condemnation will be sought unless the owner negotiates a sale or exchange of the property, and (3) the information conveyed to the owner gives the owner reasonable grounds to believe that the threat was authorized and likely to be carried out unless a sale or exchange is arranged.…

A whiff of a threat of condemnation can make a sale tax-free to a buyer who is willing to reinvest in other property somewhere. A seller and buyer can more or less arrange a condemnation 'threat' with the city to qualify a property for Section 1033. While I'm not privy to the Principal and Wells-Fargo land purchases cited by the Register, I would be surprised if Section 1033 wasn't an important part of the mix.

In theory, the buyers can arrange for similar tax results using a Section 1031 'like-kind exchange.' These are more difficult to pull off, though, because there is only a six-month window to reinvest proceeds, and a Section 1031 deal has to meet a long list of fussy technical requirements.

I believe Kelo is still bad law and bad policy (I include here my standard disclaimer that I speak for myself, not the firm). It still amounts to a way for the well-connected to get a better deal than the little guy in their property purchases. But efforts to overturn Kelo in the legislature may run into resistance from a surprising quarter: potential sellers of property who could use a whiff of condemnation to make their property sales tax-free."
This is interesting.

Friday, January 27, 2006


In one of my classes last week we were discussing the ways in which economic analysis help us understand why cities develop and why some cities are small and others are large. A very interesting, and I suspect important, question was brought up that might suggest that the broad outlines of the economic analysis are off the mark. The economic analysis suggests that land prices in the center city will be very high, and that land prices will decline as we move out and away from the center city (I think we might subsitute "employment center" for "center city" as well). Given the high prices for land in the center city we would expect to see high density economic uses of this land, and it seems that often the high rise office buildings are found in the center city because of the incentives of high land prices.

The question involves what explains the presence of inner city poor neighborhoods if land prices are supposed to be high in the center city.

I suppose while there might be several possible explanations or elements in any explanation, a student made an interesting observation that might be part of the explanation. The story he told about Denver and Coors Field was that the Lodo area had been a run down area of Denver. After the decision to locate Coors Field in Lodo, the city changed the zoning regulations for parcels in the Lodo area. The result was a process of change that reinvigorated the economic activity of the Lodo area. Several other students immediately responded with their own similar observations from other cities across the country.

One of the things I'm thinking, both about the inner city poor neighborhood question, as well as when I consider why eminent domain is necessary if it is supposed to also be the case that the parcels will be much more valuable in another "economic development" use, is that perhaps zoning could be a significant factor to look at.

I'm thinking about a story I heard told on the radio last week of a church being threatened with eminent domain in Sand Springs Oklahoma. The Pastor of the church told about one of his elderly parishoners who had been in the threatened neighborhood all her life. Government came to take her house in the name of a mall with big box stores, and with government's efforts they moved her to a new house in Tulsa. Now the Pastor has to drive into Tulsa to pick her up for church and then return her to her new home. What I wonder about such stories is why eminent domain is necessary. If the parcel in question is more valuable in another use, then why wouldn't the alternative use present an economic opportunity for the parcel's owner, even if she had lived there all her life? If the property has such great value, then she should be able to sell and earn enough to move and probably have a great deal more money left in her pocket.

I'm thinking that what might be in play is the property is not currently zoned for the activities to which the "economic development" project will put the property. I'm thinking that zoning can preclude the market from valuing property in more valuable alternative uses. This might often have a great deal to do with why the property owners aren't selling to those who would put their property to more highly valued economic uses. Is this possible?

If so, then the use of eminent domain may be even more egregious than I had thought. Why? Because, if it is possible, it would seem the story is that government first says your property can only by used as it currently is. This means that you cannot possibly sell your property for its true economic value in its best use. Then the city says your property should be used differently, but before it changes the zoning so it can be used differently, it is going to threaten to take your property from you. Could this be what is happening in many cases?

Thursday, January 26, 2006

Justice Souter might lose NH home

Check out this article about a group of citizens that is trying to get Justice David Souter evicted from his New Hampshire home in the name of economic development. The group would like local government to use eminent domain to seize his property so that it can be turned into an inn called the Lost Liberty Hotel.

It’s not that I don’t find these tactics entertaining and good for a long chuckle, but I just don’t think that two wrongs will make a right. I’m not sure that turning Justice Souter’s home into a bed and breakfast will do anything to accomplish the abolition of eminent domain abuse on the part of local governments. In fact, such action may serve to further cement the path of eminent domain abuse that local governments have been more and more willing to travel down.

Perhaps this group’s efforts would be better spent getting their government representatives to actually limit the power of eminent domain. After all, when the Supreme Court ruled in Oregon v. Mitchell to the dissatisfaction of many citizens the 26th Amendment was ratified to bring the legal voting age to 18 years. Perhaps a constitutional amendment needs to be ratified to deal with the surge of eminent domain abuse as a result of the Kelo ruling.

Tuesday, January 17, 2006

To Take Oil & Gas Reserves?

KTVA - Local:
"According to the Associated Press, six bills have already been filed by Alaska lawmakers in response to last year's U.S. Supreme Court decision on eminent domain. But just one suggests keeping eminent domain to force development of the state's oil and gas reserves.

Representative Eric Croft (an Anchorage Democrat) says taking leases back from non-producing oil companies would benefit Alaska's citizens. Croft, who is running for governor, says he wrote the bill with the untapped gas fields of Point Thomson and the unrealized North Slope natural gas pipeline in mind."

NLDC: Private Organization?

From the website of the New London Development Corporation:
"The New London Development Corporation (NLDC) is committed to creating public-private partnerships that act as an engine for economic development in New London. The goals of this private, not-for-profit organization are to increase the city's tax base, to promote an increase in the number of jobs available in the city and to enhance the quality of life for New London's residents."
Don't you wonder why a "private, not-for-profit organization" is involved in the use of the power of eminent domain?

Don't you wonder why a "private, not-for-profit organization" has an increase in a city's tax base as one of its goals?

Political Economy of Just Compensation

Nicole Garnett has a paper on the political economy of just compensation regarding the power of eminent domain. Todd Zywicki comments:
"To my mind, I haven't really been persuaded by the 'Just Write Them A Check' approach to Eminent Domain, which basically says forget about the Public Use Clause and simply ensure Just Compensation. As a logical matter, if that approach is valid with respect to the Takings Clause, why not apply it to the remainder of the Constitution? If ex post compensation (a liability rule) is supposedly a perfect substitute for an ex ante injunction (a property rule), why not apply it across the board? The logic of the argument seems to imply that the government could simply search your home without cause, and then simply write you a check for the inconvenience caused by the intrusion. As Nicole's paper suggests, there are non-instrumental harms present with respect to constitutional rights, and they seem to me to apply in both contexts. I honestly don't see why I only get constitutional protection in the form of a property from a search of my home but not the tearing down of my home for the benefit of a private developer (as Justice Thomas observed in his dissent)."
I agree. Still, as I've suggested in posts before, I think it is likely that compensation has probably often been significantly below a value that was "just" from the perspective of economic analysis.

Also, Ben Barros notes a presentation by Vicki Been concerning what we don't know about the real-world application of eminent domain:
"Here's a list of the subjects Been suggested would be good candidates for empirical work:

The costs and benefits of actual uses of eminent domain.

What entity is doing the taking and who pays for the taking?

Is there a differences in eminent domain practices between states or within states? If so, what explains those differences?

What is being taken?

Do the takings involve private-public partnerships?

What compensation is being paid, and how (and why) does it vary?

Has the use of eminent domain become more or less frequent? If so, why? Are municipal attempts at promoting infill development having an impact on the rates?

Why is eminent domain being used rather than a market transaction? What does the bargaining process look like? Who settles and who doesn’t? What is the role of subjective value in the settlement process? What does holdout problem actually look like? Do tax issues factor in (e.g., when an exercise of eminent domain is more tax positive for the owner of property than a voluntary sale)?

Are economic development takings a good thing? Can economic development be effectively done in a patchwork, voluntary fashion, without eminent domain? What is the long term impact of redevelopment projects? If restrictions are put on economic development takings, will that lead to more redevelopment projects based on blight?"
I'm convinced that takings for economic development are, in general, not good for true economic development. Actually, most of what local governments do in the name of economic development are probably bad economic policies from the perspective of economic analysis. For economic analysis to support local government economic development policies, one would have to believe there were sources of market failure with respect to the location of economic activities. Further, one would have to believe the sources of market failure took the form of positive externalities. The reasons local government officials give sound on the surface like positive externalities, but in general I think they are not. Jobs and taxes are most often cited. Jobs are determined within markets, which means there is no external effect involved. Taxes are transfers. Whether government takes property in the name of economic development, or just chooses some other form of policy, the result tends not to move resources in the community to higher valued uses since there are likely no market failures. Of course, forcefully taking another person's property in the name of economic development seems to me to make government's actions that much more egregious.

Thursday, January 12, 2006

Blighted in Norwood Ohio

Often the local government's use of eminent domain is invoked because the property at issue is part of a "blighted neighborhood." Ever wonder what a "blighted neighborhood" looks like? Here are a few pictures of the "blighted" and "deteriorating" neighborhood in Norwood Ohio that is the subject of a case before the Ohio Supreme Court.

You can see more pictures of this blighted neighborhood at the Institute for Justice website.

Monday, January 09, 2006

For Target & Home Depot

In this news item we find that the power of eminent domain may be used for big box stores:
If you own a small business in Richfield, then you may be targeted for eminent domain abuse. That's because the City of Richfield has placed a bull's-eye on small businesses along Cedar Avenue just west of the Minneapolis-St. Paul International Airport, and plans to remove them in favor of two big-box retailers and other private development.

'Our business is location-driven,' says Marv Johnson, founder of Air Carego Shipping. 'It's essential that we be next to the airport.' But Richfield doesn't see it that way. Its plans call for Target, Home Depot and other stores to push Johnson's business out of the location it has been in for nearly 22 years — even though there are other Target and Home Depot stores less than five miles away.
Once again, we have government taking property used by one business to be used later by a different business.

[Nick Dranias, "Capricious use of eminent domain hampers businesses,", Jan. 05, 2006]

Sunday, January 08, 2006

For the NFL

Here's a another news story about the use of eminent domain to provide a new stadium for an NFL football them, this time for the Indianapolis Colts. Here's something interesting from the story:
"The government has offered the Hurst company $3.7 million for its property, including the factory building. Hurst officials, according to The Indianapolis Star, have estimated the costs of moving the factory alone at more than $7.5 million, not including the cost of acquiring new land and a new building.

Indiana's current eminent-domain law is so vague that government can often get by with simply calling a property blighted, whether it is or not. Such would appear to be the case in the Hurst case."
Note the suggestion that the use of eminent domain in this case is attempting to take property which is not "blighted," and is property that is actually being used in a successful business.

Further, note that government has offered only $3.7 million while the owner of the property estimates the cost of moving his business to be nearly twice the offer. Perhaps this suggests, first, a point that has been suggested before on this blog, i.e., the compensation that is paid under the power of eminent domain may be significantly less than a figure we would reasonably consider consistent with the constitutional requirements of "just compensation." Second, if we take the government's offer of $3.7 million as an expression of the value of the property to government, then the property owner's estimate of the costs of moving his business in this case may suggest the property is already in a more highly valued use (from an economic perspective) that would be the case if the property becomes part of the provision of NFL football. Presumably, the point of using eminent domain for "economic development" is that the use for which the property is taken will be a more highly valued use than was previously associated with the property. If the property is put to a less valued use, then we would appear to be talking not about "economic development" but "economic diminishment."

["Editorial: Stadium authority tries an eminent domain end run: Legislature should not let it succeed,", originally published January 5, 2006]

Friday, January 06, 2006

Eminent Domain for a School

Hey, check this news. A city is going to actually use eminent domain to take land for a public school, i.e., a public use:
"Officials revealed during the meeting that Robert Donellan, owner of land the town wants for the school on Clark Gates Road is being offered $715,000. The town also wants land on Sillmanville Road that is owned by an estate managed by Leo Gold. The estate is being offered $225,000.

[Josh Mrozinski, "East Haddam to start eminent domain proceedings, Middleton, 1-5-2006]