Monthly Archives: September 2008

Poletown: In the Short Run it Was Outrageous – In the Long Run It was for Nothing

            In keeping with our promise to provide our readers with a bit of eminent domain history, here is the story of the Poletown disaster (Poletown Neighborhood Council v. City of Detroit, 304 N.W.2d 455 (Mich. 1981) – and a disaster was just what it was. As Carla T. Main, put it, “Poletown has acquired a kind of infamy in legal and social science circles, forever equated with the idea of government folly, gross waste, and a what-were-they-thinking sort of horror.” It was a redevelopment project in Detroit that destroyed an entire unblighted, integrated working-class neighborhood, consisting of 144 businesses, 1500 homes, two schools, a major hospital, and 16 churches. It displaced 3400 people. To what end? To provide General Motors with a “free lunch,” so it could build a new Cadillac plant on the cheap. And it wasn’t just GM’s doing – there was plenty of villainy in this caper to go around. This project was enthusiastically supported not only by the city and its Mayor, but also by the UAW and the local archdiocese. The federal government was also implicated when it ponied up some $138 million to help fund this caper. The total cost eventually came to more than $200 million. The excuse was that GM, whose Detroit Cadillac plant was getting long in the tooth, needed a new plant so GM let it be known that unless Detroit provided it with a vacant 500-acre plant site accessible to highways and railroads, and above all, cheap (cheap to GM, that is), including a hefty tax abatement, it would build the new plant outside of Detroit. 

            The city’s justification for this mass condemnation – where have we heard that one lately? – was that it had problems: unemployment was high (18.3%) and therefore Detroit had to keep the Cadillac plant in town. GM encouraged that attitude by promising that the new plant would provide 6000 jobs – a big deal to a city on the skids, although employment at the new plant would involve few new jobs. But like so many things about redevelopment, the optimistic promises did not turn out to be true. The contract between Detroit and GM committed GM to only 3000 jobs, “economic conditions permitting.” In fact, the latter figure was not achieved – employment at that plant hovered below 3000 most of the time, and  never mind the 6000-job fantasy. The City of Detroit was not revived. The geniuses behind these capers somehow never get it through their skulls that the adverse circumstances that cause their city to decline in the first place, are rooted in major post-World War II demographic mega-shifts that unless addressed will continue to be felt, whether a new plant is built or not. What these guys thus do is sort of like standing under a waterfall with a bucket hoping to stop the flow of water.

            And so, in spite of the Poletown caper the City of Detroit has continued to decline and eventually became the basket case of urban America. The construction of GM’s Poletown Cadillac plant did nothing to reverse that trend. Within the past year, Detroit’s population, that has been declining for years, fell below 1 million, as its inhabitants continue their out-migration to the suburbs. And why not? The city has become an urban jungle. Every year on “Devil’s Night,” the night before Halloween, young Detroiters amuse themselves by torching vacant, abandoned houses, burning down one or two hundred of them every year. Even so, Detroit still has thousands of empty, abandoned homes sitting around, decaying. Last time I was in Detroit, I saw abandoned blocks and — what was really shocking – grocery stores operated by armed shopkeepers behind locked doors. See Julia Vitullo-Martin, The Day the Music Died, Wall St. Jour., Jul. 20, 2007, at p. W11, commenting on the impact of the 1967 riot on Detroit’s decline.

            And as for General Motors, the Poletown caper did it no good in the long run. After consuming a fortune in public funds and years of shirking its duty to pay property taxes on the same basis as all other Detroit property owners, GM abandfoned its hearquarters building, and moved to the Renaissance Center on the waterfront. In spite of its Poletown Cadillac plant,GM is now on the ropes, facing bankruptcy – some of its bonds are selling for around fifty cents on the dollar, yielding over 20%, ten times the fed funds rate.  

            Still, there is something good to be said about it all. It took a quarter of a century, but the Michigan Supreme Court came to its senses and in County of Wayne v. Hathcock, 684 N.W.2d 755 (Mich. 2004) it overruled the Poletown case. But Detroit continues on its downward path, in spite its long history of trying redevelopment, most recently for sports arenas and gambling casinos which show no sign of reversing the city;s decline. It was Albert Einstein who defined insanity as doing the same thing over and over again, but expecting a different result each time. And that’s the way it goes in the wacky world of eminent domain.

  

Brigham-Kanner Property Rights Conference

The fifth annual Brigham-Kanner Property Rights Conference will take place on October 17-18, 2008, at the William and Mary College Law School in Williamsburg, Virginia. The recipient of this year’s Brigham-Kanner Prize is Professor Robert C. Ellickson of Yale Law School.

The conference will consist of a dinner and presentation of the Brigham-Kanner Prize to Professor Ellickson on October 17, 2008, at the historic Great Hall in the Wren Building. The conference presentations and discussion will take place in the afternoon of October 17th and the morning of the 18th at the William and Mary Law School.

The registration fee for the conference is $50, and $100 for the dinner. To register, or for further information contact Kathy Pond, at William and Mary College Law School, P O Box 8795, Williamsburg VA 23187-8795, telephone (757) 221-3796.

Say “Aloha” to Your House, Then Say “Sayonara”

      Let’s see, where were we? Oh yes. We are supposed to tell the real story of Hawaii Housing Authority v. Midkiff. So here goes.           

       Conventional wisdom has it that Midkiff was a case of land redistribution from a big, bad landlord, a “trust” no less,  to poor serf-like tenants who leased the sites on which their homes stood. Because of Hawaii’s unusual history, there were these large land holdings that were assembled by the New England missionaries who went to Hawaii to do good and did well. If you want to learn more about that, see the movie “Hawaii” or read James Michener’s book by the same title. These are no history treatises but they will tell you a bit about what went on in an entertaining fashion. To make a long story short, the last member of the Hawaiian royal family was Bernice Pauahi. She married one of the missionary boys and became Bernice Pauahi Bishop. When she died the remnants of the Hawaiian royal land (which she had been holding in trust for the people) were put in a charitable trust appropriately named the Bishop Estate.

            Proving once again that no good deed shall go unpunished, the Bishop Estate trustees, who needed money to run the so-called Kamehameha schools for Hawaiian children, subdivided some of the Bishop Estate land into home-sized lots and leased them in the 1950s to lessees on long-term leases, The lessees built houses on their plots and lived in them, paying $13 per month per plot. What a deal! Later, as land values began rising and land rents rose accordingly, the lessees decided to get in on a good thing and started pressing for a law that would enable them to buy their landlord’s interest and thus acquire freehold titles to the land on which their homes stood. As it happened, a lot of the land that the Bishop Estate leased to these folks was located in the poshest parts of Oahu, located east of Honolulu in Kahala and Hawaii Kai.

         Those tenants had clout. As James Mak, a commentator on these events put it: “[T]ens of thousands of owner-occupants of leasehold single family houses and condominiums in Hawaii constitute a powerful interest group that elected officials cannot ignore. When the proverbial gorilla asks for your lunch, it’s hard to say no.” And so, the Hawaii legislature passed a law allowing the condemnation of the lessor’s titles to plots already improved with single-family homes, and provided for recoveyance of those titles to the lessees who would have to pay fair market value for them. If they couldn’t pay or finance their purchase, the state would act as a financier of last resort.      

        But the Bishop Estate took exception to this law and argued that it violated the provisions of the Fifth Amendment to the U.S. Constitution which forbids condemnations unless they are for a public use. This, argued the Estate, was a transfer from one private party to other private parties, involving no change in use of those homes. Anticipating that problem, the legislature had made “findings” that there was a shortage of buildable land on Oahu, and that led to an oligopoly which in turn artificiailly limited the supply of new housing and caused prices to escalate. The new legislation was supposed to fix that by lowering or stabilizing  prices. The problem with that “finding” was that it was bullpuckey. The reason for the shortage of buildable land was that the government owned about one-half of Oahu, and local land regulations made it hard to build new housing. Nonetheless, as history records, the U.S. Supreme Court bought the state’s story – when it comes to eminent domain, those nine folks will buy anything the government says – and approved the condemnation. 467 U.S. 229 (1984). The case went to valuation trial in which the Bishop Estate scored a bull’s eye – the jury awarded it it’s full opinion of value.         

         So what happened then? Did home prices decline? Stabilize? Did those former Hawaiian tenants live happily ever after in their own homes? Don’t be silly. We told you the legislative findings were bullpuckey, didn’t we? First of all, this scheme applied only to existing, occupied homes so it could not produce one square inch of new buldable land – it only redistributed titles to existing homes. Besides, the whole scheme was economically impossible. It could not increase the supply of housing and thus could not lower prices. Fee simple titles are more expensive than limited duration leaseholds because they convey more. So no rational lessee would pay full-pop for his newly minted freehold title and then turn around and sell it for less than what he just paid. Then there was the law of unintended cosequences.          

          The Japanese, at least at that time, were committed to long-term investments and therefore weren’t interested in limited duration leaseholds. But when fee simple titles became available in good parts of town it became a whole other thing. Also, it just happened that at that time the dollar was sinking and the Yen was rising. Do we need to say anything else? What resulted was what Charlotte Low Allen of Insight Magazine called a golden land rush. The Japanese swooped down on Kahala and started snapping up those nice, upscale homes for beaucoup bucks. They then tore some of them down and built little marble mini-palaces which they then marketed to Japanese tycoons as vacation homes. The champion was a fellow named Genshiro Kawamoto who reportedly bought 100 East Oahu homes without leaving the back seat of his limousine. Way to go Genshiro!  So much for the government redistributing titles to tenants, lowering housing costs and fixing a “malfunctioning” housing market. As the Los Angeles Times put it at the time: “Though some buyers want vacation homes, many are speculators looking for fast profits. In either case, many of the properties they buy are left vacant much of the time, a painful condition in a city where housing is already in short supply.”        

         The upshot was that the original homeowners, now flush with the money generated by the fancy prices eagerly paid by Japanese investors for their old houses, fanned out across Oahu in search of suitable upscale replacement homes. That caused a ripple effect and goosed the prices of all Oahu homes upward. The result was that between 1984 and 1990 their prices more than doubled.        

          So much for the government helping out by fixing a “malfunctioning” real estate market and bringing prices down. So were there any heroes in this mess? Actually, yes. When the case was in the U.S. Court of Appeals, Judge Poole presciently pointed out  in his concurring opinion that the Hawaiian legislative scheme could not work because its provisions were antithetical to the stated objective of the law. Which is precisely what subsequent events demonstrated. Give that man a cigar.

The Norwood Case Settles

The Cincinnati Enquirer (Cincinnati.com) of September 4, 2008, reports that the Norwood v. Horney case has settled. You may recall that the town of Norwood tried to condemn Horney’s home in order to include it in the site of a shopping center, but the Ohio Supreme Court ruled that this wouls be a violation of the “public use” clause of the Ohio state constitution. See Norwood v. Horney, 835 N.E.2d 1115 (Ohio 2006). By now, most of Horney’s neighbors had settled and sold their properties to the redeveloper, so Horney’s  house wound up sitting in the middle of the proverbial nowhere — an 11-acre parcel surrounded by razed, vacant land. The settlement figure was $1.25 million. The article does not report what Norwood’s original offer was, but it indicates that the $1.25 million price was about twice what the developer, Rockwood Partners, paid for comparable, nearby parcels.

So is there a moral to this story? It would so appear. Given that the redeveloper means to build a $125 million office-condo project, and has spent some $20 million for the other properties required for this project, the $1.25 million it paid to Horney seems like a bargain, especially when you consider that the city of Norwood expects to collect some $2 million in tax revenue per year from the project. Of course, it remains to be seen if the city will actually get to collect all of those tax revenues, or whether some of them will go to the redeveloper or to pay off any TIF bonds that may have been issued for this project — as has been the case in some of these deals. So stay tuned on that one. Also, it remains to be seen whether the proposed project will actually proceed, given the deepening recession.

All of which brings to mind Justice Kennedy’s inquiry during the oral argument of Kelo v. New London, whether the compensation to condemnees in redevelopment cases should include a share of the property’s increase in value brought about by its devotion to a higher and better use upon condemnation and reuse by the redeveloper. Evidently, it can be done.

Last but not least , the redeveloper is reported as saying that it “has no specific development plans for the site yet.”  So those plans were evidently good enough to institute a condemnation action, but not good enough to tell the world what they are. Oh, we almost forgot. Didn’t the Supreme Court say in Kelo that the presence of carefully considered municipal redevelopment plans is an important element in the Court’s decision whether or not to approve the condemnation?