Monthly Archives: June 2008

Posthumous Victory for Hage

The U.S. Court of Federal Claims has ruled in favor of the estate of Wayne Hage who gained fame by his persistent, principled fight against the feds who had been harrassing him and interfering with the operaion of his Nevada ranch, notably by making it practically impossible for Hage to maintain his irrigation ditches, eventually depriving his ranch of water.  The feds ordered that the ditches be maintained with hand tools only, which rendered the maintenance of water supply for Hage’s 7000-acre ranch, plus another 700,000-acre national forest land on which Hage grazed cattle under a federal permit impossible. Later, they fenced the streams serving Hage’s ranch depriving him of the water in which he had a usufructary right under controlling Nevada law. Eventually, they cancelled Hage’s grazing permit, but that was not the source of government liability. The severe interference with Hage’s use of his ranch was.

The action was filed in 1991, and the decision by U.S. Claims Court Judge Loren Smith was handed down on June 9, 2008 — a cool 17 years later. Justice thus may have been delayed, and Hage did not live long enough to enjoy his victory, but it was not altogether denied. Judge Smith ordered the feds to pay $4.2 million, with prejudgment interest which is estimated to add another $4.4 million to the recovery. Also, under federal law, winning plaintiffs in inverse condemnation cases are entitled to recover their attorneys’ fees, but those have not yet been calculated. 

For earlier rounds of this litigation see the U.S. Court of Federal Claims opinions reported at 35 Fed.Cl. 147, 35 Fed.Cl. 237, 42 Fed.Cl. 249, and 52 Fed.Cl. 570. The latest opinion may be found at Estate of Hage v. United States  2008 U.S. Claims Lexis 156.

In Pursuit of the Free Lunch

It’s an enduring verity among economists that there ain’t no such thing as a free lunch. Somebody always has to pay for the benefits we seek. But when it comes to redevelopment, the woods are full of well heeled, high-level hustlers out to make a mega-buck or two at someone else’s expense. How do they do it? Simple. Modern redevelopment rests on two pillars: first, shortchanging the condemnees whose property is taken for redevelopment projects by paying them only partial compensation and acquiring their land on the cheap, and second, issuing tax-free bonds with which to finance the whole private profit-making shebang in the name of “public use.” That’s bad enough under any circumstances but it becomes obscene when the beneficiaries are mega-jillionaires who own professional athletic teams but who come schnorring to cities and get them to finance (read “pay for”) their multi-hundred-million dollar stadiums.

Case in point, the Los Angeles hustle where, in the words of the Los Angeles Times, “State officials . . . earmarked $30 million in voter approved housing bonds for a group with ties to Staples Center owner Philip Anschutz, for sprucing up the street next to his multibillion-dollar entertainment projects in downtown Los Angeles. . . . The funds come from a pot of $2.3 billion that voters gave the state permission to borrow for affordable housing in California.” (Patrick McGreevy, Subsidies May Aid L.A. Live, June 14, 2008, at p. B1). In case you are not a California real estate maven, maybe we should mention that “affordable housing” in these parts is an oxymoron.

And in New York, we learn from today’s New York Times (Charles V. Bagli, A Question Mark Looms Over 3 Expensive Projects, June 14, 2008, at p. A17), that the promoters of Barclays Center, “expected to be the most expensive arena in the world,” and surprise, surprise, the folks behind the Atlantic Yards project in Brooklyn (see our blog of March 22, 2008,  Another Big Redevelopment Project Down the Tubes?) are getting bent out of shape because — are you ready? — Uncle Sam, meanie that he is, is no longer enamored of letting them finance their multi-hundred-million-dollar stadiums with tax free bonds, and is contemplating new regulations that would make interest on bonds used to finance such projects taxable, the same as interest on all other private bonds. Which means that if Uncle gets his way, the owners of big-league sports stadiums may actually have to pay for their own ball parks. Oh the horror of it!

Not to be outdone by the Brooklynites, the Bronxites are at it too. The New York Yankees, who are building a new stadium on what used to be a park, “are being helped along by hundreds of millions of dollars in taxpayer subsidies, and may be heading back to the public trough for more.” Editorial, Green Thievery in the South Bronx, N.Y. Times, June 14, 2008, at p. A26.  As of now, this caper will save the Yankees a cool $190 million over the 40-year life of their tax free bonds. And how can we leave out the Mets? They have lined up $547.35 million in tax free bonds for their new CitiField stadium, to say nothing of the City’s subsidy of $166.1 million for new parking.

Here is how the redevelopment scam works. Typically, though not always, a would-be redeveloper with connections in City Hall  persuades the city to  declare an area that he covets as “blighted” which it may or may not be. Often, as MIT Professor Bernard Frieden put is, what these guys are after is not genuine blight that is a proper candidate for cleaning up, but rather “blight that’s right,” meaning an area that is just sufficiently downscale to inspire a colorable claim that it is blighted, but actually is sufficiently upscale so that upon its redevelopment it will be attractive as a site for fancy shopping malls and such.  Then the city redevelopment agency proclaims that the “blight” must be eliminated by acquiring the private property within the project area and reselling it at a subsidized price — or giving it gratis — to the chosen redevelopers. So far, so bad. But it gets worse. All that wheeling and dealing takes money, so the city redevelopment agency issues bonds and uses the proceeds to finance the acquisition of the “blighted” land so the redevelopers — poor babies — don’t have to pay the going market rate for it. Since those are revenue, not general obligation bonds, the city gets to skip any voter approval before issuing them. Neat, eh?

Ah, but if you borrow money, whether your indebtedness is bonded or not, you have to pay it back. Or at least that used to be the theory before the recent orgy of seemingly sane bankers lending huge sums of money to people plainly unable to pay it back, if you’ll pardon a digression.

So to pay off those redevelopment bonds, cities use Incremental Tax Financing, known as TIF. Under this scheme all the property tax revenues in the redevelopment project areas are “frozen” and become the base of future taxation. Actually, nothing is really frozen — property taxes continue to be paid and continue to be raised. What happens is that the increment of those taxes, over and above the “frozen” amount doesn’t go to the usual municipal taxing authorities that pay for schools, fire and police protection, etc., but rather is diverted to the redevelopment agency which then uses that money as a grubstake for redevelopers who get the land they want but don’t have to pay for it themselves as the taxpayers save them that inconvenience.  Your tax dollars at work, as it were.

This is sophisticated stuff, so the general public is largely unaware that this sort of thing goes on. In the meantime, bonded municipal debt accumulates as new redevelopment projects are created. In California that debt went from $5 billion in 1985 to $61 Billion in 2004 — and counting. Someone will have to pay off that debt, and we leave it up to you to figure out who that someone will be — hint: if you’re having problems doing that, look in the mirror. And as long as you are looking in the mirror, guess who gets stuck with the bill when a redevelopment project fails and is unable to pay its debts?

And as these rivers of public funds are diverted from publicly beneficial expenditures into the pockets of redevelopers, redevelopment agency lawyers (and condemnors’ lawyers generally) are in court, whining to sympathetic judges (who are often former government lawyers themselves) that, gee golly, Your Honors, we just plumb can’t afford to pay property owners whose land is taken, full compensation for all their demonstrable economic lossess, because if we do that it will be curtains for the civilized society as we know it, or at least, as the California Supreme Court once absurdly put it, an embargo will have to be declared on desirable public projects. And so it goes.

So you may agree with Milton Friedman that there is no such thing as a free lunch, but the big boys in the redevelopment game know better — at least the lunch is free for them. As for you, the revealed wisdom from on high is for you to keep your mouth shut and pay your taxes — which, as the ongoing campaign rhetoric has it,  the forces of “change” can’t wait to increase. And that folks, is what the U.S. Supreme Court calls a “public benefit.”

Have a nice day.

UPDATE. If you are interested in the details of TIF financing in redevelopment, see a new article by Alan Woolever, Tax Increment Financing, Government Grants, and Developer Tax Consequences: An Analysis of Statutes, Regulations, Case Law and Related Policy Considerations, 40 The Urban Lawyer 299 (2008). It turns out that redevelopers not only get to enjoy a free lunch vis a vis the condemnees and the hapless city inhabitants who rarely know what is going on, but they also get a break from Uncle Sam. Their city grants may be excludable from income when the time comes to pay federal income taxes. How sweet it is! 

SECOND UPDATE. Don’t miss the article by Charles V. Bagli, in the NY Times, Sep. 17, 2008, at p. A23, entitled Report Questions Use of Bonds for Yankees. It appears that New York Assemblyman Richard L. Brodsky has issued a report charging that New York City’s and the Yankees’ use of $943 million in tax-exempt bonds is illegal. This is being denied by the city and the Yankees, but it appears that the Yankees will save $181 million over the life of those bonds due to their tax-exemot status and correspndingly lower inrerest rates. We also learn from this article that “the city and the state agreed to provide the Yankees with more than $300 millionin cash subsidies for gaarages, a Metro-North train station, replacement parkss and road work. But the teams do not pay rent for playing on city land, nor do they pay property taxes.”

Your tax money at work.

Missouri Enters the 20th Century

“This case involves a problem which has plagued the judiciary of this state for some time without satisfactory resolution,” said the Missouri Supreme Court.  It was nice to hear that at long last the court recognized “the problem” and decided to do something about it, but their Lordships still don’t appear to understand that the problem is not theirs — it’s a problem of the affected — or more accurately, afflicted — property owners, and that it should have been addressed decades ago. 

Condemnation blight — what happens to city areas that have been designated for government acquisition, has been with us for a long time, and has historically been plaguing the affected property owners. When the government designates an area for acquisition, tenants depart, leaving behind vacant structures, and no new tenants can be secured since few people are willing to move into an area from which they are about to be evicted. This goes in spades for businesses whose owners realize that in the coming condemnation action they won’t be compensated for their business losses. As a result, vacancies rise, maintenance levels decline and the municipal designation of blight becomes a self-fulfilling prophecy. Some structures are abandoned, and others are sold to the cities which have been known to leave them unoccupied, making them a magnet for transients and vandals. To make things worse, some cities have harassed the owners in targeted areas with a rash of inspections and charges of building code violations, some going so far as to deny buildng permits, so that the hapless property owners would be charged with building code violations but rendered unable to make the needed repairs. Back in the 1960s, in the Midwest, there were even cases in which cities withheld trash pickup and police protection from the targeted areas. Then, if and when the cities finally got around to condemning those properties, they sought to acquire them at their municipally-depressed values. To the courts’ everlasting shame, at times this was permitted.

It all came to a head in 1964 in Detroit where, in the celebrated Foster cases (see Foster v. Herley, 330 F.2d 87 (6th Cir. 1964)), the federal courts said “Enough!” and created a right of action for de facto takings that can result from such municipal activities. Other jurisdictions followed suit but there were a few holdouts, Missouri among them. Now, it appears that the Missouri Supreme Court, usually a court that is not hospitable to the plight of condemnees, has entered the fray and for once has come down on the side of the abused property owners.  It’s about time.

In Clay County Realty Co. v. City of Gladstone, Mo. Supreme Ct. Docket No. SC88924, decided on June 10, 2008, the court joined the growing trend and held that the abused property owners do have a cause of action for just compensation against the city for its blighting activities. It this case the city declared the subject area blighted in 2003, but failed to make a deal with a redeveloper. So it tried again in 2005 when it again declared the area blighted, but never approved a Tax Increment Financing (TIF) project and never completed the condemnation of the “blighted” properties. Unsurprisingly, this resulted in a departure of tenants from the subject property (a shopping center), and a loss of rents. And oh yes, it was also alleged that the city harassed the owners with charges of code violations and interfered with their ability to attract new tenants. Where have we heard that one before?

When the owners sued, the Missouri Supreme Court, in a somewhat grudging opinion, conceded that what it called “aggravated delay” in acquisition of properties declared to be blighted, or other “untoward activity” in instituting the condemnation proceedings, can give rise to an action in inverse condemnation by the affected owners. These owners need not wait until the filing of condemnation proceedings to make their claim, but can take the initiative and sue when the proscribed municipal activities reach the level of unreasonableness.

The bottom line of it all is that the cost of uncertainties and delays in municipal acquisition of property have to fall somewhere, and though in the nature of things, some of them — but only some — may have to fall on the affected owners, when they reach a certain point they should properly fall on the city which is the party that (a) is responsible for them, (b) stands to gain from them, and (c) has the ability to spread the cost on the community that is said to benefit form them. It’s an old maxim of jurisprudence that he who takes the benefit should bear the burden. That shouldn’t be such a big deal, should it?

So here is our message to the Missouri Supreme Court: Welcome to the 20th century, guys. What took you so long?

Two postscripts. First, this case contains a comprehensive collection of case law dealing with this problem, which should be handy for practitioners. Second, if you want to read up on the legal principles underlying the problem of blight, we recommend Gideon Kanner, Condemnation Blight: Just How Just Is Just Compensation? 48 Notre Dame Law Review 765 (1973). It’s an oldie but goodie.

New Treatise on Eminent Domain

There is a new book out that, though of primary interst to Colorado eminent domain practitioners, should make a handy reference in any specialized law library. It is written by  Leslie A. Fields, an experienced practicing eminent domain lawyer in Denver. It is entitled COLORADO EMINENT DOMAIN PRACTICE (Bradford Publishing Co. 2007), and contains 263 pages including text, sample forms, tables and an index.  ISBN 978-1-932779-56-1.

Check it out.

Mark Your Calendar

       On July 16, 2008, between 12:00 and 1:30 PM Eastern time, the American Bar Association Section of State and Local Government will present a 90-minute teleconference on Eminent Domain. The Moderator will be Dwight H. Merriam of Robinson & Cole, Hartford Connecticut, and the speakers will be Michael M. Berger of Manatt Phelps & Phillips, Los Angeles, Professor Emeritus Gideon Kanner, Amy Brigham Boulris, of Brigham Moore, Coral Gables, Florida, and Robert S. Poliner, Ombudsman for Property Rights for the State of Connecticut, Hartford, Connecticut.

For further information and to register for this program, call 800 285-2221 and select Option 2. Event Code CET8SCR.

California’s Eminent Domain Proposition 98 Loses — Snatching Defeat From the Jaws of Victory

In yesterday’s elections, California voted on two competing propositions seeking to amend the state Constitution with regard to its eminent domain provisions. The vote is now in and the results are unequivocal. Proposition 98 went down, and Proposition 99 passed. At first blush this seems passing strange, given the widespread, strongly negative  public reaction to the Kelo decision and to its notion that people can be just kicked out of their unoffending homes to make room for wealtheir individuals who are thought likely to pay more taxes. So what happened?

Much could be said about the virtues and vices of both these propositions, but having recently done that in our post of May 28, 2008,  entitled California Proposition 99 Is as Phony as a Three-Dollar Bill, we see no need for doing it again. Instead we note and deplore the foolishness of Proposition 98 sponsors who evidently thought that they could phase out rent control in California under the banner of  eminent domain reform.  Also, for reasons that we don’t understand, they saw fit to insert into Proposition 98 language forbidding the condemnation of property for consumption of natural resources — whatever that means. It was that part of Proposition 98 that led California Governor Arnold Schwartzenegger to conclude that if passed, Proposition 98 would hamper condemnation of water resources, and so he came out against it.

So what possessed the sponsors of Proposition 98 to do these things? As far as that “consumption of natural resources” shtick goes, only God knows because we doubt very much that they do themselves. We certainly don’t. And as for rent control . . .For once words fail us.

Rent control was a separate major, controversial subject that had nothing to do with eminent domain (unless you believe that all rent control is a taking — a proposition uniformly rejected by the courts).  The insertion of the rent control business into Proposition 98 was an invitation to the California courts to invalidate the whole shebang, had it passed, because it thus dealt with two subjects, whereas the state Constitution permits constitutional amendments by initiative only one subject at a time. Moreover, taking on rent control without a preceding public debate and without an evolution of an organized constituency  opposing it, was utter folly. It enabled the opponents of Proposition 98 to ignore its eminent domain reform provisions and to rise in defense of rent control. For example, on June 2, 2008, the day before the election, opponents of Proposition 98 ran full page ads in the Los Angeles Times, that spoke only to the rent control issue.

We don’t pretend to be expert on political campaigns and on the extent to which propositions can be sneaked into the law past inattentive voters, but you don’t have to be a rocket scientist to understand what happened here. This was a classic case of well-meaning people messing around with a subject they simply didn’t understand. Not only that, but as far as we have been able to determine by contacting skilled condemnation lawyers all over the state, Proposition 98 sponsors did not consult any of tem either.

So is there a moral to it all? We sure hope so. And if you figure out what it is, please let us know.

A more detailed analysis of this election may be found in Patrick McGreevy, Voters Reject Proposition to Phase Out Rent Control, L. A. Times, Jun.4, 2008, at p. A1. McGreevy is an experienced reporter who has reported on the subject of urban redevelopment extensively.

Update. The Los Angeles Times reports that the final figures on Propositions 98 and 99 were:

     Prop 98    No 61%, Yes 39%

     Prop 99   Yes 62.5%, No 37.5%

The voter turnout was an abysmal 22.2% although so far uncounted absentee ballots may raise it to 27% — still a record low.

For the full story see Patrick McGreevy, Prop. 98 Backers Seek Eminent Domain Limits, Los Angeles Times, Jun. 6, 2008, at p. B1.

Whatever Happened to the “People’s Right to Know”?

As the story of failure of the New London redevelopment project that gave us the wretched Kelo Supreme Court decision unfolds, a fascinating phenomenot is unfolding with it. Given the enormous publicity that the Kelo decision received from the mainstram press and national broadcast media, one would think that there would be at least some follow-up coverage of events in New London. But there isn’t. Except for one 2005 article in the New York Times, the mainstream press has provided no coverage of the failure of the Fort Trumbull redevelopment project, and of what happened in New London after the Supreme Court gave the green light to the city’s seizure and destruction of a lower middle class neighborhood to make room for . . what?

The Supreme Court gave extreme deference to municipal redevelopment plans that were supposedly prepared by experts and thoroughly vetted by the municipal government officials. In fact, it was those plans’ asserted thoroughness and quality that motivated the Supreme Court to defer as greatly as it did to New London’s desire to proceed with its redevelopment plan at the expense of Suzette Kelo and her neighbors. But it now turns out that these plans were not realistic, that nothing of substance is being done to translate them into reality, and that the city’s redeveloper isn’t even able to secure financing for this grandiose projext that was supposed to revive the community. 

So where is the press on this one? Whatever happened to “the people’s right to know” that we never hear the end of when the press asserts its rights in controversies involving the First Amendment?