Wednesday, March 22, 2006

A thoughtful defense of eminent domain (but would it fit Atlantic Yards?)

The good liberal brownstoners of Brooklyn, and others troubled by the Atlantic Yards project, have some uncomfortable bedfellows in challenging Forest City Ratner and the Empire State Development Corporation on the issue of eminent domain. After all, the leading critics of the Supreme Court's Kelo decision come from the libertarian right (though there is a broad spectrum of critics).

Still, you don't have to be an absolutist on eminent domain to be concerned about eminent domain abuse--and to conclude that even a good defense of eminent domain for urban redevelopment might run aground when addressing Atlantic Yards.

Indeed, a recent article in the Vermont Journal of Environmental Law, titled Public-Private Redevelopment Partnerships and the Supreme Court: Kelo v. City of New London, by Marc B. Mihaly of the Vermont Law School Environmental Law Center, offers a spirited defense of eminent domain in urban redevelopment projects. At the same time, it's difficult to fit the fact pattern of the Atlantic Yards project into Mihaly's description of how redevelopment does and should occur.

Redevelopment, not development

Mihaly begins by quarreling over terms; what the Supreme Court justices, in their spectrum of opinions in the Kelo case, call “economic development” should be considered, he writes, “redevelopment” or “public-private redevelopment,” reflecting the intent of government to correct the failure of the market alone to bring an area back to life after a substantial period of economic decline. The language of the phrase “economic development” implies the dissents’ conclusion, namely a process operating simply to create new forms of economic wealth. This essay employs the more accurate terms.
(Forest City Ratner uses the term development regarding Atlantic Yards, but then again, so do a lot of people.)

Has the market failed to bring the Metropolitan Transportation Authority's Vanderbilt Yard back to life? It never was given the chance. The blocks around it had begun to gentrify; indeed, some old industrial buildings were turned into upscale housing.

Had the market failed to provide affordable housing? Very much so. But that would be an argument for first reforming city rules that provided tax breaks for luxury housing.

Misunderstanding land use?

Mihaly writes: But, without diminishing the success of the political right in framing the debate, more is needed to explain both the popular and judicial response to the Kelo decision. Simple ignorance of the transformed and transforming nature of city-center land-use development lies at the heart of the pervasive popular reaction to the Kelo decision. Redevelopment has failed to make its case. Most Americans enjoy the fruits of revitalized urban cores, but they do not understand how the transformation occurred. Nor do they know that the very nature of land development in the city center has evolved, altering both public and private roles, erasing traditional boundaries between what is a public use and what is a private use, and between what is government owned and what is privately owned.

Kelo an anomaly?

Mihaly writes: Much of the popular reaction to Kelo rests on the specter of Suzette Kelo being forced out of her home, a fact pattern recited in both the majority and dissenting opinions. The majority tells us that petitioner Wilhelmina Dery has lived in her home all her life, and that Suzette Kelo has made extensive improvements to her house and prizes its water view.... It is difficult to imagine more perfect plaintiffs to sound a case against redevelopment. And, that may be why the case reached the high court.

But this is a highly uncommon fact pattern, he says: Most landowners in redevelopment projects either negotiate a sale to the city or redevelopment agency or “participate” in the project, that is they themselves redevelop their properties in a manner consistent with the redevelopment plan, often in partnership with other landowners and with the assistance of public financing. Redevelopment and economic development agencies are reluctant to use condemnation because the total costs of acquisition, including legal fees, run higher than fair market value, generally by about a third.

He adds that residential condemnation is rare. For the Atlantic Yards case, there are several renters and homeowners who have yet to sell, though few may have stories as compelling as those in New London.

Mihaly offers further defense of New London's plan: The opinions do not mention New London’s allocation of ten million dollars for relocation assistance, nor that the plan for redevelopment provides for the construction of eighty new housing units in an new urban neighborhood. And we certainly are not told, even by the majority, that in many states the condemnation could not have proceeded without the likely consent of a committee representing Ms. Kelo and her neighbors.

There's no committee in Brooklyn, is there?

New amenities

Mihaly continues: These public-private redevelopment experiences tell a story different from the facts in Kelo. Yet these are the typical scenes of redevelopment. New public facilities, often in tandem with new affordable housing, rise on vacant or under-utilitized sites, producing uses and amenities that reinvent the urban center.

Could housing, including affordable housing, be built without eminent domain? That's what the community-developed UNITY plan envisaged, as well as the Extell Development Company's bid. Eminent domain may be needed to build the Brooklyn Arena, which would be built over and beyond the railyards, as well as to assemble other pieces of land. New amenities? Does the promised privately-run public space at the Atlantic Yards project qualify?

New London vs. Brooklyn

Mihaly places the Kelo case in context: The majority opinion commences with a recital (albeit characteristically brief and bland) of the facts leading to redevelopment, describing a city designated by a state agency as “distressed” after decades of economic decline, unemployment nearly double the state average, and actual decreases in population. The dissenting Justices do not acknowledge, much less address, these conditions. The truncated factual recitation in Justice O’Connor’s opinion begins with the petitioners and skips directly to the Pfizer development. She does not mention the economic decay, unemployment, or population loss.

Brooklyn is experiencing an economic upsurge, with a growing population faced with gentrification and a decreasing amount of affordable housing. One solution is indeed to build up, to take advantage of density. But the density bonus for affordable housing, for example in the Greenpoint-Williamsburg rezoning, was negotiated publicly. The density bonus for the Atlantic Yards project has been negotiated with ACORN but not the public at large.

How it should work

Mihaly's case for redevelopment suggests a rational planning process:
The typical city, recognizing the reciprocal advantages of a relationship with a private developer, may advertise for a “master developer.” The master developer will assist the city in planning, perform due diligence reviews concerning site issues such as contamination, and assist in the preparation of estimates of the cost of removal of old infrastructure and the cost of new project infrastructure and improvements, as well as eventually find and manage relationships with developers of sub-areas within the project. The request typically asks for experience and financial capability.


Is there a master developer in Brooklyn? There may be a leading developer--Forest City Ratner was prescient and willing to invest in Brooklyn, but the company has not been finding developers for sub-areas.

Public advisory committees often advise the city council on the selection process and the selection itself. Competing development teams make presentations to the council in open session. On the basis of these, the council selects one developer with whom to negotiate the documents that would guide a permanent relationship.

Competing bids in Brooklyn? It took 18 months before the MTA issued an RFP for the Vanderbilt Yard.

The course of each negotiation is different, but, especially for large project areas, the elements are similar. The parties first attempt to reach a mutual understanding of the project economics. They spend many months developing engineering estimates of project costs such as infrastructure and performing market studies to determine the likely revenues from the sale of land and sale or rental of buildings. This effort, when reasonably complete, allows the construction of a hopefully mutually agreed-upon economic model of the development, a spreadsheet commonly called a “pro-forma.”

Project economics? We still don't know.

Rate of profit

Mihaly writes: As they build the pro-forma, the city and the developer negotiate a reasonable rate of profit for the developer, based on the risk associated with the developer’s contributions. That profit is usually measured as the developer’s internal rate of return (IRR). The parties argue about the level of each sort of risk—regulatory risk (which the city asserts it will mitigate through the contract under negotiation), construction risk (the risk of cost overruns can be quite high), market risk (the risk that the rental and sales markets will change), and interest rate risk (the risk that interest rates will change).

If this had been done from the start, there likely would have been more public discussion about the projected number of office jobs and the percentage of affordable housing--and the bait and switch charge might have been averted.

Government as protagonist?

Mihaly suggests that the government is usually the leader: The government typically is the project protagonist, affirmatively pushing the redevelopment to achieve public benefits. This public-benefit package often achieves major public goals such as the production of low-income housing, creation of new jobs for a lower-income community, construction of new parks and recreational facilities, and needed infrastructure. The developer is more of an agent of the public, performing specified tasks for a return which allows it to function and attract the necessary private capital to make the project succeed. In some cases, this agency relationship is formalized such that the developer simply performs its obligations for a negotiated fee. Whatever the form, public gain and private gain intertwine.

If the government were truly the protagonist, it would do a lot better math on the costs and benefits of this project.

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