Second thoughts from a former state official; could Times Square have been reclaimed without eminent domain?

The recently transformed Times Square area is a poster child proffered by city officials like Mayor Mike Bloomberg in defending the use of eminent domain. But what if eminent domain really didn’t work?

Consider the analysis by William Stern, former CEO (1983-85) of the state Urban Development Corporation (UDC), precursor (and formal name) of the Empire State Development Corporation.

Largely reprising an Autumn 1999 article he wrote in the conservative Manhattan Institute’s City Journal) headlined The Unexpected Lessons of Times Square’s Comeback, Stern offers a report for the libertarian Institute of Justice titled The Truth About Times Square. 

His argument: government should have eschewed eminent domain and gotten out of the way.

Eminent domain opponents like DDDB naturally seized on it. But Stern's argument is worth a closer look, since some other close observers--a critic of eminent domain, Julia Vitullo-Martin, and a scholar who studied Times Square, Lynne Sagalyn--have come to different conclusions.

The discussion should continue, and turn into a direct debate.

Stern’s take

Stern writes:
Our extravagant plans actually retarded development. The changes in Times Square occurred despite government, not because of it. Times Square succeeded for reasons that had little to do with our building and condemnation schemes and everything to do with government policy that allowed the market to do its work, the way development occurs every day nationwide. By lowering taxes, enforcing the law, and getting out of the way instead of serving as real estate broker, the government incentivized investment and construction and encouraged the rebirth of Times Square to what it is today.

The UDC’s power

As planner Alexander Garvin has commented elsewhere, the UDC, set up to build low-income housing in the wake of urban riots, had extraordinary powers. Stern's summary:
By statute, it had been given powers that, at the time, were unprecedented for a governmental development agency. It could override local zoning, issue bonds, serve as its own building permit agency, supervise construction and, most importantly, condemn property for reasons of “economic blight,” a term the UDC used for areas it felt were underperforming economically.

Blame Carey

Who’s responsible for the UDC’s transformation? Governor Hugh Carey. Stern writes:
Seeing its enormous power, Governor Carey’s administration transformed the agency from its original purpose of building low-income housing (a purpose that the agency had used to drive the state and city into a very serious fiscal crisis in the 1970s) to a full-blown economic development agency that co-opted the functions of the private market, engaging in real estate speculation and procurement (instead of focusing on creating an inviting environment for private development without government assistance or subsidy). For that reason, the UDC played a central role in planning the redevelopment of Times Square, which had reached its absolute nadir in 1981.

The UDC in Times Square

What did the UDC do? A lot.

Stern writes:
Working closely with Governor Cuomo, the UDC board and representatives from the city, I approved or opposed developers for the project, directed the various UDC departments and subsidiaries involved in the work (such as the legal and engineering divisions) and approved all property condemnations contained in the plan. The latter made my agency a particularly powerful player, since the city had to rely on the UDC’s exclusive condemnation authority. Indeed, this role was one of the key reasons the city wanted to make this a joint effort with the state —we could fast-track the development process and condemnations and offer tax abatements. This city-state partnership was a unique alliance that other large-scale development projects throughout the country did not have.
(Emphasis added)

Sounds a bit like Atlantic Yards.

Infighting and the Times

Stern explains how different factions jockeyed for power, given that the city and the New York Times favored one team for part of the project, while the state disagreed.

In pointing to the potential for unfairness, Stern targets the Times, serving as both newspaper and business (a role it played more recently in reaping the benefits of eminent domain for its building and then having trouble writing about it):
It was then that I began to see the negative implications of government-directed projects like this—the influence peddling, cronyism and corruption, especially when eminent domain is involved. Using eminent domain for private development gives the private sector the opportunity to wield public power—which is more or less for sale—in order to benefit privately. One of the more prominent yet untold players was The New York Times, a private company that was deeply involved in this public project. As the newspaper of record in New York, they would naturally cover the project closely—but their involvement transcended journalistic scrutiny.

For example, Jack Rosenthal, then deputy editorial page editor of the paper, was the Times’ point man in representing their interests about the redevelopment. He acted not as a journalist covering a story but as a decision maker, dictating public policy. Rosenthal was speaking for the paper, and the paper was part of the New York Times Corporation. The Times Corp. had decided it should have as much decision power as city or state government with regard to 42nd Street.

They did so in many ways. One of the primary methods was to use their close relationship with important city officials, such as city planning commissioner Herb Sturz (the city’s point man on the project and my equivalent for the city), who later went to work for the Times after he left city government. An incident that demonstrates Sturz’s relationship with the Times occurred at a city-state meeting to discuss the project. At the meeting, Sturz announced, “Punch [Arthur Sulzberger, former publisher of the Times] wants 1 Times Square down.” At other times it was unvarnished attempts at pressure. In a private meeting, Rosenthal made it very clear to me that the Times wanted Klein to develop the garment wholesale mart and grew increasingly upset at my opposition to the idea.

What surprised me most was that nobody at the Times seemed to care that they were compromising their journalistic integrity by assuming the dual roles of political reporting and pure politicking when it came to 42nd Street.

Indeed, while there’s a difference between news coverage and editorial page commentary, this shows an extension of editorial page influence that is remarkably blatant.

The contrast to the east

Stern think there’s a simple contrast:
The failure of heavy-handed government strategies to cure the economic downfall experienced in Times Square is even more pronounced when taking into account the east side of Manhattan during the same time, which, without the plagues of Times Square and the government’s intervention competing to condemn the area to perpetual economic decline, enjoyed a remarkable period of building and development from 1981 until 1988. Between 1981 and 1983, three new towers were completed and two more began, with construction beginning on yet another the following year. In 1985, 77 projects were under construction south of 96th Street—70 percent of which were on the East Side.

I don’t know if the comparison is as cut and dried, but it’s worth debating going forward.

Eminent domain unnecessary

The heart of Stern’s argument:
In fact, about the only thing the plan accomplished was something it never needed to do in the first place—use eminent domain to take the property of private parties and give it to other private parties for the latter’s use. From 1984 on, drawing on the UDC’s special condemnation powers, the redevelopment project began taking businesses in a purported attempt to cure “economic blight.” This condemnation binge kicked out businesses of all types and sizes. To implement the project, the plan called for the demolition of 20 buildings and the displacement of 400 existing businesses, only a little more than 40 of which were adult bookstores or peep shows. In other words, although the sex businesses represented an economic drag on the area, our goal was to remove not only these establishments but all businesses that did not fit into the government’s master plan.

By 1990, after a hugely expensive six-year condemnation process and with no anchor tenants, the UDC had taken title to nine acres of the 13-acre project area. The cost reached nearly $300 million, a sum advanced by the developers, who would be reimbursed through tax abatements.

In hindsight, eminent domain was not merely unnecessary; eminent domain was destructive and counterproductive to the aim of achieving redevelopment. The properties surely could have all been bought out by the mega-developers. After all, that is how mega-development traditionally has taken place in the United States. It used to be called an “assemblage,” and good developers know how to do it without eminent domain. That kind of process would have been fairer and less costly. It also would have helped assure from the start that the buildings ultimately constructed on the site had the best chance of meeting the market’s demand—rather than government officials’ caprice. It was the way, after all, that Times Square had been developed in the first place. During my time at the UDC, developers approached me privately and said eminent domain was not needed. They had previously implemented large-scale development without eminent domain and were confident they could do so in Times Square. 
(Emphasis added)

That’s a very interesting argument. One of the strongest arguments for eminent domain is the “holdout” issue, the property owner who refuses to sell. Julia Vitullo-Martin of the Manhattan Institute wrote in May 2006:
Brooklyn is not cursed with porno theaters, whose profitability in Times Square was so great that no "market" offer would ever be accepted by owners.

But Stern says that developers thought they didn't need eminent domain. I wonder if that was a consensus.

The harm of eminent domain

Stern thinks the use of eminent domain had short-term impacts and set a bad example:
While eminent domain may have made it easier two decades later to build (since the property was already condemned), the city lost far more than what it could ever gain from the lands’ new uses. It destroyed legitimate local businesses that create the patchwork of unique attractions that bring tourists from across the country to any major city. It delayed any resurgence of Times Square, as property owners and government officials remained in limbo and tax dollars were lost.

Our efforts ignored the root causes of the problems in Times Square, blinding us to any true cures and setting a dangerous precedent for future projects in New York City. Property owners who were anticipating massive buy-outs as a result of the West Side’s upzoning were shocked when they learned this simply ushered in a plan that effectively wiped them out, with “fair” market value in place of negotiation. This unfair, unjust and unconstitutional treatment led to ten years of legal challenges. What’s worse, none of the developers we condemned property for ever realized our collective vision.
(Emphasis added)

Indeed, it's quite likely that if Atlantic Yards goes forward, what emerges will look very different than the project as sold to the public and approved by the ESDC in 2006.

An unfair process

Stern says that eminent domain picks winners during a situation of uncertainty:
When government is given the power to take property from one private owner and give it to another, an inevitable and very ugly political process begins. Instead of competing in a marketplace where outcomes are determined by who has the best innovative ideas, strong financing, creative marketing and capable management, developers compete for political influence. 

...Times Square was bursting with investment and renewal, but it was not because of the 42nd Street Development Plan, since it had built nothing, nor even because the nation had entered into an economic boom. Forty-Second Street kept rotting away through the economic booms of the 1960s and 1980s. Instead, the market began to work because government took actions that all governments can and should to incentivize development in troubled areas—take public safety seriously and lower taxes to draw businesses into the area.

Stern's lessons

Stern concludes by arguing what he considers three universals:
The lessons I learned from the 42nd Street Development Project in New York are true for cities and small towns across the nation. First, public safety is essential if there is to be civil society... Second, states and cities should rethink using condemnation power to take property from one private owner and give it to another private owner. To use that power is to open a Pandora’s Box filled with influence peddling and power brokering, which is always sleazy and often corrupt... 

Third, tax policy is important, and to have development, local governments must have a competitive tax structure... can anyone honestly identify a logical, empirical, non-political reason why the new headquarters of The New York Times, which is located in the project area, required every tax break and government subsidy imaginable, while the myriad restaurants, shops and small businesses required no tax relief?

An AY example

In a sidebar in the IJ’s report, Stern picks up the story:
Unfortunately, the most atrocious aspects of the Times Square redevelopment have been embraced as a grand tradition in New York City development, as the unique city-state alliance forged through our efforts in the 1980s paved the way for future massive intervention at both levels of government. Influence peddling is still as prevalent as ever, as billionaire developer Bruce Ratner’s buddies in office have helped him seize private homes and businesses for his Atlantic Yards project in Brooklyn—despite massive public outrage.

The argument in 1999

In The Unexpected Lessons of Times Square’s Comeback, in the Autumn 1999 issue of City Journal, Stern made his point, without hammering as hard on eminent domain:
Government began to do three things—two of them with the plan's help, though the city could have done them more effectively on its own—that ignited Times Square's revitalization: it started to fight crime, it kicked out the sex industry, and it lowered taxes selectively for big businesses willing to locate in the area.

Getting rid of the sleaze

Stern suggests zoning, rather than eminent domain, might have worked:
But through the state's Urban Development Corporation, the redevelopment plan did play a key role in the second thing government did that helped to revive Times Square: kicking out the sex businesses.

...Instead of condemning, why didn't the city just zone out the sex businesses? After all, throughout the nineteenth century—and indeed, for most of the twentieth—cities freely applied tough zoning regulations to the sex industry, viewing it, apart from any moral objection, as poisonous to other economic activity.

...To apply zoning restrictions to sex businesses was henceforth different from applying them to, say, a slaughterhouse or a chemical plant, since now to do so supposedly violated the First Amendment. It also would invariably incur the wrath of the cultural left, loudly decrying censorship and the imposition of puritan values. The redevelopment plan allowed the city and the state to escape these invented First Amendment restrictions... 

...Yet condemnation might not have been necessary after all. As early as 1976, the Supreme Court started to allow municipalities to subject "adult" businesses to zoning regulations for reasons of "secondary effects" on neighborhoods, with economic blight leading the list—the Fiorello La Guardia argument, we could call it.

Picking winners

Stern gives a concrete example to back his preference for across the board tax relief as opposed to targeted reductions:
This favoring of the old and the well-connected over the new and the as yet unknown—it's really a form of state—directed capitalism, where government substitutes its bureaucratic thinking for the market's invisible hand—means that New York squanders enormous economic possibilities. Imagine a 29-year-old college dropout named Bill Gates coming to us in 1984 and asking for a tax abatement to build a 42nd Street office for his new computer-software company.

A scholar’s take

In her epic Times Square Roulette, Lynne Sagalyn sees the redevelopment effort as defensible but certainly worthy of debate. She writes:
Relying on eminent domain to assemble the project’s 13 acres of land, city and state officials were following the conventions of urban renewal as commonly practiced in the Untied States during the decades following World War II. That process coupled government’s sovereign power to seize private property--for a ‘public purpose’ with payment of ‘just compensation’--with its police power to control what and how new land uses would be put in place, and it packaged those powers in a special-purpose entity such as UDC designed to facilitate public-private development ventures. 

For urban redevelopment, government is often redistributing property rights among private interests. The political power to do so comes form an evolved legal system that countenances a broad standard as to what constitutes ‘public purpose’ and bestows judicial deference to agency execution of public/private endeavors. While government tends to prevail in contests of condemnation, the process is not without its legal and political costs. 

Better compensation?

Sagalyn sees the alternative not as the absence of eminent domain but a better compensation system to reward owners with the fruits of the redevelopment:
Though relied upon repeatedly, compulsory purchase--condemnation is an American term--employed for urban renewal and economic development remains fraught with political controversy. The policy arguments for the use of eminent domain were relational, proven, and, given the ambitions of the 42DP, practical. The ‘taking’ was also within the scope of UDC’s statutory authority , as attested to by the project’s successful rebuff of all legal challenges. 

(Emphasis added)

Yet continuous litigation laid bare the risks of this second strategic policy decision. Given that the condemnation process is so cumbersome and costly, inherently litigious, and full of political risks, was there another way to effectuate comprehensive redevelopment? [Carl] Weisbrod, for one, kept positing this question in a series of private interviews in the mid-1990s. What realistic and workable alternatives might offer potentially greater efficiencies and expanded equity under a standard that gives existing property owners potential long-term economic rights beyond those of ‘sure and certain compensation’?

Consider a system in which the public sector creates a legal-entity to redevelop land within a defined project area, some kind of joint-stock corporation whose shareholders include cash investors... and existing property rights interests... who are issued shares in property to the value of their property rights as determined by a fair and just system of valuation...

Such a broader sharing of benefits has been suggested, as has "supercompensation."

Sagalyn suggests there was a goal beyond economics:
Taxpayers always had a stake in the revival of Times Square, but economics was never the policy driver for the 42DP... From start to end, the cleanup-turned-transformation aimed to restore civility--real as well as symbolic--to New York’s most public of public spaces.

Stern on zoning

In an essay headlined Why Gotham’s Developers Don’t Develop, in the August 2000 issue of City Journal, Stern argued for streamlining the city’s building process:
Of course, he can't help being a wheeler-dealer if he wants to build in the city. That's because complying with New York's Kafkaesque zoning code and its banana-republic process for approving building projects requires first and foremost a Herculean exercise in politics. It is hugely time-consuming and very expensive, not only because time is money, but because a developer has to schmear people, both publicly and sometimes not so publicly, every step of the way. One high-powered city developer put it bluntly: "You have to be a conniver to get things done."

Everything changed in 1961, however, when Mayor Robert Wagner and Faustian master builder Robert Moses imposed a new zoning code that swapped the market's invisible hand for the vision of central planners, dictating every jot and tittle of what a developer could build and where he could build it.. These three principles they enshrined in a code of stupefying complexity.

Then came further tweaks. Stern writes:
...To make matters even worse, beginning in the mid-seventies, the developer now had to go through a heavily politicized process for approving any building proposal that needed re-zoning—in other words, almost any significant proposal. Called the Unified Land Use Review Process (ULURP), it forces the builder to seek level after level of city-government approval before getting a final pass on his project. One real-estate lawyer likens it to "a Minotaurian maze"—take a wrong turn and you're dead.

The ULURP completed the transformation of the builder into the politician....
Thanks to a 1976 state law, the developer must also submit his proposal (if it requires re-zoning) to the most exhaustive environmental review in the nation, which typically takes 18 months to complete. It looks at a project's potential impact on everything from population concentration and noise to smog and endangered species. The review, or Environmental Impact Statement (EIS), is as costly to the developer in consulting and legal fees as it is time-consuming. Says environmental lawyer Michael Gerrard, "A good-size EIS will cost several hundred thousand dollars, but it could be more than a million.

In the case of AY, it cost much more--and that was by avoiding ULURP.

Playing the game

Stern cites some developers who bought into it:
Normally, you'd think builders would be waging an all-out battle to overturn the barriers that make it so hard to build in Gotham. But the major-league New York developers have learned how to thrive in this climate.

...In fact, this complex system has turned New York's big developers into a de facto cartel. The system keeps the competition out. It makes it hard for national developers and newcomers, who lack the political know-how and the right political connections, to get a foothold in the city.

A nod to Ratner

And some who didn’t:
...Not all developers oppose shaking things up, however. Two years ago, Douglas Durst and another city developer, Bruce Ratner, complained publicly about the need to make huge political contributions in order to construct anything in the city.

Ratner, however, learned other ways to steer contributions, and then got back in the game.

Some UDC history

In the Winter 1995 issue of City Journal, Stern offered some unflattering reflections on his old agency, in a piece headlined Empire State Perestroika.

He wrote:
The Urban Development Corporation, which I ran from 1983 to 1985, was formed to build low-income housing after the riots of the late sixties. It has the power to override zoning ordinances and condemn property, and it is exempt from local property taxes and building inspections. It practically bankrupted the state and helped precipitate the fiscal crisis of 1975. Then it got into subsidizing developers. Today it's a huge patronage mill, with fortunes being made, and nobody knows who's really running things. There are organized crime figures roaming around. When I first got to the UDC, I thought my mother would be proud of me. But my second meeting there was with a pair of pretty well-known mob figures.

I don’t think--but can’t be certain--that mob figures have the same role, but the question of favoritism persists.

On the Legislature

Stern got way ahead of the left-leaning Brennan Center, which in 2004 called the New York Legislature the country’s most dysfunctional.

He wrote:
The most dramatic, complete impediment to change is the State Legislature. It is the worst governmental institution of the Western world. It has more employees than California's Legislature, even though California's population is half again as big as New York's. It is filled with conflicts of interest. Members are allowed to practice law on matters that come before the committees that they sit on. There has been no post Watergate ethics reform of the New York State Legislature. Many other legislatures have instituted reforms—including the U.S. Congress—but New York has a completely unreconstructed Legislature, presiding over a blown-up welfare state.