Thinking about eminent domain: economist suggests property owners should get a share of future profits

New York State is going to court today to condemn the last seven properties needed for the Atlantic Yards project, and the big question is not whether the condemnation will be successful but how much developer Forest City Ratner--actually, Greenland Forest City Partners--will have to pay.

The tremendous gain in development rights, thanks to the state's override of New York City zoning, is a boon for the developer, which often but not always compensates the property owner for replacement value (plus a premium for speed of departure, attorneys' fees, and other costs), not the new value of the site.

Then again, as I reported in May, the state condemnation judge, Wayne Saitta, did find for the property owner in one case, declaring that evidence "demonstrates that there is a reasonable probability that absent the project, the subject property would have been upzoned."

Thus he rejected the state's claim that an Atlantic Avenue property was barely worth $2 million, and instead valued it at nearly $9.2 million, far less than the $20.6 million that the owner sought but still a major gain.

An economist's take

Economist Claude Gruen is no opponent of eminent domain--he's worked on numerous major real estate projects in California and elsewhere--but he thinks compensation should be changed to make a more equitable system, allowing property owners to get a piece of future profits

In his in his 2010 book New Urban Development: Looking Back to See Forward, he cites the initial appellate division ruling rejecting the Atlantic Yards challenge, which stated:

Any incidental profit that may inure to Forest City from the remediation of the blighted project site does not undercut the public purpose of the condemnation of substandard land.

Gruen comments:

Redevelopers of blighted areas do not just make a profit by selling or renting the new space they build. By their branding--that is, by moving the area up the filtration ladder of neighborhoods--they increase land values over what they were when the area was blighted. But under eminent domain laws, the deposed owner of a condemned property is compensated by being paid the price of the land in its 'as is' condition... both state and federal laws specifically disallow the condemnation valuation to include any value increase that might be bestowed on the property by the project for which it is condemned.

Two policy changes

He recommends two changes, one to block holdouts, the other to share the wealth:

First, private parties who have acquired 80 percent of the properties within a blighted project area will be granted the power of eminent domain to acquire the remaining 20 percent of the property under the condition described next. Second, upon taking title, the private redeveloper will pay the owner of taken property the fair market value of the property in its "as is" condition. When the project or a significant portion of it is completed, the project's developer must make an additional payment to the former owner equal to the difference between the original fair market value of the condemned property and the proportionate share  of the property's value after the project has been completed and is 90 percent occupied...
I do not know if they would have been satisfied... But giving them a proportionate share of the profit made from the use of land they had possessed seems fairer than simply paying them what the property was worth in the blighted neighborhood.

Well, private parties can't exercise eminent domain themselves, but there is an argument--at least when a neighborhood is truly blighted and that has been established through a truly public process (both very dubious in the case of Atlantic Yards)--to allow assemblage of large sites for public purposes.

That policy change might be easier to achieve than the second one.

After all, that one proposal, rejected by the board of the Metropolitan Transportation Authority as it considered a deal proposed by developer Forest City Ratner to lower its upfront cost for the Vanderbilt Yard, was a tradeoff: in exchange for concessions, the state to get more of future profits.