When the Supreme Court ruled on Kelo v. New London last summer, it gave local governments carte blanche to take private property for economic development. Many private developers and municipalities quietly celebrated, unaware that the decision would ultimately give opponents ammunition to challenge building permit requests. After 30 years of sprawl and growing opposition to development, the decision set off a firestorm of protests that threatens all new projects.
Far from greasing the wheels for development, the ruling has actually spurred hordes of angry citizens to lobby politicians. Many are expressing their outrage in the press and over the Internet, where anti-eminent domain groups are mobilizing to rally opposition.
Already these groups can bolster their case by sheer numbers. According to a study by Libertarian law firm Institute for Justice, more than 10,000 condemnations were proposed and/or approved to clear the way for private development between 1998 and 2002.
The Institute for Justice also provides on its Web site an “Eminent Domain Abuse Survival Guide,” which offers “practical suggestions for attacking the condemnation of your property outside of the courtroom.” An updated study will be released this summer.
“I strongly believe that politicians misjudged the amount of national and local sentiment about this issue,” says attorney Richard Clark, a partner at Sparta, N.J.-based Laddey Clark & Ryan. At the time of the ruling, Supreme Court Justice John Paul Stephens wrote that nothing in the decision precluded states from placing further restrictions on eminent domain. In fact, 10 states already had passed legislation prohibiting condemnation for economic development.
Six months later, roughly 38 states have introduced legislation to dull — or extract altogether — the teeth of Kelo. Seven states and roughly 36 local governments have passed anti-Kelo legislation. And, according to a recent survey commissioned by the Saint Consulting Group, which advises developers on local political issues, opposition to new development has steadily risen from 68% in July 2005 to 81% in November 2005 [see chart p. 22].
Some recent cases:
In November 2005, the Arizona Supreme Court rejected the city of Tempe's appeal to condemn 19 businesses to make way for the Tempe Marketplace shopping center. The city pushed for condemnation, citing environmental problems as well as potential benefits from economic development that would be created with the shopping center. A trial court judge said the taking was unjustified.
In December 2005, the Superior Court in Mercer County, N.J., blocked the city of Trenton's attempt to broaden a redevelopment area that local planners claimed was full of “unsafe, dilapidated” buildings. The court argued that Trenton did not present enough “credible” evidence that the property needed to be redeveloped.
In January, residents of the suburban Cincinnati town of Norwood went to the state's Supreme Court to block a $125 million mixed-use development. The city attempted to condemn houses and businesses on the property shortly after the Kelo decision, but residents opposed the taking. The city and the developer claim that the area is not blighted but “deteriorating.” The Ohio Supreme Court had not ruled on the case as of late January.
Dilemma for local governments
“I consider [legislation limiting eminent domain] to be a knee-jerk reaction,” says former Indianapolis Mayor Bill Hudnut, currently mayor of Chevy Chase, Md., and a senior fellow at the Urban Land Institute.
“It's very ill-advised to take away the power of eminent domain from local governments. In 16 years as mayor of Indianapolis, we probably used eminent domain only once or twice,” says Hudnut, adding that the simple threat of condemnation was often enough to get all parties to the bargaining table.
Despite the need for local governments to provide jobs and increase tax bases to pay for schools, infrastructure and public programs, the U.S. House passed an anti-Kelo bill in November. The bill calls for federal economic development funding to be withheld for two years from states or local governments that use condemnation powers for economic development purposes.
At least three similar bills were introduced in the Senate and almost 10 similar bills in the House as of late January.
Attorney Clark believes that such legislation, if passed, would do more harm than good. “The funding is absolutely necessary for rehabilitation in certain urban areas,” he says. “Now, not only might there be local opposition to a development project, but there may also be a court test as to the power to condemn in conjunction with that development.”
Legal cases spurred by eminent domain can last anywhere from three to five years, with no guarantee of the outcome. In addition, politicians who defy public pressure are often sent on permanent vacations via the ballot box.
President Patrick Fox of the Hingham, Mass.-based Saint Consulting Group says that “as the population has grown, negative reactions to development have also increased.” His firm works for both developers and their opponents on contested real estate projects.
“Ten years ago, most of the opposition was clustered along the coasts, but demographics and population density have collided with growing businesses. The end result is that everyone is bumping up against each another,” says Fox.
The current population of the U.S. is 300 million. The U.S. Census Bureau estimates that the population will grow to 351 million by 2025 and balloon to 421 million by 2050.
Not only is there less elbow room, but more Americans actively oppose real estate developments in their communities. The Saint survey finds that most Americans have taken a decidedly negative stance against development. Roughly one in five of the 1,000 survey respondents, in fact, say they have actively opposed a development in their community.
By contrast, just one in 10 respondents claim to have actively supported a development in their community. Fox attributes some of the opposition to widespread cynicism about how developers and elected officials work together.
The study also found that 70% of respondents believe that relationships between elected officials and developers render the approval process unfair.
Roll of the dice
“The question that developers will need to address this year is: Where are businesses to locate and build the structures for future jobs, if 83% of citizens like their neighborhoods exactly as they are?” asks Fox. The Saint Group survey revealed that 83% of suburban Americans oppose new development while 73% of Americans in general oppose new development.
In the future, attorney Clark suggests that developers steer clear of condemnation projects unless local planners have already identified an area as ripe for redevelopment in a master plan or independent study in which the public has participated. “If they have not, I would tell my developers, ‘Do you really want to take that chance?’”
Some have taken such advice to heart. In February 2005, for example, Vornado Realty Trust abruptly shelved plans to develop a 132,000 sq. ft. shopping complex in the New York City borough of Queens. The centerpiece of the project would have been a Wal-Mart Supercenter — not a popular concept among the local community and politicians, who closed ranks to fight it early on. Wal-Mart went so far as filing a land-use application with the city that winter, but Vornado decided that it wasn't worth the fight.
Wal-Mart is the virtual poster child for opposition. In April 2005, voters in the Los Angeles suburb of Inglewood rejected a planned Wal-Mart store after 60% voted against it in a referendum. The Chicago City Council also blocked Wal-Mart from entering a South Side neighborhood last May.
Wal-Mart's troubles stretch beyond conventional NIMBY (a pejorative term meaning Not In My Backyard) concerns. According to the Saint survey, most Americans would oppose a Wal-Mart development in their community [see chart, p. 27].
Gaining public support
The single-minded approach to development hasn't won many friends. According to Hudnut, it's vital to include the neighbors and the stakeholders in the planning process as early as possible.
Hudnut cites the partnership between Montgomery County, Md., and PFA Silver Spring LC (a joint venture between The Peterson Cos., Foulger Pratt Cos. and Argo Investment Co.) as one model. While formulating a $400 million downtown redevelopment project, developers embarked on a long campaign to generate public support.
“The process is cumbersome, but at least you get the community's buy in,” says Tom Maskey, senior vice president of retail at Fairfax, Va.-based Peterson Cos.
The development partnership began wooing the public two years in advance of the project and attended scores of meetings that ranged from small gatherings in living rooms to large public gatherings at town halls. All of the meetings were designed to outline the project and convince people that it could be done. “It takes longer and costs more money, but it's worth the time and effort,” says Maskey.
Even a lone dissenter can hold up the development process long after a project has been cleared. When Federal Realty Trust started the final phase of its mixed-use Bethesda Row project three years ago, the REIT faced little opposition. Some residents in the affluent community of Bethesda, Md., objected to the project's height, but most were happy to see a tired commercial strip leveled in favor of new shops, restaurants and apartment units.
Three years later, the buzzing 12-acre Bethesda Row center routinely lures thousands of diners, shoppers, residents and moviegoers to the project's 53 tenants. But the Rockville, Md.-based owner/developer has been stymied to complete the project's eighth and final phase — a 65-foot tall apartment and retail complex — after one local resident challenged the planning board's 2004 decision.
In short, Bethesda's 1994 master plan established a 42-foot height restriction on the Arlington East site. Federal Realty successfully lobbied for a 2001 zoning change that would allow for a 75-foot-tall apartment. The challenger is arguing that the zoning cannot be changed, if it differs from the master plan.
“We had both the community and local political support, and we cleared the zoning well in advance,” says Don Briggs, vice president of development at Federal Realty Trust. “But this one individual is holding up the completion of our project, and we can't start building until the courts rule on this case.”
The Arlington East case illustrates how anti-development forces are increasingly acting against — and effectively stalling — commercial developments. While that by itself is hardly news, the breadth of opposition has taken on staggering proportions since last summer's controversial Kelo ruling in the Supreme Court.
Rather than wait for trouble to brew, Fox of the Saint Group counsels developers to neutralize problems in advance. As a result, he talks to residents with homes on the edge of a given site to gauge what issues might trouble them about a future development. If the concern is traffic congestion, Fox brings a traffic engineer to allay concerns. If the concern is environmental, he brings an environmental expert in to explain the impact.
“The worst thing that can happen is to find yourself in a room with a bunch of angry neighbors who have little information about the project,” says Fox, adding that developers in years past often chose to let opposition build before dealing with it.
Opposition has its upside
Zoning hurdles are typically cleared before a lender will commit to a construction loan. Despite that, one major Manhattan-based lender says that these days some developers can secure financing before the zoning picture is crystal clear. Such an arrangement may involve a recourse loan, meaning the lender can claim money directly from the borrower in default.
“Once you get your zoning permit, you suddenly have a lot of competition from other lenders,” says Ben Marciano, managing director at Germany-based real estate investment bank Eurohypo. Eurohypo financed $5 billion in commercial projects in 2005, many of them condo conversions in scorching markets such as Las Vegas, Florida and Southern California. That risk profile suggests that Eurohypo wouldn't shy away from financing an embryonic-stage development.
Not so, says Marciano, who will only finance projects that have cleared both zoning and regulatory hurdles. What about last-minute opposition from the community or local politicians? “Not only is the zoning usually in place before we commit, but any opposition that emerges is more of a nuisance than an impediment,” he says.
This so-called “nuisance” can act as a competitive advantage if it bars other projects from being built alongside one that he's agreed to finance. For Manhattan-based Fitch Ratings, which only started rating condo conversion loans six months ago, there's no question that opposition can work to a developer's advantage.
“In a market where you have five parcels of viable land next to your site, it can be a problem having no opposition,” says Joe Kelly, a senior director at Fitch Ratings. He takes time to scour a sponsor's past track record at clearing all zoning and regulatory hurdles. If a developer has worked with the local authorities and neighbors before, that increases the odds that he will be able to build expeditiously without losing time trying to secure approvals.
And how often has he seen lenders jump the gun by committing to a project well before any approvals have been obtained? “We're always cautious when we see a loan on a project without any approvals, but it is rare,” he says. “There have been some one-off condo conversions where the permits aren't finalized, but the financing is. That's really a competition issue.”
Perception is reality
In the current hostile environment, many developers have sought help from publicists. And, if the Saint Consulting Group survey is any indication, this is no small task. Even if a developer has the community's best interests at heart, public opinion is likely to go against his project.
For one New Jersey-based public relations executive, the days of maverick developers clearing projects through sheer force of will are over. “It used to be that developers called me when they had a problem,” says Michael Beckerman, president at Bedminster, N.J.-based public relations firm Beckerman Public Relations. “Now they call me before they have any problems,” he says.
New Jersey is the most densely populated state in the nation with more than 1,000 people per square mile. In India, by comparison, the population density is only 825 people per square mile.
As of mid-January, Beckerman counted 50 New Jersey developers as clients. He, too, has watched anti-developer sentiment increase over the past few years. While he labels much of this criticism as unwarranted, he acknowledges that some lone-wolf developers ask for it.
In 2003, for instance, Beckerman was approached by a New Jersey developer that was hastily assembling a multifamily project on a brownfield site. The developer wanted to hire Beckerman.
After quietly making some calls, Beckerman learned that the site remediation efforts hadn't been completed. The upshot? He declined the business.
Still, Beckerman says that the system can easily be abused by both sides, noting that the planning process in many towns has been “hijacked” by political opportunists determined to draw attention to themselves.
“Most of the developers that we work with have accepted that public relations is a daily priority, even if they don't have a project going on,” he says. In short, developers are becoming much more proactive than they were in the past; discussing public relations strategies before projects are under way.
Fighting fire with fire
Aside from public relations tactics, developers are also using grass-roots campaigns to further their cause. In 2003, for example, Fox of the Saint Group represented an East Aurora, N.Y. developer who was attempting to relocate a supermarket to a larger site down the street.
Fox quickly learned that the local planning board was elected on a no-growth platform some years earlier. After discovering that one key swing vote was needed to clear the project, Fox launched an aggressive voter education campaign in the area.
“This grass-roots campaign told the residents that this particular board member is preventing you from getting a larger supermarket,” he says. After enlisting community members to make hundreds of phone calls, Fox says that “massive pressure” on the key planning board member persuaded the board member to vote in favor of the project. Ironically, says Fox, the board member couldn't even go to the grocery store without being mobbed by proponents of the larger project.
The approach worked. Only one month after the holdout board member voted in favor of demolition, the larger supermarket was developed a half-mile down the street. Concludes Fox: “Educating people, creating a database of supporters and then focusing on key people in the political process is essential.”
Sibley Fleming is managing editor. Parke Chapman is senior editor.