Utilities and Government and Economic Development and Real Estate & Retail

Eminent domain facing legal challenges: Supreme Court, Indiana legislature consider changes to economic development tool some say is unfairly used

February 21, 2005

The tool of eminent domain, increasingly used for redevelopment projects in Indiana cities and towns, could change significantly depending on the outcome of a U.S. Supreme Court case and a bill before the Indiana General Assembly.

In Indianapolis, city officials are closely watching the cases and legislation. In recent years, construction of WellPoint Inc.'s operations center, redevelopment of the Link-Savoy and Blacherne apartment buildings, and Fall Creek Place have all involved eminent domain. Officials have also indicated they may use eminent domain to acquire land needed for a new stadium downtown if funding for that project is approved.

"The city does have a history of using eminent domain," both for infrastructure improvements such as road widening and for economic development, said city attorney Kobi Wright.

According to the U.S. Constitution and laws in most states, including Indiana, municipalities have the authority to take property through eminent domain if the taking is for a public use.

What constitutes "public use" is the major question in both a U.S. Supreme Court case and legislation in the General Assembly.

In the Supreme Court, arguments are scheduled for Feb. 22 in Kelo vs. the City of New London, a case from Connecticut that could shape the use of eminent domain nationwide.

In that case, the city of New London condemned as blighted an area of 15 homes and pursued eminent domain to take over the land. Once the land was in its control, the city planned to turn it over to private developers for a hotel and other commercial projects servicing a nearby plant being built for pharmaceutical company Pfizer Inc.

"There was nothing particularly wrong with those homes," said Jim Carlino, a real estate attorney with local law firm Bose McKinney & Evans, who is following the case. "They just happened to be in a place well-suited to economic development."

The Connecticut Supreme Court ruled the city could proceed with the project as long as the property owners were compensated fairly. The landowners appealed the decision and the U.S. Supreme Court agreed to take up the case.

Traditionally, eminent domain has been used primarily for public improvement projects such as new roads, public utilities or schools.

In the 1950s and 1960s, however, cities and towns began using it to take control of large inner-city tracts of land containing homes and buildings that had deteriorated to the point of becoming havens for crime and disease, said Rory O'Bryan, a real estate attorney with local law firm Harrison & Moberly LLP. Redevelopment of such areas was widely understood to serve a valid public purpose.

In the 1980s, local and state economic development agencies began using eminent domain to assemble land for large, privately funded projects, whether or not the neighborhoods were in distress. Officials argued that such land takings would increase an area's tax base and create jobs, which served a public purpose.

In 1997, Indianapolis-based Simon Property Group Inc. received national attention for such a case. The city of Hurst, Texas, sought to acquire 10 houses for an expansion of Simon's North East Mall. The homeowners sued, arguing eminent domain was used illegally, but the city eventually prevailed, and the houses were bulldozed to make way for the shopping mall's expansion.

Municipalities and property-rights advocates nationwide are keeping a close eye on what the nation's high court rules on the Kelo case, as it could affect how and if economic development agencies proceed with major redevelopment projects.

"Courts have been making determinations that public use can be expanded to economic development purposes without finding property blighted. That's something a lot of people are very concerned about," Carlino said. "As long as the public use has some reasonable relationship to some valid governmental purpose, it will be upheld. That's a pretty low threshold."

In reviewing the case, the Supreme Court has several options. It could send the case back to lower courts, rule on the case at hand without addressing the broader issue of what constitutes public use, or set a new standard for "public use" that either embraces or eliminates eminent domain for many economic development projects.

"The fact that the court has a number of options is what's concerning" to municipalities, said city attorney Wright.

In Indiana, State Rep. David Wolkins, R-Winona Lake, is sponsoring legislation unconnected to the Kelo case that would restrict the ability to use eminent domain for land that would end up in private hands.

Wolkins' legislation, House Bill 1063, would allow eminent domain to be pursued for commercial purposes only if the municipality pays the landowner 150 percent of the appraised value or the assessed value, whichever is higher. In the bill, commercial use is defined as any private residential development or use of the property, private development of the property under a lease, or use of the property for retail or industrial purposes.

The use of eminent domain for roads, utilities or other government functions would not be affected.

Wolkins said he introduced the bill to clarify Indiana's laws after seeing a report on cases in other states where eminent domain was used on non-blighted properties that ended up being transferred to private entities for development.

Not surprisingly, the state's cities and towns oppose passage of the bill.

"It would cause somewhat of an obstacle for the city and county to pursue certain economic development strategies, particularly in downtown Indianapolis," Wright said. "Our view is, we don't think property is more valuable for different uses, as in whether it's used for widening streets or for economic development. Also, there may be a constitutional issue with treating property owners in a different manner, if one gets fair-market assessed value while another gets 150 percent of the fair-market assessed value."

Under Wolkins' legislation, several of the city's high-profile eminent domain cases of recent years could have turned out differently.

In the case of the Plaza Parking garage at 30 W. Vermont St., the city pursued eminent domain to seize the garage from its owner to pave the way for redevelopment of the Link-Savoy and Blacherne apartment buildings, both of which will be owned by private companies. The city offered $825,000 for the garage and won the eminent domain case. The garage's owner appealed. Before the appeal was resolved, the city agreed to buy the garage for $1.2 million.

Although the purchase price for the garage was 150 percent of the appraised value, the city would have saved a lengthy court battle if Wolkins' bill had been law.

In the 1998 case of WellPoint Inc.'s operations center on the southeast corner of downtown, a Shelby County circuit court judge ended up ruling in favor of the landowner, locally based produce company Ray & Mascari Inc. The city sought to seize Ray & Mascari's half-acre of land and building in exchange for $377,000 in compensation. Ray & Mascari countered with a $7 million asking price. Subsequent negotiations ended in a stalemate, and the case landed in court.

The court ruled the city's intended use for the land, a private office complex solely for the use of WellPoint, then known as Anthem Inc., did not constitute a public use. Ray & Mascari ended up selling the property to the city for $2.1 million- far more than 150 percent of the property's appraised value.

In upcoming months, the city might pursue eminent domain seizures for some of the seven acres it still needs for a proposed stadium south of the RCA Dome if a funding plan is approved by the General Assembly.

The stadium and an accompanying expansion of the Indiana Convention Center would be a major economic development project for the city. However, it would be owned by the Marion County Capital Improvement Board, a quasi-governmental agency. The situation, Wolkins admitted, falls in a gray area not addressed by his bill.
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