A bill that would revive redevelopment as a tool for local governments passed the state Legislature in the final days of the summer session on party-line votes.

Now the question is whether a so-far noncommittal Gov. Gavin Newsom will accept the claims that Senate Bill 5 by Sen. Jim Beall, D-San Jose, has enough safeguards to prevent redevelopment from going as astray as the version that Gov. Jerry Brown and the Legislature killed in 2011.

That version allowed local redevelopment agencies to divert a slice of property taxes to use on projects meant to spur the economies of “blighted” neighborhoods. If the projects boosted property tax revenue, the additional increment would go to the agencies for new projects. In 2010, some 400 redevelopment agencies diverted 12 percent of all California property taxes for their use.

‘Scams providing windfalls to cronies’

But by 2011, many investigations had found that redevelopment funds were routinely diverted to pay for City Hall salaries and that many of the projects that did get funding were those pitched by politically connected developers. Then-state Controller John Chiang said many redevelopment projects were “scams providing windfalls to political cronies.”

Many healthy businesses with prime locations had been declared “blighted” so cities could use eminent domain to seize them and hand them over to car dealerships or big-box stores which would generate the sales taxes that are a key source of revenue for city coffers.

And on top of these issues, the Legislative Analyst’s Office said there was “no reliable evidence” that redevelopment helped the economy. Instead, it attracted businesses that would have opened elsewhere without subsidies offered by local government – shuffling economic activity around, not spurring it.

New version would emphasize housing

In interviews and committee meetings, Beall has argued that a much-more focused version of redevelopment that gives at least half of diverted funds to subsidized low-income housing – up from the previous 20 percent – can help California with its housing shortage. The new program would also fund transit-oriented projects and play its old role of helping poor neighborhoods boost their economies. 

To prevent past problems with cronyism, a state oversight group would have to certify projects met basic standards before funding could be diverted.

The bill would initially allow $200 million in property taxes to be diverted annually with a phased-in upper limit of $2 billion a year. About $5 billion a year was being diverted when redevelopment was shelved by the state in 2011.

While running for governor in 2018, Newsom was supportive of reviving some form of redevelopment. But he included no funds for a new program in his initial state budget and has told reporters that his budget already includes record funding for affordable housing.

Meanwhile, while it didn’t get as many headlines as some other problems did, redevelopment’s record with creating affordable housing in California was also poor to mixed.

Old version often generated no new units

In 2010, the Los Angeles Times reported that, “At least 120 municipalities – nearly one in three with active redevelopment agencies – spent a combined $700 million in housing funds from 2000 to 2008 without constructing a single new unit … .  Nor did most of them add to the housing stock by rehabilitating existing units.”

Where did the money go? The Times cited many examples of redevelopment agencies buying property that was never subsequently developed.

It also found that “nearly three dozen cities, including Monterey Park and Pismo Beach, reported spending most of their affordable housing money over the decade on ‘planning and administration’ – but never built a single unit.”

Beall’s bill passed the Senate 29-9 and the Assembly 55-19.

The California High-Speed Rail Authority – the agency in charge of building the state’s bullet train system – has already faced a tough year, with Gov. Gavin Newsom signaling in February that he’s not confident the full system can ever be built. But now the rail authority has two new public relations headaches on its hands.

In the Central Valley, farmers were already upset over state use of eminent domain to seize their property for construction of the project’s first segment – a 110-mile route from Bakersfield to Merced projected to cost $12.2 billion. But a recent report in the Los Angeles Times documented how slow the rail authority was in paying for seized land and in refunding farmers for the cost of the train project’s effects on their businesses.

The Times’ story focused on a kiwi farmer who lost 70 acres of land to the project more than a year ago and who since has gone unpaid for $250,000 incurred in “relocating wells, removing trees, building a road and other expenses.” It also noted farmers who had been owed $1.9 million and $630,000 for three years, and two others owed $500,000 and $150,000, though for shorter periods of time.

State officials questioned by the Times had no explanation for the delays beyond saying the project was complex in its legal and engineering challenges.

A follow-up story by Fox News emphasized why the delayed payments are particularly upsetting to many Central Valley residents. Not only is there a chance the initial segment between Bakersfield and Merced will never be completed because the state doesn’t have enough funds, there is a good chance that even if the segment is finished, some of the property that has been seized won’t be used for the project. That’s because even now – more than five years after the administration of Gov. Jerry Brown decided to start the bullet train’s construction in the Central Valley – authority officials still haven’t agreed on the exact details of the final route.

“The property owners are very frustrated that the High-Speed Rail Authority [doesn’t] seem to know what they actually need,” Sacramento attorney Mark Wasser said. “We have farmers who the authority has come back four times to change where they want to take.” Wasser has more than 70 clients affected by the rail authority’s Central Valley project.

Audit warnings validated by ethics probe

Meanwhile, state audits which have long warned that it is problematic for the rail authority to rely so heavily on outside consultants have been vindicated with what appears to be evidence of a conflict-of-interest scandal.

Recently, the authority’s deputy chief operating officer – Roy Hill – was suspended pending an investigation by the state Fair Political Practices Commission. Hill is a top executive with the WSP consulting firm employed by the authority. Evidence suggests that Hill approved a $51 million increase in a bullet-train contract held by the Spanish firm Dragados despite his apparent ownership of more than $100,000 in stock in Jacobs Engineering, a multibillion-dollar multinational corporation that is providing key services to Dragados on the California project.

The FPPC approved the request of Assemblyman Jim Patterson, R-Fresno, to investigate Hill, his actions and his personal economic interests.

“This is such a deep conflict that it calls into question whether the entire High-Speed Rail Authority and the contractors they have put together are involved in a massive corruption,” Patterson told Fresno TV station KMJ.

The rail authority says it will cooperate with the FPPC probe.

Hill has not yet commented publicly on the matter.

Five years ago, when state courts

But Brown never really made clear if he shared this critique — or if he just thought that during a budget crisis, the $1.7 billion he could take could be put to better use. He had used redevelopment while mayor of Oakland, but he also had to be aware of redevelopment abuses involving dubious blight declarations and the diversion of 12 percent of all state property taxes to various redevelopment projects. 

Now it is clear that Brown was driven by fiscal pressures. Last year, he signed Assembly Bill 2, which allows local governments to expand and better fund entities called a “Community Revitalization and Investment Authorities.” Last week, he signed AB2492, a companion bill that defines circumstances in which local taxes can be diverted for which projects — and it appears to encourage the same sort of mischievous declarations of blight that drove critics mad in redevelopment’s previous California incarnation. Both were authored by Assemblyman Luis A. Alejo, D-Salinas.

Successful businesses could be declared blighted

Under the latter measure, blight can be declared — and land seized for economic development purposes — if median income in a defined area is lower than 80 percent of the median income either “statewide, countywide or citywide.” Critics such as Marko Mlikotin of the California Alliance to Protect Private Property Rights say this would give developers and their political allies a tool to declare many thriving businesses, churches or public offices as blighted so their land could be conveyed to the developers for projects that are pitched as helping the local economy. Such diversions were allowed by the U.S. Supreme Court in 2005 on a 5-4 vote in the Kelo v. New London case.

Chris Norby, a former state assemblyman, Orange County supervisor and Fullerton mayor, chronicled the misuses of redevelopment in California in his 44-page 2007 analysis, “Redevelopment: The Unknown Government.” Here’s a short excerpt:

Redevelopment subsidies are not distributed evenly. Major developers, NFL team owners, giant discount stores, hotels and auto dealers receive most of the money. Small business owners now must face giant new competitors funded by their own taxes. …

Costco [received] over $30 million in subsidies in Orange County alone, extrapolated to $300 million statewide. Wal-Mart has gotten over $1 billion in public handout nationwide, with an estimated $100 million in California. Pro sports also profit from lavish subsidies. The Raiders got $7 million from Irwindale just for opening negotiations on a new stadium site (never built). In 1995, the Raiders returned to Oakland, lured by $94 million in public subsidies. The Chargers have gotten $134 million in seat guarantee pay offs courtesy of San Diego taxpayers.

While redevelopment apologists claim to be “rebuilding” our cities, barely 19 percent went for actual real estate development, and another 5 percent for land acquisition, much of it still vacant.

Significantly, $580 million — 11 percent — was spent on administration, most of it for redevelopment staff salaries. This provides a lucrative bureaucratic base that redevelopment staffers seek to preserve and expand.

Poor families evicted at developers’ behest

Norby’s research showed that many cities targeted areas with inexpensive housing for redevelopment, forcing evictions and reducing housing stock.

When Anaheim “improved” its working class Jeffrey-Lynne neighborhood, it forced existing apartment owners to sell to Southern California Housing Corp. Half of the units were demolished, over 400 tenants evicted and those that remained saw their rents doubled. Public subsidy: $54 million.

The Brea Redevelopment Agency demolished its entire downtown residential area, using eminent domain to force out hundreds of lower-income residents. Much of its housing money has since been spent on mixed-use projects that are really more commercial than residential. The agency gave $649,000 in housing funds to a largely retail development that will include only eight loft apartments.

Some of Norby’s criticisms were confirmed by a 2011 Legislative Analyst’s Office report.

Defenders of redevelopment counter that bad projects shouldn’t be held against good projects.

The redevelopment of San Diego’s Gaslamp area downtown is often held up as the crown jewel of California redevelopment. In the 1970s, the area was crime-ridden and seedy. Now it is a haven for towering hotels, trendy restaurants and bars, and the Petco Park baseball stadium.

Many cities which rely heavily on sales taxes for revenues also tout their use of redevelopment to open up “Mile of Cars”-style areas full of lucrative vehicle dealerships.

California has moved one step closer to the return of redevelopment and the controversial power to seize private property through eminent domain.

The state Senate approved legislation Wednesday that would give local governments the power to create new entities, known as community revitalization authorities, to stimulate economically-depressed or crime-ridden areas. Assembly Bill 2 would grant these new government agencies broad powers to issue bonds for the purpose of investing tax funds in infrastructure, affordable housing and economic revitalization projects.

“Redevelopment was a multi-purpose tool that focused over $6 billion per year toward repairing and redeveloping urban cores, and building affordable housing, especially in those areas most economically and physically disadvantaged,” argues the bill’s author, Assemblyman Luis Alejo, D-Salinas, according to a legislative analysis. “Since the dissolution of redevelopment agencies, communities across California are seeking an economic development tool to use.”

However, property rights advocates warn that the bill’s language contains no restrictions on eminent domain and could resurrect the abuses made possible by the Supreme Court’s controversial Kelo decision.

“Today, the state Senate passed a land grab bill that will make it easier for government to seize homes, businesses and places of worship by eminent domain!” the California Alliance to Protect Private Property Rights, an opponent of the bill, posted on its Facebook page.

4 GOP Senators Join Democrats to Pass AB2

Republican Senator Anthony Cannella of Ceres, who introduced the bill on the Senate floor, argued that AB2 will provide economic stimulus to disadvantaged communities.

“This will grow jobs, reduce crime, repair deteriorating and inadequate infrastructure, clean up brownfields and promote affordable housing,” he said.

With Cannella’s support, the bill passed on a 29-10 vote — with the support of all but one Democrat and four Republicans, including Sen. Tom Berryhill of Twain Harte, Sen. Bob Huff of Diamond Bar and Sen. Sharon Runner of Antelope Valley.

Under the bill, a Community Revitalization Investment Authority could be created by a city, county or special district if certain conditions are met. The first requirement is that the area have an annual median household income that is less than 80 percent of the statewide median. Additionally, three of the following four conditions must be met:

• Unemployment that is at least 3 percent higher than the statewide median unemployment rate;
• A crime rate that is 5 percent higher than the statewide median crime rate;
• Deteriorated or inadequate infrastructure such as streets, sidewalks, water supply, sewer treatment or processing, and parks;
• Deteriorated commercial or residential structures.

Private Property Rights Threatened

Only one senator, Republican Jim Nielsen, R-Gerber, spoke in opposition to the bill.

“This is the resurrection of the redevelopment agencies – the failed redevelopment agencies,” he said. “They absolutely exploited and will continue to exploit – under the provisions of this bill – the seizure of private property under eminent domain.”

Eminent domain is mentioned in the bill 21 times. The Legislative Counsel’s bill digest explicitly states, “The bill would authorize an authority to acquire interests in real property and exercise the power of eminent domain.”

Although the bill subjects private property to eminent domain, government agencies would receive a special carve-out from the practice.

“Property already devoted to a public use may be acquired by the agency through eminent domain, but property of a public body shall not be acquired without its consent,” the bill states.

Sen. Bob Huff: “We led the charge to save redevelopment”

In 2005, the U.S. Supreme Court ruled in Kelo v. New London that government agencies have the power to seize property for economic development. The decision was widely criticized across the political spectrum and inspired states to pass tougher laws limiting governments’ eminent domain powers. Here in California, the momentum for property rights reached its zenith in 2011, when Gov. Jerry Brown pushed through a plan to end redevelopment as part of his plan to balance the state budget.

Huff, who until recently served as Senate GOP leader, downplayed the “scare stories” of eminent domain abuse by private property advocates and reminded his colleagues of his past work with Sen. Rod Wright to save redevelopment agencies.

“We led the charge to protect redevelopment because it was one of the few economic developments that cities had,” Huff said on the Senate floor in support of AB2. “It was also one of the few ways to generate revenue for our affordable housing.”

With the Senate’s approval, the bill returns to the State Assembly for concurrence, where it is expected to pass with widespread support.

In May, AB2 passed by a 63-13 vote – without a single member – Republican or Democrat – voicing opposition. A dozen Assembly Republican lawmakers, including Assembly GOP leader Kristin Olsen, joined the Democratic majority in backing the bill.

Assembly Bill 2, authored by Assemblyman Luis Alejo, D-Salinas, would give local governments the power to create new entities that would have the same legal authority as redevelopment agencies. These new Community Revitalization Investment Authorities would have the power to issue bonds, award sweetheart deals to businesses and “acquire and transfer property subject to eminent domain,” according to the legislative analysis of the bill.

Property rights advocates warn that the bill’s language contains no restrictions on eminent domain and could resurrect the abuses made possible by the Supreme Court’s controversial Kelo decision.

“It brings back the right of governments to exercise eminent domain against some private parties in order to resell their property to other private parties,” cautioned Howard Ahmanson, Jr., a property rights advocate and founder of Fieldstead and Company. “Only new and wealthy suburbs would be potentially spared from ‘redevelopment,’ the lower middle class and poor would not.”

12 Assembly Republicans back redevelopment, unrestricted eminent domain

In 2005, the U.S. Supreme Court ruled in Kelo v. New London that government agencies have the power to seize property for economic development. The decision was widely criticized across the political spectrum and inspired states to pass tougher laws limiting governments’ eminent domain powers. Here in California, the momentum for property rights reached its zenith in 2011, when Gov. Jerry Brown pushed through a plan to end redevelopment as part of his plan to balance the state budget.

Now a decade since Kelo, the horror stories of small businesses being seized to make way for strip malls and condo complexes have faded from public memory. During the state Assembly’s floor debate on the bill, not a single member – Republican or Democrat – spoke in opposition to the bill, which passed by a 63-13 vote.

Surprisingly, a dozen Assembly Republican lawmakers, including Assembly GOP leader Kristin Olsen, joined the Democratic majority in backing the bill. Olsen’s office refused to comment on the bill or explain how the bill fit with the Republican Caucus’ position on property rights. One GOP lawmaker defended her vote by arguing that redevelopment agencies are an important tool for economic development.

“I ran for Assembly to help create jobs,” said Assemblywoman Young Kim, R-Fullerton. “RDAs give us another tool to do just that while turning around poor and disadvantaged areas.”

Redevelopment focused in areas with high unemployment, crime

Under the bill, a Community Revitalization Investment Authority could be created by a city, county or special district if certain conditions are met. The first requirement is that the area have an annual median household income that is less than 80 percent of the statewide median. Additionally, three of the following four conditions must be met:

• Unemployment that is at least 3 percent higher than the statewide median unemployment rate;
• A crime rate that is 5 percet higher than the statewide median crime rate;
• Deteriorated or inadequate infrastructure such as streets, sidewalks, water supply, sewer treatment or processing, and parks;
• Deteriorated commercial or residential structures.

“It’s redevelopment with a kinder, gentler twist,” explains Steven Greenhut, the state’s foremost expert on eminent domain and author of the book, Abuse of Power: How the Government Misuses Eminent Domain. “If AB2 passes, agencies will take property by eminent domain and use public dollars to fund private projects. Localities will run up debt without a vote of the public. As always, the plans of residents will give way to the edicts of the planners.”

There’s overwhelming evidence that redevelopment agencies harm small businesses, while failing in their mission to stimulate economies. That’s most evident in the landmark Kelo case, where a Connecticut town offered a corporate welfare package to the pharmaceutical giant Pfizer, Inc.

“While Ms. Kelo and her neighbors lost their homes, the city and the state spent some $78 million to bulldoze private property for high-end condos and other ‘desirable’ elements,” the Wall Street Journal observed in 2009. “Instead, the wrecked and condemned neighborhood still stands vacant, without any of the touted tax benefits or job creation.”

Those abuses extended to California’s application of redevelopment, property rights advocates say.

“California has rightly earned the reputation as one of the nation’s largest abusers of eminent domain, given that Redevelopment Agencies routinely abused their power of eminent domain to seize homes, small businesses and places of worship for private development,” wrote the California Alliance to Protect Private Property Rights, the state’s leading property rights group. “Time and time again, these obscure agencies diverted taxpayer dollars from core government programs to finance professional sports arenas, luxury hotels, golf courses and strip malls.”

Alejo: Bill needed to help disadvantaged communities

Nevertheless, supporters of AB2 say that blighted areas are a problem that demand government action.

“There are many areas in the state where the streets are broken and old water and sewer pipes lurk below,” Alejo said of his legislation. “In these areas, businesses do not open up shop. This leads to high unemployment, high crime rates and a hopeless community. This bill will work to tackle issues facing our state’s most disadvantaged communities.”

Several GOP lawmakers that opposed the bill dispute Alejo’s arguments.

“Private property rights are a foundational principle declared by our founding fathers,” said Asm. Scott Wilk, R-Santa Clarita, who opposed the bill. “Eminent domain is used by the government to trample on private property rights and as an individual property owner, there are legal protections in place to prevent government encroachment.”

Assemblywoman Melissa Melendez, R-Lake Elsinore, one of only 13 members to oppose the bill, said that she understands her colleagues interest in redevelopment, but can’t back legislation that undermines property rights.

“Stripping away property rights in the name of economic development isn’t the answer,” said Melendez, a former member of the Lake Elsinore City Council. “I think it has become more fashionable to allow the government to take over instead of allowing the free market to do so.”

This month, two state legislative panels blocked efforts by Central Valley Republican lawmakers to guarantee the property rights of those caught in the path of the the $68 billion transportation project. State Senator Andy Vidak of Hanford and Asm. Jim Patterson of Fresno are concerned that the California High Speed Rail Authority could use eminent domain to seize land for a project that may never be built.

“I’ve heard from dozens and dozens of property owners – many are farmers, small businesses and homeowners – that they are victims of these flash appraisals and pressure tactics,” said Sen. Vidak, who has been one of the state’s leading high-speed rail critics. “Many of these folks have land, businesses and homes that have been in the same family for several generations.”

Eminent domain requires fair-market compensation

For centuries, governments have used the power of eminent domain to compel property owners to sell their property for large public works projects. In theory, the Fifth Amendment guarantees the rights of property owners to receive just compensation for any property that is seized for public use.

“The U.S. Supreme Court has defined fair market value as the most probable price that a willing but unpressured buyer, fully knowledgeable of both the property’s good and bad attributes, would pay,” Cornell University Law School explains in its Fifth Amendment primer.

However, in practice, government agencies with their unlimited resources and army of lawyers can tip the scales in favor of a lower price.

Lawmakers say “no” to independent audit

In the Central Valley, residents are concerned that the state’s high-speed rail agency, which has already blown its budget estimates, could use “flash appraisals” and other hardball tactics to take property for less than the fair market value.

To make sure that everything’s on the up-and-up, Vidak requested that the state’s independent auditor investigate the California High-Speed Rail Authority’s property acquisition process. Among the questions Vidak wanted answered:

• Has the Authority’s contractors issued any property acquisition offers that the property or business owners were not involved in for the appraisal of their property or business?
• What policies and procedures has the Authority given to its contractors in order to obtain property necessary for the completion of the High-Speed Rail project?

After hearing testimony from the High-Speed Rail Authority, the Joint Legislative Audit Committee rejected Vidak’s audit request on a party-line vote.

“There seems to be a misperception that the High-Speed Rail Authority has unique authorities or abilities with regard to right of way that are separate from other state agencies,” California High-Speed Rail Authority CEO Jeff Morales told state lawmakers. “That’s just not the case.”

A flabbergasted Vidak expressed his dismay at his colleagues.

“I won’t say the result of the hearing was a ‘whitewash’ or ‘cover-up’ for the Authority, but clearly this reasonable request should have been given high priority, not rejected,” he said following the vote.

Assembly Committee rejects Patterson’s property rights proposal

In the lower house, Asm. Jim Patterson, a fellow Central Valley Republican lawmaker, didn’t fare any better with his proposal to place restrictions on when the rail authority can seize property.

Assembly Bill 1138, the Protection from Eminent Domain Act, would prohibit the rail authority from beginning the eminent domain process until all the necessary funding and environmental approvals for the project have been secured.

Central Valley property owners that have held land for multiple generations supported the measure as a way to guarantee that their historic land rights remain intact – if the project is unsuccessful. According to the Sacramento Business Journal, the state has acquired just 209 of the 1,100 parcels needed for the first construction segment from Madera to Bakersfield – with 54 eminent domain lawsuits pending against the state.

“The reality is — this project does not have the funds in line necessary, and it is a grave injustice to the people whose property is being taken,” Patterson said at a press conference earlier this month. “We join with our Central Valley neighbors who are concerned that their property will be taken by the state for a project that doesn’t have a clear funding source and could be abandoned altogether, leaving these hardworking families with nothing.”

Yet, the Assembly Transportation Committee ignored those concerns and defeated Assembly Bill 1138 on a party-line 5-10 vote, with all Republicans in favor.

With ongoing questions about ridership estimates and travel times, the project’s viability remains very much in doubt. CalWatchdog.com’s Chris Reed has pointed out that the chorus of high-speed rail critics is growing – with even liberal journalists questioning the project.

“We are rapidly exiting the realm of rose-colored glasses and entering the realm of pure fantasy here,” Kevin Drum, a writer for Mother Jones magazine, wrote last year. “If liberals keep pushing this project forward in the face of plain evidence that its official justifications are brazenly preposterous, conservatives are going to be able to pound us year after year for wasting taxpayer money while we retreat to ever more ridiculous and self-serving defenses that make us laughingstocks in the public eye.”

Prices are soaring in the blue-collar Bay Area suburb. The Zillow.com home price index is up 33.7 percent this past year in the city, reducing the number of homeowners who owe more on their loans than their homes are worth. And some homeowners have already gotten help. Twenty percent of all Richmond homes with underwater loans have had the principal on their loans reduced as of January 2013.

Nevertheless, on July 1, the Richmond City Council voted 4 to 3 to use eminent domain to seize 624 underwater mortgages it has identified from private mortgage lenders so as to prevent future foreclosures.  But to pursue condemnation of the mortgages, the council needed a two-thirds majority, or five votes, making the 4-3 vote symbolic, not binding.

The Richmond council members want their city to partner with another city to form a joint powers authority to reduce the legal and administrative costs involved. But other cities appear wary for many reasons, starting with the fact that San Bernardino and North Las Vegas abandoned using mortgage eminent domain after concluding it would severely harm their real estate economies because lenders would stop making home loans.

Most knowledgeable eminent domain experts don’t believe mortgage eminent domain will meet the legal tests required that such actions can only be undertaken for a broad, necessary public purpose — such as seizing land to build a dam or a police station.

The four council members say they are trying to help constituents who can’t get help from the state or federal governments.

A double-whammy on property taxes

Zillow.com reports that 27.8 percent, or 7,584 homes, in Richmond had negative equity as of March 31, 2014.  The median home price during the mortgage bubble was about $444,000 compared to $314,250 today.  That $129,750 gap could mean nearly $1 billion in negative equity in homes, reflecting a potential property tax decline of $10 million a year.

To compound Richmond’s loss of property tax revenues from over-mortgaged homes, its school districts lost 14.61 percent of their property tax revenue this past year due to the August 2012 Chevron refinery fire, and the city lost $6.1 million in revenue.

“Richmond’s decline was driven largely by the change in the refinery’s valuation. County Assessor Gus Kramer said his office valued the Richmond refinery at about $2.75 billion in 2013-14 compared with around $3.75 billion the previous year. The city as a whole was given a net assessed value of $10.89 billion, a decline of more than $1.86 billion; every other city in the county saw an increase in assessed value,” the Contra Costa Times reported in July 2013.

Chevron paid $2 million in fines after the city sued Chevron for costs of fire, police, environmental clean-up costs.

But what appears to be the most common form of eminent domain in the U.S. is typically an appalling assault on liberty. As Justice Sandra Day O’Connor argued in her dissent in 2005’s Kelo vs. New London, it’s commonly used for reverse Robin Hood purposes — taking land from the poor (or poorly connected) and giving it to wealthy, connected developers.

Now we may be on the brink of eminent domain takings in California that would be uniquely odious. I wrote about it in U-T San Diego in reaction to Judge Michael Kenny’s finding that the state didn’t have a legal business plan, sufficient environmental reviews or authority to issue any more bonds for its high-speed rail project:

“These are immense obstacles. Yet instead of acknowledging their seriousness, rail authority board Chairman Dan Richard depicted them as predictable ‘challenges,’ and a spokeswoman said the authority would proceed with its plans to seize land for the project in the Central Valley via eminent domain.

“This is in keeping with Richard’s full-speed-ahead bravado. But is also unconscionable — disrupting the lives and livelihoods of Central Valley residents for a project that is now an extreme long shot solely to create an apparition of progress.

“Before this happens, it’s time for a ‘have you no shame?’ intervention in Sacramento. If Jerry Brown won’t take Richard to the woodshed, then it’s time for some senior Democratic leader to take Brown to the woodshed.

“A decade ago, when he was attorney general, Treasurer Bill Lockyer ripped the ‘puke politics’ of Gov. Gray Davis. Taking away folks’ homes and farms for political theater is politics at its pukiest. In coming days and weeks, we hope Lockyer, Lt. Gov. Gavin Newsom, Sen. Dianne Feinstein or some Democrat of stature has the decency to make this point.”

As with Kelo ruling, backlash could be huge

In 2005, principled believers in property rights were very pleasantly surprised at the sharp backlash against eminent domain triggered by the 5-4 high court Kelo vote to continue to allow land grabs to help local governments increase tax revenue.

I think there’s a chance that if the rail authority starts seizing productive ag lands and neighborhoods of middle-class homes in the Central Valley for a project that appears dead, there would be another backlash, and not just in California.

It wouldn’t just be an obnoxious assault on the property owners facing land grabs. It would be a hateful assault on American norms of fairness and honesty.

We’ll see.

Kanner’s recent analysis  — “Stop the BS About Underwater Mortgage Eminent Domain Takings” — on his website Gideon’s Trumpet tells a different story than what most of the public is reading in the mainstream media. Kanner calls most of the people writing on the subject “clueless” for several reasons.

What clueless media never explain

First of all, Kanner points out that the city of Richmond will have to pay just compensation to lenders — not some “bargain basement figure pulled out of thin air” so that the city and its mortgage carpetbaggers can reap a windfall.  And this compensation has to be deposited in full at the start of the eminent domain action.  Citing Article 1, Section 19 of the California Constitution, Kanner says: “the ‘just compensation’ called for in the state constitution has to be ‘first paid’ – in full, and up front, that is – before any taking can occur.”  Apparently, cash-strapped Richmond is going to borrow the money from its mortgage advisors to make this upfront payment.  This means the city will have to go into more debt.

As pointed out by me elsewhere, this will mean the city will have to pay back its mortgage consultants’ investors instead of the investors of the banks that hold the mortgages.  Whether the courts would allow mortgage lenders to be stiffed to enrich mortgage consultants working for cities is doubtful.

Secondly, Kanner says Richmond will have to pay “fair market value” which is defined as the “highest price” and not some bargain price coerced from a seller under duress of the eminent domain law.  In other words, Richmond and its mortgage partners cannot pay a low-ball price to make a profit for themselves on the backs of lenders.

Kanner says that if Richmond’s “harebrained scheme becomes a’cropper, as it likely will, for one reason or another, it won’t be the first time Richmond got its greedy finger burned playing with eminent domain.”  Kanner cites the 1977 case of Richmond Elks Hall versus the City of Richmond Redevelopment Agency (561 F. 2d 1327 – 9th Circuit).  This case is one of the leading cases of eminent domain abuse in the state wherein the courts ruled against a city trying to pick up properties on the cheap.  The court rejected Richmond’s low-ball compensation in that case.

Eminent domain arbitrage: buy low, sell high

According to the compensation formula reported by the city’s mortgage advisors, the city can only make mortgage eminent domain work by arbitraging –– buying the mortgages at the lowest price and then allowing its mortgage middlemen to sell them for the highest price.  Courts have historically rejected the tactic of cities trying to to downzone a property so it could be condemned on the cheap.  The same principle of banning municipal arbitraging would likely apply to the city of Richmond.

Richmond would also have to pay damages to lenders for any losses to their whole loan portfolio.  Kanner says that Richmond’s scheme to take only mortgages where the homeowners are making payments would leave lenders with only bad mortgages that are in foreclosure.  Thus, Richmond would likely have to pay damages.  In my experience as an appraiser for a large public utility, sometimes damages can exceed the whole value of the property.

Richmond will also have to pay its own attorney fees.  And if the city loses each court case, it will have to pay the lenders’ attorney fees.  It typically costs a minimum of $50,000 for legal representation in eminent domain cases. Damages and attorney fees alone could eat up all the profit that Richmond and its mortgage consultants expect to make.

Where is the condemnation of condemnation?

Kanner views the upcoming eminent domain trials as “spectator sport” brought about by harebrained academics, greedy mortgage consultants, “big shot lawyers” who are ignorant about eminent domain law, and cash-strapped cities who hope to plug holes in their pension plans with ill-gotten gains from eminent domain.  The city of Richmond thinks it would reap $48 million under this scheme. To imagine what Richmond is doing imagine the city of Bell in Los Angeles County using eminent domain to fund fat-cat salaries, perks and benefit plans for the City Council and its cronies.

Mortgage eminent domain in Richmond is likely to backfire in a big way.  Are elected leaders in Richmond prepared for recall elections when all this backfires on them?  Stay tuned.

By Nick Sibilla

Carina Alvarez has a dream for a comfortable retirement.  But it’s turning into a bureaucratic nightmare.

Carina bought a four-plex on Mobley Lane in Hemet for $170,000 back in 2010 as an investment.  She then spent $60,000 overhauling the property.  She repaired the roof and replaced carpets, flooring, bathtubs, locks, windows, water heaters and kitchen cabinets—just a few of her many improvements.  To help Hemet crack down on illegal activity in rental properties, Carina joined the city’s Crime Free Multi-Housing Program.

But Mobley Lane has taken a turn for the worse.  According to Carina, the area has turned into a “ghost town,” while “taxpayer-funded property is being left to rot.”

Unbeknownst to her when she first bought her property, the city of Hemet had a very different idea for Mobley Lane.  The city planned to acquire all 16 four-plexes for an affordable housing redevelopment project.  In 2010, the Hemet Housing Authority purchased 11 of the 16 properties, but then boarded them up.  Six months after she moved in, Carina received a letter from the city that Hemet wanted to buy out—or potentially force out through eminent domain—Carina and the other three remaining private property owners on Mobley Lane.

The state’s redevelopment program had allowed cities to siphon property taxes from schools and other public infrastructure and seize land through eminent domain through redevelopment agencies.  But redevelopment became infamous for waste and violating Californians’ property rights.  Over the past decade, the Institute for Justice “catalogued more than 200 projects that abused eminent domain across the Golden State.”  To top it all off, according to California Controller John Chiang, redevelopment agencies have racked up more than $30 billion in debt.

So in 2011, the state abolished its redevelopment program and more than shuttered 400 redevelopment agencies that had operated across the state.  Cities are now charged with winding down their redevelopment efforts and selling off assets—like Hemet’s 11 vacant, boarded-up properties that surround Carina’s homes.

Crime magnets

Meanwhile, those abandoned houses have become a magnet for crime.  Mobley Lane has been plagued with break-ins, trash, car thefts and graffiti.  Thieves strip metal from outdoor air conditioning units.  Carina even had to notify the city after she learned a drug dealer was living in a Hemet-owned four-plex.  After a year of living on Mobley Lane and dealing with the high crime, Carina moved out, saying, “It was too dangerous for me to live there.”

She now lives in Orange County, but continues to rent out her property on Mobley Lane.  Yet the city-owned, vacant four-plexes are still damaging her property values.  “We’re losing $1,000 every month because of the vacancies,” she said in an interview. 

Frustrated with this urban decay, last July Carina and another property owner devised a plan to revitalize the neighborhood.  The two brought along two investors who are willing to offer more than $2 million to purchase all 11 four-plexes from the city.  Carina hopes this private redevelopment would turn Mobley Lane into “a nice gated community.”  Considering that Hemet is currently facing a budget shortfall of $2.7 million, that private investment could be a huge boon.

Yet Mayor Robert Youssef called that plan “premature.”  In an August 2012 letter, he stated the city “must first gain clear direction from the State regarding redevelopment dissolution and then after perhaps can entertain proposals to clear or redevelop the properties.”

But as of January 2013, 34 redevelopment agencies around California have been completely dissolved.  This list includes agencies in cities much bigger than Hemet, like San Francisco and Sacramento.  So why can’t Hemet move more quickly to liquidate the Mobley Lane project to willing investors?

For Carina, she just wants this Mobley Lane fiasco to end.  She wants people to know “the injustice of what the city is doing to us.”  Her neighborhood has deteriorated and bureaucrats continue to stonewall her private redevelopment plan.  “It’s been three years.  When are they going to do something?”

Nick Sibilla is a Maffucci Fellow at the Institute for Justice.