Post-Post-Kelo Urban Renewal Legislation

 By William J. Scheiderich

William J. Scheiderich is an assistant city attorney of Beaverton, Oregon, and co-chair of the Condemnation Law Committee. This article is an edited version of Mr. Scheiderich’s Condemation Law Committee Hot Topics presentation during the Section’s Spring Council Meeting in San Jaun, Puerto Rico.

 The National Conference on State Legislatures website (ncsl.org) lists those states where legislation, citizen-initiated ballot measures, or constitutional amendments were enacted in reaction to the U.S. Supreme Court decision in Kelo v. City of New London, 545 U.S. 469 (2005). At least twenty-one states now have limited or have outright prevented the use of condemnation to acquire property for “economic development,” and many of them also have re-defined what constitutes “blight.” Many make an exception for taking property that constitutes an “immediate threat” (whatever that is) to public health, safety, and welfare but thus allow taking only single sites, which could limit plans to assemble an area for redevelopment. Those enactments are at odds with the traditional logistics of urban renewal.

In Oregon, a citizen initiative, enacted in 2003, effectively reversed state legislation promoting economic development. At that time the legislature found that measures to address such conditions as decreased employment opportunity and “lack of sites and facilities for orderly and necessary retail, commercial and industrial growth” are “deemed a public purpose, and the acquisition of property for such purpose is deemed a public use.” Or. Rev. Stat. § 280.415. A companion statute provides that to carry out that purpose, a city may acquire by eminent domain “any land” and other improvements “which are deemed necessary in connection with an eligible project” and may then “sell and convey all properties acquired . . . for such price . . . as the city may determine.” Or. Rev. Stat. § 280.425.

With passage of Ballot Measure 39 in 2006, Oregon law now forbids condemnation of private real property “used as” a residence, business, or for farm or forest if “at the time of condemnation [it] intends to convey fee title to all or a portion of the real property, or a lesser interest . . . to a private party.” It makes an exception for property that constitutes a “danger” by reason of “contamination, dilapidated structures, improper or insufficient water or sanitary facilities, or any combination [thereof]. . . .”

A more extreme example is Arizona H.B. 2675, vetoed by the governor. It would have required a city council to declare by two-thirds majority that a slum exists by finding clear and convincing evidence as to each property. Public use would not include the incidental benefits of economic development “including an increase in tax base, tax revenues, employment or general economic health.”

In typical urban renewal a city adopts an urban renewal plan after first making a factual finding of a blighted area. The case law and the treatises sometimes treat “blight” as a process, not a description of the end result, and a state’s statues may define blighted area. Or. Rev. Stat. § 457.010 is typical. In Oregon a blighted area is characterized by structures that are unfit or unsafe to occupy because of

• defective design or construction;

• faulty layout or overcrowding;

• insufficient light, sanitation, and open space;

• functional obsolescence or dilapidation;

• economic dislocation “resulting from faulty planning” (!!);

• irregular subdivision lots that are wrong-sized for development;

• property layout that disregards contours, drainage, or other physical surroundings;

• inadequate streets or other infrastructure;

• sites that are subject to flooding;

• a prevalence of depreciated values and “social and economic maladjustments” such that tax receipts are inadequate to meet the public services required;

• a “growing or total lack of proper utilization of areas” resulting in unproductive land that is otherwise valuable; or

• population loss that results in further deterioration and added costs to build infrastructure elsewhere.

Thus, a plan to remove blight most likely will target not only those properties that present an “immediate threat” to public health, safety, and welfare but will also include in the plan boundary other properties meeting the above criteria where the “threat” is neither immediate nor obvious. Most urban renewal plans finance the new infrastructure (and sometimes finance new private construction) by diverting the higher property taxes that result from adding value to the area. The larger the area within the boundary, the more incremental the tax revenues are that are available for use for redevelopment. An urban renewal plan includes an end date at which the incremental tax revenue will revert to the use of all taxing districts and not just to the urban renewal agency. The plan will match the proposed expenditures for new improvements to the incremental property taxes diverted from formation to the time of termination.

Against that background consider how an urban renewal plan that requires assembling large sites within a certain boundary by eminent domain, if necessary, can accomplish that when takings are limited only to those individual sites that present an “immediate threat.” Some additional issues that now confront urban renewal after these post-Kelo enactments:

• Restrictions on taking property “used as [. . .]”: What if the property is abandoned?

• Taking property that has inadequate sewer, water, or other infrastructure: Does one measure adequacy by current conditions—whether, say, the property is barely habitable—or measure what is adequate for the property’s highest and best use, which is what will determine the property’s value in a standard appraisal? The highest and best use also goes to determine if there is blight in the first place.

• CDBG (federal block grant) funds for urban renewal: Use of these funds requires that a local program meet one of three national objectives (see 24 C.F.R. § 570.200(a)(2)), namely, that the activity “address slums or blight” on an area basis; or, that the activity “eliminate[s] specific conditions of blight . . . on a spot basis not located in a slum or blighted area” (emphasis added); or, that the activity be located in an urban renewal area and is necessary to complete the urban renewal plan.” CDBG funds have “spend down” conditions obligating the recipient to spend the funds as proposed within a time certain or forfeit them.

• Tax consequences of takings under threat of condemnation: Offering to acquire property voluntarily “under threat” allows a property owner certain income tax consequences, but only if the condemnee has a then-present belief that, but for offering to sell, the condemnor would obtain title by judgment. This offer factors often in reaching mutual purchase and sale agreements in lieu of condemnation. Some post-Kelo citizen-initiated ballot measures mistakenly foil this technique by allowing a potential condemnee to sell the property to another private party (presumably for a better price than offered by the condemnor) while the property is “under threat.” The IRS, of course, is not bound by such state measures.

• Oregon and some other states now allow for a trial court independently to decide all factual findings as to property condition made in an urban renewal plan “without deference to the agency.” That implies that this cause of action is not limited to writ of review, when the standard of review is substantial evidence, and it creates much more delay before urban renewal may go forward, irrespective of any time limitation on, say, spend down of federal funds.

Initiatives and state legislation meant to “take back” property post-Kelo seem poised to seriously delay or even defeat the best-laid urban renewal plans from going forward. The redevelopment agency associations as of this writing appear to be in the early stages of dealing with loss and there is little to show in the current literature that any have reached “acceptance,” much less “bargaining” with state legislatures to fix the overreactions of last year. Consider that New London, Connecticut, planned to take Ms. Kelo’s property as part of a redevelopment plan that was many, many years in the making.

For an interesting proposal for going forward, see Marjorie Ramseyer Bardwell & James Geoffrey Durham, Transfer Fee Rights—Is the Lure of Sharing in Future Appreciation a Flawed Concept?, Prob & Prop. 24, May/June 2007, which discusses a technique to create a conveyable fee property interest that reserves rights of appreciation to the grantor.