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Supreme Court Upholds Use of Eminent Domain for Economic Development

Article

June 24, 2005

In the closely watched case of Kelo v. City of New London, a sharply divided U.S. Supreme Court ruled 5-4 that the use of eminent domain for economic development constitutes a valid public purpose and therefore is permissible under the Fifth Amendment to the U.S. Constitution. The decision vests state and local governments with broad power to enact laws allowing for acquisition of private property by eminent domain as part of a comprehensive redevelopment initiative, even where the property to be acquired is not blighted or in need of redevelopment. This article summarizes Kelo and its potential impact on redevelopment in New Jersey.

New London’s Redevelopment Initiative

The Kelo case presented the U.S. Supreme Court with a unique set of facts to test the parameters of the use of eminent domain to promote economic development. Faced with a litany of declining economic conditions which led to it being designated as a “distressed municipality” by the State of Connecticut, the City of New London (the “City”) desired to see its Fort Trumbull area developed in a more economically productive manner. To facilitate this objective, the City — as allowed by Connecticut law — designated the New London Development Corporation (“NLDC”), a non-profit corporation without the power of eminent domain, to act as the City’s agent for implementing the project. The City then authorized the NLDC to exercise the power of eminent domain for the purpose of acquiring property within the development area.

The Court concluded that the City’s determination to embark upon a redevelopment initiative was entitled to deference, in part because it both was comprehensive in nature and benefited the public rather than an individual property owner. Thus, the Court ruled that the project “unquestionably” serves a public purpose.

“Area in Need of Redevelopment” Not at Issue

Connecticut, like many other states, has an urban renewal statute which requires a finding of blight before the power of eminent domain can be utilized to acquire property by eminent domain. However, that statute was not at issue. The NLDC sought to acquire the properties in question under a different statute, one which authorizes use of eminent domain to acquire property for a “business purpose,” which is defined as “any commercial, financial or retail enterprise.” Alleviation of conditions warranting redevelopment therefore was not at issue, and there had been no finding that the existing development was in disrepair. Instead, the Court was presented with a situation where the property was designated for acquisition by eminent domain solely to promote economic development, with the objective of providing a potential increase in tax revenue to the City.

Constitutional Considerations

Kelo forced the Court to juxtapose Connecticut’s virtually unlimited power of eminent against the Fifth Amendment’s “public use” requirement, which provides “nor shall private property be taken for public use without just compensation.” The question before the Court centered on whether the exercise of eminent domain to acquire private property for the purpose of facilitating a private development project constitutes a “public use” within the meaning of the Fifth Amendment, particularly where the economic benefits were uncertain.

Under an established series of precedents spanning half a century, the Court recited a variety of situations in which takings have been held to constitute valid public purposes which meet the constitutional “public use” requirement, such as slum clearance and reduction in concentration of land ownership. Use of eminent domain for economic development, the Court concluded, was fully consistent with these precedents.

Dissent Favors Property Rights

In a strongly worded dissent, four justices asserted that the majority’s decision subjects all private property to eminent domain. According to the dissenters, an economic development condemnation amounts not to a public use, but one for the benefit of private persons. They argued that the takings which the Court has upheld in the past, such as for slum clearance, in and of themselves benefited the public and therefore constituted a public purpose. By contrast, condemning one private use solely to allow development of another does not constitute a public purpose. The result of the Court’s decision, asserted the minority, will likely mean that those with the ability to wield influence in the political process benefit, while those lacking power and resources are harmed.

Implications of the Decision

As a result of the Kelo decision, state courts and legislatures will become the new battleground for economic development condemnations. Kelo gives states a green light to enact laws like the one in Connecticut which, if consistent with the respective state’s constitution, allow the taking of private property for redevelopment, even where no blight or similar finding has been made. At least one state, Michigan, enacted such a law which initially was upheld by its Supreme Court in the early 1980’s, only to be overruled as unconstitutional last year. Over time, a patchwork is likely to develop among states like Connecticut that have both a constitution and state laws which permit economic development condemnations, and those like Michigan, that do not.

Impact in New Jersey

New Jersey currently lacks a statute, like the one at issue in Kelo, which permits the use of eminent domain solely for economic development purposes without a precedent finding that the area in question is “in need of redevelopment.” The required criteria to make such a finding, some of which focus on blighting influences while others do not, are set forth in the Local Redevelopment and Housing Law, N.J.S.A. 40A:12A-1 et seq. (the “LRHL”). A finding as to the existence of only one of the following criteria constitutes sufficient basis to designate an “area in need of redevelopment” which carries with it the power of eminent domain. The criteria, set forth in the LRHL at N.J.S.A. 40A:12A-5, are as follows:

  1. The generality of buildings are substandard, unsafe, unsanitary, dilapidated, or obsolescent, or possess any of such characteristics, or are so lacking in light, air, or space, as to be conducive to unwholesome living or working conditions.
  2. The discontinuance of the use of buildings previously used for commercial, manufacturing, or industrial purposes; the abandonment of such buildings; or the same being allowed to fall into so great a state of disrepair as to be untenantable.
  3. Land that is owned by the municipality, the county, a local housing authority, redevelopment agency or redevelopment entity, or unimproved vacant land that has remained so for a period of ten years prior to adoption of the resolution, and that by reason of its location, remoteness, lack of means of access to developed sections or portions of the municipality, or topography, or nature of the soil, is not likely to be developed through the instrumentality of private capital.
  4. Areas with buildings or improvements which, by reason of dilapidation, obsolescence, overcrowding, faulty arrangement or design, lack of ventilation, light and sanitary facilities, excessive land coverage, deleterious land use or obsolete layout, or any combination of these or other factors, are detrimental to the safety, health, morals, or welfare of the community.
  5. A growing lack or total lack of proper utilization of areas caused by the condition of the title, diverse ownership of the real property therein or other conditions, resulting in a stagnant or not fully productive condition of land potentially useful and valuable for contributing to and serving the public health, safety and welfare.
  6. Areas, in excess of five contiguous acres, whereon buildings or improvements have been destroyed, consumed by fire, demolished or altered by the action of storm, fire, cyclone, tornado, earthquake or other casualty in such a way that the aggregate assessed value of the area has been materially depreciated.
  7. In any municipality in which an enterprise zone has been designated pursuant to the “New Jersey Urban Enterprise Zones Act,” … the execution of the actions prescribed in that act for the adoption by the municipality and approval by the New Jersey Urban Enterprise Zone Authority of the zone development plan for the area of the enterprise zone shall be considered sufficient for the determination that the area is in need of redevelopment … for the purpose of granting tax exemptions within the enterprise zone district…or the adoption of a tax abatement and exemption ordinance …The municipality shall not utilize any other redevelopment powers within the urban enterprise zone unless the municipal governing body and planning board have also taken the actions and fulfilled the requirements prescribed … for determining that the area is in need of redevelopment or an area in need of rehabilitation and the municipal governing body has adopted a redevelopment plan ordinance including the area of the enterprise zone.
  8. The designation of the delineated area is consistent with smart growth planning principles adopted pursuant to law or regulation.

Kelo likely will have little or no impact with respect to the criteria relating to such factors as overcrowding, abandonment, dilapidation and obsolescence. However, Kelo may have great relevance with respect to the LRHL criteria outlined above in e. (lack of proper utilization) and h. (smart growth principles), neither of which requires a finding that an area is blighted or “in need of redevelopment”.

Criteria e. of the LRHL allows a municipality to declare an area “in need of redevelopment” merely upon a finding of a growing lack of proper utilization, resulting in a not fully productive condition of land useful for contributing to public health, safety and welfare. By way of example, this would appear to allow a municipality to declare an area in need of redevelopment based on a finding that an old neighborhood which is not blighted could be made more productive and safer if replaced by a new, better secured (e.g., well lit, monitored and trafficked) property. This is not unlike the situation in Kelo. It could also allow a municipality to declare an area in need of redevelopment simply because it is not developed to the maximum permitted by the applicable zoning regulations (e.g., the existing development has greater than the minimum required setbacks, or is fewer stories than the maximum permitted building height).

Similarly, an “area in need of redevelopment” designation based solely on “smart growth principles” (LRHL criteria h.) can be made without finding the area to be blighted, and appears to be supported by the holding in Kelo which upheld economic revitalization as sufficient justification for exercising the power of eminent domain.

To be fair, Kelo also emphasizes the comprehensive nature of the project at issue as an important factor in the Court’s decision. This, along with the extensive planning which took place prior to the use of eminent domain, underscores the importance of comprehensive planning in both justifying and legitimizing the redevelopment process. Kelo may make it easier for municipalities to defend “area in need of redevelopment” designations based on criteria other than those involving the physical condition of the property, particularly where they are preceded by a significant planning process rather than a cursory investigation resulting from a proposal by a developer. It remains to be seen, however, whether there are circumstances in which use of the power of eminent domain – to implement redevelopment designations based on a lack of proper utilization or based on the project’s consistency with smart growth principles – violate the New Jersey Constitution.

Finally, the Kelo decision has spurred the introduction of legislation relating to the use of condemnation for redevelopment purposes. For example, S-2739 would prohibit the use of eminent domain to acquire residential property for redevelopment, if legally occupied for residential purposes and maintained in accordance with applicable housing codes and standards. If enacted, the bill would prevent the taking of private homes and other residential units, by condemnation, to facilitate economic development.