JMBM Tax Newsletter: The Effect of “Kelo” on California Property Owners

On June 23, 2005, a bitterly divided U. S. Supreme Court upheld a local government’s use of eminent domain to seize private property “for the purpose of economic development.” Previously, courts had looked to the standard of whether property would be directly taken “for public use,” under the Fifth Amendment. However, in Kelo v. City of New London, Conn., the Supreme Court expanded the right of municipalities to exercise eminent domain so long as the property in question was “serving a public purpose,” a seemingly much broader standard.

Historic Standards

The Fifth Amendment of the Constitution explicitly states, “private property [shall not] be taken for public use without just compensation.” Throughout history, government has “taken” property for such public uses as railroads, schools, hospitals, military bases, public utilities, government buildings, and, more germane to the Kelo case, to rectify urban blight. However, Kelo represents the first time the Supreme Court has ruled that eminent domain can be used to condemn property without any showing of blight, and such condemnation power can also be used to transfer condemned property from one private owner to another.

In California

Unlike Connecticut, California’s current laws only allow eminent domain to be used to acquire property for economic development in areas that are deemed to be “blighted.” As defined by the California Redevelopment Law, a “blighted”
area must have two characteristics: 1) it must be located in an urban area; and 2) the blight must be so prevalent and so substantial that it causes a serious physical and economic burden on the community which cannot reasonably be reversed or alleviated by private enterprise or governmental action without redevelopment (i.e., condemnation). Following the Court decision, legislators in Congress and in 28 states, including California, have introduced legislation to greatly restrict the use of eminent domain process.

Conclusion

In the end, if the media and political backlash of the Supreme Court’s ruling is any indication, the pen might be mightier than the gavel. Newspapers have reported that Pfizer, Inc., the pharmaceuticals manufacturer that started the whole controversy when it announced plans to build a global research facility in the City of New London, has halted development plans for the area and is awaiting a state decision on the proper use of eminent domain. In the future, local agencies may be reluctant to use eminent domain for fear that a small project might create a sizeable controversy—one that no amount of positive economic development can easily overcome.

Benjamin M. Reznik is chairman of the Government, Land Use, Environment & Energy Department at JMBM. Contact him at BMR@jmbm.com.