Legal Briefs

Domain Decision

The Supreme Court finds economic development qualifies as public use.

The U.S. Supreme Court recently decided Kelo v. City of New London, one of the most significant property rights cases in decades. The Court determined it is constitutional for a local government to condemn non-blighted private property for purely economic development purposes. The decision turned on whether the meaning of the Fifth Amendment’s takings clause, which states “[P]rivate property [shall not] be taken for public use without just compensation,” includes economic development as a public use. In Kelo, the Court held that, under the right circumstances, economic development can be considered public use under the Fifth Amendment, creating broad implications for municipalities, commercial real estate developers, and property owners alike.

Case Background

Kelo arose out of the city of New London, Conn.’s attempts to acquire a group of private homes by eminent domain as part of an effort to revitalize its downtown and waterfront areas. In 1998, when pharmaceutical company Pfizer decided to build a $300 million research and development facility in New London, the city established New London Development Corp., a nonprofit organization acting with state and local governmental approval to assist in creating related economic development.

NLDC formed a plan to build a conference hotel, marinas, a riverwalk, a museum, and several private residences, as well as office and retail properties, on a 90-acre site near the proposed Pfizer facility. To carry out the development plan, the New London City Council charged NLDC with acquiring the necessary property by purchase or, if necessary, by eminent domain. After successfully purchasing most of the property in the area, NLDC was unable to acquire homes owned by Suzette Kelo and a number of other residents who declined to sell. Since the acquisition of those homes was necessary to implement the development plan, NLDC initiated condemnation proceedings to acquire the properties.

Kelo and the other homeowners argued that the takings clause states that taking property from owner A to give to owner B because owner B would make more economically productive use of that property stretches the definition of public use beyond the constitutional limits. Even if private economic development was considered a public use, the petitioners contended that no economic benefits for the community could be guaranteed. The city countered that the project would spur economic development, significantly increase property tax revenues, and create jobs.

A divided Connecticut Supreme Court (4-3) held that under the U.S. and Connecticut constitutions, the taking of land as part of an economic development project qualified as valid public use. The Court rejected a more stringent test that would have forced the city to provide conclusive evidence that the anticipated economic benefits actually would materialize.

In 2004, the U.S. Supreme Court granted a legal review on the question of whether the taking of private property solely for economic development purposes qualifies as a public use within the meaning of the takings clause.

Analyzing the Court’s Decision

In a 5-4 ruling, the U.S. Supreme Court affirmed the Connecticut Supreme Court’s holding that New London and NLDC’s exercise of eminent domain was constitutional. Writing for the majority, Justice John Paul Stevens stated that “over a century of case law” dictated that “carefully formulated” economic development projects such as New London’s are permissible public use. Justice Stevens rejected the property owners’ argument that economic development never qualifies as a public use, because public use jurisprudence “eschew[s] rigid formulas and intrusive scrutiny.”

Acknowledging the efforts of the property owners in this case, Justice Stevens noted “the necessity and wisdom of using eminent domain to promote economic development are certainly matters of legitimate public debate,” and he emphasized that nothing in the Court’s opinion “precludes any state from placing further restrictions on its exercise of the takings power.” The Court stressed that the creation of more than 1,000 jobs in an economically distressed city made the takings “reasonably necessary.”

Justice Anthony Kennedy, the critical swing vote in the decision, wrote a separate concurrence stating that there may be some occasions when the courts could presume an “impermissible private purpose.” However, in this case the development plan primarily was aimed at benefiting the local economy as a whole rather than just Pfizer’s or the project developer’s private economic interests.

Future Implications

Whether the decision will make it easier for private developers involved in municipal public/private partnerships remains to be seen. In making the decision, the Court emphasized that New London carefully had formulated a development plan that it believed would provide appreciable benefits to its residents. Still, the decision preserves a role for lower courts to evaluate challenges to the use of eminent domain for economic development. Judicial scrutiny clearly will be applied in cases where the alleged public benefit is incidental or a pretext and the intended primary beneficiary of the economic development is a private entity. In such cases, lower courts may evaluate the purpose of and motive behind property transfers.

As Justice Stevens explicitly noted, states may enact further restrictions on the exercise of the takings power, and many already have. In this respect, it is important for commercial real estate professionals to monitor the legal developments regarding eminent domain in both the courts and their respective state legislatures.


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