Eminent Domain

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The Intrinsic Value of Poor (or Adaptable) Neighborhoods

Howard Husock’s The Poor Side of Town: and Why We Need It looks at the history of American housing policy since Jacob Riis. Exploring the social and economic value of poor neighborhoods, Husock examines how urban processes are intertwined with civil society, and their traditional role in allowing Americans (especially migrants) to shape their lives and obtain an initial foothold in a commercial society. Husock also explores how a century of American public policy — in particular, the growth of prescriptive land use regulations and the failures of large-scale public housing — has interrupted or distorted the participatory, resourceful urban adaptations that once fostered new communities and small-scale property wealth. My review of this timely and thoughtful book is now up at National Review.

Pace Jacob Riis, many working-class neighborhoods of the industrial age, like this street in Philadelphia circa 1910, comprised small rowhouses or other human-scaled housing options. Source: Helen Parrish, National Housing Association (1911).

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Piano Tuner Defeats Casino Agency — But Why?

Here’s some good news: in New Jersey, the government can’t take your land for a public purpose unless it has, actually, um, specified a public purpose. That’s good. But here’s the bad news: in Atlantic City, a state agency called the Casino Reinvestment Development Authority has spent the past five years trying to do precisely that, to a local couple. Specifically, the agency tried to leverage the state’s power of eminent domain to take away Charles and Linda Birnbaum’s three-story building and “bank” it for an unspecified future use.

Here’s some human context about the decision, from Amy Rosenberg at the Philadelphia Inquirer:

Birnbaum retained the right to keep the home his parents, who were Holocaust survivors, bought in 1969, because the state’s Casino Reinvestment Development Authority could not provide assurance that its plans for the property and surrounding area “would proceed in the reasonably foreseeable future,” the court ruled…. Birnbaum’s mother, Dora, lived in the house on Oriental Avenue until 1998, when she was killed during a home invasion. Birnbaum, who lives in Hammonton with his wife, rents out the upper floors and uses the first floor for his piano-tuning business.

Your tax dollars at work, New Jersey. It’s good that the court said no. But maybe this case is a signal that it’s time for the state to stop acting as a legal henchman for casino developers. Casino gambling has failed to bring back Atlantic City, after more than four decades. It has, however, destroyed much of what once remained of the traditional seaside urbanism of America’s prime Victorian-era beach resort. And it has resulted in perverse scenarios like the one at the center of this lawsuit.

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Missing the Point?

This is what affordable housing once looked like.

Incredibly, Bryce Covert, in a long article at The Nation about the supposed roots of America’s affordable-housing crisis, manages to go on for nearly 5,000 words about the history of American affordability programs and initiatives — while offering only one, almost offhand mention of zoning. And while the focus of the piece is the situation in Los Angeles, migration patterns to Southern California — a huge part of the story there, from post-war internal migration to more recent immigration –don’t even get a passing nod.

The ebb and flow of public monies for housing construction certainly makes for an interesting angle about the changing political philosophies of the United States over the past century. And, to be sure, large-scale federal housing initiatives backed by the power of eminent domain created a lot of new, often spacious units during the post-war period. But that the story of such initiatives, and their decline or disappearance, provides a satisfactory explanation for the current housing crisis is not accurate.

The private housing market has always provided the overwhelming majority of housing units in the United States. (For decades, it has also been heavily subsidized by taxpayers through the mortgage-interest deduction, as well as other elements of federal, state, and local tax policy — but that’s a separate issue.) And until fairly recently, the private housing market has produced sufficient housing to meet demand. What has changed is that, as population has grown, and the remaining land within commuting distance of major cities has dwindled, markets have collided with local zoning policies that prevent new construction. This has chronically limited the number of units, placing a premium on each and every one. Without new units, subsidies to individual households will only push rents even higher.

The argument that poor people cannot afford the carrying costs of new construction is also missing the point. When land prices are not artificially inflated by a policy-imposed scarcity, middle-class and wealthy households, by and large, can afford the carrying charges for new units. Cheaper units then “filter” into the market in older buildings, whose construction costs have been paid off; a knock on effect is that these cheaper units in older buildings, when they exist, can provide a counterweight to forces that might encourage an upward spiral toward exorbitant prices for newer units.

This entire dynamic, which works relatively well in a mixed market, has been distorted by a chronic, artificial shortage of housing units because of restrictive zoning laws. As an aside, some of the public monies now being used to support marginally effective (drop in the bucket) programs could potentially support infrastructure projects, instead, if private development were freed to meet a more meaningful proportion of the current pent-up housing demand.

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Limited Equity: Stable Communities, Affordable Housing

The Amalgamated Dwellings in New York City. Photo: Theo Mackey Pollack.

I have a new article published at TAC’s New Urbs blog, about the history and legal structure of New York City’s limited-equity housing cooperatives, which continue to provide surprisingly affordable, high-quality housing units in one of the most expensive real estate markets in the United States. The piece tells the story about how limited-equity co-ops got started; their philosophical roots; their early successes; why the model declined in popularity; and how an approach that recovers its best qualities might be be compatible with various subsets of the polarized political landscape of contemporary America.

I think there’s little question that the shortage of affordable housing in the regions with the best economies is a major driving force in the structural inequality that characterizes our current moment; and that the biggest beneficiaries of this status quo are rent seekers, rather than actors who contribute anything dynamic or innovative to the economy. Taking the role of speculation out of the equation can do a lot to keep prices in line with what residents can actually afford. For the reasons described in my article, I think this is an important idea that deserves to be recovered and applied in today’s metropolitan real estate economies.

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Preserving New Jersey’s Palisades

A nice partial history of the Palisades Interstate Park, beginning in the late 19th century, when the cliffs were being blasted to make concrete for Manhattan’s early skyscrapers, and continuing through its heyday during the New Deal. (I didn’t know that so many people used to swim in the Hudson!)

This park is still one of my favorite spots. I worked there when I was a teenager, in the summers of 1998 and 1999. I read most of the Beat generation’s greatest hits while manning the ticket booths — at the Englewood and Alpine Boat Basins, the Undercliff Picnic Area, and Ross Dock — selling tickets to visitors who had come to picnic, launch boats, or just explore the woods and cliffs. It remains one of the most pleasant employment experiences I’ve had.

Nice footage of cars and fedoras. The narrative begins around 2:43.

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Land Use Imitates Art

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Here’s a three-dimensional, color map of Los Angeles, in 1909. It’s interesting. You can see the urban core that was beginning to take shape: the concentration of zero-lot line buildings, the canyons of concrete, the traditional green squares, the grid of warehouse blocks near the railroad tracks. Had it not been for the interruption by history — motor vehicles, modern zoning — a more traditional big city might have evolved there.

Here are a couple of surviving examples that I found of urban fabric in the core of Los Angeles, from which you could kind of envision an alternate pattern of how Southern California might have developed:

Broadway / 7th Street, Los Angeles.

Spring / West 4th Streets.

Just north of the urban core is Bunker Hill. You can see it in the bird’s-eye view, above, where the land rises behind the dense grid of streets, and the structures transition from commercial to residential. Most of what was once there is gone today. Here’s an old photograph, looking across Pershing Square:

Downtown-LA-1900

Raymond Chandler described the late stages of the neighborhood’s decline in his 1942 novel, The High Window, as only he could do:

Bunker Hill is old town, lost town, shabby town, crook town. Once, very long ago, it was the choice residential district of the city, and there are still standing a few of the jigsaw Gothic mansions with wide porches and walls covered with round-end shingles and full corner bay windows with spindle turrets. They are all rooming houses now, their parquetry floors are scratched and worn through the once glossy finish and the wide sweeping staircases are dark with time and with cheap varnish laid on over generations of dirt. In the tall rooms haggard landladies bicker with shifty tenants. On the wide cool front porches, reaching their cracked shoes into the sun, and staring at nothing, sit the old men with faces like lost battles.

In and around the old houses there are flyblown restaurants and Italian fruit stands and cheap apartment houses and little candy stores where you can buy even nastier things than their candy. And there are ratty hotels where nobody except people named Smith and Jones sign the register and where the night clerk is half watchdog and half pander.

Out of the apartment houses come women who should be young but have faces like stale beer; men with pulled-down hats and quick eyes that look the street over behind the cupped hand that shields the match flame; worn intellectuals with cigarette coughs and no money in the bank; fly cops with granite faces and unwavering eyes; cokies and coke peddlers; people who look like nothing in particular and know it, and once in a while even men that actually go to work. But they come out early, when the wide cracked sidewalks are empty and still have dew on them.

The urban fabric of Bunker Hill was almost completely demolished in the 1960s under a massive redevelopment plan. For a sense of what was lost: George Mann, a Los Angeles photographer, took this picture in 1959:

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Grand Avenue / 2nd Street. Photo by George Mann, courtesy of Dianne Woods and the George Mann Archives. (Fair use.)

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Using Eminent Domain for Underwater Mortgages

The New York Fed has an interesting white paper out by Robert Hockett, in which the author proposes the use of eminent domain to purchase large numbers of underwater mortgages — as in, the actual financial instruments. The idea targets mortgages whose debt holders are the holders of mortgage-backed securities– so called privately securitized mortgages. The strategy is based on the fact that PSM shareholders are such large and geographically dispersed classes that it is not reasonable to expect them to write-down the values of their claims in the same way that — say — a large bank could do. And, since there’s no cram-down power regarding home mortgages in bankruptcy court, the same write-downs couldn’t even be imposed through equity in cases where distressed homeowners wind up in bankruptcy. I thought the details of the proposal were fairly interesting to read through.

One aspect of the paper that’s really shocking is the following map, showing how many outstanding mortgages remain underwater, by county:

Underwater Mortgages as a Share of All Mortgages, by County, 4Q 2012. Source: CoreLogic Negative Equity Report, via Federal Reserve Bank of New York.

Underwater Mortgages as a Share of All Mortgages, by County, 4Q 2012. Source: CoreLogic Negative Equity Report, via Federal Reserve Bank of New York.

At the end of 2012, blue counties had the lowest rates of underwater mortgages, with increasing rates of negative equity correlating with increasing greenness, yellowness, and then redness. Note that (with the tiny geographic exceptions around wealthy New York City and San Francisco), the places with lowest levels of underwater mortgages are almost all rural areas that didn’t experience much of a run-up in residential property values in the decade before 2008. That’s a lot of pain.

It certainly makes theoretical sense that eminent domain can be used to take personal property — such as contract rights — and not just real estate. But it’s not something that you run across all that often. I liked this paragraph, summarizing the phenomenon:

Forms of intangible property that have been purchased in eminent domain include bond tax exemption covenants, insurance policies, corporate equities, other contract rights, businesses as going concerns, and even sports franchises (Hockett 2012a). Because the law draws no distinctions between kinds of property that can be purchased in eminent domain, it is unsurprising that loans and liens in particular, as one form of contractual obligation among many, are themselves regularly purchased. Among these are mortgage loans and liens, as the Supreme Court and state courts have long recognized.

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NJ Eminent Domain Reform

The New Jersey Senate is considering legislation that would amend the Local Redevelopment and Housing Law (LRHL) to reflect the clarified blight prerequisite from the Gallenthin decision, and also to incorporate a response to the due process concerns that were raised in the DeRose case.

♦  S-2447 would rewrite the ambiguous language of 40A:12A-5(e) to clarify the blight requirement for takings.

The statute presently reads:

(e)    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.

Post amendment, it would read:

(e)    A growing lack or total lack of proper utilization of areas caused by the condition of the title, diverse ownership of the real properties therein or other similar conditions which impede land assemblage or discourage the undertaking of improvements, resulting in a stagnant and unproductive condition of land potentially useful and valuable for contributing to and serving the public health, safety and welfare, which condition is presumed to be having a negative social or economic impact or otherwise being detrimental to the safety, health, morals, or welfare of the surrounding area or the community in general.

♦ The bill would create two distinct classes of redevelopment areas: condemnation and non-condemnation. Councils would be required to choose a class when directing their planning boards to investigate the potential for redevelopment among certain parcels, and future actions would be limited by their choices.

♦  The bill would strengthen the requirements for noticing property owners in potential redevelopment areas, particularly with regard to eminent domain in proposed condemnation redevelopment areas.

The bill is sponsored by two Democrats, Jeff Van Drew (Cape May) and Ron Rice (Essex). S-2447 cleared the Community and Urban Affairs committee with unanimous support (5-0) earlier this month. If you’re interested in how the states are tackling eminent domain issues in the post-Kelo landscape, then the markup is worth a look.

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New Jersey Land Use Update

There were no reported decisions on land use or zoning in the past two weeks, but there was one reported decision on eminent domain last week: In Borough of Merchantville v. Malik & Son LLC, et al., an Appellate Division panel affirmed a trial court’s holding that a borough was not required to negotiate with a lien holder — even though that party had foreclosed on the property at issue — before proceeding to an action against the owner of record, as described in N.J.S.A. 20:3-6. In an opinion written by Presiding Judge Francine I. Axelrad, the panel followed a rule set down in a 1997 case, City of Atlantic City v. Cynwyd Investments, which had held that the title owner was the proper negotiating partner for a public authority in a condemnation; the panel was unpersuaded by attempts to distinguish the earlier holding (which was based, among other things, on the practicality of not requiring the government to enter negotiations with every potentially interested party) from the case on appeal. On a separate point, the court held that the the owner of record in this case, who had rejected the Borough’s one-time offer, had failed to subsequently provide evidence that would counter the fairness of the Borough’s underlying appraisal. Among other things, the court reiterated a rule that previous purchase offers for much higher amounts (but which never manifest as sales) will not negate the findings of a formal appraisal.

Among unpublished opinions, one recent case addressed an inverse condemnation claim flowing (in part) from the actions of a planning board. In Woodruff v. U. S. Home Corp., et al., an Appellate Division panel affirmed a trial court’s granting of summary judgment to the Township of Upper Deerfield, in Cumberland County, based on the fact that the challenge to the planning board’s approval of a subdivision was time-barred by Rule 4:69-6(a), and did not meet any of the established criteria for extending the 45-day period of time, under Rule 4:69-6(c), “in the interest of justice.” The court also affirmed the trial court’s decision that storm water runoff from the subdivision’s board-approved storm water management system did not constitute a compensable inverse condemnation. Following the federal criteria for takings claims, the A.D. based its affirmation on the lack of any permanent, physical occupation of the property, and the minimal impact of intermittent water in an unused ravine on the claimants’ use of their property. As always, the temporary New Jersey Courts links are alive for now, but the opinions will be archived at the Rutgers Law Library next week.

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Subprimes into Land Banks: A State Bill

An interesting proposal, close to home: S-1566 was proposed in the New Jersey Senate by Democrats Barbara Buono and Raymond Lesniak. The bill is similar to a proposal in Truthout that LT linked to last month: It would authorize the state to acquire foreclosed properties, in order to assemble an affordable-housing land bank. Properties in the program would be conveyed to qualifying buyers with 30-year deed restrictions on future sale and rental prices; allowable prices would be pegged to an affordable ratio of the region’s median income.

I think this proposal is a good step. It would be hard to overemphasize the importance of the role that a durable stock of affordable housing could play in improving the economic health and social equity of New Jersey’s communities– or the price that the state has already paid in these areas for the absence of such housing. Since the 1970s, this state has followed the most affirmative approach to inclusionary housing in the nation. Yet, all of the statutory attempts to comply with the Mount Laurel doctrine have been inadequate to solve the state’s housing crisis. S-1566 strikes me as a modest but practical new way to approach the challenge of creating durable, affordable housing in competitive metropolitan land markets. Incidentally, the NSPs championed by HUD (under both Bush and Obama) have followed a similar approach, with deed restrictions and median-income ratios.

I would love to see an amendment to this bill that actively encouraged the formation of limited-equity co-ops, in order to develop high-density, privately-owned communities on some of the acquired lands. Obviously, this would work better in some places than in others. It worked well in New York City during the mid-20th century, and it could work well again in metropolitan New Jersey today. Another notable absence from the language of S-1566 is any reference to eminent domain powers. Presumably, the lenders wouldn’t bargain too hard for a lot of these properties, in the first place. However, the New Jersey Constitution of 1947 explicitly authorizes the use of eminent domain to acquire blighted parcels (N.J. Const. art. VII, § 3, ¶ 1), and I’d imagine that abandoned foreclosed properties would meet even the strict Gallenthin criteria for defining such conditions, if such an approach became necessary.

Update, 02/16: S-1566 passed unanimously in the N.J. Senate Economic Growth Committee on Thursday. It will now go before the full Senate, and its counterpart, A-2168, will be introduced in the General Assembly. Clearly there is a broad base of support for this measure in Trenton. In terms of finding bipartisan backing for a good idea, this is great news.

The main question I have now is about how the spending criteria will be developed. The Senate bill doesn’t spell out a set of conditions that must be met prior to property purchases. It may be that these matters are customarily developed on the ground, and not at the legislative level; I don’t know. But whether this issue should be explicitly worked out in the legislation, or somewhere else, I’d like to think a basic principle would be acknowledged with some specificity in the bill: Namely, that the amount paid to an institutional lender for any property acquired under this program must be limited to a price that ensures that the lender will be paid no more than a certain ratio of what the Corporation intends to ask for the eventual sale price of that property, pursuant to the affordability formula. Furthermore, reasonable projected costs for any necessary pre-occupancy repairs, upgrades, and legal work should also be subtracted from the maximum allowable purchase price under this program.

In most cases, I’d think that the right maximum ratio would be 1:1, minus costs, but there may be occasional situations where it’s worth taking a loss to acquire a particular property for a specific purpose. The point is that the state has leverage here: These are unsold, abandoned properties. Enacting language that exercises that leverage for the benefit of New Jersey taxpayers could greatly mitigate the potential for program losses, and quell public suspicions that a government program might overpay lenders to acquire low-value properties. In exchange for greater solvency and legitimacy, such language would likely result in at least two trade-offs: First, it would likely reduce the total number of properties in the program portfolio. Second, it would sharply reduce the number of program properties in expensive neighborhoods. But I think these outcomes would merely emphasize the limitations of this solution. At best, this program could be one more piece of a larger housing puzzle.