Brett Nelson, 08.10.05,
NEW YORK - As if small business owners didn't have enough to worry about. In addition to the trials of satisfying customers, inspiring employees and paying the electricity bills, entrepreneurs now have to sweat the not-so-distant chance that they could wake up to a Caterpillar (nyse:
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people ) bulldozer plowing through their parking lots. About a month ago, the U.S. Supreme Court dusted off an age-old legal maneuver called "eminent domain." Traditionally, eminent domain laws have granted local governments the power to seize property for public projects as roads, parks and libraries--not for economic development projects such as hotels and shopping malls that promise to pep up economically sluggish areas, fill tax coffers and--more to the point--fatten developers' wallets. But in late June, the court gave the city of New London, Conn., the right to take property belonging to Susette Kelo and some other local home owners in order to build a hotel, offices and a pedestrian river walk to complement a nearby Pfizer (nyse:
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people ) research facility (see:
Supreme Court Takes On The Public). Typically, a local authority must show that the surrounding area has fallen into blight before it can seize the property; not so in the Kelo case. The ruling has since touched off a torrent of protest nationwide--and has encouraged other local authorities to push the eminent domain envelope.
"About 30 states are moving ahead with condemnations for private development," reports Lisa Knepper, communications director for the Institute for Justice, a public-interest law firm.
"People's fears are well-founded." States with broader interpretations (read: in the developers' favor) of eminent domain include New York, California, Florida, Missouri and Maryland. On the bright side, Alabama and Utah have passed restrictions on eminent domain for private development. There is no central repository for information on changes in eminent domain, but the
Institute for Justice and the
National Conference of State Legislaturesboth offer some insight.
The original purpose of eminent domain was to make it easier for governments to set up their operations. If a local authority needed a courthouse, it could seize the land, at some price, and build one. Controversy over eminent domain heated up in 1981, when the Michigan Supreme Court granted the city of Detroit the power to seize thousands of homes and businesses in an area called Poletown, home to a large Polish population, so that General Motors (nyse:
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people ) could build a plant there. While the city argued the new plant would create jobs, and therefore qualify as a "public use" project, opponents said it was a giveaway to GM. Last year, the Michigan Supreme court reversed its decision. Now with the Kelo case, the tide has shifted again. What's an entrepreneur to do?
The good news is the Fifth Amendment establishes that private property shall not be taken for public use "without just compensation." So while most property owners and tenants have slim chance of stopping an eminent domain proceeding in its tracks, say, by lobbying their local jurisdictions, they can make the best of a bad situation by taking pains to ensure they are fully compensated for the damages wrought by the condemning authority.
The key: Know what your assets are worth. At a minimum, this will involve enlisting lawyers, accountants, real estate appraisers and perhaps an engineer or two to help you determine the "highest and best use" for your property. Thankfully, most cases settle before juries get involved.
"A condemnation lawsuit is a war," says Matthew Deal, partner at Lewis Realty Advisors in Houston. Property owners and tenants often wrangle over how to split up the booty. "They end up suing each other," says Deal. Rules for recouping expenses vary from state to state. For example, some California businesses owners can be compensated for goodwill--namely for the value of their enterprise based on location, traffic patterns and other intangibles in excess of the bricks-and-mortar assets--while those in other states don't have that option, says Michael Thornton, partner at law firm Nossaman, Guthner, Knox and Elliott in San Francisco. Other costs such as attorney's fees, moving expenses, lost profits, increased costs of operation and other damages may or may not be compensable.
Different, too, are the provisions regarding a "partial take" (when only a portion of your property is taken) and a "total take." In Florida, for example, a total take precludes payment of business damages, says Jeffrey Savlov, partner at Savlov and Anderson, a Tallahassee firm specializing in eminent domain. "The Florida Department of Transportation has been known to exaggerate their need for a total take," he quips. If you're lucky, you might get more for your business than you would have thought it worth in its current form. A mobile home park may be worth $800,000 more as a storage facility, as one of Thornton's clients discovered back the late '90s. For all the vagaries of the eminent domain process, one thing is certain: Expect your lawyer to take a hefty cut--perhaps a third--of the difference between the government's initial (low-ball) offer and what you end up agreeing on. This "contingency fee" is above and beyond the regular fees--and those charged by the appraisers and engineers--that the property owner might recoup. That cut can be fairly substantial. Take an ongoing case involving Thomas Sheen, owner of a used-restaurant equipment store in Orlando, Fla. Citing eminent domain, the Florida Department of Transportation plans to run a new highway overpass through the property. According to Savlov, Sheen's lawyer, Sheen has 50,000 square feet (4,000 pallets worth) of new and used merchandise. Moving costs alone will be in the neighborhood of $500,000--that is, if there was another suitable and available place within three counties that could house it all. The FDOT has offered $2.5 million. "We're going for more than twice that," says Savlov. If the figure winds up at $6 million, at 33%, that means Savlov would pocket $1.15 million. Savlov did not specify the fee arrangement and Sheen did not return calls for comment. While the Kelo case may bring plenty of pain, says attorney Deal, "at least the compensation element hasn't changed." A hint of solace for savvy negotiators.