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Tuesday, June 28, 2005

Kelo on the brain

I have two more quick thoughts on Kelo:

1.  As a result of Kelo, shouldn't we expect property values to dip a little bit, at least in some places?  If you are buying property in a blighted town, or in one with known ambitions to attract developers, and particularly if that property is located near open, depressed, or town-owned space, the price should reflect the possibility that your property will be taken.  UPDATE: Of course, if you agree with Kaimi and me, you wouldn't expect anything to change, since Kelo simply reaffirmed pre-existing law and expectations.  (I thought that this point was implicit in my original posting, but perhaps not.  Now it is explicit.)

2.  In order to fix the Kelo problem, at least in part, I propose federal (UPDATE: or state) legislation requiring the government to pay a 10% premium over fair market value in all, or at least some, takings cases.  This will protect property owners from some takings and soften the blow in the rest.

Posted by Hillel Levin on June 28, 2005 at 02:29 PM in Constitutional thoughts | Permalink

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Leaving aside Treanor's claims about regulatory takings, since real takings were recognized, it would be interesting to investigate what kinds of compensations people thought were "just". Since I don't think there were many federal takings at all, we might have to investigate state court enforcement of the same provisions in state constitutions, and even then it would require some knowledge of 18th-century real estate markets (how good, and how trusted, were property value appraisals then anyway?) but it would be an awesome article.

Posted by: Will Baude | Jun 28, 2005 9:37:26 PM

Justice Souter's property value may be about to take a hit from Kelo.

Posted by: Simon | Jun 28, 2005 7:34:41 PM

Hillel,

The leading piece on understandings of the Takings Clause at the time of the founding is Treanor's piece in Penn L Rev. (There are those who disagree with Treanor, of course). And Will is exactly right to point out the Madison's language wasn't FMV, it was "just compensation."

A huge problem with using time-of-the-founding understandings of value is that the regulatory takings doctrine was not recognized at all at the time of the founding. (See, e.g., Treanor). So basing valuation on ideas at the founding is conceptually problematic, to say the least, as relating to the regulatory takings field.

Posted by: Kaimi | Jun 28, 2005 7:24:05 PM

Hillel, I don't know whether the rule was in effect at the time of the founding. My source is Davies, Law of Compulsory Purchase and Compensation 4th ed. I should have looked at it again before making my prior post, because it clarifies that the rule is no longer in effect. Here is what it says (at p. 136) "Section 2 of the Act of 1919, now re-enacted with slight changes of wording by s5 of the Act of 1961, laid down six rules to govern the assessment of market value. . . . The first of the six rules is: 'No allowance shall be made on account of the acquisition being compulsory', which Lord Denning MR has described as being 'directed to the added sop (which was in the old days always given in these cases) of 10 per cent to soften the blow of compulsory acquisition. [The rule] disallows that 10 per cent'. The 10 per cent rule was evolved as a matter of custom and accepted by the courts: notably In Re Athlone Rifle Range [1902 1 IR 433]." If the rule was well established and customary as of 1902, it may have been around at the time of the founding.

I agree with your additional point about discouraging riskier projects, though that would apply to all types of property, not just homes. My work-in-progress is about Home as a Legal Concept, and I'm focused on how homes are treated differently from other types of property. I do think that homes are different, so I think that equity to the homeowner should be paramount in home cases, though I might agree with Vic on other types of property.

Posted by: Ben Barros | Jun 28, 2005 6:07:27 PM

If the point is to induce the efficient level of taking, then I'm with Serkin. I suspect a discount, not a premium, is needed. If the point is to provide equity to the landowner, then a premium is needed.

Or (I'm joking here) perhaps we need a system where the last person to reach a settlement with the government gets nothing. That would help solve the hold-up problem.

Posted by: Vic Fleischer | Jun 28, 2005 5:42:30 PM

Will:

First, I appreciate your elevating me to Professor, but it is not a title which I actually possess. I'm just a dude with a J.D. So Mister Levin, or perhaps even Dr. Levin (if I were pretentious) would be appropriate. But most appropriate would be "Hillel." :-)

I think your idea of an empirical review has a great deal of merit. As an empiricist myself, I'd be interested in doing it. But you point to the biggest obstacle: how to control for the zillions of factors in play. Let me give it some thought.

As for your question concerning the meaning of "just compensation" (i.e. "fair market value" or something more), I must admit that I simply do not have the answer. However, the concept of "fairness" is itself ambiguous. If the Framers intended to adopt what Ben characterizes as a clear British law requiring a 10% premium, using the word "fair" is not the way to do it. I imagine that there has been a great deal of scholarly writing on takings at the founding.

Posted by: Hillel Levin | Jun 28, 2005 5:30:49 PM

Professor Levin:

Pardon my ignorance. You write: "Framers explicitly rejected that law in favor of a pure FMV approach?" Is there evidence that the framers did? There are Supreme Court opinions, albeit recent ones, pointing out that "fair market value" is not always "just", which is what the Framers (actually James Madison, here) picked.

Were takings compensated under the 5th Amendment always compensated at FMV at the founding? (What federal takings were there at the founding anyway? Wasn't federal eminent domain not invented until the 1870s?)

Posted by: Will Baude | Jun 28, 2005 4:50:19 PM

I'm not sure Professor Levin intended the first suggestion seriously, but I think it would be a fascinating project for somebody in empirical law and econ. Of course, searching for a global effect in the counry would be erroneous and too-easily confused, but you could look at the public-use law opinions in each state, and whether it was a matter of state or federal law (and therefore whether it had been overruled by Kelo)... and then compare those jurisdictions where the binding law changed (i.e. those jurisdictions whose state supreme courts had banned economic development takings on federal grounds only) and see if their housing projects behaved differently compared to those where there was no change. You'd still probably want to control for some variable like "propensity to take", because some state political cultures are different than others, but it would be interesting to see if property values noticed.

Posted by: Will Baude | Jun 28, 2005 4:45:08 PM

Ben:

It sounds interesting. A couple of questions:

1. When was the English law in effect? If it was in effect at the founding, isn't it odd that the Framers explicitly rejected that law in favor of a pure FMV approach? Does it suggest something about the relative value that the Framers placed on the whole "home is castle" idea, i.e. that they thought less of private property than the English did? (Mind you, I'm just curious about the Framers' decision. It doesn't have any normative impact on whether or not the 10% premium is a good idea.)

2. In addition to the two benefits you've identified (encouraging non-home takings and compensating for personal value), consider the benefit that I've suggested: by increasing the cost of the taking to the taker, it would scare off developments that are riskier propositions.

Posted by: Hillel Levin | Jun 28, 2005 4:34:26 PM

I've also been toying with the idea of a ten percent premium in a work-in-progress. I picked the idea up from an English law (which may no longer be in effect) that required a 10 percent premium to be paid for taken property. My twist would be to require the premium to be paid only for the taking of homes, in part to encourage municipalities to take other types of property if possible and in part to compensate homeowners for the “personal” value that they place in their homes.

Posted by: Ben Barros | Jun 28, 2005 4:22:14 PM

My colleague (and soon to be Brooklyn assist prof) Chris Serkin has a view (and a draft article) on this 10% premium idea - but I think he thinks that local governments, if anything, under-take. So he'd give them a discount, or at the very least no enhancement. If he's right, then that's yet another thing about Kelo - there's no reason to believe that the local government political process can't, in most cases, adequately protect the rights of homeowners.

Posted by: David Zaring | Jun 28, 2005 4:16:42 PM

Dave: I don't really care about the exact amount of the premium. But I think your reason for favoring 25% over 10% misses something important. Whether I sell my home in the normal course or via taking, my transaction costs (finding a new place, moving, etc) will be the same. So if I would agree to sell at 300K, and you would agree to buy at 300K, then 300K is the FMV. If the government pays 300K, it is already paying FMV. Transaction costs are already included; or if they are not included, then they are also excluded from the 300K that you and I would agree on. A 10% premium means 10% MORE than what the market would bear.

Vic: The 10% (or 25%, whatever) premium is not meant to compensate subjective value; it is meant to balance our knee-jerk reaction against McTakings with our belief that such takings may be beneficial. Add a premium, and only local government and McTakers with very compelling development plans will Take. This will (1) cut down on the number of takers, and (2) for those who still face involuntary takings, they will at least have some consolation.

Posted by: Hillel Levin | Jun 28, 2005 3:35:04 PM

Isn't it possible that instead of a dip in some property values, Kelo might cause a rise in those values? Given that taking a property through eminent domain involves paying FMV, and that this price is often negotiated between the taking government and the owner, couldn't Kelo lead to some increased speculation in land that might be subject to some sort of taking in the future? I think that this might be especially true if the planned future use of the property were taken into account in computing the FMV.

Also, I don't think there necessarily needs to be a change in the law for the case to have an impact on peoples behavior. Increased public knowledge of what the law is might have a similiar impact on behavior. Especially if the rule clarified was established before the 24 hour news cycle.

Posted by: Tshaka Randall | Jun 28, 2005 3:24:12 PM

Is there empirical evidence that people receive typically receive less than market value in these cases? I would think that the Kelo case would boost market values.

In the typical case, I would think that the threat of hold-out litigation would cause developers to pay at least a small premium to market value to most owners. Maybe a big premium. In which case increasing the chances of a taking will slightly increase the current market value.

Legislation to add a premium still might be a good idea if you think people's subjective value isn't adequately compensated.

Posted by: Vic Fleischer | Jun 28, 2005 3:20:57 PM

Ah, sorry Hillel. Too subtle for my (quick) reading!
I tend to agree that a good fix if you are really worried about taking is to increase compensation. Ten percent seems low to me - I'd choose 25% above FMV. (Transaction costs to buy a new place will make 10% above FMV look alot like just FMV in the end.)

Posted by: Dave Hoffman | Jun 28, 2005 2:57:13 PM

Dave:

1. That's precisely what I meant to point out . . . subtly. If this was a change in the law, then there might be some change in values. But there won't be; because, as I argued previously, this isn't a change in the law. One *might* argue that there still could be a change in land values because it is now certain that this surpreme court will allow such takings. But I don't expect it.

2. 10% is just a number I picked out of a hat. As for enumerated powers, I expect that this kind of thing could work under the commerce clause, particularly if you limit its applicability to cases with private developers. Alternatively, you could do what Senator Cornyn did and draft it such that it only applies when federal dollars are to be spent.

Anyway, my point wasn't so much as the legality of it as about what it would accomplish: It would allow the wheels of progress to continue to turn, while still offering added protection to property owners. It is a compromise position between that adopted by New London (takings like this should be commonplace) and that suggested by libertarians (takings like this should never happen). If you don't like the federal aspect of my proposal, just change it to a state law. The point remains the same.

Posted by: Hillel Levin | Jun 28, 2005 2:51:37 PM

Interesting.
1. We would only expect this effect if Kelo changed the governing law, which I don't think it did. Now, Kelo may have highlighted the law, but given the liquidity of the housing market, wouldn't it be safer to assume that redevelopment risk is already incorporated in prices?

2. Why 10% What enumerated power allows this kind of commandeering of state police powers?

Posted by: Dave Hoffman | Jun 28, 2005 2:42:43 PM

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