Real Estate

Eminent domain: Whose land is it anyway?

Nine years ago, James Dupree bought a rundown warehouse and onetime horse stable in Philadelphia so he could convert it into an art studio. The 64-year-old muralist and painter knew he would have to spend thousands of dollars to fix it up.

What he didn't know was that the city was going to use the power of eminent domain to take the property and convert the block where Dupree's studio sits into to a high-end shopping area.

John Nordell | Christian Science Monitor | Getty Images

"It started right after I purchased the building," explained Dupree, who has been fighting the seizure in court. "They had called this area a blight several years ago, but didn't move on it until 2005."

"It's nothing more than a land grab," said Dupree. "And the kicker is the developer who was going to build the shopping area backed out of the deal."

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While the number of eminent domain cases are hard to pin down, according to experts, Dupree is part of what appears to be a growing caseload of homeowners and businesses facing the loss of their property over government seizures.

"I think there are more cases and as a result, more publicity about them," said Scott Gizer, a business litigation lawyer at Early Sullivan. "There's more land taken for the upgrading of infrastructure like bridges and roads and a lack of land for development."

"But whatever the reason, it's a hot-button issue with people and creates a negative feeling toward government," he said.

Next 25 years in commercial real estate
Next 25 years in commercial real estate

Many countries, like Italy, France, Canada and Pakistan, have some sort of provision allowing the government to take over private lands. In the U.S., the policy dates back to the Constitution, specifically the Fifth Amendment, which provides compensation for land taken for the "public good."

Most court challenges to eminent domain have been rejected over the years and in some cases have led to expansion of the practice. Experts point to a 2005 ruling by the U.S. Supreme Court , Kelo v. City of New London, as a game changer.

That ruling affirmed the authority of New London, Conn., to take nonblighted private property by eminent domain for the purpose of increasing municipal revenue.

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"That ruling allowed the taking of residential property under the idea that it was good for the people," said Nicholas Chop, director of litigation at Integra Realty Resources. "It's really opened up the floodgates when it comes to eminent domain."

As a result of the Supreme Court ruling, some states have passed legislation to curb the power of eminent domain—from prohibiting eminent domain for economic development, to requiring compensation for more than fair market value.

But those measures do not supersede federal laws that allow the national government to use eminent domain.

(An ongoing, high-profile dispute in Nevada between the U.S. Bureau of Land Management and rancher Cliven Bundy does not involve eminent domain. In that case, a court ruled that Bundy must pay back fees in order to continue to graze his privately owned cattle on public lands. Bundy claims that he should not have to pay those fees because his ancestors ran cattle on the land before the BLM was formed.)

Farmers wanted
Farmers wanted

For those who have gone through it, eminent domain can be devastating.

"It's taken an emotional and financial toll on us for sure," said George Kosser, vice president of operations for Karp Associates, a third-generation manufacturing company, now based in Melville, N.Y.

Karp's previous location in the Maspeth section of New York City was seized in 2006 by the state Department of Transportation in order to make way for a new bridge to replace the nearby Kosciuszko Bridge.

"People from the DOT came in the front door and said this is what's going to happen," explained Kosser, whose firm employs 135 people—of which nearly all moved to the new location, about 30 miles away.

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"We knew we couldn't really fight the takeover, but the issue for us is fair compensation," said Kosser. He added that the company is still waiting for a final payment from the state government, even though an agreement was signed months ago.

"We spent more than a million dollars on new facilities and new equipment," Kosser said. "The state paid for what they took but not for what we have to buy in new machinery." He added that the state helped with tax breaks for the move, but the final cost to the company won't ever be recouped.

Kosser's point about fair compensation lies at the heart of eminent domain, said Jennifer Polovetsky of the law firm Sanchez & Polovetsky, who handled the settlement for Karp Associates.

"Most of the battles are around what's the right value for property and land," said Polovetsky, who once represented the city of New York in eminent domain cases. "It often times comes down to the defendant's appraiser versus the government appraiser and a judge or jury has to decide."

No shortage of cases

Despite the hardships, some analysts, at least in theory, believe in eminent domain.

"It serves an economic development purpose that often goes unnoticed," said Rebecca Lee, a partner at the Boston-based law firm, Edwards Wildman, and whose clients include real estate developers.

"For example, in Boston, eminent domain established clear title to land parcels left over from highway and railroad projects, and allowed for developing affordable housing," said Lee, who once worked for Boston and New York City redevelopment authorities.

"Eminent domain doesn't always have to be a negative," said Jennifer Polovetsky, referring to her client, Karp Associates. " Even with the problems, there was a positive outcome in the company staying in the state instead of moving elsewhere."

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There's no shortage of eminent domain cases. Landndowners in Nebraska and Kansas are going to court to fight efforts by Canadian firm TransCanada to take over property it wants in the U.S. to build the as-yet-unapproved Keystone Pipeline. Businesses in an industrial section of New York City, Willets Point, are fighting to prevent losing the property for a proposed shopping mall.

And several cities and towns have looked into using eminent domain, to take over failing mortgages and keep homeowners from foreclosures. Perhaps ironically, the federal government, along with mortgage lenders, is fighting those efforts.

There have been some successful attempts, through grass-roots organizations, to limit or stop eminent domain actions on the state and local levels. However, for James Dupree, the fight at this point is over money. He wants around $2.2 million for his property and workshop, which he says is the fair value. The city has so far offered $640,000.

"I've got a court date in about a month, and I'm not looking forward to it," said Dupree. "What I want at this point is for the city to pay for destroying my business."

—By CNBC's Mark Koba.