March 25, 2008
Houston, we have a development takings problem

Joy Ford is what textbooks in law and economics call a holdout problem. Owner of Country International Records, Ms. Ford is something of a Nashville institution, a card-carrying member of the old school music scene. So is her business property, pictured here. bilde.jpg

According to Sunday's Nashville Tenneseean [article here]

The Metro Development and Housing Agency, the arm of the city government that oversees urban redevelopment, has signed an agreement with the Houston-based Lionstone Group to buy Ford's property, then sell it to Lionstone at cost. Backed with the possibility of eminent domain, city officials hope to persuade Ford to sell and clear the way for Lionstone's $100 million plan for a two-building commercial and residential complex.

Here's a rendition of the proposed development.
bilde2.jpg

Ms. Ford has turned down Lionstone's offer of $600,000. Her announced asking price is $12 million. The Tennesean quotes her as saying, "I told them, 'I don't want to sell my property, but if you really have to have this property here's the price."

From an economics perspective, I can think of three important issues at play here. 1) public choice vs. property rights; 2) subjective value vs. opportunism; and 3) private vs. public development. See below the fold if you are interested. Thanks.

1. Public choice: Kelo defers to the states to define public use and protect property against development takings. An interesting question is, how are rights protected when left to legislative majorities?

Like too many of the 34 new state laws after Kelo, Tennesee's new statute has a lot of bark with little bite. While it states that "public use" does not include economic development (or jobs or enhanced tax base), there are numerous exemptions. If the property has been blighted, or if the develoment is for an industrial park, or if the property owner has previously refused the government's offer of fair market value, then it's a green light. Protections are embodied in vague language such as "it is the intent of the general assembly that the power of eminent domain shall be used sparingly, and that laws permitting the use of eminent domain be narrowly construed..." What little property protections in the law will degrade over time. With any regulation, even the slightest loopholes tend to get mined over time. It's no wonder the legal scholar Jed Rubenfeld described the public use clause as being "of nearly complete insignificance."

In the summer of 2007, the Institute for Justice published a "50-state report card" on development takings. The report calls Tennessee's situation "deeply disappointing" and assigns a grade of "D-" (a three-way tie for second to last; nine states got "F" grades). In a new workign paper, Andy Morris [link forthcoming] breaks down the empirical determinants of the IJ report card. Ilya Somin argues the political reasons for legislation to leave broad takings powers [paper here].

My paper with Noel Campbell and Todd Jewell is the first to empirically analyze the new state laws. Our qualitative analysis finds that 12 of the 34 new laws have no bite--they are symbolic or obfuscating in nature. But the other 22 have susbstantive bite. Our paper asks what are the observable determinants of whether a state updates at all, whether the update is symbolic or substantive, and how soon after Kelo a state updates. Race and income inequality matter a lot. So do economic freedom and the value of new housing being built. Paper is here.

2. Subjective value vs. utilitarianism: Where does subjective value end and strategic opportunism start?

When developers first started poking around Ms. Ford's property in 1999, the surrounding area had already declined. The Country Music Hall of Fame had relocated, and the tourist shops and had restaurants followed. It doesn't sound like there was much going on there at that time. Things aparently started to turn around in 2004 when the city built some new infrastructure and a developer build a new nine-story office building. Developers have apparently always had some interest in the area, gradually buying out all of Ms. Ford's neighbors. Yet Ms. Ford has been resisting buyouts the whole time. She argues that her business is location sensitive. The musical acts she signs, mainly upstarts it seems, benefit from being able to network on Music Row, and her building provides a hang out where artists can gather to get their creative juices flowing. On the other hand, who's to say a different entrepreneur won't lease some space in the new development and provide these benefits even better? It doesn't sound like Ms. Ford's company has evern been a big success in music. Lionstone's attorneys say she's simply against any development in the area.

It doesn't sound like a strategic hold out case to me. She would have played that game through by now. But it doesn't sound like a pure subjective value case either. Maybe she's being ideological about it, like her opponents claim. In which case, the city will proceed to force her out and she'll likely get less than $600,000 and she'll have imposed much higher transaction costs on society. From a utilitarian perspective, she clearly needs to go. Of course, from a rights perspective the costs and benefits don't really matter. But how far do her rights extend? This is a puzzling case, I think.

3. Development without eminent domain: Eminent domain has famously (and rightly, IMO) been called the "despotic power."

Lionstone's offer of $600,000 is based on the value they paid for nearby properties. If done legitimately, the city's determination of fair market value would come very close to that figure. So why involve the city? The only difference is its coercive bargaining power, which Lionstone does not have.

One thing is, without Tennesee's bark-no-bite law, none of this would be an issue because eminent domain wouldn't be on the table. If the developers wanted it bad enough, they'd build around her. More likely, she'd sell if they offered enough. For their bottom line, it's less costly to get the government involved, and that should be troubling from any perspective.

Clever and determined developers can almost always find a way to assemble parcels of land (my op-ed on this here.). In a series of papers (try here and here), Bruce Benson explains more and describe the historical development of how we got here.

Posted by Edward J. Lopez at 11:53 AM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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