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Court Case Over Blight Reveals Decrepit System

The recent San Diego Superior Court decision (Community Youth Athletic Center v. City of National City, et al.) to reverse the City of National City’s redevelopment plan amendment is more than meets the eye.

Touted as a victory for land owners not desirous of being paid “just compensation” for the taking of their property when, in fact, they want to keep their property (in this case an “at-risk” youth boxing club), the decision has the potential to form the basis for new law or interpretations on how eminent domain is administered by every city in the state.

Local land surveyor, planner and engineer Michael Pallamary, who represented the Washington, D.C.-based Institute for Justice (which provided attorneys for the youth athletic center) as an expert witness called it “arguably one of the most important land use cases to be decided in years.”

He testified on the absence of valid information on how to correctly apply the state’s eminent domain findings relative to blight in California. Among other things, he opined that the city “came to the table with a foregone conclusion and then developed a fabricated set of ‘facts’ to support that conclusion.”

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In analyzing the “findings” of economic blight asserted by the city, Pallamary said that the city had cherry picked select data and that this became the basis of what he termed a “planned deceit.”

Antiquated System

I have no doubt he is right, although, I find it difficult to fault the City of National City entirely on this matter. They are a victim of California’s redevelopment legal requirements and an antiquated system of redevelopment.

The issue came about when the city determined that the boxing club sat on “blighted” property — a must-have determination in order to proceed with obtaining the property under state law. Once declared “blighted,” the city could then buy the property and redevelop it.

The boxing club didn’t think it was blighted property.

The city did.

The irony is that blighted or not, nothing could have been or will be built on that site for years to come. There was a brief moment when a proposed high-rise residential tower might have been built. However, the city dragged its heels — as it did on most of their other redevelopment projects — and missed the market window. No project of this magnitude is feasible on this site now.

In other words, this has been an exercise of redevelopment promiscuity, with no real, achievable development outcome.

Actually, that is a good thing. If the project had been built, it probably would have ended up more blighted than it actually is because few of the units would have been sold, and the project would long ago have ended in failure, either foreclosure, bankruptcy, bank sale or some other decrepit end.

What happened here is actually at the heart of the redevelopment debate. Cities need the redevelopment tool to create new development and investment in older urban communities. Redevelopment law has been that tool. The law’s ability to designate certain geographical areas as “blighted” gives cities the ability to redevelop.

A Key Tool

First and foremost is the use of “tax increment financing,” a key financial tool which allows a city to project for tax purposes a value of property based on the eventual, realizable value of a new, dense project that might be built on the property.

Tax increment financing “moves time ahead” by creating a bondable value on the incremental difference between the “today” value and the value once the redevelopment is completed. This allows that value differential to be bonded against, so that investors provide upfront dollars. These upfront dollars are then, in turn, used by the city to pay for preparation costs such as better streets, sewers, fire stations, parks, etc.

Without this key tool, most of these projects would not be built within a reasonable time frame — if ever. It is a classic problem associated with the fact that in real estate development the costs to build are realized upfront, but the revenues and profits are only achieved at the end of the development period.

Tax increment funding bridges this timing gap.

What National City sought to do is essentially no different than what many of the municipalities and other public agencies throughout the state accomplish through the redevelopment laws: They employed a broad definition of “blight” in order to get the use of this property.

Many property owners love this, because they get paid a good price for property that would not otherwise be fungible. In other words, they are able to make “liquid” a classically nonliquid property asset in a run-down area. Some (like the boxing club apparently) just do not want to sell or move, and are not moved by the city’s need to relocate them.

Throughout this whole process, the system has been “gamed.” Too many cities have used a very broad designation of “blight” to squeeze more property into the redevelopment areas so that they may use redevelopment law as a transformative tool in their neighborhoods.

Stories are legendary of communities in San Diego and throughout the state that have done this. Ultimately, the tool worked.

But the Institute for Justice lawyers have now successfully argued that the game is dishonest.

I agree.

But I do not agree with those who will now use this decision to criticize or otherwise seek to terminate redevelopment.

The problem is not with the idea of redevelopment. Rather, the problem is with the idea of having to make something “blighted” before it is redeveloped.

Surely, we can explore more honest and creative fiscal strategies to redevelop communities. One idea that should be vetted is the creation of infrastructure overlay zones. These would be geographic areas that are large enough to be bonded against but where “blight” does not have to be designated or properties necessarily “taken.” No city should have to declare an entire area “blighted” to accomplish its civic objectives of improving a community.

Blight should not be the standard, as currently defined.

Cities must retain the right to use eminent domain. It is important to access properties and more importantly, to bring property owners “to the negotiating table” to discuss a fair deal. Strategic acquisitions are important for cities and other agencies.

No Fairy Tale Deals

But no fairy tale deals. The problem with the National City deal was that it was never real.

We need to create incentives for everyone — developers, the community, private property owners and the public agencies (in terms of their fiscal needs) — to facilitate private redevelopment without the city having to intervene.

One lesson in the National City debacle is that cities don’t do a good job at redevelopment. For their few successes (locally that would be downtown San Diego), there are mostly failures and delay. Cities don’t have the same sense of timing and entrepreneurial instinct as the private citizens who actually build.

We need better facilitation tools, but not necessarily intervention tools.

We need to review the entire redevelopment concept at the “30,000-foot level.” It has become a whipping boy for all who despise municipal intervention in community upgrading.

Yet, redevelopment is needed to facilitate change that will inevitably be necessary if the region is going to continue to accommodate economic growth and improvement. In the coming years, this region will be almost wholly dependent on revitalizing existing urban areas. That means “redevelopment” in one form or another.

Gary H. London is president of The London Group Realty Advisors, which provides real estate consulting and economic analysis. Check him out on the Web at londongroup.com.

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