San Diego Business Journal

SPECIAL REPORT: Cities

Encinitas Takes on the Supreme Court

City Makes Historic Move to Challenge Eminent Domain Ruling

n & #8201;by pat broderick

Eminent domain can be a double-edged sword for developers who, on one hand, can reap big bucks on redevelopment projects, but also run the risk of being seen as heartless home stealers.

Some manage to find a middle ground. But with the recent U.S. Supreme Court ruling loosening restrictions on private property takeovers, all bets seem to be off.

On June 23 in a 5-4 split decision, the high court ruled local governments have the right to take land and, in turn, give it to private developers to spur economic development and tax revenues for the community.

California's eminent domain law is stricter, requiring that seized property must be designated as blighted. But, ask some in the development community, who determines blight?

"The question is, who do you trust?" asked Mike Andreen, the publisher/editor of the Surf City Times in Encinitas and chairman of communications for the Encinitas Chamber of Commerce.

Encinitas City Councilman Jerome Stocks decided not to take any chances and proposed what is considered the first ordinance in the nation to strengthen private property rights in the face of the Supreme Court's decision. On July 13, the Encinitas City Council approved a draft ordinance of his proposal, which is scheduled for final approval Aug. 17.

Under his proposal, the city would not be able to take private property and transfer it to another private owner or project by eminent domain without first calling for a public vote during a regularly scheduled election. Voters then must approve the transfer by greater than a two-thirds vote.

Stocks is especially concerned about the increased vulnerability of property owners who have reaped the benefits of Proposition 13. That measure, approved by the voters in 1978, reduced property taxes by more than 50 percent by capping property tax rates at 1 percent and rolling back property values for tax purposes to the 1975-76 level.

"Owners who have property over 10 years have got a bull's-eye on it," Stocks said at the time he proposed his ordinance. "Our property values have more than doubled."
Andreen observed that Encinitas is "a bedroom community, with no manufacturing bases, a beach town."

"For a constituency where 90 percent of the voters own property, it is a very disturbing measure from the Supreme Court," he said.

Since Stocks announced his ordinance, he said that he has received e-mails from all over the country, with about "99.9 percent" supporting his efforts.

" 'My home is my castle,' that is a core American value, and to have the Supreme Court say, 'We don't think so,' has rocked people," said Stocks.

Matthew Adams, the vice president of government affairs for the Building Industry Association of San Diego, said the builders have a passion for private property rights, but also must be careful not to throw the baby out with the bath water.

"A two-thirds threshold is hard to achieve," he said. "Talk to anybody trying to get initiatives passed. It's a herculean effort at best. The real losers can be the citizens if it affects roads or schools. But we support his intentions to preserve and protect the rights of property owners."

Adams added that, "As homebuilders, the government is taking our land all the time in the name of the environment. We haven't been compensated at all."

But, he said, he doesn't think that California landowners are in any immediate danger of losing their land in light of the high court ruling. Nor does Adams think that California communities need to start passing their own versions of Stocks' ordinance right away.

"I would like to see what kinds of actions come out of Sacramento," he said. "There will be a lot of discussion."

Indeed, there has been some. On July 14, state Sen. Tom McClintock, R-Thousand Oaks, introduced a constitutional amendment that would prohibit the use of eminent domain for private use "under any circumstances."

For public uses, local governments would have to convince a judge that the seizure of property is a last resort, when no "reseasonable alternative exists," and would require that the land be returned to the rightful owner if the public use no longer applies.

John Stoos, McClintock's chief consultant, said if the senator's proposal is successful, it would supersede any local ordinances. But, in the meantime, he said Stocks' ordinance offers a higher level of protection, and legally "should stand scrutiny."

Keith Turner, the chief executive officer of the Encinitas Chamber of Commerce, agreed that Stocks' ordinance should stand up, but noted that since it was introduced, local governments and states around the country seem to be getting on the bandwagon.
"They're lining up behind this," he said. "It's nice to be out front."

Small Business/Big Picture
John Najjar worries about short-term thinking and long-term impacts. Najjar owns the Cardiff Seaside Market, a 20-year mainstay near Coast Highway 101 in Encinitas that anchors a neighborhood shopping center that includes a Starbucks and a Postal Annex, along with a mix of other small businesses.

"The big fear, personally, is when you have thriving small businesses in the community and a municipality that wants tax revenues, they will forgo the long-term effects of the big retailers and end up getting into a situation of eminent domain," said Najjar, who is a partner in the market's property.

Once the small fish are shut down, he said, a big retailer , whether it's a big box operation or a car dealership , can decide to move on to greener pastures, leaving the small fry high and dry.

"Small businesses work in the community and reinvest in the community," he said. "The big retailers don't. They take profits with them and leave. It has a long-term negative effect. It's scary to a lot of people that now municipalities can take your small business or property away in order to get more revenue. I think the thought of not knowing what government is going to do tomorrow to effect your business is mind boggling."

Najjar doesn't feel particularly threatened, although, he added, "there is empty land adjacent to me that would be a little scary." But when and if the time is right, he said, he might consider an offer.

"Everything has its price, I guess," said Najjar. "But nobody wants to be in a situation where they're forced, especially by government, telling you what you can and can't do with your property. The whole idea is scary for anybody."

Funky Leucadia
Fear has been running particularly rampant in Leucadia, one of the five distinctive communities that make up the city of Encinitas. Leucadia is recognized for its giant eucalyptus trees that line Coast Highway's main thoroughfare. It's also a place where anti-gentrification motorists drive around with tags proclaiming their desire to keep the place "funky."

"Leucadians are afraid, because so much is being done behind the scenes," said Bob Nanninga, who owns the E Street Caf & #233; in downtown Encinitas and a party planning/special events home-based business in Leucadia.

"We look at where the rest of coastal California has gone, with strip malls. Leucadia has empty lots on the Coast Highway, and we like it. It's cool. I live in Leucadia, I shop on the Coast Highway, I eat at the restaurants there. We have no problem living in Lecuadia. It's the people who don't live here who want to gentrify it."

Leucadia, he said, has a "funky charm, laid back, unpretentious."
He added: "If they make it look like downtown Carlsbad, why don't we just move to Carlsbad? If we are that blighted, why do property rates still go up?"

Nanninga said he approves of Stocks' ordinance, strengthening private property rights, as far as it goes.

"I think what he's doing is offering a false sense of security," said Nanninga. "You can't count on anything. The language is not strong enough. It should be 'never, never, never.' "

Shortly before the Supreme Court ruling, Leucadia was faced with an interesting dilemma: The community could agree to become a redevelopment area, open to the possibility of eminent domain seizures, but eligible for funding that would help fix a serious flooding problem.

"The same people who fear eminent domain are also the same people who show up at City Council asking them to fix the problem," Andreen said.

But the fear won out, and the Encinitas City Council recently decided not to pursue establishing a redevelopment area at this time.

"The city would have to authorize a study to determine the exact boundaries of the redevelopment areas," said Stocks.

But, he added, community support would be needed to justify the considerable expense.
"If the community comes down and stamps its foot, it can be brought back to life," he said. "But, based on the community feedback, there is more fear about redevelopment than the financial benefits. The City Council decided that we are not in the business of scaring the heck out of the residents."

From a purely business standpoint, said Andreen, the issue remains: Who is going to pay for improvements in aging neighborhoods?

"Leucadia's infrastructure is in very bad shape," he said. "The city, because it's built out, doesn't have a no-growth problem. The growth is here. Our city is like a living organism, as far as capital investment. The money can't go into growth, so it has to go into regrowth, like the Gaslmap Quarter. So, too, can Leucadia address its flooding with or without redevelopment."

Andreen said he knows investors in commercial real estate who believe the future of the city is in Leucadia and are willing to put money there.

In the meantime, the community's flooding issue will have to be addressed in some other way, said Stocks.

"It will take longer, unless we can come up with some kind of federal funding," he said. "It's part of the job."

J. Scott Brown, project manager for Pacific Scene Homes in Old Town, also owns property in downtown El Cajon, where he's working on a mixed-use development.

"I can see both sides," he said of the Supreme Court ruling.

When land was being assembled for Petco Park in Downtown San Diego, he was the executive vice president for the Tom Hom Group, whose block-and-a-half property ended up being incorporated into the ballpark.

"We were on the other side of eminent domain," said Brown. "We negotiated with the CCDC (Centre City Development Corp.). We wanted the ballpark to come. We knew it would be a positive for the city and we worked with them. We didn't get everything we wanted, you never do. But it worked out fine."

On the other hand, said Brown, "Taking people's property should never come easy, especially when we're talking about homes. Most of the government and entities I've dealt with take that very, very seriously. They're looking at it as a last resort.

"There have been governments and redevelopment agencies that have taken advantage of eminent domain, but all the governments I've worked with have taken this seriously and as a last resort. The power needs to be there, where there is blight."
As a builder himself, Brown said he doesn't depend on local governments to do his negotiating.

"I have never gone in as the first order of business and asked a redevelopment agency to condemn a piece of property," he said. "I always try to negotiate with the property owners first.

I don't know anybody who would want to go to court. Nobody really wins when you go to court. Attorneys make money off the deal, but everybody else doesn't seem to do so well. I would prefer to avoid that scenario. It makes you look bad as a developer, trying to take somebody's home.

There are underhanded developers, but the majority of us work hard. We have families. A few bad apples can make us look bad."

What if the property owners resist?

"There are many ways to skin a cat," he said. "There are ways to help somebody, maybe give people an interest in the deal, over and above the purchase price. It all depends on what I'm trying to do."

Oceanside City Manager Steven Jepsen said there are no plans to strengthen local property rights, because, he added, they're already sufficiently protected.

"I can't imagine Oceanside going out and taking property unless it serves the public good, rather than simply raising tax revenues. The public always will be involved in the process and have access to policymakers. I think that if cities went out and wholesale condemned property, people elected to public office wouldn't last very long."

The city of Carlsbad has no eminent domain authority, according to Ted Owen, the president and chief executive officer of the Carlsbad Chamber of Commerce.

"The city's position is unity and community," he said. "The city does things with the community, rather than to the community. If it needed a piece of land, the city would approach the owner to be a partner in the process, and if they didn't capitulate, that's over. The city would find some other way to do the project. Most people don't like eminent domain. It's against the American creed, like taxation without representation."