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Eminent Danger

Cash-strapped cities use entrepreneurs' property to lure big businesses.

Dino Paspalakis was sure his business was secure. For 17 years, as co-owner of Joyland Amusement Center, a popular arcade in Daytona Beach, Florida, he's been pouring his money into upgrades, drawing a consistent clientele, and carrying on the family business. His father opened the arcade in the 1960s, "after working every snack bar on the Daytona Beach boardwalk to make money to buy it," Paspalakis, 40, says. But now he faces a threat. The city of Daytona Beach, using a legal doctrine called eminent domain, is trying to take the property and give it to developers to build high-rise condos and hotels. "In February [2004], they told me they'll be seizing the land. Developers are pushing out [independent] shops," he says.

Paspalakis' story is hardly unique. Historically, city and state governments used eminent domain to take over property for public infrastructure, such as highways and schools. But in recent years, as cities have assumed more responsibility for encouraging economic development, they have extended the power of eminent domain and started repossessing property to give to developers and other large companies. Eminent domain "has increasingly been used as a redevelopment tool to transfer private property from one owner to another," argues Mark Brnovich of the Goldwater Institute, a Phoenix think tank. And more often than not, the private property lost belongs to small companies.

A recent report by the Institute for Justice, a Washington, DC, public-interest law firm, found that about 10,000 properties across the nation were taken or threatened by eminent domain between 1998 and 2002. At least half those projects involved businesses being condemned or threatened with condemnation. In Colorado alone, the number of eminent domain cases rose 28 percent between 1999 and 2002, according to an investigation by The Denver Post.

While seizing these properties, cities argue they can transfer domain to private businesses seeking to develop the area because that economic development will be for the public good. Often, cities don't take into account how the move affects the small companies. "Small businesses can be decimated by eminent domain," says Dana Berliner, a senior attorney at the Institute for Justice. "Location is crucial to their success, and when they move, they can lose out."

And while property owners are supposed to get "just compensation," few states require that the compensation take into account improvements put in by an entrepreneur. In Mesa, Arizona, Randy Bailey, owner of Bailey's Brake Service, claims the city offered him only one-fourth of what he estimated his moving costs would be. Paspalakis says the city of Daytona Beach is offering far less than the true value of his beachfront property.

Until recently, most small businesses haven't fought these eminent domain cases, in part because legal fees would be high. But Berliner believes that may be changing. A few entrepreneurs have tried to get their businesses listed on state and national registers of historic sites, which can protect them from seizure. More important, small businesses have begun to sue cities and win cases against eminent domain. In July, the Michigan Supreme Court overturned a 1981 ruling in the famous Poletown case, which held that cities could serve the public good by handing property to private companies. Attorneys representing small businesses believe the Poletown decision will make municipal officials think more carefully before using eminent domain. Already, small businesses are suing cities in more than a dozen other states. The U.S. Supreme Court has now decided to consider whether cities are abusing eminent domain.

But the eminent domain trend is unlikely to change without legislative action. In their most recent sessions, 10 state legislatures considered bills that would reform eminent domain by offering more protection to property owners. Yet only in Colorado did a piece of reform pass, and that legislation had less protection in it than the original draft of the bill. "Small-business groups haven't been active in pushing against eminent domain," says Berliner. Unless that changes, more entrepreneurs might find themselves in Dino Paspalakis' position.

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This article was originally published in the January 2005 print edition of Entrepreneur with the headline: Eminent Danger.

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