Eminent Danger Cash-strapped cities use entrepreneurs' property to lure big businesses.
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Dino Paspalakis was sure his business was secure. For 17 years,as co-owner of Joyland Amusement Center, a popular arcade inDaytona Beach, Florida, he's been pouring his money intoupgrades, drawing a consistent clientele, and carrying on thefamily business. His father opened the arcade in the 1960s,"after working every snack bar on the Daytona Beach boardwalkto make money to buy it," Paspalakis, 40, says. But now hefaces a threat. The city of Daytona Beach, using a legal doctrinecalled eminent domain, is trying to take the property and give itto developers to build high-rise condos and hotels. "InFebruary [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 andstate governments used eminent domain to take over property forpublic infrastructure, such as highways and schools. But in recentyears, as cities have assumed more responsibility for encouragingeconomic development, they have extended the power of eminentdomain and started repossessing property to give to developers andother large companies. Eminent domain "has increasingly beenused as a redevelopment tool to transfer private property from oneowner to another," argues Mark Brnovich of the GoldwaterInstitute, a Phoenix think tank. And more often than not, theprivate 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 acrossthe nation were taken or threatened by eminent domain between 1998and 2002. At least half those projects involved businesses beingcondemned or threatened with condemnation. In Colorado alone, thenumber of eminent domain cases rose 28 percent between 1999 and2002, according to an investigation by The Denver Post.
While seizing these properties, cities argue they can transferdomain to private businesses seeking to develop the area becausethat economic development will be for the public good. Often,cities don't take into account how the move affects the smallcompanies. "Small businesses can be decimated by eminentdomain," says Dana Berliner, a senior attorney at theInstitute for Justice. "Location is crucial to their success,and when they move, they can lose out."
And while property owners are supposed to get "justcompensation," few states require that the compensation takeinto account improvements put in by an entrepreneur. In Mesa,Arizona, Randy Bailey, owner of Bailey's Brake Service, claimsthe city offered him only one-fourth of what he estimated hismoving costs would be. Paspalakis says the city of Daytona Beach isoffering far less than the true value of his beachfrontproperty.
Until recently, most small businesses haven't fought theseeminent domain cases, in part because legal fees would be high. ButBerliner believes that may be changing. A few entrepreneurs havetried to get their businesses listed on state and nationalregisters of historic sites, which can protect them from seizure.More important, small businesses have begun to sue cities and wincases against eminent domain. In July, the Michigan Supreme Courtoverturned a 1981 ruling in the famous Poletown case, which heldthat cities could serve the public good by handing property toprivate companies. Attorneys representing small businesses believethe Poletown decision will make municipal officials think morecarefully before using eminent domain. Already, small businessesare suing cities in more than a dozen other states. The U.S.Supreme Court has now decided to consider whether cities areabusing eminent domain.
But the eminent domain trend is unlikely to change withoutlegislative action. In their most recent sessions, 10 statelegislatures considered bills that would reform eminent domain byoffering more protection to property owners. Yet only in Coloradodid a piece of reform pass, and that legislation had lessprotection in it than the original draft of the bill."Small-business groups haven't been active in pushingagainst eminent domain," says Berliner. Unless that changes,more entrepreneurs might find themselves in Dino Paspalakis'position.
