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Privatization of Eminent Domain and Privatization of Taxes: The Story of Chapt

special to MCHC, Shirley Kressel
2005-04-12

Special to MCHC

Privatization of Eminent Domain and Privatization of Taxes:
The Story of Chapter 40Q

by Shirley Kressel

In the summer of 2003, the Massachusetts Legislature enacted a new land use law known as Chapter 40Q. Included as part of a “municipal relief and flexibility” package, it was billed as a way to help towns and cities deal with the financial stress of two years of cuts in local aid. Chapter 40Q is supposed to create more taxable property in a community, thus providing tax revenues to help balance the municipal budget. But Chapter 40Q is another in a series of laws that seem to be written of, by, and for the real estate developer lobby. As such, it promises to create more problems than it solves.

Under Chapter 40Q, a municipal government can use eminent domain to acquire other people’s properties and turn them over to redevelopers. The new-growth taxes on the redevelopments can be diverted from the general treasury, to be spent on site-related “public improvements,” broadly defined to include the land taking itself, parking garages, roads, and other works associated with the new projects. The municipality would issue bonds to pay for these “improvements” up front, in anticipation of taxes in future years.

Here is what’s in store for our municipalities under Chapter 40Q:

• We will have the disruption of urban renewal without even requiring developers to choose “blighted” areas. Up to 25% of a town or city, in single parcels or large areas, can effectively become new urban renewal areas. Viable neighborhoods can be erased from the map to make way for private development.
• On the decision of the mayor and city council or other legislative body, a real estate developer will be able to get the municipality to take other people’s property for him to redevelop. Attractive property will not be safe if the developer is politically well-connected.
• The municipality will end up defending many legal challenges to the takings, the legal costs of which will fall on the taxpayers.
• New growth in tax revenues for such development will be privatized, being spent on the project that generates them (or says it will generate them in the future). This will erode the ability of government to direct new revenues to the community’s most critical needs.
• The bonds issued will raise the limit of the municipality’s debt burden, a limit that is set to avoid over-burdening the municipality with loan payments and risking default. This puts the municipality’s borrowing rating at risk, possibly raising interest rates on other bonds needed for legitimate public purposes.
• The municipality will use the bond money to pay for the developer’s individually tailored “public works” (broadly defined, including building demolition, roadways, ramps, parking garages, parks, etc.). This will produce private profit at taxpayer’s expense.
• The municipal government will provide an inside track, with eminent domain and public taxes, to help favored enterprises avoid competing on the open market. Government will support one developer’s proposal instead of letting all interested parties bid for use of land taken by eminent domain. This will further politicize the development process, increasing cronyism and corruption. It will also slam the door on new, small, and politically unconnected development companies.
• Developers will engage in speculative enterprises too risky for the open market, since much of the risk of their schemes will be borne by the taxpayers. This will distort the competitive real estate market in the city and region and encourage large, speculative ventures. The failure rate will be higher than usual, subjecting the financial health of cities and towns to added risk.
• The property taken by the designated administering entities, especially if they are urban renewal agencies which hold property tax-exempt, may be kept by them and leased rather than sold to the developer. This will keep property off the tax rolls. It’s unclear if the “accrued tax value” would ever be paid to the municipality by the developer in some form, e.g., Payment in Lieu of Taxes. State officials indicate that they haven’t thought about this.

• Developers can and probably will get other tax breaks at the same time, like TIF state income-tax breaks. Public officials will have a vested political interested in making Chapter 40Q projects look financially successful, and so are likely to put more public money into them or award them special tax giveaways to keep them afloat.
• The public process provided for under Chapter 40Q appears entirely inadequate given the stakes of the decisions. Meaningful public participation in the decision-making will be very limited.

How 40Q Changes the Rules of Development

• The municipality, or the public or private entity it designates as program administrator, will, at the request of a developer, apply to the State Office of Business Development to create a “development district,” an area where the developer wants to build a project with support by Chapter 40Q actions. A developer will propose a “development plan” for the development district — that is, a redevelopment proposal for a site that may be owned by himself or by someone else – “demonstrating” that he will produce more taxes than what’s there now.

• If the site belongs to another, the municipality or its agent will take the site for the redeveloper by eminent domain, at a price its appraisers come up with.

• Unlike urban renewal, “blight” need not be proven — or even alleged.

• There is no “but for” qualification to meet, as in “this project couldn’t be created ’but for’ this government help.” As long has a developer has a proposal, that’s good enough.

• Constitutionally, the only justification for eminent domain is a “public use.” Chapter 40Q allows eminent domain for “public purpose” — defined very broadly as “increased residential, industrial, and commercial activity.” This is even more general than what has come to pass as the public interest – “economic development” — since urban renewal persuaded the courts to expand the concept of “public use” to “public purpose” and even more generally, “public benefit.”

• The taxes from the increased property value of the redevelopment won’t go to the general treasury of the municipality to meet the community’s most pressing needs; they will be diverted for “improvements” that help the developer (even if these improvements are not on the project site) These “public works” will be broadly defined, and may come to include construction not typically considered public works.

• Since taxes don’t all come in at the beginning of a project but over the course of the following years, the municipality would issue bonds for these improvements. Even if the project fails, taxpayers are still obligated to pay off those bonds. (Rather than paying for improvements themselves, developers can loan the money to the city and be the bond-holders. That way they get back their bond investment and tax-free interest, even if their projects are complete failures.)

Serious questions need to be asked regarding the expansion of the government’s powers of eminent domain in this way. Historically, eminent domain was intended for taking property needed for essential public uses such as schools or bridges. But public purpose is defined by 40Q as “increased residential, industrial and commercial activity” – which could include just about any for-profit scheme. This is not really a public purpose – this is activity that belongs in the private real estate market.

Chapter 40Q launches municipalities into the for-profit real estate business which compromises their more traditional roles of guiding and regulating for-profit development. In doing so, Chapter 40Q creates a conflict of interest for public officials charged with safeguarding the public interest. How can we expect local officials to stand firm for responsible plans or zoning enforcement when the developer can say, “If you hold me to the regulations, we won’t make enough money and you won’t get enough taxes to cover your bond payments.”

In Boston, the state’s biggest development arena, the potential for problems is especially acute. The Boston Redevelopment Authority – the urban renewal agency that would administer 40Q – serves as a developer and a developers’ advocate while simultaneously operating as the City’s planning/zoning/project review agency. This fundamental conflict of interest has generated problems for half a century.

Although Chapter 40Q passed in summer of 2003 and the regulations are finalized, state legislators and program staff haven’t yet decided what will happen if a project loses money and doesn’t generate enough new tax revenue to pay off the bonds. Furthermore, there appear to be no answer to what will happen if urban renewal agencies take land and render it tax-exempt, decreasing the incremental taxable value of the new development. Sorting through the fiscal and legal morass of a Chapter 40Q failure is not going to be a pleasant experience.

Urban Renewal Program officials at DHCD apparently perceived Chapter 40Q as simply a tax increment financing mechanism for cities who needed funds to build infrastructure to attract taxable development. The eminent domain provision seems to have been added late in the legislative process. The end result is “urban renewal without urban renewal” —that is, without “blight.” Interestingly, the urban renewal plans created in the heyday of the renewal program in the 1950’s, ‘60’s and ‘70’s are now reaching the expiration dates of their 40-year terms. Chapter 40Q gives the real estate industry and its backers in State government a vehicle for perpetuating the enormous powers of urban renewal without having to worry about justifying it as a tool to fight “blight”.

As developers learn to use Chapter 40Q, the balance of power between developers and community advocates will become even more unbalanced and unjust. Municipal government, which should be on the side of the people, will be encouraged to seize land to help for-profit developers. And tax revenues will be diverted from serving the greatest needs of the community into support for private projects. Chapter 40Q is not the only land use law that serves developers more than the public interest. Citizen protests generated by the flaws of Chapter 40B and the state’s fast-track auction law have led to calls to rewrite Massachusetts land use laws so that they respect community planning and more effectively address our critical needs for affordable housing and livable communities. It’s time our legislators got this message and stopped enacting laws that are appallingly biased in favor of for-profit developers. Fixing Chapter 40Q should be a major goal in any comprehensive reform campaign.

Shirley Kressel is a resident of Boston. She is a landscape architect, urban designer, and co-founder of the Alliance of Boston Neighborhoods.

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