Eminent Domain Roulette

Wal-Mart found itself on the other side of the table this week when the Hercules, Calif., City Council decided to use eminent domain to stop Wal-Mart from opening a new store in town. The council voted to seize Wal-Mart’s land. Wal-Mart now finds itself to be the victim of the same strategy it has used to gain a foothold in other communities: using the threat of eminent domain to pressure property owners to sell.

Hercules is a leader in using so-called ”smart growth” policies to plan development. City plans regulate everything from architectural styles to front porches on homes. However, Hercules’s councilmen will be no more successful in centrally planning its local economy than the Soviet Union’s bureaucrats were in planning theirs. The market’s competitive process, which offers monetary profits or losses, is much better than city planners at figuring out which businesses should offer which products in what locations.

City officials want a “village-like atmosphere” in Hercules, with no retailer bigger than 64,000 square feet in this location. Local businesses, however, don’t seem to agree. Doug Mull, a vice president of Lewis Co., which previously owned the land, said that his company couldn’t find any tenants interested in the property under the city plans. That’s when his company proposed to allow Wal-Mart to open a larger store. After the city rejected the proposal, Wal-Mart bought the property and has continued efforts to build a store.

The City Council agreed with outspoken residents who claimed that there is no demand for Wal-Mart’s products in the area and that upscale restaurants, boutique stores, and specialty retailers such as Whole Foods or Trader Joe’s are needed instead. Where were these tenants when Lewis Co. was trying to lease the property according to city’s central plan?

Apparently those businesses don’t estimate the same demand for their products as the city government does. Similarly, Wal-Mart has not made billions of dollars by opening stores where there is no demand for its products. Its eagerness to open a store in Hercules–where the specialty retailers have passed on that opportunity—suggests that there is more demand for Wal-Mart’s products than these other stores’ products.

Hercules Vice-Mayor Ed Balico said that outsiders have to understand that “The city of Hercules is very unique.” Unfortunately, what is unique about Hercules are the draconian measures it is willing to take to enforce the will of the planners. The U.S. Supreme Court opened the door for this type of abuse when it ruled in Kelo vs. City of New London, Conn., that cities can use eminent domain to seize private property from one party to sell or lease it to another private party to promote economic development.

Eminent domain not only violates property rights, it’s also bad economics. Seizing someone’s private property to give it to another private party actually harms economic development, by switching it to less valuable uses. If other businesses valued locating on this property more than Wal-Mart, there is no reason they couldn’t privately purchase the land.

Wal-Mart turned down an offer the city made to purchase the property in March. Instead of offering enough to entice Wal-Mart to sell, the city is now using its power to acquire the property by force. The fact that eminent domain requires the city to pay “fair market value” still does not compensate Wal-Mart fully.

This is the basic economic problem with eminent domain. Forced property transfers to recipients who were unwilling to pay enough to obtain the property voluntarily always constitute an economic takings. The very act of not selling at market price demonstrates that the current owner values the property more than the “fair market value.” Since eminent domain moves property from higher valued uses to lower valued uses, it undermines economic development.

This case of eminent domain is the opposite of what most Californians’ fear. Since the Kelo ruling last June, many property owners are afraid that eminent domain will be used to transfer homes to large retailers such as Wal-Mart in the name of economic development. The “Protect Our Homes” Initiative, which will appear on the November ballot, would help prevent such abuses. Ironically, by protecting homeowners from Wal-Mart, voters would also be protecting Wal-Mart from Hercules’s central planners. The initiative will be beneficial in either case because eminent domain is not good for our economy whether Wal-Mart is the goose or the gander.