The Demise of Redevelopment and Properties Acquired through Eminent Domain

Like all good things, the era of redevelopment agencies has ended. In the last days of 2011, the California Supreme Court rendered an opinion that will forever change California’s municipal landscape.  The Court found that AB 1x 26, a legislative scheme that provides for the dissolution of redevelopment agencies, is constitutional.  What is worse, the Court also found that AB 1x 27, which would have allowed redevelopment agencies to ‘buy-back’ their existence, was unconstitutional.  Taken together, the Court’s decision resulted in the mandatory dissolution of redevelopment agencies across California. The decision set off a proverbial firestorm. In all the commotion, very little (if any) attention has been paid to the manner in which redevelopment agencies acquired property that successor agencies must now dispose of.

For decades, redevelopment agencies served a critical purpose in California.  They revitalized neighborhoods, created jobs and helped cities prosper.  Regardless of one’s personal view about the importance of redevelopment agencies, there is one thing everyone can agree on: the dissolution of redevelopment agencies has created significant uncertainty and confusion in the municipal world.  No one knows how the dissolution process will play out and how specific situations not addressed in the dissolving legislation will be dealt with.  The way a property was acquired is one such situation.

The manner in which a redevelopment agency acquired property matters because of a little-known code section in the eminent domain statutory scheme, which can have big ramifications.  Enacted in 2007, section 1245.245 states that if an agency does not use property that it acquired by eminent domain within 10 years of acquisition for the purpose identified in the Resolution of Necessity, it must either adopt a new resolution or offer to sell the property back to the original owner.  That, of course, is the Reader’s Digest version.

Section 1245.245 was enacted in the wake of the Kelo decision, in which the U.S. Supreme Court held that it is constitutional for a public agency to condemn private property and turn it over to private developers. Pundits across the nation commented that, barring any legislative restrictions, a public agency could condemn someone’s home to make way for a big box retailer. Maybe, maybe not – that is a topic for another article.

California already had restrictions in place so Kelo did not have much of a legal punch.  However, Californians were outraged nonetheless and called for legislation to protect property owners from this non-existent threat.

The idea behind section 1245.245 seems to be that agencies should not use false pretenses to acquire property through condemnation. The section also requires that the property be offered to the original owner for the same price for which the agency acquired it.

The legislative history of section 1245.245 hints that once the property is put to its public use, the use can be changed without the need to offer the property back to the original owner.  However, an agency cannot acquire property for one public purpose, never use it for that purpose, and after acquisition, use it for another purpose instead.  To use the property for an altogether different purpose, the agency must adopt a new resolution.  Under AB 1x 26, successor agencies do not have the authority to adopt resolutions or to create new obligations.  Thus, their only option is to dispose of property owned by redevelopment agencies.

First, the good news about section 1245.245:  If the property was acquired, either by a settlement agreement or by a final order, before 2007, the section does not apply.

Now, the bad news:  There is significant uncertainty regarding the application of section 1245.245 in conjunction with AB 1x 26.  Redevelopment agencies regularly used their eminent domain powers to acquire property for assemblage and to eliminate blight from neighborhoods.  Although the sites were often cleared upon acquisition, sometimes, especially in 2009 and 2010, the sites were simply boarded up and left in place due to a lack of funding.

In the wake of AB 1x 26, questions are now arising about whether these properties have already been put to the public use for which they were acquired. In other words, are acquisitions for ‘assemblage’ or ‘redevelopment’ public uses in and of themselves or does the agency have to take some action after the acquisition for the public use to attach?  If it is the latter, then do successor agencies have an obligation to offer to sell such properties back to the original owner before they try to sell it in the open market?  Successor agencies are bound by the edict contained in AB 1x 26 that property must be expeditiously sold at maximum value, leaving many successor agencies grappling with a dilemma:  Do they abide by the mandates of section 1245.245 or do they follow the instructions most recently provided by the legislature?

It is true that there is a canon of statutory interpretation that statutes must be interpreted in a manner that gives seemingly conflicting statutes meaning.  But then there is also a canon that says that it is assumed that the legislature knew about existing law when it created new law so if a conflict cannot be reconciled, the latest enactment trumps.

In this situation however, because there is so little guidance provided by the legislature, it is difficult to reconcile AB 1x 26 with section 1245.245 when it comes to property acquired by eminent domain for redevelopment purposes but not yet put to any use.

For successor agencies facing this dilemma, perhaps the decision to offer property back to the original owner or to sell it to a third party at market value should be a case-by-case determination.  Depending on the interests acquired, the manner of acquisition (litigation versus negotiated acquisition, or somewhere in between), the length of time since the acquisition, and various other factors, successor agencies may need to think twice before disposing of property to third parties.  After all, should they follow the requirements of one legislative statement, they are likely to have problems with the other.

Because this is unchartered territory, there are no absolutes.  Successor agencies must assess the properties acquired between 2007 through 2011 and carefully balance the risks versus the benefits of any course they choose.  Suffice to say, should a successor agency find itself in this dilemma, its best to get legal advice at the earliest stage possible to minimize exposure and maximize returns.

Mona Nemat is a senior associate at Best Best & Krieger LLP and belongs to the firm’s Eminent Domain and Business Litigation Practice Groups. Her practice is multi-faceted, ranging from advising public entity clients on topics related to project planning and right of way acquisition all the way through various stages of complex, high-stakes litigation. Based in Riverside, Nemat can be reached at Mona.Nemat@bbklaw.com.

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