Hunting a way to make private expropriation more fair

Well, the Supreme Court ruled today that expropriation for private development can still be legal if the town council seems to think there’s a public benefit. It’s a terrible decision, with strange logic, and strange votes from the judges, but you will probably read many other articles about that today. What I want to figure is, given this ruling, what can we do to make it better?

What we will see happening is a land developer coming to the city with a plan to demolish a redevelop a block in a way that they claim will be good for the city — perhaps bringing in tourists, jobs, business, whatever. Of course the deal is very good for the land developer, or they would not be drafting it.

I suggest we make it less sweet for the developer in such cases and give some of that sweetness to the expropriation victims. Today they get a “fair market value” for their property (that part of the 5th amendment wasn’t shredded) but I say, if the expropriation is for private use, let’s give them more.

First, start by paying them this fair market value at the date of expropriation, as we do now.

Then, after the deal is complete (with some time limits and other good constraints) we want to determine just how much “value” came from aggregating the properties. Right now this value goes to the developer. We’re going to give most or all of it to the expropriated folks. So we come up with a value for the amalgamated property. (More below on how to do that.) This pre-opening profit would go, all or most of it, to the landowners. The developer keeps any further appreciation of the property as they operate it — they need an upside too, of course.

More ideas follow…

We might also try to estimate some of the value that comes from the property in its developed form. There, we might try to get a value after it is developed, but before it opens, and subtract cany capital costs of developing it.

To get a market value in either case, we could of course open things up for bids, or ask that the developer name a value. Once they name a value, any other developer could come in and purchase the amalgamated property for that value, so they must not set too low. The resulting profit would go to the original homeowners, pro-rata based on their fair market valuations.

Of course, the market may go down, but the homeowners would not lose any money. They get the maximum of the estimated fair market value and the amalgamation/development “value added.”

Of course you could tune this to make no upside for the developers, but in that case you might was well just ban these private expropriations, and I support that. But that’s not going to happen. So you need to tune it to leave an upside for developers that makes it worth their while to do these supposedly city-boosting projects, but helps the expropriated.

This formula needs some tweaks if there is only one property to expropriate, as is the case when everybody sells but one person. Tuned too far, it might cause people to always refuse to sell, figuring they have more upside in being expropriated, and we don’t want that. In theory the developer should pay something that’s some reasonable margin below the true value it has to them.

Of course, a lot of the cost in these developments is all the government lobbying/bribing required. If another developer buys, that is reflected in the amalgamated market value. So now those bribes must be paid twice, once to the city and once to the homeowners.

With true public expropriation, there is no private developer and it’s hard to judge a market value. If they bulldoze your house to put in a bypass, it just happens and you take the value.

Prior to this ruling, when a private developer wanted to buy up a block of homes to do a development, they typically had to offer not just “market price” but an above-market price to make the deal happen, and hope there wasn’t somebody who would not sell at any price. Usually such people give anyway (do they really want to live there with everybody else gone and torn down) from from time to time you’ll see a lone house or building (or commonly church) surrounded by new development towering over it. This formula gives this “premium” normally paid in a private amalgamation to the homeowners. This makes sense because with the new ruling, it is cheaper to get the city to expropriate than pay the premium.

The premium isn’t always there. One day, years ago, a buyer came out of the blue to look at our house. He toured it but you could see he wasn’t really interested. He then delivered an offer for 20% over the market value, which was very tempting. But then I talked to the neighbours and we learned a group of 6 houses had gotten the offers. So we got together, but in the end once he learned his play was out, he just dropped it and was not heard from again. The houses, which were always zoned for both residential and commercial, are still residential to this day.

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