How the government can take your land without paying for it
A weird thing happened to me recently that prompted thoughts on real estate investing, “eminent domain” and big gubmint, a.k.a. big government.
I (re-)learned that what you don’t know might hurt you, and also what you think you know about your constitutional rights might not be true.
Through a series of unfortunate events, I became a one-fifth owner in a parcel of agricultural land in Southeast Bexar County, Texas. I’ve been trying to sell it ever since. I have areas of investment expertise, but real estate development isn’t one of them. Which is probably why I found myself in this awkward spot.
Last fall I learned from our real estate agent that a 50-acre parcel of which I am a part-owner has a planned “major thoroughfare” running through the middle of it.
My agent sent me the city parcel map, and yup, there’s a bright yellow line cutting right through our property. As owners we can’t build on that. Any development done on the property has to make way for a future, theoretical, 120-foot wide road right down the middle.
Theoretical highways
Art Reinhardt, an assistant director of transportation for the city of San Antonio, explained to me that in 1978 – and then periodically updated afterward — the city mapped out future theoretical roads, to account for growth.
The long-planned major thoroughfare is not built yet and might not be built for decades, or even built at all, ever. But in the meantime, we can’t use that land for anything except a road.
All-in, the as-yet nonexistent “major thoroughfare” will take about 5 acres out of the parcel and make it unavailable for building. Multiply those 5 acres times the cost per acre, and we’re talking about real money lost by myself and my fellow owners.
Constitutional shield
At first, I thought the carved-out 5 acres would be no big deal. Because, well, I’m an American. And I was flipping through my copy of the U.S. Constitution, as one does in one’s free time, and I reread Article V of the Bill of Rights: “Nor shall any person … be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
This amendment is the basis for limitations on any government — city, state or federal — claiming “eminent domain” over private property, taking it for public use without paying the private property owner for that taking.
So, no problem, I thought, the city of San Antonio will certainly pay us for that public use, right? I mean, I read it right there in the Fifth Amendment of the U.S. Constitution. So, cool, I’m good.
That’s when I called city officials to test my theory.
Nope. There will be no compensation. I checked with multiple city officials familiar with this type of matter in the planning, transportation, and legal counsel’s offices. None of them wanted to be identified because they weren’t authorized to be quoted.
I further learned that even if an unbuilt (but planned) major thoroughfare exists, it won’t show up in a title search, the typical due diligence real estate purchasers use to be certain they have full to ownership with no liens or counterclaims from anyone, like an unpaid creditor or previous owner.
It seems the only practical way a buyer would know about this is through hiring a specialist attorney familiar with maps showing city plans for major thoroughfares. Something we clearly hadn’t done.
The particulars
I talked to San Antonio attorney David Denton, a specialist in eminent domain and governmental real estate issues. He helped walk me through the legal particulars that would define an “eminent domain” case versus a “tough luck, private property owner” case.
Cities and other government entities obviously have rights and the need to restrict private usage through zoning, parcel platting, infrastructure requirements and transportation. These are considered “exactions” imposed by a city government.
An exaction, in real estate law, is land, money or goods the government requires and the property owner has to provide as a condition to develop the land. It’s not considered a taking covered by eminent domain because — get this — it’s treated as a negotiated deal. Except the property owner doesn’t really have a choice, and the government holds all the cards.
In legalese, qualifying for payment under eminent domain hinges on whether it’s an “exaction” (a negotiated deal in which there is no cash compensation for the private land-owner) or a “taking” (possible compensation for the private landowner).
Exactions provide government cover for a variety of legitimate uses, including it seems, future theoretical road access. Denton also mentioned case law around the “proportionality” of the government’s requirements. I understand that to mean that if a higher proportion of a full property value was lost, it might start to resemble a taking, but my situation didn’t rise to that level.
A few lessons
One lesson, obviously, is don’t get into investing in things without really knowing what you’re doing.
In other words, do as I say, not as I do.
Another lesson, more subtly, is that the world of real estate is not as simple as a bright line between private property rights and public or government property rights. We rarely can do precisely what we want with private land, and the public interest can impinge upon our theoretical property rights.
The third lesson I learned along the way is that big gubmint can be serendipitously profitable. It turns out there’s private silver lining opportunity in this public impingement. As a developer buddy of mine explained, some investors seek out land like this, with a major thoroughfare plan running through it.
Here’s why. If the major thoroughfare did get built soon, I’d be sitting on a potential gold mine (a very small-scale gold mine, but still).
Suddenly my rural land would become far more valuable from the expected increase in automobile traffic. I could lease it out to a Krispy Kreme or whatever fast-food joint would build a store next to the major roadway cutting through the property.
Actually, who am I kidding? If we could lease to Krispy Kreme specifically, I would move into a trailer next door and never leave. I love that sugary goodness.
Michael Taylor is columnist for the San Antonio Express-News, a former Goldman Sachs bond salesman and writes the Bankers-Anonymous.com finance blog. michael@ michaelthesmartmoney.com @Michael_Taylor