originally published in the u.m.d. law student newspaper, "the raven."
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So over winter break, a 7-11 opened up as part of the “Westside Development,” and from all the hype, you’d think O’Malley tripped on his way down Eutaw and found the biggest gold vein this side of the Mississip’.
City officials have trumpeted the success of their revitalization plans. And I must say that I appreciate the effort, if only out of respect for their masterful command of buzzwords and catchphrases.
“The West Side vision is to create a dynamic, predominantly residential, urban [sic] mixed-use neighborhood that connects adjacent neighborhoods and sub-districts.”
Wow.“The West Side strategic plan details sustainable benefits for the City of Baltimore and the State of Maryland.”
Hello, state and federal funds.“Complete implementation of the strategic plan will yield approximately 7,000 permanent direct jobs and 4,000 spin-off jobs.”
The question is, “Who wouldn’t vote for this?” – and the answer is “no one.”
And just when I thought I was impressed, I had what could only be described as a religious experience. Or, maybe it was an aneurism. (Whichever it was, everything smelled like flowers and I had a hell of a hangover.)
Before I explain what triggered my revelation, let’s take a quick look at the history and modern mechanics of government plans for “economic redevelopment.”
Eminent Domain gives our government the power to commandeer private land, with an important caveat: the land-grab must be for “public use.” Historically, this power was used as an absolute last resort, and the “public uses” were governmental endeavors that garnered overwhelming political support, such as mass transit, public schools, and functional government buildings.
Condemnation used to be referred to as “governmental taking,” but the concept goes down much better if our politburo frames its plan as “governmental giving” – breathing new economic life into areas that are currently “under-utilized.”
Jeff Finkle is president of the International Economic Development Council. His organization is a trade association representing development and redevelopment organizations and agencies. They are proponents of Eminent Domain – weird. They, and others, would argue that it is an essential tool because costs of negotiating with myriad landowners will often be too high (in their minds, too high even for experienced developers like Baltimore's Angelos or Paterakis) and because landowners will be tempted to hold-out for an unreasonably high price, ruining the opportunity for collective gain. So, they argue, the government should be able to act as a final arbiter to make sure that our economic engine runs smoothly.
Leaving aside arguments against government enterprise in general and game-theory research that casts serious doubt on the prevalence of hold-outs, there is almost universal support for condemning buildings that are “blighted” or present a danger to public health.
But even Eminent Domain’s advocates cannot defend its recent incarnation. In Reason magazine, Finkle said that its exercise “should be the last possible tool. If negotiations fail, if the bully pulpit fails, then you go to a takings case.”
Instead, local governments around the country are acting more and more like small real-estate venture-capital firms. Recent abuses of eminent domain include:
--New London, Connecticut – removing an entire neighborhood and condemning homes for a privately owned and operated office park and other, unspecified uses to complement a nearby Pfizer facility.
--Riviera Beach, Florida – approving the condemnation of more than 1,700 buildings and the dislocation of more than 5,000 residents for private commercial and industrial development.
--Merriam, Kansas – replacing a less-expensive car dealership with a BMW dealership.
--Canton, Mississippi – seizing the homes of elderly homeowners for transfer to Nissan for a car manufacturing plant, despite the fact that Nissan is willing to build even without these 28 acres on the south end of 1,400.
The knee-jerk political response dismisses these takings as no different from the pillaging that goes on in the private sector, and this misconception is precisely what the geniuses at City Hall have tried to take advantage of.
Here’s where I fainted:“The West Side Strategic plan will… represent over eight hundred million dollars ($800,000,000) of private sector investment, leveraged by one hundred million dollars ($100,000,000) of public sector investment, over a six year build-out period.” [Emphasis added.]
Why the epiphany, you ask? Let me explain.
You see, normally, “leverage” refers to a business deal where an investor borrows money in order to increase his or her return on an investment. For those of you who haven’t yet covered the concept, here’s an example. If I can get my hands on a Ripken (Cal, obviously) rookie card for, say, $20 and then resell it for $60, I’ll have forty new bucks from my twenty – a 200% return. That’s a pretty durn good return. But what if I borrow $10 from Dino the loan shark? Even if I repay him with 50% interest – an awfully steep $5 – I’ll still make $35 out of $60 ($60 - $10 - $10 - $5 = $35). That’s a 350% return on my $10. What’s more, I can use that extra $10 burning a hole in my pocket to buy another card and make another profit, then treat a lady friend to a nice steak dinner. Note, however, that leverage implies that I will pay Dino back, lest he break my thumbs.
Leverage requires that the debtor put cash back into the pocket of his investors. The debt is secure, and there will be consequences if he defaults. The creditor investigates the debtor’s finances and knows that he is solvent, or at least he is willing to gamble that is so. In this way, should the investments go completely south, the creditor can still recover from the debtor’s other assets.
On the other side of the investment coin, a real, live businessman that goes to get a loan presents his case to a group of investors. These professionals scrutinize the market data and the probable returns, and they deal with things like future interest rates and discounted valuation. They want to be as certain as possible that their investment will pay off. Why would anyone go through all that trouble? – Because they’re putting money on it. If their gamble doesn’t pay off, they’re probably out of a job.
Securitization and leverage, like Dino’s thumb-breaking clause, combine to create accountability, both on the part of the investor and the debtor.
“Ack-own-tuh-bill-ee-tee?” Our simple, down-home politician scratches his head. He doesn’t know how to make fancy business talk like the bankers.
Fortunately, our boy doesn’t have to deal with the trifling details of business and finance when handing out free money. Their idea of leverage is to dole out a hundred mil in subsidies, sit back and relax while the taxes come rollin’ in. (At this point, you should picture a cartoon character smoking a cigar while his get-rich-quick scheme goes horribly awry.) Ask them and they’ll guarantee you that their investment will pay off a hundred-fold in taxes alone, not to mention money in local pockets.
If politicians inhabited a world that in any way resembled reality, they would be totally screwed and utterly unemployed. Fortunately, time smiles on our city officials. By the time anyone figures out what a bust the project was, they can blame it on any sort of exogenous variable they want (most likely the lack of state support) and continue their drive to the White House.
Even better, their buddies are in a win-win situation. They get government subsidies poured into their projects and tax breaks on their returns. But we haven’t even gotten to the best part.
Young Cho is a Korean immigrant who saved for 15 years just so that she could have her own business. Her successful beauty salon has been condemned by our omniscient city council. She will now have to go before an elected judge and fight a developer that has real-estate appraisers out the wazoo, just to show why she should get the price she’d ask for, instead of what the developer wants to offer.
And this is where the plan really gets brilliant – because the subsidies that developers gain from governmental takings don’t even show up on balance sheets at all. The $100,000,000 that the city admits is a direct subsidy doesn’t even include the discounts that developers are getting with the strong-arm of the government. Every dollar per square-foot below what the developer would have to pay without condemnation is a dollar in the developer’s pocket.
Now, some of you might ask why I’m so down on the government’s chances. I’d invite you to do one of two things: 1) go to the library windows and check out the crack-heads dancing (sans music) up and down Paca Street; or 2) go to Potsdamer Platz in East Berlin. The urban center was developed by “public-private partnerships” that aimed to create a cultural and economic center. Fifteen years later, the residential vacancy is so high that many builders are contemplating demolition to save maintenance costs, and even heavily subsidized business can’t turn a profit – this, without the social problems that face Baltimore’s Westside. Another eastern district, Mitte, has thrived despite (or because of) having been almost untouched by urban planners.
The 1700 block of North Charles stands in contrast to the West Side in the same way that Mitte compares to Potsdamer Platz. Starting in the 1990’s, entrepreneurs collected the resources to turn the block into a thriving mini-district with a popular art-house theatre and restaurants cropping up all around. They succeeded in the face of blight and crime, and without government subsidy.
All I know is, I’m getting out of Fayette Square. Good thing I didn’t buy.
