April 15, 2009



By: Trey Duhon and Don Garrett
Citizens for a Better Waller County
Copyright 2009

One of our founding fathers and the second president of the United States, John Adams, once stated, “Property must be secured or liberty can not exist.” Adams understood perfectly well that property rights were the heart of the necessary liberties that would form the basis of our democracy. As Adams also stated, “"The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.” Private property rights were the cornerstone of the liberties which were essential to the success of our new society. For this reason, the founding fathers created the Fifth Amendment of the U.S. Constitution, which provides that “private property [shall not] be taken for public use, without just compensation.”

So you can imagine the surprise and shock of property owners across the country when the U.S. Supreme Court in 2005 dropped a bombshell on private property rights in America. In a 5-4 split decision in Kelo v. the City of New London (now known as the Kelo case), the U.S. Supreme Court ruled that a governmental entity can give the power of eminent domain to private entities for those entities to use in the name of “economic development”.

The case originated in 1998 when pharmaceutical company Pfizer built a facility next to Fort Trumbull and the City of New London determined that someone else could make better use of the land than the Fort Trumbull residents. The city handed over its power of eminent domain (which is the ability to take private property for public use) to the New London Development Corporation, a private entity, to condemn the entire neighborhood for private development. As the Fort Trumbull property owners discovered, when a private entity can wield government’s power of eminent domain and can justify taking property under the guise of “economic development,” all private property owners are in trouble.

Justice O’Connor wrote the dissent, which was joined by Chief Justice Rehnquist, Justice Scalia, and Justice Thomas. Justice O’Connor found that the majority had confused “public use” with “public purpose” as that term is used in the Fifth Amendment. In interpreting the Fifth Amendment, O’Connor wrote, “we have read the Fifth Amendment to impose two distinct conditions on the exercise of eminent domain: “the taking must be for a ‘public use’ and ‘just compensation’ must be paid to the owner. These two limitations serve to protect “the security of Property,” which Alexander Hamilton described to the Philadelphia Convention as one of the “great objects of Government.” Although the public may “use” the property after it is transferred and developed, that “use” is not a “public use” such as a road, a hospital, or a military base.

O’Connor recognized that the courts are ill-equipped to pass judgment on whether or not the public will be better off after the transfer of property. She succinctly summed it up by stating, “The specter of condemnation hangs over all property. Nothing is to prevent the State fromreplacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

Sadly, Justice O’Connor was correct.

After Kelo, the neighborhood was condemned, the houses were bulldozed, and the developer subsequently failed to obtain financing, and today the land sits barren, a blight on the community and a substantial blow to the tax base of the city.

How can anyone say that the current state of the barren land is a “public use” or even a benefit to the public for that matter? So, how do we protect private property rights in Texas in a post-Kelo world? Especially with the Obama administration promising billions of dollars in infrastructure funds to states and local governments, all private property owners have cause to be concerned about whether they will be protected.

Since Kelo, 42 states have enacted legislation to restrict the use of eminent domain for economic development. The Texas legislature quickly responded by passing Senate Bill 7.

SB 7 prohibited the use of eminent domain for economic development, but left huge loopholes for things such as the Trans Texas Corridor, sports stadiums, or instances in which a city sought to “eliminate an existing harm on society from slum or blighted areas.” In addition, without a constitutional amendment to the Texas constitution, there is no guarantee that SB 7 will withstand a court test.
Lastly, SB 7 did nothing to correct past problems with Texas eminent domain law.

What kind of problems were there with Texas eminent domain law?

Believe it or not, the attack on private property rights in Texas actually began long before the Kelo case. In 2004, the Texas Supreme Court’s decision in Hubenak vs. San Jacinto Gas Transmission Company further eroded property rights by making eminent domain easier for governments. Although previous law had required government to make a “good faith offer” in the initial stage of a condemnation, Hubenak changed that.

State law, according to the Hubenak ruling, authorizes the initiation of condemnation proceedings only if the two parties are "unable to agree" on a purchase price, and the Court found that any offer at all by a political subdivision satisfied the law's intent. Therefore, the government could make an offer on property for an absurdly low amount, and then initiate court proceedings once the owner rejected that offer. By removing the requirement for good faith negotiations with its Hubenak decision, the Texas Supreme Court tipped the balance further away from property owners to the benefit of the state. This ruling forces property owners to fight condemnation in court where the property owner is at a severe disadvantage, due to the fact that even if the property owner is successful in court, he is unable to recover attorney fees or expert witness fees (appraiser fees). Such a disadvantage forces most landowners to settle in order to avoid the high cost of litigation, which only serves to erode the damages a property owner will eventually receive.

HB 2006 sought to address the Hubenak case and the Kelo aftermath by 1) defining “public use”, 2) removing the legal presumption that any condemnation by a government entity is for “public use” by requiring proof of public use by the condemnor, 3) changing court rules so that a “bona fide offer” must be made initially, 4) allowing successful property owners to recover reasonable attorney fees in litigation, and 5) allowing landowners to recover compensation for “diminished access” that may result from a partial condemnation to a property.

As the Texas Public Policy Foundation determined, “HB 2006 is essential to reversing [the substantial erosion of private property in the last 50 years] and restoring the property rights of all Texans.” The Texas legislature agreed, passing HB 2006 by overwhelming margins in 2007.

Unfortunately, there was one person who disagreed – Governor Rick Perry, who vetoed HB 2006 without giving the Legislature an opportunity to override the veto. Perry made unsubstantiated claims that the diminished access provisions would substantially raise the cost of condemnation for local governmental entities. The Texas Public Policy Foundation correctly concluded, however, that the cost of paying these damages would have been less than what Perry alleged, and such cost was pale in comparison to the cost to property owners in having HB 2006 fail to become law.

Where do we go from here?

First, it is essential that the Texas legislature immediately pass a bill similar to HB 2006, providing the protections already referenced above, including 1)restoring the definition of “public use” to its traditional meaning, 2) eliminating the blight/slum loophole from SB 7, 3) place the burden of proof on the condemning entity to prove “public use and necessity”, and 4) That if a condemning entity does not use condemned property for the purpose for which it was initially condemned within five years of the date it was taken, then the property should be offered back to the original property owner at the price for which it was taken.

In the event of a gubernatorial veto, the Texas legislature must be prepared to immediately override it. It is also vital that the Legislature and Texans pass a constitutional amendment making it clear that property shall not be condemned for economic development, so that SB 7 and HB 2006 can withstand any constitutional challenge in court.

What is interesting is that Gov. Perry, who will be running for re-election next year and will likely face a strong challenge from Texas Senator Kay Bailey Hutchinson, has suddenly come to the realization that a constitutional amendment is needed as soon as possible to “protect private property rights” of Texans, as he announced with much fanfare on January 22, 2009, that he would be working for a constitutional amendment to protect Texans from the Kelo decision, something he clearly did not do in the 2007 legislative session.

Eminent domain is an ugly word to any property owner. Unfortunately, it is a necessary tool for the public good if it is for a true public purpose, and subject to public control. Nobody can deny that our state is experiencing unparalleled growth, as it is estimated that Texas’ population by the year 2030 will increase by 10 million citizens and the demand on our infrastructure will increase proportionally along with the need for goods and services. Transportation will be a key component to accommodating this growth.

Perhaps the inherent problem in eminent domain is the failure to recognize that for many property owners, receiving fair market value is not truly adequate compensation for their land. Awarding fair market value obviously ignores intangibles such as sentimental value, historical family significance, and the simple fact that some property owners don’t want to sell their property, regardless of the price, for various reasons. Therefore it is time that government re-examine its position on eminent domain and instead of offering incentives to private developers and public private partnerships, perhaps the government should offer them to the property owner at both the state and federal level.

Additional incentives could be given to the property owner in the form of tax abatements, credits, deferment, and in special cases mitigation in the event there is the use of eminent domain and condemnations proceedings. The notion of providing additional benefits to citizens that have made sacrifices for the betterment of our state or country is not a new one. For example, one of the many ways we recognize the sacrifice made by our military veterans is by providing benefits such as home loans at reasonable rates through the Veterans’ Administration.

Why not recognize the sacrifice of private property owners that have no choice in giving up their land for the greater good? Something must be done to recognize the intrinsic fact that fair market value is not always adequate compensation. There are several opportunities for providing this recognition. Property owners having their property taken under the law of eminent domain for local, state, and or federal use should be exempt from federal capital gains and state income tax on the proceeds from the actual land and/or improved property taken. Since the property owners did not ask that their property be taken, is it fair that they be further penalized by having to reduce their net proceeds on their unwanted gain by capital gains, state income tax, or franchise tax obligations?

Should there be an agriculture exemption on the property at the time of taking then the remaining contiguous tracts or remaining parcels shall not be subject to roll back taxes in the event it is sold to a third party or the current owners wished to change the status of the exemption to something that is more suitable to the adjoining condemnation, such as new roads, parks, and other instances where it would be conducive to change the use of the land.

Therefore the property owner should be allowed to position himself without future penalty. In the event the remaining acreage is less than sufficient to qualify for an agriculture exemption by not meeting the gross acreage requirements, the parcel shall remain exempt. The status should remain until the property is conveyed to a third party that is not immediately legally related (by blood and or partnership structure) to the property owner and/or its use status changes. A transfer or sale to an immediate family member such as a wife, a sibling, spouse, child and/or grandchild should not change the status of the exemption.

Additionally, on rural and residential property the owner could be given a lifetime exemption on the remaining tract where the property value is frozen for the duration of their ownership similar to an age exemption after age 65, as long as the property is used as a primary residence. The property and/or parcel shall be defined by its dimension in a recorded lot, plat, or a legally described tract by the local appraisal district.

In the event that the taking subjects the property to negative conditions, the owner should be compensated not only for fair market value of the land taken, but also receive additional compensation on the remaining property for economic obsolescence. Excessive noises, pollution, congestion, and restricted access due to traffic patterns are examples that contribute to economic obsolescence. Economic or external obsolescence is defined by the American Institute of Real Estate Appraisers as “an element of accrued depreciation; a defect, usually incurable, cause by negative influences outside a site”. The difference in value is the loss attributed to this type of obsolescence.

Not all roads, easements, and other uses through eminent domain have a positive affect on real estate. A small business and/or rural farm where the actual taking totally consumes or destroys the owner’s ability to function should be offered the choice of mitigation or the elimination of acapital gains tax on their proceeds.

In the near future we will see more attempts to legitimize public private partnerships as an alternative method of financing public infrastructure projects. In the event a public private partnership is properly underwritten, property owners should be allowed to participate if they so choose. Unlike the Kelo situation where they were simply removed off of their property and compensated unwillingly, they should be offered the opportunity to participate in the economic profits of the project. The fair market value of their land could be treated as capital or equity contributed to the equity pool with guarantees that it be treated as the primary investor in the transaction (first in, first out).

Historically, the fight over property rights has always been a grass roots struggle, going back to when our forefathers chose to breakaway from King George. This struggle must continue today with the same vigor and passion lest we find ourselves with a Constitution being pushed into an abyss of irrelevance by self-serving interests and an indifferent government. We have a choice to make to restore parity in our legal system in regard to our diminishing property rights or sit idle and watch them become meaningless. Fair compensation and the legal process go hand in hand in restoring these rights to our property owners. As property rights deteriorate, so does the basis of our democracy and our American way of life. We must now decide if we will allow anarchy and tyranny to commence.

About the authors

Carbett “Trey” J. Duhon III
Trey Duhon is an attorney with a private practice in Waller, Texas, licensed since 1995. He currently serves as the president of the Waller Area Chamber of Commerce, in addition to serving as a director of the Waller County Toll Road Authority and as a director and vice president of Citizens for a Better Waller County. He was recently appointed to the Transportation Commission's citizen's Advisory Committee on the TTC-69. Trey graduated from Texas A&M University cum laude in 1992 and the University of Houston Law Center in 1995. He currently lives in the Fieldstore area just south of the Waller/Grimes County line with his wife, Jennifer.

Don M. Garrett
Don Garrett is a real estate broker, private investor, and consultant in Waller County, Texas. He has been a real estate professional for over 30 years and is a licensed real estate broker in Texas, Nebraska, North Carolina, and Georgia. During the ‘80’s he was responsible for liquidating a major bank portfolio in Houston, TX during the Savings & Loan Crisis. He is a board member and trustee of the Waller County Economic Development Partnership, president of Citizens for a Better Waller County, and was recently appointed as a director for the Waller County Sub-Regional Planning Commission. Don received his BS from Lamar University in 1970 and his M. Ed. from the University of Arizona in 1973. He and his wife Brenda live on their working farm near Hockley, TX.

© 2008 Citizens for a Better Waller County, P. O. Box 1802 Waller, TX. 77484: www.wallercountycitizens.org

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