March 1, 2001 - From the March, 2001 issue

Blight is the Cornerstone of Redevelopment Law USC's Professor Lefcoe Demystifies Governing Law

Our cities have evolved. And because of that our redevelopment techniques have grown. But, as our knowledge of returning communities to "peak performance" grows, why do we continue to be bound by the shackles of an outdated blight definition? George Lefcoe, the Florine and Ervin Yoder Professor of Real Estate Law at USC asks this very question in his article, "Finding the Blight that's Right for California Development Law." TPR is pleased to excerpt his piece which asks for a new paradigm to truly aid municipalities in their pursuit of comprehensive, cohesive and economically viable cities.


George Lefcoe

By: George Lefcoe

Introduction

For over half a century federal and most state laws empowering local governments to act as urban redevelopers have attempted to confine such activity to blighted areas. Nowhere have the statutory definitions of blight, and judicial enforcement of those standards, been more rigorous than in California. In Diamond Bar [the] appellate court struck down [a] redevelopment proposal for crossing the blight line. This paper describes those cases in light of the evolution of the blight requirement. It ends up questioning whether the 1993 California legislature was right in trying to limit local government's use of redevelopment solely to those older urban areas showing unmistakable signs of physical decay.

The Origin of the Blight Requirement

[I]n the 1940s when the federal urban redevelopment law was enacted, the specter of redevelopment agencies condemning one person's property for eventual re-sale to another private owner invited constitutional objections predicated on the Fifth Amendment's "public use" requirement. When the constitutionality of using eminent domain for redevelopment reached the U.S. Supreme Court in the 1954 landmark case of Berman v. Parker, the "blight" requirement proved redundant. The Supreme Court declared that the constitutional "public use" requirement didn't necessitate findings of blight. Local governments' assertions of public use were deemed "well-nigh conclusive." "Public use" would henceforth be taken to mean nothing more than "coterminous with the scope of a sovereign's police powers." After Berman v. Parker, federal courts have never rejected a condemnation of private property for want of a public use, nor have most state courts.

The Diamond Bar Case

Diamond Bar Depicted. Diamond Bar is an affluent community, mostly residential, at the southeastern border of Los Angeles County, "with a median income of about $66,000, average home prices of $300,000, and a relatively low crime rate." The city incorporated in 1989, mainly to exercise greater control over land use decisions previously made by the county government. To the casual visitor, this suburban, recently-built community, set amidst rolling hills and valleys at the junction of two major freeways, may appear close to picture-perfect. Only about 20 percent of the city's land area is nonresidential, and much of that is dedicated to schools and parkland. But the city of Diamond Bar was a fiscal loser.

Because California cities depend heavily on sales taxes as a revenue source, Diamond Bar officials weren't pleased to learn from a 1995 survey of 400 residents that 86 percent of them "most often purchase their retail merchandise outside of the City of Diamond Bar." From 1991 to 1994, seven of the eight surrounding communities (many with redevelopment programs of their own) experienced increased taxable retail sales while Diamond Bar's taxable sales decreased almost five percent.

Only about 2% of Diamond Bar's land is dedicated to commercial uses. Most of Diamond Bar's retail centers were built in the 1970s and 1980s and had become obsolete. They were strip retail centers and small shopping centers conspicuously devoid of anchors , short on parking and 24% vacant.

Other types of real estate wasn't doing much better. Office vacancy rates in Diamond Bar ran from 20 to 40%, and its industrial vacancy rate stood at 16%. Sites in planned industrial and office subdivisions went begging. Southern California was in the midst of a real estate recession but values were receding faster in Diamond Bar's commercial and industrial areas than elsewhere in Los Angeles county, registering an 11% decrease at a time when county values were down a comparatively enviable 1.78%.

As Diamond Bar officials came to realize, only the most expensive housing ($500,000 and up) generates sufficient property taxes to offset the cost of municipal services and the quality of public improvements its affluent residents desired. Either Diamond Bar had to restrict housing development to pricey gated communities, or nurture better use of the commercial and industrial land within its turf. It chose the latter.

Seven years after incorporation, the city council commissioned an initial study to explore the feasibility of redevelopment, and adopted a redevelopment plan in 1997. The council placed virtually all of the city's commercial and industrial land into the redevelopment project area. Improving the city's tax base was high on its redevelopment agenda. Diamond Bar's plan was to enhance its tax base by using tax increments to lure new business, subsidize the rehabilitation of existing ones, improve roads, upgrade schools and parks, install streetscaping to create a pedestrian-friendly retail environment, and provide other public amenities.

On behalf of a dozen Diamond Bar residents, that plan was successfully challenged by one of California's leading redevelopment attorneys . In Beach-Courchesne v. City of Diamond Bar, a unanimous three judge appellate panel overturned the trial court's determination, and found no substantial evidence that Diamond Bar's redevelopment plan complied with the state blight statutes.

No Physical Blight in Diamond Bar.

The appellate court flunked Diamond Bar for not fitting its project within the statutory conditions defining physical blight, so the court never reached the sub-section of the statute defining economic blighting conditions.

The first of four physical blighting conditions listed in the statute concerned unfit buildings. The appellate court concluded that Diamond Bar had abandoned at trial any effort to prove the project area contained buildings unsafe or unhealthy to live or work in. While this was not quite what Diamond Bar's attorneys thought they had done, they acknowledged some difficulty satisfying this condition, but explained they didn't have to. The statute identified dilapidated buildings as but one of four possible ways to demonstrate physical blight. Before the 1993 changes, "a building or structure must have been unfit or unsafe to occupy in order [for a project area] to be deemed physically blighted." Under the extant statute, a redevelopment agency didn't need to show any physical blight in this sense.

The second blighting physical condition mentioned in the statute mixes physical components (inadequate lot size, lack of parking) with economic loss (prevention or hindrance of economically viable use). The court faulted the city for failing to "identify a single building" as suffering from inadequate vehicular access, substandard building materials, or inadequate loading areas. Even if it had identified such a building, the city would then have had to show how these deficiencies "hindered the economically viable use" of the property identified, and how the redevelopment plan was going to set things right. The redevelopment agency thought it had done its job by pointing generally to parking and loading area deficiencies in the project area, and the agency's plans to lure new firms and subsidize upgrades to existing retail facilities. It hadn't anticipated having to provide a building by building analysis, or having to connect particular physical deficiencies to prove unprofitability.

Incompatible land uses are at the core of the third physical blighting condition. It, too, has both a physical ("adjacent or nearby uses that are incompatible with each other") and an economic component ("prevents the economic development of those parcels or other portions of the project area").

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To make its case on this point, the city had cited as evidence of incompatible uses some industrial areas located near schools. It mentioned specifically the "potential hazard to children" exacerbated by the absence of a traffic signal at a busy intersection separating the school from many industrial uses. But this evidence didn't help. Diamond Bar never demonstrated the relevance of the incompatibility to the redevelopment plan. Even if the industrial uses were harmful to the school, the city had no intention of acquiring and relocating the school, or eliminating the industrial uses. Although respondents' brief alluded to high vacancy rates–up to 50%–in some of the industrial and commercial buildings near the school, the city had offered no plausible explanation of how proximity to the school had lead to the high industrial vacancy rate, or prevented the economic development of the industrial parcels.

Under the fourth physical blight condition, the city had pointed to 48 parcels–including 10 of the city's 15 retail shopping centers–being held in multiple ownership. In response, the court picked up this point from Appellants' Brief: "The mere fact of multiple ownership does not establish blight. Otherwise, a condominium development by definition would be blighted."

The city's consultants had contended that its retail areas were too small and poorly configured to accommodate large scale ‘power centers' and ‘big box' type retailers. There were two problems with the city's embracing its consultant's analysis on this point. First, the city had banned ‘big box' retailing through its general plan. Second, a number of undeveloped parcels within the project area contained parcels large enough for such retailing, sites of 47, 41, 36, 35 and 24 acres.

All in all, the appellate court opinion held out little hope that Diamond Bar could ever fashion a lawful redevelopment project along the lines of the proposal it had been advancing.

Did Diamond Bar Make New Law?

In one respect [this] case [has] made new law. [It has] specified an exacting level of documentation for redevelopment agencies aspiring to surmount the "physical blight" and "predominantly urbanized" bars set in place by legislation enacted in 1993. But that bar had already been set on the high side by the California Supreme Court in its 1976 opinion, Sweetwater Valley Civic Association v. City of National City.

In Sweetwater, the California Supreme Court reversed both a trial and appellate court by ruling against a redevelopment project designed to facilitate the conversion of a marginal golf course into a regional shopping mall. The redevelopment agency's prospects of being able to clear the blight hurdle of the day didn't look too bad. At the time blight could be found in "an economic dislocation...resulting from faulty planning." Compared to the land valuation and property taxes of the average acreage in town, Bonita was only 57% as valuable. This economic dislocation (measured by the disappointing property value) could be seen as having resulted from faulty planning since water run-off inundated the site with mud and debris for periods as long as two weeks at a time.

To the California Supreme Court, the statutory reference to economic dislocation didn't mean the community could imagine increasing its tax yield if the site were put to better use. It meant the present use had deteriorated into an irreparable economic failure. That wasn't the situation here. The record showed "the golf course is at least marginally profitable." Anyway, the court reminded, "the maintenance of open space land for recreational purposes is in the public interest," evidenced by the Open-Space Lands Act (discouraging premature conversion of open space lands to urban uses). As the California Supreme Court explained, the city had come to view the site as a liability not because of how it was being used but because of its unrealized potential.

Compliance Failures After the'93 Statute

Following the 1993 legislation the Legislative Analyst's Office examined redevelopment activity from January 1993 to August 1994. It found "no evidence that redevelopment project areas established in 1994 are smaller in size or more focused on eliminating urban blight than project areas adopted in earlier years." Recently, William Fulton, an expert in California planning, reached the same conclusion, that many new redevelopment projects seem to skirt the law successfully. Mr. Fulton predicts that "the redevelopment game–even if it slows down–probably will not stop until every older area in the state is inside a project area."

Should Blight Be Redefined ?

No jurisdiction has ever attempted to enforce a blight test as stringent as California's. Perhaps we should consider relaxing the definition. Officials in Diamond Bar were trying to make their communit[y] more attractive for business, and to work their way out of a deep real estate recession that had diminished local tax revenues. Diamond Bar also hoped to spark a retail resurgence.

These communities were actively attempting to achieve the stated goals of California planning law, to meet local infrastructure needs, conserve open space, facilitate economic development, and enhance affordable housing opportunities. If they erred by trying to use redevelopment in unblighted areas, it was not because they had overlooked better options. The state has denied local governments access to enough resources to attain the goals that emerge from the state-mandated planning process.

Cities and counties cannot attain a full array of land use planning goals utilizing only their traditional land use powers. True, cities can be quite inventive in wielding their land use powers to secure a range of public benefits. Yet, in the end, land use controls amount to nothing more than the right of a city council to "just say no" to development proposals. It's mostly sticks, few carrots. Redevelopment, as Charles Abrams observed over three decades ago, "supplies a multipurpose opportunity in place of the piecemeal efforts to correct traffic problems, provide playgrounds and open spaces, provide neighborhood amenities, and new housing, public and private." Without such pro-active powers, cities and counties must remain largely passive players in shaping the use of land within their boundaries, even when the private sector isn't fulfilling community planning aspirations. Why shouldn't redevelopment agencies be empowered to re-plan developed urban areas so as to improve traffic flow, the mix of land uses, or the quality of open space?

A Proposal.

Communities should be encouraged to redevelop underutilized urban land through a definition of blight specially crafted to their needs, as the legislature has accommodated redevelopment projects involving the re-use of closed military bases or rebuilding in the wake of disasters. The statutory definition should be re- formulated to promote infill-the intensive re-use of sparsely developed urban parcels. Then, instead of having to shoehorn planning-motivated redevelopment into the narrow last of the present blight definition, communities would have a choice, a Plan B. While it isn't clear that Diamond Bar could qualify a redevelopment plan even under such a re-definition of blight, they should be given the chance if they want. Even if they can't qualify, other communities might, which would advance the goals of California land use planning laws. To soften the impacts on other taxing entities, consider the possibility of allocating to them a larger percentage of the tax increment than physically blighted redevelopment projects are made to pay, or reinstating their prerogative to negotiate larger sums from redevelopment agencies, a right they enjoyed before 1993.

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