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Memo - 5th and 6th Ave Redevelopment .. - I Economic Development I MEMORANDUM TO: Honorable Mayor and City Council FROM:jQim Kerrigan, Director of Pianning & Economic Development DATE: January 13, 2005 . . SUBJECT: Redevelopment Project, 5th_6th Avenues, North of Mainstreet Purpose of Memo As the Council was previously informed, GPS Financial had secured purchase agreements on all of the properties on Block 64; however, since that discussion the owner of the Park Plaza Property has canceled their purchase agreement (they had this ability based on a contingency in the purchase agreement). GPS is now asking the Council to consider the possibility of utilizing eminent domain to gain title, Sid Inman of Ehlers & Associates and Dan Wilson of Wilson Development Services will be present at the meeting. Overview . GPS Financial Group is proposing a possible redevelopment project for the block bounded by 5th Avenue, 6th Avenue, Mainstreet, and First Street North. Initial discussions have outlined a mixed-use project with approximately 10,000 square feet of lower level retail and approximately 320 to 450 for-sale residential units, This block has 13 taX: parcels with six different owners. GPS has been undertaking a process to secure control of the property in this block, the following being the status to date: . Completed purchase of 2 single family homes, one on 5th Avenue and one on 6th Avenue . Executed purchase agreement for apartment complex at 33 - 6th Avenue North Negotiating purchase agreement for 2 commercial properties on Mainstreet The above properties encompass five of the 13 parcels on this block. The other 7 parcels are owned by 5th Avenue Partnership. This property contains Park Plaza and its adjacent surface parking areas. GPS has stated that they have attempted to negotiate a purchase with the owner of this property; however, the owner has stated they are not interested in selling. As a result, the developer is asking the City to consider the use of eminent domain to secure this property. Memo to Mayor, et aI., January 13,2005 - Page 2 Primary Issues to Consider No action is being requested from the Council. At this time the developer needs to know whether the Council is willing to use eminent domain powers to acquire the property if they are unable to negotiate a purchase. If the Council is agreeable to such action, a preliminary development agreement would be negotiated, which would identify the items that would need to be completed before the City would actually undertake the eminent domain process, What are the issues that relate to eminent domain? Dan Wilson of Wilson Development Services has prepared a memo concerning eminent domain. Mr. Wilson has been involved with a number of eminent domain actions throughout the years. Also attached is an article on this subject that appeared in the most recent issue of Minnesota Cities. Acquisition of the Park Plaza through eminent domain would be fairly high profile, It is anticipated it would have significant press coverage because of the displacement of low income residents and removal of affordable housing from the marketplace. What would be the impact of not using eminent domain? GPS has stated that they feel they will be unable to acquire the Park Plaza property through a negotiated process. They have stated that if the property cannot be secured through the use of eminent domain, they will be unable to proceed with their proposed project. Attachments . Memo from Dan Wilson, Wilson Development Services . Eminent domain article, Minnesota Cities, November/December 2004 . Site map OFFICE 952.448.4630 800.448.4630 FAX 952.448.4676 WILSONDEV510@AOl.COM 510 CHESTNUT STREET, SUITE 200 CHASKA, MINNESOTA 55318 RELOCATION & CONDEMNATION ISSUES AND RISKS BLOCK 64 REDEVELOPMENT, HOPKINS, MN The City has been'contacted to determine its interest in participating in the redevelopment of this block. Two issues above and beyond the financial feasibility surfaced that may require the City Council's attention and discussion. 1. Condemnation The developer, GPS Financial Group, has acquired or is in the process of negotiating purchase of the property on the block between 5th and 6th Avenues, north of Mainstreet (Block 64)-except for the property owned by 5th Avenue Partnership (Park Plaza Hotel). The developer has stated that if a negotiated purchase cannot be completed for the Park Plaza property they would ask the City to use its eminent domain powers (condemnation). Condemnation settles or establishes two major points. First, is there a "public purpose" for the acquisition. A public purpose would be established through the adoption of a redevelopment plan, which would set forth the public purpose due to substandard property issues, etc. . Second is the determination of property value either by the court appointed commissioners or a district court jury upon appeal. More and more sophisticated property owners are turning to the condemnation process to arrive at a settlement price as a matter of course. The request for property acquisition by condemnation is not unusual and is not necessarily adversarial. The condemnation action does provide the seller with two years, instead of one, in which to reinvest the proceeds before paying capital gains tax. The "threat" of condemnation is actually sufficient to provide this tax break. I believe that this is part of the terms being negotiated with the 5th Ave. Partnership. The condemnation process is a legitimate way to arrive at a selling price. There is the additional cost such as commissioner's expense, attorneys, appraisers and other expert witness, The expenses could approach $15,000 to $20,000 and are typically passed on to the developer and/or paid by the TIF. Page 1 of 3 ,. The "risk" of condemnation can be: 1. Public Opinion Condemnation is typically not seen in a popular light by the general public. The City of Richfield's "Best Buy" project has recently raised public awareness of condemnation in a negative context. The City of Hopkins has , used condemnation in a very limited way. Actually, it has been about thirty years since condemnation has been ~sed for redevelopment. 2. Public Purpose Challenge The seller has an opportunity to object to the public purpose at the first court hearing. If the judge were to agree, the condemnation action would halt, . subject to appeal by the city. The reality is, the condemnation laws in Minnesota are very strong in favor of the condemning authority. Typically, successful appeals to the public purpose occur when the property owner already had a private redevelopment plan of their own in motion and then it isn't certain. . 3. Price Increase The quick take condemnation action delivers title and possession of the , property in 90 days. The final price may take several more months, to over a year for a final price settlement. 2. Relocation The developer is seeking TIF assistance for the project. Receipt of TIF assistance triggers the Minnesota Uniform Relocation Act (MURA) (Section 117.12) which means that anyone displaced by the property acquisition will be entitled to relocation benefits and assistance. Basic relocation assistance includes: 1. Assurance of at least one comparable unit being available before seeking their displacement. 2. Ninety day notice to vacate. 3. Rental assistance to compensate for increased cost of housing for 42 months. 4. Move of personal property. The developer had a significant number in his initial development cost budget for relocation, so he is aware of the relocation responsibilities. Relocation is technically a city or HRA responsibility. The city can move the costs, or financial responsibility, to the developer through the development agreement (this was done with The Oaks of Mainstreet), but the city remains the responsible party if disputes arise. Page 2 of 3 .. The displacement of a large number of possibly low-income persons is certain to draw the attention of the public. . The existing residents can be dealt with directly through a relocation plan implementing all of the rights and benefits due them under the MURA. Relocation is one of those time-tested processes establishing a fair and reasonable way to minimize per~onal hardships brought about by their displacement. There are advocacy groups in the metro area that may choose to become involved. They typically are concerned with 1) The loss of affordable housing, and 2) Treatment of displacees. They may step forward during the public hearing process the city will go through to adopt the redevelopment plan. Prepared by Daniel Wilson Wilson Development Services December 28, 2004 . . Page 3 of 3 Eminent Domain The tension between the interests of local governments and the rights of private landowners continues to play out across the nation. Private property rights advocates have launched an aggressive effort to curtail local governments' ability to use eminent domain for economic development and redevelopment projects. he V,S. Supreme Court recently agreed to review a Connecticut case (Kelo v. City if New London) addressing the issue of whether it is appropriate to use the govem- ment's power of eminent domain to take property for economic development purposes. The Supreme Court's review of this case threatens to reverse long-standing legal precedent that affords great deference to municipalities in canying out conunu- nity and economic development plans. In Minnesota, the Alliance for Reasonable Municipal Regulation (ARMR) proposed legislation during the 2004 legislative session that would have made sweeping changes to Minne- sota's land acquisition process. The pro- posal would create uncertainty in the law that would generate expensive litigation, increase the cost of public projects, and impair critical development projects. (ARMR is a coalition of business interests that includes the Min- nesota Automobile Dealers Association, Builders Association of Minnesota, Builders Association of the Twin Cities, Minnesota Realtors Association, Min- nesota Retailers Association, Minnesota Petroleum Marketers Association, Marathon Ashland Oil, Super America, Alliance of Automotive Service Provid- ers of Minnesota, Outdoor Advertising Association of Minnesota, and the Minnesota Grocers Association. The League strongly opposes this legislation. Constitutional and statutory requirements Under the framework established by federal and state constitutions, the gov- ernment may take private property for a public use if the owner receives just '6 By TOm Grundhoefer and Laura Offi,'dahl compensation and is provided due pro- cess. In Minnesota, the law requires a local authority to develop the factual basis for supporting a taking. The con- demning authOlity must weigh the evidence, consider local conditions, and make difficult decisions about whether the taking provides broad public benefits. A court may overturn the local authority's decision if the authority's action was "manifestly arbi- trary or umeasonable." [City of Duluth v. State, 390 N.W. 2d 757 (Minn. 1986)] In the context of economic development and redevelopment, the courts have consistendy found that creation of "permanent and temporary employment," generation of "retail sales," and expansion of a city's "tax base" are all valid "public purposes" that justifY the use of eminent domain. State law contains several protections for property owners. Minn. Stat. ~ 117.52 requires cities to pay relocation benefits to individuals displaced by eminent domain. Local authoriries acquiring property for transportation purposes must provide early notification to landowners whose property may be the subject of an eminent domain pro- ceeding, and negotiate in good faith with the landowners plior to initiating the eminent domain process. The law also requires cities to obtain an appraisal, make the appraisal information available to property owners, and advise land- owners that they may seek their own appraisal and be reimbursed for appraisal expenses up to $1,500. These numerous protections exist to ensure property own- ers are fairly and adequately compensated. MINNESOTA CITIES While basic disputes about compen- sation are inherent in any property acquisition, Minnesota's process has worked well for many years. It balances the rights of individual landowners and the general public, and is a fair and effi- cient process for compensating property owners. A critical community development tool The government uses eminent domain to provide many public necessities- roads and highways, water mains, sewer lines, and other public services-on land acquired from individual, private property owners. Eminent domain is vital to local community and economic development efforts. Cities have few tools available to help them redevelop blighted areas and facilitate renewal of their conununities. Eminent domain is critical to local efforts to spur economic development that increases the local tax base and creates new jobs. Generating more local capacity through economic development allows cities to continue providing the quality services citizens e>"1'ect and the infi:astructure necessary to support a thriving cormnunity. It is imperative that cities be able to access condemnation authority, when neces- sary, to carry out a broader vision for their communities. ARMR proposal Last session, ARMR proposed a broad legislative fix to address a couple of specific concerns related to the public purpose and just compensation for a taking. Specifically, the group pointed to the City if Richfield v. Walser case, and problems with the right-of-way practices of the Minnesota Department of Trans- NOVEMBER-DECEMBER. 2004 ...-. - portation (Mn/DOT), as the basis for seeking extensive changes to Minnesota law. In 2002, the Minnesota Supreme Court heard a landmark case involving a taking by the city of Richfield of the Walser Buick Dealership in order to make way for the new Best Buy head- quarters. In a 3-3 split decision, the .court upheld a CQUlt of appeals decision, finding that the city's condemnation of the Walser property served a public purpose. A year later, the Senate Trans- portation Committee held a public hearing on Mn/DOT's land acquisition practices in response to a two-part series published in the StarTlibu/1e that criticized the department's acquisition of property for the expansion of High- way 52 in the Rochester area. ARMR's original bill would have made two significant changes: it would have required cities to prove by a pre- ponderance of evidence that a taking serves a primarily public purpose; and it would have required cities to pay property owners' attorney fees if the final award exceeded the city's offer by 20 percent. A city that offers a property owner too little would have to pay the landowner's attorney fees. And if the city is taking the property and later conveying it to a private party, then the city would have to provide more evi- dence supporting the public purpose for the taking. While these changes sound modest, the impacts are dramatic. Consequences for economic development and redevelopment The ARMR proposal fundamentally changes the relationship between courts and local government bodies by elimi- nating the deference historically given to a local government decision and shifting this decision-making to the courts. This change creates uncertainty in the development process, and puts judges in the position of having to decide on a case-by-case basis whether a par- ticular project serves primarily a public or private benefit. Such ad hoc judicial second-guessing, which affords no deference to the decisions oflocal' elected leaders, undermines the authority of city officials to make complex, decisions about the future of a community. . The proposal also opens the question of whether a court would ever find that a taking serves a public plllpose if the property is eventually conveyed to a NOVEMBER-DECEMBER 2004 private party. Minnesota courts have long held that the public purpose test can be met even if the property is ulti- mately conveyed to a private entity. In intelpreting the ARMR language, a court might well conclude that the Legislature intended to alter that con- clusion. The result might mean that a taking for these purposes would only be upheld in unusual circulllStances. This unceltainty in the development process could have a chilling effect on economic development and redevelop- ment activities around the state. For example, ARMR's proposed changes to eminent domain could prevent the city of New Brighton from assembling the parcels necessalY to advance its Northwest ,Quadrant redevelopment project. As a result, the city would lose $317 million in new tax base, 750 units of housing, and an opportunity to draw a large corporate development to the area. Limiting local government's ability to take property for economic develop- ment and redevelopment may call into question the appropriateness of all gov- emrnent programs designed to generate economic development. Actions that redefine what qualifies as a "public use," or that require the courts to detennine "public purpose" when a property is acquired through eminent domain for economic development and redevelop- ment, may lead to sClutiny of other govemment programs that use public funds to influence economic develop- ment activity. Increasing the cost of public projects Allowing a COUlt to award attorney fees to a landowner if the :final damage award exceeds'the condemning authority's offer by 20 percent will encourage litigation and result in more expensive public projects. Since property values, tend to increase over time, it is possible that the final award would often exceed the acquiring authority's offer by 20 percent-not because the govern- ment offered too little, but because property values have increased during the period of the negotiation. In addi- tion, most condemnation cases involve small snip takings for roads, water mains, and sewer lines. In these cases, attorney fees could easily surpass the amount of the award. Consequences for properly owners ARMR's proposal does not serve the interests of all propelty owners. A con- MINNESOTA CITIES demnation petition typically includes many parcels, so efforts by one land- owner to challenge public purpose ultimately affects all the landowners in the condemnation. This leaves all prop- erty owners-including those who choose to sell-in limbo while the court decides the issue. 'While condemnation is difficult for the affected landowners, they ultimately want celtainty so they can make long-term plans. Finding common ground The Legislature and the administration should carefully evaluate the impacts of the ARMR proposal on economic de- velopment and redevelopment effOlts, and on the vast majority oflandowners who want to quickly settle or litigate a fair price for their property and move on. The League supports entrusting these important decisions to those who are elected and accountable to their constituents. We will continue to fight legal and legislative challenges that seek to undermine the fundamental authority of government to protect the public health, safety, and welfare of citizens. We believe legislative action during the 2005 session on the broad issue of public purpose would be premature given the U.S. Supreme COUlt'S impend- ing review of the Kelo case; however, we are willing to consider changes that provide for a more transparent property acquisition process. The League is exploring several changes that would streamline the 'appraisal and negotiation process; provide more public notice and opportunities for input; require legisla- tive findings that clearly articulate the public benefits associated with a taking for development; and 'provide a reason- able timeframe for challenging a taking. The League will continue to work ..to develop legislation that improves the land acquisition process without imped- ing critical development tools that revel'Se blight; provide opportunities for businesses to expand and create jobs; , and create strong, vital communities. ... Tom Grundhoifer is general counsel1l'ith the League of Minnesota Cities. E-mail: tgrundho@lmnc.org. Phone: (651) 281- 1266. Laura Offerdahl is intergovemmental relations represet1tative with the League if Minnesota Cities. E-mail: lofferdahl@ lmnc.org. 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