The Government's Right to Eminent Domain and its Boundaries

The Government's Right to Eminent Domain and its Boundaries

By: Joseph Krahn

           

Eminent domain has been a hot topic for many decades. There are arguments for and against it.  The reason that eminent domain exists is that it allows the government to purchase property from an unwilling seller so that a government project, such as a highway, can be completed.  There are many advocates who believe eminent domain is not right because it allows the government to take someone's property away without having a justifiable reason to use the land: Mere compensation is not enough to grant the government the power to take property.  Because of this, there needs to be laws that protect an individual’s private property rights: States such as California are helping to accomplish that.  To better understand why these laws are needed, we first need to understand what eminent domain is.

            Eminent domain is a term that was coined by Hugo Grotius in 1625 (Kmiec, 2005), and it "is the power to take private property for public use by a state or national government.  However, it can be legislatively delegated by the state to municipalities, government subdivisions, or even private persons or corporations when they are authorized to exercise functions of public character" (Eminent Domain, 2013).  Eminent domain was transplanted to America through common law, or natural law, in which it was assumed that the government could take property that was unimproved without compensation. This was accepted in the colonies because at the time land was abundant and cheap (Eminent Domain, 2013).  When the Founding Fathers began writing the United States Constitution, they realized that property rights had to be codified to prevent future government abuse.  James Madison said, "A Government is instituted to protect property of every sort . . . This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own" (Kmiec, 2005).  Thus, the Framers limited the use of eminent domain in the Fifth Amendment to the Constitution: "Nor shall private property be taken for public use, without just compensation"  (Eminent Domain, 2013).  There are many reasons for the government to take property.  "The most common uses for property that is taken through eminent domain is for government buildings and other facilities, public utilities, highways, and railroads" (Eminent Domain, 2013).  There is a lot of important infrastructure that has been built because of this right of the government.  One of the most important uses of eminent domain is building infrastructure for transportation and utilities: Roads, highways, railroads, communications, and electrical wiring take up space.  Sometimes the property that the government needs in order to complete a project is located on land that the owner is not willing to sell.  This creates a spatial monopoly, which is defined as "a local market in which a single landowner controls the supply of land or property type in a particular geography" (Diaz III & Hansz, 2010, p. 165).  Eminent domain allows the government to purchase this property for just compensation so that the road can be completed even if the owner does not want to sell.  However, even though eminent domain does have its purposes, it can be abused.  Thus, the Framers limited the use of eminent domain in the Fifth Amendment to the Constitution: "Nor shall private property be taken for public use, without just compensation"

            As was stated before, eminent domain is important in order to complete projects that are for the public.  But who defines public use?  There are many examples of abuse in the system.  Typically, public use has been defined as a road, school, government buildings, utilities, or something of that nature that would be used by the general public.  But is an arena for a sports team considered appropriate for such public use?  For example, the New York Supreme Court allowed 50 properties in Brooklyn to be condemned so that a new arena could be built for the Nets.  In addition, Washington D.C. seized 18 acres of businesses to build condos and a mall (Sibilla, 2013).  Furthermore, could economic improvements be considered public use?  In 1832, a mill owner was allowed to expand his dam through use of eminent domain because of the economic impact of the expansion.  Therefore, it is quite obvious that there are plenty of ways that eminent domain can be abused.  What is being done about it?

            To help solve the issue of eminent domain abuse, 44 states, including California, have passed eminent domain reform.  These reforms were brought about after Kelo v. New London in which the United States Supreme Court ruled that New London, Connecticut could condemn a neighborhood so that an urban village could be built to house the workers at Pfizer’s new plant.  Because of this abuse, most of the states passed reforms protecting individuals’ property rights. Some states even went so far as to amend their constitutions to further entrench these protections (Sibilla, 2013).  Then in 2006, President George W. Bush signed Executive Order 13406 which stated that eminent domain could not be used "for the purpose of advancing the economic interest of private parties to be given ownership or use of the property taken" (Eminent Domain, 2013).  These steps were a big win for the rights of property owners.

            Eminent domain has been a hot topic for many decades and there are arguments for and against it.  Eminent domain is sometimes a necessary right for the government to exercise in order to build infrastructure that is needed by the public.  Conversely, there are many cases of eminent domain abuse for projects that are in the gray area of public abuse.   It is ultimately up to the states to make sure that their citizens are protected from property abuses.  In conclusion, eminent domain is necessary, but it needs to be carefully watched and regulated to prevent exploitation.

Works Cited 

Diaz III, Julian and J. Andrew Hansz. Real Estate Analysis: Environments and Activities. Dubuque, IA: Kendall Hunt, 2010.

Eminent Domain. 29 October 2013. 29 October 2013 <http://en.wikipedia.org/wiki/Eminent_domain>.

Kmiec, Douglas W. The Takings Clause. 15 September 2005. 29 October 2013 <http://www.heritage.org/research/reports/2005/09/the-takings-clause>.

Sibilla, Nick. It's Time For Congress To Actively Condemn Eminent Domain Abuses. 28 June 2013. 29 September 2013 <http://www.forbes.com/sites/realspin/2013/06/28/its-time-for-congress-to-actively-condemn-eminent-domain-abuses/>.

Chapter 9. M/C and T/F

1.   The risk that the investor will not be able to pay promised debt service and that the property, used
      as collateral for the loan, will be taken from the investor.
      A. Management risk   B. Inflation risk   C. Liquidity risk   D. Financial risk
2.  The risk that the investor cannot sell and convert the real estate investment to cash, called
     liquefying, when desired.
      A. Management risk  B. Inflation risk    C. Liquidity risk   D. Financial risk
3.  The use of borrowed funds by the anticipation of increasing investment returns.
     A. Leverage   B. Spread   C. Mortgage reduction  D.  Adjusted basis
4.  Oligopoly is a market with a few suppliers that have some control over market prices since there is
     limited competition.
     A. T
     B. F
5.  The operating expense rate (OER) is that OER = Total Operating Expenses / EGI
     A. T
     B. F.
6.  Breakeven ratio (BER) shows how close an investor is to just breaking even on an investment.
      BER=(Total Operating Expense + ADS)/EGI
     A. T
     B. F
7.  The debt service coverage ratio (DSCR) is another measure of the money left after consideration
     of the annual debt payment.
     A. T
     B. F
8.  The broker's rate of return (BRR) is as follows:
      BRR=(Cash Flow +Mortgage Reduction)/Ve
     A. T.
     B. F.


Answers D, C, A, A, A, A, A, A.

Come join us for this special event!

 

 

 

When: Tuesday, October 29, 2013

Time: 5:00PM - 6:00PM

 

Where: PB 103 (Peters Business Building)

 

Who: All students who are interested in Real Estate, Construction and other related industries

 

Guest Speaker: Ashleigh Rocker, Programs and Volunteer Coordinator for Associated Students, Incorporated (ASI).

 

Ashleigh will be speaking to our group about a wonderful opportunity with the neighboring El Dorado Park Community that is just west of our Fresno State campus. This kind of endeaver will allow our members a chance to assist and collaborate on projects with the Property Owners Association, networking with apartment managers and delving in the real estate research and development aspects of the El Dorado Park Community Development Corporation which oversees the revitalization of this distressed community.

 

If you wish to utilize your talents and skills in the real estate field or are unsure of what exact sector of the real estate industry you wish to work in, come join us this Tuesday and hear how you can be a part of this experience and expand your abilities.

 

Look forward to seeing you Tuesday.

 

Diane Ray

President, Student Society of Real Estate

Blog 2; An Individual Home Buyers Perspective of the Real Estate Market .

    


         An Individual Home Buyer's Perspective of the Real Estate Market

       Over the past several years my husband and I have wanted to buy a house and other properties for rental investments. We have been carefully watching the market for a number of years now and have noticed some very odd trends that have caused us to be hesitant on these decisions. The market a year and a half ago actually look pretty good, but for the fact that there appeared to be a considerable amount of foreclosure overhang still coming to market which should have depressed housing prices further.
       The past year especially has made us pay closer attention, especially with the unusual rise in housing prices that have occurred in our local market and in other markets in the country. What caused this? Was it the economy recovering, jobs returning, prosperity returning, and hence driving increased housing demand and higher prices?  Or was it something else?
Generally speaking prosperity in an economy occurs, when there are more jobs, and people are making more money. But what my husband and I have noticed anecdotally, in our local market, was not supportive of a growing economy and real organic housing growth. We still saw vacant houses owned by financial companies, we saw people losing their jobs and moving home to live with family, we saw several families moving into our neighborhood and living in a single family home; we saw, at the macro level, a continued to drop in the overall national labor force participation rate. I could mentioned that there we're and still are record people on food stamps and disability, and growing monthly.  Disability seems to have become a new program for hiding the unemployed in the market today, and it has drastically skewed how most people view the economy.  The fact of the matter is the economy is not growing, less people are working than ever before, and the only entities that seem to be benefiting from the cheap money policies of the Federal Reserve and the US government are the very banks that helped caused much of the mortgage mess that we have today.
       After reading very various articles at the Wall Street Journal, Forbes, Counterpunch, and a couple of well-informed financial blogs that pulled insights and data from these and other  sources, we have come to the conclusion that this is a very poor investment environment for the homeowner and for a small real estate investor.
Hedge funds and other special purpose investment entities have been given unusually cheap money and access to the myriad of mortgage inventories on bank balance sheets. This stacks the deck against the average smaller retail investor, or any mom and pop type operation that would want to start collecting their own rental assets. The cheap money funded by the FED and the government has essentially allowed preferred cash buyers and investors to come to market, flush with cheap money, and that do not have to qualify for conventional mortgages as small investors do.
       These funds and other financial entities then collect these properties and turn them into baskets of rental income properties, some became becoming real estate investment trusts, sold to foreigners. The problem with this is that this does not solve any of the fundamental problems in the mortgage industry, and has not corrected the abuses of many banks, but merely moved under-performing or nonperforming assets off of their balance sheets, at inflated prices, and into the hands of investors that might not realize The questionable quality of the investment vehicles in the funds they would invest.  This also locks up the inventory that banks refused to sell normal people at a larger loss in a normal market.  The bottom line here is that when financial Giants, hedge funds, REITs, and other banks are stomping around in the real estate markets, and moving massive amounts of assets from balance sheet balance sheet without regard to the long-term supply and demand effects in the market, and without a fundamental recovery in economy, employment, or wages earned, there can be very few sound investments in the industry. This is unfortunately a very expensive and dangerous game of musical chairs with real estate assets. We think small investors like us are best positioned staying on the sidelines.   At some point the bottom will basically drop out of the market, and any small investors will essentially be wiped out. But hopefully, after a few years, the housing market will return to some semblance of normal, after the mortgage and foreclosure backlog has properly cleared, and a new pricing level has established itself in markets.
       As best we can tell, that is what we think is going on. The government is still supporting the banks, not letting the markets clear and correct, and hopping in now is no more intelligent than playing a game of financial Russian roulette. It's not a matter of if a further downturn in the housing market will happen, but only a question of when.  Since this is all tied to the Fed 'Quantitative Easing' Policy, and other policies that support bank liquidity and cheap money, which we think will be ending in the coming months.  Now is definitely not the time for us to be putting our hard-earned cash and assets into a market that will quickly lose value, and put investors like ourselves quickly underwater.
       That is why my husband and I have chosen to sit things out, pursue more conservative investments, perhaps in foreign currency and commodity markets.  Maybe we'll build a custom house from scratch, one with a really big kitchen.  It won't be an investment, but it will be a permanent home.

 References

Brennan, M. (2013, 3 18). Wall street institutions behind home price surges in markets like phoenix  Retrieved from http://www.forbes.com/sites/morganbrennan/2013/03/18/wall-street-institutions-behind-home-price-surges-in-markets-like-phoenix/ 
 
Diaz III, Julian and J. Andrew Hansz. Real Estate Analysis: Environments and Activities. Dubuque, IA: Kendall Hunt, 2010.

Olenick, M. (2012, 8 21). Still looking for a housing bottom [Online forum comment]. Retrieved from http://www.nakedcapitalism.com/2012/08/michael-olenick-looking-for-a-housing-bottom.html

Roberts |, L. (2013, july 26). "housing" - is it really recovering? 
 Retrieved from http://stawealth.com/daily-x-change/1774-housing-is-it-really-recovering.html

Swiatek, J. (2013, 9 3). As investor groups buy thousands of indianapolis area homes, worries - and prices - rise ]. Retrieved from http://www.indystar.com/article

The real reason housing prices have skyrocketed (2013, June 5). [Web log comment]. Retrieved from http://www.washingtonsblog.com/2013/06/the-real-reasons-housing-prices-have-skyrocketed.html 

WHITNEY, M. (2012, September 4). Discounts for speculators, foreclosures for mom and pop! Obama secret plan to prop up housing prices. Retrieved from http://www.counterpunch.org/2012/09/04/obamas-secret-plan-to-prop-up-housing-prices/

Chapter 10 - M/C and T/F Questions

1.         When a mortgage loan is due in full due to default, the condition in the loan documents indicates what kind of clause?

            a.         Prepayment clause

            b.         Due on sale clause
            c.         Acceleration clause
            d.         None of the above

 2.         What is the borrower referred to in the loan documents?

            a.         Grantor

            b.         Grantee
            c.         Mortgagee
            d.         Mortgagor

 3.         Who is transferred the ‘Deed of Trust’ document?

            a.         Trustor

            b.         Trustee
            c.         Mortgagor
            d.         Mortgagee

 4.         Who is transferred the ‘Deed of Reconveyance’ document?

            a.         Trustor

            b.         Trustee
            c.         Mortgagor
            d.         Mortgagee

 5.         Collateral is the significant difference unsecured debt and secured debt.

            True

            False
 

6.         An investor’s return is also referred to as the lender’s effective yield?

            True

            False

7.         Evaluating the risk associated with a lender’s loan package to a Mortgagor is processed by the underwriter.

            True

            False

Answers:         1) c, 2) d, 3) b, 4) c, 5) True, 6) True, 7) True

Chapter 9 - M/C and T/F Questions

1. The investment risk in real estate includes which of the following?

            a. Tax shelter
            b. Opportunity cost
            c. Cash flow
            d. All of the above

2. The rule of negative leverage is represented as
           
            a. Ro < Rm
            b. Ro > Rm
            c. Ro < Re
            d. Ro > Re

 3. What real estate investment benefits are considered in the valuation method?

            a. Tax shelter
            b. Appreciation
            c. Mortgage reduction
            d. All of the above

 4. Cash flow before taxes should be considered when determining viability of an investment.
            a. True
            b. False

5. Reserve accounts are used for periodic repairs and replacement expenses but need to be accounted for on the cash flow statement such as a savings account.

            a. True
            b. False

 6. Typically a market with a lower cap rate indicates that investors are paying higher prices.

            a. True
            b. False

  Answers: 1) b 2) a, 3) d, 4) True, 5) True, 6). True

Chapter 10 Lending Activity

1. Due on sale clause; A requirement that the entire loan balance must be paid off at the mortgage contract rate.

A. True
B. False

2.  Secured debt; A personal promise to pay back a loan.

A. True
B. False

3. Overall caps; A limit on a contract interest rate change over an adjustment period

A. True
B. False

4. Unsecured debt; A personal promise to pay back a loan backed up with collateral.
A. True
B. False

5. A credit report can be downloaded immediately online and costs around $ 30

A. True
B. False

6. Which one of the following is NOT the credit analysis that begins with a credit report from one or more of the three major credit-reporting agencies?
A. Equifax
B. Trans Union
C. Experian
D. Your Employer

7. What to bring when meeting with a mortgage originator.
A. Employment contract
B. Minimum of 2 years of tax returns
C. Pay stubs from at least the last 3 months of pay
D. All of the above

8. _____ Secondary income may include

A. Part-time employment
B. bonuses
C. A&B
D. None of the above

Answers: 1) T, 2) F, 3) F, 4) F, 5) T, 6) D, 7) D, 8) C

Chapter 9 Investing Activity

1. Cash Flow is the income from a real estate investment realized by the investor after vacancy and credit loss, all operating expenses, and debt service have been paid.
A. True
B. False

2. Monopoly; two suppliers in a particular market that have control over market prices, since there is no competition.

A. True
B. False

3.  Appreciation; The increase in asset value over a certain period.

A. True
B. False

4. Ratios are also used to evaluate investment risk.
A. True
B. False

5. The abbreviation "DS" stands for Debit Service

A. True
B. False

6. Which one of the following has nothing to do with Capital Gains Tax in Real Estate?
A. Less Value of the land
B. Net proceeds from sale
C. Value of improvements
D. Gold stock going down in value

7. Which are the benefits in Real Estate?
A. Cash flow
B. Psychic perks
C. Tax shelter
D. All of the above

8. _____ The likelihood of an occurrence of an unwanted event

A. Opportunity cost
B. Risk
C. Mortgage reduction
D. B& C

Answers: 1) T, 2) F, 3) T, 4) T, 5) F, 6) D, 7) D, 8) B

Chapter 9

1. A tax shelter is the reduction in taxable investment income.
A. True
B. False

2. The control of a real estate product within a defined geographic region is a Spatial monopoly or Oligopoly.
A. True
B. False

3. The Annual debt service is the difference between annual intrest paid and annual principal reduction.
A. True
B. False

4. There are ten varieties of return ratios.
A. True
B. False

5. The abbreviation "OE" stands for Operating Expenses.

A. True
B. False

6. Which one of the following isn't a benefit to investing into Real Estate?
A. Morgage reduction
B. Pychic Perks
C. Cash Flow
D. None of the above

7. Which of the following is a Risk in Real Estate?
A. Tax shelter
B. Leverage
C. Liquidity
D. Inflation hedge

8. _____ is the risk that the investors cannot sell and convert the real estate investment to cash.
A. Management Risk
B. Liquidity Risk
C. Financial Risk
D. Inflation Risk

Answers: 1) A, 2) A, 3) B, 4) B, 5) A, 6) D, 7) C, 8) B

Chapter 8

1. Developers gain control of the site by purchasing the land in stage two, Examine Project Feasibility.
A. True
B. False

2. The Project should be killed in stage 2 if the developer finds a cloud on the tittle along with environmental issues on the site.
A. True
B. False

3. Precommintment Activity has three stages.
A. True
B. False

4. The Dynamic Process of Real Estate Development consists of 6 sets of activities.
A. True
B. False

5. Construction loans are short term loans.
A. True
B. False

6. What are some examples of performing Due Diligence?
A. Finding easements
B. Finding environmental issues
C. Zoning
D. All the Above

7. "Teaser Documents" are assembled by two major documents for whom?
A. Potential lenders
B. Potential investors
C. Potential representatives
D. Both A&B

8. Which of the following options is not a major challenge in stage five, Construct the Design?
A. Scheduling subcontractor tasks
B. Maintaining timetables
C. Managing equipment
D. Resolving on-site conflicts and problems

Answers: 1)B, 2)A, 3)A, 4)B, 5)A, 6)D, 7) D, 8) C

Chapter 8. questions

1.  What is the "teaser financial documents"?
     A. Company Bank financial documents
     B. Company Bank statement
     C. Equity package
     D. Equity package and specific project financial documents
2. Those stages of the development process which occur before the developer has committed
    significant resources to the project.
     A. Precommitment   B. Postcommitment   C. Productive analysis   D. Market analysis
3. What loan is the gap between the construction loan and the permanent loan by taking out the
    construction lender before the permanent loan is available?
    A.  Bridge loan   B. Construction loan  C.  Mortgage loan  D. Small business loan
4. Marketability study is an analysis to estimate the existing and likely demand for, as well as the
    existing and likely supply of, a particular type of real estate use in a specific competitive market.
    A. T
    B. F
5.  Certificate of occupancy is the process of obtaining the necessary government permits to begin
     and sustain a construction project.
    A.  T.
    B.  F.
6.  General contractor, a construction expert who contracts with a developer to  construct or to
     manage the process of constructing real estate improvements.
    A. T.
    B. F.
7.  Construction loan is a long term loan issued to a developer to fund the construction state of a
     project
     A. T.
     B. F.
8.  Takeout loan commitment is a usually short loan.
     A. T.
     B. F.

Answers D, A, A, B, B, A, B, B.

Chapter 9 Questions

1)      There is a direct relationship between risk and return, and an inverse relationship between risk-return and acquisition price.

a.       True

b.      False

2)      There are several risks involved with real estate including the following: opportunity cost, business risk, management risk, inflation, financial risk, liquidity risk, and many others.

a.       True

b.      False

3)      Real estate is homogeneous, meaning that every real estate investment has the same characteristics with a limited variation of benefits and risks.

a.       True

b.      False

4)      Improvements to land are depreciated but land itself is not because land is permanent and does not waste away with time.

a.       True

b.      False

5)      It is possible for an individual or a small amount of investors to dominate a particular real estate product locally.

a.       True

b.      False

6)      The increase in asset value over a certain period of time is ______.

a.       Reserve account

b.      Appreciation

c.       Tax shelter

d.      Cash flow

7)      The use of borrowed funds by an investor with the anticipation of increasing investment returns is called ______.

a.       Leverage

b.      Spread

c.       Inflation

d.      Mortgage reduction

8)      ______ is investing in a variety of assets to spread risk in order to avoid large losses.

a.       Monopoly

b.      Oligopoly

c.       Diversification

d.      Adjusted bias

Answers: 1)T   2)T   3)F   4)T   5)T   6)B   7)A   8)C