HOA's: The Solution to Eminent Domain?

Every couple of weeks I quickly go through the ritual of flipping through the pages of the latest edition of my free trial copy of Forbes Magazine. The columns at the front are what interest me most, as Mr. Forbes, Rich Karlgaard, Paul Johnson, Lee Kwan Yew and Caspar Weinberger and others offer some worthwhile insight. In the latest issue I came across an op-ed piece by Robert H. Nelson of the Competitive Enterprise Institute, a pro-market think tank. In response to the Supreme Court’s decision on Kelo earlier this year, Nelson proposes a way to counter the threat of strengthened eminent domain powers of municipal governments. Realizing that many inner city areas are desperate for investment and new commercial anchors necessary for revitalization, eminent domain is often the only means to achieve these goals. Yet it often leaves those about to be forcibly uprooted in an unfairly week negotiating position. Nelson writes:

But older cities face serious land-use problems. How can a dense urban area like New London or Hartford revitalize itself if developers have to build one lot at a time? Should residents of failing cities insist that shopping centers be built only in the far suburbs, displacing farms and increasing suburban sprawl? Must all large housing developments be relegated to the exurbs?

That definitely seems to be the pattern. Housing is often more affordable in the suburbs, property taxes lower and land cheaper. The massive migration to the periphery triggers the development of retail centers, especially big-box stores and smaller and more lucrative chains. The clean slate of undeveloped land is a boon to big-box retailers that prefer vast un-built acreage, a close highway and comparatively low land values with a potential to quickly rise. Decaying inner cities have none of those attributes. Still, when a big-box retailer does make its way into a central part of the city, inhabitants from all over the city flock to it in droves, overwhelming its parking lots. This intense commercial activity in turn acts as a catalyst for further commercial development in the surrounding area, making it more attractive for outsiders to move into the city. Tax revenues rise. This was part of the logic used by the city of New London in the argument for eminent domain. Nelson agrees that this kind of development is a good thing, but the uncoordinated nature of individual property rights acts as a barrier to opportunity. The solution lies in the ability for residents to control collectively their neighborhood, similar to homeowner associations (HOA) common to many newer master-planned neighborhoods:

Community associations are spreading rapidly in America's suburbs. From 1980 to 2000 half of new U.S. housing was built within a community association. It's time that the benefits of associations become available in older cities as well. A new state law would work like this: If a group of urban owners wished to consolidate their properties, they would petition the city. A transfer agreement for streets, parks and other public services would get worked out. Then if a supermajority of 70% or 80% voted to approve, a new private community association, including all the property owners, would be established.

It also sounds a lot like one of those condominium associations, where if the majority votes to do repairs on the property, the minority has to suck it up and pay, whether or not they can afford it. What might seem like a good idea for some in a neighborhood might not be for others, and there is no way that minority rights can be assured in such a situation. I’ve read quite a few anecdotal accounts of the tyrannical nature of HOA’s which makes me relieved that I’ve never been involved in one. Still, it’s precisely the case that I’m freer to choose where I live than those who can’t afford to that maybe some form of HOA is a good move towards enticing commercial anchors. After all, forming this kind of community association is voluntary, and if a developer does want to buy out many occupied lots, he can make an offer that would be far more generous to residents who are not all that interested through an association than by eminent domain. Nelson explains:

There would be no cram-down eminent domain; the property owners themselves, through a supermajority vote within their association, would approve any sale. And they'd get a price set not by judicial decree but by private negotiation. Proceeds would be divided according to the association's rules. If the owners preferred to stay in the neighborhood, rather than sell out, their new association would then function much like a residential version of a business improvement district. They could collect assessments, for instance, to sweep the sidewalk.

I am still not totally sold on the idea. It’s no doubt a very original idea and a welcome contribution to the debate on where authority should lie in city planning. I’m more interested in what you readers think of this idea and what potential problems and unexpected benefits the privatization of inner cities brings. Read Nelson’s piece and try to answer the question: is his proposal the best solution to the problem of eminent domain?