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Erika Morphy is co-editor of Debt and Equity Journal, from which this article is excerpted.

On the one-year anniversary of Kelo v. City of New London, the Bush Administration weighed in on the still controversial issue by declaring that federal agencies cannot seize private property except for public projects like highways or hospitals. Experts say the gesture was largely symbolic.

Kenneth B. Bley, a land-use attorney and partner in the Los Angeles office of Cox, Castle & Nicholson LLP, explains, “The only use of economic redevelopment that I know of is carried out by cities, counties and redevelopment agencies. I’d be surprised if the federal government engages in economic redevelopment at all.”

That is not to say the federal government cannot bring its weight to bear on local activity. One bill pending in Congress, introduced by Sen. John Cornyn, R-Texas, would withhold federal funds for projects that use eminent domain to seize property for development.

State legislatures, however, have been the most active, with 31 passing laws restricting the use of eminent domain for private gain. Other states, including California, are taking the issue to the voters by putting it on the ballot next November.

Few Supreme Court decisions have inspired such a wide swath of opponents to demand legislative action like the five to four ruling in Kelo v. City of New London. Some developers, city officials and economic development agencies privately worry that a backlash is forming that will negate whatever gain Kelo delivered.

“After Kelo, just about every state introduced some statute in reaction,” says Dusty Elias Kirk, a partner at Pepper Hamilton LLP and co-chair of the firm’s real estate practice group in Pittsburgh. The State of Pennsylvania just passed legislation in May, which Kirk says has some teeth. Only blighted property can be seized and it can only be taken for specified public purposes.

Ironically, she adds, Kelo was perceived as far worse than it was in reality. “All Kelo said was, if the state permits this, then we won’t stand in the way. Eminent domain is a balancing act that each state has to decide based on local needs.”

Bley believes it will be a while before emotions cool. “These issues tend to follow a pendulum,” he says. “I think a situation is developing where eminent domain will be curtailed either de jure or de facto–because officials will just be too scared to use it–in a lot of jurisdictions. But eventually the pendulum will swing when it becomes clear it has its uses as a tool.”

Bley points out two instances where it served as a tool for some strange bedfellows. In Aaron v. Target, plaintiff Jeffrey S. Aaron, a resident of Florida and a trustee of the Sylvia H. Aaron Revocable Trust, a New York revocable trust that is a tenant in common with Adtar, a Delaware limited liability company, found itself on the receiving end of eminent domain used for private gain or development. The trust and Adtar each own, or, rather, owned, a 50% interest in two buildings in Saint Louis, MO in which a Target Inc. store is located, as well as the property itself.

In 1974, Target entered a long-term lease for 25 years to be renewed at five-year increments. The lease included a store building previously leased to another discount retailer. Target was to maintain the property and had the right to make changes to the building. In March 2002, Target contacted the owners with a proposal of replacing the store with a larger one. In May 2002, the owners responded that they were not opposed to demolition of the existing store, but wanted more rent, specifically a figure based on estimated sales at the new facility.

According to court filings, by Sept. 2002, alderman James Shrewsbury became concerned that Target would close its store if the property owners would not agree to its terms. Eminent domain was used to condemn the building. From there, the case went down a long legal path that is still incomplete, but even without a conclusion, its lesson is clear: eminent domain can be used against commercial property owners and investors as well as individual ones.

The other example Bley cites is the city of Hercules, CA, where some in the community are urging local officials to use eminent domain to stop Wal-Mart Stores Inc. from developing in the area. “You can’t help but see the irony in this,” he says.

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