Boston Mayor Threatens Filene's Developers With Eminent Domain Power

The mayor of Boston said in March that he may condemn and seize the former Filene's Basement property slated for a multimillion-dollar building project currently stalled in the Downtown Crossing area. He also floated the idea of revoking the building permits that expire in August anyway.

Democrat Thomas "Tom" Menino is Boston's longest-serving mayor and a lifelong resident of the city. According to the mayor's website, he has a degree in community planning, and has focused largely on creating vibrant and financially sound neighborhoods. Known fondly for his sometimes humorous verbal gaffes and for allegedly having met over half of the city's population personally, the mayor reacted angrily to remarks by Vornado Realty Trust Chairman Steve Roth.

Vornado is a New York-based real-estate investment trust worth billions. Vornado and three business partners - JPMorgan, Gale International and Mack-Cali Realty Corp. - demolished the old Filene's building in 2008, leaving an ugly, giant hole in the urban landscape. The project planned for the site is called One Franklin, a $700 million skyscraper complex that would include condominiums, retail space, a hotel, offices and a new Filene's store. However, construction has been halted for two years.

Vornado CEO Michael Fascitelli blames the stalled project on the economy and on the complexity of having three business partners in the project, claiming it is no longer economically viable. But in a speech, Chairman Roth suggested a deliberate stalling tactic for large construction projects to create blight and attract public financing. He was previously accused of this approach in a similar situation at the razed site of New York's Alexander's department store, which he let sit undeveloped for years.

In a letter, Mayor Menino called Roth's comments outrageous and raised the specter of using the city's eminent-domain authority to condemn the One Franklin development. Roth has apologized in person at city hall for his remarks.

Further Speculation

Ironically, some critics feel that the mayor's threat may frighten away potential investors needed to complete the project in a time of conservative lending. Others say the mayor's warning is without teeth because whether the property is condemned or not, the problem is really that there is no money to finish the project. Equally daunting is the task of finding enough tenants to fill the building when it is finished.

One popular opinion is that for the city to seize the property would be a great solution and financial boon for the developers of the failed project in these uncertain economic times. If the city uses its eminent-domain power to condemn and take title to the property, Boston would have to compensate Vornado and the other investors for its value. The city may end up paying $100 million for the property, the amount of Vornado's purchase price.

What Is Eminent Domain?

First recognized in European law, eminent domain is the inherent governmental right to take legal title to private property, usually land, for public use or public purpose. The U.S Constitution limits the governmental takings power, better known as condemnation, by requiring payment of reasonable compensation to the private owner. The duty of the governmental taker to pay compensation applies equally to the federal government, the states and their subdivisions, including cities.

In the Boston situation, the Massachusetts Constitution and eminent-domain laws would also apply. Massachusetts law requires that the reasonable compensation to be paid by the government unit taking private property in eminent domain is the fair market value (FMV) of the property considering its highest and best use.

The highest use of the Filene's property may well be worth more than the $100 million purchase price.

Liberalization of Eminent Domain

Historically, the typical eminent-domain situation has been when a government body condemns a private home or business and the land it sits on to extend a public thoroughfare or erect a public building. However, this picture has become much more complicated in modern times. A governmental entity is usually given a great deal of latitude and discretion in determining what is meant by a public purpose pursuant to which property can be condemned.

The landmark 2005 U.S Supreme Court case Kelo v. City of New London, Conn . stunned the nation by holding that a municipality could condemn a large block of various private properties - including in this case an apparently adequately maintained home lived in by the same family since 1918 - for purposes of economic rejuvenation. The distressed city's comprehensive economic development plan called for "commercial, residential, and recreational uses of land, with the hope that they will form a whole greater than the sum of its parts."

The court found that, when taken as a whole, the benefits to the community (including more jobs and tax income) constituted the public use required by law. This it found to be true despite the key fact that some of the property would eventually end up in the hands of other private parties. Kelo sparked a national debate about where to draw the line on eminent-domain power.

Massachusetts Law

Massachusetts allows governmental authorities to condemn blighted property for urban renewal projects, including housing developments for the economically disadvantaged or for other needy people like veterans or residents with disabilities. The law requires that the construction of an urban renewal project must be started within a reasonable time.

Uncertain Outcome

At present no one knows when or if construction will resume, or whether the mayor will make good on any of his threats. The expansive view of eminent domain that includes economic development within the definition of public purpose not only affects private parties, but also has implications for commercial developers and financial investors. On the one hand, public economic rejuvenation projects that may need private investment provide opportunities for significant commercial activity. On the other hand, developers and investors may find themselves in a position of fighting condemnation of their own property.

The one certainty is that any private or commercial party involved in such projects from any angle needs skilled and knowledgeable legal counsel to protect its legal rights and provide crucial guidance.