Hotels and Kelo vs New London

The San Francisco Chronicle today has a report on a ballot initiative in California that would seek to limit the State’s use of eminent domain. The paper notes that in 25 states and several local jurisdictions local laws and ordinances to blunt the Supreme Court’s ruling of a year ago that affirmed the Town of New London’s right to seize private property for a different owner to develop a hotel, condominiums and commercial space. That action by the nation’s top court evoked a firestorm across the country’s legislatures and in Congress resulting in an unusual resolution in the House of Representatives that decried the Supreme Court’s decision. It even got personal with a petition in Weare, N.H. for taking over Justice David Souter’s (one of the yeas in the SC’s decision) farmhouse in that town with a view to converting it into a hotel!

However, the reaction among developers of real estate including hotels has been muted at best with few if any, hotel companies commenting on the case. Takings via eminent domain have almost never been used in the US for hotel development as historically these actions have been for public goods such as roads and other infrastructure related projects. There are instances in other countries such as India with fairly strong private property rights where eminent domain is being actively used to build much needed infrastructure such as airports and roads but also for developing “technology parks” and hotels.

In California, the measure would no doubt make it virtually impossible for governments to seize private property without incurring high costs in a state. That would hardly be a surprise given California’s historically high costs of development even in a normal transaction. For US hotel owners, the implications of Kelo cuts both ways. Heretofore blighted property in declining downtowns could be possibly be revived via redevelopment plans with opportunites for hotel development. Equally, hotels that ought to be under the wrecking ball can be hastened to their demise with the land being put to better use. However, the US is unlikely to see any concerted and activist action in favor of eminent domain as a tool for development. Apart from militating against the notion of fair play, it is a poor gage of valuation. The market has almost always proven to be the best judge of best use. The state should limit itself to what it has historically done best – the provision and maintenance of infrastructure.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.