The power of eminent domain to redistribute land ownership

By J. Arthur Rath

The recent news has been filled with the term “redistribution of wealth,” but in Hawaii and elsewhere the power of the state to confiscate private property under the guise of economic development has never been more popular.

The recent U.S. Supreme Court case Kelo v. City of New London in 2005 involving the use of eminent domain to transfer land from one private owner to another to further economic development is one example. In a 5-4 decision the Court held the state using eminent domain to redistribute property for redevelopment was permissible “public use” under the Takings Clause of the Fifth Amendment because the community derived “economic benefits”.

Disrespecting private property rights has a history in Hawaii, and many people who live along Oahu’s proposed rail system corridor are about to experience that firsthand. In Hawaii it was not uncommon for a person to purchase a home but not the land it rests upon to make it more affordable. This is called Leasehold and differs from the more traditional Fee Simple purchase where you buy both the land and the buildings on a property. The state’s 1967 Leasehold Conversion Act changed that. Aimed particularly at the Bishop Estate, the new law forced Hawaii’s largest landowner to sell the land under homes. Public policy ignored the primary concept behind the leases—which was to make home ownership more affordable—and also the historical context in which these leases were made, which was at a time when the lease-to-fee conversion law wasn’t even contemplated. The Hawaii State Legislature used the power of eminent domain to redistribute land ownership in Hawaii and the courts wound up setting the price. The Bishop Estate resisted the state’s involuntary conversion of its residential leases. Losing in the federal district court, it appealed to the Ninth Circuit Court and won. The state appealed, and the United States Supreme Court overruled the Ninth Circuit Court.

“We may live to regret the day we heard about the Hawaiian land reform,” stated an article in The Wall Street Journal. The U.S. Supreme Court had decreed public use was no longer a requirement for the awesome power of condemnation under the Fifth Amendment. The article went on to say that, “The real issue is that a well-intentioned court has just opened this sphere to a host of unforeseeable harassments.”

During a speech to a district council of civic clubs, Bishop Estate trustee Matsuo Takabuki explained that the formula set in a legislative session meant a property lot having a value of $55,000 could be worth about $4,000 under the state government’s method of valuing the present worth of the lessor’s interest. “The movement against private property is only beginning in the state legislature. In votes lessees greatly outnumbered the lessors; the survival instinct of those in politics is very strong,” said Takabuki.

And locally the story is the same. Honolulu Condo owners also wanted conversion rights…the law known as Ordinance 38 used the city’s powers to condemn the land beneath condominium buildings to help leasehold owner-occupants buy the land.

Over the last 30 or so years, the sales of fee-simple lots has totaled about $600 million. “A more realistic pricing system would have yielded more than $2 billion,” reported Bishop Trustee Oswald Stender. “That’s what the owners turned around and sold their fees for.” Trustees’ fees were still based on the fixed percentage of qualified income receipts established by state law back in 1943. When land sales caused the estate’s receipts to increase more than tenfold, newspapers drew attention to what trustees were now being paid. In 1980, trustees earned an average of $125,000 per person. Seven years later their commissions rose to $926,000 each. In fiscal year 1990, the trustees earned just over $1 million each.

With the recent passage of the rail project proposal, those who live along the rail route will experience firsthand the power of eminent domain to redistribute land ownership. Sheer numbers of citizens might be able to influence politically motivated persons waiting to see which way the wind blows but unless we make our voices heard the day may be rapidly approaching where true private property ownership in Hawaii and America becomes a thing of the past. And that will be a very sad day indeed.