The City of Detroit finds itself in the unenviable position of having a crushing operating deficit over a vacated dominion. Mayor Dave Bing has taken a logical approach with his Consolidation Plan, which would consolidate the city's population into fewer, denser neighbourhoods that can be served more efficiently. Yet the plan will be challenged by current property owners interested in recovering their investments, and they will likely find that the Fifth Amendment, which addresses eminent domain, supports their position.
These problems start with the prudent practice of auctioning off properties that have failed to pay their property taxes for three years running. Once a year the public is given a chance to bid for the properties before they revert to municipal ownership. The website Bid4Assets.com helped sell 13,000 properties for Wayne County in the fall of 2010, with the vast majority up for bid coming from the City of Detroit. The auctioned properties helped to raise 15 million US dollars for the city. In an inflationary property market investors would jump at the chance to buy a fixer-upper on the cheap, make modest improvements, and flip it for a profit. However for the past few decades Detroit's overall real estate trend has been deflationary. In such a market the auction process breaks down and the city starts to lose more in property values and tax revenue than it gains from the auction.
As Detroit's freeways emptied its core, fewer investors could see any potential for the city's real estate. The majority of parcels went unsold at property tax auctions and reverted to the city's portfolio. Despite the property auctions the City of Detroit currently holds over 39,000 parcels under its stewardship due to unpaid taxes. Real estate prices have dropped to a level that is inviting for speculators. Unlike an investor, a speculator has no intention of putting money toward a property and just waits for the surrounding environment to change and add value by proximity. The speculator can bid for a property for the minimum of $500. If there's any outide interest in the property, the speculator can start paying property taxes and exercise their rights to motivate a sale. If there is no interest, the speculator does not even pay the property taxes to the city. They can just hold it for three years; when the land reverts to the city they can bid for it at auction again.
Speculators are denounced as predators or scavengers that impede genuine development. Large projects such as a riverfront casino district or a revitalising city airport quickly get drowned by speculator frenzy as all available surrounding properties are purchased at auction or bought outright in hopes of flipping to heavily financed organisations at a profit. Mayor Bing's Consolidation Plan is becoming another grand project that property speculation may make too expensive to execute. The property speculators are the last optimists in Detroit's brutal real-estate environment. They have gambled on Detroit's turnaround, and will confront the city on any plans to give up on its abandoned neighbourhoods.
The City of Detroit cannot abandon whole districts of the city just because they are underused. There are property owners in those districts, especially speculators, who would challenge any attempt by government to devalue their property. If the city condemned the surrounding properties of a privately-owned parcel it would lower the value, especially if public access via a street were no longer maintained. The property could be devalued to a point where the owner has no choice but to sell it to the city at a much lower cost. This could be interpreted as fraud as it circumvents the fair compensation protections in the Fifth Amendment's eminent domain clause.
In the United States the government can legally take property only for "public use", not for any public purpose or general public interest. In the Consolidation Plan, the property will not be for public use like a freeway or airport but rather for condemnation. This would devalue surrounding private properties, and the government has no right to knowingly assist in making an individual's property worthless.
This is the case that speculators can bring time and time again, grinding the implementation of the Consolidation Plan to a halt. Over time, the government's lawyers and politicians may be able to battle their way to a compromise, but Detroit's current financial state needs faster solutions.
One proposal is that properties that fail to pay taxes would not go to auction, but rather into a Land Bank controlled by the city. Investors would propose development plans to the city and negotiate purchase of the property from the Land Bank. The city would have more control over who owns the properties than in an auction process. The concern however is that this creates an environment for corrupt land deals. Properties might be sold to a preferred group of investors and flipped for profit to the developer actually requesting the property. Land Banks also prioritise larger developments to the detriment of any grassroots innovations in property development. Detroit cannot afford to chase just a few big projects while 39,000 parcels sit idle.
Neither the property auctions nor the Land Bank can solve the city's problems alone, but a Land Bank integrated with a lease auction arrangement could combine each of their most positive aspects. The city could put all its real estate holdings up for auction as leases. The city as landlord would have more rights over its properties than the city as property tax collector. Different interests could bid to lease a property for one year, three years, ten years or thirty years. One year terms with no minimum bid would allow grassroots groups and small entrepreneurs to experiment with parcels around the city at minimal cost. Minimum bids for thirty year terms could be as high as the assessed value of the property. The leases would contain provisions to deter speculators from holding leases, such as payment terms that would break the lease if not met.
Lease terms should also carry incentives for investors. When the property is improved investors should be able to sub-lease it or have the option for final bid at auction when the lease ends. The auctions could be held online, but more importantly the leasing information for each property should also be made available. Then a resident or business can see what leases will be auctioned in their area, and who they could contact to sub-lease a property, rendering the whole market transparent and accessible.
Detroit must make itself open and inviting to opportunities and experimentation beyond anything other cities have attempted. The media often talks about Detroit's inability to assemble the real estate for large projects that could revitalise the city. This goes against the idea of subdividing properties to create value by including more owners or users within the city limits. Detroit was built by big business and it has been abandoned by big business. Now is the time for Detroit to challenge the world: "Here is a parcel for lease at negligible cost. What can you do with it?"