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The Origins of Urban Renewal

The rationale for Urban Renewal stems from two very simple economic circumstances. To build on virgin land, the builder need pay only the cost of the land plus the cost of construction. But to build on land containing structures that must be demolished, the builder must also pay the residual value of those structures. A building may be obsolete. Its owner or any objective observer might agree that under present circumstances it would never make sense to build a building like it on the present site. Nonetheless, if the building yields some stream of income to its owner, he or she will not give up the building without compensation.

Consider the following example. Mr. X owns a 90-year-old tenement near the core of the city. The building contains 12 apartments, which rent for an average of $200 per month—a low figure, which represents the fact that these apartments are close to the bottom of the city's housing market. Mr. X is approached by a developer who is interested in the land under the building but must acquire that building to get at the land. A rule of thumb for rental properties is that buildings are valued at 100 times the monthly rent roll, so Mr. X responds with an offer to sell for $240,000 (12 x 200 x 100). If the building occupies a 50-by-100-foot lot, that works out to about $48 per square foot, or roughly $2 million per acre. Even if the developer thinks Mr. X may come down considerably, that number makes vacant land on a suburban highway at even a million dollars an acre look good.

The second factor that impedes development in built-up areas is the land assemblage problem. Typically, urban land ownership is highly fragmented. A single city block is likely to be owned by many separate individuals or business organizations. In fact, in many cities the basic unit into which land was originally subdivided is the 25-by-100-foot lot (25-foot frontage and 100-foot depth). For the developer setting up a major project, it may be necessary to deal with dozens of different owners. In some instances their titles may have legal problems that cannot be resolved without substantial delays. In other cases the owner of a small parcel may exploit his or her capacity to block a large project by holding out for a price that far exceeds the fair market value of the land. Compared with the urban fringe, where land is generally owned in much larger blocks, the situation can be very discouraging.

These impediments to urban redevelopment were recognized during the latter part of the Great Depression, and the federal government became interested in taking steps to improve the competitive position of the central cities. In December 1941, hardly good timing for proposing a new civilian program, Guy Greer and Alvin Hansen published an article suggesting the creation of City Realty Corporations.4 These organizations would be able to use eminent domain to assemble land and would have funds from higher levels of government for the acquisition and clearance of sites. The proposed corporations would thus be able to deal effectively with both the residual value and the land assemblage problems.

The idea lay dormant through World War II but was revived shortly thereafter. The Housing Act of 1949 brought the program into being very much as Hansen and Greer had envisioned it. The act provided for the creation of Local Public Agencies (LPAs) analogous to the City Realty Corporation. The LPA would have the power of eminent domain to acquire sites. Two-thirds of the LPA's funding was to come from the federal government, and the remaining one-third from the municipality. However, some of the local share could be services in kind (services of city personnel, donation of city-owned land, etc.) so that in cash terms the federal government paid more than the nominal two-thirds. The LPA would use its legal powers and financial resources to acquire, clear, and otherwise prepare sites (grading, provision of utilities, widening and straightening of streets, etc.). These sites would then be sold or leased to private developers at substantially below cost.

By absorbing the residual value as well as many other development costs, the program would greatly accelerate the redevelopment process within the designated renewal areas of cities. By using public powers to acquire and clear large sites, the program would permit far more coordinated and imaginative development than would otherwise be the case.

In order to work as described, Urban Renewal introduced a new practice into law. It had previously been understood that eminent domain could be used to take private property and convey it to a public body for public use (for example, the building of a public school). But under Urban Renewal, government took property from one private party—say, the owner of a dilapidated tenement—and ultimately conveyed it to another private party, the developer building on the Urban Renewal site. This arrangement seemed questionable on constitutional grounds, and a property owner took an Urban Renewal Agency to court. But in 1954 in Berman v. Parker, the Supreme Court sustained the agency. Had the case gone the other way, the Urban Renewal process as it was then structured would have come to a virtual halt, another indication of the decisive role that the courts often play in planning.

In 2005 the Supreme Court, in effect, reaffirmed Berman v. Parker in the Kelo v. New London decision. However, the political uproar that followed the Kelo decision caused many states to ban private-party-to-private-party transfers so that, at present, the question of how many redevelopment projects will proceed is not clear. The Kelo decision and the states' responses to it are discussed in detail in Chapter 5.

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