Banks Weigh In On Explosive Issue Of Eminent Domain

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Eminent domain catapulted last year from a topic for policy wonks to a mainstream issue in the wake of a U.S. Supreme Court decision, which allowed a Connecticut town to buy 15 residents' properties over their objections to raise more tax revenue. Now, banks are beginning to take a stand, though vastly differing opinions are dividing the industry.

Winston-Salem-based BB&T, the nation's 12th-largest U.S. bank with $107 billion in assets, made the unusual move in February of publicly announcing a new corporate-lending policy of not extending loans to developers in some eminent domain cases. Specifically, it says it will shun cases that ultimately benefit a private-sector developer instead of resulting in a clear case of "public use," which is the traditional use of eminent domain.

Soon afterward, Missouri-based community bank Montgomery Bank followed.

While some community groups applauded the banks' moves, others have derided them as publicity stunts that enable the institutions to appear concerned about their communities-yet risk nothing.

Ken Chalk, senior evp and chief credit officer at BB&T, says the bank had followed this issue for some time and came to a heartfelt decision about the "right thing to do" after the 2005 court decision. Indeed, the bank's chairman and CEO John Allison said, "The idea that a citizen's property can be taken by the government solely for private use is extremely misguided. In fact, it's just plain wrong."

Though homeowners are forced to sell at a price presumed to be fair market value, the public backlash is more about the notion that property owners can be forced to sell even when the new project is a private venture, like a shopping mall, instead of a public use, such as a school or a highway.

The Fifth Amendment to the U.S. Constitution says: "Nor shall private property be taken for public use, without just compensation." From past court decisions, the public use restriction was more broadly interpreted to become a public purpose, which, in turn, has come to include objectives like higher tax revenue and job creation. In the 5-4 vote in June, the Supreme Court codified those developments in deciding that New London, CT, could condemn private property and turn it over to private developers for a complex to be anchored by a Pfizer Inc. research center.

The high court specifically said that states could take the opposite position to curtail eminent domain if they wished. Some have done just that, which has created a patchwork of state laws and prompted pockets of public furor.

BB&T's Chalk noted that the bank would reap benefits from its new policy. "If the community does well, the bank has a better chance of doing well," he says. Still, the motive behind such announcements has left some real estate experts wondering if bank management is overstepping its bounds. John McIlwain, senior fellow at the Urban Land Institute, questions whether a public pronouncement like BB&T's is a disservice to shareholders. "This was an absurd position for a bank," he says. "Someone is going to bring [a bank] a possible deal that's legal and presumably profitable and you're going to turn it down? To me, the chairman's views are irrelevant." He adds that this type of policy can be a slippery slope since a bank CEO could decide that he does not want, for example, to lend to churches or synagogues.

Richard Bove, a financial institutions analyst at specialty investment bank Punk Ziegel & Co., rejects the notion of a slippery slope, but, at the same time, dismisses sincerity on the part of BB&T. "It's a PR gimmick," he says. He says this position allows banks to "sound concerned" about issues like personal property and freedom while taking no risk. "BB&T has a constituency of small businesses and they're losing zero on the other side," he says. "Nothing."

Not surprisingly, social-activist investors were inclined to view the announcement, as well as its motives, positively. Timothy Smith, director of socially responsive investment at Walden Asset Management, says the bank took into account non-financial factors that impact the bottom line. "Even if it stems from the feeling of the CEO, that feeling can still be buttressed by business issues," he says.

The question remains: Will banks make a difference in the eminent-domain debate? Robert Puentes, a metropolitan-policy fellow at Washington-based think tank The Brookings Institution, says they could indeed have an impact, but not necessarily for the better. He maintains that eminent domain is a necessary tool for cities undergoing meaningful redevelopment, and as nervous as mayors across the U.S. have become of using it, they now have more reason to be cautious. "This is certainly a blow to the cities," he says. (c) 2006 U.S. Banker and SourceMedia, Inc. All Rights Reserved.

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