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The Ramifications of Post-Kelo Legislation on State Transportation Projects (2012)

Chapter: IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS

« Previous: VIII. POST-KELO REFORMS AND PRETEXTUAL TAKINGS
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Suggested Citation:"IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS." National Academies of Sciences, Engineering, and Medicine. 2012. The Ramifications of Post-Kelo Legislation on State Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/14631.
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Suggested Citation:"IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS." National Academies of Sciences, Engineering, and Medicine. 2012. The Ramifications of Post-Kelo Legislation on State Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/14631.
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Suggested Citation:"IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS." National Academies of Sciences, Engineering, and Medicine. 2012. The Ramifications of Post-Kelo Legislation on State Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/14631.
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Suggested Citation:"IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS." National Academies of Sciences, Engineering, and Medicine. 2012. The Ramifications of Post-Kelo Legislation on State Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/14631.
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Suggested Citation:"IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS." National Academies of Sciences, Engineering, and Medicine. 2012. The Ramifications of Post-Kelo Legislation on State Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/14631.
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24 ship’s desire to control airport operations.”286 The court held that the purpose of a condemnation must be exam- ined when the record suggests “discriminatory or ille- gal” purpose.287 On remand, the trial court would have to consider whether there was a public purpose that was sought to be achieved by the condemnation.288 In sum, although several takings since Kelo have been challenged on the basis that they were pretextual, the courts for the most part have held that the takings were not pretextual, especially when a highway project was involved. As seen, however, a case may be re- manded to the trial court if a pretext claim has not been examined carefully in light of evidence suggesting that a taking was for other than a public purpose. IX. THE EFFECT OF POST-KELO LAWS ON TAKINGS FOR TRANSPORTATION PROJECTS A. Post-Kelo Reforms’ Effect on Cost and Timely Delivery of Projects 1. Cost of Projects As for whether any post-Kelo reforms have affected the cost of transportation projects, the DOTs in Califor- nia, Iowa, Missouri, Nevada, and Oregon stated there has been some post-Kelo impact. Table 3. Post-Kelo Reforms’ Effect on the Cost of Transportation Projects Transportation depart- ments reporting no effect on the cost of transportation projects 21 (81 percent) Transportation depart- ments reporting some effect on the cost of transportation projects 5 (19 percent) California stated that “[b]ecause of greater potential for project delays the effort to avoid eminent domain has increased somewhat. The Department has seen a rise in costlier administrative settlements.”289 Califor- nia’s experience is that “[t]he Department has a greater pre-disposition to settling [right-of-way] matters rather than risk potential schedule delays going through an eminent domain process and is willing to pay higher administrative settlement amounts than ‘pre-Kelo’ days.”290 Moreover, when “eminent domain is necessary, the [Order of Possession] hearing process has caused 286 Id. at 315, 976 A.2d at 1119. 287 Id. at 320, 976 A.2d at 1122. 288 Id. at 320, 976 A.2d at 1123–24, cert. denied, 2010 N.J. LEXIS 123 (Jan. 19, 2010). 289 Caltrans’ Survey Response, dated Mar. 18, 2011. 290 Id. some project delays that ultimately result in higher project costs as well.”291 In Missouri, the Missouri Highways and Transporta- tion Commission (MHTC) “continues to use eminent domain but the post-Kelo laws have affected its use. The condemnation process now takes additional time and costs significantly more money.”292 Missouri re- ported that between fiscal year 2008 and fiscal year 2011 to date, the Missouri DOT has spent an additional $7.8 million in heritage293 and homestead294 payments as provided in the new post-Kelo statutes.295 “[T]he new post-Kelo laws statutorily redefined the concept of ‘fair market value’ in a manner that will increase property acquisition costs.”296 Nevada reported that its post-Kelo laws have made the department “consider potential settlements that we may have rejected in the past, thereby increasing ac- quisition cost. We are also experiencing several inverse condemnation cases….”297 The full effect of the changes in Nevada are not known because the amendments were added recently and because the downward trend in real property prices has reduced right-of-way pro- gram costs.298 Wyoming also cited higher costs as an effect of post- Kelo reforms because of increased steps and time needed for an acquisition, including more attorney time by staff and consultant attorneys.299 291 Id. 292 MHTC’s Survey Response, dated Mar. 10, 2011. 293 A "heritage value" is “the value assigned to any real property, including but not limited to real property owned by a business enterprise with fewer than one hundred employees, that has been owned within the same family for fifty or more years, such value to be fifty percent of fair market value….” MO. REV. STAT. § 523.001(2). 294 A “homestead taking" is any taking of a dwelling owned by the property owner and functioning as the owner's primary place of residence or any tak- ing of the owner's property within three hundred feet of the owner's primary place of residence that prevents the owner from utilizing the property in substantially the same manner as it is currently being utilized…. MO. REV. STAT. § 523.001(3). 295 MHTC’s Survey Response, dated Mar. 10, 2011. 296 Id. The Missouri statute provides that "fair market value" is the value of the property taken after considering comparable sales in the area, capitalization of income, and replacement cost less depreciation, singularly or in combination, as appropriate, and additionally considering the value of the property based upon its highest and best use, using generally accepted ap- praisal practices. If less than the entire property is taken, fair market value shall mean the difference between the fair market value of the entire property immediately prior to the taking and the fair market value of the remaining or burdened property immediately after the taking…. MO. REV. STAT. § 523.001(1). 297 Nevada DOT’s Survey Response, dated Mar. 14, 2011. 298 Id. 299 Wyoming DOT’s Survey Response, dated Mar. 22, 2011.

25 One cost factor specifically mentioned in Nevada’s and Oregon’s survey responses was attorney’s fees. In Oregon the most significant impact was the amendment of the attorney’s fee provisions in Oregon Revised Stat- utes (ORS) Section 35.346(7)(a). The amendment re- quired that attorney’s fees were due if the final judgment at trial was greater than the “initial” written offer provided by the condemnor. The result of this change was to greatly reduce the incentive for property owners to settle with ODOT or any other condemnor in the state. If the verdict at a condemnation trial exceeded the amount of the initial written offer, a condemnor was required to pay the prop- erty owner’s attorneys fees. Thus a written offer made one to two years before the verdict was the amount the property owner had to “beat” at trial to have all attorney’s fees paid. This was true even if the condemnor received new information and increased its offer of just compensa- tion.300 According to the Oregon DOT, the amendment resulted in public bodies having to pay larger settlement amounts solely because of the likelihood of having to pay a significant sum of attorney's fees at trial. The DOT reported that in one case a settlement was reached with a property owner prior to trial. After the settlement, the department received an attorney’s fee bill in the amount of $60,000. Although the department contested the bill, the court ruled that the settlement amount had been higher than the initial written of- fer.301 However, the attorney’s fee issue was addressed in the Oregon 2009 legislative session. The legislature modified…ORS 35.300 to add the ability of a condemnor to make an “Offer of Compromise” up to 10 days prior to trial. If this offer was rejected, and the property owner did not achieve a higher result at trial, a condemnor only had to pay attorney’s fees up to the day of the offer.302 The legislature also modified…ORS 35.346(7)(a) to require attorney’s fees [to] be paid only if a property owner received a jury ver- dict higher than ‘the highest written offer’ made by a con- demnor prior to filing for condemnation. This highest written offer prior to filing is now incorporated into the Department's negotiation process and is routinely used in situations where it is likely that we will be forced to file for condemnation.303 As discussed in Section V.D.6, even if post-Kelo reforms result in payments exceeding fair market value, FHWA’s policy, as long as the costs are “appropriately documented,” is to reimburse for the increased costs. 2. Timely Delivery Twenty-three departments reported that the post- Kelo constitutional or legislative changes in their state 300 Oregon DOT’s Survey Response, dated Mar. 10, 2011. 301 Id. 302 Id. 303 Id. had not affected the timely delivery of projects, whereas the departments in three states (California, Missouri, and Wyoming) reported that there had been an effect. Table 4. Post-Kelo Reforms’ Effect on the Timely Delivery of Transportation Projects Transportation depart- ments reporting no effect on timely delivery of transporta- tion projects 23 (90 percent) Transportation depart- ments reporting some effect on timely delivery of trans- portation projects 3 (10 percent) When summarizing the effects of post-Kelo laws in California, Caltrans explained that since the Kelo deci- sion California has enacted three laws affecting the use of eminent domain that have affected highway pro- jects,304 all of which are discussed in Section VII.A. As noted, one new requirement is for an Order of Posses- sion (OP) hearing that is attended by both parties where the property owner may identify a hardship that may “delay possession indefinitely depending on what the judge determines from the testimony.”305 In addition to the comments of the MHTC that were noted previously, the MHTC stated that additional time is now required prior to filing a condemnation peti- tion.306 Moreover, “the new post-Kelo laws allow prop- erty owners additional time to vacate residential prop- erty,” as well as “provide landowner’s attorneys new statutory means to delay condemnation cases.”307 Wyoming stated that there have been occasions when the department chose not to acquire property if the owner did not want to sell because of the time con- straints in using eminent domain.308 The reforms’ addi- tional steps “have caused projects to be late.”309 B. Post-Kelo Reforms’ Effects on Appraisals, Land Acquisition, and Project Planning 1. Appraisals Some states require that a condemnor must have the property being acquired appraised before initiating ne- gotiations with the property owner;310 that a condemnor make reasonable efforts to acquire the subject property 304 Caltrans’ Survey Response, dated Mar. 18, 2011 (citing SB 1210, SB 1650, AB 1322). 305 Id. (citing SB 1210). 306 MHTC’s Survey Response, dated Mar. 10, 2011. 307 Id. 308 Wyoming DOT’s Survey Response, dated Mar. 22, 2011. 309 Id. 310 GA. CODE ANN. § 22-1-9(2); MINN. STAT. § 117.036, subd. 2.

26 by negotiation;311 or that a condemnor’s offer be no less than the condemnor’s independent appraisal.312 Nevertheless, in response to the survey, 22 state DOTs reported that there had been no effect on ap- praisals. Although the DOTs in four states, California, Iowa, Missouri, and Nevada, said that the laws have affected appraisals, the Iowa DOT commented that any impact has been minimal.313 Table 5. Post-Kelo Reforms’ Effect on Appraisals Transportation depart- ments reporting no effect on appraisals 22 (85 percent) Transportation depart- ments reporting some effect on appraisals 4 (15 percent) California’s response to the survey noted that, prior to the post-Kelo reforms, “appraisal efficiencies” existed in that the department could combine a number of ap- praisals on comparable or similar properties in one re- port. Now, because of the need to craft one appraisal for each property, “the combined reports are no longer as expeditious.”314 Moreover, California law now requires a “condemning agency [to] pay the reasonable cost of an appraisal (up to $5,000) if the owner so chooses.”315 An owner is entitled to receive a full copy of the depart- ment’s appraisal; prior to the change in the law an ap- praisal summary statement was all that was re- quired.316 In Iowa, although the reforms “included the payment of the cost of one appraisal in addition to reasonable attorney fees if the compensation award exceeds 110 percent of the final offer,” as noted, the Iowa DOT re- ported that the reforms had had little impact.317 According to the MHTC, there has been an effect in Missouri because a “condemnor’s appraisal reports now must be co-signed by a state-certified appraiser” and because the statutory redefinition of fair market value “will require additional appraisal resources to address previously restricted appraisal techniques.”318 A recent Missouri case was located for the digest concerning the post-Kelo reforms and appraisals with respect to a redevelopment plan. One issue in the case 311 GA. CODE ANN. § 22-1-9(1); MINN. STAT. § 117.036, subd. 3; R.I. GEN. LAWS § 42-64.12-7(b) (property being acquired for redevelopment purposes). 312 GA. CODE ANN. § 22-1-9(3); but see MINN. STAT. § 117.036, subd. 3 (requiring only that the appraisals be con- sidered). 313 Iowa DOT’s Survey Response, dated Mar. 11, 2011. 314 Caltrans’ Survey Response, dated Mar. 18, 2011 (citing AB 1322). 315 Id. (citing SB 1210). 316 Id. (citing AB 1322). 317 Iowa DOT’s Survey Response, dated Mar. 11, 2011. 318 MHTC’s Survey Response, dated Mar. 10, 2011. was the appraisal that was made a part of an offer prior to an eventual taking by eminent domain.319 In reject- ing the condemning authority’s argument, the court held that that the post-Kelo 2006 amendments to the applicable statute did affect a condemning authority’s requirement to negotiate in good faith.320 In affirming the circuit court’s judgment and its award of attorney’s fees,321 the court held that “[b]lind acceptance of an ap- praiser’s testimony…would permit the condemning au- thority to provide landowners with ‘slipshod or incom- petent appraisals,’ the precise evil the legislature sought to avoid” by the amendments.”322 In a Minnesota case, a condemning authority failed to comply strictly with the state’s appraisal and nego- tiation requirements in Minnesota Statute Section 117.036.323 The statutory provision was amended post- Kelo in 2006 “to govern all condemnation petitions filed under chapter 117.”324 The court held that the state’s failure did not deprive the district court of subject mat- ter jurisdiction because substantial compliance was sufficient.325 Moreover, notwithstanding the intended transfer after the taking, the taking was held to serve a public purpose, the latter determination being a judicial issue in Minnesota.326 2. Land Acquisition Twenty-two departments reported that their state’s post-Kelo reforms have had no effect on land acquisi- tion, but the DOTs in four states, California, Missouri, Nevada, and Wyoming, said that there has been an ef- fect with one state reporting that one of the state’s post- Kelo reforms actually benefited the department. Table 6. Post-Kelo Reforms’ Effect on Land Acquisition Transportation depart- ments reporting no effect on land acquisition 22 (85 percent) Transportation depart- ments reporting some effect on land acquisition 4 (15 percent) According to Caltrans, some property owners will de- lay making a settlement while waiting for their ap- 319 Planned Indus. Expansion Auth. of Kan. City v. Ivanhoe Neighborhood Council, 316 S.W.3d 418 (W.D. Mo. App. 2010). 320 At trial the court found that the appraisers demon- strated “an inability to explain…drastic adjustments” resulting in a devaluated appraisal of the subject property. 316 S.W.3d at 422. 321 Id. at 423. 322 Id. at 427 (citation omitted). 323 City of Granite Falls v. Soo Line R.R., 742 N.W.2d 690 (Minn. Ct. App. 2007). 324 Id. at 695 n.2 (emphasis in original). 325 Id. at 697. 326 Id. at 697, 698.

27 praisal to be completed.327 Additionally, by giving own- ers a full appraisal rather than an appraisal summary statement, “owners have more to complain and/or argue about, thus delaying settlements.328 Knowing that [Or- der of Possession or OP] hearings are now part of the process, reduced negotiation time occurs to make up for the added time it takes to get an OP.”329 One effect on land acquisition in Missouri is that “[o]ccupants of acquired residential property now have 100 days to vacate the premises, instead of the 90 days provided by federal law.”330 Furthermore, [u]nder Missouri’s new post-Kelo statutes, a “Notice of the Intended Acquisition” must now be provided to affected property owners at least 60 days prior to filing a condem- nation petition. The petition cannot be filed within 30 days of MHTC’s written purchase offer. In addition, MHTC offers the new statutory homestead or heritage bonus as an administrative settlement during pre- condemnation negotiations if the property owners qual- ify.331 The Nevada DOT stated that, regardless of size, all acquisitions may need an appraisal if condemnation is possible. Therefore, in planning projects, it is necessary to consider the time and effort needed to prepare each acquisition for the possibility of a condemnation ac- tion.332 The cost and time necessary to prepare apprais- als must be taken into account.333 The DOT stated that the law has “[c]hanged our definition of fair market value to the ‘highest price in terms of cash’ instead of ‘most probable price….’”334 The change “may have an impact on the dollar amount paid to the property owner, but [it] is hard to measure the impact.”335 If the department acquires property by eminent domain, the department “must use it within 5 years of the acquisi- tion. Therefore, we must keep track of these acquisi- tions….”336 In contrast, in 2006, Pennsylvania enacted the Prop- erty Rights Protection Act337 as part of a reenactment of Pennsylvania’s Eminent Domain Code.338 Because the post-Kelo changes apply mostly to redevelopment, PennDOT reported that the changes have not affected any PennDOT projects.339 “In fact, the only provision directly impacting PennDOT bolsters PennDOT’s abil- ity to condemn private lands to lessen the impacts of 327 Caltrans’ Survey Response, dated Mar. 18, 2011. 328 Id. 329 Id. 330 MHTC’s Survey Response, dated Mar. 10, 2011. 331 Id. 332 Nevada DOT’s Survey Response, dated Mar. 14, 2011. 333 Id. 334 Id. 335 Id. 336 Id. 337 26 PA. CONS. STAT. §§ 201–07. 338 Id. § 101, et seq. 339 PennDOT’s Survey Response, dated Mar. 9, 2011. access restrictions on land remaining after a condemna- tion.”340 3. Project Planning As discussed in Section VI of the digest, some states’ post-Kelo reforms include new procedural requirements. However, 22 of the 26 transportation departments in states having post-Kelo reforms reported that the laws had not affected the agency’s planning for projects. The DOTs in four states, California, Missouri, Nevada, and Wyoming, reported that there had been an impact on project planning. Table 7. Post-Kelo Reforms’ Effect on Project Planning Transportation depart- ments reporting no effect on project planning 22 (85 percent) Transportation depart- ments reporting some effect on project planning 4 (15 percent) California stated that the changes since Kelo have necessitated longer lead times to acquire property be- cause of the OP hearing process and because of having to craft a “property owner-ready” appraisal.341 Simi- larly, in Missouri, “[a]dditional time now has to be added to project schedules to comply with the new stat- utes,” and “each potentially impacted property owner has a pre-condemnation option to propose alternate locations.”342 C. Other Post-Kelo Laws’ Effects on Transportation Projects 1. Construction Only California advised that because of the new re- quirements, “construction has greater impetus to ‘turn dirt’ lest the Department has to get into a lease back or buy back situation with impacted property owners.”343 2. Property Management The transportation departments in two states, Cali- fornia and Nevada, said that property management had been affected. Caltrans, for example, observed that the new “requirements have the potential of adding work- load to property management to find the owners, then craft either the leases or the selling of property that has not yet been used as part of a construction project.”344 340 Id. 341 Caltrans’ Survey Response, dated Mar. 18, 2011. 342 MHTC’s Survey Response, dated Mar. 10, 2011. 343 Caltrans’ Survey Response, dated March 18, 2011 (citing SB 1650). 344 Id.

28 3. Public-Private Partnerships More than 20 states have enacted PPP-enabling leg- islation that may be invoked to establish that a taking for a PPP project is for a public use; thus, there is “sig- nificant statutory authority” for PPP projects.345 As seen in the Kelo decision, the tendency is for the courts to defer to the legislature regarding the need to take pri- vate property for a public use. In Kelo, the city invoked a state statute that authorized the use of eminent do- main to promote economic development in New London. The Kelo Court relied on the statute in part to support its decision that the planned economic redevelopment was for a public use even though a private interest may be benefited by the takings. With the exception of California, the DOTs reported that their states’ post-Kelo reforms have not affected PPP projects in their states. Although not reporting a specific instance involving a post-Kelo effect on a PPP project, Caltrans commented that “[a]ny PPP projects have to undergo the same schedule impacts and consid- erations in the post-Kelo world as non PPP projects.”346 It may be noted that in California the state code author- izes local government use of PPPs for the design, con- struction, or reconstruction by private entities of com- muter and light rail, highway or bridge, tunnel, airport and runway, and other projects.347 Under California Government Code Section 5956.7, a “governmental agency may exercise any power possessed by it with respect to the development and construction of infra- structure projects pursuant to this chapter.”348 Al- though neither the state nor a state agency may use the authority granted in California Government Code Sec- tion 5956 et seq. for a state project such as a toll road or state highway, other authority exists for PPP projects. For example, the California Streets and Highway Code Section 143 authorizes PPPs for certain qualified state transportation projects.349 4. Relocation Assistance Of 26 departments responding to the survey that are subject to post-Kelo laws, only the MHTC reported an impact on relocation assistance. The MHTC stated that “[o]ccupants of acquired residential property now have 100 days to vacate the premises, instead of the 90 days provided by federal law.”350 345 Seth Eaton & William D. Locher, Give PPPs a Chance, LOS ANGELES LAWYER, Jan. 2009, available at http://www.lacba.org/Files/LAL/Vol31No10/2556.pdf, hereafter cited as “Eaton & Locher” (citing Federal Highway Administra- tion, State P3 Legislation, available at http://www.fhwa. dot.gov/ipd/p3/state_legislation/state_legislation_key_ elements.htm), last accessed on July 5, 2011. 346 Caltrans’ Survey Response, dated Mar. 18, 2011. 347 CAL. GOV’T CODE § 5956.4. 348 Id. § 5956.7(a) (emphasis supplied). 349 CAL. STS. & HWY. CODE § 143 is applicable to Caltrans and regional transportation agencies. See also Eaton & Locher, supra note 347, at 25. 350 MHTC’s Survey Response, dated Mar. 10, 2011. 5. Utility Relocation All 26 departments stated that there had been no ef- fect of post-Kelo laws on utility relocation. D. Post-Kelo Effect on Takings of Blighted Property for Transportation Projects All 26 DOTs in states with post-Kelo laws reported having no specific project, whether alone or in coopera- tion with another agency, in a designated blighted area that has been affected by post-Kelo reforms. Neverthe- less, in its response Caltrans stated, first, that the post- Kelo laws could affect “certain areas along major free- ways that are currently being widened that perhaps have been designated blighted by the local jurisdiction.” Second, the laws “may have an impact…in the planning stages when investigating environmental justice issues on a given alignment.”351 E. Transportation Departments’ Providing of Guidance Regarding Post-Kelo Laws Six DOTs reported having provided guidance to planners, engineers, attorneys, or other requestors re- garding takings for transportation projects because of post-Kelo laws. In California, “[v]arious memoranda have been released” regarding the required appraisal “reimbursement.”352 Moreover, the Caltrans legal de- partment has provided internal guidance on the OP hearing process, and the right-of-way project delivery and appraisal offices have issued joint memoranda on the implementation of the various laws.353 Alerts have been provided to engineers and project managers re- garding the effects of the new laws.354 The Ohio DOT reported that in addition to providing training and amending its Real Estate Manual to in- clude the state’s “Kelo laws” in the acquisition process, the department’s staff provides guidance as re- quested.355 The MHTC also stated that it has provided training and guidance “to attorneys, engineers and right of way staff regarding the additional time and steps now required under the new law….”356 Some of the guidance has been to the effect that the changes since Kelo generally do not affect takings for highway and other transportation projects. The Dela- ware DOT stated that it periodically has explained that its “projects and any property acquisitions made for them are not subject to Kelo-type restrictions, largely because the agency’s actions are not of the type of eco- nomic development takings challenged in [the Kelo] case.”357 The Nevada DOT stated that under its stewardship program in working with local public agencies, the de- 351 Caltrans’ Survey Response, dated Mar. 18, 2011. 352 Id. (citing SB 1210). 353 Caltrans’ Survey Response, dated Mar. 18, 2011. 354 Id. 355 ODOT’s Survey Response, dated Mar. 2, 2011. 356 MHTC’s Survey Response, dated Mar. 10, 2011. 357 Delaware DOT’s Survey Response, dated Feb. 15, 2011.

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TRB's National Cooperative Highway Research Program (NCHRP) Legal Research Digest 56: The Ramifications of Post-Kelo Legislation on State Transportation Projects explores the consequences of legislation enacted by state legislatures that limits the use of eminent domain in response to the 2005 United States Supreme Court case of Kelo v. the City of New London, where the Court held that the use of eminent domain to take nonblighted, private property for a city-approved, privately implemented economic development plan was constitutional.

The report examines how state legislation has affected the use of eminent domain for economic development, for condemning blighted and nonblighted property, and for restricting transfers of condemned property to private parties. The report also examines how states have legislatively redefined the concept of “public use.”

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