Land Grab--Legal, But Not Ethical

Elaine Foxwell Comments
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Recently, the city council of Aurora, Colo., passed a zoning-amortization ordinance to the detriment of several small businesses. Normally, amortization ordinances are used to revitalize a blighted area by ridding it of undesirable businesses such as adult bookstores or billboards. Businesses are given a period of time to conform to the new zoning requirements, usually by changing the type of business, or selling or leasing the property to another business that complies with the new zoning. Unlike condemnation, in which the government of a municipality pays owners a fair price for the property, amortization requires owners to find a conforming use for their property or dispose of it.

At the center of the affected area is the former Fitzsimmons Army Hospital, which is now being developed into a multibillion-dollar medical campus. The Fitzsimmons boundary area extends several blocks into neighborhoods populated by small businesses, including a self-storage facility, a gas station, hotels and low-income mobile-home parks. The amortization ordinance gives theses businesses 10 years to comply with a 1999 zoning change or cease operation. But it does not take into account single-use businesses such as self- storage, gas stations or car washes. If these types of businesses cannot be converted to meet zoning, owners will probably have to sell for land value alone, depriving them of the value of the business or improvements.

Property owners do have some recourse. After the ordinance was endorsed by the city council earlier this year, property owners were given the option of collecting enough voter signatures to call for a referendum for a special election, allowing them to vote on the ordinance. The call will require 4,001 signatures, or 10 percent of the total voters in the last election. If the amortization is rejected through the referendum vote, the city will have to look at other options, including condemnation.

Legal, but Is It Ethical?

"Amortization would allow the city to get the property without paying the condemnation price. This is not parity," says Donna Muse-Marcy, vice president and chief operations officer for San Antonio-based Brundage Management Co. Inc. Brundage owns A-AAAKey Mini Storage, one of the businesses affected by the ordinance. "What are you going to convert a gas station to, what are you going to convert a mini-storage to?" she asks. "Our self-storage facility is the highest and best use of the land. Why would we bulldoze it and go into a different use?" She maintains her business stands to lose up to $2 million if forced to sell.

Brundage has formed a group of several businesses to obtain sufficient signatures for the referendum. "It really is in everybody's benefit to participate in this," Muse-Marcy says. Brundage indicates it is prepared to fight what it sees as a real threat to small businesses everywhere.

Jim Burling, principal attorney with the Pacific Legal Foundation Property Rights Section also has real concerns about the amortization ordinance. "It is very disturbing," he says. "Not only is the city establishing a very harsh amortization rule to evade its responsibility to allow the continuation of nonconforming uses that do not constitute a nuisance, but it has also established a very expensive and complex appeals procedure that seems designed to discourage landowners from asserting any challenges." Specifically, Burling is concerned that landowners must, within 180 days of notice of registration, file an appeal for $1,000 that contains very detailed and complex disclosure requirements--requirements that will be quite expensive and cumbersome for many small businesses to follow.

"What's more, the appeal process appears to be based on the notion that tax depreciation is the lodestar for determining the amortization period," Burling says. He has seen this approach used before with devastating consequences on landowners because tax depreciation simply has no practical relationship to the real world of business and real estate investment. There are many businesses that have fully depreciated real estate and capital-equipment inventories that have many years of useful life remaining.

The fact is, after 10 years, or even after a longer tax-depreciation period (in those cases where the depreciation is not yet fully realized), these businesses will more often than not remain viable businesses capable of returning significant capital to their owners for many years after the depreciation period, Burling states.

Burling encourages landowners in this area to vigorously challenge this ordinance while also acknowledging whatever administrative remedies are available. This will not necessarily be easy--with precedents in Colorado and the Tenth Circuit upholding amortization periods for signs and adult entertainment, some courts might be inclined to analyze the ordinance the same way. That is certainly what the drafters of this ordinance are hoping. However, the scope of this ordinance is extraordinary as it applies to a whole variety of existing businesses on an area-wide basis. Also, in those cases where a use prohibition might otherwise constitute a taking because the economic viability of the property is destroyed, the case for the unconstitutionality of the ordinance might be even stronger. In the event the landowners do decide to challenge this ordinance, Burling would like to know about it.

A Multibillion-Dollar Incentive

Charles Richardson, city attorney for Aurora, explains the amortization ordinance was the result of the move of the new development for the University of Colorado Health Science Center. "The University of Colorado's Health Science Center, medical school and hospital were constrained physically by their location in Denver," says Richardson. "Moving to the Fitzsimmons site was a wonderful opportunity to build a whole new complex on a large piece of property." In addition, one of the most important points in the consideration of the move was there is enough land to build the ancillary biomedical-research facility. Other medical facilities, including a state-of-the-art cancer center, are already built.

"This is a real exciting and vibrant project for a city of 300,000 that was previously a bedroom community," Richardson says. But, despite the availability of a large tract of land, there is a problem with the area that threatens Aurora's plans.

Because the Fitzsimmons base is located in a distressed part of the city, there was some resistance from the U of C staff and students who were not comfortable with the environment surrounding the new facility, Richardson says. "Our urban planners have a concomitant obligation to provide the businesses, mixed-use residential and support structure to surround this jewel in our crown." After weighing all the options, the end product was the amortization process in which most current uses were declared nonconforming and given 10 years to switch to a conforming business.

"The city council has gone an extra mile by having an appeal provision by hearing process if a business owner cannot recoup his investment in the 10 years," Richardson says. "An appointed independent hearing officer can provide for a longer amortization period."

Some businesses have come to the hearings to ask for a straight condemnation, thinking they will come out better, but Richardson has doubts that people should consider condemnation as the best answer. The city attorney's office uses outside attorneys who specialize in condemnation. "There is a simplistic view out there that condemnation is the answer," Richardson explains. "We've tried to explain you should look at the condemnation remedies, since sometimes you don't get what you expect. Basically, you're putting your property into the hands of citizens, or a jury. Either way, sometimes things don't turn out the way you hope."

"It's really a difficult dilemma," adds Kevin Hougen, president and CEO of the Aurora Chamber of Commerce. "Aurora and its leadership are looking at development outside the area the base used to be. The city stands to gain 38,000 new highly paid, highly skilled jobs with the development of this $5 billion complex."

Hougen says this came about too fast to give the chamber time to react. "Normally, the chamber would prefer condemnation proceedings rather than amortization," he says. "Despite having years, few of the landowners along the corridor have tried to improve their properties, so that is why the council is voting in favor of this." And, although the vote of council members was divided 6 to 4, the council member who represents that region voted for amortization, according to Hougen. The city council is hoping that by rezoning this area, the businesses that are not conforming may find a developer that will come out and buy them for a large amount.

Conclusion

"It's eminent domain on the cheap," says D. Carlos Kaslow, legal counsel for the Self Storage Association and author of The Self Storage Legal Review. "When you look at this, it comes down to Aurora has figured out a way to confiscate businesses they don't like in a particular area without condemning them." Kaslow says the SSA is opposed to this kind of forced government-taking of a self-storage facility. The community has concluded it no longer likes this type of business, but isn't prepared to compensate the owner for the true value of the company.

Kaslow maintains that giving someone 10 years to wind down a business doesn't change the fact the government is eliminating his pre-existing right to do business based on compliance to all prior all zoning and building regulations. If a business owner puts up a building that is properly zoned at the time, theoretically, municipalities can't change the rules halfway through the game, Kaslow says. "It's a slippery and dangerous slope for business owners. We're already seeing a similar situation in Pasadena, Calif., where a community enacted a moratorium on constructing certain kinds of buildings, including self-storage."

It often comes down to a revenue situation, Kaslow states. Self-storage is not a major generator of taxable revenue but, on the other hand, its facilities place limited demands on city services. "You put up a self-storage facility, and the cost to the city is extremely low compared to other kinds of businesses," he says. "City government often overlooks this."

"For people who have businesses there, it is a concern," says Charles LeClaire, president of the Colorado Self Storage Owners Group. "The city or the state is not willing to buy out the area." However, LeClaire doesn't think use of the amortization process to claim property poses much of a threat to real estate throughout the United States.

Jim Chiswell, owner of Chiswell & Associates LLC, disagrees. "This goes to the heart of the ownership of real property. The city of Aurora is attempting to take the properties of a number of small business people," he says. "Property ownership is a basic right, but the amortization ordinance represents a threat to all property owners. If Aurora officials are allowed to do this, it could sweep the country as communities look for ways to redirect their growth."

FOR MORE INFORMATION

Jim Burling Pacific Legal Foundation
916.987.7088

Jim Chiswell Chiswell & Associates LLC
434.589.4446

Kevin Hougen Aurora Chamber of Commerce
303.344.1500

D. Carlos Kaslow Self Storage Association
510.528.0630

Charles LeClaire Colorado Self Storage Owners Group
303.320.1300

Donna Muse-Marcy Brundage Management Co. Inc.
210.735.9393

Charles Richardson City Attorney, Aurora, Colo.
303.739.7030.

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