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Tim Myers: Avoid real estate bust: Own property the city wants!

Posted: January 31, 2009 10:06 p.m.
Updated: February 1, 2009 4:59 a.m.
I serve various Boy Scout troops in the Santa Clarita Valley instructing Scouts on the Eagle required merit badges of Citizenship in the Community, Nation and the World.

During the course of this instruction Scouts must make themselves familiar with that most seminal document of American basic freedoms, the Bill of Rights.

It pleases me to say that all Scouts possess a basic understanding of the meta-rights contained in the first 10 amendments, including freedom of speech, religion and assembly.

These seem to find their way into the DNA of the nation. Thanks to countless hours of police procedural television programs, Scouts also seem quite familiar with the right to counsel and against self-incrimination.

But some of the rights leave the youngsters scratching their heads. For instance, the Third Amendment restriction against quartering of troops in people's homes did not really resonate, but seemed quite important to early Americans in New England who remembered providing free room and board to occupying
British troops in pre-Revolution days.

Similarly, the lesser known Fifth Amendment right of eminent domain requires explanation.

Historically, the new Americans felt strongly about the power of eminent domain. In the old days in Great Britain, the King or Queen (meaning the government) could seize the property of anyone for any reason, since the sovereign stood in the shoes of the ultimate owner of all property.

Eventually, protections came in for the titled nobility, which the King or Queen could easily strip with a trumped-up charge of treason (along with the removal of the offending party's head in some cases).

The Founding Fathers saw the need to facilitate the acquisition of private property for the common good, but felt strongly that the government should compensate private property owners "fairly."

Hence the eminent domain protections of the Fifth Amendment.

The Fifth Amendment realized a very rocky history, particularly of late.

In the late 20th century planners located freeways and other major public projects through the most distressed areas of a city, paying little or no compensation to folks with residences of low value where the proceeds could not possibly gain them replacement housing.

Lately, in reaction to a Supreme Court case validating the ability of a local government to utilize eminent domain to obtain property then turned over to private use, many states, including California, enacted laws or initiatives forbidding this specific practice.

Now remembering the primary injustice addressed by the Fifth Amendment related to the government seizing private property for no compensation, the history in the U.S. related to the fear that the government would seize property for unfairly low compensation, particularly when transferred to another private purpose.

Luckily, in the city of Santa Clarita, we should bear no concern for this either, though the rest of the community, primarily the taxpayers, may feel victimized.

The case in point? The city will soon obtain a small building used currently to house a piercing business in downtown Newhall, requiring the property for a building of a new public library.

While the owner seemed somewhat unwilling to part with the property without an eminent domain battle, a purchase price proffered of $1 million changed his tune quickly.

The $1 million price relates to an original purchase price of $250K in 1997, according to reports. This price implicates a 17 percent compound increase in the value of the property every year.

Of late reports surfaced concerning the renegotiation of commercial leases mid-term at rates of a 15 percent to 20 percent reduction, implying a correlating loss in total value.

If we extrapolate this to the building in question, this means that through 2007, if the city actually paid fair-market value, the building ran up to a value of $1.2 million; an astounding 20 percent compound
increase in value year after year.

But most astounding? If the owner of the building put in the normal 70 percent leverage on the original purpose, he did not quadruple his money like some reported; he received a net proceeds after debt repayment of $825K, a whopping 11 times more than his original investment and a compound annual return of 30 percent per year.

What does this illustrate besides the power of leverage? To avoid a real estate or credit crunch, one needs to possess a broken-down building in a distressed area of town that the city of Santa Clarita really, really wants.

Tim Myers is a Valencia resident. His column represents his own views and not necessarily those of The Signal. "Myers' Musings" appears Sundays in The Signal.


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