Reallocating Redevelopment Risk

Abstract

Scores of cities across the country face devastating financial crises, and the COVID-19 pandemic has brought even more to the brink. But economically distressed municipalities have few places to turn for help. Saddled by rising unemployment, weak tax bases, and state law limitations on deficit spending and debt assumption, they generally cannot spend their way out. And as conditions deteriorate, mobile capital and labor move to greener pastures, further hollowing out the cities they leave behind. With state and federal lifelines tenuous at best, offers by large developers to redevelop an area of the city can thus appear to be the path to salvation: a shot in the arm that will raise property values, create jobs, attract residents, expand the tax base, and generate further interest in similar projects.

Given their outsized importance, private redevelopment projects warrant sustained scholarly attention. But nearly all of the attention they receive focuses on just two aspects of the issue: the doctrinal scope of local power to engage in them, and the law and policy steps necessary for them to achieve an efficient and just allocation of resources. These questions, though certainly important, overlook something central. Even a plan that promises a just and efficient distribution of resources may disappoint on both scores if things fail to pan out as hoped. That is, there is always risk that a project will fail to deliver on its promises—or worse, fail to get off the ground entirely. And where there is risk, there is someone who must bear it.

This Article shines a new spotlight on the problem of risk-allocation in redevelopment projects. It observes that, as most of these projects are pursued, it is the municipalities that bear nearly all of the risk of failure, while developers are permitted to bear almost none. And it develops a normative theory of redevelopment risk-allocation, arguing that this prevailing allocation of risk is neither efficient nor just but instead perversely increases the chance developments will fail and leave municipalities even worse off than they had been before. Accordingly, this Article theorizes and details novel ways in which three areas of law—takings, land use, and municipal finance—can work to shift risk to developers and more closely tie developers’ fortunes to those of municipalities. Finally, it draws on and advances state and local government law and scholarship by evaluating the political economy of reallocating redevelopment risk, concluding that attempts focused at the local level will inevitably come up short. Action at the state and regional levels, however, could chart a promising path forward.