A4_CHEN.DOCX (DO NOT DELETE) 20/07/2015 7:36 AM Invited Takings: Supermajority, Assembly Surplus, and Local Public Financing Ruoying Chen ABSTRACT: Fear of the abusive exercise of eminent domain power and of potentially high costs resulting from serious holdout could cause slowdown and even suspension of land assembly for urban redevelopment, which is particularly devastating for the developing world, as evidenced by urban slums and vulnerable infrastructure. Invited takings, as recently emerged in China, delivered success in overcoming holdout without a heavy dose of eminent domain. Property owners are empowered to decide whether to sell their property to the government with a supermajority vote at two distinct stages in the project, while subjecting the dissenting minorities to eminent domain. Invited takings differ from private techniques for land assembly by implementing equal treatment and transparency within the group of property owners. It also deviates from conventional wisdom by allocating a substantial portion of assembly surplus to property owners. Such a strategy was made possible and attractive with certain background institutions as a response to limited local government revenue, such as debt financing provided by a wide range of residents, directly linked to specific land assembly projects. Finally, it better aligns costs and benefits of land assembly, shedding light on institutional design for other developing countries. For the first time within and outside of China, this Essay provides a systematic description and analysis of invited takings, based upon information on 23 invited taking projects that occurred in eight provinces and two provincial-level cities in China over the past ten years. Associate Professor, Peking University Law School, [email protected]. For valuable discussions and suggestions, I thank William Alford, Richard Epstein, Lee Fennell, Saul Levmore, Ruijian Li, Ehud Kamar, Jennifer Nou, Ariel Porat, Aaron Simowitz, Eric Singer, Lior Strahilevitz, Mang Zhu, participants at the Symposium of Spontaneous Order and Emergence of New Systems of Property, on November 14–15, 2014 at the Classical Liberal Institute at New York University Law School, especially Karen Bradshaw, Richard Brooks, Yun-chien Chang, Fernando Gomez, Gary Libecap, Dean Lueck, Henry Smith, and Frank Upham, and participants at a faculty workshop at Buckmann Faculty of Law at Tel Aviv University and a Chinese Law workshop at Harvard Law School. Graduate students at PKU Law School Jingyi Ge, Yuyan Shen, Yuan Lu, Kai Xu, and Yiran Jiang provided excellent research assistance. 2309 A4_CHEN.DOCX (DO NOT DELETE) 20/07/2015 7:36 AM 2310 IOWA LAW REVIEW [Vol. 100:2309 I. INTRODUCTION ........................................................................... 2311 II. HOLDOUT IN LAND ASSEMBLY AND SPECIAL CHALLENGES FOR DEVELOPING COUNTRIES ............................................................ 2315 A. PRIVATE TECHNIQUES: CHALLENGE FROM LARGE-SIZED GROUPS ................................................................................ 2317 B. EMINENT DOMAIN POWER: EITHER WILD OR DEAD ................. 2318 III. INVITED TAKING BY THE GOVERNMENT IN CHINA ....................... 2319 A. SUPERMAJORITY CONSENT IN TWO STAGES ............................. 2320 B. TRANSPARENCY AND UNIFORMITY .......................................... 2321 C. BONUSES FOR SIGNING AND MOVING OUT ............................... 2322 D. GOVERNMENT AS INFORMATION EXCHANGE AND NEGATIVE COMMUNITY EXTERNALITY .................................................... 2323 IV. TREATMENT OF MINORITIES: COMPARISON WITH TENDER OFFER AND LAD ..................................................................................... 2325 A. LESS COERCION: COMPARISON WITH TENDER OFFER ............... 2325 B. SHARED PHILOSOPHY AND DIFFERENT REACTION FROM GOVERNMENT: COMPARISON WITH LAD ................................ 2327 C. ENTITY TO CONDEMN: AUTONOMOUS ORGANIZATION V. THE GOVERNMENT ....................................................................... 2329 D. TREATMENT OF MINORITIES .................................................. 2329 E. RISKS OF MANIPULATION BY GOVERNMENT ............................ 2330 V. ASSEMBLY SURPLUS: MARKET, BENEFITS, AND LOCAL PUBLIC FINANCE ...................................................................................... 2332 A. ADMINISTRATIVE COSTS ........................................................ 2332 B. CORRECTIVE JUSTICE ............................................................. 2333 C. DISTRIBUTIVE JUSTICE, SPECIAL ASSESSMENTS, AND LOCAL GOVERNMENT FINANCING ...................................................... 2335 VI. CONCLUSION .............................................................................. 2338 APPENDIX: SUMMARY OF INVITED TAKINGS PROJECTS IN CHINA ......................................................................................... 2340 A4_CHEN.DOCX (DO NOT DELETE) 20/07/2015 7:36 AM 2015] INVITED TAKINGS 2311 I. INTRODUCTION Throughout the world, land assembly is necessary for more efficient use of land, economic development, and the improvement of living conditions and infrastructure. However, holdout by property owners can prevent efficient land assembly, causing devastating and long-lasting problems, especially in the developing world. Consequently, urban slums and vulnerable infrastructure remain widespread, causing misery to the lives of hundreds of millions. Moreover, it reduces the value of and causes nuisance to surrounding areas. Compared to the developed world, private costs to holdout are lower in the developing world, causing more substantial and longer-term harm. Unfortunately, eminent domain and private purchase, which are the two conventional solutions to holdout, are of little help. Secret purchase, the most common technique used in private purchase, is generally too costly (if feasible at all) for large-sized groups, thus deterring private assemblers. The exercise of eminent domain power, meanwhile, has long been abused and has been associated with violence and corruption due to loose institutional supervision and scrutiny, which, in turn, causes resistance among citizens and reluctance among officials. As a result, local government developed systematic inertia in using eminent domain, which inevitably prevented the efficient assembly of land. During the past decade or so in China, a new model of land assembly has emerged with respect to urban redevelopment projects (“URPs”), which I define as “invited takings.”1 It developed as a local government practice that spontaneously responded to the deadlock caused by serious holdout and government inertia in using eminent domain. URPs involve building new or replacing old and poor infrastructure to provide decent housing and to improve the overall look of cities. It is a typical scenario of a “thin market” closely resembling the situation of one wanting to buy adjacent land to expand an existing site and thus justifying the use of eminent domain power.2 But eminent domain has become too risky for local officials to use because of widespread conflicts and complaints about past practice. Use of secrecy has been suggested as an alternative in such a setting,3 but the government can 1. In official documents and media reports, it is often referred to as “taking simulation” (模拟拆迁) in renewal of old town (旧城改造 or 棚户区改造). But we believe that the current term of “invited taking” would capture the features of such arrangements and practices— especially their voluntary nature—more accurately. In China, land is divided into two systems: rural land owned by collective communes and urban land owned by the state. Invited takings only refer to takings of real property on urban land. 2. Thomas W. Merrill, The Economics of Public Use, 72 CORNELL L. REV. 61, 75–77 (1986) (describing a situation where the target adjacent land was in poorer condition with lower value and the buyer’s property was in a better condition with a higher value). 3. Sanford J. Grossman & Oliver D. Hart, Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation, 11 BELL J. ECON. 42, 43 n.3 (1980) (“In the case of real estate, this ‘unexcludability’ is avoided by the use of secrecy . .”). A4_CHEN.DOCX (DO NOT DELETE) 20/07/2015 7:36 AM 2312 IOWA LAW REVIEW [Vol. 100:2309 hardly hide the location of URPs or the buyer’s identity in the way that private developers can. Under invited takings, the government would not make a purchase offer or start the associated preparatory work unless and until it has been “invited” by a supermajority of property owners in a given community. Once this supermajority has been obtained, the government would make a real offer to purchase, which, however, would not become binding unless and until another supermajority of the same group of owners accepted the offer by entering into a standard form compensation agreement with the purchasing government. If the second supermajority is obtained within the set deadline, the government would be entitled to exercise eminent domain power over the silent or dissenting minority. If the government fails in obtaining the second supermajority consent, the offer would lapse and the existing property owners’ title would remain intact. In most invited takings about which I have information, a supermajority at the second stage was reached and the possessors vacated the land rather quickly.4 The conflicts, complaints, and litigation usually associated with the use of eminent domain are almost absent in the case