Dec. 12 (Bloomberg) -- A New Jersey Supreme Court ruling broadening the eminent domain power of local governments will have a ``chilling effect'' on real estate investment in the state, the New Jersey Builders Association chief said.

The high court's 6-1 ruling on Dec. 7 affirmed the right of Mount Laurel to seize the site of a planned housing tract, and said limiting the number of school-age children who might move into a town and attend its schools was a valid reason to block residential development.

``This is an ambush,'' Patrick O'Keefe, chief executive officer of the association, which represents 2,000 companies, said in an interview. ``With this decision, even if an applicant demonstrates full compliance with all of a municipality's rules, the public sector can seize the land if school-age children are likely to reside on it.''

MiPro Homes LLC received approval from Mount Laurel's planning board in 2002 to build 23 single-family homes on a 16- acre parcel. Mount Laurel seized the property by eminent domain three weeks after consenting to the construction, saying the land should be kept free of development.

Eminent domain allows governments and public bodies to seize private property for public use, usually with compensation. The court ruled that Mount Laurel, located 20 miles east of Philadelphia, will have to pay MiPro what the land would be worth if it were approved for development.

Discouraging Investors

O'Keefe said the ruling will discourage investors at a time when the number of new homes under construction is falling.

Housing starts in New Jersey have dropped about 16 percent from 2005, when developers broke ground on about 38,000 units, O'Keefe said. Nationally, the number fell to 165,000 in October from a high of 241,000 in January.

``Investors in New Jersey real estate can't prudently assess the risks and potential for reward because those risks are infinite and retroactive,'' O'Keefe said. ``The MiPro decision will have a chilling effect on prospective developers.''

Donald Witmondt, president of Woodmont Properties, a developer in Parsippany, New Jersey, called the ruling unfair.

``This is a way for towns to circumvent zoning laws,'' Witmondt said. ``It's just too broad. It's a land grab.''

Overcrowded Schools

Towns worried that development strains their roads, sewers and other infrastructure have long cited threats to the quality of air, water or wildlife habitat to invoke eminent domain to block further construction.

The ruling in favor of Mount Laurel, a township of 41,000, lets towns use eminent domain to keep away families with schoolchildren, placing overcrowded schools on a par with traffic congestion and pollution.

The U.S. Supreme Court ruled last year that local governments have broad power to take over private property to make way for office parks, shopping malls and sports stadiums. The New Jersey court did not mention the federal ruling.

The court said it based its decision on ``strong and sustained public interest in the acquisition and preservation of open space.'' New Jersey, the most densely populated state in the U.S., pours almost $200 million a year into its Garden State Preservation Trust Fund, which buys land for open space.

``Isn't there an ability of a town to say, `We've reached our limit?''' said William Kearns, general counsel for the New Jersey League of Municipalities, an advocacy group for local governments that filed a brief in support of Mount Laurel.

Environmental leaders praised the ruling as affirmation that towns can use eminent domain to limit development.

`One More Tool'

``This ruling gives municipalities one more tool when they run up against areas that are the last prime spots that need to be conserved in order to preserve drinking water or protect fragile habitat,'' said Lisa Jackson, commissioner of the state Department of Environmental Protection.

Said Jeffrey Tittel, president of the state Sierra Club: ``The court is saying that open space has greater public benefit than development.''

New Jersey's property tax, at $2,099 per person in 2004, was the highest in the U.S., according to the Tax Foundation, an educational organization based in Washington.

Rick Van Osten, executive vice president of the Builders League of South Jersey, said Mount Laurel used environmental concerns as a cover for the real worries of township residents.

``The issue is property taxes,'' Van Osten said. The court ``blatantly came out and said they were against more schoolchildren.''

The case is Mount Laurel Township v. Mipro Homes LLC, No. A-85/86, Supreme Court of New Jersey.

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

Last Updated: December 12, 2006 15:27 EST