(FORTUNE Small Business) – In East Baltimore a 31-acre area of low-income homes and small businesses has been condemned to clear space for a medical research park that local officials hope will attract biotech startups as well as large pharmaceutical companies. Using the same power of eminent domain, officials in Hollywood, Fla., have condemned a small, family-owned commercial building to make way for a retail mall and condominium tower. And the city of Freeport, Texas, has moved to seize waterfront lots belonging to two local seafood companies in order to create an $8 million private marina.

Eminent domain--under which owners can legally be forced to sell their property if the government says it needs it for some public purpose, usually to build a road or park--has always had its detractors, particularly among property owners caught in its cross hairs. But a Supreme Court decision in June fueled the controversy dramatically by finding that governments may effectively transfer property from one private owner to another in order to enhance economic productivity and boost tax revenues. (The case in question, Kelo v. New London, arose when the Connecticut city condemned private homes to make way for a riverfront hotel and office space for Pfizer Corp.)

In the months since the Kelo decision, several municipalities have moved to take property from small businesses in hopes of boosting tax revenue. Many of the cases are of the replace-the-corner-butcher-with-a-Wal-Mart variety, but others fit less neatly into a David vs. Goliath story line. By 2007, Baltimore officials hope that their research park will be home to several bootstrapping biotech entrepreneurs. And Freeport's redevelopment plan seems like a great opportunity for small business along the Texas Gulf Coast. Using eminent domain, city officials hope to transform ten decayed downtown acres on the Old Brazos River into a vibrant public space that will include restaurants, hotels, and specialty shops in addition to the marina.

Nobody wants to see arrogant officials trampling on individual property rights to help rich developers get richer. But most large-scale urban-development projects could not happen without eminent domain. To cite just one example, many property owners were forced to sell out in order to clear space for Baltimore's Inner Harbor redevelopment, a project that has since generated numerous jobs and opportunities for entrepreneurs as well as big business.

In Freeport today, 80% of all buildings in the riverfront commercial district are currently vacant, according to Lee Cameron, executive director of the local Economic Development Corp. "Downtown Freeport is severely blighted," says Cameron. "We're trying to develop an area that will be a public gathering place."

Wright Gore III's family shrimp-packing operation, Western Seafood, owns one of the plots that Freeport officials are condemning for the marina. "We would understand if the city wanted our land for a bridge, a road, or a tunnel," says Gore, whose company is challenging the seizures in federal court. "But we feel it's un-American to take our property to enrich our next-door neighbor."

That's a common sentiment among property-rights advocates in the wake of the Kelo decision. By early September, Congress and 34 state legislatures were considering or drafting bills to limit the use of eminent domain for economic development, according to the Institute for Justice, an advocacy group based in Washington, D.C., that fights what it calls "eminent domain abuse." At presstime, Alabama and Texas had already passed such laws.

Yet eminent domain disputes are about market competition as much as property rights. From a Darwinian perspective, as opposed to a legal or moral one, eminent domain is simply a mechanism that allows more capable (read: wealthy and politically connected) entrepreneurs to exploit market opportunities at the expense of their less capable brethren. On the other hand, courts and the legislative process can provide avenues of redress for aggrieved property owners facing condemnation.

Most communities want to attract fast-growing companies that will generate jobs and tax revenues. Most entrepreneurs would like to run those companies. And while entrepreneurs believe in property rights by definition, most also acknowledge the essential role of government in economic development. The Kelo decision placed those two bedrock business values in explicit conflict. That may be its lasting significance for the small-business community, whether or not Wright Gore gets to keep his shrimp plant.