Eminent Domain Comment
The Effects of the Casasola Decision on the After Condition Goodwill Analysis
-From the Business Owner’s Perspective
There is an old adage “bad facts make bad law”. In my opinion Los Angeles Unified School District v. Casasola (2010) 187 Cal.App. 4th 189 (hereinafter “Casasola”) is the poster child for that adage. I suspect, as a result of Casasola, fewer businesses impacted by takings have relocated and goodwill appraisers working on behalf of agencies have lower opinions of goodwill loss than they would have had prior to the decision.
To better understand the impact of Casasola it is helpful to understand why C.C.P. Section 1263.5101, according to the California Supreme Court, was enacted in the first place and how loss of goodwill is determined.
“The section [1263.510] was enacted in response to widespread criticism of the injustice wrought by the Legislature's historic refusal to compensate condemnees whose ongoing businesses were diminished in value by a forced relocation.” (People v. Muller (1984) 36 Cal.3d 263, 270, brackets added.)
The purpose of the statute was unquestionably to provide monetary compensation for the kind of losses which typically occur when an ongoing small business is forced to move and give up the benefits of its former location. (Id. at 270.)
How is loss of goodwill determined?
There is no single method by which to measure goodwill, however, it generally represents the present value of the anticipated profits of the business. (People v Leslie (1997) 55 Cal. App. 4th 918, 922.) But no matter what method(s) the appraiser uses to calculate loss of goodwill in an eminent domain action, the method must (1) exclude the value of tangible assets or the normal return on those assets and (2) be based on the difference between the goodwill value at the site taken and the goodwill value at the relocation site, if the business relocated. (See, People v. Muller, supra, 36 Cal.3d at 271, fn. 7; City of San Diego v Sobke (1998) 65 Cal. App. 4th 379.) In other words, the appraiser should be comparing apples to apples to determine the difference (i.e., goodwill before v. goodwill after.)
So what is wrong with Casasola? As applied by agencies, it prevents appraisers from comparing apples to apples. This results in an inflated after condition goodwill value causing a reduced loss of goodwill.
In Casasola, Los Angeles Unified School District (District) acquired by eminent domain property on which Rudy and Teresa Casasola (the Casasolas) operated a catering truck supply company. The Casasolas purchased a replacement property and moved their business to that location. The Casasolas’ goodwill appraiser’s opinion of the value of the business goodwill prior to the acquisition was $126,000. The District reimbursed the Casasolas a total of $224,252 for relocation expenses. In the eminent domain proceeding the Casasolas’ sought an additional $1,131,021 which they spent to mitigate their loss of $126,000 in goodwill. That attempt to recover an additional $1,131,021 was wrong; $126,000 was the maximum the Casasolas could receive for loss of goodwill.
The simple answer to the Casasola facts is that the maximum recoverable in the eminent domain action pursuant to section 1263.510 is $126,000, the Casasolas cannot lose any more goodwill than they had in the before condition, even if they spent $1,131,021 in their attempt to retain it. The Casasola court’s analysis was incorrect and it was not necessary to affirm the Trial Court’s decision or to protect condemning agencies in the future from Casasola type claims; section 1263.510 provides it. The “owner of a business conducted on a property taken” may be entitled to “loss of goodwill”, nothing more.
2. Conflict with People v. Muller
a. Casasola improperly precludes consideration of significant expenses incurred to reduce loss of goodwill.
In Muller the Court held, inter alia, that expenses incurred in a reasonable effort to prevent loss of patronage, including increased rent of $29,000.00 per year, should be considered in determining the goodwill value at the relocation site. (Muller at 271-272.) Casasola is directly contrary to Muller on this point. Comparing Casasola to the Muller facts clearly demonstrates this.
Under Casasola, Dr. Muller’s appraiser in determining the goodwill value at the relocation site could not have considered the fact that the rent for the first two years would be a total of $58,000 more than it was at the old site. This is because under Casasola, any costs that fall within “reestablishment expenses”, including all “reestablishment” costs above the $10,000 cap, cannot be considered by a goodwill appraiser in an eminent domain action. As pointed out in Casasola, numerous items fall within “reestablishment expenses” including the “estimated increased cost of operation [e.g., increased rent] during the first two years at the replacement site”. Accordingly, pursuant to Casasola, Dr. Muller’s appraiser would have been required to ignore the fact the rent more than doubled during the first two years at the relocation site. The end result would be a false net profit calculation (inflated), leading to an equally false (inflated) after condition goodwill value. This would result would erroneously reduce loss of goodwill.
This result is exactly what the condemnor State of California sought in Muller when it argued that “benefits” referred to in section 1263.510 only relate to “loss of patronage” and not loss of cheap rent at the condemned property. The Court in Muller disagreed with the condemnor and held that section 1263.510 does authorize compensation for loss of “benefits” of “location”, including “the manifest benefit of a cheap rent in an older building”. (Muller at 269.)
b. Casasola arguably prohibits consideration of the return on certain tangible assets at the relocation site.
In Muller the Court held that “[g]oodwill must, of course, be measured by a method which excludes the value of tangible assets or the normal return on those assets.” (Muller at 271, fn. 7.) In other words, when appraising the goodwill value in both the before condition and again at the relocation site, the goodwill appraiser must consider the tangible assets in order to exclude them from the goodwill valuation.
As explained by the Court in Muller, one method of determining goodwill is the “capitalization of excess earnings”. (Muller at 266.) With this method, net earnings are computed and then a percentage return on the tangible assets is calculated. The tangible asset return is then subtracted from the net earnings, resulting in the excess earnings number. This excess earnings number is then capitalized to arrive at the goodwill value. (Muller at 266, fn. 2.) Thus, as tangible asset value goes up, goodwill value goes down.
Casasola, as applied by agency appraisers today, prevents consideration of certain tangible assets when appraising the goodwill value at the relocation site. The end result is an inflated goodwill value at the relocation site and an overall improper reduction in recoverable loss of goodwill.
The Casasola court held “[f]or the reasons that follow, we conclude that a displaced property owner may not recover under the eminent domain law expenditures deemed nonrecoverable under the Relocation Assistance Act.” This includes “a class of nonrecoverable expenses” and “reestablishment expenses” in excess of $10,000.00. In other words, in determining goodwill value at the relocation site the goodwill appraiser cannot consider the value of tangible assets deemed nonrecoverable under the Relocation Assistance Act or the normal return on those assets. As discussed above, this will result in an inflated goodwill value conclusion at the relocation site and denial of recovery of all of the goodwill actually lost by the owner.
An example of the above is as follows. A business relocates and pays $400,000.00 for necessary tangible assets at the relocation site which is considered nonrecoverable under the Relocation Assistance Act. Under Casasola, as applied by some agencies, the appraiser valuing the goodwill at the relocation site must ignore the required expenditure of $400,000.00 for tangible assets since the “owner may not recover under the eminent domain law expenditures deemed nonrecoverable under the Relocation Assistance Act.” In other words, although the appraiser must deduct the return on the tangible assets from net earnings at the original site in appraising the goodwill, the appraiser is prohibited from deducting the return on the $400,000.00 in tangible assets at the relocation site. Assuming the estimated annual return on the $400,000.00 tangible asset is 6% ($24,000) and a capitalization rate of .20 is applied, this would increase the goodwill value at the relocation site by $120,000 ($24,000/.20) thereby reducing the actual recoverable overall loss by $120,000.
Since Casasola, I have been confronted with similar examples of hundreds of thousands of dollars of necessary tangible assets purchased by business owner clients for operation at relocation sites being ignored pursuant to Casasola by agency goodwill appraisers. These same tangible assets, if they existed at the property taken and were owned by the business owner, are considered in the before condition goodwill analysis. Why are they not considered at the relocation site? The agency will argue, most often, the subject expenditures for tangible assets fall within “reestablishment expenses” and the $10,000 (soon to be $25,000) cap has been reached. Thus, under Casasola those expenditures cannot be considered in the eminent domain action.
Pursuant to Casasola but contrary to Muller, many agency appraisers are no longer comparing apples to apples. The method they use, as described above, accurately values goodwill in the before condition but inaccurately values (inflates) goodwill in the after condition. Common sense dictates that if they are fairly measuring the loss, the same measuring stick must be used in both instances.
As Casasola is being applied by some agencies, the business owner is not put in as good a position had his property not been taken, which is the goal in an eminent domain proceeding. (Baldwin Park Redevelopment Agency v. Irving (1984) 156 Cal. App. 3d 428, 438.)
There is no way to reconcile Casasola with Muller. What should a goodwill appraiser do when appraising goodwill at the relocation site, follow Casasola or follow Muller? As explained above, this can make a significant difference in the goodwill valuation. As the Court stated in Muller, section 1263.510 was enacted “to provide monetary compensation for the kind of losses which typically occur when an ongoing small business is forced to move and give up the benefits of its former location.” Id. at 270. Following Casasola would prevent this. Under Casasola, many business owners who want to relocate their businesses would be faced with the threat of not being compensated for their true “loss of goodwill” as required by Muller. This prospect will result in some businesses, which otherwise would have relocated, not being able to afford to relocate.
I submit that agencies should follow the mandate of the Supreme Court in Muller and ignore Casasola to the extent it is contrary to Muller.
 Unless otherwise noted, further statutory references are to the Code of Civil Procedure.
(November 2014, by Andy Turner)
Severance Damages and Most Injurious Use
Often the condemning authority takes only part of the larger parcel, such as a strip of land for a right of way. In eminent domain parlance this is often referred to as a "part take" or a "partial acquisition". There will be hundreds of part takes by the California High Speed Rail Authority if its project moves forward.
A very important issue in a part take case is severance damages. In other words, is the owner's remaining property (i.e., property not taken) either damaged by the acquisition (e.g., irregular shape) or by the condemning agency's construction and use of the project in the manner proposed (e.g., noise and vibrations from trains)?
Thus, "construction and use of the project in the manner proposed" is a significant consideration in the severance damage analysis. Especially considering that the eminent domain proceeding is the only opportunity owners will have to obtain compensation for severance damages. San Diego Gas & Electric Co. v. Daley (1988) 205 C.A.3d 1334, 1345; Ellena v. State of California (1977) 69 C.A.3d 245, 254.
Fortunately, because this is the only opportunity for the owner to be compensated for the project impacts, the law provides owners significant protection. In a "part take" case the public authority is precluded from contending that it will not fully use the property acquired in order to attempt to reduce the severance damages it must pay the owner. The owner is entitled to recover compensation in the form of severance damages for the most detrimental and injurious uses of the property taken that are reasonably possible.
The jury's award must include all present and prospective damages that may occur. San Diego Gas & Electric Co. v. Daley (1988) 205 C.A.3d 1334, 1345 ("The jury must assume 'the most serious damage'" from improvements which may be constructed.); County of San Diego v. Bressi (1986) 184 C.A.3d 112, 123 ("Most injurious use of the property reasonably possible."); People v. Logan (1961) 198 C.A.2d 581, 588 ("The most detrimental and injurious use reasonably possible"); Los Angeles Flood Control Dist. v. Jan (1957) 154 C.A.2d 389, 394 ("The most injurious mode of construction"); People v. Silveira (1965) 236 C.A.2d 604, 622 ("The most injurious use of the property reasonably possible").
The condemning authority cannot present evidence at trial qualifying its taking or limiting possible uses of its property, "the jury must consider the entire range of uses permitted under the resolution of necessity." County of San Diego v. Bressi, supra, 184 C.A.3d at 123.
In Bressi, supra, the County of San Diego filed a condemnation action to take avigation easements over the defendant's property by "any" aircraft. On appeal it was held that the County could not present evidence that the easement would not be used for jumbo aircraft since the easement that was being taken was for use by "any" aircraft. In other words, if the County did not want to pay for use by jumbo aircraft it should have excluded the possibility of that use in its easement taking. The defendant's attorney put it best, "the County cannot have its 'take' and eat it too…" Supra at 122.
Accordingly, one must be very careful to consider all rights the condemning agency is taking, what the proposed project is and how this could impact the remainder. This requires a close review of the condemning authority's resolution of necessity, complaint, planning documents, construction plans, projections, etc. It is not easy to anticipate and discover all the impacts of a project that usually has not yet been built, but that is what an owner subjected to a "part take" must do. This will be especially important and difficult in the High Speed Rail "part take" cases because construction of the improvements on the land taken will take several years and actual completion and operation of the entire project will take decades.
(June 2013, by Andy Turner)
In acquisitions for right of way widenings the question sometimes arises whether double compensation is being claimed.
Assume there is an acquisition of a 20 foot swath off the front of a commercial property for a street widening project. The acquisition includes the entire landscape area along the larger parcel's frontage. The owner will be compensated for the property taken, including the landscaping improvements if they contribute to the highest and best use. Should severance damages include the cost of creating a new landscaped area along the remainder's new frontage? It depends.
Under California law "[c]ompensation shall be awarded for the property taken" and, "[w]here the property acquired is part of a larger parcel, in addition to the compensation awarded... for the part taken, compensation shall be awarded for the injury, if any, to the remainder." (Bold added.) (Code Civ. Proc., §1263.310 and §1263.410, subd. (a).) Compensation for the property taken and severance damages are "separate and distinct" and are to be assessed separately. (People v. Logan (1961) 198 CA2d 581, 590-591.)
In the above hypothetical, if the cost to install landscaping on the remainder exceeds the reduction in market value of the remainder resulting from the removal of the preexisting landscaping, these costs are not recoverable. But if the cost to install replacement landscaping on the remainder is less than that decrease in value of the remainder, that cost to cure those damages is relevant to the issue of severance damages. "[C]ost to cure is a measure of damage only when it is no greater in amount than the decrease in the market value of the property if left as it stood." People Ex Rel. Dept. of Pub. Wks. v. Flintkote Co. (1968) 264 CA2d 97, 106.
One might ask, if the condemnor paid for the landscaping improvements that it acquired why does it also have to pay for the cost to landscape the remainder? Isn't this double compensation? Assuming the cost of replacement landscaping is less than the decrease in value of the remainder that would otherwise have occurred, it is not double compensation. Under this hypothetical the owner is mitigating his damages. If the owner did not install landscaping on the remainder, the severance damage would be greater. This cost to cure measure of damages for loss of the preexisting landscaping on the property frontage is "separate and distinct" from and in addition to the compensation for the property taken.
(February 2012, by Andy Turner)
High Speed Rail Impacts on Property Value
During the last 18 months I have given numerous presentations to community groups, attorneys, realtors and appraisers in the Bay Area and in the Central Valley about eminent domain in general and specifically about the rights of owners whose property interests may be acquired for the California High Speed Rail Project ("Project") by the California High Speed Rail Authority ("Authority").
Frequent questions I hear relate to an owner's entitlement to compensation for the damaging impacts from the Project. The good new is that if any portion of an owner's property is taken ("severance of the remainder from the part taken"), under California Eminent Domain Law he or she is entitled to:
"Damage to the remainder... caused to the remainder by either or both of the following:
(a) The severance of the remainder from the part taken.
(b) The construction and use of the project for which the property is taken in the manner proposed by the plaintiff whether or not the damage is caused by a portion of the project located on the part taken." (CCP Sec. 1263.420.)
These damages may be caused by negative impacts such as noise, vibration, loss of privacy, shape of the remaining property, etc.
If your property is adjacent to the new Project line but none of it is being acquired for the Project, it is much more difficult to obtain compensation for the damages caused by the Project. To obtain compensation in this scenario, the landowner/business owner must bring an action against the Authority, most likely an inverse condemnation action, and prove the Project imposes a direct, peculiar and substantial burden on the property or business to be entitled to damages.
Another question I often hear is the following:
"I want to sell my property today but the value has already diminished due to public awareness that a portion of my property may be acquired for the Project and, if so, the high speed trains will be running right next to my house. What do I do?" Unfortunately, this places an owner in a difficult situation. A way to describe that owner's predicament is provided by the following hypothetical.
Assume there is a home on a 10,000 square foot lot on the Peninsula somewhere between San Francisco and San Jose and a portion of the back yard is within the future proposed Project right of way. Assume also that, ignoring the anticipated impact of the proposed Project, the value of the portion not within the proposed right of way is $1,000,000. However, due to the expectation that a portion of the backyard may eventually be acquired for the Project and the home will then be adjacent to the Project rail line, the value of that remaining property is thereby reduced from $1,000,000 to $800,000. Therefore, if the owner sells now he will receive $200,000 less because of the anticipated Project. And, unless otherwise agreed, the buyer, assuming he is still the owner at the time the Authority acquires the property for its Project, will receive the severance damage award. Unfortunately, many owners will not be able to wait for the Authority's acquisition or may decide to sell at a reduced price today just to avoid the uncertainties and potential litigation resulting their continued ownership of the property.
If the owner delays selling until after a portion of the land is acquired for the Project he will receive compensation from the Authority for the portion of his backyard taken plus the $200,000 damage to the remaining property caused by severance of the remainder from the part taken and/or from construction and use of the Project. (If there are benefits from the Project, these would be offset against the $200,000 severance damages.)
I recommend that before making decisions related to the sale or retention of property that may be affected by the proposed Project, that you contact an attorney with significant eminent domain experience for advice.
(December 2011, by Andy Turner)
How should an appraiser to treat project impacts in an eminent domain appraisal?
What should an appraiser do if the public project for which the property is being acquired (and appraised) has affected the value of that property? Ignore that effect, sometimes. This is established law but something that is often overlooked in eminent domain appraisals.
Section 1263.330 of the California Code of Civil Procedure, which governs eminent domain appraisals, provides as follows:
"The fair market value of the property taken shall not include any increase or decrease in the value of the property that is attributable to any of the following:
(a) The project for which the property is taken.
(b) The eminent domain proceeding in which the property is taken.
(c) Any preliminary actions of the plaintiff relating to the taking of the property."
Government Code section 7267.2 provides a similar rule.
So why do I say sometimes? Because there is an exception. The appraiser should not always ignore the positive effect the project has had on the value of the subject property (i.e., project enhancement).
In Merced Irrigation District v. Woolstenhulme (1971) 4 C3d 478, the California Supreme Court explained when "project enhancement" should be considered by an appraiser in the eminent domain setting.
"During that period when it was not likely that his land would be condemned, the fair market value of the property may have appreciated because of anticipation that the land would partake in the advantages of the proposed project. The owner would be entitled to such increase in value. On the other hand, once it becomes reasonably foreseeable that the land is likely to be condemned for the improvement, 'project enhancement,' for all practical purposes, ceases. FN11 Thus, in computing 'just compensation' in such a case, a jury should only consider the increase in value attributable to the project up until the time when it became probable that the land would be needed for the improvement." (Bold added.) (Id. at 498-499.)
Why is this fair? The Court in Woolstenhulme explained it as follows:
"We have determined that it would be unfair, in computing just compensation, to eliminate the appreciation in market value which a specific piece of property in fact enjoyed before it was designated for condemnation, since that would in effect deny to the owner the market value of his property prior to the time it was pinpointed for taking." (Id. at 484.)
(See also, People ex rel Department of Water Resources v. Andresen (1987) 193 CA 3d 1144 and City of San Diego v. Barratt Am. Inc. (2005) 128 CA4th 917.)
(November 2011, by Andy Turner)
The information in these Comments is not intended to provide specific legal advice. You should consult with an attorney and not rely on any specific information contained herein regarding your specific situation.