Adorno Yoss Alvarado Smith kmccullough@adorno comkmccullough@adorno - IRWA-Chapter 1 Valuation... · 2009-05-06 · Creativity Does Not Always Equal Reality • Mesdaq, 154 Cal App

Lost Business Goodwill: Wh C ti it M t R litWhere Creativity Meets Reality

Keith E. McCulloughKeith E. McCulloughAdorno Yoss Alvarado & Smithkmccullough@adorno [email protected]

Goodwill in Eminent DomainGoodwill in Eminent Domain

• Statutory origin – not part of “constitutionalStatutory origin not part of constitutional just compensation”

• California one of a few states that permits• California one of a few states that permits compensation for lost business goodwill in eminent domaineminent domain

Goodwill in Eminent DomainGoodwill in Eminent Domain• Code Civ. Proc. § 1263.510:

( )(a) The owner of a business conducted on the property . . . shall be compensated for loss of goodwill if the owner proves all of the following:(1) The loss is caused by the taking of the property or the injury to the remainder.(2) The loss cannot reasonably be prevented by a relocation of the business or by taking steps and adopting procedures that a reasonably prudent person would take and adopt in preserving the goodwill.(3) Compensation for the loss will not be included in payments under(3) Compensation for the loss will not be included in payments under Section 7267 of the Government Code.(4) Compensation for the loss will not be duplicated in the compensation otherwise awarded to the owner.(b) Within the meaning of this article, ‘goodwill’ consists of the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in the probable retention of old or acquisition of new patronage.p q p g

Goodwill in Eminent DomainGoodwill in Eminent Domain

• Creative valuation techniques do not alwaysCreative valuation techniques do not always pass legal scrutiny

• Case law will continue to evolve with each• Case law will continue to evolve with each matter

Creativity Does Not Always Equal RealityCreativity Does Not Always Equal Reality

• “. . .[T]here is no single method by which to. . .[T]here is no single method by which to measure goodwill” and “each case must be determined on its own facts and circumstances.” Barthelemy v. Orange County Flood Control District (1998) 65 Cal.App.4th558 R d A f h Ci f S Di558; Redev. Agency of the City of San Diego v. Attisha (2005) 128 Cal.App.4th 357,368.

• Let the Creativity Begin!


• Redevelopment Agency of the City of SanRedevelopment Agency of the City of San Diego v. Mesdaq (2007) 154 Cal.App.4th 1111

Can the concept of “highest and best use”‐ Can the concept of highest and best use and lost business goodwill be merged to demonstrate compensable damages indemonstrate compensable damages in eminent domain?


• Mesdaq 154 Cal App 4th 1111 (con’t)Mesdaq, 154 Cal.App.4 1111 (con t)– 5000 sf Gran Havana cigar and coffee shop

– Taking for a 40,000 sf hotel in the Gas Lamp District ofTaking for a 40,000 sf hotel in the Gas Lamp District of San Diego

– Motion in Limine granted to preclude testimony of hypothetical business operations

– Owner’s expert testified as to the “highest and best ” f h i i b i f ili i i h h diuse” of the existing business facilities with the median

revenues per seat in a comparably sized California restaurant – not the actual historic userestaurant not the actual historic use


• Mesdaq 154 Cal App 4th 1111 (con’t)Mesdaq, 154 Cal.App.4 1111 (con t)– “there is no single method by which to measure goodwill”goodwill

– Owner’s expert, rather than using actual revenues to the business, projected “representative”to the business, projected representative income statements utilizing a “highest and best use” of the business facilities

– Owner’s expert projected growth for business that did not actually occur


• Mesdaq, 154 Cal.App.4th 1111 (con’t)esdaq, 5 Ca . pp. (co t)‐ Despite in limine ruling, owner’s expert testified. The trial court said it was “too close to call” as to whether owner’s expert had crossed the line into conjecture.‐ Appellate court overruled the trial court finding that an analysis of hypothetical revenues did not fit the definition of “lost business goodwill” infit the definition of lost business goodwill in eminent domain.‐ Hypothetical revenues do not pass legal scrutinyHypothetical revenues do not pass legal scrutiny


• Inglewood Redev Agency v Aklilu (2007) 153Inglewood Redev. Agency v. Aklilu (2007) 153 Cal.App.4th 1095

Can start up costs to create an auto‐ Can start up costs to create an auto maintenance business serve as the basis for lost goodwill?lost goodwill?



• Aklilu, 153 Cal.App.4th 1095 (con’t)Aklilu, 153 Cal.App.4 1095 (con t)‐ The Auto Inn opened in 1997 and showed a modest profit in 1998. It showed a loss inmodest profit in 1998. It showed a loss in each of the succeeding 4 years.‐ Situated across Century Blvd. from theSituated across Century Blvd. from the Marketplace at Hollywood Park which was under construction until 2003.‐ Upon completion of the Marketplace, the Auto Inn returned to profitability.


• Aklilu, 153 Cal.App.4th 1095 (con’t)‐ Unable to relocate within the redevelopment area, the Auto Inn suffered a total loss of goodwill.The Agency maintained that the Auto Inn had no lost‐ The Agency maintained that the Auto Inn had no lost

goodwill claim because it could show no excess profits.‐ Aklilu showed that the business had a great potential f i d t d fitfor increased patronage and profit.‐ $200,000 in goodwill awarded based on the “cost to create” the business; upheld by appellate court.; p y pp‐ Section 1263.510 is a “remedial statute to be construed liberally.”


• City and County of San Francisco v CoyneCity and County of San Francisco v. Coyne(2008) 168 Cal.App.4th 1515

Can a future intended business for the site‐ Can a future intended business for the site experience lost business goodwill?

I d i i j b i h‐ Is a condominium project a business that can experience lost goodwill?



• Coyne, 168 Cal.App.4th 1515 (con’t)Coy e, 68 Ca . pp. 5 5 (co t)‐ Triangular vacant lot in San Francisco‐ Planned 9 unit condominium development withPlanned 9 unit condominium development with retail on first floor; leased on month to month basis for surface parking‐ Taking to reserve as “open space”‐ No office, phone, fax or mail delivery at site‐ Approx. $150,000 invested in plans, permitting and engineering for condo project


• Coyne, 168 Cal.App.1515 (con’t)y , pp ( )‐ Owner’s real estate business conducted at 736 Clementina Street‐ Owner contended that in addition to entitled land value of property, should also receive lost business goodwill for the “business of developingbusiness goodwill for the business of developing the property.”‐ Owner’s goodwill expert opined $2.1 to $2.9 illi i d ill l d kimillion in goodwill lost due to taking

‐ City’s appraisal expert testified that all compensation included in real property valuationcompensation included in real property valuation


• Coyne, 168 Cal.App.4th 1515 (con’t)Coyne, 168 Cal.App.4 1515 (con t)‐ Trial court, after testimony, excluded lost goodwill claim – owner failed to show angoodwill claim owner failed to show an operating business on the property‐ Appellate court upheld the trial courtAppellate court upheld the trial court

a) No business conducted on the property that would qualify for lost goodwillthat would qualify for lost goodwill

b) Condo development not a “business” that would qualify for lost goodwillthat would qualify for lost goodwill

Enter . . . The Dog WhispererEnter . . . The Dog Whisperer


• SCE v Millan LASC Case No BC385209SCE v. Millan LASC Case No. BC385209

‐ Can a profitable business in the midst of developing plans to relocate to the propertydeveloping plans to relocate to the property being taken be compensated for lost business goodwill?goodwill?

The Dog Psychology CenterThe Dog Psychology Center


• SCE v Millan (con’t)SCE v. Millan (con t)

‐ Self‐taught dog behaviorist Cesar Millan operated the Dog Psychology Center inoperated the Dog Psychology Center in renovated industrial space in south L.A. for seven yearsseven years

‐ Episodes of National Geographic channel “Th D Whi ” h h D“The Dog Whisperer” shot at the Dog Psychology Center and at other locations



‐ Due to environmental issues the Dog Psychology Center needed to relocatePsychology Center needed to relocate

‐ Millan determined to find a live/work property on the fringe of LA Countyon the fringe of LA County

‐ Millan purchased Blue Cloud Road property in Santa Clarita with the intent of constructing aSanta Clarita with the intent of constructing a residence on one portion and the Dog Psychology Center on another portion of the same propertyCenter on another portion of the same property




‐ Millan, upon learning of SCE’s plans for transmission line easement suspended plans totransmission line easement, suspended plans to relocate Dog Psychology Center to Blue Cloud

‐ Cleared brush improved existing well and‐ Cleared brush, improved existing well and water system

Millan sought lost goodwill for effect of the‐ Millan sought lost goodwill for effect of the transmission line project on the projected Dog Psychology CenterPsychology Center


• SCE v. Millan (con’t)( )‐ SCE challenged Millan’s claim for lost goodwill by motion per CCP § 1260.040, Mesdaq and CoyneCoyne‐ Millan countered that he has a profitable business and was in the midst of planning tobusiness and was in the midst of planning to relocate to the property when the take came‐ Trial court granted SCE’s motion finding no

i b i hoperating business on the property ‐ Case then settled after Motions in Limine were exchangedexchanged

Lost Business Goodwill: Wh C i i M R liWhere Creativity Meets Reality

• There is no single valuation rule for lostThere is no single valuation rule for lost business goodwill claims

• Creative valuation theories do not always pass• Creative valuation theories do not always pass legal muster

E h ill i f d• Each case will turn on its own facts and circumstances

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Adorno Yoss Alvarado Smith kmccullough@adorno comkmccullough@adorno - IRWA-Chapter 1 Valuation... · 2009-05-06 · Creativity Does Not Always Equal Reality • Mesdaq, 154 Cal App