David Girbovan, ASAJohn Frederick Smith, Esq.

How 35 Years have Elucidated Cal. Code Civil Procedure § 1263.510

Introduction Enacted in 1975, the 123 words of CCP Section

1263.510 provided the basis for compensation of lost business goodwill.

Today, thirty-five years later, we will examine those 123 words to see how case law has refined the code, how generally accepted appraisal practice has applied the code, and some current issues.

The owner of a business conducted on the property taken, or on the remainder if the property is part of a larger parcel, 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 Section 7262 of the Government Code.

(4) Compensation for the loss will not be duplicated in the compensation otherwise awarded to the owner.

Case Law◦ Redevelopment Agency v. International House of

Pancakes (1992) 9 Cal.App.4th 1343

◦ Question answered in the case is “whether a franchisor who granted a franchise for the operation of an International House of Pancakes restaurant on property later taken in eminent domain proceedings was entitled to claim compensation under section 1263.510, even though there was no partnership, joint venture, or agency relationship between the franchisor and franchisee.”

Redevelopment Agency v. IHOP

◦ Trial court concluded that the franchisor was not an owner within the meaning of the statute.

◦ Appellate court agreed.

◦ Franchisor had a “passive” investment.

◦ Franchisor “established a method of operation intended to immunize or insulate itself from the risks and liabilities inherent in the ownership of its franchised business.”

Redevelopment Agency v. IHOP Goes on to say that franchisor never explained how the

same agreement that insulated it from the risk of the business could also make it the owner of the business for the sole purpose of the eminent domain proceeding.

Can’t have its pancakes and eat them too.

“It is undoubtedly true that IHOP (franchisor) derives income from its franchisee’s operation of the restaurant. But the Legislature did not authorize compensation for any and all business owners whose goodwill might have been affected by the taking of a business, only the “owner of a business conducted on the property taken.” Business was the franchisee’s restaurant, not the franchisor.”

Generally Accepted Appraisal Practice◦ Franchisors not entitled

Fast Food Gas Stations

◦ Vendors?

◦ Suppliers?

◦ Grey Areas

Case Law◦ City and County of San Francisco v. Coyne (2008)

168 Cal.App.4th 1515

◦ Redevelopment Agency v. Mesdaq (2007) 154 Cal.App.4th 1111

Generally Accepted Appraisal Practice◦ Quantifying goodwill attributable to the individual

businesses on the property

◦ Businesses with multiple locations?

Case Law◦ City of San Diego v. Sobke (1998) 65 Cal.App.4th

379

◦ Case involved a business, Baja-Mex Insurance and Money Exchange, located in San Ysidro near the boarder with Mexico.

◦ A portion of the property was acquired on two parcels through eminent domain for street improvements. The businesses relocated on the remainder, however, the configuration changed as did several business factors related to the taking, including parking, parking lot employees, space occupied , and use of a trailer.

City of San Diego v. Sobke Other factors changed, but were not due to the

taking, including leasing of space to keep competitors out and the devaluation of the Peso, which increased profitability.

The appraiser did not determine goodwill in the before condition, nor goodwill in the after condition.

Projected increased expenses and returned them to present value.

Trial court said owner did not meet burden of proof. Methodology insufficient to establish the existence

or loss of any goodwill. Appellate court agreed.

Generally Accepted Appraisal Practice◦ Simple equation:

Goodwill in the Before Condition - Goodwill in the After Condition

= Loss of Business Goodwill

◦ Case also raises issue – even though goodwill increased in the after condition, could there still be a loss? That is, would goodwill have been even higher had the take not occurred?

Case Law◦ People ex rel. Department of Transportation v.

Salami (1991) 2 Cal.App.4th 37

◦ Redevelopment Agency v. Thrifty Oil Co. (1992) 4 Cal.App.4th 469

Generally Accepted Appraisal Practice◦ Consult with counsel

Case Law◦ San Diego Metro. Trans. Dev. Bd. v. Handlery

Hotel (1999) 73 Cal.App.4th 517

◦ Emeryville Redevelopment Agency v. Harcros Pigments (2002) 101 Cal.App.4th 1083

Generally Accepted Appraisal Practice◦ Identification of the causal factors – the take - the

construction – the economy?

Case Law◦ Community Redevelopment Agency v. Abrams

(1975) 15 Cal.3d 813

◦ Regents of University of California v. Sheily (2004) 122 Cal.App.4th 824

Generally Accepted Appraisal Practice◦ Relocation efforts can be challenged in

entitlement phase◦ Mitigation costs?

Case Law◦ Redevelopment Agency v. Arvey Corp. (1992) 3

Cal.App.4th 1357

◦ “The issue is whether the Eminent Domain Law requires that moving and related expenses be paid only under Relocation Assistance Act or whether it merely prohibits double payment for those expenses that potentially could be recouped under either statute or in part under each statute.”

◦ Court held that the phrase “will not be included” means “is not includable.”

Generally Accepted Appraisal Practice

◦ Analyze profit and loss statements.

◦ Remove 7262 expenses (and revenue) from the profit and loss statements.

Case Law◦ New Haven Unified School Dist. v. Taco Bell Corp.

(1994) 24 Cal.App.4th 1473

◦ Emeryville Redevelopment Agency v. Harcros Pigments (2002) 101 Cal.App.4th 1083

Generally Accepted Appraisal Practice◦ Work with real property and asset appraisers to

avoid double counting