We've been meaning to post People ex rel. Dept' of Transportation v. Presidio Performing Arts Foundation, No. A145278 (Nov. 3, 2016) for a while (as you might be able to tell by the date of the opinion), thinking that one of our left coast colleagues more familiar with the workings of California's goodwill-in-eminent-domain rules would analyze it and tell us what to think. But so far, we haven't seen anything from them, so we'll take a short stab at it.
Caltrans has been fixing up the southern approaches to the Golden Gate Bridge, and anyone who has ever driven that stretch of road knows two things: (1) Doyle Drive was hairy -- nicknamed "blood alley" because it required Steve McQueen-level driving skills just to make your way to the Bridge, and (2) it runs through the Presidio of San Francisco, the former Army post, now converted to public uses. As part of the improvements, Caltrans needed the "use, occupancy and possession" of one of the old Army buildings, by then being leased for a nonprofit dance studio. Out the studio had to go, and the building demolished. A few months later, the dance studio found another building in the Presidio to rent, although predictably, the new space rent was more expensive, less functional, had a larger security deposit required, had shared bathrooms, was away from public transportation, and is a historic property (meaning the dance studio was limited in how it could configure the interior). Oh, and the Presidio's "service fees" also increased.The compensation paid by Caltrans did not include any business goodwill, the value in a business in excess of the value of its tangible assets. (Those of you in the approximately 40 jurisdictions that don't recognize business goodwill as recoverable in eminent domain are probably saying to yourselves "no surprise there", but remember in California, it may be recoverable by statute). The Presidio asked anyway, Caltrans said no, and then instituted a declaratory action that it didn't owe business goodwill.
The Presidio's appraiser testified that the dance studio had "negative cash flow" before, and the loss of its facility had made it worse, $62k worse than would otherwise be expected. He attributed the bigger losses to the taking since, in his opinion, nothing else could account for the change. Caltrans' expert, on the other hand, limited his testimony to criticism of the Presidio's expert, and predictably came to the conclusion that there was no goodwill and that the dance studio was a loser of money, and thus "there was no evidence that anyone would pay money for a company that does not expert a positive cash flow (let alone pay over $700,000 for it)." Slip op. at 8. As for the dance studio's nonprofit status -- not a factor, according to Caltrans' appraiser. The Superior Court agreed with Caltrans: "Although it was 'clear that Caltrans‘ taking caused the Foundation to suffer a loss of goodwill‖' due to the change in the Foundation‘s location, damage to the Foundation‘s reputation, and the disruption of its operations, the court concluded that the Foundation had nonetheless 'failed to meet its burden because it failed to prove the quantitative ... loss of goodwill.'" Slip op. 8.
The court of appeal didn't agree, and instead concluded that in order to qualify for business goodwill, the Presidio only need prove that it "suffered some loss of the benefit" which it gained by things like its former location, reputation, quality, and the other factors set out in the goodwill statute. It didn't need to be a "quantitative" loss of goodwill.
The court rejected Caltrans' argument that "the only way to determine pre-taking goodwill value is to calculate the total business value and subtract the value of tangible assets." Slip op. at 15. Ultimately the question of how much goodwill may have been lost is one for the jury, not the judge at the entitlement stage. Id. ("Accordingly, in the entitlement phase, the party seeking compensation need only show that there was some loss of the benefit that the business was enjoying before the taking due to its location, reputation, and the like, without necessarily having to quantify its precise value."). There's no required method to determine whether goodwill existed. Slip op. at 22.
The court held that profits are not the sole measure of a business, especially one set up as a nonprofit:
Here, Regus did not use the cost to create approach, and the Foundation is a nonprofit organization rather than an unprofitable for-profit business. But Aklilu illustrates that a methodology other than the profit-based one dictated by the trial court in this case may apply under appropriate circumstances. As in Aklilu, Regus determined that the Foundation had some goodwill before the taking, based on its location and reputation, and then set about determining the value of that goodwill using a method not dependent on profits, in light of the nonprofit nature of the Foundation‘s enterprise.
Slip op. at 23. The court finished with this, noting that it didn't matter that the business went from losing money to losing more money:
Nor would limiting compensation to profitable businesses make sense. A business operating at a loss before a taking may not be able to demonstrate pre-taking goodwill value, but that does not mean that the benefits it enjoyed from its location and reputation have not been adversely affected by the taking. Nothing in the statute suggests compensation should be given to a business that was profitable but became less profitable, but deny compensation to a business that was unprofitable and became even more unprofitable. To do so would preclude recovery to those least likely to afford the loss of goodwill benefits due to a taking.
Slip op. at 24.