Property Reserve Aftermath: Discovery Available in Right of Entry Cases & Young’s Market Co.

When the California Supreme Court issued its ruling on Property Reserve v. Superior Court, handing a substantial victory to public agencies, we were given three key takeaways:  (1) the “Right of Entry” statutes (CCP §1245.010 et seq.) are constitutional, (2) the activities the Department of Water Resources sought to undertake are covered by the broad scope of these statues, and (3) if the language of a statute doesn’t match your planned opinion, you can always reform it to match the claimed legislative intent of the statute.

To that last point, the Court’s opinion included its reformation of the right of entry procedure to include a jury trial to determine compensation for any losses caused by the entry on property and activities undertaken thereon. Thereafter, the case was remanded back to the appellate court for further proceedings and the happenings on remand have been all but ignored, though were important.  Since the Supreme Court likened the right of entry process to an expeditious condemnation proceeding, it only makes sense that discovery is part of the process as well.

Indeed, on December 16, 2016, as an early Christmas gift, the Court of Appeal gave California public agencies a more complicated and expensive right of entry procedure when it held that a property owner has a right to discovery from the public agency during the process.  In an opinion that was largely a reiteration of the higher court’s ruling on the main constitutional issues, the appellate court held that both Eminent Domain Law and the Civil Discovery Act allow a property owner to conduct discovery, disagreeing with the trial court’s ruling that the right of entry statutes were exempt from discovery.  The petition for entry process is a “condemnation proceeding” and as such, is governed by rules of practice that govern civil actions, which include traditional discovery rules.    (It also made some ruling or other about indispensable parties … see page 15 of the opinion.)

The Fate of Young’s Market Co.

While the Property Reserve remand opinion got very little notice, the higher court opinions on Young’s Market Co. v. San Diego Unified School District were pretty much ignored.  If you recall, the Supreme Court granted review of Young’s Market and tied it to the fate of Property Reserve stating that “Further action in this matter is deferred pending consideration and disposition of related issues in Property Reserve v. Superior Court…”

On October 16, 2016, the Supreme Court remanded the matter to the appellate court and instructed the court to “vacate its decision and to reconsider in light of Property Reserve.”  And on January 17, 2017, in an unpublished decision, the court held that, as it had decided previously, the actions of the school district were authorized by the right of entry statutes and that the activities on the parcel were temporary and did not constitute a permanent, physical occupation of the property.  The appellate court stuck with its prior ruling – that the activities were acceptable – and pretty much left it at that.

Conclusion

We have yet to see how public agencies and property owners will utilize the Property Reserve opinion to their own advantage, whereas owners may try to drag out the petition proceedings and game the system for increased compensation and leverage – delays in testing can lead to delays in environmental documents, which can lead to delays in project approvals, which can lead to delays in construction timing (resulting in delay damages to the contractor), which can lead to increased project costs and compensation to owners, etc., agencies may try to increase the character, intensity or duration of activities they seek to carry out on private property – as long as owners get their day in court in a condemnation proceeding, we should be allowed to do whatever testing we want.  Only time will tell how this will play out but needless to say, the owners winning on the discovery issue pales in comparison to the slam dunk handed to public agencies in Property Reserve.

Have We Seen the Last Dance for Quantitative Before Condition Goodwill Valuations?

When a business is taken as a result of a public improvement, the business is entitled to seek compensation for, among other things, loss of business goodwill. Typically, this loss is calculated by measuring the business’ “before-condition” value and comparing to its “after-condition” value.  This traditional methodology was the cornerstone for business goodwill appraisers to determine just compensation.  Yet late last year, the California Court of Appeal issued a ruling in People ex rel. Dep’t of Transp. v. Presidio Performing Arts Found. (2016) 5 Cal. App.5th 190 which may have changed the law in eminent domain actions by arguably all but eliminating the need to quantify pre-taking — or “before condition” — goodwill value.

Background

The Presidio Performing Arts Foundation (the “Foundation”), a non-profit founded in 1998, is an acclaimed non-profit dance theatre serving the San Francisco Bay Area youth. In 2009, the California Department of Transportation (“Caltrans”) undertook a highway project which impacted the building from which the Foundation operated.  The Foundation was displaced from its location and relocated to another facility.  The relocation site resulted in increased rent as well as a less functional space, and the Foundation made a claim for loss of business goodwill.

In January of 2015, the court held a bench trial to determine whether the Foundation could establish entitlement to goodwill. The Foundation’s expert identified indicators concerning the Foundation’s location, its reputation, its workers and its quality, and concluded there was the “presence of goodwill at the Foundation” before the impact of the project. The Foundation’s expert then opined that these indicators had changed along with the Foundation’s revenues.  Using the discounted cash flow methodology, he determined the Foundation’s before condition cash flow to be approximately negative $14,000 and the after condition cash flow to be approximately negative $77,000.  He attributed the $63,000 shortfall to loss of goodwill.  Capitalizing the lost cash flow, the Foundation’s expert concluded that the Foundation had lost $781,000 in goodwill and opined that the Foundation must have had at least that much in goodwill before the taking.  In other words, the Foundation’s expert did not value the Foundation’s entire business in the “before condition”, subtract the value of tangible assets, and determine whether there was in fact goodwill remaining, before concluding to whether there was a loss in the “after condition”.

Caltrans sought to exclude the business appraiser’s testimony since the appraiser did not establish the business had goodwill in the first place. The trial court agreed with Caltrans and concluded that although the taking may have caused the Foundation to suffer a loss due to change in location, reputation, etc., the Foundation had failed to meet its burden under Code of Civil Procedure §1263.510(a)(1) because it “failed to prove the quantitative … loss of goodwill.”  The trial court relied on City of San Diego v. Sobke (1998) 65 Cal.App.4th 379 (Sobke) indicating that a business must have quantifiable goodwill in the before condition, before the loss of such goodwill can be calculated – a principal which was also affirmed in People ex rel. Dep’t of Transp. v. Dry Canyon Enters., LLC, 211 Cal.App.4th 486, 149 Cal.Rptr.3d 601 (Cal. App., 2012).

Court of Appeal Decision

The Court of Appeal disagreed. The Court began its analysis by looking at the definition of “goodwill” under the statute.  Subdivision (b) of 1263.510 states: “[w]ithin 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 probable retention of old or acquisition of new patronage.”

Unlike the progeny of cases that have preceded Presidio and have looked for a quantitative “before condition” goodwill value, the Appellate Court was interested in whether the Foundation offered sufficient evidence of the factors listed in the statutory definition of goodwill, i.e. “benefits that accrue…as a result of its location, reputation….”, to establish the existence of goodwill.  The Foundation, through witnesses and its expert had produced evidence that it had a favorable location and a great reputation prior to its relocation.  Moreover, since the Foundation had also shown evidence that it had experienced a reduction in patronage and that there were disadvantages to its new location, the Court drew the reasonable inference that the Foundation had goodwill prior to being displaced and of course suffered some loss of the benefits when it relocated.  In other words, the Foundation had goodwill based on the qualities set forth in the statute – and that was sufficient.

The Court reasoned that for purposes of the threshold determination of entitlement to compensation, a party must establish that the taking caused some amount of loss of goodwill due to the taking, but need not quantify the loss in a specified manner. In contrast to Sobke, the court in Presidio concludes:

…we are not convinced … that the only way to quantify lost goodwill is by establishing pre-taking goodwill value and subtracting post-taking goodwill value. Nowhere in the statutory language is there a precondition that this [goodwill] compensation is available only to a business that, before the taking, had a total business value in excess of its tangible assets, or profits in excess of a fair rate of return on its total assets.

Conclusion

So is Presidio the demise of the before-condition valuation on the threshold issue of entitlement to goodwill, or is it limited to its facts?  Would the Court have decided this case differently if the business wasn’t a non-profit?  The Court does go out of its way to distinguish Presidio from Sobke and Dry Canyon; nevertheless, the decision is likely to have broad implications on future goodwill claims and certainly leaves room for arguments by business owners and agencies alike.

California to Consider Significant Change to Eminent Domain Law Regarding a Condemnee’s Right to Recover Litigation Expenses

On February 9, 2017, California Assembly Member Phillip Chen (a Republican from the 55th district) introduced Assembly Bill 408 (AB 408).  You can find a copy of the bill here.  AB 408 is styled as an “act to amend Section 1250.410 of the Code of Civil Procedure relating to eminent domain.”  There is very little history available on AB 408 and it appears that the next action is for it to be heard in committee on March 12, 2017.  If AB 408 is ultimately approved in its current form, it would radically change the standards by which courts decide whether or not to award litigation expenses in eminent domain actions.  This, in turn, could drastically impact public projects in California because property owners may have less incentive to settle pre-litigation or during early litigation.  This could lead to increased costs, more trials, less judicial discretion, and more opportunity for mischief.  Fundamentally, it could cause right-of-way costs to go up dramatically and projects may take longer to build.

I wrote a detailed analysis of AB 408 that was published by Nossaman as an e-alert this afternoon. You can find a copy of the e-alert here.  If you are involved directly or indirectly with eminent domain in California, I encourage you to read it.

Trump’s Border Wall: Will Eminent Domain Be National News Again?

Border Wall

There has been a lot of news lately concerning President Trump’s desire to build a border wall. Many of the articles focus on the efficacy, costs and practical challenges of building the wall.  But the discussions are also starting to move into our world of eminent domain.  An Op Ed piece in the Washington Post  talks about “Donald Trump’s Great Wall of Eminent Domain” and mentions that 67 percent of the nearly 2,000 border miles constitute private and state-owned lands. The Daily Beast published an article called “The Great Wall of Trump Would Be the Ultimate Eminent Domain Horror Show,” which describes 480 acquisitions occurring in 2008 when 370 miles of pedestrian fencing along the border was built.  If we assume a comparable number for the estimated 1,000+ miles of right-of-way that must be acquired for Trump’s Border Wall, there would be well over 1,200 acquisitions.  The article discussed grim stories of how Native American burial grounds were impacted and how construction pursuant to the earlier Secure Fence Act left human remains hanging off of machinery used to build the wall.

In other words, eminent domain will almost certainly feature more and more prominently in the nation’s consciousness should President Trump’s border wall move forward. The last time I recall this occurring was in 2005 when the United States Supreme Court held in Kelo v. City of New London 545 U.S. 469 (2005) that generating more tax revenues was a valid public purpose that enabled the government to take private property for private redevelopment. Trump’s Border Wall appears to be far more polarizing in many different ways, so we will undoubtedly see a tremendous amount of political and legal challenges in the days ahead, and eminent domain will be an inevitable part of it.

Just yesterday, I was contacted by a local radio station (KNX 1070) and interviewed concerning Trump’s Border Wall and whether it could be built as quickly as President Trump claims.  The producer of the news program had done her own research and asked me whether a 1907 proclamation by President Theodore Roosevelt called the “Roosevelt Reservation” meant the federal government already owned all the right of way it needs along the U.S. / Mexico border.  This was news to me, so I found a copy of it online.  I ultimately explained to the producer that the Roosevelt Reservation was limited to California, Arizona, and New Mexico, exempted properties that were privately owned, and really only permitted highway use.  While it proved not to be a panacea for President Trump’s right-of-way needs and ultimately was not part of my interview, it certainly demonstrates the creative thinking people may use to fast-track the project.

As I sat down to write this post, I read one additional informative article that touches on many issues surrounding the Border Wall.   One item from the article that I found of particular note was the Real ID Act of 2005 which allows the Department of Homeland Security to waive 37 federal laws to construct border fencing, including the Endangered Species Act. In other words, it’s possible that President Trump could build the wall without the usual analysis of environmental impacts.  Because a wall would impose a physical barrier not only for two-legged animals (albeit, with questionable long-term efficacy), but also migratory wildlife, this could be a significant concern to environmental groups.  But it may theoretically eliminate one significant obstacle in President Trump’s desire to fast-track the Border Wall’s construction.

Whether you support or oppose President Trump’s Border Wall, it will almost certainly bring to the forefront the work we eminent domain practitioners do.

A Condemnation Action is Looming — What are a Landlord’s Disclosure Obligations to Potential Lessees?

commercial-tenant-build-outBefore an eminent domain action is filed, public infrastructure projects involve years of planning, environmental approvals, design, and property negotiations.  During this time, property owners and real estate agents/brokers are often faced with deciding what to disclose about the potential condemnation to prospective tenants when attempting to lease out space.  It is a difficult position to be in, as (i) disclosing too much makes it extraordinarily difficult to find a tenant willing to pay market rents with the looming “cloud” of condemnation, and (ii) disclosing too little exposes the landlord or broker to a potential concealment or fraud claim.  This situation recently played out with a commercial property owner facing Caltrans’ I-5 freeway widening project, and a Court of Appeal decision in DNI Food Service v. Kim (2017) Cal. App. Unpub. LEXIS 199 provides some guidance to landlords.

In DNI Food Service, the owner of a multi-tenant retail building received a notice from Caltrans that its property would be impacted by an upcoming project.  After Caltrans sent a “Notice of Decision to Appraise,” identified the permanent and temporary construction easements to be acquired, and had its appraiser inspect the property, the landlord proceeded to lease space to a restaurant without disclosing the upcoming project.  Shortly thereafter, Caltrans filed an eminent domain action, which was the first time the restaurant tenant received notice about Caltrans’ taking.  In the condemnation action, the tenant filed a cross-complaint against the owner and the real estate agents, claiming they should have disclosed information related to Caltrans’ planned freeway expansion that would affect the property.  The tenant asserted that had the proper disclosure been made, it would have never leased the space or spent time and resources remodeling and equipping the restaurant.

In analyzing the tenant’s claims, the court explained:

a property owner is under a duty to disclose material facts affecting the value or desirability of the property, if it is known that such facts are not known to or within the reach of the diligent attention and observation of a buyer. . . .  When the seller’s real estate agent or broker is also aware of such facts, “he [or she] is under the same duty of disclosure.”

The court went on to explain that “a fact is material if it has an effect on the value or desirability of the property.”

Here, the property owner and agents knew about the planned Caltrans taking and failed to disclose that fact while simultaneously touting the property’s excellent location and convenient proximity to the freeway.  Sounds like a slam dunk concealment case, right?  Surprisingly, the court denied the tenant’s claim, concluding that the scope of Caltrans’ acquisition — which primarily involved a small piece of landscaping at the opposite end of the commercial development — had such a minimal impact on the value of the lease that it was not a material fact giving rise to a duty to disclose.

In reading between the lines, it appears the tenant’s business was failing regardless of Caltrans’ acquisition.  The court further concluded that even if there was a duty to disclose, the restaurant tenant failed to demonstrate causation and damages, as the restaurant shut down within months of learning of the eminent domain proceeding, but before any construction had started.  This may have been an underlying driving factor in the court’s decision.

While the property owner and real estate agents/brokers were let off the hook in this particular case due to Caltrans’ taking being deemed “immaterial,” it is a good reminder on landlord disclosure obligations with a future acquisition looming.  Landlords should not leave it up to chance to determine what is and what is not material, and should instead take the cautious approach and disclose.  If the landlord is worried about not being able to find a tenant or accepting below market rent due to the pending project, one suggestion is to consider entering into a lost rents agreement with the public agency.  This has the benefit of putting rent in the landlord’s pocket, while keeping the space vacant and avoiding a large goodwill or relocation claim for the public agency.

Value Trends of Gas Stations and Car Washes

gas-stationIn a previous post, “What is ‘Just Compensation’ For Gas Station Acquisitions,” we explored various methods for valuing gas stations and car washes in an eminent domain action, including a recommendation by a gas station appraisal firm, Retail Petroleum Consultants, to approach such valuation assignments as “special use properties”.  Retail Petroleum has issued another useful article, “Value Trends in Gas Stations and Car Washes,” which examines recent trends driving the valuation of such properties in California.

Retail Petroleum explains that because gas stations are typically special-use properties sold based on a going-concern value, there are two primary valuation metrics buyers and sellers use in the market:  (i) the Gross Profit Multiplier method, which measures value based on the gross profit generated by the property, and (ii) the Capitalization Rate approach, which measures value based on the net operating income generated.  The article concludes that the vast majority of gas stations are run by small businesses, meaning operating expenses can vary dramatically from property to property, and therefore the Gross Profit Multiplier may be a more reliable method for valuation.  However, the article explores certain nuances that should be considered with each approach, depending on the particular gas station being valued:

  1. Gross Profit Multiplier Mirrors Real Estate Market Trends:  Based on statistical data, the Gross Profit Multiplier valuation method has trended more consistently with the real estate market, whereas capitalization rates showed an opposite trend through the recent recession (i.e., capitalization rate trends indicated increasing gas station values during the recession and falling values after the beginning of the recovery, which clearly did not occur).  This needs to be taken into consideration when deciding what “cap rate” to utilize for purposes of valuation.
  2. Capitalization Rate Approach Considers Risk:  Post-recession, most stations saw an increase in cash flow with improved fuel margins, higher convenience store sales, and heightened sales at car washes and quick-serve restaurants.   However, a higher net income generally results in increased risk to a buyer (there is a greater risk of continuing that above-market income stream into the foreseeable future), and capitalization rates are therefore impacted.  This risk may not be as fully recognized by simply looking at gross income, and the size of the gas station’s income therefore needs to be taken into consideration when deciding what multiplier or cap rate to utilize.
  3. Capitalization Rate Approach Recognizes Pool of Buyers:  Properties with a higher net operating income will generally be higher-priced and will therefore have a smaller pool of buyers, which would also impact capitalization rates.  For properties with lower net operating income, many more potential buyers can bid on the property, thus pushing capitalization rates into a lower and more constant range.  As a result, for gas station and car wash going-concerns, an appraiser must consider the relationship between the property’s income and the appropriate capitalization rate to be applied.

Retail Petroleum concludes that both methodologies should be carried out in any appraisal of a gas station, c-store, or car wash:

They can both provide useful insight into how buyers, sellers, and other market participants value these property types, which can be quite complex. Differing locations, improvements configuration and condition, profit centers, underlying land values, and a multitude of other factors can influence values.

However, value indications from a gross profit multiplier may be more consistent because of the more consistent market data available, whereas capitalization rates will tend to be somewhat less reliable due to the nature of accounting for operational expenses within small businesses.

For a detailed analysis of the two approaches and current statistical trends, take a look at Retail Petroleum’s article.

Tentative Decision Favors Private Utility Company in Takeover Bid

One of the hot issues in eminent domain these days involves the government’s efforts to take over privately-run utility companies.  The argument typically is that the government — which has no profit-making motive — can run the utility at a lower cost, saving the ratepayers money.   Not surprisingly, the utility companies feel otherwise.

WaterIn California, one of the first cases to reach trial on this issue is about to wrap up.  The City of Claremont sought to condemn the Golden State Water Company’s assets, and Golden State fought the City’s right to take.

In a Court trial (i.e., a trial without a jury), the judge has just issued a tentative decision to side with Golden State, denying the City’s right to take.  According to a November 10 article in the Inland Valley Daily Bulletin, Tentative ruling has Claremont losing bid to takeover water system:

Judge Richard Fruin’s tentative decision finds it is in the public’s best interest for the system to remain as a private investor-owned utility.

This is not necessarily the end of the story.  The City has 15 days to submit comments and, even if the judge maintains his decision, the City has the option to appeal, something which seems likely, as the City’s November 10 press release explains: “Should the final decision be against the City, the City Manager will forward a recommendation to the City Council to begin the appeal process.”

We will keep you posted.

What Does the Election Mean for the Future of Infrastructure Development?

With only a few days remaining until one of the most controversial presidential elections in history, there has been little focus on the candidates’ plans as it pertains to the future of infrastructure development in America.  But both Hillary Clinton and Donald Trump have big spending plans — they are just vastly different in their proposals on how funds will be raised and spent.  If you’re interested in a detailed breakdown of Clinton’s and Trump’s infrastructure plans, there is an excellent article by Chuck Devore in Forbes titled “Where Clinton and Trump Stand on Transportation“.

According to the article, infrastructure experts predict that America needs $500 billion of new infrastructure spending per year — about 3 percent of the national economy and a little more than double the current rate of spending.  Where would that money come from, and how would it be spent?  Here’s a brief re-cap of the article discussing where Clinton and Trump stand, along with Devore’s take on potential issues or concerns:

CLINTON PROPOSAL

  • $500 billion in added infrastructure spending over a 5 year period.
  • Funding primarily coming from a hike in taxes on businesses, along with a revolving fund government infrastructure bank to underwrite projects.
  • Broad spending on areas outside transportation, including school construction and environmental spending.  (Devore’s article uses California as a cautionary tale, with the state’s borrowing tens of billions of dollars to build transportation and water infrastructure, but instead significant money is spent on endless studies, environmental remediation, and park land acquisition.)
  • Spending along the lines of the status quo, with politicians picking projects, often based on political considerations, rather than where the dollars can most be efficiently spent.

TRUMP PROPOSAL

  • $1 trillion in added infrastructure spending over a 10 year period.
  • Funding does not come from raised taxes, but instead by adjusting the tax code to incentivize private investment in public projects with an 82% tax credit on equity invested in infrastructure, combined with federally-subsidized loans.
  • Spending focused on creation of more roads, bridges and water projects — projects that can create a revenue stream from users in order to incentivize private investments in public projects.  (Devore’s article suggests the need for eminent domain reform in this instance to ensure private property owners have greater assurance of being treated fairly by powerful public-private partnerships that can condemn their land for public transportation projects.)
  • Relies on investors, not politicians, to make decisions about what to build, and with private “skin in the game,” a lower likelihood of costly, underused projects.

While infrastructure development continues to be a huge issue in America, and Clinton and Trump’s proposed plans differ significantly, transportation spending will likely remain out of the main stream media given the more dramatic issues surrounding each candidate.  Happy voting America!

New Opinion Clarifies Takings Law Regarding Affordable Housing Programs

Last year, my partner Ben Rubin reported on the California Supreme Court’s decision in California Building Industry Association v. City of San Jose, which analyzed an inclusionary housing ordinance and held that such ordinances do not qualify as “exactions” and, consequently, are reviewed under a deferential standard that looked at whether the ordinance was “reasonably related” to the city’s interest in promoting the health, safety, and welfare of the community.

Last month, we saw the first published decision following last year’s Supreme Court pronouncement.  In in 616 Croft Ave., LLC v. City of West Hollywoodthe Court of Appeal looked at another affordable housing ordinance.  There, the court again held that the ordinance did not qualify as an “exaction” and therefore was not subject to scrutiny under the typical NollanDolan analysis, which examines whether (1) a “nexus” exists between the exaction and the impact a proposed development will have on public infrastructure, and (2) whether the extend of the exaction is “roughly proportional” to the impact the proposed development will have.

In Croft, as in the City of San Jose case last year, the Court felt no need to delve into Nollan/Dolan jurisprudence, because an affordable housing ordinance is not an “exaction.”  How can this be, when in Croft, the owner was forced to pay an affordable housing in lieu fee (i.e., a fee paid in lieu of actually reserving a certain portion of the units being built as affordable housing) of more than $500,000 in order to build 11 condominiums?  Sounds a lot like an exaction.

But the housing in lieu fee differs from an exaction in one crucial respect.  Exactions are, by their very nature, fees imposed to offset the impact a proposed development will have on the community.  Affordable housing programs are entirely different.  The city in Croft, for example, is not claiming that the owner’s 11 condominiums will generate $500,000 worth of affordable housing needs.  Instead, the affordable housing program is designed to combat a state-wide concern that has little to do with the specific development the owner planned for its property.   As the Court explained:

the purpose of the in-lieu housing fee here is not to defray the cost of increased demand on public services resulting from Croft’s specific development project, but rather to combat the overall lack of affordable housing.

Thus, because the fee is not an “exaction,” it is not analyzed under the Nollan/Dolan rubric.

There’s more to the decision and to the owner’s challenges, but the end result of all of it was that the court upheld the imposition of the in lieu fee.

From a larger perspective, the case raises issues that remain in flux around the country, and as one commentator convincingly argues, makes these issues ripe for additional U.S. Supreme Court guidance. For more on that angle, read Bryan Wenter‘s post,  Court Rejects Takings Challenge to City’s Imposition of $600,000 in Fees for 11-Unit Infill Project | Land Use Developments.

Municipal Condemnation of Privately Held Utilities Continues to be a Hot Issue, but at what Cost?

In January, I spoke at a conference in Austin about efforts by municipalities to condemn privately-held utility companies.  At the time, I figured it would be a one-off presentation on a pretty niche issue, even for eminent domain attorneys.  But next month, I’ll be speaking on a variation of that topic at CLE International’s 2016 Eminent Domain Conference in Las Vegas, a presentation that will be the third time this year I’ve spoken on the topic.

In fact, we’ve been following this issue since at least 2014, when my partner Brad Kuhn wrote about a takeover effort involving PG&E.  Those efforts remain ongoing, and in June, the South San Joaquin Irrigation District (“SSJID”) adopted a Resolution of Necessity to condemn PG&E’s facilities in Ripon, Escalon, and Manteca.  SSJID filed an eminent domain action on July 7.

Without passing any judgment on PG&E or SSJID in the above case (I have no personal knowledge about the case and am not involved in it in any way), it does provide a framework for what I think may be the most important aspect of these types of cases: valuation.

SSJID’s premise in condemning PG&E’s facilities is that it will be able to save its constituents 15 percent on their utility bills.  I have no idea whether that is or is not the case, but I do know that the actual savings in these situations can be complicated and very difficult to predict.  Hopefully, before a municipality proceeds down this path, it will have performed a realistic financial assessment that takes into account both (1) what the municipality thinks it will cost to provide utility service and (2) what it will cost to acquire the private utility company’s assets.  This second piece is crucially important, because the residents are not likely to be very impressed with a reduction in their utility bills if they have bonds to pay off from the acquisition that dwarf the utility service “savings.”

This is where I think many takeover efforts will collapse, as municipalities run their calculations, demonstrate a net “savings,” and then find out during the acquisition process that the cost is far higher than they had projected.  As just one recent example, the City of Missoula, Montana condemned the utility company in its jurisdiction based on a projected acquisition cost of $50 million and anticipated legal fees of $400,000.  Ultimately, the condemnation award was $38 million higher than projected — and the legal fees may turn out to be as much as $14,000,000.

Lmountain-water-companyike the SSJID case, I have no personal involvement or knowledge about the situation in Missoula.  But I do know that a takeover effort projected to cost $50,400,000 may not “pencil out” quite the same if the actual cost turns out to be more than twice that much.  At least one person following the situation there appears quite concerned about how everything is turning out.  Dan Brooks, in his August 4 blog post Two years and $14 million later, Missoula wins right to buy Mountain Water, expressed his frustration at the city’s process and (apparent) lack of financial planning:

The city had not run the numbers to determine at what point Mountain Water stopped being a good deal. Fifty million was a good price, apparently, and $50 billion would be too much. But within that range, no one could say exactly where a smart investment would turn dumb.

So what’s my point in all of this?  Only this:  whether you are a city representative considering whether a takeover bid makes sense or a resident encouraging your local government to take steps down this path, you need to think carefully about the costs of proceeding.  As well intentioned and as meticulous as your financial planning may be, it is a good bet that the takeover target is going to view the costs very differently, and that the actual acquisition costs may be higher . . . potentially far higher . . . than anything that makes sense in terms of saving anyone any actual money.

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