Appraisal Institute Announces new "Standards of Valuation Practice"

Last week, the Appraisal Institute unveiled its Standards of Valuation Practice (SVP).  SVP will not replace USPAP (the Uniform Standards of Professional Appraisal Practice) -- which have long-been the mainstay of appraisal standards for many appraisals -- but will serve as an alternative when USPAP or other standards are not required.

According to AI President, Ken Wilson, MAI, SRA:

The SVP will establish a higher level of professional practice, engender public trust and facilitate the growth and advancement of the valuation profession...The SVP will recognize the broad area of practice of valuation professionals and the diverse needs of users of valuation services

While this is unlikely to make a change in the types of appraisals typically seen in an eminent domain action, which comply with USPAP, the new standards will fill a gap for areas where there are no other standards.

You can read the SVP here.

Did Koontz Stop Illegal Development Exactions in California?

The U.S. Supreme Court's decision last year in Koontz v. St. John's River Water Management District received quite a bit of national coverage in the development world.  If you'll recall, Koontz held that the nexus and proportionality standards that apply to the government's attempt to exact land in exchange for a land use permit similarly apply to monetary exactions.  While the decision may have caused a change in the entitlement process in other states, this was generally already the rule in California under the Mitigation Fee Act.  So deciphering just how Koontz would impact California was a bit uncertain.  My partner, John Erskine, who specializes in representing developers through the entitlement process, recently wrote a great article on Koontz' effects locally -- from a real-world, on the ground perspective.  

The article, Did Koontz Stop Illegal Development Exactions?, concludes that Koontz really isn't doing anything to change the development landscape in California, because "even with the procedural boost provided by the Mitigation Fee Act in California, most developers are reluctant to sue unless the illegal exaction is so significant in amount that it is considered project-threatening . . . ."

As John so aptly concludes, "obtaining project approvals while avoiding illegal exactions is a tight-rope walk, and Koontz unfortunately appears to be a rather porous net.  Local government officials are not avoiding discussions with developers . . . nor are they getting any less creative in converting potential project revenue into municipal budget supplements."

Give the article a read if you're interested in hearing more.  

City May Be Liable for Damage to Home Caused by Falling Tree in Inverse Condemnation and Nuisance

During a windstorm, a tree owned by the City of Pasadena fell on Mr. O’Halloran’s residence, causing damage to his home. Mercury Casualty Company paid Mr. O’Halloran for the damage pursuant to his homeowner’s insurance policy, and then sued the City for inverse condemnation and nuisance based on the damages caused by the City’s tree.

Inverse Condemnation

To state a cause of action for inverse condemnation, the plaintiff must allege that defendant substantially participated in the planning, approval, construction or operation of a public project or improvement which proximately caused injury to his/her property. Courts have stated that when a physical injury is the incidental consequence of a deliberate action by the government taken in furtherance of public purposes, the damaged property has been appropriated for public use.

The trial court denied the City’s motion for summary adjudication of the inverse condemnation claim on the grounds that "the evidence shows that the subject tree is part of a work of public improvement that may properly be the subject of an inverse condemnation action." The City disagreed, and sought a writ of mandate in the Court of Appeal (essentially, an effort to get the trial court reversed before there is a final judgment that could be appealed in the normal manner).

In City of Pasadena v. Superior Court of the State of California, et al. (2014 Cal. App. LEXIS 733), the Court of Appeal held that the trial court properly denied summary adjudication because there were triable issues of material fact as to whether the tree was part of a work of public improvement.

The court explained that:

(1) Deliberate action is not found where the purported public improvement is neither an instrumentality of the sate nor controlled by the state. However, the evidence showed that the subject tree was part of the City’s forestry program to enhance the quality of life of its residents and visitors, and that the City took deliberate steps to manage and maintain the trees.

(2) The public improvement element of an inverse condemnation claim is satisfied where the instrumentality that allegedly caused the plaintiff’s damages (such as a tree) is part of the construction of a public improvement (such as a highway beautification project). The evidence showed that the tree was part of the City’s program to maintain trees along the roads, thus serving a public purpose of improving public roads.

The Court of Appeal found that the evidence presented demonstrated that the City’s forestry program, of which the subject tree was a part, is the result of a deliberate action by the state serving a public purpose. Accordingly, summary adjudication was properly denied.

Nuisance

A nuisance is "anything which is injurious to health . . . or is indecent or offensive to the senses, or an obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or property." (Civil Code, § 3479.)

The trial court also denied the City’s motion for summary adjudication with respect to the nuisance claim. The trial court found that negligence is not required to establish nuisance, and that the City failed to submit evidence excluding the likelihood that the public improvement was a substantial factor in causing damage.

The Court of Appeal agreed that nuisance liability is not necessarily based on negligence. However, where the liability for nuisance is based on the failure to act or an omission, then negligence is required. Liability for negligence is based on a defendant’s breach of its duty of care to plaintiff, and damages caused by that breach. The court explained that the City was required to present some evidence that it had not breached its duty of care by first establishing the nature and extent of its duty. Because the City failed to do so, it did not meet its burden for summary adjudication. Accordingly, the Court of Appeal affirmed the trial court’s denial of summary adjudication as to the nuisance claim as well.

Note that the ruling does not mean that the City is necessarily liable under either the inverse condemnation or nuisance theory. At this point, the Court has only ruled that the City could not escape liability through its summary adjudication motion, meaning the case will now proceed to a trial on the merits of the plaintiff’s claims. Note also that this opinion was not ordered published by the Court of Appeal, meaning it is not citable as precedent in any other case.

 

California Legislature Moves One Step Closer to Authorizing Eminent Domain for Martins Beach

Just in case you lost track of the Martins Beach saga, here is a quick summary and update.  According to reports, a couple of years after billionaire Vinod Khosla bought beachfront property in San Mateo County for over $30 million, his property manager locked a gate to a private access road on the property.  This access road, however, in addition to providing access to the property's residence, also had been used by the public to access Martins Beach (the parties do not agree as to whether the public use was permissive or under claim of right).  

Following the gate closure, lawsuits have been filed, the Coastal Commission has initiated an investigation into a possible public prescriptive easement, and State Senator Jerry Hill has introduced legislation (SB 968) requiring the California State Lands Commission to acquire public access by eminent domain.  As recently reported by Aaron Kinney of the San Mateo County Times, the legislature has moved one step closer to passing SB 968, "clearing the Assembly Appropriations Committee on a party-line vote."  Having cleared the Committee, SB 968 will now go to the full Assembly for a vote, and, if it passes there, to the Senate floor.  It should be noted that while SB 968 originally "required" the State Lands Commission to acquire public access should negotiations with the property owner fail, the version approved by the Committee would "ask" the State Lands Commission to use eminent domain to acquire public access. 

Keeping its Options Open: Lodi Passes Resolution of Necessity as Negotiations Continue

As we have reported in the past, public agencies are often faced with deadlines to secure possession of necessary right of way and ensure project funding.  Given the amount of time it takes to secure possession through the court process, agencies must proceed with condemnation actions even where they need additional time to negotiate with property owners.  Delaying the condemnation action for several additional months, while likely to lead to a settlement, ultimately places the project at risk if no deal is reached and thereby forces the agency's hand.  This is exactly what happened in the City of Lodi. 

The Lodi Sentinel-News reports that the City Council passed a Resolution of Necessity to aquire the two remaining properties needed for the Harney grade separation project.  According to the article, the Council would have preferred to avoid filing a condemnation action, but delaying the action put the project's Measure K funding at serious risk.  So the Council hedged a bit -- it adopted the Resoultion, but directed the City Attorney not to file an action for 30 days while negotiations continued. 

Will 30 days be enough?  Apparently, the owners are supportive of the project, but question the City's offer of compensation.  My guess is they won't be able to bridge the gap and the risk of losing project funding will mean the City will be forced to file the action.

Relocation Benefits and Eminent Domain: How do they Fit Together?

One issue that eminent domain attorneys face routinely involves helping businesses obtain the relocation benefits to which they are entitled under the law, while at the same time pursuing a claim for lost business goodwill.  To us, there is a clear difference between the two, as we are indoctrinated early in our careers into understanding that the two types of relief, while seemingly closely related, are instead largely unrelated in the eyes of the law. 

But to a typical business owner facing a forced relocation due to a government acquisition, the issues can appear thorny and complex.  And, let's face it, pretty arbitrary.  Stepping back, I can understand why owners feel that way.  After all, they are concerned with relocating, preserving their business, and minimizing losses along the way.  What does it possibly matter whether the business lost money due to the cost of relocating equipment or due to increased rent at the new location? 

But under the law, the difference is important, and it dictates how -- and if -- the business owner can recover.  A short blog post is not the place to go into detail on how all of this works, but I do want to hit a couple of key points for people to keep in mind. 

First, relocation expenses are almost always handled outside any eminent domain action.  The owner will typically work with a representative of the condemning agency to document the relocation expenses that the law deems recoverable, and the owner will submit a claim to the agency.  If everything appears satisfactory to the agency, the owner will receive a check. 

Second, if there is a dispute over what relocation expenses are recoverable and what are not, the owner typically must first go through some type of administrative appeal process in an effort to convince the agency to change its mind.  At this point, it is often crucial to have an eminent domain attorney helping you, because some of the rules are hyper-technical and (sadly) a bit nonsensical. 

If the administrative appeal does not solve the problem, the owner is free to sue, but even then, the lawsuit would be separate from any condemnation action.

Third, in the condemnation action, owners used to routinely capitalize relocation costs that the agency deemed non-compensable, folding those costs into a "loss of business goodwill" claim.  But California law has changed, and this tactic is largely no longer possible.  (For more on that, see our post on Los Angeles Unified School District v. Casasola.)

Fourth, goodwill claims come with their own set of technical, procedural requirements, and it is pretty easy to make what seems like a harmless mistake, only to discover that it destroys the entire goodwill claim.  (While representing an agency, I once had an owner admit on the witness stand that he didn't really try to relocate the business.  The owner wasn't too concerned about the testimony until he learned that that one answer precluded any recovery for lost business goodwill.)

Because of this, business owners facing a condemnation action should consider hiring a qualified eminent domain attorney early in the process.  This can be crucial if the owner is to avoid making one of those simple -- but fatal -- mistakes (which can occur even before a condemnation lawsuit is filed).

So there you have it.  Just enough about relocation and business goodwill that you are likely more confused now than you were when you started reading.  But look on the bright side.  Unlike me, you probably don't have to deal with these issues every day.  (And if you really are confused about how all this works, feel free to send me an email or give me a call; hopefully I can clear things up or, better yet, refer to you one of my more talented colleagues.) 

Court Provides Guidelines on Valuing Natural Resources in Eminent Domain Proceedings

Valuing mineral rights in eminent domain proceedings is inherently speculative and can lead to wide swings in property valuations.  So how do appraisers best deal with the uncertainty involved in mineral exploitation?  The California Court of Appeal recently provided some guidance in San Diego Gas & Electric Company v. Arnold J. Schmidt et al. (2014) 2014 Cal. App. Unpub. LEXIS 5090.  

In Schmidt, the Court allowed the introduction of the property owner’s appraiser’s valuing 115 acres of vacant in San Diego based on the projected future income the property would generate for mining operations.  This approach resulted in a jury awarding approximately $8,000,000 to the owners as a result of a condemnation by SDG&E for its Sunrise Powerlink Project.  SDG&E valued the property at approximately $700,000.  This huge difference in valuation turned on the highest and best use of the property, and permissible methods for determining the proper amount of just compensation for losing the ability to exploit the property’s natural resources.

The Court began by noting some well-established principles of California’s eminent domain law, including: that owners of private land are entitled to just compensation for property taken for public use; that the measure of this just compensation is the property’s fair market value; and that this fair market value includes the right to exploit the natural resources located on or under the land in the future.  So, “[i]n determining just compensation in eminent domain proceedings, the existence of valuable mineral deposits in the land taken… influences the market value of the land.”  The Court noted that while valuation of a mineral estate is inherently difficult, and to some degree speculative, that doesn’t preclude the mineral estate from having and ascertainable market value.

To properly determine this value, the Court explained the first step is to present evidence that the exploitation of minerals is compatible with the highest and best use of the property.  Following that, the next step is determining the proper valuation method for the property.  Usually, the comparable sales approach is the easiest and most reliable method, but if there are no comparables, other valuation approaches may be used.  In such cases evidence of income that may be generated from the land may be considered, even though evidence of income generated from a business conducted on the land may not.  Evidence of income that may be generated from the land can be presented by expert testimony regarding “(1) the existence of the deposit, (2) the quantity and quality of the deposit, (3) whether a market exists for the deposit, and (4) the net income projected over the life of the deposit.”  However, given the time value of money, that projected income must be capitalized and discounted to its present day value.

In this case, the property owners’ expert determined the average income that the owners could realize by leasing the property for mining purposes (approximately $3.3 million per year), and then discounted the future income stream in order to reduce it to its present day value.  The Court rejected SDG&E’s argument that the discounted cash flow method used by the owners’ expert violated Evidence Code section 819, which permits use of the capitalization of income approach only for the land and the existing improvements thereon.  The Court explained that the statute allows "the capitalized value of the reasonable net rental value attributable to the land," which included the capitalized value of the income stream from the potential lease of the property to a mining operator.

While the court ultimately acknowledged that the valuation of a mineral estate will necessarily involve some speculation, its decision provides some guidance as to how to properly value a mineral estate for the purposes of determining its fair market value in an eminent domain proceeding.
 

How Untimely Service Can Be Deadly To Your Takings Claim

If you ask ten attorneys what keeps them up at night, at least six of them will recount nightmares about missing a filing deadline.  I know what you're thinking.  How hard can it be?  You just look in the Code, find the applicable limitations period, and then you're off.  However, as with all things law related, it very rarely is that simple.  In a recent decision issued by the Second Appellate District, the court explained why filing deadlines are not the only thing practitioners should have nightmares about.  In Excelaron, LLC v. County of San Luis Obispo, the court of appeal upheld the dismissal of plaintiffs' inverse claim with prejudice, because the timely filed complaint was not timely served

Plaintiff, the owner of various mineral estates in an unincorporated area of the County of San Luis Obispo, applied for a conditional use permit to drill and operate oil wells on its various estates.  The County, however, denied the application, and in its notice of final action stated: 

"Pursuant to Section 1.09.040 of the San Luis Obispo County Code, please be advised that the time within which judicial review must be sought is governed by the provisions of California Code of Civil Procedure section 1094.6 and Chapter 1.09 of the San Luis Obispo County Code (copy enclosed)." 

Both the County Code section 1.09 and section 1094.6 state that a complaint must be filed within 90 days of the final decision; they are silent on the issue of service.  Within 90 days of the decision, consistent with the requirements in the County's Code and 1094.6, the plaintiff filed a petition for writ of mandate and complaint for inverse condemnation.  Two days later, a first amended petition and complaint was filed adding three additional petitioners and a new claim under the California Environmental Quality Act (CEQA).  The complaint sought approximately $6.24 billion in damages (that's with a "b").

129 days after the final decision was issued, the complaint was served on the County.  The County subsequently demurred to the entire petition and complaint on the ground that the plaintiffs had failed to comply with the service requirement in Government Code section 65009.  Section 65009, which only applies to a certain segment of land use decisions, including decisions relating to conditional use permits, states that except as provided therein, "no action or proceeding shall be maintained . . . by any person unless the action or proceeding is commenced and service is made on the legislative body within 90 days after the legislative body's decision[.]"  Based on the failure to comply with the service requirement in section 65009, the trial court granted the demurrer without leave to amend.

On appeal, plaintiff asserted four arguments:  (1) the County was estopped from relying on section 65009; (2) section 65009 was preempted by County Code section 1.09; (3) the County waived the protection of section 65009 by enacting County Code section 1.09; and (4) section 65009 does not apply to CEQA or inverse condemnation claims.

Plaintiff's estoppel argument was premised on the language in the County's final decision regarding section 1094.6 and County Code section 1.09.  Plaintiff asserted that by specifically identifying sections 1094.6 and 1.09, the County knowingly and willfully misled the plaintiffs into believing that the claims would be timely so long as they were served within 90 days of the final decision.  The court of appeal made short work of this argument, however, as it found that this exact argument had already been rejected in Honig v. San Francisco Planning Dept. (2005) 127 Cal.App.4th 520 and Beresford Neighborhood Assn. v. City of San Mateo (1989) 207 Cal.App.3d 1180.  In light of these authorities, the court of appeal stated that "[a]lthough it might be better practice to include a reference to section 65009, the County's failure to do so here provides no basis for us to deem it estopped from asserting the statute as a defense."  The court similarly rejected plaintiff's waiver and preemption arguments.

Finally, the court of appeal turned to the question of whether section 65009 applied to the CEQA and inverse claims.  The court concluded that the CEQA claim was barred, relying on the plain language of section 65009 and Royalty Carpet Mills, Inc. v. City of Irvine (2005) 125 Cal.App.4th 110, since the claim "essentially and necessarily" challenged the County's decision to deny the application.  The court reached the same conclusion with respect to the inverse claim, explaining that the gravamen of the claim hinged "on the validity of the County's decision to deny the application[.]"  Thus, the court of appeal concluded that the inverse "cause of action is subject to section 65009's statute of limitations."   

Accordingly, because the petition and complaint was not served within 90 days, the court of appeal affirmed the dismissal of a timely filed inverse claim that had an estimated value of $6.24 billion, with prejudice.  Now that is a nightmare scenario.   

Motions in Limine May be Used in Eminent Domain Proceedings to Determine Party's Interest in Property

"Motions in limine" are motions made shortly before trial, and they're typically filed in an attempt to limit the introduction of evidence to the jury.  They are a powerful tool in eminent domain proceedings, and can be used to limit an appraiser's comparable sales, valuation methodology, or even the expert's entire testimony.  In a recent unpublished California Court of Appeal decision, Verizon of California v. Carrick (2014 Cal. App. Unpub. LEXIS 5030), the Court even approved of the use of an in limine motion to determine whether a party had a compensable interest in the property being condemned.  

Background

In Verizon v. Carrick, Verizon filed an eminent domain action to acquire an easement to place underground fiber-optic cables along a road.  The area at issue was privately owned, and Verizon named all the private property owners in the condemnation complaint.  After securing an order for prejudgment possession to start the installation work, a home owner's association filed a motion to vacate on the ground that the road was owned and maintained by the association.  The association also challenged Verizon's right to take the property, and ultimately succeeded in requiring Verizon to secure approval from the California Public Utilities Commission (CPUC) to condemn the property. 

After Verizon obtained CPUC approval, the case moved forward to a valuation trial.  Verizon filed a motion in limined to exclude the association's valuation appraiser, Chris Pedersen, on the grounds that the association did not own a compensable interest in the property being condemned.  The trial court conducted a hearing pursuant to Evidence Code section 402, and concluded that the association could not participate in the condemnation action because it did not own any interest in real property.  The appraiser was then limited to testify as to damages suffered by the individual property owners as a result of the condemnation (to whom the appraiser allocated 100% of the damages).  After the valuation trial, the association appealed, arguing that an in limine motion was not a proper procedure to determine the association's standing to bring a claim.

Appellate Decision

While the Court of Appeal recognized a dislike for the use of in limine motions for dispositive issues, it explained there was no blanket prohibition on such use.  Here, the Court found the in limine procedure was appropriate, as there was ample evidence the association had no interest in the real property.  Moreover, there was no harm to the association:  the trial court still allowed the appraiser to testify as to damages, and he allocated 100% of the damages to the private property owners.

The association made one last attempt to assert a claim through "associational standing," which applies where an association is seeking relief which would inure to the benefit of the organization's members.  The Court also rejected this claim, concluding that associational standing is inappropriate where the harm is suffered by the organization's members and requires the participation in the individual members in the lawsuit.   

Conclusion

It's tough to glean what really took place in this litigation.  For instance, why was the association so adamant on making a claim if the individual property owners were already parties to the condemnation action and could seek 100% of the compensation?  Similarly, why did Verizon wait until just before trial to address the association's interest in the property?  And what happened with the association's effort to set aside the order for prejudgment possession?  Unfortunately, there are a number of missing pieces to this story, but the take away is that in limine motions can be used for many purposes, including addressing whether a party has a compensable interest in the property being condemned.

Time Limit to Transfer Base Year Property Tax Value Expanded for Eminent Domain Takings

Californians who have owned their properties for years understand the benefits of Proposition 13: their property taxes are based upon the property's purchase price (with only small allowable annual increases), as opposed to the property's current value.  But upon a transfer, the property gets reassessed at its current value.  Consequently, people in California often wind up with higher property taxes when they sell one property and buy another, even if the new property costs exactly what they received for the sale of the old property.

When an owner is forced to "sell" as a result of the government's power of eminent domain, this rule does not apply.  Rather, California law contains an exception which allows condemned owners to keep their Proposition 13 base year value and transfer it to a replacement property.  However, there are limitations.  

For example, California Revenue and Taxation Code section 68 provides that the property owner must file a request for the transfer of the base year value within four years after the recordation of a final order of condemnation.  So what happens if the property owner fails to file for the transfer within the four year time limit?  This question was recently answered by the Court of Appeal in Olive Lane Industrial Park v. County of San Diego (2014 Cal. App. LEXIS 632).  

Background

In Olive Lane, a property owner had its property condemned by Caltrans and was awarded just compensation of $2 million.  The owner had a base year tax value in the condemned property of $650,000.  The owner then purchased another property within the four year time limit, but failed to file its application to transfer the base year value for five and one-half years.  The County of San Diego denied the owner's application as untimely, and the trial court agreed.  

Appellate Decision

On appeal, the Court held that the Legislature has the right to impose reasonable limitations on the exercise of constitutional rights, and therefore it can impose time restrictions on a property owner's ability to transfer their base year tax value of property taken by eminent domain.  However, in interpreting the legislation, the Court held that while the four year time limit applies to a property's owner seeking a retroactive application of the base year value transfer, it is silent as to an owner's application to transfer the base year value going forward in future years.  In other words, the legislation allows the

"application of the eminent domain replacement property exclusion in a prospective manner when a taxpayer acquires the property within the four-year period but misses the four-year filing deadline."

The Court explained that its holding was "a narrow one, premised on the just compensation eminent domain principles . . . ."  

Conclusion

The case serves as an important reminder for property owners seeking to acquire replacement property after their property is acquired by eminent domain:  the replacement property must be acquired within four years of the recordation of the final order of condemnation if the owner seeks to transfer its base year tax value.  If the owner wants the base year value applied retroactively, the application must be filed within four years as well.  However, according to Olive Lane, the owner will not lose the right to transfer the base year value prospectively if it misses the four year filing window.  

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