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California Eminent Domain Report

"…nor shall private property be taken for public use, without just compensation."

What is “Just Compensation” for Gas Station Acquisitions?

Posted in Valuation

Car-Wash-Franchises-OpportunitiesGas stations and car washes are primarily owner-occupied convenience businesses, typically located near freeway off-ramps and at the intersections of well-traveled roadways.  As a result, they’re frequently involved in eminent domain acquisitions for freeway expansions or road widenings.  A common question is how should such properties and businesses be valued to satisfy California’s requirement of “just compensation”?

A recent article by Retail Petroleum Consultants, Condemnation: Appraising Gas Stations and Car Washes, How to Ensure Just Compensation for Business and Goodwill, provides some interesting insights.  According to the article, it is typical — but probably inaccurate — for eminent domain attorneys, public agencies, and gas station owners to retain two appraisers, one for the real estate and one for the business goodwill.  Retail Petroleum Consultants explains that this dual appraisal methodology does not arrive at the correct value for a number of reasons, including:

  • gas stations and car washes are sold based on their cash flow potential, not physical units of comparison, such as a price per square foot that you would typically see with a commercial property;
  • buyers of gas stations do not separately purchase business goodwill, fixtures and equipment, and real property — they pay an agreed price for the entire going-concern based on the business’ potential cash flow; and
  • there is little available data in the marketplace about recent, arm’s-length rental rates and capitalization rates for gas stations and car wash properties.

These are all valid points, but what is the solution?  Retail Petroleum Consultants suggests that gas stations and car washes are “special use properties,” and parties should retain an appraiser that has access to confidential proprietary market data, including sales volumes, profit and loss statements, expense ratios, fuel margins, car counts, operations by brand, car wash type, and cost comparables and going-concern sale comparables.  Again, unlike typical commercial properties, they suggest there is little, if any, relationship between the number of dispensers or building size and how much cash flow a gas station generates.  Market participants instead value such owner-occupied properties based on cash flow, focusing on gross profit multiples and capitalization rates to convert income to value.

If you’re interested in learning more about gas station or car wash valuations, check out Retail Petroleum Consultants’ article.  Something for all of us involved in the right of way industry to consider.

Looming Right of Way Certification Deadline Threatens Butte County Project

Posted in Projects

Looming Right of Way Certification Deadline Threatens Butte County Project

Right of Way Certification is a key project milestone; not only does it mean a project is ready for advertising but obtaining certification by a certain date is often a prerequisite for funding.  Tying certification to dollars means it’s crucial that agencies acquire property and/or obtain orders for possession in a timely manner.  As we’ve discussed here before, this can mean filing an eminent domain action while still negotiating with property owners, something many agency boards are reluctant to do.

The latest example of the perils of prejudgment possession comes out of Butte County.  Ryan Olson of the Chico-Enterprise Record reports in his article “Butte County Supervisors to Consider Eminent Domain for Oroville Sidewalk Project” that three properties remain to be acquired for the Lincoln Boulevard Pedestrian Safety Project.  According to Olson, the County needs to acquire the right of way or obtain orders of possession for all of the required parcels by August 30, 2015.  The County Board of Supervisors is scheduled to consider Resolutions of Necessity at its meeting this week.  Once the resolutions pass, the County may file eminent domain actions.  But this is cutting it fairly close.  Under Code of Civil Procedure section 1255.410, an agency must give an owner of occupied property at least 60-days notice before bringing a motion for prejudgment possession.  And the order is usually not effective for another 30 days after the hearing.  So, assuming a best case scenario – the County is able to serve the motion for possession immediately after filing the complaint and is able to get a court hearing 60 days later – the effective date of possession is probably early-to-mid- August.  That doesn’t give the County a lot of time to serve its papers or deal with any objections or potential right-to-take challenges before the August 30 deadline.

Filing an eminent domain action can seem like a drastic step to both agency boards and property owners.  But the reality is that with funding and tight project schedules, it is often necessary to take action sooner than later.  This does not have to derail negotiations.  Letting owners know how the process works, and offering them alternatives (such as a possession and use agreement) can often keep negotiations on track for everyone.

California Court Explains the Interrelationship Between the Resolution of Necessity and Project in the Manner Proposed in an Eminent Domain Action

Posted in Court Decisions

One of the issues often disputed between public agencies and property owners in eminent domain actions is the assessment of severance damages, and in particular, whether damages should be based upon (i) the terms of the resolution of necessity, or (ii) construction of the project in the manner proposed.  This dispute grows from a seeming conflict between a court of appeal decision, County of San Diego v. Bressi (1986) 184 Cal.App.3d 112, and Code of Civil Procedure section 1263.420.  Specifically:

  • Bressi held that in a condemnation action, (1) the jury must determine damages caused by the construction of the project, and in doing so, it must consider the most injurious use of the property reasonably possible, taking into consideration the entire range of uses permitted under the resolution of necessity, and (2) that the condemning agency may not introduce any evidence that “contradicts” the resolution.
  • Section 1263.420 provides that severance damages include damages caused by “construction and use of the project for which the property is taken in the manner proposed by the [agency] . . . .”

Property owners routinely rely upon Bressi to argue that the most injurious use permitted under the resolution of necessity must be considered for purposes of assessing damages.  Public agencies counter by relying on section 1263.420 to argue that damages should be based upon the construction of the project in the manner proposed – not some hypothetical project or use that has never been considered.

It is practically impossible for public agencies to narrowly tailor their resolutions of necessity to specifically spell out in detail how every aspect of the project will be constructed.  Thus, appraisers often base their opinions on wildly different assumptions about the “project,” leading to a wide disparity in appraisal opinions.

A recent Court of Appeal opinion, Sacramento Area Flood Control Agency v. Dhaliwal (April 21, 2015), while unpublished, provides some guidance as to how these issues should interplay.  In Dhaliwal, the property owner filed a motion in limine to exclude any evidence of possible access to the property by a particular road on the grounds that such evidence contradicts the resolution of necessity and would require future permits.  The agency countered that there was no contradiction, and it was entitled to introduce post-project plans to provide access to the property.  The court allowed all evidence to go to the jury.

On appeal, the Court explained that the jury is entitled to consider any factor affecting market value so long as it is not speculative and does not contradict the scope of the taking defined by the resolution of necessity.  The Court held that it was proper for the jury to hear evidence regarding the owner’s potentially obtaining post-project access, as it was not speculative and did not contradict the resolution.  The Court clarified that Bressi

stands for the unremarkable proposition that the condemning agency may not introduce evidence pertaining to a proposed, intended, or future use which contradicts the scope of the taking as set forth in the resolution of necessity.

In Dhaliwal, while the agency’s resolution did not specify that the owner reserved certain access rights, the resolution also did not prohibit the owner from securing such rights in the future, meaning there was no conflict.  The Court held that absent a contradiction, the agency’s failure to “carve out an exception” or provide the owner with access rights is of no consequence.

While unpublished, the Dhaliwal opinion is an important one for public agencies.  It supports the proposition that an agency need not spell out every precise detail of the project, and that as long as the project in the manner proposed does not conflict with the resolution of necessity, it is appropriate to introduce such evidence to the jury.  Until a published, citable, decision exists on this point, however, the tension between Bressi and section 1263.420 will likely continue to manifest itself in wildly divergent appraisal opinions.

Court Clarifies Rules for Recovery of Attorneys’ Fees in Eminent Domain Actions

Posted in Court Decisions

200572855-001In California eminent domain actions, absent special circumstances (such as an abandonment, successful right to take challenge, or inverse condemnation finding), a property or business owner is typically only entitled to recover litigation expenses (attorneys’ fees and expert costs) in one circumstance:  where the public agency’s final offer of compensation is unreasonable and the property owner’s final demand is reasonable.  In making this determination, the judge is only to consider the final offer and demand that were made at least 20 days before trial.  (See Code Civ. Proc., sec. 1250.410.)

But the law has been somewhat unclear on how this rule works where a trial date is continued, or where there are separate trials on (i) whether certain items of damages are allowed and (ii) the ultimate jury trial on the amount of compensation.  This week, in People ex rel.  Dept. of Transportation v. Hansen’s Truck Stop (April 24, 2015), the California Court of Appeal addressed these questions and provided guidance for public agencies and property owners in making their final offers and demands.

The Court set forth the following rules for final offers and demands when dealing with trial continuances and bifurcated trials:

  • Trial Continuances:  when the trial date is continued, the judge is to consider the final offer and demand made at least 20 days before the date trial actually commences — regardless of whether offers and demands were timely filed in connection with previously scheduled trial dates.
  • Bifurcated Trials:  where there is a separate trial on issues relating to compensation (such as entitlement to certain aspects of damages, like access impairment), this early trial does not trigger the obligation to exchange final offers and demands; instead, the operative date for purposes of the final offer and demand is the date trial actually commences on the determination of compensation (i.e., the jury trial).

When reaching these conclusions, the Court was troubled with the statute’s mandate that allows only a single offer and demand to be considered on the issue of reasonableness.  The Court provides an example where a condemning agency could make a pre-litigation offer for “an artificially low sum, insist upon a bifurcated trial on preliminary issues of dubious merit, then avoid paying the property owner’s expenses for that trial by making a section 1250.410 offer that is reasonable prior to the compensation trial.”

While this example could theoretically occur (although it seems somewhat unlikely), the Court’s ruling also potentially causes a different problem:  if one party timely exchanges a final offer or demand 20 days before trial, and the other party does not exchange, the non-complying party will do everything possible to seek a trial continuance; the continuance would then reset the date of exchange, allowing the non-complying party to now make an exchange while having the benefit of seeing the other party’s number.  I’ve seen a number of instances where one party fails to timely exchange a final offer or demand, and to me, this circumstance seems more likely than the Court’s concern about a public agency making an unreasonable initial pre-litigation offer, then proceeding all the way through a bifurcated trial on a dubious legal issue, and then only after losing making a reasonable offer before the valuation trial.

The bottom line is that the best practice is to agree in advance with opposing counsel on how and when the final offer and demand will be exchanged.  If you have questions about this process or how it works, let us know.  And be on the lookout for a more detailed discussion of the case through an e-alert that will be following shortly.

Update on Two Recent California Eminent Domain Cases

Posted in Court Decisions, Inverse Condemnation & Regulatory Takings

I wanted to provide a quick update on two recent cases from the California Court of Appeal.

The first, Golden State Water Company v. Casitas Municipal Water District (April 14, 2015), involves what appears to be an issue of first impression in California:  can Mello-Roos financing be used to fund an eminent domain action to acquire a utility company’s assets?  In Golden State Water Company, the Casitas Municipal Water District wanted to acquire the assets of the Golden State Water Company for the purpose of taking over the provision of water to many residents in Ojai, California.  The idea is for Casitas to condemn Golden State’s assets — both its physical facilities and its intangible assets such as water rights and business goodwill — and thereby take over Golden State’s utility service to those Ojai residents.  To finance the plan, Casitas intended to use Mello-Roos financing.

Golden State sued, raising three arguments as to why Casitas should not be allowed to do this:

  1. Mello-Roos Financing Cannot be Used for Eminent Domain.  The Court rejected this argument, holding that “purchase” in the Mello-Roos Act includes involuntary purchases through eminent domain.
  2. Mello-Roos Financing Cannot be Used to Acquire Intangible Assets.  The Court rejected this argument, holding that intangible assets can be acquired with Mello-Roos financing so long as their acquisition qualifies as “incidental expenses” related to the acquisition of tangible assets.
  3. Mello-Roos Financing Cannot be Used to Replace One Service Provider with Another.  The Court avoided this argument, concluding that Golden waived the right to make the argument because it did not raise it at the trial court and could not, therefore, make the argument in the Court of Appeal.

Ultimately, the Court upheld Casitas’ plan, allowing it to proceed with its eminent domain action funded by Mello-Roos financing.  There is a lot more intrigue to this case, and you can read more about it in our E-Alert, Mello-Roos May Be Used to Fund Condemnation Action of Private Utility Provider.

The second case, Brost v. City of Santa Barbara (March 25, 2015) is an unpublished decision (meaning it cannot be cited in court) that involves many of the same issues as the Court of Appeal confronted in the 2008 Monks case.  The main issue involves a city’s liability for a regulatory takings claim where it seeks to limit what, if anything, can be built in areas with known slope stability issues.  In Monks, the Court of Appeal held that the City of Rancho Palos Verdes could not preclude certain lot owners from building homes within the city’s Landslide Moratorium Area.

In Brost, the issue involved plaintiffs’ attempt to re-build homes destroyed in a 2008 wildfire.  The homes were located in “an active landslide area known as Slide Mass C of the Conejo Slide,” and a city ordinance precluded construction on properties within the area.  The city refused to allow plaintiffs to build, and the trial court held that the refusal qualified as a taking.  Not surprisingly, the Court of Appeal focused considerable attention on the Monks decision and how it impacted the Brost plaintiffs’ claims.

One issue in Brost was whether plaintiffs’ taking claims were ripe, with the city arguing the claims were not ripe because plaintiffs did not submit formal development applications before filing their lawsuit and, therefore, the plaintiffs had not exhausted their administrative remedies.  The Court focused on the “futility exception,” holding that where, as in Brost, it was clear that the city would not approve any development plans, the plaintiffs were not required to spend the time and money on a “futile” effort to obtain permits before filing suit.   The Court explained:

We recognize that in most cases, the nature and extent of the land’s permissible uses will not be certain and that the processing of at least one development application will be necessary to define those uses. But, as the trial court aptly observed, this case “presents the extraordinary circumstance when no productive or economically beneficial use of land is permitted.”

Next, the Court focused on the city’s claim that allowing plaintiffs to develop would constitute a nuisance and, as a result, precluding development cannot qualify as a taking.  The Court agreed with the trial court’s conclusion that based on expert testimony, the most that could be said was that “uncertainty” existed regarding whether it would be unsafe to allow plaintiffs to rebuild.  And, as explained in Monks, “‘uncertainty’ regarding the geological stability of [an] area is not a sufficient basis for depriving plaintiffs of the right to rebuild their homes.”  The Court upheld the trial court’s rejection of the city’s nuisance theory:

This speculative harm is insufficient for the City to preclude plaintiffs, for their “own good,” from all economically beneficial uses of their properties.

Thus, as in Monks, the city in Brost could not preclude plaintiffs’ development of their own properties within the slide area.  Its efforts to do so constituted a regulatory taking.

Don’t Overlook the Potential Value Added By Green Buildings

Posted in Events, Valuation

Green futuristic city living concept. Life with green houses, soIt is increasingly important for buildings to be energy efficient.  So-called “green buildings” can not only lead to more efficient energy use, but can also result in significant cost savings over time.  Indeed, green buildings may be more valuable than comparable buildings that are not as energy efficient.  This is an important factor to consider in eminent domain proceedings.  This point was driven home in a recent presentation made by Michael Frost, LEED AP, First Vice President at CBRE in its Palo Alto, California office.  He made the presentation to a diverse group of right of way professionals at the International Right of Way Association (“IRWA”), Chapter 42, the Silicon Valley Chapter of the IRWA.  Michael has an extensive background in green building issues and was the first LEED accredited commercial broker in Silicon Valley.

Michael explained that there is a LEED green building rating system that is a voluntary, consensus based, market driven system based on existing proven technologies.  The system evaluates exterior building design and construction, interior design and construction, and building operation and maintenance.  There is a point system based on several factors including: location and transportation; sustainable site; water efficiency; energy and atmosphere; materials and resources; indoor environmental quality; and innovative and regional priority.  Buildings can achieve four levels: Certified, Silver, Gold, and Platinum, depending on how many points a building receives under the rating system.

Michael pointed out that green buildings provide many benefits to both landlords and tenants.  For landlords, having a green building and a high score on the rating system can improve the value of the building because it may result in lower operating costs and lower energy costs.  This will provide the landlord greater flexibility and competitiveness in a competitive leasing marketplace.  For instance, it may lead to shorter lease-up times and higher rental rates.  For tenants, green buildings may provide a public relations and marketing opportunity, showing that the tenant’s business values energy efficiency.  It also may help with recruitment among millennials who are very concerned about energy efficiency and the environment.  Some of the other employee friendly benefits of green buildings, such as using natural lighting, better indoor air quality, and more responsive and controllable smart building systems (e.g., digital HVAC controls and networked lighting), may lead to greater productivity from employees.  Michael noted that, while sustainability and energy efficiency may not be the chief criteria for a tenant making decisions on where to locate its business, the “smart-building” benefits of green buildings can be an important factor.

Finally, Michael noted that, with respect to new construction and remodels, landlords today have less choice because regulations may require energy conservation measures in new and rebuilt buildings.  Some cities and counties may also have building codes that require a building to meet certain energy efficient standards.  Michael expressed confidence that energy efficient and green buildings are the wave of the future.  He noted that some countries, such as Germany, have made a major concerted effort at all levels of government to promote energy efficient and environmentally sustainable growth.

For those valuing a green building in an eminent domain proceeding, serious consideration should be given to the benefits that a green building provides to owners and tenants as compared to a non-green building.  These benefits may result in a material increase in value of a green building as compared to a non-green building.  At the least, the energy efficiency of a building and whether it is a green building should be thoroughly investigated by anyone valuing a building, and consideration should be given to how its energy efficient status impacts its value.

Caltrans and Temecula Join Forces to Relieve I-15 Congestion

Posted in Projects

The City of Temecula is moving forward with the French Valley Parkway.  The project involves construction of a new arterial, as well as improvements to the I-15 Winchester Road interchange.  Phase I of the project included constructing southbound off-ramps for the future Parkway.  These ramps are complete, but as a post on The Transit Coalition Inland Empire blog asked a year ago – “What the heck is going on with French Valley Parkway?”   The answer is the same now as it was then — Caltrans and the City are working to establish the scope and phasing of the remaining improvements.  So when will it be actually be built?

Well, there are some indications that it could be soon.  The City recently issued an RFP for property acquisition services, though the French Valley project is not specifically mentioned.  But we do know he project will involve acquisitions from at least 9 privately-owned properties and may require relocation of two businesses.  Those owners can expect to receive “Notices of Intent to Appraise” soon, if they haven’t already.  For more on the eminent domain process, check out our brochure “A Property Owner’s Survival Guide to Eminent Domain.”

Can Comments By a Federal Employee Result in a Taking Requiring Compensation Under the Fifth Amendment?

Posted in Court Decisions, Inverse Condemnation & Regulatory Takings, Uncategorized

It depends.  A recent decision out of the Federal Circuit tackled this very issue, and the court’s decision strongly suggests that a taking could arise under the right circumstances.  (Filler v. U.S. (Fed. Cir. Mar. 10, 2015) Case No. 2014-5117.)  As you probably already guessed by my use of the phrase “strongly suggests,” both the lower court and the Federal Circuit in this case found that the plaintiff’s challenge did not present the “right circumstances.”

After sustaining a work-related injury, an employee of the U.S. National Marine Fisheries Service visited the plaintiff to receive treatment.  Sometime after receiving treatment, this federal employee posted a number of comments to a public message board using a private account.  The federal employee, however, posted these comments from a government computer during normal working hours.  Learning of these comments, the plaintiff filed an action for common law defamation and interference with prospective business advantage, as well as a claim for inverse condemnation.

The lower court and the Federal Circuit rejected plaintiff’s claim for inverse condemnation, finding that despite the fact that the federal employee made the comments on a governmental computer during normal working hours, the federal employee was acting “for her independent purpose of conveying her personal views on the efficacy and advisability of the treatment,” and not in an official governmental capacity.  Accordingly, because there must be an authorized government action in order for there to be a compensable taking under the Fifth Amendment, the courts found that plaintiff failed to state a cognizable claim for inverse condemnation.

Notably, the lower court also found that plaintiff’s medical license did not, as a matter of law, constitute a compensable property interest for purposes of the Takings Clause.  The Federal Circuit, however, expressly declined to address this issue.

Lake Elsinore to use Eminent Domain to Expand Serenity Park

Posted in Projects

On Tuesday, the Lake Elsinore City Council adopted a Resolution of Necessity to acquire a 2+ acre property in order to expand Serenity Park.  As Michael Williams describes in his article “City hopes to take over boat launch,”  the expansion is part of the City’s plan to develop a skateboarding arena .  The City’s staff report says the City has been negotiating with the property owners for about a year, but that they have not agreed on a price for the property.  The staff recommended the city move forward with an eminent domain lawsuit.

Elsinore_Serenity_Park

It isn’t clear why the owners rejected the City’s offers, but a good bet is that they weren’t happy with the appraised value.  Although the property is currently vacant, Mr. Williams’ reports that at one time the owners sought to develop the property with a self-storage facility.   My guess is that the owner sees it as a valuable, income producing property, while the City looks at it as a piece of vacant land not suitable for much.  In other words, this may come down to a fight about the property’s “highest and best use.”

Long-Awaited Montebello Grade Crossings Moving Forward

Posted in Articles, Projects

As this article by OCTA explains, the Southern California region is growing both in terms of population and in the volume of goods moving through the region via both road and rail.  I am sure many of us are familiar with the impacts this has on our daily lives — like being stuck for what feels like hours at a train crossing.  But several local agencies are doing what they can to ease our pain.  In Orange County, OCTA is in the midst of its OC Bridges program building grade separations.  And in Los Angeles, the Alameda Corridor-East Construction Authority (ACE) has completed several new crossings, with many more in construction and design.   (Go to theaceproject.org to see the project map.)  The latest ACE projects to hit the news are the grade crossings in Montebello.

Nancy Martinez reports in her EGP news article “Montebello Council Approves Plan to Build Rail Crossings” that many in the Montebello community are glad the 15-year wait is (more or less) over.  After much debate, the City recently approved plans for underpasses at Maple Avenue and Montebello Blvd.  But not everyone is happy.  It looks like the projects will require several properties including several homes and at least two businesses along Maple Avenue.   (You can see the presentation to the City Council here.)   The City’s approved plans now go on to ACE, who must approve them and will actually undertake the work — the last of ACE’s projects before the agency shuts down.

Grade separations are complicated, time consuming and expensive.  They can also be very disruptive to the surrounding community.  But the upside is a much safer and more efficient way to move goods and people through the region.