Caltrans Seeks Input on SB1 Planning Grants Guides

We’ve previously reported on the recent passage of Senate Bill 1 (SB 1), The Road Repair and Accountability Act of 2017, which will raise approximately $52 billion in funding over the next 10 years specifically for transportation.  SB1 is now in full swing, and Caltrans is on a fast track to release new grant funding provided under the legislation.

On August 3, Caltrans released for public review and comment the final drafts of the SB 1 Sustainable Communities and Adaptation Planning Grant guides, which will provide more than $270 million in planning grants for local communities over the next decade.  These Grant Application Guides for the new SB 1 planning grant funds encompass the following:

  • Transportation Planning: Caltrans will provide $25 million in annual grants for planning to support the goals and best practices cited by the California Transportation Commission in its regional transportation plan guidelines.
  • Climate Change Adaptation Planning: Caltrans will provide $20 million over three years to agencies to support transportation infrastructure planning for areas that are potentially vulnerable to climate change.

The formal 30-day comment period for the final draft guides will be open through August 31.  The draft guidelines and comment forms can be found at  Additionally, two workshops will be held to discuss the Grant Application Guides.  The Sacramento workshop will be webcast live and viewable at

Grant applicants are encouraged to begin considering possible applications based on these drafts.  More details about the workshops, the grants and applications can be found at:

Supreme Court Develops New Multifactor Balancing Test to Determine What Constitutes a “Larger Parcel” in Regulatory Takings Cases

Last week, the United States Supreme Court in Murr v. Wisconsin issued a key regulatory takings decision which creates a new multifactor balancing test to determine whether two adjacent properties with single ownership could be considered a larger parcel.  In a 5-3 decision, the Court found that the properties were a single parcel and because the owners were not deprived of all economically viable uses of their property they could not establish a compensable regulatory taking.

The Murr Family owned two lots adjacent to a river.  A cabin was built on one of the lots, while the other lot remained unimproved.  The Murr Family attempted to sell one of two lots.  Although each lot was over an acre, due to their topography, each lot had less than one acre suitable for development.  State and local regulations prevented the use or sale of adjacent lots under common ownership as separate building sites unless they have at least one acre of land suitable for development.  The Murr Family applied with the St. Croix County Board of Adjustment (“Board”) for approval of a variance, which the Board denied.  The state court affirmed, finding that the local ordinance effectively merged the lots.  The unimproved lot, therefore, could not be sold or developed separately, though the property could continue as a residential use with a single improvement to extend over both lots.

In finding that the property was a single parcel, the Supreme Court laid out the following factors:

  1. the treatment of the property, in particular how it is bounded or divided, under state and local law;
  2. the property’s physical characteristics, including the physical relationship of any distinguishable tracts, topography, and the surrounding human and ecological environment; and
  3. the property’s value under the challenged regulation.

The Court found that all three factors pointed to the lots being evaluated as a single parcel.  Specifically, the merger of the lots under state law “informs the reasonable expectation that the lots will be treated as a single property.”  Second, the terrain and shape make it reasonable to expect their range of potential uses may be limited.  The property’s location adjacent to a river would also put the owners on notice of potential state, federal and local law regulations.  Third, the restriction on using the individual lots provides a benefit of increasing privacy and recreational space that can benefit the other property.  The Court also concluded that because the property could still be used as a residential property, the owners have neither been deprived of all economically beneficial use of their property under Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003, nor have they suffered a taking under Penn Central Transp. Co. v. New York City (1978) 438 U.S. 104, 115-116.

The dissent argues that the State law should define the boundaries of distinct parcels of land, and those boundaries should determine the “private property” at issue in regulatory takings cases.  States may define those plots differently, whether using metes and bounds, government surveys, recorded plats or subdivision maps.

The Supreme Court’s undertaking may have implications across the Country as the Court’s fluid multifactor test appears to give courts more discretion in determining what constitutes the “larger parcel.”  And by looking at the government’s interest, as the dissent explained, the new test may result in less favorable outcomes for property owners.  The “larger parcel” inquiry is only the first step in determining whether a taking has occurred.  The court must also analyze the regulation under Lucas or Penn Central, which provide two other seemingly fluid and discretionary tests that also look at the government’s interest when determining whether a regulatory taking occurred.


Public Comment Requested on Revisions to Precondemnation Right of Entry Statutes

When public agencies analyze a potential public project, they often need to gain access to private property for surveys, testing, and to otherwise investigate whether a particular property is suitable for a planned project.  Often, agencies gain access by talking with the property’s owner and reaching agreement on a right of entry.  But where the owner refuses to allow access, the agency must resort to the courts.  For decades, agencies have followed a set of rules that allow them to obtain a court-ordered right of entry with minimal notice and without most of the formality of a full-blown eminent domain action.  When that process was challenged in Property Reserve v. Superior Court, last year the California Supreme Court held that the right of entry statute was constitutional, with the exception of needing to include a right to a jury trial on compensation (which the Court “reformed” on its own initiative to require such a trial).

The Court’s holding created an inconsistency between what the statute says on its face and what the Court reformed it to mean.  As a result of this situation, and to avoid confusion and error, the California Law Revision Commission tentatively recommends that the precondemnation activities / right of entry statute be revised to conform to the reformed meaning established by the Court, and is seeking public comment accordingly.  The tentative recommendation is available on the California Law Revision Commission’s website.  Other than minor tweaks, the Commission’s proposed revision includes adding a sentence to Code of Civil Procedure section 1245.060, subdivision (c), stating that

In a proceeding under this subdivision, the owner has the option of obtaining a jury trial on damages.

The Commission often substantially revises its recommendations as a result of public comment.  If anyone is interested in commenting on the Commission’s recommendation, to receive timely consideration, comments should be submitted by August 8, 2017.

Government’s Termination of Lease Pursuant to its Terms is Not a “Taking”

Public agencies own significant amounts of property throughout California and the United States.  Sometimes, those properties are not being put to a public use, and the government acts as a landlord, leasing out property to private entities.  But when the government is ready to put the property to a public use, and it terminates the lease, is there a “taking” of private property triggering the need to pay just compensation?  A recent unpublished Court of Appeal decision, California Cartage Company v. City of Los Angeles, addressed this issue and held that the government’s termination of a lease in accordance with its terms does not trigger inverse condemnation liability.

In California Cartage, the public agency leased property to a private entity since the 1950’s pursuant to a series of fixed-term leases, but then, more recently, as a month-to-month tenancy.  Over the course of 60 years, the tenant constructed extensive physical improvements; its was operating a large business that generated over $65 million in annual revenues and employed hundreds of workers.  In order to make way for a public project, the agency sent the lessee — in accordance with the lease — a 30-day notice to terminate.  The lessee filed an inverse condemnation action, claiming that the termination of its lease was the “substantial equivalent” of a taking.

Both the trial court and Court of Appeal found no liability:

[T]he termination of Plaintiff’s short-term contractual right to occupy the land already owned by the City . . . does not constitute a taking for purposes of eminent domain law.

The Court distinguished situations in which an agency provides a notice of intent to condemn, but then purchases private property under threat of eminent domain and terminates the lease.  In such cases, there is a substantial equivalent of condemnation because the agency acquires the property “not as a result of bargaining in the open market, but rather in the broad exercise of its power to condemn private property for public use.”  In other words, simply having the power to condemn is not sufficient; there must be some actual exercise of that power either by condemnation or the threat of condemnation.

In conclusion, for purposes of takings-liability, public agencies operating in the open market without exercising (or suggesting the potential use of) eminent domain should be treated similarly to other private market participants.  The fact that a public agency’s lease termination was for a public use is irrelevant if there was no taking.  But keep in mind that the agency does not need to condemn to trigger liability; in California Cartage Companythe court concluded that the agency had never even threatened to use its power of eminent domain — a key factor in the court’s finding of no taking.

Note also that this analysis may be different in the context of a claim for relocation reimbursement if a person or business is displaced by a public project, which has a different set of regulations that do not necessarily require a taking of private property.  While the case law is only partially developed, there is a reasonable argument that the standard for qualifying for relocation benefits as a displacee is lower than the standard for proving a taking for inverse condemnation liability.

Valuing Underground Natural Gas Storage in Eminent Domain Proceedings

In California eminent domain proceedings, a property owner is entitled to the “fair market value” of the property being acquired.  Typically, fair market value is determined by analyzing comparable sales or by utilizing an income capitalization approach.  But every once in a while, there is no relevant market data, in which case the law permits determining compensation “by any method of valuation that is just and equitable.”  (Code Civ. Proc., sec. 1263.320.)  A recent court of appeal decision, Central Valley Gas Storage v. Southam, explains when this “just and equitable” valuation approach may be used, and what limits an expert appraiser may face when using such a methodology.

In Southam, Central Valley operated a reservoir for storage and subsequent withdrawal of natural gas.  After obtaining approval from the California Public Utilities Commission, Central Valley commenced an eminent domain action to acquire Southam’s underground gas storage rights in 80 acres of land.  Central Valley’s expert sought to value the storage rights using market data of similar transactions, which he claimed were based on the number of surface acres the landowners hold within the storage boundaries.  Southam, on the other hand, sought to value the storage rights based on the volume of gas in the storage reservoir.

Central Valley filed a motion to exclude any valuation testimony based on the volume of gas in the storage reservoir, claiming that such an approach was improper given the uncertainty and speculative nature of what is lying underneath the ground.  The trial court agreed, and excluded any such valuation testimony.

On appeal, Southam claimed that its approach was proper and Central Valley’s approach was inappropriate.  Southam pointed out that thirty years ago, in Pacific Gas & Electric Co. v. Zuckerman (1987) 189 Cal.App.3d 1113, the court excluded the exact surface-acre approach Central Valley now used, concluding there were no true “comparables” in dealing with underground storage reservoirs because there were relatively few such properties in the state, and they were substantially different in geographical locations, temporal transactions, and physical characteristics.  As a result, in Zuckerman, the court stated that “latitude must be accorded an expert in valuing such properties, and any approach that is ‘just and equitable’ may be considered.”

Here, however, the circumstances had changed:  a market for natural gas storage leases had developed in California since the decision in Zuckerman was issued, and all of these leases were based on the number of surface acres the landowners hold.  Given the existence of the new market for comparable data, the court found Zuckerman inapplicable.  The court further held that it is inappropriate to admit evidence of a valuation methodology that ignores the developed market for a particular type of property, and an expert’s opinion must take into account only reasonable and credible factors.  Because Southam could not produce a single instance of a natural gas storage lease that based its value on underground volume, it was appropriate to exclude such an approach.

The Southam case serves as a good reminder:  the “just and equitable” valuation methodology cannot ignore evidence of how particular properties are bought and sold, and it likewise must be reasonable, credible, and non-speculative.  It also allows for the valuation of underground rights based on surface-acres given the existence of market data supporting such an approach.

Court Rejects Takings Claim Based on Temporary Prohibition of Mining

As we’ve reported in the past, temporary takings are compensable in California.  But such claims are not easy to prove, particularly when you’re dealing with the federal government imposing temporary regulations preventing use of property.  A recent case, Reoforce v. United States, demonstrates some of the hurdles an impacted property owner may face.

In Reoforce, the plaintiff discovered a mineral deposit called pumicite on federal land in Kern County, California.  Believing the deposit had potential value for paint and fiberglass applications, Reoforce submitted a mining claim in accordance with federal law and applied with the Bureau of Land Management (BLM) to mine approximately 100,000 tons per year.  After obtaining necessary approvals, Reoforce slowly began mining for the mineral, but only sold 5 tons over an eight-year period.

The property was then transferred into a California state park, and the BLM issued new regulations which (i) restricted mining for some types of mining claimants until additional approvals were obtained, but (ii) allowed other mining claimants to continue operating on an interim basis.  It was unclear whether Reoforce could continue to operate, and due to the regulations and turmoil within the company, Reoforce did not undertake any mining for a 13 year period.  Eventually, it was finally once again granted approval to mine.  Reoforce thereafter filed a lawsuit for a temporary taking, alleging that the cessation in mining due to government regulation was a temporary taking of its property rights.  Reoforce sought just compensation under the Fifth Amendment.

The court held that Reoforce had not stated a takings claim because the temporary prohibition on mining did not amount to a taking under the Penn Central test.  That test applies to potential regulatory takings, and requires an analysis of:

  1. the economic impact of the regulation,
  2. the extent to which the regulation has interfered with distinct investment-backed expectations, and
  3. the character of the governmental action.

Here, the court concluded that the temporary government regulation, even if it completely prevented mining, had a minimal impact on Reoforce since it was several years away from ever engaging in commercial production of its mineral deposits.  The court likewise concluded there was no interference with reasonable investment-backed expectations since the mining operation was a heavily regulated industry, which Reoforce was aware of when entering into the operations.  Finally, the court concluded that the character of the governmental action favored a finding of no liability as Reoforce was not singled out or targeted, but instead was subject to a broadly applied regulation along with numerous other claimants within the area.

The Reoforce case is a good reminder of the uphill battle a property owner faces when pursuing a temporary regulatory takings claim.  Each case will continue to be analyzed on a fact-specific basis:  the court will continue to focus on the government’s conduct, and whether a property owner has been singled out and forced to bear a significant economic impact.

SB1: California Transportation Funding the Talk of the Capitol This Week

Most Californians agree that our State’s transportation system is in dire need of additional funding for additional improvements and repair.  The problem has always been where to secure the necessary funding.  In short, it has become more difficult to rely on the federal government, local and regional transportation agencies have become less reliant on the State, the gas tax has not been raised in years, and vehicles have become more fuel efficient, resulting in more miles traveled by more cars without the incremental increase in funding.  This week is a major turning point to potentially provide a solution, as the California legislature is set to vote on SB 1, a proposal to raise approximately $52 billion in funding over the next 10 years specifically for transportation.

Having spent the last two days at the Capitol, I can attest that this bill is a major talking point of Governor Jerry Brown and the Legislature:

The roads are broken and they are getting worse and they are not going to get better unless we get a significant injection of money,

Brown told the panel in rare testimony to a legislative committee.  While recognizing the need for transportation funding, there are always concerns with raising taxes.  Here, much of the proposed funding would come through raising gas taxes and vehicle license fees.  Governor Brown acknowledged that the tax increases are difficult:

I know there is a political concern because people don’t like gas taxes, but what do you do,

he said.  As reported in the LA Times, some feel the funds should come from a different source, such as the oil companies.  Others believe that it’s time for a gas tax increase — especially since it hasn’t happened in 23 years.

If approved, the measure would raise the base excise tax on gasoline by 12 cents per gallon, raise diesel taxes, and create a new annual vehicle fee that would average $51 based on the value of the car or truck.  Current estimates suggest the proposal will cost the average motorist $10 per month.

Thursday will be a major turning point to see whether Governor Brown can gather the necessary votes.  If he does not, it may be years before we see another effort to raise funding for transportation.  If the bill passes, then the debate will involve where to spend the funds — repairs or improvements, and on roads, highways, toll/HOV lanes, public transit, bike/pedestrian corridors, mitigation, or something else.  Stay tuned California….

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.


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.


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.


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.