CACI 3513 Goodwill

New September 2003; Revised February 2007

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•Compensation for Loss of Goodwill. Code of Civil Procedure section 1263.510.

•“Goodwill is the amount by which a business’s overall value exceeds the value of its constituent assets, often due to a recognizable brand name, a sterling reputation, or an ideal location. Regardless of the cause, however, goodwill almost always translates into a business’s profitability.” (People ex rel. Dept. of Transportation v. Dry Canyon Enterprises, LLC (2012) 211 Cal.App.4th 486, 493–494 [149 Cal.Rptr.3d 601], internal citation omitted.)

•“Historically, lost business goodwill was not recoverable under eminent domain law. However, in 1975 the Legislature enacted section 1263.510 ‘in response to widespread criticism of the injustice wrought by the Legislature’s historic refusal to compensate condemnees whose ongoing businesses were diminished in value by a forced relocation. [Citations.] The purpose of the statute was unquestionably to provide monetary compensation for the kind of losses which typically occur when an ongoing small business is forced to move and give up the benefits of its former location.’ Thus, a business owner’s right to compensation for loss of goodwill is a statutory right, not a constitutional right.” (City and County of San Francisco v. Coyne (2008) 168 Cal.App.4th 1515, 1522 [86 Cal.Rptr.3d 255], internal citations omitted.)

•“Determining liability for loss of goodwill under section 1263.510 involves a two-step process. ‘First, the court determines entitlement: that is, whether the party seeking compensation has presented sufficient evidence of the conditions for compensation set forth in subdivision (a)—causation, unavoidability, and no double recovery—such that the party is entitled to some compensation. If the party meets this burden, the matter proceeds to a second step, in which a jury (unless waived) determines the amount of the loss.’ Thus, if that party meets certain ‘ “qualifying conditions for such compensation,” ’ it has a right to a jury trial on the amount of compensation due.” (Los Angeles County Metropolitan Transportation Authority v. Yum Yum Donut Shops, Inc. (2019) 32 Cal.App.5th 662, 669 [244 Cal.Rptr.3d 201], original italics, internal citation omitted.)

•“[T]he owner of a business conducted on property taken by eminent domain is entitled to compensation for loss of goodwill resulting from the taking. (Thee Aguila, Inc. v. Century Law Group, LLP (2019) 37 Cal.App.5th 22, 27 [249 Cal.Rptr.3d 254].)

•“ ‘Under section 1263.510, subdivision (a), the business owner has the initial burden of showing entitlement to compensation for lost goodwill.’ ” (City and County of San Francisco, supra, 168 Cal.App.4th at pp. 1522–1523, internal citations omitted.)

•“Since the conditions set forth in subdivision (a) all pertain to the ‘loss’ of ‘goodwill,’ the initial obligation to establish entitlement to compensation requires a showing, ‘as a threshold matter, that the business had goodwill to lose.’ ” (People ex rel. Dept. of Transportation v. Presidio Performing Arts Foundation (2016) 5 Cal.App.5th 190, 201 [209 Cal.Rptr.3d 461].)

•“[I]n the entitlement phase, the party seeking compensation need only show that there was some loss of the benefit that the business was enjoying before the taking due to its location, reputation, and the like, without necessarily having to quantify its precise value.” (People ex rel. Dept. of Transportation v. Presidio Performing Arts Foundation, supra, 5 Cal.App.5th at p. 204, original italics.)

•“After entitlement to goodwill is shown (which includes a showing that compensation for the loss will not be duplicated) neither party has the burden of proof with regard to valuation.” (Redevelopment Agency of the City of Pomona v. Thrifty Oil Co. (1992) 4 Cal.App.4th 469, 475 [5 Cal.Rptr.2d 687], internal citations omitted.)

•“Only an owner of a business conducted on the real property taken may claim compensation for loss of goodwill.” (San Diego Metropolitan Transit Development Bd. v. Handlery Hotel, Inc. (1999) 73 Cal.App.4th 517, 537 [86 Cal.Rptr.2d 473], internal citation omitted.)

•“[W]hile there are no explicit statutory requirements regarding an expert’s use of a particular methodology for valuing lost goodwill, the expert’s methodology must provide a fair estimate of actual value and cannot be based on hypothetical or speculative uses of a condemned business … .” (City and County of San Francisco, supra, 168 Cal.App.4th at p. 1523, original italics.)

•“The underlying purpose of this statute is to provide compensation for the kind of losses which typically occur when an ongoing business is forced to move and give up the benefits of its former location. It includes not only compensation for lost patronage itself, but also for expenses reasonably incurred in an effort to prevent a loss of patronage.” (San Diego Metropolitan Transit Development Bd., supra, 73 Cal.App.4th at p. 537, internal citations omitted.)

•“Goodwill must, of course, be measured by a method which excludes the value of tangible assets or the normal return on those assets. However, the courts have wisely maintained that there is no single acceptable method of valuing goodwill. Valuation methods will differ with the nature of the business or practice and with the purpose for which the evaluation is conducted.” (People ex rel. Dept. of Transportation v. Muller (1984) 36 Cal.3d 263, 271, fn. 7 [203 Cal.Rptr. 772, 681 P.2d 1340], internal citations omitted.)

•“The value of this goodwill may be determined using a variety of methods: for example, determining the total value of the business by capitalizing its cash flow, and then subtracting its tangible assets; or determining the amount by which the business’s average profits exceed a fair rate of return on the fair market value of its tangible assets, and then capitalizing that amount. But the essential idea is that there is some intangible ‘X-factor’ that gives the business greater value than it would otherwise have.” (People ex rel. Dept. of Transportation v. Presidio Performing Arts Foundation, supra, 5 Cal.App.5th at p. 201, internal citation omitted.)

•“Certainly a comparison of the pre-taking and post-taking goodwill values would be one way to quantify the amount of goodwill that was lost due to the taking. But it is not evident from the appellate record that the amount of lost goodwill could not be calculated in some other manner.” (People ex rel. Dept. of Transportation v. Presidio Performing Arts Foundation, supra, 5 Cal.App.5th at p. 205.)

•“Section 1263.510 does not dictate that the only way to obtain compensation for the loss of goodwill is to prove pre-taking goodwill value based on a business value in excess of its tangible assets. Nor does the statute define goodwill as the value of a business not attributable to its tangible assets.” (People ex rel. Dept. of Transportation v. Presidio Performing Arts Foundation, supra, 5 Cal.App.5th at p. 211.)

•“[A] ‘cost to create’ approach is a permissible means by which to value goodwill under [Code of Civil Procedure] section 1263.510 where, as here, a nascent business has not yet experienced excess profits but clearly has goodwill within the meaning of the statute and experiences a total loss of goodwill due to condemnation of the property on which the business is operated.” (Inglewood Redevelopment Agency v. Aklilu (2007) 153 Cal.App.4th 1095, 1102 [64 Cal.Rptr.3d 519].)

•“As Aklilu implicitly recognized, unless there is independent proof that a business possesses goodwill in the first place, the cost-to-create methodology does not reflect the cost of creating any actual goodwill. Instead, it simply adds up costs and calls the total ‘goodwill.’ The relationship between goodwill and the costs to create breaks down even further when the condemnation takes only a portion of the business’s goodwill. In that situation, it becomes necessary to figure out which costs match up with which portions of goodwill that are lost; in most cases, this will devolve into an exercise in futility or fiction.” (Dry Canyon Enterprises, LLC, supra, 211 Cal.App.4th at p. 494.)

•“Since quantifying the loss of goodwill is a matter concerning the amount of goodwill lost, it is for the jury to decide between the competing views of the experts.” (People ex rel. Dept. of Transportation v. Presidio Performing Arts Foundation, supra, 5 Cal.App.5th at pp. 213–214.)

•“A business which is required to move because of the taking of the property on which it operates has suffered a loss from the taking. This is true whether the tenancy is for a fixed term, or is a periodic tenancy as in this case. The value of the lost goodwill is affected by the probable remaining term of the tenancy. Evidence of the remaining length of a lease and the existence of an option to renew a lease are, of course, relevant for determining the amount of compensation, if any, to be paid for loss of goodwill. Similarly, evidence of the pre-condemnation duration of a periodic tenancy and the quality and mutual satisfaction in the landlord and tenant relationship are probative for determination of compensation for loss of goodwill.” (Los Angeles Unified Sch. Dist. v. Pulgarin (2009) 175 Cal.App.4th 101, 107 [95 Cal.Rptr.3d 527], internal citation omitted.)

•“The statute’s unambiguous plain language provides that a condemnee must show it cannot prevent a loss of goodwill by relocating or otherwise taking reasonable steps to prevent that loss to be entitled to a jury trial on the amount of that unavoidable loss. A fortiori, if the condemnee would lose goodwill—even if it relocated its business or otherwise reasonably mitigated the loss—the condemnee satisfies its threshold burden.” (Los Angeles County Metropolitan Transportation Authority, supra, 32 Cal.App.5th at p. 670.)

•“[I]n some circumstances, there may be a limited right to reimbursement for costs incurred to mitigate loss of goodwill.” (Los Angeles Unified School Dist. v. Casasola (2010) 187 Cal.App.4th 189, 208 [114 Cal.Rptr.3d 318].)

•“Although the statutory scheme applies only to eminent domain proceedings, the right to recover lost goodwill has been extended to the indirect condemnee. Thus, ‘goodwill is compensable in an inverse condemnation action to the same extent and with the same limitations on recovery found in … section 1263.510.’ ” (San Diego Metropolitan Transit Development Bd., supra, 73 Cal.App.4th at p. 537, internal citations omitted.)