California Eminent Domain Report

Join Us in San Diego at IRWA Chapter 11's Eminent Domain Seminar

Brad Kuhn — Tue, 08 May 2012 09:21:35 -0800

This Friday, May 11, International Right of Way Association Chapter 11 (San Diego) will be hosting a great program titled "Eminent Domain Seminar: The Acquisition Process and Litigation Case Study." If you want an update on recent developments in eminent domain, or if you've ever wondered what a relocation appeal hearing or a condemnation trial looks like, this seminar is for you. There are a number of great speakers lined up for the full-day class.

My colleague Rick Rayl and I will be going toe-to-toe in a mock trial on the valuation of a gas station and the loss of business goodwill caused by a public project. I'll be representing the business owner and teaming up with the "owner's" goodwill appraiser, Steve Zamucen. Rick will be representing the agency with the "agency's" goodwill appraiser, Aaron Amster. Steve and Aaron are some of the best eminent domain business appraisers out there, and they'll be sure to create some fireworks (and make Rick and I look good at the same time).

The seminar is being held at Caltrans' San Diego Headquarters, and below is an outline of the topics:

Fundamentals of Acquisition
Resolution of Necessity and Order for Prejudgment Possession
Relocation Appeal Process
New Cases and Developments in Eminent Domain Law
Real Estate Appraisal Mock Trial
Business Goodwill Appraisal Mock Trial

If you're interested in attending, e-mail Cynthia Colburn at Overland, Pacific & Cutler. We hope you'll join us, and we look forward to seeing you there!

Redevelopment Happy Endings Do Exist....

Brad Kuhn — Tue, 08 May 2012 08:41:00 -0800

The demise of redevelopment in California has surely sparked strong emotions from both its supporters and its opponents. And while the wind-down process continues to dominate the headlines, a recent article caught my eye about the tale of a long, hard-fought redevelopment battle -- with a happy ending, for everyone.

If you have a moment, check out a great story in last week's Park La Brea Press, Eminent Domain Didn't Send Bernard's Packing, detailing a property owner's successful fight against redevelopment in Los Angeles. The article provides a current update on a drawn out eminent domain battle between a mom and pop luggage shop in Hollywood who opposed making way for the new W Hotel.

The story begins back in the 1950's, when Bernard's luggage shop began renting the location they ultimately purchased 20 years later. It was a family-owned business, a staple in the community. Then, the owners heard news that their property, along with 31 others, were potentially going to be condemned for a new hotel.

While Suzette Kelo was battling for her property rights on one side of the country, the mom and pop luggage shop owners led a strong grass roots movement of their own to stop the redevelopment acquisitions. Shortly after the Resolution of Necessity hearing, a billboard went up: "Murder on Vine Street: Eminent Domain Kills Small Businesses." Amidst a media frenzy, legal threats, and community complaints, the parties ultimately reached a settlement whereby the W Hotel would be built around the business, with the store reconstructed allowing the developers to install subterranean parking.

Like any happy tale, there must always be bumps in the road. In this case, unfortunately, the battle was quite taxing on the family, and the luggage shop is no longer in business. However, the family continues to own the property, and it apparently has some high hopes for a bright future. Store owner Bob Blue hopes to have a restaurant tenant within the year, and hopefully an eatery to complement Hollywood's history.

The Redevelopment Wind-Down: A Quick Update

Rick E. Rayl — Tue, 01 May 2012 13:13:38 -0800

California continues its process of dismantling its redevelopment infrastructure. The state's redevelopment agencies disappeared on February 1, 2012, and today marks another key milestone. May 1 is the deadline for the creation of the Oversight Boards that will watch over the Successor Agencies as they dispose of redevelopment assets.

What does this mean? In many cases, nothing particularly significant. Oversight Boards have been empanelled for many Successor Agencies before today, and even once empanelled, there is no guarantee that anything will happen immediately. But theoretically, Successor Agencies can start to dispose of assets, with Oversight Board approval.

There are a few other things going on, and some acronyms to talk about. Here are a few highlights:

Recently, we saw the first lawsuit generated by the winding down process (at least , the first one we noticed). The City of Fresno has sued over the make up of its Oversight Board, arguing that the Board has not been created in compliance with AB X1 26. An April 23 article in the Fresno Bee, Fresno Oversight Board members sued at chaotic meeting, opens with this colorful quote:

The Fresno Oversight Board got two pieces of bad news when it met Monday for the first time.
Board members were told they don't exist.
Then they got sued -- by their own legal advocate.

A Sacramento County judge later ruled that the Board could meet -- for now -- but ordered the parties to return to court for a substantive hearing on the Board's makeup on May 14.

And while the successor agencies and their Oversight Boards try to sort through the process, there are continued efforts in the Legislature to amend the law. There have been a dozen or more bills introduced, focusing on everything from basic housekeeping/clean up to addressing affordable housing funds to creating a framework for an orderly dissolution process.

The bill that has seemed to have the most momentum has been AB 1585, It seeks to do the following:

Provides discretion to oversight boards to allow for expansion of enforceable obligations;
Restores some funds for low and moderate income housing;
Provides guidance regarding disposition of assets in an effort to avoid “fire sale”; and
Makes changes to stabilize bond payments.

AB 1585 was approved by the Assembly, 56-7, receiving two more votes than the super-majority required for passage as an urgency measure. At this point, it remains unclear whether AB 1585 -- or any other pending redevelopment legislation -- will pass in both houses. And if something does pass, it is also unclear whether Governor Brown will sign any such legislation. To the extent a new law impacts the amount of money available to the state, a veto remains a likely outcome.

Finally, a few new acronyms. The Enforceable Obligation Payment Schedule, EOPS, is the schedule of enforceable obligations created by the redevelopment agencies before their dissolution. These are not particularly significant at this point, because the real focus is on the Recognized Obligation Payment Schedule, ROPS, which is the enforceable obligation payment schedule created by the successor agency and then certified by the county auditor-controller and approved by the oversight board. The ROPS will be getting considerable attention over the next few months as the stakeholders argue about what qualifies as a legitimate enforceable obligation -- and what does not.

We can't predict what will happen next, but it will almost certainly be interesting. And at the end of the day, it seems likely that the Fresno lawsuit will be only one in many, many legal disputes over this process.

Eminent Domain: Who "Wins" When a Case Settles?

Rick E. Rayl — Fri, 27 Apr 2012 09:36:03 -0800

As an eminent domain attorney, a litigated outcome nearly always comes with the satisfaction (or devastation) of realizing that you have won or lost. Sure, sometimes the jury splits (in fact, that probably happens most of the time), but the result can be placed in the context of the settlement negotiations that took place leading to the trial.

A verdict much better than the settlement possibility feels like a "win" and a verdict much worse than an offered settlement understandably feels like a "loss." It's really pretty simple.

But I have not had enough decisions to have empirical evidence of whether settling is better than trial in the long run. And I certainly don't know whether it matters whether I represent an agency or a landowner/business owner in this respect.

The good news is that someone else had done this empirical work, and there results are pretty interesting. The bottom line of this research seems to involve two outcomes:

Agencies are more often "correct" in rejecting an offered settlement and proceeding to trial. In other words, when the agency turns down a demand, it will do at least as well or better at trial far more often than a landowner who rejects a settlement offer. On the other hand,
When the agency makes a mistake, the costs are much higher than a landowner's mistake. In other words, while the agency "misses" less often, when the agency does miss, it will often get killed at trial.

This research was brought to our attention by Stanley Leasure, who writes a fairly new blog, Eminent Domain ADR. Mr. Leasure is reporting on a 2008 study published by Randall L. Kiser, Martin A. Asher, Blakeley B. McShane in the Journal of Empirical Legal Studies titled Let's Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations.

To be honest, I have not yet managed to get my hands on the actual article, so I cannot meaningfully comment on or critique Mr. Leasure's characterization of it. I will say, however, that though I had never really thought about the issue in quite this way, the conclusions seem to make sense.

Generally speaking, I think landowners are more often guilty of having a higher opinion of the value of their property than is warranted. This is natural, and presumably derives at least in part from the emotional attachment and value many people place on their own property -- but which the market does not recognize. (The same concept would apply to business owners.) For this reason, it can be difficult for an owner to accept the reality of "fair market value" in a forced transfer.

On the other hand, we have all seen that when the agency gets it wrong, it can get it really wrong. The downside for an agency, especially in a severance damage or goodwill context, can be almost limitless, and it does not surprise me at all that the wildest misses are on the agency side.

I'm going to work on getting my hands on the article itself, and I may have more to say about it down the road. In the meantime, it seems that Mr. Leasure is working on a series of blog posts on this topic, and if you are interested, you may want to follow along at blog.edom-adr.com.

Is a Property Interest Really Necessary?

Ben Rubin — Thu, 26 Apr 2012 09:40:26 -0800

Yes! And two separate groups recently learned this fact the hard way. On April 17, the Eastern District of California issued two separate decisions dismissing two separate inverse condemnation claims with prejudice because the plaintiffs did not have an independent property interest in the subject property. In Abarca v. Merck & Co. (E.D. Cal. Apr. 17, 2012) Case No. 1:07-cv-0388, a group of minor plaintiffs and a group of non-owner landscape plaintiffs filed an action against the County of Merced, the Merced Irrigation District, and Merced Drainage District, alleging, among other claims, that the defendants inversely condemned the subject property in 2006 when a deliberately and/or negligently designed, constructed, and/or maintained embankment failed and flooded the subject property.

The defendants moved for summary judgment on the basis that the minor plaintiffs and non-owner landscape plaintiffs did not have an independent interest in the damaged property, and therefore could not maintain a claim for inverse condemnation. The District Court, setting the stage for its eventual ruling, stated that:

To establish liability for inverse condemnation, a plaintiff must demonstrate four elements: (1) an interest in real or personal property; (2) that the government entity substantially participated in the planning, approval, construction, or operation of a public project or public improvement; (3) damage to the property; and (4) that the government entity's act or omission was a substantial cause of the damage.

The District Court then found that the minor plaintiffs who did not assert property damage claims apart from those suffered by their parents lacked the interest in property necessary to maintain an inverse claim. The District Court also found that the non-owner landscape plaintiffs lacked the necessary property interest to maintain an inverse claim because they could not show that they had any cognizable legal interest in the damaged landscape at issue. (See Minor Plaintiffs Decision; Non-Owner Landscape Plaintiffs Decision.)

In a separate decision, relating to the same defendants and occurrence, but different plaintiffs (the "Dairy Plaintiffs"), the District Court denied a motion for summary judgment brought by the defendants on the basis that there were genuine issues of material fact. The defendants argued that the Dairy Plaintiffs, who had the necessary interest in the subject property to maintain an inverse condemnation claim, were barred from asserting such a claim because of a provision in the 1917 deed for the subject property which granted the "right to temporarily flow the said land . . . without liability therefor when such flowing results from breaks in any ditch or canal . . . caused by any water coming from such canals or ditches or when caused by water turned into said natural channels . . . ."

Essentially, the defendants argued that this provision granted them a flooding easement. The District Court found, relying on Salton Bay Marina, Inc. v. Imperial Irrigation Dist. (1985) 172 Cal.App.3d 914, that the language in the deed did not create an easement, but was rather an exculpatory clause. Analyzing the deed language in this light, the District Court found that the language was ambiguous as to whether it protected against only natural flooding, or also flooding resulting from deliberate or negligent acts. Accordingly, because the defendants did not present any undisputed evidence regarding this ambiguity, the Court denied the motion for summary judgment. The District Court also found that there was an issue of fact as to whether the flooding was "for the use and benefit of the canal system." (Dairy Plaintiffs Decision.)

The lessons learned from these decisions are not novel or complex. Instead, they are simply a reminder of the basics. Does the plaintiff have a cognizable property interest?

Business Valuation Resource

Brad Kuhn — Thu, 26 Apr 2012 08:55:34 -0800

If you've ever watched the show Shark Tank on ABC, you know that many individuals value their businesses much higher than their business' numbers suggest. It's human nature: you focus on the upside and tend to ignore the blemishes or risk areas. As Kevin O'Leary -- "Mr. Wonderful" -- would say, the numbers tell the story, because it's all about the money.

Mr. Wonderful's it's-all-about-the-numbers concept also holds true in the valuation of businesses in the eminent domain context: the jury's task is supposed to be a sober inquiry into values, ignoring personal worth or attachment. It's a tough issue, especially for smaller businesses where an individual runs the day-to-day operations of the business and makes a nice living doing so. The owner-operator feels the business has substantial value, as it provides a good, steady income for the owner. The difficulty of this situation from the valuation standpoint, however, is that one must assume the owner is not running the business, but is instead paying someone else to do so. Thus, once someone else is paid for running the day-to-day operations, the business may not make much else and therefore has little goodwill value. I've had this discussion with business owner clients before, and it's not easy to explain this concept.

Nevertheless, we still find wide spreads when it comes to valuing a business in eminent domain. Unlike real estate, business valuations seem to be more art than science and small numbers can be easily manipulated to make huge differences in value. If you're interested in learning more about business valuation concepts, I'd suggest taking a look at the blog Just Elementary run by Pramod Patel. There's some pretty cool concepts on business valuation techniques and some of the issues one may run into when buying or selling a business. In particular, take a look at the post Business Valuation Too High Using Wrong Methodologies and Books & Records and Your Lease Two Factors That Impact The Attractiveness Of Your Business To Potential Buyers.

Another $5,000 Appraisal Reimbursement Discussion

Rick E. Rayl — Wed, 25 Apr 2012 07:29:05 -0800

My partner Brad Kuhn and I spoke yesterday at the IRWA Chapter 1 Valuation Conference. Our topic involved large-scale acquisitions, and what makes them different from a typical, single-parcel acquisition. As always, the Conference was well attend. And as always, both the panelists and the audience are made up of a great cross-section of the top right of way practitioners in Southern California. This mix often leads to some great discussions -- and yesterday was no exception.

One of the questions that arose during our presentation involved the fairly recent requirement that agencies offer to reimburse the property owner up to $5,000 to obtain his or her own, independent appraisal of the property. This is a topic that comes up frequently at these events; indeed, it commanded a large block of time at a recent ASA-sponsored seminar at which our group spoke.

The requirement comes from Code of Civil Procedure section 1263.025 (one of the statutes enacted in the wake of the Supreme Court's 2005 Kelo decision). Section 1263.025 reads, in pertinent part:

A public entity shall offer to pay the reasonable costs, not to exceed five thousand dollars ($5,000), of an independent appraisal ordered by the owner of a property that the public entity offers to purchase under a threat of eminent domain, at the time the public entity makes the offer to purchase the property.

The statute's purpose is to facilitate early resolutions, hopefully avoiding the time and cost of an eminent domain action. But the statute leaves some questions concerning its application.

First, nothing in section 1263.025 specifies when the owner must obtain the appraisal or request the reimbursement. We have come across situations recently where owners sought to use the $5,000 to obtain a trial appraisal just before the expert exchange. In my view, this does not comply with the statute's intended goal, in that it cannot facilitate early settlement if the owner does not even obtain the appraisal until shortly before trial.

Don't get me wrong. I am not arguing that owners should be forced to provide agencies early, "free discovery" by turning over these early appraisals. We've written about this subject before, and I continue to believe that agencies in general have no right to demand a copy of the owner's appraisal before making the $5,000 reimbursement. (For present purposes, I'm leaving aside the specific statute applicable to Caltrans, which does require that the owner present the appraisal in order to obtain the reimbursement.)

An owner should expect, however, to disclose at least some of the information in that independent appraisal if the owner wants to use that appraisal as leverage for an early settlement. But such a voluntary disclosure in an effort to reach a settlement is different from compelled disclosure in order to obtain reimbursement.

The bottom line: I think agencies should have a right to expect that owners who wish to take advantage of this $5,000 appraisal reimbursement will do so early in the process and with the intent of seeing if an early resolution is possible.

The second question involves negotiation timing. Now that the agency must offer to pay for this independent appraisal, must the agency also wait for the owner to obtain that appraisal before proceeding with a condemnation action? While this sounds logical, I don't believe this is a fair requirement. California's extended possession timeline already wreaks havoc with many projects and can even put federal funds in jeopardy. Adding another barrier to gaining possession -- especially considering the timing of the independent appraisal falls outside the agency's control -- does not reflect good policy, in my view.

On the other hand, where the agency does not have a compelling reason to proceed more quickly, no reason exists that the agency should not encourage owners to get their appraisals quickly in exchange for the agency's not proceeding with eminent domain in the interim. This would help fulfill the statute's goal by giving the parties a more meaningful chance to negotiate with similar information before condemnation proceeds.

In the end, it will take either an amendment to section 1263.025 or a published decision to clarify these issues. But they seem to arise frequently as practitioners struggle with how to interpret this new law, and for what it's worth, I thought I would share my view of how I think the law should evolve when all is said and done on this issue.

Blogging about Speaking About Blogging

Rick E. Rayl — Tue, 24 Apr 2012 13:45:39 -0800

About two years ago, I embarked on a path to start blogging about eminent domain issues. At the time, I didn't read a lot of blogs (OK, I probably didn't ready any blogs). I also had little idea where the path would lead me, and I certainly had no clue what it might mean for my practice.

Now, I follow several other blogs and have a much better sense about how it all works. So much so, apparently, that I've been asked to sit on a panel at an upcoming PLI Conference Lawyers' Guide to Using Social Media for Professional and Client Development 2012. Truth be told, I'm inclined to think that all the really good bloggers are too busy to attend such an event, but I'm choosing to block that thought process in favor of being honored to be included in the program.

I think -- and hope -- that the program will provide some good insights as to why attorneys could benefit from blogging and many other forms of social media. If you're an attorney and you're thinking about these issues, you may want to look into it. There's still time to register.

A Reminder to Carefully Review Your Right Of Way Contracts

Brad Kuhn — Mon, 16 Apr 2012 08:05:36 -0800

It's common practice for government agencies and property owners to reach an agreement on the acquisition of property without the use of eminent domain. Agencies understand the negative connotation of condemnation, along with the litigation costs involved, and right-of-way agents typically make strong efforts to negotiate a voluntary purchase. Acquisitions are usually resolved by the parties' entering into a standard right of way contract or purchase agreement. But once the eminent domain action is filed, attorneys like to resolve the case through the entry of judgment -- as opposed to using the standard purchase agreement -- and a recent California Court of Appeal decision serves as a good reminder as to why this is the case.

The case, People ex rel. Department of Transportation v. Scotti, deals with a dispute as to whether the right of way purchase agreement covered payment of the property owner's attorneys' fees. Caltrans' property negotiator could not reach a voluntary acquisition of the owner's property, and an eminent domain case followed. After the exchange of expert appraisals, the parties entered into a right of way contract and the condemnation action was dismissed.

The owner then filed a motion for attorneys' and expert fees pursuant to Code of Civil Procedure section 1268.610, which entitles a defendant in an eminent domain action to recover litigation expenses any time the action is dismissed. Caltrans argued that the owner was not entitled to attorneys' fees because the right of way contract provided that the purchase price was "inclusive of interest, fees and costs." The trial court entered judgment finding the owner was not entitled to an award of costs and attorneys' fees.

On appeal, the Court explained that the statute is clear and the owner is entitled to attorneys' fees given Caltrans' dismissal of the case; however, there was a contractual interpretation dispute as to whether the owner had already recovered those fees as part of the purchase agreement. The Court concluded that the right of way contract was ambiguous as to attorneys' and expert fees, and therefore it was appropriate to look outside of the four corners of the agreement to determine whether these fees were included in the purchase price. Caltrans' right of way agent declared that the "fees" provision of the contract included the owner's attorneys' and expert fees, and the Court interpreted the provision in this manner. Therefore, the trial court decision was upheld.

The Scotti case is why attorneys like to avoid dismissals in eminent domain actions, and prefer to have a judgment entered by the court. The case also serves as a good reminder to agencies, right of way agents, and property owners to carefully review voluntary purchase agreements. Make the terms explicitly clear: if the purchase price is inclusive of attorneys' and expert fees, say so.

Obviously, most purchase agreements are utilized before a condemnation action is filed, and therefore the dismissal statute does not come into play. Regardless, be careful using a standard purchase agreement for every situation; carefully review those agreements and make sure they take into account the particulars of the deal.

Join Us at IRWA Chapter 11 (San Diego) on April 18 for the Update on Redevelopment in California

Brad Kuhn — Tue, 03 Apr 2012 10:09:50 -0800

The demise of redevelopment world tour continues! Gale's been speaking away up north at the IRWA, the Appraisal Institute, and various other organizations, and Rick and I have been trying to do our part to keep up down here in Southern California. So, here we go again -- this time down in San Diego, and we hope you'll join us. We promise to use some new materials and give some updates on the status of pending clean-up legislation and how the redevelopment agency winding up process is playing out in California.

The details: we'll be speaking to the San Diego Chapter of the International Right of Way Association on April 18, 2012. The meeting will take place at the Handlery Hotel, located at 950 Hotel Circle North, and it usually starts around 11:30 am. Yes, you'll hear about the backdrop of the events leading up to the adoption of AB1X 26 and 27, the ensuing litigation and the Supreme Court's opinion in Matosantos, and the aftermath of the decision on redevelopment agencies across California. But we'll also get into what's been playing out over the last few months on the ground. We hope to see you there!

Proposition 13 Base Year Value Transfer Under Threat of Eminent Domain

Brad Kuhn — Fri, 30 Mar 2012 09:50:01 -0800

A few months ago, I had a property owner call me and explain he had recently sold his property to a utility company under threat of eminent domain. He took the sale proceeds and invested the money in a comparable replacement property. When he applied to transfer his Proposition 13 base year value to the replacement property, the County assessor denied his request. The assessor explained that because the sale under threat of eminent domain was not to a public entity, it did not fall within the exception that allows for a transfer of the base year value.

I was a bit surprised by the assessor's explanation, so I went to look it up. Sure enough, the regulation (Property Tax Law Guide section 462.500) provides that an owner is only entitled to transfer the Proposition 13 base year value if the owner is displaced (1) as a result of an eminent domain action or (2) under threat of eminent domain by a public entity. In other words, if a property owner faces condemnation by a non-public entity, the owner loses the ability to transfer the Proposition 13 base year value to a replacement property if the owner sells before the condemnation action is filed.

Based on the plain language of the statute, this likely is the correct analysis. And a new published decision, Duea v. County of San Diego, confirms this interpretation. But it doesn't make it right. This language does not match the parallel income tax provision which allows for owners to accomplish a "1033 exchange" when selling as a result of eminent domain or under threat of eminent domain -- regardless of the identity of the condemnor. And, such an interpretation simply doesn't make sense, as it serves no legitimate purpose, and will only force unnecessary litigation with non-public entities just to avoid unfavorable tax treatment.

If you're interested in a more detailed explanation of the rules, the Duea decision, and our thoughts on why a legislative fix is necessary, give our E-Alert, "The Unpreservation of the Base Year Value Transfer Under Threat of Eminent Domain," a read. And, if you ever have issues working through a Proposition 13 base year value transfer or a 1033 exchange to preserve your property tax basis or defer your income tax gains, feel free to give us a call. We'll do our best to walk you through these hyper-technical rules.

Not Just Another End of Redevelopment Story

F. Gale Connor — Wed, 28 Mar 2012 14:05:37 -0800

By now, loyal followers of this blog are well versed in the whys and wherefores of redevelopment's demise. You know all about the 30+ year struggle between the state and cities over allocation of property tax revenues. The impact on the State's budget caused by Proposition 98, the creation of ERAFs and Propositions 1A and 22 in the new millennium are by now old hat. You can recount by heart the story of the rise and fall of the alternative voluntary redevelopment program that was ABx1 27 and the Supreme Court’s decision in California Redevelopment Assn v. Matosantos.

But what does all of this mean for the assets, obligations, and liabilities of the former redevelopment agencies? How do cities go winding down their redevelopment agencies and disposing of their assets? When the Legislature adopted ABx1 26, it no doubt anticipated that most cities would elect to participate in the alternative voluntary redevelopment program. Undoubtedly, a few would be unable or unwilling to make the required payments and would therefore wind down their agencies as mandated by ABx1 26. What the Legislature never anticipated was that all 400 or so agencies would be dissolved simultaneously. As a result, ABx1 26 paid scant attention to the details of dissolution.

The Legislature is now grappling with the unintended consequences of ending a 60 year program at the stroke of a pen. What, for example, did they mean when they instructed cities to dispose of the assets of their former redevelopment agencies "expeditiously and in a manner aimed at maximizing value”? Are successor agencies supposed to “expeditiously” sell the properties at fire sale prices or should they develop long-term asset management plans to dispose of them in a more orderly, but less expeditious, fashion? What of cities that elect to retain the housing assets and functions previously performed by their redevelopment agencies? ABx1 26 passes on the obligations and liabilities for low to moderate income housing programs without clearly identifying funding sources.

These and other issues are addressed in various bills now pending before the State Legislature.

If you are interested in learning more about pending cleanup legislation, how the winding up process is actually playing out, or if you would like a refresher on the whys and wherefores of redevelopment’s demise, I will be speaking at the IRWA chapter 42 lunch in San Jose next Wednesday, For more information or to register for the lunch, please go to the Chapter 42 page.

The Weekly Condemnation Update

Brad Kuhn — Wed, 28 Mar 2012 06:15:07 -0800

Here's some news making headlines this week in the eminent domain community:

The Base Year Transfer Rule Under Threat of Eminent Domain: A new published California Court of Appeal decision -- Duea v. County of San Diego -- came out yesterday addressing whether a property owner can transfer their base year value to a replacement property when the owner sells its property to a private developer under threat of eminent domain. The Court held that the owner had some procedural missteps which doomed the case, but also went on to hold that this type of transfer does not qualify for a base year value transfer. We'll have more on the opinion shortly, but in the meantime, take a look at our colleague Robert Thomas' inversecondemnation.com blog post on the case.
Eminent Domain in Placer County: According to an article in the Sacramento Bee, Eminent domain process OK'd for road widening in Placer County, Placer County Supervisors authorized the use of eminent domain to acquire pieces of five properties needed to complete the widening of Auburn Folsom Road. While the property owners argued that the County failed to negotiate in good faith, the County responded that the road widening project had been on the books for years and it had successfully negotiated with 13 other impacted owners.
Condemnation for Hesperia Interchange: According to an article in the Hesperia Star, City officials could use eminent domain to acquire interchange land, the City of Hesperia may turn to eminent domain to complete the Ranchero Interchange, a $59 million project that would connect Ranchero Road to Interstate 15. The City has apparently obtained rights to all necessary properties but one. The City hopes to begin construction work on the project in late 2012 or early 2013 and have the interchange open by July 2014.
Redevelopment Updates: Looking for an update on redevelopment in California? There's a nice, simple opinion piece in the Bakersfield Californian, Redevelopment work may have a place after all, which gives a concise update on some bills making their way through the legislature. SB 1585 would clean-up the dissolution process and better defines "enforceable obligations," while SB 654 would restore some funds for low and moderate income housing. SB 986 would require bond proceeds specified for specific developments to be used for those projects as opposed to throwing the money into the city or county's general fund. And SB 1186 would allow agencies to establish community development authorities to oversee affordable housing projects.

Keep on the look-out for our E-Alert on the Duea opinion.

Just Like A Win Win

Ben Rubin — Mon, 26 Mar 2012 09:05:24 -0800

Last year I saw Win Win, a movie starring Paul Giamatti, Amy Ryan and Jeffrey Tambor. The movie, besides receiving critical acclaim, had two hooks for me. One, the protagonist in the movie is an attorney. I am a sucker for almost any lawyer movie. (I still say My Cousin Vinny is one of the best 50 movies of the past 50 years.) And two, the movie included wrestling. No, not the Hulk Hogan and Macho Man Randy Savage stuff. I mean the real folkstyle wrestling that occurs every 4 years at the Olympics and at the collegiate level.

My dad was a college wrestler, which is probably why I have come to appreciate the sport. Anyway, without giving away too much, the movie basically sets up a scenario whereby Paul Giamatti's character is able to have his cake and eat it too, at least for a little while. In a recent decision out of the United States Court of Appeals for the Third Circuit, the Court allowed property owners to achieve this oft mentioned but rarely achieved result, holding, to the chagrin of the Internal Revenue Service, that the installment interest the property owners received as part of a settlement agreement with the government could be excluded from taxable income. DeNaples v. IRS (4th Cir. March 19, 2012).

In 1998, as part of a highway improvement project, the Pennsylvania Department of Transportation filed an eminent domain proceeding seeking to condemn several parcels of real property. In 2001, the property owners agreed that in exchange for all of their ownership interest in the various parcels, the Department of Transportation would pay $40.9 million, of which $24.6 million would be allocated to principal and $16.3 million would be allocated to interest ("settlement interest"). A few months later, however, when the parties executed the formal settlement agreement, the State lacked the necessary funds to pay the lump sum of $40.9 million. In order to accommodate the State's fiscal situation, the property owners agreed to accept the settlement funds in five installment payments subject to the interest rate set forth in the Pennsylvania Rules of Civil Procedure ("installment interest").

The State made timely payments, but the property owners filed income tax returns each year that identified only some of the settlement funds. Specifically, the property owners excluded from their gross income a portion of the settlement interest income and all of the installment interest income. In 2008, the IRS issued a deficiency notice asserting that the property owners owned an additional $2.3 million in taxes.

During the litigation before the Tax Court, the property owners argued that under Section 103(a) of the Internal Revenue Code, the excluded interest income and installment income were not subject to taxation because they were an "obligation of the State." Section 103(a) states, in part, that "gross income does not include interest on any State or local bond." The Tax Court rejected the argument, and the property owners appealed.

On appeal, the Third Circuit explained:

when the state pays interest at a fixed rate pursuant to a statutory or judicial command, it is plainly not excludable under Section 103 of the Internal Revenue Code. On the other hand, when the government's obligation to pay interest arises out of voluntary bargaining, the interest exclusion may play an important role in allowing the state to reduce its borrowing costs. This implicates the state's borrowing authority and may be excludable under Section 103.

Turning to the merits of the case, the Third Circuit found that the installment interest was the result of voluntary bargaining, not by operation of law, since it did not necessarily spring from the settlement of the eminent domain action. In this regard, the Court noted that it was critical that no condemnation award was ever issued, and that the installment interest rate was lower than what the property owners would have been entitled to if the condemnation proceeding had been completed.

The Fourth Circuit did issue a warning, however, stating that it was not holding that any interest payment made pursuant to a voluntary settlement agreement is automatically excludable under Section 103. Also, the Fourth Circuit held that the settlement interest was taxable, because the property owners failed to demonstrate why their initial allocation between interest income and principal was not arbitrary and excessive.

Thus, the property owners scored a Win Win, at least with respect to the installment income.

So You Want to Be a Litigation Appraiser, Southern California Version

Rick E. Rayl — Mon, 19 Mar 2012 16:43:05 -0800

In case you didn't have a chance to attend the event my partner, Gale Connor, spoke at earlier today, there's still time to learn about appraising in a litigation context.

On Wednesday, March 21, I'll be speaking with three of my colleagues, Brad Kuhn, David Graeler, and Bernadette Duran-Brown at a half-day event sponsored by the American Society of Appraisers. We're presenting Everything You Need to Know About Appraisals for Litigation at Scott's Restaurant and Bar in Costa Mesa. The seminar runs from 2:00 to 5:00, with a dinner and networking event to follow.

There may still be some seats available for the event, but if you want to attend, you should contact the ASA soon. We planning for an interactive, engaging event, and we hope to see you there.

So You Want to Be an Eminent Domain Appraiser?

F. Gale Connor — Wed, 14 Mar 2012 10:00:18 -0800

How is an eminent domain appraisal different from other forms of appraisals? What is the difference between a deposit appraisal and an exchange appraisal and why do condemners usually hire separate appraisers for each? If I am an appraiser, how do I develop a practice as an expert witness?

These and other questions will be answered in a panel discussion at the Northern California Chapter of the Appraisal Institute's "2012 Annual Spring Conference" to be held at the Doubletree Hotel, in Modesto, CA., on March 19, 2012. I, along with Norm Hulberg of Hulberg & Associates and Larry Castellanos of Associated Right of Way Services, will be speaking on the topic of "Appraisals for Eminent Domain."

The Anti-SLAPP, Something to Remember

Ben Rubin — Tue, 13 Mar 2012 08:46:10 -0800

California provides a special procedural remedy whenever a lawsuit implicates a defendant's First Amendment right to petition or free speech. The procedure is commonly referred to as the "anti-SLAPP." (SLAPP is an acronym for Strategic Lawsuit Against Public Participation.) Under this procedure, the trial court evaluates the merits of the lawsuit using a summary judgment like process, often at an early stage of the litigation. In a recent unpublished decision, the California Court of Appeal affirmed the propriety of applying this procedure when a plaintiff is seeking Klopping damages in an inverse condemnation action. (Jones v. People ex rel. Department of Transportation (March 8, 2012), No. B226430.)

In 1998, CalTrans finalized a Major Investment Study regarding the proposed widening of Interstate 5 between State Route 91 and Interstate 710. Shortly thereafter, the project received funding, and Caltrans drafted the necessary environmental documents. Following the finalization of the environmental documents, Caltrans initiated eminent domain proceedings to acquire properties in the first segment; the project was divided into multiple segments.

Jones, the plaintiff, owned a commercial property in the second segment of the project with a single business tenant, TuneUp Masters. Jones and TuneUp Masters received notifications regarding the project throughout the planning phase. These notifications described the potential project alignments and impacts. In 2009, TuneUp Masters and Jones contacted CalTrans to discuss the project and its impacts to the property and business. During these discussions, a CalTrans representative repeatedly explained that the project would impact the front of the property, resulting in a take of approximately 24 feet. This impact was also depicted on the design plans for the project. As a result of this information, TuneUp Masters refused to sign a new lease with Jones. Instead, whereas the prior lease was for a term of ten years with a base monthly rent of $4,800, TuneUp Masters and Jones executed a lease addendum creating a month-to-month tenancy with a monthly rent of only $2,500.

After executing the addendum, Jones requested that CalTrans compensate him for the loss of rent. CalTrans refused to do so, claiming any compensation would be premature and that the addendum was likely the result of the economic downturn. Jones filed an inverse condemnation action shortly thereafter, including a claim for unreasonable pre-condemnation conduct. CalTrans filed a demurrer to the complaint, but the trial court overruled the demurrer finding that the complaint adequately alleged a cause of action against CalTrans. Undaunted, CalTrans then filed the anti-SLAPP motion. Although the trial court had overruled the demurrer, it granted the special motion to strike finding that the complaint was based on CalTrans' protected speech, and that Jones had failed to establish a probability that he would prevail on the merits. Because the California anti-SLAPP statute provides for an award of fees, in addition to striking the complaint, the trial court awarded CalTrans $11,418.75 in attorneys' fees.

On appeal, the Court of Appeal reversed the dismissal and award of fees, but affirmed that "[a] governmental entity can file an anti-SLAPP motion," and that the claim for Klopping damages was based on protected speech. Addressing whether Jones had demonstrated a probability of success on the merits, the Court of Appeal explained that Jones need only demonstrate that his claims have "minimal merit." CalTrans argued that Jones could not satisfy even this lowly burden, because CalTrans had only designated the property for condemnation, and as such it did not go beyond the planning stage. The Court of Appeal rejected this argument, however, finding that the initiation of eminent domain proceedings for the first segment and the history of communications between the parties "support the conclusion that [CalTrans] will acquire a portion of Jones' property." And, "so far as Jones is concerned, CalTran's actions have taken it beyond mere planning and created potential liability for inverse condemnation based upon its unreasonable conduct."

Even though this decision is unpublished, and therefore cannot be cited as precedent, as a result of this decision, and the Court of Appeal's express affirmation of the anti-SLAPP motion in the inverse condemnation context, inverse plaintiffs should expect government agencies to employ similar tactics whenever Klopping damages are claimed. This procedure may be particularly appealing to government agencies because of the potential for attorneys' fees, which the agency can then use as leverage for settlement.

What Does the End of Redevelopment Mean for Real Estate in California?

F. Gale Connor — Mon, 12 Mar 2012 13:53:37 -0800

Are you interested in learning more about the impacts of the dissolution of redevelopment agencies in California? Will you be in the Walnut Creek area on Thursday? If so, please sign up to attend a candid panel discussion with influential local politicians who can articulate what aftershocks can be expected by the recent decision to eradicate Redevelopment Agencies. I will be providing a legal perspective on why this all came about and what it means for cities and counties whose redevelopment agencies were abolished.

The event is sponsored by the East Bay chapter of Commercial Real Estate Women. A Link to the March 15th event can be found here.

Eminent Domain Decision: Award of Litigation Expenses Requires an Actual Trial

Rick E. Rayl — Fri, 02 Mar 2012 11:23:57 -0800

Shortly before an eminent domain trial, a government agency and a property owner exchange a statutory final offer and final demand. The statute’s sole purpose is to encourage settlement before trial, providing a carrot (to the property owner) and a stick (to the condemning agency).

If the matter fails to settle before trial, the owner can seek an award of litigation expenses (i.e., attorneys’ fees and expert costs) if the court ultimately determines that, in light of the outcome, the agency’s final offer was unreasonable and the owner’s final demand was reasonable. (See Code Civ. Proc., § 1250.410.)

A new published decision makes clear that the opportunity to recover litigation expenses requires an actual trial. On March 1, the Court of Appeal issued its opinion in Dept. of Transportation v. Menigoz (March 1, 2012), holding that if the matter settles at any time before the jury is empanelled, the agency has no liability for litigation expenses, regardless of how unreasonable its pre-settlement conduct may have been. On the other hand, once trial commences, the agency could face liability for litigation expenses – even if the parties reach a settlement before the trial ends.

The opinion is fairly simple and straight-forward, though it does contain an interesting procedural twist. The parties exchanged final offers and demands only $30,000 apart. Five days before trial, Caltrans accepted the owner's demand, and the parties submitted a stipulated judgment. The trial court thereafter granted the property owner's unexpected (at least to Caltrans) motion for award of litigation expenses, leaving Caltrans in a tough spot.

As we saw last year in City of Gardena v. Rikuo Corp. (2011) 192 Cal.App.4th 595, post judgment orders are not appealable where the underlying judgment was stipulated (making the judgment itself non-appealable). So what was Caltrans to do?

It opted for a writ of mandate, rather than a traditional appeal, claiming the trial court had exceeded its jurisdiction. The Court of Appeal concluded that this was procedurally proper, and it proceeded to rule on the merits.

The Menigoz Court rejected the owner's invitation to extend an earlier decision in Coachella Valley County Water Dist. v. Dreyfuss (1979) 91 Cal.App.3d 949, in which the Court of Appeal awarded litigation expenses in an eminent domain case where trial commenced, but the parties settled prior to getting to a jury verdict.

The Menigoz Court explained that the commencement of trial in Dreyfuss made all the difference, establishing what appears to be a bright-line rule: litigation expenses are potentially recoverable pursuant to section 1250.410 once trial commences, but not a second before.

For agencies, the lesson is clear: make sure that any settlement reached once trial commences contains language that expressly states that the owner cannot seek an award of litigation expenses. For owners, well, let's just say that there may be sneaky opportunities for owners negotiating with unaware agencies.

Goodwill Appraisers: Hypothetical Businesses Are a No-No

Brad Kuhn — Wed, 29 Feb 2012 14:17:02 -0800

Over the past few years, we've seen California courts go in several different directions when it comes to admitting opinions on the value of a business' loss of goodwill in the context of an eminent domain action. As a result, eminent domain attorneys, public agencies, and appraisers have been left shooting at somewhat of a moving target as to whether courts will be flexible on the admission of unique or unconventional goodwill opinions. This week, the California Court of Appeal issued an unpublished decision, City of South Gate v. S&M Auto Sales, which, although not citable, at least provides some direction on where to aim.

To provide some context to the "moving target" reference, on one side of the aisle we observed in Inglewood Redevelopment Agency v. Aklilu the court's permitting an opinion of loss of business goodwill under the cost-to-create method, which resulted in the finding of goodwill depsite the nonexistence of any profits. On the other side, we observed in Redevelopment Agency of the City of San Diego v. Mesdaq the court's refusal to admit an opinion of goodwill loss based upon a hypothetical business that did not operate on the property being condemned. We were left scratching our head a bit on where to draw the line on the admissibility of goodwill opinions.

This new opinion, S&M Auto Sales, falls in line with the Mesdaq case, suggesting a narrower approach to the admissibility of goodwill opinions. In S&M, the City condemned a property on which S&M operated a used car dealership. The business was forced to relocate. The business retained a goodwill appraiser who valued the business using the discretionary earnings methodology. While the appraiser relied upon the business' actual sales, he did not rely upon the business' actual expenses, instead using a hypothetical expense figure based on only a three-month sample that was projected out over the entire year. If actual expenses were used, the appraiser conceded the business had no goodwill in the before-condition.

At trial, the court concluded that it was not reasonable for the business' appraiser to rely on hypotheical expense figures, especially where the actual expese figures existed. The court also held that this method of valuation was essentially valuing a hypothetical business in violation of Mesdaq. On appeal, the court agreed that the opinion was properly excluded. While the court noted that while adjustments to expenses can be appropriate in some circumstances, there was no evidence it was appropriate here. The court concluded that while "courts at times have permitted experts to estimate future anticipated profits, [there are no cases providing] that an expert may reject actual cost data in favor of hypothetical cost data."

Kudos to our colleagues Keith McCullough and Kevin Day at Alvarado Smith on the victory.