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.

Background

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...