Has The Link Between Business Goodwill And Profits Been Severed?

“When property is taken by eminent domain, the owner of a business operated on the property is entitled to compensation for any “business goodwill” lost due to the taking. Usually, “goodwill” translates into a business’s profitability. However, earlier this week, the California Supreme Court denied review in People ex rel. Department of Transportation v. Presidio Performing Arts Foundation, C.A., 1st; A145278 which held that a business operating at a loss before the taking may be entitled to compensation for loss of goodwill where the taking renders it even more unprofitable.

Presidio Performing Arts Foundation (“Foundation”), operated a non-profit dance theatre in a leased building located in the Presidio of San Francisco. The California Department of Transportation (“CalTrans”) moved to acquire, under threat of eminent domain, the building occupied by the Foundation for construction of the Doyle Drive Replacement Project. The Foundation was forced to relocate to a smaller, more expensive building in a less desirable location.

While CalTrans agreed to pay $107,000 for tenant improvements, that payment did not include anything for goodwill. Instead, CalTrans filed an action for declaratory relief, requesting a declaration that the Foundation could not establish entitlement to a claim for loss of goodwill. The Foundation responded by filing a cross-complaint seeking compensation for the taking of its goodwill. The trial court found that, although the Foundation demonstrated it had goodwill before the taking, it failed to prove a quantitative loss by calculating its pre-taking goodwill value and then subtracting from that amount its post-taking business goodwill value. The Court of Appeal reversed, opening the way for a jury trial on the amount of compensation due for lost goodwill.”

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Connor, Gale. JDSupra Business Advisor 23 January 2017.