United States: Reserving Goodwill Claims

20 December 2023

by Kristin L. Mendenhall

Nossaman LLP

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In California, a business operating on real property being acquired, in whole or in part, for a public project may make a claim for loss of goodwill and be entitled to compensation if the business operator establishes the foundational elements: (1) the taking caused the loss, (2) the loss could not be prevented by relocation or other reasonable mitigation measures, (3) the loss is not includable as a reimbursable relocation expense, and (4 ) the loss does not duplicate other compensation being paid. (Code Civ. Proc. §1263.510(a).) As part of its affirmative duty to mitigate damages, a business often relocates its operations to a new site to preserve its goodwill. Appraisers retained by the business and agency typically compare the business' goodwill in the "before condition" (at the subject property) and in the "after condition" (at the replacement property) to determine the amount of loss, if there is any loss.

This comparison can be difficult when appraisals must be exchanged at a time when the business has little to no operating results at the replacement property because it has not yet moved or is still in a start-up period. When the replacement property selected by the business has many of the same characteristics as the subject property and the project impacts are well understood from detailed construction plans, the parties usually choose to resolve the goodwill claim along with the real property claims in the existing litigation. The appraisers are able to use historical data to determine goodwill in the before condition and compare it to the goodwill in the after condition, which they usually determine by making adjustments for the impacted condition. The appraisers' adjustments take into consideration the project plans, the owner's testimony, other expert opinions, paired sales if available, and their own expertise. Subjectivity obviously creeps in with so many unknowns at play. However, if the adjustments are substantiated and the appraisal testimony credible, goodwill claims often settle, and sometimes go to trial, without the need of actual performance at the replacement property to compare with their performance (unimpacted) before the relocation.