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Developers' Creative Compensation Argument Fails

An appellate court has declined to allow additional compensation in an eminent domain case to San Francisco landowners who argued that they should be made whole for the expected revenue on an approved but unbuilt mixed-use project on their land.

The developers argued the state law mandating compensation for loss of business goodwill in eminent domain cases required San Francisco to pay for the developers' projected gains, because the developers would be unable to pursue their project. But the First District Court of Appeal ruled that the law did not apply because the developers "had no ongoing business located on the undeveloped parcel taken, a necessary predicate for recovery of lost goodwill."

Martin Coyne and Brian Murphy O'Flynn owned a triangular parcel on Lombard Street in San Francisco's North Beach district that they leased for surface parking. In June 2003, they received Planning Commission approval for a nine-unit residential condominium development with retail space on the ground floor. In early 2004, however, the San Francisco Board of Supervisors approved a "resolution of necessity," which commenced the eminent domain process. San Francisco sought the property for a park. At the time, Coyne and O'Flynn had commissioned architectural and engineering plans, but they had not yet obtained building permits or secured construction financing. They had invested about $150,000 in the project, not including property acquisition and holding costs, and the value of their own time.

The developers responded by requesting compensation for loss of business goodwill under Code of Civil Procedure 1263.510. A trial court judge rejected the request. On appeal, the First District ruled in an unpublished opinion that there was insufficient evidence for the judge to decide on the request.

The matter returned to Superior Court for a bifurcated trial. The first phase involved whether San Francisco had the right to take the property, and whether the developers could claim entitlement to compensation for lost goodwill. The second phase involved a jury determination of value.

In the first phase, Judge Diane Elan Wick ruled the city could take the property and the landowners had failed to establish a loss of business goodwill. In the second phase, a jury awarded Coyne and O'Flynn about $2.7 million. They then went back to the appellate court to challenge the ruling on business goodwill again.

Coyne and O'Flynn argued that they were actively engaged in developing a residential and commercial complex on the property, and the city's condemnation eliminated their business. Based on the testimony of their expert, they argued they were entitled to an additional $2.1 million to $2.9 million essentially, the amount they could make from the completed project.

A unanimous three-judge panel of the First District noted the developers had not received a building permit, had not begun construction and had not pre-sold or pre-leased any units. "Section 1263.510 provides for compensation for losses resulting from the forced relocation of an ongoing business conducted on condemned land," Presiding Justice Mark Simons wrote for the court. "There is no evidence of an ongoing business located on the property, aside from the parking lot."

Instead, the court said the developers were trying to find a way to base the fair market value on the "developers approach," also known as the economic analysis approach or residual land value approach. Courts have consistently rejected this approach, Simons noted. Coyne and O'Flynn argued that courts have rejected this approach only for setting the value of the undeveloped land and not for calculating the value of goodwill. But Simons called this argument "illogical."

"If we adopted the rule proposed by appellants, we would allow developers of raw land to achieve through the back door precisely what California case law has long denied them at the front, a recovery rooted in a specific development plan," Simons wrote. The goodwill statute only contemplates actual goodwill lost, not hypothetical or potential losses, Simons pointed out.

The Case:
City and County of San Francisco v. Coyne, No. A11822, 08 C.D.O.S. 14825, 2008 DJDAR 17947. Filed December 5, 2008. Modified December 29, 2008, at 2008 DJDAR 18864.
The Lawyers:
For San Francisco: Kristen A. Jensen, city attorney's office, (415) 554-4700.
For Coyne: Jonathan R. Bass, Coblentz, Patch, Duffy & Bass, (415) 391-4800.