Inglewood Redevelopment Agency v. Aklilu

• Decision Date: 30 July 2007
• Docket Number: No. B185107.,B185107.
• Citation: 64 Cal.Rptr.3d 519,153 Cal.App.4th 1095
• Court: California Court of Appeals Court of Appeals
• Parties: INGLEWOOD REDEVELOPMENT AGENCY, Plaintiff and Appellant, v. Elias AKLILU, Defendant and Appellant.

64 Cal.Rptr.3d 519

153 Cal.App.4th 1095

INGLEWOOD REDEVELOPMENT AGENCY, Plaintiff and Appellant, v. Elias AKLILU, Defendant and Appellant.

No. B185107.

Court of Appeal, Second District, Division 3.

July 30, 2007.

As Modified August 20, 2007.

Anita C. Willis, City Attorney, Cal Phil Saunders, Interim City Attorney; Kane Ballmer & Berkman, Royce K. Jones and

June Ailin, Los Angeles, for Plaintiff and Appellant.

Century Law Group, Karen A. Larson, Los Angeles, and Daniel A. Woodford, for Defendant and Appellant.

KLEIN, P.J.

SUMMARY

This is an eminent domain case involving the Inglewood Redevelopment Agency (the Agency) and Elias Aklilu, dba Auto Inn Lube and Oil (Auto Inn). Commencing in 1997, Aklilu operated Auto Inn on the real property at 3300 West Century Boulevard, which he leased from the Nix Family Trust (the Nixes). Auto Inn was profitable in 1998 but lost money each of the succeeding four years. Aklilu attributed this downturn to the construction of the Marketplace at Hollywood Park across the street from Auto Inn. When completed in 2003, the Marketplace at Hollywood Park featured a Home Depot and a Target. Auto Inn returned to profitability and its future looked bright.

In October of 2004, the Agency filed a complaint in condemnation with respect to the property at 3300 West Century Boulevard in furtherance of a redevelopment plan. The Agency was unable to relocate Auto Inn within the redevelopment area. Consequently, Aklilu suffered a total loss of goodwill, which is defined by Code of Civil Procedure, section 1263.510, subdivision (b), as "the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage." ¹

The Agency settled with the Nixes and Aklilu's subtenant who operated a smog inspection shop on the premises. However, the Agency was unable to settle with Aklilu. The Agency's expert took the position Auto Inn had no goodwill at the time of the condemnation because it had never generated excess profits. The Agency offered Aklilu $35,000 for his lost goodwill.

Aklilu's expert, Chris Pedersen, conceded Auto Inn had no goodwill under the excess profit test. However, Pedersen's investigation of Auto Inn revealed it clearly had great potential for increased patronage and profit. Pedersen found the business could have been sold for $410,271, and Pedersen attributed $238,716 of this value to Auto Inn's goodwill. Over the Agency's objection, Pedersen testified that he valued the goodwill based on Aklilu's "cost to create" it. Pedersen found Aklilu reasonably had expended $238,716 to put Auto Inn in the enviable position it enjoyed upon completion of the Marketplace at Hollywood Park.

A jury found Aklilu suffered lost goodwill attributable to the condemnation of the property in the amount of $200,000. The trial court denied Aklilu's motion for litigation expenses (§ 1250.410, subd. (b)) and granted the Agency a set-off against the interest due on the judgment in the amount of the rent Aklilu owed the Agency after the date on which the Agency was entitled to possession of the property (§ 1268.330).

Both sides appealed. The Agency contends the trial court should have excluded Pedersen's testimony on the value of Auto Inn's lost goodwill because the opinion improperly was based on a "cost to create" approach, which no previous case had recognized as an acceptable method of valuing goodwill.

Aklilu contends the trial court erroneously refused to permit Aklilu to litigate the propriety of the resolution of necessity pursuant to which the Agency condemned the property, the trial court abused its discretion in denying his motion for litigation expenses, and the trial court improperly adopted the Agency's proposed final judgment of condemnation.

We conclude a "cost to create" approach is a permissible means by which to value goodwill under section 1263.510 where, as here, a nascent business has not yet experienced excess profits but clearly has goodwill within the meaning of the statute and experiences a total loss of goodwill due to condemnation of the property on which the business is operated. Consequently, the trial court did not err in admitting Pedersen's testimony. In the balance of the opinion, we reject the contentions raised by Aklilu.

In sum, we affirm the judgment and award Aklilu costs on appeal.

FACTS AND PROCEDURAL BACKGROUND

1. The redevelopment plan and the condemnation proceedings.

In 1981, the City of Inglewood (the City) adopted a redevelopment plan for the Century Redevelopment Project, which merged in 1996 with other redevelopment plans operated by the Agency. The real property at 3300 West Century Boulevard (the property) is located in the Merged Century Redevelopment project area. In 1998 the City created the "Village Specific Plan" to revitalize the area previously known as Darby Dixon. The area was blighted and had the highest crime rate in the City.

On June 10, 2003, the city council, sitting as Board of Directors for the Agency, adopted a resolution of necessity authorizing the condemnation of the property. On October 22, 2003, the Agency filed a complaint in eminent domain against the Nixes, Aklilu and Aklilu's subtenant, Ha Nguyen, who operated VN Smog Test Only on the premises. Nguyen cross complained against Aklilu for damages based on Aklilu's asserted failure to disclose to Nguyen the impending condemnation proceedings when Nguyen entered into the sublease with Aklilu.

Prior to trial, the Agency settled with the Nixes in the amount of $665,475 for the real property, plus $34,525 for the improvements. The Agency settled with Nguyen in the amount of $35,000 for lost goodwill. As part of this settlement, Aklilu paid Nguyen $2,000 and Nguyen dismissed his cross-complaint against Aklilu and waived discovery sanctions in the amount of $2,281.60, which the trial court had awarded in favor of Nguyen against Aklilu's attorney.

Prior to trial, Aklilu demanded $355,668 consisting of $239,000 for lost goodwill, $31,095 for improvements to the real property, and $85,573 for "moveable equipment." The Agency offered Aklilu $35,000 for lost goodwill.

2. Trial.

a. Aklilu's testimony.

Aklilu came to this country in 1974, received a degree in automotive technology in 1976 and worked for two different BMW dealerships from 1976 until 1985 when he opened an automotive repair business in Beverly Hills. In 1997, Aklilu leased the property from the Nixes. Aklilu testified the location was excellent and large retailers were interested in the area. Aklilu thought it would take three to five years for the business to become successful. The lease had an option to renew for five years that included a right of first refusal if the Nixes decided to sell. Aklilu was aware the leased property was in a redevelopment area. However, he was led to believe his business would be relocated in the redevelopment area.

Construction of the Marketplace at Hollywood Park, across the street from Auto Inn, caused disruption of Aklilu's business in 1999 through 2002. The Nixes excused some of Aklilu's lease payments because construction resulted in lack of access to the property and air borne debris. Toward the end of 2002, Aklilu exercised the option to renew the lease at a rent of $2,200 per month.

In 2003, a major portion of the Marketplace at Hollywood Park was completed and traffic flow returned to normal. The development included a Home Depot and a Target. Aklilu testified that, as a result of these improvements, "my location became fantastic, which I was waiting, praying for." Auto Inn became profitable in 2003.

b. Aklilu's expert.

Chris Pedersen, a certified business appraiser and a former business broker who has qualified as a business valuation expert approximately 100 times, became involved in this case when Aklilu was close to eviction and was in the process of trying to relocate his business within the project area. Pedersen's investigation revealed Auto Inn was in "as fine a location as I've ever seen for this type of a business." The business had "outstanding exposure to the street, as well as the [destination] shopping centers across the street." Access and parking were excellent and there was no competition from any similar business. A smaller development might include two businesses similar to Aklilu's. Here, there was only one for the entire development.

Pedersen opined the business had a "very, very promising future" with "lease, location, product, no competition, new area.... I don't even think a fluctuation in the economy would have had any impact on it over the next four or five years."

In appraising the value of Auto Inn's goodwill, Pedersen used a "cost to create" approach. Pedersen testified cost frequently is the only provable value for a product or a business. "And that tends to be a minimal value, but it is an identifiable value." When asked about the lack of profits from 1999 through 2002, Pedersen testified the "business is obviously going to do very well and sales and profit had jumped up dramatically when they stopped all the construction. And ... the business obviously is a good concern."

Pedersen appraised Auto Inn's goodwill based on Aklilu's income tax returns for the years 1998 through 2003. Pederson made adjustments to these figures to reflect an owner's annual salary of $24,000, plus a 12 percent return on tangible assets, and concluded Auto Inn had adjusted annual losses of $35,000, $37,000, $49,000, $53,000, $52,000 and $12,000 in the years 1998 through 2003, for a total loss of $238,761. By combining the value of the goodwill and the value of the fixtures and equipment ($171,510), Pedersen opined Auto Inn, which consisted of the location and the lease, including the right of first refusal, had a total value of $410,271. Pedersen testified that, within a matter of days, Auto Inn could have been sold for...