Goodwill Study Executive Summary

1. Goodwill StudyExecutive Summary State of ConnecticutOffice of Ombudsman for Property Rights Public Act No.07-207, Section 3 Robert S. Poliner, OmbudsmanJanuary 1, 2008

2. Robert S. Poliner, Ombudsman for Property RightsAdvisoryCommittee Members

3. Purpose “The Ombudsman for Property Rights shall study the feasibility of calculating relocation assistance for businesses displaced by eminent domain or condemnation, pursuant to Chapter 132 or 588l of the general statutes, on the basis of any loss or gain in good will associated with the displacement of the business.” Public Act No. 07-207, Section 3(b)

4. Considerations • The possible methods for calculating such loss or gain in good will. • The advantages and disadvantages of basing relocation assistance on any loss or gain in good will associated with relocation of the business. • The experience of other states. • Possible strategies for municipalities to achieve the fiscal capacity necessary to compensate property owners for lost good will associated with displacement of a business. Public Act No. 07-207, Section 3(b)

5. Methodology • A diverse group of business and real estate valuation experts, public agency officials and experienced real estate lawyers were recruited by the Ombudsman to advise him in researching and preparing this report. • Regular public monthly meetings occurred to discuss and analyze information obtained through research of committee members and other interested parties. The public was invited to speak at these meetings. • The Ombudsman condensed the materials into a report containing 11 specific recommendations.

6. Methodology (cont.) • The draft report was circulated among committee members for comment. • The report as submitted is the result of the research, analysis and writing of the Ombudsman and advisory committee members. • The report was submitted to the joint standing committees of the General Assembly relating to the Judiciary and Planning and Development.

7. Good Will or Goodwill • The terms are interchangeably used in case law, statutes and legal treatises. • Connecticut cases discussing business valuations use “goodwill,” as the goodwill of a business. • Both Government Accounting Standards Board (GASB) and Financial Accounting Standards Board (FASB) use the term goodwill.

8. Definition of Goodwill • “Goodwill” consists of the benefits that accrue to a business as a result of its location, positive reputation for dependability, skill, or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage. Uniform Eminent Domain Code § 1016, California Civil Procedure Code § 1263.510(b) and Wyoming General Statutes § 1-26-713(b). (The word “positive” has been added.) • Goodwill of a business is sometimes referred to as “enterprise goodwill.” • Enterprise goodwill is a transferable and saleable asset.

9. Methods of Calculating Goodwill • Standard of Value – Fair Market Value defined as the price at which property would change hands between a willing buyer and willing seller under no compulsion to buy or sell. • Determining goodwill first requires valuing the business. • There are three generally accepted valuation approaches: • Asset-based approach • Earnings-based approach • Market-based approach

10. Methods of Calculating Goodwill (cont.) • There are two generally accepted methodologies for calculating goodwill: • Capitalized Excess Earnings Methods. • Residual Method. • The value in excess of a business’s tangible and identifiable intangible assets is generally considered goodwill.

11. Process of Valuationand Calculation of Goodwill • An independent valuation is performed by a qualified business appraiser. • No one method of valuation is controlling in determining value of a business or goodwill. • The person charged with making an impartial decision as to value arrives at his/her opinion by employing the most appropriate method for determining gain or loss of goodwill.

12. Recommendations Recommendations • Businesses displaced by eminent domain that suffer a loss of goodwill associated with the displacement of the business should be compensated for the loss. • Loss of goodwill should become an eligible category of payment under the Connecticut Uniform Relocation Act for established businesses with at least three years standing prior to the taking of the real property.

13. Recommendations Recommendations 3. The definition of goodwill should be consistent with definitions in the Uniform Eminent Domain Code and statutes of other states (including California). 4. All recognized methods of determining the value of a business and calculating therefrom the loss or gain of goodwill should be allowed in accordance with the highest professional standards of business valuation appraising.

14. Recommendations Recommendations Recommendations 5. Goodwill should be measured for businesses which do not move at the time of initiation of negotiations by the public agency or adoption of the resolution authorizing the plan of development showing the location of proposed development areas, whichever is earlier. 6. Goodwill should be measured for businesses which move no earlier than one and no later than two years from the date of commencement of operations in the replacement location.

15. Recommendations Recommendations Recommendations 7. The cap on allowable search and reestablishment expenses and fixed payments in lieu of moving expenses should be increased. 8. Payment levels based on square footage, number of employees, manufacturing, gross volume of business or net earnings averaged over a period of years should become standards used to determine amounts of actual and reasonable search, reestablishment and in lieu fixed payments made to eligible businesses.

16. Recommendations Recommendations Recommendations 9. A business operating in 10,000 sq. ft. or more or moving to a site that exceeds its current location by a factor of 1.25 but not less than 10,000 sq. ft. and employs 10 or more full and part time employees or is engaged in manufacturing or has a gross volume of business which exceeds $1,000,000 or an average net earnings over the last two years of at least $100,000 should be eligible to receive up to $25,000 in search expenses, $250,000 in reestablishment expenses and $250,000 fixed payments in lieu of moving expenses. (continued)

17. Recommendations Recommendations Recommendations • All other businesses should be eligible to receive up to $10,000 in search expenses and $100,000 in reestablishment expenses and $100,000 in fixed payments. The capped amounts should be indexed to the U.S. Department of Labor, Consumer Price Index and adjusted annually.

18. Recommendations Recommendations Recommendations • Municipalities should rethink the process through which development projects are conceived and carried out minimizing the need for use of eminent domain whenever possible. • Without regard to the stated public purpose or the chapter of Connecticut General Statutes under which property is acquired or condemned, state and local governments should be required to pay for loss of goodwill to a displaced business whenever a property is taken by eminent domain or acquired under a threat of eminent domain.

19. Relocation Assistance - Connecticut Connecticut Uniform Relocation Assistance Act currently allows for: • Payment of actual, reasonable expenses of moving. • Search expenses (capped at $500). • A fixed payment in lieu of actual moving expenses equal to the average net earnings of the business for the last two years not less than $2,500 or greater than $10,000. • No payment for reestablishment expenses. • Actual direct loss of tangible personal property as a result of moving or discontinuing a business. • No payment is provided for loss of goodwill

20. Relocation Assistance - Federal Federal Uniform Relocation and Real Property Assistance Act currently allows for: • Payment of actual, reasonable expenses of moving. • Search expenses (capped at $2,500). • A fixed payment in lieu of actual moving expenses equal to the average net earnings of the business for the last two years not less than $1,000 or greater than $20,000. • Reestablishment expenses (capped at $10,000). • Actual direct loss of tangible personal property as a result of moving or discontinuing a business. • No payment is provided for loss of goodwill.

21. Recommended Changes to Connecticut’s Relocation Assistance Act • Add loss of goodwill as an eligible moving expense for all displaced businesses. • For businesses operating in 10,000 sq. ft. of space and employing 10 or more people or manufacturing or gross volume of business more than 1 million dollars or two year average net income of $100,000. • Actual and reasonable search expenses should be increased to $25,000. • Payment of reestablishment expenses should be instituted and capped at $250,000. • Payment in lieu of actual moving expenses should be increased to $250,000.

22. Recommended Changes to Connecticut’s Relocation Assistance Act (cont.) • All other businesses – search expenses capped at $10,000, reestablishment expenses instituted and capped at $100,000 and fixed payment in lieu of actual moving expenses capped at $100,000. • Repairs and improvements to the replacement site and some increased costs of operation at the replacement site up to two years should be considered eligible as moving expenses. • Caps should be indexed and adjusted annually.

23. Relocation AssistanceOther States Recent Modifications • Maine – Increased reestablishment expenses to $20,000 and fixed payment in lieu of moving expenses to $100,000. • New Hampshire – Increased reestablishment expenses to $100,000. • Maryland – Increased reestablishment expenses and in lieu fixed payment to the greater of $60,000 or the authorized amount under the federal Uniform Relocation Assistance Act. • Wisconsin – In addition to allowable reestablishment expenses $50,000 to owner occupied businesses and $30,000 to tenant occupied businesses. • Ohio – Created a new category of compensation for loss of goodwill up to $10,000.

24. Payment of Loss of Goodwill as Compensation By statute, California and Wyoming allow for recovery of loss of goodwill provided: • The loss is caused by the taking of the property or the injury to the remainder (partial taking); • The loss can not be reasonably prevented by a relocation or by taking steps a prudent person would take to preserve the goodwill; • Compensation for the loss will not be included under the Uniform Relocation Act; and • Compensation will not be duplicated in compensation otherwise awarded to the business owner. • CT does not pay compensation to businesses for loss of goodwill.

25. Other StatesBusiness Damages/Compensation • Florida and Idaho compensate for damage or destruction of a business of more than five years standing in a limited number of situations. • Vermont compensates “business damages resulting from the taking or use of the property.” • Louisiana compensates owners of businesses to “the full extent of loss, including all costs of relocation, inconvenience and any other damages incurred.”

26. Other StatesBusiness Damages/Compensation (cont.) • Minnesota compensates a business owner for destruction of “going concern value” as a direct result of condemnation. • South Dakota recognizes “the good will of a business” as property capable of “appropriation.” • Georgia allows recovery of business losses as “just and adequate compensation.”

27. Small Business • “Small business” is defined under federal relocation regulations as “a business having not more than 500 employees working at the site being acquired.” • 99.7% of Connecticut’s businesses have fewer than 500 employees. • Calculation of gain or loss of goodwill bears no relationship to the public purpose which necessitates the taking of property and forces relocation of a business.

28. Scenarios for Qualificationor Payment for Loss of Goodwill • The business is located in real estate that is the subject of a taking, partial or whole, and as a result of the taking the business is forced to move and moves. • In the case of a partial taking, the business does not move but is negatively impacted. • The business is located in real estate that is subject to taking. The business closes down rather than move. • Same as above, the business closes down but would have relocated to a suitable replacement location if one existed.

29. Period of Time Loss of GoodwillShould Be Measured and Paid • Businesses need money to plan for and make a move. • Businesses that do not move should be able to determine loss of goodwill at the earliest time possible. • If relocation payments are increased, businesses will have more money available at the time of moving. • Gain or loss of goodwill can be determined after the move is made.

30. Strategies • Municipalities should rethink the process through which projects are conceived and carried out. • Municipalities should: • Minimize the use of eminent domain whenever possible. • Seek to relocate businesses within the development area or close by. • Allow property and business owners to participate in redevelopment of their own properties or as investors in the development. • Make municipal land use regulations less restrictive.

31. Strategies (cont.) • Municipalities engaging in eminent domain should: • Anticipate and budget for added costs. • Seek reimbursement from federal and state grants and loans. • Seek additional investment of private capital.

32. Strategies (cont.) • State of Connecticut should consider creation of a tax increment financing program: • For the benefit of “location-dependent businesses.” • For the sole purpose of goodwill development at the replacement location. • Financed through sales and business taxes collected at the replacement location. • Grants would not be considered compensation or relocation assistance for loss of goodwill.