Eminent Domain Case Leads to Key Allowance in Valuation of Intangibles
An eminent domain suit is a peculiar type of action where the condemnor is under a duty and responsibility to pay the defendant landowner the full fair market value of his or her property. In this Mississippi Supreme Court case a city (Gulfport) took over the land of a privately owned public utility (Dedeaux Utility Corp.). “The value of the utility as a going concern is obtained by taking a comprehensive view of each and all of the elements of property, tangible and intangible, and considering them as inseparable parts of the business entity.”
Dedeaux possessed a Certificate of Public Convenience and Necessity ("Certificate") from the Mississippi Public Service Commission to provide certain water and sewer services within a 2.6-square-mile area of Harrison County. There were two opposing experts in the litigation, and the main point of contention was how to treat this intangible.
The parties each disagreed with the trial court’s findings, and rationale, and sought remedy on appeal.
Three things are instructive in the ruling:
1. The court again reinforced the (now unforgivable) error expert witnesses make when they use the “because I said so” rationale for their opinion, without supporting precedent or practice.
2. The court accepted 15 years as reasonable life for the intangible assets (the Certificate) valued in this case, rubber stamped the present value of future cash flow analysis as correct methodology, and accepted the theory for valuation that deemed the tangibles and intangibles as inseparable and therefore allowed all future incomes to be attributable to the intangibles.
“While [Dedeaux expert witness] Elliott admitted that the physical facilities and Certificate collectively produce future income, he chose to attribute the entire present value of future cash flow to the Certificate. The ability to produce income is interdependent upon both, for under the circumstances presented, neither can produce income without the other being in place. Whether the cash flow was attributed by Elliott to one, the other, or collectively both, is of no consequence as long as they are not cumulative.”
3. And the court allowed that taking into account future CIAC (contributions in aid of construction) did not violate the as of date rule normative in valuations. As the expert arguing for inclusion (Elliott) opined, "no prudent businessman would not consider [future CIAC] because that is one of the primary values that you get by right of holding a certificate to provide exclusive service." (The expert's intangible asset valuation included "the probability of future [CIAC] the utility company could reasonably expect to receive . . . from developers building new subdivisions ..." This figure was based upon taking "the average rate of contributions [from 1970 through 1996] and . . . project[ing] that forward into the future 15 years.")