Relocating A Business
By M. Robert Goldstein & Michael J. Goldstein
Rose v. State of New York, 24 N.Y.2d 50 (1969) effectuated a change in the common law of New York. Whereas, prior to that decision, there was no common law right to be compensated for the costs of relocation, after it, a condemnee was given the right to be paid for the costs of relocating his fixtures, including machinery and other equipment, as part of his compensation in a condemnation proceeding. While it did not include the costs of relocating his non-fixtures, such as stock, there were other statutes which covered some of that gap.
General Municipal Law, Sec. 74 (b) provides that every "Municipal Corporation", except a City of less than one million people, was to pay relocation expenses of not more than $25,000 to commercial condemnees (apparently Public Benefit Corporations were excluded, we assume inadvertently, from the definition of Municipal Corporation, Dormitory Authority of the State of New York v. Security Mutual Insurance Co., 63 A.D.2d 633, 405 N.Y.S.2d 253 (1st Dept. 1978)). The statute also provides that where federal funds are used in the acquisition, the relocation payments are to be in accordance with federal law.
The Uniform Relocation Assistance and Real Property Acquisition Policies Act. of 1970, as amended, 42 U.S.C. 4601 et. seq., provides that, where federal funds are used in real property acquisition, the provisions of that statute must be followed in order to qualify for the grant. In that statute, the only limitation on the amount of relocation assistance is that it be "actual, reasonable and necessary". Accordingly, we find Highway Law, Sec. 30 (10) provides that the New York State Department of Transportation is to establish rules and regulations for relocation assistance, authorizing the payment of "actual reasonable and necessary moving expenses of occupants of property acquired pursuant to this section." We also find the rules and regulations of the Housing and Development Administration, Department of Relocation and Management Services of the City of New York, published on April 19, 1973 and republished on April 26, 1973, adopted pursuant to General Municipal Law, Sec. 74-b and 503 (i) and Sec. 1160-1.0 (now Sec. 26-301) of the Administrative Code of the City of New York providing for the payment of "actual reasonable expenses in moving".
Between the expanded common law right and the various statutes providing from up to $25,000 to an unlimited right to recover relocation expenses in the City of New York and elsewhere where federal funds are used, one would assume condemnees would opt to relocate their fixtures and equipment rather than claim for their value in the condemnation proceeding, if they were going to stay in business. After all, if they chose not to relocate their equipment, but rather reequip new, they have a virtual guarantee they would be out of pocket when they set up their new plants. Since the measure of damages is new cost as of the date of the taking, less actual (not book) depreciation, they know, unless their machinery is new, that they must receive less than for new replacement machinery on that date. They must also pay attorney and appraisal fees and other disbursements of litigation, which will reduce the net proceeds available to them. They also take the risk of litigation, not a light consideration.
Since there often is a delay of several years between the valuation date, the day of taking, and the receipt of most of the money, they must assume they will have to pay higher prices than that upon which values had been fixed in the condemnation proceeding. If to beat this latter problem, they buy replacement machinery as soon as the property is condemned, unless they have large cash resources, and must people do not, they will have to borrow money at substantially higher rates of interest than they will receive, further reducing their net proceeds. While the cost might be reduced by buying used equipment, most such items are not available on the market. It is true with most equipment that, when you want it, you can not find it for sale, and when you want to sell it, there are no customers. That is one reason why machinery and equipment are deemed specialty items.
But aside from availability, the losses in plant production that come from even one faulty used machine make most buyers leery of buying anything but new. Such losses often exceed the supposed saving effected. The machine that is working fine in one plant may be different after it has been disassembled for moving and reassembled again in a new location. Even with their own equipment, this is a problem, but someone else's unknown equipment, for most, is just not worth the risk, even considering a lesser initial cost.
Now they have the problem of financing. Most businessmen do not have the cash resources to pay for a new plant. Mostly, their assets are tied up in the condemned premises between capital equipment, stock and goods in production. They cannot receive their award until their case is disposed of and the time lag often is measured in years. Banks will not lend on the security of a potential award. Financing the machinery being bought by equipment loans only pays for a portion of the cost and at high interest rates in comparison to what they are getting. A business which travels this route can choke and die on the carrying costs of these loans and their lack of cash availability.
Now they have the worry of machinery deliveries. Most condemning authorities want site occupants out fairly rapidly. Certainly, condemnees cannot be assured of any certain, much less lengthy, tenure of the condemned premises. If new equipment is to be purchased, it rarely is in stock, and must be manufactured to order. Delivery times are lengthy and uncertain. There is always the risk that a tenant will be forced out of the site before the delivery of ordered equipment which will cause the shut down of the entire plant. The loses which result may be enough to ruin the business.
Weighed against the above is a variety of problems. The moving of a business and setting it up in a new location, then getting the reassembled machinery and/or equipment to work properly and in synchronization with the entire plant so as to get production going very often involves a substantial period of time. During that time there is little, if any production. Not only does overhead continue, but so must salary of personnel. The owner's time is fully taken up with the move and start up. There is no time for getting business or handling customers.
Meanwhile, for practical purposes, the plant is out of business. Orders are not being taken or filled and customers are being lost. If it is a competitive business and very few are not there will be, because of the shutdown, only the most loyal customers left to resume business with, and they may be a fraction of those the business had before the move. Most customers will give their business elsewhere if you cease to service their accounts and you cannot service it if you are out of production. When finally in production, it will be like a new business, just starting out with few, if any, customers. Of course, any profits that could have been made have been lost and the owner can be thankful if the business has not been lost as well. One may lose money by building a new plant, but at least the business is intact. One may save money by moving the equipment, but you end up with no business.
There are still other worries. Machinery and equipment properly serviced, repaired, renewed and taken care of will continue to work in a plant for an indefinite period of time. Most new models of machinery put out do not change from basic design concepts of older machinery, thus older plants continue to operate as well as new ones and are competitive with them.
But move those machines, especially if they have been operating for some time, they just do not operate right again. It may be many months of trial and error until they do. Some machinery which has been in operation for some time, particularly when it has been exposed to water, steam and/or heat just will not survive disassembly, a move and reassembly, no matter how easy it may appear. Moveover, one just cannot be sure what will happen once you start. Does an owner take the risk of moving and committing to a position based upon this and then find that the machine is no good? What happens to the business if one first has to order new machinery then and it is not available for many months? If essential to the operation, the results may be drastic. In the meanwhile, one has waived the claim for its value in condemnation proceedings by having moved it. (Great A. & P. Tea Co. v. State of N.Y., 22 N.Y.2d 75, 1968). Then there is the problem if the site of the new location is any distance from the old, of retaining trained employees. Without them, until new ones can be trained, production suffers greatly. While said quickly here, it is a major problem.
These are not easy choices under the best of circumstances but, come condemnation, they must be faced, answers found and usually under pressure, with little time to find solutions. And they must be solved, with the risk from a wrong choice being as drastic as the loss of the business.
This is not a problem born out of our imagination. We have been the observer of too many bankruptcies and business failures of apparently healthy companies who relocate their businesses after a condemnation. If we had to pick one absolute essential for a business to survive after a condemnation, it is adequate financing. It can buy time to solve other problems. The next is an assurance that the operation is ready to do business at the new location as soon as the old is closed down. However, as to the latter, even with the best made plans, it is a given that something will go wrong.
We had one printing plant client who not only received a six million dollar settlement but the right to remove all his equipment. It seemed the right solution for the business to survive. In the end, the machinery did not work in the new premises, despite working well in the old, and six millon dollars was not enough to make up for the inevitable losses. Bankruptcy resulted.
Then there was the client, in a business which absolutely required daily deliveries to all of its clients, who built an absolutely new facility supposedly ready to operate the day the old facility closed, with new computers, new telephones, new everything. He even operated the two plants for a short time, shipping out of the old where he could and restocking only the new, operating with two work forces. But who knew the computers would not work properly in the new facility and, for the crucial weeks after the move, when they were totally operating in the new one, found they not only had no inventory control, but could not tell whether orders were being received or deliveries made. On top of it, the new telephone system was out of commission for the first week. They continued to survive, but it was hairy.
Then there was the client with the food processing plant who moved all of his food processing equipment, after first setting up the new plant with all of its infracture installed, ready to receive the equipment being moved. But despite the best organized plan, the move was not smooth and there was a considerable down time when there was no production in the facility. Blessed with adequate financing and in order to maintain his customers, he bought product in the open market from his competitors, supplying them to his customers at a loss until his production was back on line. Despite receipt of relocation payments, the actual costs and uncompensated losses far outstripped what was received from administrative payments.
Then there was the long established oriental rug cleaning and dyeing plant which set up a totally new facility, not willing to take the risk of down time after relocating from the condemned premises. As a huge consumer of water (its operation in some respects being similar to a laundry), it relied on its own well in the old and City water in the new plant. It did not find out, until it started operating in the new plant, that its rug dyeing formulas, while working very well in its old plant, were incompatible with the water at its new location, discoloring the rugs being cleaned and dyed. It was the hard way to find out that all water is not the same. It took many months and a lot of losses until it solved the problem and almost lost its business.
The bottom line is that there are no easy answers in relocating a business. What is needed is careful planning, adequate time to put it into effect, abundant cash resources and a lot of luck.
Reprinted with permission from the October 25, 1995 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.