Source: https://caselaw.findlaw.com/ca-court-of-appeal/1445635.html
Timestamp: 2019-04-18 15:27:19+00:00

Document:
The H.N. & FRANCES C. BERGER FOUNDATION, Plaintiff and Appellant, v. CITY OF ESCONDIDO, et al., Defendants and Respondents.
Ronald R. St. John,Tod V. Beebe, Barton, Klugman & Oetting, Los Angeles, CA, for Plaintiff and Appellant. Linda B. Reich, Donald L. Lincoln, Endeman, Lincoln, Turek & Heater, Jeffrey Epp, City Attorney, Steven J. Nelson, Deputy City Attorney, for Defendants and Respondents.
The H.N. & Frances C. Berger Foundation (Berger), the owner of a mobilehome park in the City of Escondido (the City), appeals a judgment denying its petition for writ of mandate (Code Civ. Proc., § 1094.5) challenging the adequacy of a $31 rent increase 1 authorized by the City of Escondido Mobilehome Rent Review Board (the Board), and dismissing on summary judgment an accompanying complaint for damages on theories of inverse condemnation and violation of a right to constitutional due process under title 42 United States Code section 1983. Berger contends the Board's decision is not supported by substantial evidence, and, specifically, the Board failed to adequately account for inflation as a factor affecting the fair return analysis. We agree the Board's decision lacks evidentiary support. We reverse the judgment insofar as it concerns the court's denial of the petition for writ of mandate, and affirm it in all other respects.
In June 1988 the City's voters approved a mobilehome rent control ordinance (Ordinance; Escondido Mun.Code, § 29-101 et seq.) designating the Escondido City Council as the Board, establishing base rent ceilings at January 1, 1986 levels, and requiring owners to obtain the Board's approval for any rent increase. The Ordinance, which has been the subject of extensive litigation, provides that on application by the owner the Board “shall approve such rent increase as it determines to be just, fair and reasonable.” The Ordinance specifies no method or formula for determining rents, but it enumerates nonexclusive factors the Board shall consider, including changes in the Consumer Price Index (CPI) 2 , comparable rents and capital improvements.3 The Ordinance provides no guidance on how the Board should weigh the factors.
Berger, a charitable foundation, acquired the Town & Country Club Park (the Park) in 1988 by donation. The Park is a “senior park,” in which at least one resident in 80 percent of the spaces must be a minimum of 55 years old.
In February 2002 Berger applied for a rent increase. At the time, the average rent was $360.4 Berger claimed various valuation approaches justify a rent increase of between $65.26 and $140; it sought an increase of $90, or 25 percent.
At the September 2002 administrative hearing the parties presented reports and testimony, which will be discussed more fully in part II, post. The City's principal expert recommended a rent increase of between $38.44 and $56.36. The Board adopted a resolution authorizing a $31 increase.
Dr. Baar calculated that under an MNOI standard, Berger's rent should be increased by $13.87 to cover the $25,464 increase in operating costs between 1998 and 2001. He recommended additional increases of $10.56 for two capital improvements 6 and $2.07 to cover the $3,800 long-form application fee.
The City also retained an appraiser, James Brabant, to address the Ordinance's comparable rents factor. Brabant believed the Park's spaces had an overall rental value of $400, for an increase of $40. In Dr. Baar's report, however, he criticized Brabant's inclusion in his analysis of some spaces not subject to rent control. For instance, when a mobilehome is sold in place, the owner may raise rent for its space without applying to the Board. Dr. Baar found that when such rents were excluded from the study, Berger's rents lagged those of comparable spaces by $25.
The tenants objected to any rent increase, but their representative argued that if the Board granted an increase it should not exceed $25. Several tenants submitted letters of hardship.
The Board rejected Dr. Baar's recommendation of a minimum rent increase of $38.44. It also rejected Brabant's comparable rents analysis of $40. It granted a $31 rent increase by averaging three figures: an increase of $25 based on Dr. Baar's analysis of controlled rents; an increase of $31.67 based on an increase of existing rents by 60 percent of the increase in the CPI; and $38.44 based on an MNOI standard that indexes base year NOI at 40 percent of the increase in the CPI. The Board added these figures, divided the total by three and rounded the result of $31.70 down to the nearest dollar.
We conclude the Board's ruling lacks evidentiary support. Although the Board was not required to employ any specific formula, its averaging method was faulty because there was no showing that two of the figures the Board relied on were within the range of reasonable rents under the fair return criterion. Conceptually, several figures may be averaged to arrive at a new rent only if each of the figures is independently within the range of reasonableness.
Dr. Baar neither recommended a $25 rent increase based on the single factor of comparable rents, nor stated such an increase would satisfy the fair return standard. Rather, he believed a minimum increase of $38.44, under a modified MNOI standard, was required to meet the fair return standard. Dr. Baar's report explains that “[if] a fair return is provided [under an MNOI standard], no additional increase would be justified by the ‘comparable’ rent factor.” (Italics added.) Further, Dr. Baar wrote that the “difference between the result required to permit a fair return ($38.44 ․ ) and the result that would be justified under [Brabant's] comparable [rents] approach ($40.00) is not substantial. In the past comparables have only been considered as a relevant factor if the differences in rents among comparable parks are significant.” Dr. Baar indicated this is not such a case.
At the hearing, Dr. Baar conceded that “[l]iterally reading that term [the comparable rents factor], it would mean any rents that are charged as long as they are not in violation of the law.” Brabant advised the Board his $40 comparable rents figure was based on “what I believe to be all of the lawfully charged rents at comparable parks.” Given the plain language of the Ordinance, we cannot say the voters who approved the rent control scheme intended to exclude non-controlled rents from a comparability study. For comparability, the mobilehome park spaces must be comparable, not the manner in which rents are set.
Likewise, no evidence was presented that a rent increase of $31.67, based on a straight CPI increase at the 60 percent level, would constitute a fair return, taking the effect of inflation into consideration. The mere fact that an expert's report includes consideration of various single factors enumerated in the Ordinance does not show a rent increase based thereon would provide a fair return.
The City points out that “due process only requires a fair return on the mobilehome park as a whole, not a fair return on each discrete aspect of the park,” such as each capital improvement. (Morgan v. City of Chino, supra, 115 Cal.App.4th at p. 1199, 9 Cal.Rptr.3d 784.) The City suggests a $31 increase would provide a fair return even if it does not cover all of its increased operating costs or specific capital improvements. To any extent that is arguably correct, it remains that there was no evidence before the Board to support the use of the $25 and $31.67 figures in deciding the fair return issue. Further, Dr. Baar found that in this instance a fair return would cover increased operating expenses and capital improvements.
Under these circumstances, we must reverse the superior court judgment insofar as it denies Berger's petition for writ of mandate. Berger is entitled to a new hearing for the Board's reconsideration of the matter.
It is not our province to specify what standard the Board should use on remand. For its instruction, however, we address Berger's contention that as a matter of law in an MNOI analysis, to account for inflation the base year NOI must be indexed by no less than 100 percent of the increase in the CPI to avoid unconstitutional confiscation over time. We are unpersuaded by Berger's position.
The Board will reconsider the issue at the new hearing, in light of the fair return standard. It is not, however, required as a matter of law to use 100 percent indexing of NOI in an MNOI approach.
In any event, the summary judgment was proper. “[A] price regulation that causes confiscation may be designated interchangeably as either a taking of property under the Fifth and Fourteenth Amendments of the United States Constitution or a violation of due process.” (Galland v. City of Clovis, supra, 24 Cal.4th at p. 1024, 103 Cal.Rptr.2d 711, 16 P.3d 130.) As the court explained in Kavanau v. Santa Monica Rent Control Bd. (1997) 16 Cal.4th 761, 786, 66 Cal.Rptr.2d 672, 941 P.2d 851, however, when the remedy of future rent adjustments is available as a matter of due process, as here, there can be no taking or other civil rights violation.
We reverse the judgment insofar as the denial of the petition for writ of mandate is concerned, and instruct the superior court to issue a writ directing the Board to vacate its decision and conduct a new hearing consistent with this opinion. In all other respects the judgment is affirmed. The parties are to bear their own costs on appeal.
1. All rent figures discussed are per month per space.
4. This action is the most recent of several actions Berger has brought challenging the Board's rulings on its applications for rent increases. In 1999 this court issued an opinion reversing the denial of Berger's petition for writ of mandate challenging the Board's decision to grant it two particular increases, part of a cumulative $41.39 increase granted over a period of nearly six years. We concluded the Board placed undue emphasis on Berger's acquisition of the Park as a gift and failed to adequately account for inflation as a factor affecting the fair return analysis. (H.N. and Frances C. Berger Foundation v. City of Escondido (Feb. 26, 1999, D029003) [nonpub. opn.].) After remand, the parties reached an agreement raising average rents from $285 to $360.
8. It appears that the $38.59 figure should actually be $39.58.
10. Dr. Baar's report states: “The ‘leveraged’ nature of real estate investments may allow investors to obtain a reasonable return on their investments when rates of indexing are well below 100% of CPI. As a result of the leveraging factor, the return on investment may be a multiple of the rate of increase in the net operating income and value of the property. [¶] ․ [¶] If an investor purchases a mobilehome park for $1,000,000 with a ․ $300,000 ․ downpayment [sic ], a 20% increase in the NOI ․ leads to a 20% ($200,000) increase in the value of the park and, consequently, a $200,000 (67%) increase in the owner's equity.”Berger submits this rationale does not apply to it because it acquired the Park by donation and has no debt. For purposes of determining a fair return, however, a rent control board may impute an investment to a landlord who acquires a park by gift or inheritance, for instance by using the transferor's investment with any necessary adjustments. (Fisher v. City of Berkeley, supra, 37 Cal.3d at p. 685, 209 Cal.Rptr. 682, 693 P.2d 261.) Berger has given no convincing rationale for treating leveraged owners differently from owners privileged to acquire property without incurring any debt.
WE CONCUR: BENKE and IRION, JJ.

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