Case Name: EARL W. KAVANAU, Plaintiff and Appellant, v. SANTA MONICA RENT CONTROL BOARD, Defendant and Respondent
Court: Supreme Court of California
Jurisdiction: California
Decision Date: 1997-08-26
Citations: 16 Cal. 4th 761
Docket Number: No. S051847
Parties: EARL W. KAVANAU, Plaintiff and Appellant, v. SANTA MONICA RENT CONTROL BOARD, Defendant and Respondent.
Judges: 
Reporter: California Reports
Volume: 16
Pages: 761–804

Head Matter:
[No. S051847.
Aug. 26, 1997.]
EARL W. KAVANAU, Plaintiff and Appellant, v. SANTA MONICA RENT CONTROL BOARD, Defendant and Respondent.
Counsel
Earl W. Kavanau, in pro. per., for Plaintiff and Appellant.
James S. Burling, R. S. Radford, Paul C. Mileck, Sherman L. Stacey, Kimball & Weiner and George Kimball as Amici Curiae on behalf of Plaintiff and Appellant.
Anthony A. Trendacosta, Ralph H. Goldsen, Doris Ganga, Karl M. Manheim, Hedges & Caldwell, David Pettit and Joan Mack for Defendant and Respondent.
Louise H. Renne, City Attorney (San Francisco), Andrew W. Schwartz, Deputy City Attorney, Richards, Watson & Gershon and Rochelle Browne as Amici Curiae on behalf of Defendant and Respondent.

Opinion:
Opinion
CHIN, J.
In this case, we consider the inverse condemnation claim of Earl W. Kavanau, a property owner who prevailed in a prior action against the Santa Monica Rent Control Board (Rent Board) on the ground that the rent control regulations of the City of Santa Monica (the City) violated his right to due process of law. The Court of Appeal affirmed the trial court's dismissal order, rejecting Kavanau's inverse condemnation claim because he had not lost "all use of his property." We disagree that a property owner must lose all use of his property in order to have a viable inverse condemnation claim. Nevertheless, we conclude Kavanau is not entitled to maintain an inverse condemnation action, because he may obtain a full and adequate remedy for any interim loss flowing from the due process violation through an adjustment of future rents under the rent regulation process. Accordingly, we affirm the judgment of the Court of Appeal.
Factual Allegations and Procedural Background
Kavanau's complaint alleges as follows. In 1988, he purchased a 10-unit apartment building in the City. At that time, the building was already subject to the City's rent control law, which limited rent increases to 12 percent per year regardless of increases in landlord expenses. Between November 1, 1988, and October 31, 1989, Kavanau collected rents totaling $43,444 and spent $33,565 operating and maintaining the property, $82,934 improving the property, and $44,000 servicing debt on the property. On November 30, 1989, Kavanau applied to defendant Rent Board for rent increases on nine of the ten units in his building. The Rent Board's hearing examiner determined Kavanau was entitled to rent increases totaling approximately $35,000 per year, but required Kavanau to impose these increases over the course of eight years so as not to exceed the 12 percent limit in any one year. The hearing examiner approved rent increases for the first year totaling $5,184.
Kavanau appealed the hearing examiner's decision to the Rent Board, which upheld the decision. Kavanau then petitioned the superior court for a writ of administrative mandate, which the court denied. Kavanau appealed, and the Court of Appeal reversed. (Kavanau v. Santa Monica Rent Control Bd. (1993) 19 Cal.App.4th 730, 736 [23 Cal.Rptr.2d 724] (Kavanau I).)
In Kavanau I, the Court of Appeal concluded that the 12 percent limit on rent increases deprived Kavanau of "a just and reasonable return" and therefore was unconstitutional. (Kavanau I, supra, 19 Cal.App.4th at p. 736 & fn. 7.) The Court of Appeal directed the superior court to issue a writ of mandate prohibiting application of the 12 percent limit to his rent increase petition. (Id. at pp. 736-737.) We denied the Rent Board's petition for review. The Rent Board complied with the superior court's mandate.
Kavanau then filed the complaint in this case, seeking damages for temporary application of the 12 percent limit. In his first cause of action, he alleges he "has suffered a 'taking' and 'damaging' of his property rights" within the meaning of article I, section 19 of the California Constitution and the Fifth Amendment of the United States Constitution. He seeks "just compensation" in the form of lost rental income and interest. In his second cause of action, Kavanau alleges a violation of his right to due process of law and seeks damages, including emotional distress damages, under 42 United States Code section 1983 (section 1983).
The Rent Board demurred to Kavanau's complaint, and the superior court sustained the demurrer without leave to amend. Kavanau appealed, and the Court of Appeal affirmed. The Court of Appeal noted that Kavanau had abandoned his cause of action under section 1983. As for the cause of action alleging a taking of his property requiring just compensation under the state and federal Constitutions, the Court of Appeal rejected Kavanau's claim because he never lost "all use of his property." For example, he continued to receive rents and enjoy tax benefits, and he could borrow against the property, hold it for investment, convert it to condominiums, or sell it. One justice dissented, stressing that Kavanau I had already decided the Rent Board had applied its regulations in an unconstitutional manner. Because Kavanau lost substantial rental income as a result of this constitutional breach, the dissenting justice argued Kavanau had suffered a taking of his property and should receive just compensation. We granted review in order to consider whether a taking occurred and what, if any, right to just compensation Kavanau might have.
The City's Rent Control Law
Rent control laws must be "reasonably calculated to . . . provide landlords with a just and reasonable return on their property." (Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 165 [130 Cal.Rptr. 465, 550 P.2d 1001] (Birkenfeld).) In order to satisfy this standard, rent control laws incorporate any of a variety of formulas for calculating rent ceilings. (See Baar, Guidelines for Drafting Rent Control Laws: Lessons of a Decade (1983) 35 Rutgers L.Rev. 723, 781-817 (Guidelines) [discussing various rent control formulas].) "Rent control agencies are not obliged by either the state or federal Constitution to fix rents by application of any particular method or formula." (Carson Mobilehome Park Owners' Assn. v. City of Carson (1983) 35 Cal.3d 184, 191 [197 Cal.Rptr. 284, 672 P.2d 1297] (Carson).) Rather, "selection of an administrative standard by which to set rent ceilings is a task for local governments . . . and not the courts." (Fisher v. City of Berkeley (1984) 37 Cal.3d 644, 681 [209 Cal.Rptr. 682, 693 P.2d 261] (Fisher); cf. Power Comm'n v. Pipeline Co. (1942) 315 U.S. 575, 586 [62 S.Ct. 736, 743, 86 L.Ed. 1037] (Pipeline Co.) ["The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas."].)
The City uses a "maintenance of net operating income" formula for calculating rent ceilings. A typical maintenance of net operating income formula presumes the landlord's net operating income at the time rent control began provided a just and reasonable return. In order to maintain this net operating income at a constant level, the law permits rent increases that will enable the landlord to recoup increases in ongoing operating expenses. (See Guidelines, supra, 35 Rutgers L.Rev. at pp. 809-817.) The landlord may also amortize the costs of capital improvements over the useful life of those improvements and pass those costs through to tenants. (See id. at pp. 817-826.) Of course, if the law holds net operating income constant, inflation will erode the real value of that income. Thus, many maintenance of net operating income formulas permit a periodic inflation adjustment. (See Fisher, supra, 37 Cal.3d at p. 683; cf. Cotati Alliance for Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 289 [195 Cal.Rptr. 825] (Cotati).)
The City's rent control law conforms generally to this model. An April 10, 1979, amendment to the city charter (Charter) created the Rent Board and empowered it "to regulate rentals . so that rents will not be increased unreasonably and so that landlords will receive no more than a fair return." (Charter, § 1800.) Pursuant to this charter amendment (Charter, § 1803(g)), the Rent Board adopted comprehensive regulations (Rent Board Regulations).
The Charter amendment rolled back most residential rents in the City to their level on April 10, 1978. (Charter, § 1804(b); Rent Bd. Regs., reg. Nos. 7000-7001.) This rollback established the base rent for individual rental units in the City. (Charter, § 1804(b).) To accommodate subsequent changes in landlord expenses, the Rent Board has since authorized various general rent adjustments and surcharges. (Charter, § 1805(a), (b); Rent Bd. Regs., reg. Nos. 3000-3106.) In addition, a landlord can petition for an individual rent adjustment in lieu of applicable general adjustments (Charter, § 1805(c); Rent Bd. Regs., reg. Nos. 4100-4114), in which case a hearing examiner receives evidence and prepares a decision, including findings of fact and law (Charter, § 1805(d); Rent Bd. Regs., reg. Nos. 4007-4020). Either party may appeal the hearing examiner's decision to the Rent Board. (Charter, § 1805(d)(10); Rent Bd. Regs., reg. No. 4021.)
The Rent Board Regulations define net operating income as gross income less operating expenses. (Rent Bd. Regs., reg. Nos. 4101(a), 4104.) The Rent Board Regulations also establish a presumption that the net operating income during the 1978 calendar year provided a landlord with a fair return. (Rent Bd. Regs., reg. No. 4102.) A landlord can rebut this presumption by showing that operating expenses during 1978 were unusually high (Rent Bd. Regs., reg. No. 4103A) or that base rent was unusually low (Rent Bd. Regs., reg. No. 4103B). A landlord is entitled not only to maintain 1978 net operating income (Rent Bd. Regs., reg. No. 4102), but also to petition for rent increases that will increase net operating income at a rate equal to 40 percent of any increase in the consumer price index (Rent Bd. Regs., reg. No. 4106).
To establish an erosion of net operating income, and therefore entitlement to a rent increase, a landlord may present evidence of an increase in operating expenses. Under the Rent Board Regulations, operating expenses include capital improvement costs (Rent Bd. Regs., reg. No. 4101(c)(1)(viii)), but the landlord must amortize these costs over their useful life in accordance with an amortization schedule (Rent Bd. Regs., reg. No. 4041(a)-(c)).
At the time Kavanau improved his property, a landlord who had no financing costs could include an imputed interest cost as part of his capital improvement costs. (Former Rent Bd. Regs., reg. No. 4041(d).) Also at that time, a capital improvement rent increase lapsed once the amortization period ended (i.e., once the landlord had recouped all the costs associated with the improvement). (Former Rent Bd. Regs., reg. No. 4041(e).) Under current Rent Board Regulations, a capital improvement rent increase is permanent, allowing the landlord eventually to recoup more than his total cost. (Rent Bd. Regs., reg. No. 4041(c).)
The Rent Board Regulations protect tenants from sudden, large rent increases by delaying rent increases that would otherwise be permissible. At the time the Court of Appeal decided Kavanau I, a landlord could not increase rent more than 12 percent in any 12-month period, except in "extraordinary circumstances" such as an earthquake. (Former Rent Bd. Regs., reg. No. 4107(a), (f).) This 12 percent limit is central to the dispute in this case. Current Rent Board Regulations impose this limit only in the case of tenant hardship. (Rent Bd. Regs., reg. No. 4107(a).)
Discussion
Two independent constitutional protections are at issue in this case. The due process clauses of the state and federal Constitutions guarantee property owners "due process of law" when the state "deprive[s] [them] of . . . property." (Cal. Const., art. I, § 7, 15; U.S. Const., 14th Amend., § 1.) On the other hand, the takings clauses of the state and federal Constitutions guarantee property owners "just compensation" when their property is "taken for public use." (Cal. Const., art. I, § 19; U.S. Const., 5th Amend.) These distinct constitutional protections limit the legislative power of government in different but related ways. The due process protection focuses on the government's means and purpose: whether the government's method rationally furthers legitimate ends. The takings protection focuses on the impact of the government's action: whether the government has in effect appropriated private property for its own use, rather than merely regulating a private use of the property. This conceptual distinction, however, blurs somewhat in cases applying the due process and takings clauses to price regulations, including rent control. In that context, courts sometimes employ overlapping terminology and standards, treating the two clauses as a single constitutional protection of private property rights.
Deprivation of Property Without Due Process of Law
The state and federal Constitutions prohibit government from depriving a person of property without due process of law. (Cal. Const., art. I, § 7, 15; U.S. Const., 14th Amend., § 1.) These provisions guarantee appropriate procedural protections (see, e.g., Goldberg v. Kelly (1970) 397 U.S. 254 [90 S.Ct. 1011, 25 L.Ed.2d 287]) and also place some substantive limitations on legislative measures (see, e.g., Washington v. Glucksberg (1997) _ U.S. _ [117 S.Ct. 2302, _ L.Ed.2d _]; U.S. v. Carolene Products Co. (1938) 304 U.S. 144 [58 S.Ct. 778, 82 L.Ed. 1234]; Nebbia v. New York (1934) 291 U.S. 502 [54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469] (Nebbia)). The latter guaranty—sometimes described as substantive due process—prevents government from enacting legislation that is "arbitrary" or "discriminatory" or lacks "a reasonable relation to a proper legislative purpose." (Nebbia, supra, 291 U.S. at p. 537 [54 S.Ct. at p. 516].)
In the context of price control, which includes rent control, courts generally find that a regulation bears "a reasonable relation to a proper legislative purpose" so long as the law does not deprive investors of a "fair return" and thereby become "confiscatory." (Pipeline Co., supra, 315 U.S. at pp. 584, 585 [62 S.Ct. at pp. 742, 743]; see also Power Comm'n v. Hope Gas Co. (1944) 320 U.S. 591, 602-603 [64 S.Ct. 281, 288, 88 L.Ed. 333] (Hope Gas); 20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216, 292-296 [32 Cal.Rptr.2d 807, 878 P.2d 566] (20th Century); Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 816 [258 Cal.Rptr. 161, 771 P.2d 1247] (Calfarm); Guidelines, supra, 35 Rutgers L.Rev. at pp. 781-817.) Determining prices that will provide a fair return "involves a balancing of the investor and the consumer interests." (Hope Gas, supra, 320 U.S. at p. 603 [64 S.Ct. at p. 288].) "It is the product of expert judgment which carries a presumption of validity." (Id. at p. 602 [64 S.Ct. at p. 288].) A reviewing court focuses on whether the regulatory agency took relevant investor interests into account. (Permian Basin Area Rate Cases (1968) 390 U.S. 747, 770 [88 S.Ct. 1344, 1361-1362, 20 L.Ed.2d 312] (Permian Basin); Pipeline Co., supra, 315 U.S. at p. 586 [62 S.Ct. at p. 743].) One of these investor interests is a "return . . . commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to . . . attract capital." (Hope Gas, supra, 320 U.S. at p. 603 [64 S.Ct. at p. 288].) Though due process protections generally focus on method, not result, in the context of price regulation "it is the result reached not the method employed which is controlling. [Citations.] It is not theory but the impact of the [price regulation] which counts." (Id. at p. 602 [64 S.Ct. at pp. 287-288].) In sum, when considering whether a price regulation violates due process, a "court must determine whether the [regulation] may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection for the relevant public interests, both existing and foreseeable." (Permian Basin, supra, 390 U.S. at p. 792 [88 S.Ct. at p. 1373].)
We applied these due process standards to rent control laws in Fisher, supra, 37 Cal.3d 644, Carson, supra, 35 Cal.3d 184, and Birkenfeld, supra, 17 Cal.3d 129. Though the state and federal Constitutions do not mandate a particular administrative formula for measuring fair return (Fisher, supra, 37 Cal.3d at p. 681), we did note certain characteristics that would weigh in favor of a finding of constitutionality. For example, due to the effects of inflation, the law "may not indefinitely freeze the dollar amount of . . . profits without eventually causing confiscatory results." (Id. at p. 683, original italics.) In addition, when a rent control law establishes a "base rent" by reference to rents on a specified date, the law should permit adjustments of that base rent for those rental units that had artificially low rents at that time. (Birkenfeld, supra, 17 Cal.3d at p. 168.) Similarly, the law should permit individualized rent adjustments in appropriate cases even if the base rent was not artificially low (Fisher, supra, 37 Cal.3d at pp. 689-690), and the procedural mechanism by which landlords may obtain any of these adjustments must not be prohibitively burdensome (Birkenfeld, supra, 17 Cal.3d at pp. 169-171; see also Fisher, supra, 37 Cal.3d at p. 690). Among other things, this process may not entail "a substantially greater incidence and degree of delay than is practically necessary." (Birkenfeld, supra, 17 Cal.3d at p. 169; see also Fisher, supra, 37 Cal.3d at p. 687.) In this regard, we recommended that the law permit "general rental adjustments for all or any class of rental units based on generally applicable factors." (Birkenfeld, supra, 17 Cal.3d at p. 171; see also Fisher, supra, 37 Cal.3d at p. 687; but see Carson, supra, 35 Cal.3d at p. 194.) We also indicated rent control laws should (1) allow landlords to petition for rent adjustments without having to prove building code compliance, (2) allow the governing agency to consolidate petitions for rental units in the same building, and (3) allow the governing agency to delegate hearings on petitions to hearing officers. (Birkenfeld, supra, 17 Cal.3d at pp. 170-171; see also Fisher, supra, 37 Cal.3d at pp. 690-691.) All these characteristics would serve to reduce delay and make the petition process less burdensome to landlords, but we did not hold the state or federal Constitution required any of them per se.
Of course, the fair return principle is not limited to the property as it was when the landlord purchased it. A landlord is also entitled to a fair return on necessary capital improvements. (Sierra Lake Reserve v. City of Rocklin (9th Cir. 1991) 938 F.2d 951, 958, vacated in part (1993) 987 F.2d 662; see also Guaranty Nat. Ins. Co. v. Gates (9th Cir. 1990) 916 F.2d 508, 515.) For example, if a landlord retrofits an older building in order to comply with new building code requirements, the capital improvements may be the larger part of the building's value. In that case, if fair return did not take those capital improvements into consideration, it would be an empty promise. As the high court noted in Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 310 [109 S.Ct. 609, 617, 102 L.Ed.2d 646] (Duquesne), "fair rate of return" depends on "the amount of capital upon which the investors are entitled to earn that return." (See also Hope Gas, supra, 320 U.S. at p. 603 [64 S.Ct. at p. 288] ["return . . . should be sufficient . to attract capital"].) Thus, a rent control law that merely allows a landlord to recoup the bare cost of a necessary capital improvement runs the risk of being confiscatory and thereby violating the landlord's right to due process of law.
Taking of Property Without Just Compensation
The state and federal Constitutions prohibit government from taking private property for public use without just compensation. (Cal. Const., art. I, § 19; U.S. Const., 5th Amend.; Chicago, Burlington &c. R'd v. Chicago (1897) 166 U.S. 226, 239 [17 S.Ct. 581, 585-586, 41 L.Ed. 979] [applying the federal takings clause to the states].) In Penna. Coal Co. v. Mahon (1922) 260 U.S. 393, 415 [43 S.Ct. 158, 160, 67 L.Ed. 322, 28 A.L.R. 1321] (Penna. Coal), the United States Supreme Court recognized that a regulation of property that "goes too far" may effect a taking of that property, though its title remains in private hands. In such a case, the property owner may bring an inverse condemnation action, and if it prevails, the regulatory agency must either withdraw the regulation or pay just compensation. (First Lutheran Church v. Los Angeles County (1987) 482 U.S. 304, 317, 321 [107 S.Ct. 2378, 2389, 96 L.Ed.2d 250].) Even if the agency withdraws the regulation, the property owner may have a right to just compensation for the temporary taking while the regulation was in effect. (Id. at p. 321 [107 S.Ct. at p. 2389] [finding this right "where the government's activities have . . . worked a taking of all use of property"].)
The United States Supreme Court has struggled to articulate a standard for when a regulation "goes too far" and effects a taking. The court has stated broadly that the takings clause is "designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole." (Armstrong v. United States (1960) 364 U.S. 40, 49 [80 S.Ct. 1563, 1569, 4 L.Ed.2d 1554].) Nevertheless, the court has concluded that the inquiry in any particular case is "essentially ad hoc" (Penn Central Transp. Co. v. New York City (1978) 438 U.S. 104, 124 [98 S.Ct. 2646, 2659, 57 L.Ed.2d 631] (Penn Central)) and "a question of degree [that] *. . . cannot be disposed of by general propositions" (Penna. Coal, supra, 260 U.S. at p. 416 [43 S.Ct. at p. 160]). The court has, however, identified "two discrete categories of regulatory action" that constitute a taking. (Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003, 1015 [112 S.Ct. 2886, 2893, 120 L.Ed.2d 798] (Lucas).) Thus, the court has held that a permanent physical invasion of property, no matter how slight, effects a taking requiring compensation. (Loretto v. Teleprompter Manhattan CATV Corp. (1982) 458 U.S. 419, 421 [102 S.Ct. 3164, 3168, 73 L.Ed.2d 868].) Similarly, the court has held that a regulation that deprives a property owner of "all economically beneficial or productive use of land" effects a taking requiring just compensation. (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]; Agins v. Tiburon (1980) 447 U.S. 255, 260 [100 S.Ct. 2138, 2141, 65 L.Ed.2d 106].)
A regulation, however, may effect a taking though, as is true here, it does not involve a physical invasion and leaves the property owner some economically beneficial use of his property. In Lucas, the high court expressly rejected the "assumption that the landowner whose deprivation is one step short of complete is not entitled to compensation." (Lucas, supra, 505 U.S. at p. 1019, fn. 8 [112 S.Ct. at p. 2895].) "Such an owner" merely lost "the benefit of [the court's] categorical formulation." (Ibid.; see also Nollan v. California Coastal Comm'n (1987) 483 U.S. 825, 831 [107 S.Ct. 3141, 3145-3146, 97 L.Ed.2d 677] (Nollan).) Of course, we held in Agins v. City of Tiburon (1979) 24 Cal.3d 266, 277 [157 Cal.Rptr. 372, 598 P.2d 25], "that a zoning ordinance may be unconstitutional . . . only when its effect is to deprive the landowner of substantially all reasonable use of his property." (See also Fisher, supra, 37 Cal.3d at p. 686 [paraphrasing and citing Agins v. City of Tiburon).) But the regulation at issue in Agins v. City of Tiburon left the plaintiffs a substantial use of their five-acre property, including building as many as five single-family homes on it. In order to uphold the regulation, we did not need to limit the protections of the takings clause to total deprivations of "substantially all reasonable use" of property, because the case before us did not even approach a total deprivation. Thus, our holding was dictum. Moreover, Lucas makes clear we misinterpreted the federal Constitution, and nothing in our opinion in Agins v. City of Tiburon suggests we were interpreting the state takings clause more narrowly than the federal clause. Finally, even if we did intend to interpret the state right more narrowly than the federal right, the federal Constitution would nevertheless apply here to protect Kavanau.
When a regulation does not result in a physical invasion and does not deprive the property owner of all economic use of the property, a reviewing court must evaluate the regulation in light of the "factors" the high court discussed in Penn Central and subsequent cases. Penn Central emphasized three factors in particular: (1) "[t]he economic impact of the regulation on the claimant"; (2) "the extent to which the regulation has interfered with distinct investment-backed expectations"; and (3) "the character of the governmental action." (Penn Central, supra, 438 U.S. at p. 124 [98 S.Ct. at p. 2659]; MacDonald, Sommer & Frates v. Yolo County (1986) 477 U.S. 340, 349 [106 S.Ct. 2561, 2566, 91 L.Ed.2d 285]; Kaiser Aetna v. United States (1979) 444 U.S. 164, 175 [100 S.Ct. 383, 390, 62 L.Ed.2d 332].) Subsequent cases, as well as a close reading of Penn Central, indicate other relevant factors: (1) whether the regulation "interfere[s] with interests that [are] sufficiently bound up with the reasonable expectations of the claimant to constitute 'property' for Fifth Amendment purposes" (Penn Central, supra, 438 U.S. at p. 125 [98 S.Ct. at p. 2656]); (2) whether the regulation affects the existing or traditional use of the property and thus interferes with the property owner's "primary expectation" (id. at pp. 125, 136 [98 S.Ct. at pp. 2659, 2665]); (3) "the nature of the State's interest in the regulation" (Keystone Bituminous Coal Assn. v. DeBenedictis (1987) 480 U.S. 470, 488 [107 S.Ct. 1232, 1243, 94 L.Ed.2d 472] (Keystone); see also Mugler v. Kansas (1887) 123 U.S. 623, 668-669 [8 S.Ct. 273, 300-301, 31 L.Ed. 205]) and, particularly, whether the regulation is "reasonably necessary to the effectuation of a substantial public purpose" (Penn Central, supra, 438 U.S. at p. 127 [98 S.Ct. at p. 2660]); (4) whether the property owner's holding is limited to the specific interest the regulation abrogates or is broader (id. at pp. 127-128 [98 S.Ct. at p. 2661]); (5) whether the government is acquiring "resources to permit or facilitate uniquely public functions," such as government's "entrepreneurial operations" (id. at pp. 128, 135 [98 S.Ct. at pp. 266, 2665]); (6) whether the regulation "permit[s the property owner] . to profit [and]... to obtain a 'reasonable return' on . . . investment" (id. at p. 136 [98 S.Ct. at p. 2665]); (7) whether the regulation provides the property owner benefits or rights that "mitigate whatever financial burdens the law has imposed" (id. at p. 137 [98 S.Ct. at p. 2666]; Keystone, supra, 480 U.S. at p. 491 [107 S.Ct. at p. 1245]; Agins v. Tiburon, supra, 447 U.S. at p. 262 [100 S.Ct. at p. 2142]); (8) whether the regulation "prevents] the best use of [the] land" (Agins v. Tiburon, supra, 447 U.S. at p. 262); (9) whether the regulation "extinguishes] a fundamental attribute of ownership" (ibid.; and (10) whether the government is demanding the property as a condition for the granting of a permit (Dolan v. City of Tigard (1994) 512 U.S. 374, 385 [114 S.Ct. 2309, 2316, 129 L.Ed.2d 304] (Dolan); Nollan, supra, 483 U.S. at pp. 831, 841 [107 S.Ct. at pp. 3150-3151]).
This list is not a comprehensive enumeration of all the factors that might be relevant to a takings claim, and we do not propose a single analytical method for these claims. Rather, we simply note factors the high court has found relevant in particular cases. Thus, instead of applying these factors mechanically, checking them off as it proceeds, a court should apply them as appropriate to the facts of the case it is considering. Recent Supreme Court decisions suggest a two-part analysis that considers the economic effects of the regulation and the government's purpose. (Yee v. Escondido (1992) 503 U.S. 519, 523 [112 S.Ct. 1522, 1526, 118 L.Ed.2d 153]; Keystone, supra, 480 U.S. at pp. 484-485 [107 S.Ct. at p. 1241].) With respect to the latter consideration, the high court has declared that a regulation of property "effects a taking if [it] does not substantially advance legitimate state interests." (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141]; see also Dolan, supra, 512 U.S. at p. 385 [114 S.Ct. at p. 2316]; Lucas, supra, 505 U.S. at p. 1016 [112 S.Ct. at p. 2894]; Nollan, supra, 483 U.S. at p. 834 [107 S.Ct. at p. 3147]; Keystone, supra, 480 U.S. at p. 485 [107 S.Ct. at pp. 1241-1242]; United States v. Riverside Bayview Homes, Inc. (1985) 474 U.S. 121, 126 [106 S.Ct. 455, 458-459, 88 L.Ed.2d 419].) But, outside the context of permit condition cases such as Nollan and Dolan, the court has not clarified how it would apply this standard, and, in particular, the extent to which it would apply the standard in the same way as the similarly worded due process standard. (Cf. Nollan, supra, 483 U.S. at p. 834, fn. 3 [107 S.Ct. at p. 3147] [stating that the standards are "quite different"]; Dolan, supra, 512 U.S. at p. 391 [114 S.Ct. at p. 2319] [articulating a " 'rough proportionality' " standard for permit condition cases].)
Penn Central, supra, 438 U.S. 104, of course did not involve a price regulation. In the context of price regulation, the high court has sometimes employed an analysis under the takings clause similar to that which it employs under the due process clause, focusing on the regulation's impact and investors' ability to earn a fair return. In Duquesne, for example, an electric utility argued that electricity rates constituted a taking because the rate-setting agency did not include certain costs in the rate base. (Duquesne, supra, 488 U.S. at p. 305 [109 S.Ct. at p. 614].) Though the court was addressing a takings issue, it did not cite Penn Central. Instead, it cited due process cases, including Permian Basin, supra, 390 U.S. 747, Hope Gas, supra, 320 U.S. 591, and Pipeline Co., supra, 315 U.S. 575, and applied a "fair return" analysis similar to the analysis it had traditionally applied in due process cases. (Duquesne, supra, 488 U.S. at pp. 307-310 [109 S.Ct. at pp. 615-617]; see also FCC v. Florida Power Corp. (1987) 480 U.S. 245, 250-254 [107 S.Ct. 1107, 1111-1113, 94 L.Ed.2d 282] (Florida Power) [also applying what appears to be a due process analysis when reviewing a price regulation under the takings clause]; 20th Century, supra, 8 Cal.4th at pp. 292-296 [same]; Cotati, supra, 148 Cal.App.3d at p. 293 [a breach of the due process clause in the context of rent control "might well violate" the takings clause]; 2 Rotunda & Nowak, Treatise on Constitutional Law (2d ed. 1992) § 15.12, p. 505, fn. 59 ["Early Supreme Court opinions concerning utility rate regulation were written in terms of 'due process of law', but those opinions are now understood as establishing principles identical to those inherent in the takings clause . . . ."]; Brauneis, "The Foundation of Our 'Regulatory Takings' Jurisprudence": The Myth and Meaning of Justice Holmes's Opinion in Pennsylvania Coal Co. v. Mahon (1996) 106 Yale L.J. 613, 672, fn. 270 ["More recently, the Court has once again seemed to graft what was originally a due process test of governmental authority onto the Takings Clause . . . ."]; but see Yee v. Escondido, supra, 503 U.S. at p. 529 [112 S.Ct. at p. 1529] [suggesting that traditional takings clause jurisprudence applies to rent regulations]; Pennell v. San Jose (1988) 485 U.S. 1, 8-14 [108 S.Ct. 849, 855-859, 99 L.Ed.2d 1] [treating the takings clause and the due process clause separately when deciding a constitutional challenge to a rent control law].)
Court of Appeal Decision in Kavanau I
In Kavanau I, the Court of Appeal determined that the Rent Board's application of its 12 percent limit to Kavanau's petition for rent increases was unconstitutional. Though the court did not state whether it found a violation of Kavanau's due process rights or a taking without just compensation, the court applied a due process analysis and relied on our decisions in Calfarm, supra, 48 Cal.3d 805, Fisher, supra, 37 Cal.3d 644, and Birkenfeld, supra, 17 Cal.3d 129, which were all due process cases. (Kavanau I, supra, 19 Cal.App.4th at pp. 734-735.) Thus, we conclude the court did not find a taking.
We question some of the Court of Appeal's reasoning in Kavanau I. For example, that court implied that the state and federal Constitutions require application of the "fair return on investment" formula for setting rent ceilings. (Kavanau I, supra, 19 Cal.App.4th at pp. 733, 735; for a discussion of the fair return on investment formula, see Guidelines, supra, 35 Rutgers L.Rev. at pp. 790-796.) Though we have used the phrase "just and reasonable return" (Birkenfeld, supra, 17 Cal.3d at p. 165), we have never held that either the state or federal Constitution requires application of the fair return on investment formula or any other specific formula. (Fisher, supra, 37 Cal.3d at p. 681 [rejecting argument that Constitution requires application of the circular "fair return on market value" formula]; Carson, supra, 35 Cal.3d at p. 191.)
In addition, rather than amortizing the costs of Kavanau's capital improvements over their useful life, the Court of Appeal apparently treated those costs in the same way as ongoing operating or maintenance costs. (Kavanau I, supra, 19 Cal.App.4th at p. 736, fn. 7.) The court also apparently included as capital improvement costs certain expenditures the Rent Board had found unnecessary. (Ibid.) As a result, the court determined that Kavanau incurred a large deficit.
Moreover, the Court of Appeal assumed the City's maintenance of net operating income formula without the 12 percent limit established the minimum "fair return" under the state and federal Constitutions. (Kavanau I, supra, 19 Cal.App.4th at p. 733.) Based on this assumption, the Court of Appeal concluded the 12 percent limit put Kavanau's return below the constitutional minimum. But the court did not explain why the 12 percent limit could not be one aspect of a comprehensive scheme that as a whole provided landlords a fair return. (Cf. Pennell v. San Jose, supra, 485 U.S. at pp. 13-14 [108 S.Ct. at p. 858].) "The economic judgments required in rate proceedings are often hopelessly complex . The Constitution is not designed to arbitrate these economic niceties." (Duquesne, supra, 488 U.S. at p. 314 [109 S.Ct. at p. 619].) Thus, courts do not "examine[] piecemeal" the "subsidiary aspects of [a state agency's] ratemaking methodology" (id. at p. 313 [109 S.Ct. at p. 618]), and flexibility in one part of a regulatory scheme may offset restrictiveness in another (id. at p. 314 [109 S.Ct. at p. 619]). We see no reason why a reasonable annual limit on rent increases cannot be consistent with a fair return.
Furthermore, the City could have prohibited certain capital improvements altogether, perhaps as a way of keeping a stock of housing available for low income residents. Thus, the City could at its option permit those capital improvements, but encourage landlords to limit their magnitude by prohibiting rent increases in excess of 12 percent per year regardless of the improvements' cost. (Cf. Nollan, supra, 483 U.S. at pp. 836-837 [107 S.Ct. at p. 3148].)
Finally, the essential inquiry in due process cases involving price controls is whether the regulatory scheme's result is just and reasonable. (Hope Gas, supra, 320 U.S. at p. 602 [64 S.Ct. at pp. 287-288].) The Court of Appeal did not expressly find that the 12 percent limit prevented Kavanau from " 'operating successfully.' " (20th Century, supra, 8 Cal.4th at p. 295.) Rather, the 12 percent limit merely delayed Kavanau's rent increase. Regulated prices must fall within a "broad zone of reasonableness" to be constitutional (Permian Basin, supra, 390 U.S. at p. 770 [88 S.Ct. at p. 1361]; see also Pipeline Co., supra, 315 U.S. at p. 585 [62 S.Ct. at pp. 742-743]), and due process requires fundamentally a balancing of interests (Hope Gas, supra, 320 U.S. at p. 603 [64 S.Ct. at p. 288]). The 12 percent limit achieved this balance. It balanced landlords' interests in recouping their increased costs against tenants' interests in avoiding sudden, large rent increases. Of course, in certain circumstances—such as during times of very high inflation—a 12 percent limit on rent increases might be confiscatory, but the Court of Appeal did not adequately explain why application of the 12 percent limit to Kavanau's petition for rent increases violated his constitutional rights.
Thus we have serious doubts about the Court of Appeal's reasoning in Kavanau I. Nevertheless, the Court of Appeal's judgment in that case is final and precludes relitigation of certain issues in this proceeding. (See, e.g., Perez v. City of San Bruno (1980) 27 Cal.3d 875, 883 [168 Cal.Rptr. 114, 616 P.2d 1287].) For example, we must accept as true for purposes of this proceeding that application of the Rent Board's 12 percent limit on rent increases violated Kavanau's right to due process of law. Of course, Kavanau obtained a remedy in the form of a writ of mandate, but he also seeks damages.
Kavanau's Present Claim for Damages
In Hensler v. City of Glendale (1994) 8 Cal.4th 1, 14 [32 Cal.Rptr.2d 244, 876 P.2d 1043], we held that, if a property owner brings a timely action to set aside or void a regulation, he may but need not join a claim for damages. Instead, he may bring a damages claim separately after successfully challenging the regulation. (Id. at pp. 7, 26.) Thus, in Hensler we identified an exception to the general rule against splitting claims. (See also Healing v. California Coastal Com. (1994) 22 Cal.App.4th 1158, 1170 [27 Cal.Rptr.2d 758]; Mata v. City of Los Angeles (1993) 20 Cal.App.4th 141, 149 [24 Cal.Rptr.2d 314]; Patrick Media Group, Inc. v. California Coastal Com. (1992) 9 Cal.App.4th 592, 607 [11 Cal.Rptr.2d 824]; Gallagher v. Frye (9th Cir. 1980) 631 F.2d 127, 130.) In accordance with Hensler, Kavanau brought his present claim for damages, alleging two causes of action.
In his second cause of action, Kavanau sought damages based on the violation of his right to due process. The state and federal due process clauses, unlike the takings clauses, make no express reference to damages, but Kavanau alleged a "deprivation of . . . rights, privileges, or immunities secured by the Constitution," entitling him to damages under section 1983. We need not determine whether section 1983 would allow Kavanau to recoup damages under the facts of this case, because he abandoned his section 1983 cause of action, choosing instead "[t]o focus attention on what [he] believes to be the important constitutional questions involved . . . [in] his first cause of action for inverse condemnation . . . ." The Court of Appeal expressly noted that Kavanau had abandoned the section 1983 cause of action, and he did not petition for rehearing. Accordingly, the only cause of action before us is Kavanau's first cause of action alleging a taking and seeking just compensation. (See Cal. Rules of Court, rule 29(b).)
Kavanau's allegations, if true, are not sufficient to establish a taking, and therefore the trial court was correct to sustain the Rent Board's demurrer. This case does not fall within either of the "two discrete categories of regulatory action" that constitute a taking. (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]; Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141].) Rent control does not generally constitute a physical invasion of property (Yee v. Escondido, supra, 503 U.S. 519), and we agree with the Court of Appeal that Kavanau did not lose "all economically beneficial or productive use of' his property (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]).
Nor do the factors the high court articulated in Penn Central and subsequent cases indicate a taking in this case. The "economic impact" (Penn Central, supra, 438 U.S. at p. 124 [98 S.Ct. at p. 2659]) on Kavanau of the 12 percent limit, which in effect merely delayed his rent increase, was not significant when compared to the benefits he continued to receive from his property, including significant rental income (id. at p. 130 [98 S.Ct. at p. 2662] [rejecting assertion that a reviewing court should consider the property interest that a regulation affects in isolation from unaffected property interests]). Similarly, the "interfere[nce] with [Kavanau's] distinct investment-backed expectations" (id. at p. 124 [98 S.Ct. at p. 2659]) was minor, considering he had constructive knowledge of the 12 percent limit when he chose to improve his property. Finally, the "character of the governmental action" (ibid.) does not compel us to find a taking.
This case does not involve a regulation that "prohibited a beneficial use to which [Kavanau's building] had previously been devoted" (Penn Central, supra, 438 U.S. at p. 125 [98 S.Ct. at p. 2660]), thus interfering with Kavanau's "primary expectation" (id. at p. 136 [98 S.Ct. at p. 2665]). Rather, the 12 percent limit affected Kavanau largely because he changed the use of his building by making costly capital improvements. Nor did the 12 percent limit abrogate Kavanau's entire property holding, as might occur when someone owns only mineral rights and a land-use regulation prohibits mining those minerals. (Penna. Coal, supra, 260 U.S. at pp. 412-416 [43 S.Ct. at pp. 159-160]; Penn Central, supra, 438 U.S. at pp. 127-128 [98 S.Ct. at p. 2661].) Furthermore, by imposing the 12 percent limit, the Rent Board was not acquiring "resources to permit or facilitate uniquely public functions" such as government's "entrepreneurial operations." (Penn Central, supra, 438 U.S. at pp. 128, 135 [98 S.Ct. at pp. 2661, 2665].) Nor did the 12 percent limit "prevent the best use" of Kavanau's building or "extinguish a fundamental attribute of ownership." (Agins v. Tiburon, supra, 447 U.S. at p. 262 [100 S.Ct. at p. 2142].) In addition, the Rent Board did not impose the 12 percent limit as a condition for granting a permit. (Dolan, supra, 512 U.S. at p. 385 [114 S.Ct. at p. 2316]; Nollan, supra, 483 U.S. at pp. 831, 841 [107 S.Ct. at pp. 3145-3146, 3150-3151].) Finally, the Rent Board has a "legitimate . . . interest[]" in easing the burden on tenants of sudden, large rent increases, and the 12 percent limit "substantially advance[d]" that interest. (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141]; see also Penn Central, supra, 438 U.S. at p. 127 (98 S.Ct. at pp. 2660-2661]; Keystone, supra, 480 U.S. at p. 488 [107 S.Ct. at p. 1243].) Thus, the factors that have proved relevant in other takings cases do not indicate a taking in this case.
But Kavanau emphasizes the Court of Appeal's finding in Kavanau I that application of the 12 percent limit deprived him of a fair return and thus violated his right to due process. We must, of course, accept that finding as true for purposes of this proceeding. Put simply, Kavanau argues that, because he lost rental income as a direct result of the Rent Board's unconstitutional application of its 12 percent limit, he has suffered a taking requiring just compensation. Thus, Kavanau asks us to consider whether a rent regulation that violates a particular property owner's right to due process by depriving him of a fair return also necessarily constitutes a taking.
As noted, the United States Supreme Court has declared that a regulation of property "effects a taking if [it] does not substantially advance legitimate state interests." (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141].) The similarity of this takings standard to the due process requirement that a regulation "have a reasonable relation to a proper legislative purpose" (Nebbia, supra, 291 U.S. at p. 537 [54 S.Ct. at p. 516]) supports Kavanau's argument that a due process violation in this context constitutes a taking. In fact, when the high court first articulated this takings standard, it cited Nectow v. Cambridge (1928) 277 U.S. 183, 188 [48 S.Ct. 447, 448, 72 L.Ed. 842], a due process case. (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141].) Kavanau's argument might also find some support in cases such as Duquesne, supra, 488 U.S. 299, Florida Power, supra, 480 U.S. 245, and 20th Century, supra, 8 Cal.4th 216, which apply standards under the takings clause similar to those that apply under the due process clause.
On the other hand, the Rent Board stresses the distinct functions of the due process clause and the takings clause. The Rent Board argues that the due process protection focuses on method. It requires that a regulation not be arbitrary or capricious and that the regulator agency give due consideration to conflicting interests. The takings protection focuses on result. According to the Rent Board, a taking occurs only in cases of " 'deep financial hardship' " (20th Century, supra, 8 Cal.4th at p. 258) or when a regulation deprives a property owner of nearly all use of the property (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]). The Rent Board asserts we should no more treat a due process violation affecting property as a taking than we would treat an equal protection or free speech violation affecting property as a taking.
In this case, we need not decide whether a rent regulation that violates a particular property owner's right to due process also constitutes a taking, because, assuming it otherwise might, we hold that a remedy for the due process violation, if available and adequate, obviates a finding of a taking. In a variety of contexts, the Supreme Court has recognized that the benefits a property owner receives in conjunction with a regulation may offset the burdens and thus satisfy the takings clause. (Penn Central, supra, 438 U.S. at p. 137 [98 S.Ct. at p. 2666]; see generally, Kendall & Ryan, "Paying" for the Change: Using Eminent Domain to Secure Exactions and Sidestep Nollan and Dolan (1995) 81 Va. L.Rev. 1801, 1837-1842; Costonis, "Fair" Compensation and the Accommodation Power: Antidotes for the Taking Impasse in Land Use Controversies (1975) 75 Colum. L.Rev. 1021, 1039-1042.) Thus, in Penna. Coal, Justice Holmes noted the "average reciprocity of advantage" that often characterizes regulations and justifies them for purposes of the takings clause. (Penna. Coal, supra, 260 U.S. at p. 415 [43 S.Ct. at p. 160].) More explicitly, the court has long held that the special benefits conferred on a property owner's remaining property as a direct result of a taking may constitute just compensation. (Bauman v. Ross (1897) 167 U.S. 548 [17 S.Ct. 966, 42 L.Ed. 270].) Bauman involved the taking of private property to build a highway in the District of Columbia. The court stated: "The Constitution of the United States contains no express prohibition against considering benefits in estimating the just compensation to be paid for private property taken for the public use; and . no such prohibition can be implied . . . ." (Id. at p. 584 [17 S.Ct. at p. 980].) Similarly, a government agency may "mitigate . . . [the] financial burdens" of a land-use regulation, and thus avoid a takings clause violation, by transferring development rights to the property owner's other parcels. (Penn Central, supra, 438 U.S. at p. 137 [98 S.Ct. at p. 2666]; see also MacDonald, Sommer & Frates v. Yolo County, supra, 477 U.S. at p. 350 [106 L.Ed.2d at pp. 2566-2567]; cf. Suitum v. Tahoe Regional Planning Agency (1997) _ U.S. _, _ [117 S.Ct. 1659, 1662, 137 L.Ed.2d 980] [not deciding whether the sale value of transferable development rights is relevant to the existence of a taking or only to the adequacy of the compensation].) (9c) Consistent with the reasoning of these cases, when a due process violation is the sole basis of an asserted taking, a remedy for the due process violation, if available and adequate, is a valuable benefit that satisfies the takings clause. (Cf. Williamson Planning Comm'n v. Hamilton Bank (1985) 473 U.S. 172, 194-197 [105 S.Ct. 3108, 3120-3121, 87 L.Ed.2d 126] [state law inverse condemnation remedy may be adequate compensation for purposes of takings clause]; Ruckelshaus v. Monsanto Co. (1984) 467 U.S. 986, 1019 [104 S.Ct. 2862, 2881, 81 L.Ed.2d 815] [Tucker Act remedy may be adequate compensation for purposes of takings clause]; Regional Rail Reorganization Act Cases (1974) 419 U.S. 102, 136, 150, 155-156 [95 S.Ct. 335, 355, 362, 364-365, 42 L.Ed.2d 320] [same].)
Under the due process clause, future rent ceilings must enable Kavanau to earn a fair return that will "maintain financial integrity, attract necessary capital, and fairly compensate [him] for the risks [he has] assumed." (Permian Basin, supra, 390 U.S. at p. 792 [88 S.Ct. at p. 1373].) Among other things, this standard requires the Rent Board to consider, when setting rent ceilings, Kavanau's costs, which include certain costs associated with rent control. (Civ. Code, § 1947.15 [stating circumstances in which rent control agencies must consider the cost to a landlord of professional services associated with rent control].) We think one of the costs associated with rent control that the Rent Board must consider is the cost to Kavanau of any confiscatory rent ceilings the Rent Board previously imposed on the apartments in question. (Cf. Communications Satellite Corp. v. F. C. C. (D.C. Cir. 1977) 611 F.2d 883, 894 & fn. 19 [198 App.D.C. 60] [past deficiency "may not be capitalized into the rate base for future years" unless "rates . . . have for some time been under strictures set by an administrative agency" and the deficiency is the result of agency "miscalculation"].) Thus, irrespective of whether section 1983 would have afforded Kavanau a remedy for the due process violation, his continuing right to an adjustment of future rents can provide an adequate remedy.
An adjustment of future rents that takes into consideration past confiscatory rents is the converse of the refund that producers in price-regulated industries may have to pay if, during litigation over price levels, they charge prices that a court later determines to be excessive. (See, e.g., Trans Alaska Pipeline Rate Cases (1978) 436 U.S. 631, 655 [98 S.Ct. 2053, 2066-2067, 56 L.Ed.2d 591].) Moreover, this remedy, as opposed to an award of damages against the Rent Board, places the cost of compensating Kavanau roughly on those tenants who benefited from unconstitutionally low rents. (Cf. State of California v. Levi Strauss & Co. (1986) 41 Cal.3d 460, 472-473 [224 Cal.Rptr. 605, 715 P.2d 564] [antitrust class action applying "fluid recovery" whereby fund roughly benefits those who suffered damages]; Blue Chip Stamps v. Superior Court (1976) 18 Cal.3d 381, 388, fn. 1 [134 Cal.Rptr. 393, 556 P.2d 755] (conc. opn. of Tobriner, J.) [price reduction as remedy for overcharges].) We note in this regard that if any of Kavanau's tenants has vacated an apartment, then state law may have authorized Kavanau to set the rent for his new tenants at a level that enabled him, or will enable him, to recoup past losses. (Civ. Code, § 1954.50-1954.53.) In that case, he would not be entitled to an additional rent adjustment. Thus, in practice, future rent adjustments are likely to affect only those tenants who have not moved and who benefited from unconstitutionally low rents.
Finally, the remedy of future rent adjustments avoids putting a reviewing court in the position of declaring the appropriate regulated rent ceiling for a particular apartment in order to measure damages. (Cf. United States v. Western Pac. R. Co. (1956) 352 U.S. 59, 63-64 [77 S.Ct. 161, 165, 1 L.Ed.2d 126] [deferring to the "primary jurisdiction" of an administrative agency "whenever enforcement of the claim requires the resolution of issues which . . . have been placed within the special competence of an administrative body"].) Setting rent ceilings is essentially a legislative task, and agencies, not courts, choose which administrative formula to apply. (Fisher, supra, 37 Cal.3d at p. 681.) The state and federal Constitutions require only a fair process that reasonably takes into consideration the landlord's interests, and a landlord's return need only fall within a "broad zone of reasonableness." (Permian Basin, supra, 390 U.S. at p. 770 [88 S.Ct. at p. 1361]). Accordingly, courts are in no position to determine the appropriate rent ceiling for an apartment as a means of assessing damages. We strongly resist any rule that would impose on a reviewing court the impossible task of finding somewhere in the penumbra of the Constitution a stipulation that a particular apartment in a particular building should rent for $746 per month rather than $745.
Here, the City's rent control scheme is sufficiently flexible to permit the Rent Board to consider past confiscatory rent ceilings when evaluating a landlord's petition for a rent increase. (Charter, § 1805(e).) Kavanau, of course, is not necessarily entitled to rent increases equal to the exact amount by which his past rents fell below some imagined constitutional minimum. Rather, he is merely entitled to future rent ceilings that will "maintain financial integrity, attract necessary capital, and fairly compensate [him] for the risks [he has] assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable." (Permian Basin, supra, 390 U.S. at p. 792 [88 S.Ct. at p. 1373].) But, in measuring the future rent ceiling for a particular apartment, the Rent Board must take into consideration the effect on Kavanau, if any, of the temporary enforcement of its confiscatory regulation with respect to that apartment. In this regard, we note Kavanau's actual loss in this case may be small or nonexistent. For example, the Rent Board arguably could have satisfied the Kavanau I mandate by waiving the 12 percent limit, but imposing a higher limit, under some other regulatory provision, that adequately accommodated Kavanau's interest in a fair return. If, in response to Kavanau I, the Rent Board allowed Kavanau to increase rent in accordance with its maintenance of net operating income formula, but without any annual limit, it may already have enabled Kavanau to recoup his losses. In addition, the 12 percent limit was not confiscatory to the extent market conditions would have prevented Kavanau from increasing rent more than 12 percent even if the Rent Board had not enforced the limit.
Kavanau asserts he would have to double his rents in order to recoup his losses within a reasonable period of time. He points out that he operates in a competitive environment, and he argues that future rent adjustments are an inadequate remedy because they will price his apartments above market levels and leave him with an empty building. If Kavanau's assertion is true, then those same market forces might well have prevented Kavanau from increasing his rents regardless of the 12 percent limit. The Constitution does not protect investors from the risks inherent in the marketplace. In addition, Kavanau does not persuade us that his losses, if any, are so great as to prevent him from recouping them through future rent adjustments. In fact, Kavanau conceded at oral argument that his rents remained well below free market levels even with the full increase he sought. Moreover, if a landlord acts promptly to challenge a confiscatory regulation, and seeks a stay of that regulation during litigation, his losses, and thus any future rent adjustments, are likely to be relatively small. A landlord who unnecessarily permits large losses to accumulate cannot complain if the market prevents him from recouping those losses. Finally, we do not here decide what alternative remedy might be appropriate if a landlord can establish that the remedy of future rent adjustments is for some reason unavailable. But before Kavanau can allege the unavailability of future rent adjustments, he must petition for those adjustments, the Rent Board must determine, subject to judicial review, their appropriate amount, and he must attempt to impose them.
Just as a reviewing court averages the effects of subsidiary aspects of a price-setting scheme by looking at "net effect" (Duquesne, supra, 488 U.S. at p. 314 [109 S.Ct. at p. 619]), a reviewing court can also average the effects of a price-setting scheme over time. Thus, a fair return over the course of several years will offset a confiscatory return during a particular year. Recognizing that Kavanau has a continuing right under the due process clause to future rent adjustments that will enable him to earn a fair return, we believe he has not suffered a taking. Put another way, the ongoing process of setting rent ceilings dispels the due process violation, which in this case is the sole basis for a potential takings clause violation. (Cf. Mountain Water v. Mont. Dept. of Public Serv. Reg. (9th Cir. 1990) 919 F.2d 593, 601 [no violation of Constitution because water utility "may seek just compensation for its property taken through [future] rate setting"].) Accordingly, we agree with the trial court and the Court of Appeal that Kavanau has not stated a viable inverse condemnation claim.
Conclusion
Kavanau I determined that application of the Rent Board's 12 percent limit on rent increases violated Kavanau's right to due process. The remedy of future rent adjustments available to Kavanau under the due process clause precludes a finding of a taking in this case. Accordingly, we affirm the judgment of the Court of Appeal.
George, C. J., Mosk, J., Kennard, J., and Werdegar, J., concurred.