Opinion ID: 2347494
Heading Depth: 2
Heading Rank: 2

Heading: Determination of the Just and Reasonable Rate of Return

Text: The determination of the minimum rate of return which is constitutionally permissible is largely one of fact. There are a number of approaches which may be taken in determining the existence of such fair return. Examples may be found in statutes and regulations in this and other states and in the federal government over the years. See, e.g., L. 1953, c. 216, § 16 and L. 1966, c. 168, § 4(e), which fixed criteria for fair net operating income in terms of given ratios of net operating income to gross income of buildings of that class, and other factors. See also British Rent Act of 1968, Sec. 46, supra. We leave to subsequent cases a fuller examination of the advantages and disadvantages of these methods. However, to assist the lower courts in resolution of future cases, we do set forth general guidelines to be followed when evaluating figures which various parties proffer as representative of the just and reasonable or constitutionally minimal rate of return. In determining what is a just and reasonable return, the court must evaluate the interests of the consumer and general public as well as the interests of the landlord. Hutton Park, supra, 68 N.J. at 570 and cases cited therein. It is no objection that rental levels under the ordinance incidentally cause the value of the property to decline. Hutton Park, supra, 68 N.J. at 569; Permian Basin Area Rate Cases, supra, 390 U.S. at 769, 88 S.Ct. at 1361, 20 L.Ed. 2d at 337; FPC v. Hope Natural Gas Co., supra, 320 U.S. at 601, 64 S.Ct. at 287, 88 L.Ed. at 344. Furthermore, rent levels may permissibly work hardships on landlords in atypical cases, may drive inefficient operators out of the market and may preclude persons who have paid inflated purchase prices for buildings from recovering a fair return. Hutton Park, supra, 68 N.J. at 570; Permian Basin Area Rate Cases, supra, 390 U.S. at 769, 88 S.Ct. at 1361, 20 L.Ed. 2d at 337; Hegeman Farms Corp. v. Baldwin, supra, 293 U.S. at 170-71, 55 S.Ct. at 9-10, 79 L.Ed. at 262-63; Covington & Lexington Turnpike Rd. Co. v. Sandford, supra, 164 U.S. at 596-97, 17 S.Ct. at 205-06, 41 L.Ed. at 566-67; N.J. Central Traction Co. v. Bd. of Public Utility Comm'rs, 96 N.J.L. 90 (Sup. Ct. 1921). However, to be just and reasonable a rate of return must be high enough to encourage good management including adequate maintenance of services, to furnish a reward for efficiency, to discourage the flight of capital from the rental housing market, and to enable operators to maintain and support their credit. A just and reasonable return is one which is generally commensurate with returns on investments in other enterprises having corresponding risks. On the other hand it is also one which is not so high as to defeat the purposes of rent control nor permit landlords to demand of tenants more than the fair value of the property and services which are provided. Cf. Permian Basin Area Rate Cases, supra, 390 U.S. at 792, 88 S.Ct. at 1373, 20 L.Ed. 2d at 350; FPC v. Hope Natural Gas Co., supra, 320 U.S. at 603, 64 S.Ct. at 288, 88 L.Ed. at 345; Missouri ex rel. Southwestern Bell Telephone Co. v. Missouri Public Service Comm'n, supra, 262 U.S. at 291, 43 S.Ct. at 547, 67 L.Ed. at 986; Public Service Coordinated Transport v. State, supra, 5 N.J. at 225. The rate need not be as high as existed prior to regulation nor as high as an investor might obtain by placing his capital elsewhere. Hutton Park, supra, 68 N.J. at 569-570; Covington & Lexington Turnpike Rd. Co. v. Sandford, supra, 164 U.S. at 596-98, 17 S.Ct. at 205-06, 41 L.Ed. at 566-67. As noted above, the task of the tribunal is to determine the lowest constitutionally permissible rate. There is no constitutional obstacle to a rent control ordinance which permits a higher rate of return. [10] The duty of the courts is limited to assuring that the ordinance does not oblige the efficient landlord to accept less. Plaintiffs' proofs are almost exclusively concerned with periods prior to the adoption of the rent increase formula at issue in this appeal. This in itself does not render the attack premature. Where expenses and income can be projected forward with reasonable accuracy and the effects upon the rate of return of the regulation computed, property owners need not wait until they have already begun to suffer unjustly depressed returns before seeking judicial relief. The proofs themselves, however, are manifestly insufficient to sustain plaintiffs' heavy burden of proof. Plaintiffs have tendered no evidence with respect to the value of the properties in question. Their evidence of expenses was fragmentary and inadequately documented, and they have made no effort to prove what rate of return would be constitutionally required in the present context. On the record before the Court, plaintiffs' attack on the ordinance as confiscatory as applied must fail.