Opinion ID: 2631196
Heading Depth: 3
Heading Rank: 3

Heading: 1990 Rent Proceedings

Text: In January 1990, the Gallands noticed a rent increase of $15 a month for mobilehome owners of double-wide mobilehome coaches, and $9 a month increase for mobilehome owners of single-wide coaches, effective April 1, 1990. The mobilehome owners petitioned for review of the increases, and a hearing on the matter was set for May 18, 1990. The Gallands' submission included current financial figures showing an 8.1 percent return for the Woods in 1989, approximately the same return generated by certificates of deposit at local institutions. They also reiterated that standard accounting principles required the investment be adjusted for inflation in calculating ROI. The mobilehome owners contended that the Gallands' stated expenses were inflated and further claimed that because the Woods's rent was the second highest in the Fresno/Clovis area, the Gallands were receiving more than a fair ROI. On May 8, 1990, 10 days before the scheduled hearing, the Commission asked the Gallands to provide additional information including an auditor's statement supporting the Gallands' reported expenses, further breakdown of a number of the income and expense categories, details regarding the Woods purchase, and copies of the Consumer price shelter index for Pacific cities and the United States cities average categories for 1986 through 1989. The Gallands submitted the requested information. They also objected to a request by the mobilehome owners for further detailed financial and accounting information. The Commission further requested that Chamberlain provide a sworn declaration setting forth details of the park's operation since 1978, including purchase, ownership, and day-to-day operations; daily, monthly, and annual business and accounting practices; the same information as to PMS; and auditing practices and procedures for the Woods, for other parks managed by PMS, and for the Gallands with regard to this investment. The Commission also requested additional information regarding utilities, water and sewer payments, interest income, management fees, lease payments and legal and accounting expenses. The Gallands complied, providing through Chamberlain a detailed 22-page declaration and 18 pages of additional information. On August 2, 1990, the city attorney notified the Gallands that a Commission member had contacted the mobilehome owners' representative and provided him with copies of public records relating to the case. The Commission provided copies of those materials to the Gallands and requested clarification of various matters including the Woods's purchase, and financing and lease payments, as well as Mr. Galland's status as a PMS shareholder. Chamberlain submitted another declaration and supporting documents which explained the purchase/leaseback agreements. In May 1978, the Margaret G. Rose Testamentary Trust had agreed to provide the Gallands with $600,000 to purchase the Woods in exchange for title to the land and a 50 year leaseback. On June 9, 1978, the Gallands purchased the Woods from a third party for $4,158,625 (land, $500,000; improvements, $3,613,625; personal property, $45,000). The Gallands made a $600,000 down payment and the sellers took two notes. On August 1, 1978, the Gallands executed a grant deed to the trust as required by the terms of the May agreement. Margaret G. Rose was Mrs. Galland's mother. She died in 1969 and the trust was created pursuant to her will. Mrs. Galland's father has a life estate in the trust. Income from the trust estate and, if necessary, principal, are used for his benefit. On his death, any remaining assets will be distributed to Mrs. Galland. Mr. Galland was a 50 percent shareholder in PMS from 1978 until 1985 but received no compensation or dividends after he resigned as president in 1980. In 1985, Chamberlain purchased Mr. Galland's shares of stock in PMS. The Commission, minus the member who had contacted the mobilehome owners, heard the matter on August 13, 1990. The Gallands presented evidence supporting the $15 and $9 rent increases. Their current ROI in the Woods (adjusted for inflation) was 8.1 percent, whereas what they claimed to be equally risky investments enjoyed a 20 to 25 percent rate of return. Dr. Nordstrom testified for the mobilehome owners. He reversed his earlier position that the investment need not be adjusted for inflation and claimed that had been his position all along. He now believed the requested rent increase was not justified because the Gallands had misstated their investment in past years. He opined that the purchase/leaseback transaction had resulted in a down payment of zero rather than $600,000. Thus, the Gallands' investment consisted of principal payments on the mortgage only. By his calculations, the Gallands received a 140.63 percent ROI in 1989. Dr. Nordstrom also believed that management fees, lease payments and various extraordinary operating expenses should not be included in operating expenses in calculating cash flow. He further opined that a 14 percent ROI was fair, based in part on a similar average return for cable television franchises which, like mobilehomes, were regulated investments. At the conclusion of the hearing, the Commission approved increases of $7.50 and $4.50, half of the increases requested. The Commission found the Woods was jointly owned by the Gallands and the Rose Trust. Therefore, the lease payments were ROI rather than expenses. In addition, the Commission disallowed attorney and expert fees incurred in the rent review proceedings. With these adjustments, the Gallands' return on the inflation-adjusted investment was 11.8 percent. However, contrary to the opinion of both experts, the Commission concluded, based on common sense, that the ROI calculation should be based on historic investment. Using the unadjusted figures, the approved rent increases yielded a 23.5 percent ROI, which the Commission deemed fair. The Commission's final decision was not issued until January 29, 1992. Both parties appealed. The city council heard the appeals in May 1992, along with the Gallands' appeal of the Commission's decisions on the 1989 rent increase. The city council upheld the decisions of the Commission. The Gallands requested and Clovis granted the Woods rent increases in subsequent years and those proceedings are not before us. In 1993, Clovis amended its mobilehome rent control ordinance to permit automatic, across-the-board annual rent increases tied to the CPI.