Court Opinion

ID: 9718732
Source: CourtListenerOpinion
Date Created: 2023-08-26 07:32:11.770293+00
Date Added: 2024-06-11T18:24:02.058831
License: Public Domain

KLINE, P. J.
I respectfully dissent.
The majority’s conclusion—that a property owner participating in the rehabilitation assistance program (RAP) may pass on to tenants monthly loan payments entirely unrelated to rehabilitation of the program—undermines one of the major purposes of the RAP program. This unfortunate conclusion results from a misreading of the Marks-Foran Act and the RAP ordinance, from undeserved deference to the administrative agency and from policy considerations that are unsupported in the record and highly speculative.
1.
The ultimate interpretation of a statute or ordinance is an exercise of judicial power and it is the responsibility of the courts to declare its true meaning even where, as is not genuinely here the case, it requires rejection of an earlier administrative interpretation.1 (City of Santa Ana v. City of Garden Grove (1979) 100 Cal.App.3d 521, 530 [160 Cal.Rptr. 907]: see also Cal. Drive-in Restaurant Assn. v. Clark (1943) 22 Cal.2d 287, 294 [140 P.2d 657, 147 A.L.R. 1028].)
The phrase “monthly loan payment” as it appears in the RAP ordinance is in my view ambiguous. Nothing in the ordinance itself explains or, indeed, limits the phrase. Certainly some limitation is required, however, otherwise all a RAP borrower’s personal credit expenses, such as the repayment of an automobile loan, could be passed through to tenants—an unreasonable result by any measure. By limiting the phrase “monthly loan payments” to “loan payments to finance rehabilitation” the promissory note clarifies the ambiguity in a manner perfectly consistent with the purposes of both the RAP ordinance and the Marks-Foran Act.
*1350The RAP ordinance, like the Marks-Foran Act and its predecessor, the federally funded federally assisted code enforcement (FACE) program, seeks to achieve the dual purposes of arresting and preventing decay in low and moderate income urban residential areas while maintaining the character of those neighborhoods. In order to avoid the flight of low and moderate income tenants that invariably accompanies gentrification, both the state statute and the local ordinance protect tenants against precipitous rent hikes.
For example, the Marks-Foran Act specifically provides that as a condition of making certain RAP loans, and “in order to prevent precipitous increases in rent,” a local agency may require that the borrower agree not to raise rents beyond that necessary to yield a fair return and permit proper maintenance. (Health & Saf. Code, § 37922.5, subd. (a).) The local agency is also empowered to actually limit the amount of rehabilitation work if that proposed by the owner of residential property would engender “precipitous rent increases which may cause displacement.” (Id., § 37922.5, subd. (b).)
Such sensitivity to the needs of low and moderate income tenants is similarly apparent in numerous provisions of the RAP ordinance. For example, section 32.1, which declares the purpose of the ordinance, provides that “It shall be the policy of RAP to maintain the existing diversity of San Francisco’s neighborhoods, to encourage the existence of low and moderate income housing, and to preserve the residential character of designated areas...” (See also § 32.41, subd. (c), regarding the selection of areas for RAP designation; § 32.53, subd. (c), regarding consideration of the effect on rents and speculation prior to approving refinancing; § 32.69, concerning tenant moving costs and right of first refusal in case of temporary displacement; § 32.73, pertaining to rent increase limitations for RAP areas; § 32.74, establishing rent increase protest procedures; § 32.75, providing sanctions for violation of rent increase limitations; § 32.75-1, setting forth procedures and safeguards in eviction proceedings; and § 32.90, regarding relocation assistance for displaced tenants.) The RAP note itself clearly states that “This loan is made ... for the purpose of achieving the objectives of neighborhood preservation, preservation of low and moderate income housing, and other objectives as are more particularly set forth in these public laws.”
My colleagues find the authority for the pass-through to tenants of all preexisting debt in section 37922.5 of the Health and Safety Code, which is set forth in material part in the margin below.2 According to the majority, *1351this section of the Marks-Foran Act is “crucially significant” because it demonstrates a legislative intent to authorize a local agency to limit only those precipitous rent increases engendered by the RAP loan and deprive it of the ability to limit all other precipitous increases in rent. This interpretation of the statute is much too far a reach.
First of all, as is readily apparent, section 37922.5 more closely resembles a rent control statute than any other provision of the Marks-Foran Act. Since this section of the act does not provide a context in which one would expect to find a major constraint on the ability of the local agency to limit a precipitous rent increase of any sort, it seems reasonable to think that if the Legislature did have that intention it would have included a clear proviso to that effect. There is no such caveat in the statute. Although it acknowledges the obvious fact that RAP loans may engender precipitous increases in rent, section 37922.5 does not make the ability of the local agency to limit rent increases at all depend upon the nature of the debt the landlond attempts to pass-through to tenants; indeed, section 37922.5 does not speak in terms of pass-throughs at all. Regardless of the basis upon which the borrower endeavors to justify a rent increase, the statute simply empowers the local agency to require the borrower to “contract during the term of the loan not to raise the rental amount over an amount which the agency by regulation establishes will yield a fair rate of return for similar investments and will allow for increases that are reasonably necessary to provide and continue proper maintenance of the property.” (Health & Saf. Code, § 37922.5, subd. (a).)3 It is simply unreasonable to discern in this grant of authority a legislative intent to bar the local agency from prohibiting the pass-through to tenants of loans unrelated to rehabilitation. Such a putative intent seems to me not consistent with but inimical to the central idea embodied in section 37922.5: that the local agency possesses the power to limit steep increases in rent.
The permissive pass-through of all debt secured by the property means that the amount of rent a tenant will be required to pay will depend heavily on the financing arrangements of the owner of the property. This practice will inevitably result in the manipulation of rents by real estate speculators *1352and their lenders, who are now provided another reason to heavily leverage the acquisition of rental units in certain areas of the city designated under the RAP program. For such investors the attraction of the RAP program is not that it permits them to finance necessary repairs that could not otherwise be made, as they demonstrably have the ability to obtain commercial loans for that purpose. The value of the RAP program for them is that it provides a loophole in the rent control ordinance. By participating in the RAP program they are free to precipitously raise rents to whatever level is necessary to shift to their tenants the burden of repaying as much debt as their property will secure, regardless of the purpose for which the borrowed funds were obtained or used. To permit this to be done on the basis of section 37922.5—which, as indicated, was intended to authorize the limitation, not the facilitation, of rent increases—seems to me a cruel irony.
The assumption that a fair rate of return cannot be received unless the borrower is permitted to pass-through to tenants all debt secured by the property is not only impossible to reconcile with pertinent case law4 and with the numerous provisions of the Marks-Foran Act and the RAP ordinance designed to protect tenants, and inconsistent with the very clear language of the promissory note, but as a practical matter is wholly unnecessary to protect landlords. Notwithstanding its rent limitation provisions, the RAP program contains significant incentives for owner participation. First and foremost, the program provides lower than market rate loans to bring property into compliance with mandatory housing code requirements. For some property owners (though obviously not for appellants) the RAP program offers the only source of funds for this purpose. In Board of Supervisors v. Dolan, supra, 45 Cal.App.3d 237, the city advised this court, and we noted, that “as a practical matter, some of the neighborhoods which have been FACE areas or which will be RAP areas have been unofficially “red lined’ by lending institutions, and even if funds have been available, they have been available either for shorter than usual periods or for higher than usual interest rates.” (Id., at p. 244, fn. 8.)
Although the base rent date of 1973 requires property owners who subsequently obtained RAP loans to roll back rents to those existing in 1973, *1353generous cost-of-living adjustments cushion the impact to property owners to a substantial degree. Thus, for example, appellants were initially allowed an 82.7 percent cost-of-living increase over 1973 rent levels , in addition to actual increased maintenance, insurance, and tax costs, and the cost of the RAP loan. If such expenses and the cost-of-living increase, as is likely, additional adjustments will periodically be allowed. It is true that the RAP borrower is subject to “vacancy control” during the term of the RAP loan; that is, the rents could not be increased solely due to the change of tenants. Nevertheless, borrowers may in effect “buy out” of the RAP program rent limitations by prepaying the RAP loan without penalty. (§ 32.62.) Finally, if 1973 base rents were unreasonably low, or nonexistent, RAP rule 7.19, paragraph 2(A) allows the owner to “petition the Director to establish a base rent or to review the base.”
For the foregoing reasons, limiting pass-throughs to “loan payments to finance rehabilitation,” as prescribed in the promissory note, would not eliminate the incentive for property owners to participate in the program or otherwise obstruct its goals.
The interpretation urged by the city and endorsed by the majority— which allows landlords to pass-through any debt secured by the property— is far more difficult to reconcile with the purposes of the RAP program. The real estate department would allow rent increases to cover monthly payments on loans incurred not only for the purpose of acquiring property, but to finance a college education for the owners’ children, a gambling trip to Reno, or any other interests or investments of the borrower. The sole inquiry the department thinks necessary is whether the loan was secured by the property. The authorization of rent increases for these purposes, which for properties such as the one involved in this case would otherwise be barred by the rent control ordinance,5 will induce wealthy property owners to participate in the RAP program who do not really need its benefits. This will defeat the goals of the program by diverting and depleting the limited public funds available to improve deteriorating urban housing.
Permitting pass-throughs to tenants of any debt secured by the property is also hard to square with language in the RAP ordinance which alerts those who administer the program to “the need to prevent speculators from profiting from the use of residential rehabilitation financing.” (§ 32.53.) Judicial acceptance of the city’s permissive practice converts the RAP program into a highly attractive device for increasing rents and accelerating the *1354departure from gentrified areas of the low and moderate income tenants the program was conceived in large part to protect. In effect, the majority permit rents to be set by the very speculators against whom tenants were supposed to be protected.
2.
The linchpin of the majority opinion is its deference to the “administrative interpretation” of the RAP ordinance by the real estate department and the claimed acquiescence in that “interpretation” by the board of supervisors. The majority suggests that the department’s loan officers consistently explained to prospective borrowers that all preexisting debt service could be passed through, not just RAP payments or other rehabilitation-related payments, and the department always allowed such pass-throughs. Therefore, the majority concludes, borrowers “obviously” must have relied on such pass-throughs. (Maj. opn., p. 1343.)
This view of the facts is not supported by the record. There is no evidence loan officers told borrowers all debt service could be passed through to tenants; nor is there evidence that any borrower relied on such advice.
John Rathsam was the only loan officer to testify in any of the proceedings below. Nowhere in his testimony does Mr. Rathsam ever say he affirmatively told any borrower, let alone all prospective borrowers, that it was permissible to pass-through debt service on loans unrelated to rehabilitation. All Mr. Rathsam stated in this regard was that he never told a borrower it was impermissible to do so. In other words, since the witness never states whether any borrower ever inquired about the matter, the only inference that can safely be drawn from the record is that Mr. Rathsam never gratuitously advised a borrower that the pass-throughs in question were permissible; and we cannot be certain that he ever gave this advice to a single borrower.
The majority states that appellant Richard Klein was told by loan officer Soo Hoo, who did not himself testify, “that the costs of the purchase money mortgage could be passed along to tenants as “ ‘monthly loan payments.’ ” (Maj. opn., p. 1340.) Mr. Klein’s actual testimony, though self-serving, is by no means so clear. When asked whether Mr. Soo Hoo or anyone else from the department told him that all loan increases could be passed through into the RAP program, Mr. Klein responded “I sat with Mr. Soo Hoo for some time and he explained to me the program in some depth and I think just the way Mr. Rathsam described it to you.” When pressed further by his counsel as to whether Mr. Soo Hoo actually stated that permissive pass-throughs *1355were the policy of the RAP program, Klein replied that “I—I certainly had the impression that this had been the on-going program in terms of what he presented. He’s a very competent man.”
Though the record does not establish that borrowers were invariably induced to believe they could pass-through nonrehabilitation loans, it does establish that the department never considered this legal question.
When asked when he found out about the language of the note, Rathsam, who appears to have been the most experienced loan officer, replied that “To be honest with you it was brought out embarrassingly enough by some attorney checking over, I think in the Dodson case. We went on an assumption that they [i.e., the terms of the ordinance and those of the note] were one and the same all these years. I admit to that. Once that was turned over to the City Attorney’s office I never bothered to sit down and read the terms of the promissory note. I might have even overlooked the words.” In short, it was not until the Dodson cases were filed in 1983—nearly a decade after the RAP program was first established in San Francisco, and one year after appellants became participants in the program—that representatives of the real estate department realized that the terms of the promissory note which they provided restricted pass-throughs to “loan payments to finance rehabilitation.”
It deserves to be emphasized at this point that the language in question was not obscure either in its meaning or its placement in the two-page promissory note. At the top of the note in boldface type appeared the following warning: “Notice to Borrower: This Document Contains Provisions for a Variable Interest Rate, FOR RENT INCREASE LIMITATIONS, for Tenant’s Right of First Refusal to Reoccupy, for Open Housing and for Equal Employment Opportunity in Employment of Contractors and Subcontractors.” (Italics added.) Thus, even if it be assumed for the sake of argument that a borrower was told that all pass-throughs were permitted, and that he or she relied on that representation, the reasonableness of such reliance seems highly questionable in light of the unambiguous language to the contrary contained in the note and highlighted. It is pertinent, in this regard, that appellants, like most RAP borrowers, were owners of multiunit residential properties who cannot be assumed to be unsophisticated. (Cf. Easton v. Strassburger (1984) 152 Cal.App.3d 90, 102, fn. 8 [199 Cal.Rptr. 383, 46 A.L.R.4th 521].) They knew or should have known the legally binding nature of a promissory note, and they read or should have read the document they signed; it works no injustice to hold them to its clear conditions, as required by the ordinance.
*1356Though the record leaves considerable doubt whether RAP borrowers were told that all debt could be passed through to tenants and relied on such information, it leaves no doubt borrowers were provided the opposite advice, for the real estate department provided the promissory note to all borrowers and required them to sign it. The fact that the loan officers who provided the note did not read it does not mean those who signed and were bound by the document failed to so or should be excused from that fundamental responsibility. The RAP ordinance specifically provides that as a condition of participating in the program, a borrower “shall agree to all conditions of the loan agreement____” (§ 32.60, subd. (a).) The real estate department failed to enforce the condition at issue in this case, and therefore failed as well to enforce the RAP ordinance, due to its ignorance of the fact that the condition existed. In countenancing this failure of enforcement the majority does not have even that weak excuse.
There is no basis in the record of this case to conclude that the board of supervisors acquiesced in the pass-through to tenants of nonrehabilitation loans. The issue was never raised in any public forum until the Dodson cases were filed. There is no reason to presume that before then the board knew the department’s practice or had reason to believe it differed from that prescribed in the promissory note prepared by the city attorney.
While it is true that the superior court’s opinion in the Dodson cases is not precedent binding upon us, the failure of the city to appeal that decision certainly indicates that, in the event they were at all aware of the issue, responsible city officials understood that the court’s order would apply to all RAP loans, such as the one before us, that were outstanding at the time the Dodson cases were decided. The fact that the board of supervisors amended the RAP ordinance on several occasions after the decision in the Dodson cases without explicitly authorizing permissive pass-throughs certainly does not indicate acquiescence in that policy.
The principle that the construction of a statute by an administrative agency charged with its administration is ordinarily entitled to great weight and should be respected by the courts is improperly invoked in this case for several reasons. Chief among them, however, is that there never was an “administrative interpretation” to which great weight can be attached. In reality, the so-called “administrative interpretation” to which my colleagues pay homage is nothing more than a post hoc rationalization fashioned by the city attorney as legal argument to justify the incompetence of embarrassed loan officers in the department of real estate. My colleagues’ deference to this argument perverts the principle of statutory construction they purport to rely upon; for it results in the shielding from close judicial *1357scrutiny of an administrative practice that was carried out in ignorance rather than as the result of any considered contemporaneous construction of the ordinance and the implementing note.
3.
The majority claims “that many or most of RAP’s potential borrowers would have been driven away, as a practical matter, had they been told that existing debt service could not be passed through.” (Maj. opn., p. 1347.) In effect acknowledging that there is no support for this statement in the record, the majority concocts an elaborate hypothetical situation to ostensibly prove its point. The critical assumptions upon which it is based are so manifestly unwarranted, however, as to reveal the weakness of the case the hypothetical purports to make.
The hypothetical posits a 1973 base rent of $100 which, even with periodic adjustments, is assertedly too low to permit the servicing of the debt incurred to acquire the property. Preliminarily, such a predicament is uncommon, because responsible real estate investors ordinarily do not acquire properties that do not generate a cash flow adequate to support the purchase money mortgage, particularly in a city like San Francisco with a rent control ordinance that prohibits the pass-through of such debt. (Rules & Regs., S.F. Residential Rent Stabilization Bd., § 6.10.)6In any event, given the problem of a base rent that is unreasonably low, the property owner’s recourse is to seek to have it revised. As already indicated, the RAP rules provide that “if the owner believes that the rent charged on the base rent date was unreasonably low” he or she may petition to have the base rent increased. (RAP rule 7.19, ¶ 2(A).) The rules indicate such upward revision should be allowed if the base rent was materially lower than that charged for comparable units within the same building or in the immediate neighborhood or “any special or unusual circumstances affect[ed] the rent charged on the base rent date.” (Ibid.) In other words, the RAP program *1358includes an administrative procedure for addressing the problem conjured by the majority.7
The majority’s hypothetical is artificial for yet another reason. The majority assumes a 1973 base rent of $100, and that the new owner’s actual monthly costs include $150 for the mortgage payment and $100 or more in “insurance, maintenance, taxes and other costs.” (Maj. opn., p. 1348.) The majority further assumes that the total upward adjustment in rent that would be allowed for “increases in property taxes, insurance, maintenance, etc. plus cost-of-living ... since 1973” is $100. (Maj. opn., p. 1348.) This latter assumption grossly understates the magnitude of the generous adjustments that have actually been allowed under the RAP program. As earlier noted, for example, two years after they acquired the property, appellants were allowed an 82.7 percent increase over the base rent just to reflect the increase in the cost of living, leaving aside additional increases allowed as adjustments for increased taxes, insurance, maintenance and other costs, including the cost of the RAP loan, and leaving aside subsequent adjustments allowed for any further increases in such expenses and in the cost of living.
In short, the majority’s hypothetical case is a chimera. The extent to which it distorts reality is dramatized by the fact that in 1982 appellants increased respondent Anderson’s rent by 70 percent over the amount charged the previous year. If appellants had not been participating in the RAP program the maximum increase they would have been allowed under the rent control ordinance, which would then apply, was 7 percent.
The hypothesis contrived by the majority is unjustified not only because it ignores the generous adjustments that cushion the impact on landlords of the RAP rent limitation provisions, and the fact that the RAP program is far more magnanimous to appellants than the rent control ordinance that would otherwise apply, but because there is absolutely no evidence of which this court may properly take notice that the inability of property owners to pass-through all preexisting debt secured by the property would have “driven away” any potential borrowers. To the extent the record contains any evidence bearing upon the economic impact of pass-through policy it suggests that the permissive policy that has been in effect has been used by *1359property owners to improperly exploit tenants; i.e., that some property owners are participating in the RAP program not because they are otherwise unable to rehabilitate their property but because they are otherwise unable to increase their rents. As the majority points out, “[t]he [Dodson] cases evidently involved property owners who refinanced their property to the hilt just before taking out a RAP loan, planning to take advantage of the pass-through and perhaps to avoid the rent control ordinance, which exempts RAP-loan property in RAP areas designated before July 1977.” (Maj. opn., p. 1342.) Similarly, in the instant case appellants used a purchase money mortgage in the amount of $125,000 to finance more than 70 percent of the cost of acquiring property which, because it was also located in a RAP area designated prior to 1977, was exempted from rent control if the owner participated in the RAP program. Therefore, by obtaining a RAP loan in the relatively small amount of $7,100, appellants were able to evade the rent control ordinance and pass-through to their tenants most of the cost of acquiring the property.
By ignoring one of the critical provisions of the promissory note (which pursuant to the RAP ordinance every borrower is required to agree to) my colleagues have created a danger far more likely to materialize than the one they imagine.8 This danger—the flight of low and moderate income tenants from rehabilitated areas of the city as a result of precipitous rent increases— is one the RAP program was designed to avoid.
For the foregoing reasons, I would affirm the judgment.
A petition for a rehearing was denied July 24, 1987. Kline, P. J., was of the opinion that the petition should be granted. Respondents’ petition for review by the Supreme Court was denied October 29, 1987. Mosk, J., and Broussard, J., were of the opinion that the petition should be granted.

 As discussed, post, at pages 1354-1357 the permissive pass-through practice of the real estate department cannot be elevated to the level of an “administrative interpretation” and is not entitled to judicial deference.

 Health and Safety Code section 37922.5, subdivision (a): “A local agency, in order to prevent precipitous increases in rent which the loans would engender as to residential rental *1351property, may require, as a condition of making a loan pursuant to this part, that the borrower contract during the term of the loan not to raise the rental amount over an amount which the agency by regulation establishes will yield a fair rate of return for similar investments and will allow for increases that are reasonably necessary to provide and continue proper maintenance of the property. This subdivision shall apply only to structures which will contain 12 or more dwelling units after rehabilitation and to structures for which loans exceeding five thousand dollars ($5,000) per dwelling unit have been extended pursuant to this part.”

 So far as is shown by the record, the department never by regulation established the amount of rent that will yield a fair rate of return within the meaning of section 37922.5.

 Federal and state judicial decisions make it abundantly clear that rent limitations such as that set forth in the promissory note do not unconstitutionally deprive landlords of a fair return on their investment. See, e.g., Fisher v. City of Berkeley (1984) 37 Cal.3d 644 [209 Cal.Rptr. 682, 693 P.2d 261], affirmed (1986) 475 U.S. 260 [89 L.Ed.2d 206, 106 S.Ct. 1045]; Fox v. San Francisco Residential Rent etc. Board (1985) 169 Cal.App.3d 651, 658 [215 Cal.Rptr. 565]; Baker v. City of Santa Monica (1986) 181 Cal.App.3d 972, 978, 980 [226 Cal.Rptr. 755]; Oceanside Mobilehome Park Owners' Assn. v. City of Oceanside (1984) 157 Cal.App.3d 887, 907 [204 Cal.Rptr. 239]; Zussman v. Rent Control Bd. of Brookline (1976) 371 Mass. 632 [359 N.E.2d 29, 33-34]; Troy Hills Village v. Township Council (1975) 68 N.J. 604 [350 A.2d 34, 47].

 The provision in the RAP ordinance prohibiting rent increases that exceed those permitted under the rent control ordinance only applies to RAP areas designated on or after July 1, 1977. (See § 32.73-1.)

 The rules and regulations that implement the rent control ordinance permit such debt to be passed through only in instances in which the owner acquired the property for a price which exceeds the seller’s purchase price by “[less] than the percentage increase in the [consumer price index] between the date of previous purchase and the date of current sale plus the cost of capital improvements rehabilitation and/or energy conservation work made or performed by the seller.” (Id., § 6.10 (d).) The rules also provide that “an increase in debt service as a result of refinancing to obtain funds in excess of existing financing, will only be considered as a justification for a rent increase if the proceeds of the borrowing are reinvested in the building for purposes of needed repairs and maintenance, or capital improvements which increase the quality of the rental units.” (Id., § 6.10 (e).)

 It deserves to be noted, in this connection, that appellants never pursued this administrative remedy and never demonstrated, if indeed they could, that the RAP rent limitations created a negative cash flow or otherwise denied them a fair return on their investment. I do not understand why the majority is willing to assume that which appellants failed to show, as it seems to me much more appropriate to assume the opposite.

 The majority assumes that the issue in this case is “of limited import” because RAP loans are not currently being made. However, the RAP ordinance and the implementing rules and regulations are still in effect and new loans can be made at any time.