Rancho de Calistoga v. City of Calistoga CA1/4 ( 2015 )

Filed 7/7/15 Rancho de Calistoga v. City of Calistoga CA1/4
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
RANCHO DE CALISTOGA,
Plaintiff and Appellant,
A138301
v.
CITY OF CALISTOGA et al., (Napa County
Super. Ct. No. 26-57311)
Defendants and Respondents,
TENANTS RESIDING AT RANCHO DE
CALISTOGA MOBILEHOME PARK,
Real Parties in Interest and
Respondents.
A mobile home park owner obtained an administrative ruling increasing the rent it
may charge under a local rent control ordinance to an amount necessary to provide a fair
return on its investment. The park owner challenges that ruling, contending it has a state
constitutional right to increase the rent to a rate higher than that necessary to provide a
fair return. We conclude the administrative ruling did not violate the park owner’s
constitutional rights. We therefore affirm the trial court’s denial of the park owner’s
petition for writ of administrative mandate. (Code Civ. Proc., § 1094.5.)
I. BACKGROUND
Appellant Rancho de Calistoga, a general partnership, dba Rancho de Calistoga
Mobilehome Park (Rancho), owns and operates a 184-space mobile home park in
respondent City of Calistoga (City).
1
Like other municipalities in California, City has adopted a rent control ordinance
to address the unique attributes of mobile home ownership and park management.
(Mobile Home Park Rent Stabilization Ordinance (Ordinance No. 644), Calistoga Mun.
Code, ch. 2.22, § 2.22.010 et seq. (ordinance).)1 The findings supporting the ordinance
include: “Residents of mobile home parks, unlike apartment tenants or residents of other
rental properties, are in a unique position in that they have made a substantial investment
in a residence for which space is rented or leased. The removal or relocation of a mobile
home from a park space is generally accomplished at substantial cost. Such removal or
relocation may cause extensive damage to the mobile home.” (§ 2.22.010, subd. (B)(1).)
The ordinance sets a “base rent” for each mobile home space and places limits on
the ability of a park owner to increase the rent over time. (§§ 2.22.040, 2.22.070.) The
ordinance specifies that, in general, the base rent for a mobile home space is the rent in
effect for that space on July 1, 1993. (§ 2.22.040, subd. (A)(1).) A park owner may seek
an adjustment to the base rent by following procedures specified in the ordinance.
(§§ 2.22.040, subd. (B), 2.22.150.) In 1995, in response to a petition by Rancho, City’s
hearing officer (a retired judge) granted a $50 upward adjustment in the base rent for all
spaces at the park. The hearing officer concluded this increase was necessary so the base
date rent would reflect “general market conditions” existing on the base date (i.e., July
1993), and thus would provide a fair return.
A park owner may increase the rent every year by the lesser of (1) 100 percent of
the percentage change in the Consumer Price Index or (2) six percent of the base rent.
(§ 2.22.070, subd. (A).) (Prior to seeking the larger rent increase at issue in this case,
Rancho regularly took this automatic annual increase.) If a park owner seeks to make a
larger increase, the ordinance provides for an arbitration hearing (§§ 2.22.070, subds. (C),
(D), 2.22.090, subd. (G)), and specifies the arbitrator is to determine “whether space rent
increases proposed or imposed by the park owner are reasonable based upon the
1
All section references are to chapter 2.22 of the Calistoga Municipal Code unless
otherwise stated.
2
circumstances and all the provisions of this chapter [(i.e., the ordinance)].” (§ 2.22.110,
subd. (A).)
After hearing the evidence, the arbitrator has the authority to “reduce the proposed
rent increases . . . to a figure determined . . . to be a fair return.” (§ 2.22.070, subd. (E).)
The ordinance specifies a formula, based on the park owner’s net operating income
(NOI), that presumptively yields a fair return, but the hearing officer must assess whether
the NOI approach in fact yields a fair return. (§ 2.22.110, subd. (C)(1).) The ordinance
emphasizes the importance of ensuring a park owner receives a fair return. The
ordinance states: “Notwithstanding any other provision to the contrary, no provision of
this chapter [the ordinance] shall be applied to prohibit the granting of a rent increase that
is demonstrated to be necessary to provide a park owner with a fair and reasonable
return.” (§ 2.22.110, subd. (F).)
In July 2010, Rancho sought to increase the rent at each space in the park to $625
per month, and issued a notice of the increase to park residents and to City. (See
§ 2.22.080, subds. (B)-(C).) At that time, the average rent at the park was $471.39 per
month. Pursuant to the ordinance’s dispute resolution provisions, an arbitrator (a
different retired judge) held an evidentiary hearing on the proposed increase, at which
Rancho and the park residents presented testimony and documentary evidence. (See
§ 2.22.090, subds. (F)-(G).)
John Neet, a real estate appraiser specializing in mobile home parks and retained
by Rancho, conducted surveys of rents and transactions at other mobile home parks.
Neet concluded the market rent for spaces in the Rancho park (i.e., the price that could be
obtained if rent control did not apply) was $625 per month in 2009 and $650 per month
in 2011. Neet calculated the market value of the park to be $11.85 million; he concluded
that, if the market rent of $650 per month were charged, the market value would be
$16.58 million.
Richard Fabrikant, an economist retained by Rancho, opined that $625 per month
was not an “excessive” rent and that Rancho did not have monopoly power in the rental
market. In reaching these conclusions, he relied on the cost of other types of housing,
3
principally apartments, in the area. Fabrikant did not opine as to whether Rancho would
be denied a fair return on its investment if it could not increase its rents to $625 per
month. Fabrikant stated that, because no information about the park owner’s initial
investment (such as the cost of acquiring the land or the cost of construction) was
available, he could not conduct a fair-return analysis.
Dean Moser, the general manager of the property management company that
operates the park, testified he has been unable to locate documents establishing the
amount of the original investment in the park. Moser testified the owners of the Rancho
de Calistoga park also built several other parks in Napa and Sonoma Counties. Moser
testified the NOI calculation in the ordinance restricted Rancho’s ability to pass
expenditures through to tenants.
Kenneth Baar, an attorney and urban planner, testified as an expert for the park
tenants. Baar concluded, based on his review of Rancho’s income and expense
statements, that Rancho was earning a fair rate of return under the NOI formula set forth
in the ordinance. Baar also concluded, based on his estimate of the amount of Rancho’s
likely initial investment, that Rancho was earning a return of 11.3 percent on its
investment. Baar concluded it was “virtually certain” Rancho was earning a fair return
under a standard based on initial investment in the property. Baar stated that Fabrikant,
Rancho’s expert, has concluded in prior cases that a 9 percent rate of return provides a
fair return.
The arbitrator issued a detailed written statement of decision. He concluded
Rancho had failed to meet its burden to prove by a preponderance of the evidence that the
increase it sought was reasonable (see § 2.22.090, subd. (G)(1)). He concluded further,
however, that a $60-per-month rent increase at each space in the park was necessary to
provide Rancho with a fair rate of return. Rancho sought judicial review of the
arbitrator’s decision by filing a petition for writ of mandate under Code of Civil
4
Procedure section 1094.5 in the superior court. (See § 2.22.090, subd. (G)(5).) The court
denied the petition.2
Rancho appeals, arguing that the denial of its full requested rent increase (to $625
per month) violated its rights under the California Constitution. Rancho does not raise
any federal constitutional claims in this proceeding, having stated in the trial court and in
its opening appellate brief that it is reserving any such claims for litigation in federal
court under England v. Louisiana State Bd. of Medical Examiners (1964) 375 U.S. 411,
420–421 (England).3
II. DISCUSSION
A. Standard and Scope of Review
“An aggrieved party may seek judicial review of an administrative rent control
decision by filing a petition for writ of mandate in the superior court. (Code. Civ. Proc.,
§ 1094.5; [citation].) ‘The inquiry in such a case shall extend to the questions whether
the respondent [agency] has proceeded without, or in excess of, jurisdiction; whether
there was a fair trial; and whether there was any prejudicial abuse of discretion. Abuse of
discretion is established if the respondent has not proceeded in the manner required by
law, the order or decision is not supported by the findings, or the findings are not
2
In addition to seeking relief in the superior court, Rancho filed a petition for a
writ of administrative mandamus in federal district court. The district court dismissed
Rancho’s “regulatory” takings claim as unripe under Williamson County Regional
Planning Commission v. Hamilton Bank of Johnson City (1985) 473 U.S. 172, 194, and
dismissed its “private” takings, substantive due process, and equal protection claims with
prejudice. Rancho has appealed the district court’s judgment of dismissal. (At City’s
request, we have taken judicial notice of certain documents filed in the federal
proceeding.)
3
City did not move to strike Rancho’s England reservation, and this appeal
presents no issue as to the propriety of that reservation or the effect it may have in any
subsequent federal proceedings. (Compare Colony Cove Properties, LLC v. City of
Carson (2013) 220 Cal. App. 4th 840, 877-880 [reversing trial court orders striking
England reservations] with Los Altos El Granada Investors v. City of Capitola (2006)
139 Cal. App. 4th 629, 646, 654-655 [upholding trial court decision to strike England
reservation].)
5
supported by the evidence.’ (Code Civ. Proc., § 1094.5, subd. (b).)” (Besaro Mobile
Home Park, LLC v. City of Fremont (2012) 204 Cal. App. 4th 345, 354 (Besaro).)
“In an appeal from a judgment denying the writ, we focus upon the decision of the
rent control agency rather than the superior court, with the burden being on the appellant
to prove the decision was unreasonable or unlawful. [Citations.] We uphold the
agency’s factual findings if supported by substantial evidence, indulging in the
presumption that the record supports the agency’s findings of fact. [Citation.] The
interpretation of a rent control ordinance is a matter for our independent review, with
deference given to the agency’s interpretation. [Citation.] The constitutionality of an
ordinance as applied is reviewed de novo when the underlying facts are undisputed.”
(Besaro, supra, 204 Cal.App.4th at p. 354.)
B. Rancho’s State Constitutional Claims
On appeal, Rancho does not contend that the $60-per-month rent increase ordered
by the arbitrator is insufficient to provide Rancho a fair return on its investment (whether
determined by use of the NOI formula in the ordinance or by application of other factors,
such as an estimate of Rancho’s initial investment in the park). (See § 2.22.110,
subds. (A), (C)(1), (F).) Instead, Rancho argues that, even if it is receiving a fair return
on its investment, the denial of its full requested rent increase (to $625 per month at each
space in the park) violated its rights under the due process, “takings” and equal protection
clauses of the state Constitution. We reject these arguments.
In Besaro, a case involving similar constitutional claims by a mobile home park
owner (represented by the same counsel who represents Rancho in this matter), our
colleagues in Division Five explained: “A municipality may use its police powers to
adopt a rent control ordinance when the provisions of that ordinance ‘are reasonably
calculated to eliminate excessive rents and at the same time provide landlords with a just
and reasonable return on their property.’ (Birkenfeld v. City of Berkeley (1976) 17 Cal. 3d
129, 165 [(Birkenfeld)].) ‘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
6
become “confiscatory.” ’ (Kavanau v. Santa Monica Rent Control Bd. (1997) 16 Cal. 4th
761, 771 (Kavanau).) The constitutionally protected right in this case is the right to
receive a fair return on one’s property. (Hillsboro Properties v. City of Rohnert Park
(2006) 138 Cal. App. 4th 379, 391 (Hillsboro).)” (Besaro, supra, 204 Cal.App.4th at
p. 357.) We next apply this framework to Rancho’s specific constitutional claims.
1. Due Process
The due process clause of the California Constitution, which prohibits government
from depriving a person of property without due process of law (Cal. Const., art. I, § 7),
guarantees a mobile home park owner the right to a fair return. (Kavanau, supra, 16
Cal.4th at p. 771.) When considering whether a price regulation such as a rent control
ordinance violates substantive 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.’ ”
(Id. at p. 772.) The essential inquiry in evaluating a due process claim is “whether the
regulatory scheme’s result is just and reasonable”; to be constitutional, regulated rents
must fall within a “ ‘broad zone of reasonableness.’ ” (Id. at pp. 778–779.) “ ‘Fair return
is the constitutional measuring stick by which every rent control board decision is
evaluated.’ ” (Hillsboro, supra, 138 Cal.App.4th at p. 391.)
As noted, Rancho does not contend the arbitrator’s decision denied it a fair return
on its investment. Rancho argues, however, that because the purpose of rent control is to
prevent excessive rents, City may not constitutionally apply the ordinance to stop Rancho
from charging $625 per month, a rate that Rancho contends is not excessive or the result
of monopoly power. Rancho asserts that $625 per month is not excessive because it does
not exceed the “market rent” (i.e., the amount a willing renter not currently protected by
rent control would be willing to pay).
Like the Besaro court, we reject this circular argument, and we decline to hold a
mobile home park owner has a due process right to charge any rent it could obtain in the
marketplace in the absence of rent control. (See Besaro, supra, 204 Cal.App.4th at
7
p. 358.) City enacted the ordinance because the unique circumstances of mobile home
ownership created an imbalance between park owners and tenants, making mobile home
owners captive to rent increases. These circumstances include: (1) the substantial
investment mobile home owners have made in their mobile homes; (2) the shortage of
vacant mobile home park spaces; and (3) the difficulty and expense of moving mobile
homes. (§ 2.22.010, subds. (B), (D); see Galland v. City of Clovis (2001) 24 Cal. 4th
1003, 1009–1010 (Galland); Besaro, supra, 204 Cal.App.4th at p. 358.) “Due process is
not offended by a rent control statute designed to protect tenants from asymmetries in
bargaining power so long as the property owner can earn a fair return; to conclude
otherwise would be to render most rent control statutes virtually meaningless.” (Besaro,
supra, 204 Cal.App.4th at p. 358.)
Rancho suggests the conditions leading to the enactment of the ordinance no
longer exist (or do not exist at the Rancho park), because (1) there was no evidence of
above-market rents at the Rancho park, and the requested rate of $625 per month is not
an excessive or above-market rent, (2) the evidence showed Rancho does not have
“monopoly power in the overall housing market,” (3) the monthly cost of purchasing a
mobile home and renting a space is now lower than the cost of renting a comparable
apartment, (4) Rancho has not sought to exploit an advantage in bargaining power
resulting from a shortage of mobile home spaces, but has instead constructed several
mobile home parks, and (5) there is no shortage of opportunities to reside in mobile
homes in the relevant market. Again, we agree with the Besaro court’s conclusion that
such arguments provide no basis for a finding of unconstitutionality. “ ‘The notion that a
court may invalidate legislation that it finds, after a trial, to have failed to live up to
expectations, is indeed novel. In our constitutional system, it is generally assumed that
only the legislative body that enacted the statute may exercise a power of repeal if that
statute fails to meet legislative expectations.’ (Santa Monica Beach, Ltd. v. Superior
Court (1999) 19 Cal. 4th 952, 963–964 []; see also id. at pp. 957–960 [rejecting claim that
rent control statute violated takings clause because it had not sufficiently benefitted the
demographic groups it was designed to assist].) ‘[W]ith rent control, as with most other
8
such social and economic legislation, we leave [it] to legislative bodies rather than the
courts to evaluate whether the legislation has fallen so far short of its goals as to warrant
repeal or amendment.’ (19 Cal.4th at p. 974.)” (Besaro, supra, 204 Cal.App.4th at
pp. 358–359.)
Rancho notes that, to comply with constitutional limitations, a rent control
ordinance must (1) permit the adjustment of base rents to ensure they reflect general
market conditions on the base date (see Birkenfeld, supra, 17 Cal.3d at p. 169; Concord
Communities v. City of Concord (2001) 91 Cal. App. 4th 1407, 1414–1415 (Concord)),
and (2) permit the adjustment of maximum rents over time (even if the base rent is not
artificially low) to ensure the landlord continues to receive a fair return on its investment
(see Kavanau, supra, 16 Cal.4th at p. 772; Concord, supra, 91 Cal.App.4th at pp. 1414–
1415). This principle does not assist Rancho, because the ordinance authorizes (and
Rancho has obtained) both types of adjustments. First, the ordinance allows a park owner
to seek an adjustment to the base rent (§§ 2.22.040, subd. (B), 2.22.150), and Rancho
obtained in 1995 a $50 upward adjustment in the base rent. Second, the ordinance allows
periodic rent increases to ensure a park owner receives a fair return, authorizing park
owners to take automatic annual increases and to request larger increases. (§§ 2.22.070,
subds. (A), (C)-(E), 2.22.090, subd. (G), 2.22.110, subds. (A), (C), (F).) Rancho
regularly took the automatic annual increase and, in the underlying administrative
proceeding, obtained a larger increase of $60 per month, the amount the arbitrator
deemed necessary to provide Rancho a fair return. Rancho is not constitutionally entitled
to charge current market rates that exceed the amount necessary for a fair return. (See
Besaro, supra, 204 Cal.App.4th at p. 361.)
Finally, Rancho contends the denial of its full requested rent increase is
unconstitutional because that decision was not necessary to achieve the purposes
underlying enactment of the ordinance. Rancho cites a portion of a passage from
Birkenfeld, in which our Supreme Court stated: “[I]f it is apparent from the face of the
[rent control] provisions that their effect will necessarily be to lower rents more than
could reasonably be considered to be required for the measure’s stated purpose, they are
9
unconstitutionally confiscatory.” (Birkenfeld, supra, 17 Cal.3d at p. 165, italics added.)
Because Rancho has disavowed any argument that the ordinance is facially
unconstitutional, this passage provides no support for its position. Rancho has not
presented authority establishing a landlord has a constitutional right to charge a rate
higher than that necessary to provide a fair return, or a right to insist that every individual
rent-setting decision taken pursuant to a valid ordinance must itself be essential to
achieving the purposes that led to the ordinance’s enactment. Rancho’s true quarrel
appears to be with the whole idea of rent control, not with how City administered its duly
enacted rent control ordinance in this case.
2. Takings Clause
We reject Rancho’s claim under the takings clause, which, like the due process
clause, protects a property owner’s right to earn a fair return on its investment.
(Hillsboro, supra, 138 Cal.App.4th at p. 391; see Galland, supra, 24 Cal.4th at p. 1024
[price regulation causing confiscation can be “designated interchangeably” as either a
taking or a violation of due process].) Our Supreme Court has explained: “When a
regulation does not result in a physical invasion [of property] 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 [Transp. Co.
v. New York City (1978) 438 U.S. 104 (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.’ ” (Kavanau, supra, 16 Cal.4th at p. 775.)
These factors do not support a conclusion that Rancho has suffered a taking. (See
Besaro, supra, 204 Cal.App.4th at p. 359 [rejecting takings claim].) First, the ordinance
has not had a confiscatory effect, because Rancho is earning a fair return on its
investment. Second, application of the ordinance does not violate Rancho’s expectation
of the right to use its property in a manner yielding a fair return. Rancho “cannot claim a
‘reasonable’ expectation in greater profits in light of the [o]rdinance itself and the heavily
10
regulated nature of mobilehome occupancy. (See, e.g., Health & Saf. Code, § 18000 et
seq.; Civ. Code, § 798 et seq.)” (Besaro, supra, 204 Cal.App.4th at p. 359.) Although
Rancho argues it developed the park prior to the enactment of rent control, this does not
establish it could reasonably expect to charge, indefinitely, a rate higher than that
necessary to provide a fair return. We decline to hold that a landlord whose building or
park existed before the enactment of rent control necessarily suffers a taking when rent
control is implemented. Every reasonable and realistic investor knows that conditions
affecting valuation not only may change but will after the point of initial purchase. The
takings clause provides no refuge from that reality whenever some form of governmental
action—short of confiscation, and otherwise constitutional—brings about a post-
investment change in such conditions. Third, City’s decision to enact the ordinance
“serves a legitimate government purpose of protecting renters in a captive market from
excessive rent increases.” (Besaro, supra, 204 Cal.App.4th at p. 359.) None of these
factors supports a conclusion that Rancho has suffered a “taking,” whether denominated a
“private” taking or a “regulatory” taking.
3. Equal Protection
Rancho contends the arbitrator’s decision violates equal protection principles
because City has regulated rents at mobile home parks, but has not regulated the rents or
prices charged by other businesses. We disagree.
“ ‘The first prerequisite to a meritorious claim under the equal protection clause is
a showing that the state has adopted a classification that affects two or more similarly
situated groups in an unequal manner.’ [Citations.] This initial inquiry is not whether
persons are similarly situated for all purposes, but ‘whether they are similarly situated for
purposes of the law challenged.’ ” (Cooley v. Superior Court (2002) 29 Cal. 4th 228,
253.) Rancho has not shown mobile home park owners are similarly situated to other
landlords (or other business owners) for purposes of rent regulation. As discussed above,
City enacted the ordinance because the unique circumstances of mobile home
ownership—including the substantial investment mobile home owners have made in their
mobile homes, a shortage of vacant mobile home park spaces, and the difficulty and
11
expense of moving mobile homes—created an imbalance between park owners and
tenants, making mobile home owners captive to rent increases. (§ 2.22.010, subds. (B),
(D); see Galland, supra, 24 Cal.4th at pp. 1009–1010; Besaro, supra, 204 Cal.App.4th at
p. 358.) Because mobile home park owners are not similarly situated to other landlords
or business owners for purposes of rent regulation, neither City’s decision to enact mobile
home rent control nor the arbitrator’s application of the ordinance violated Rancho’s
equal protection rights.4
III. DISPOSITION
The judgment of the superior court (order denying petition for writ of mandate
under Code of Civil Procedure section 1094.5) is affirmed. City shall recover its costs on
appeal.
_________________________
Streeter, J.
We concur:
_________________________
Ruvolo, P.J.
_________________________
Reardon, J.
4
Because the arbitrator’s decision did not violate Rancho’s state constitutional
rights, we need not address Rancho’s argument that the trial court erred in determining
the appropriate remedy for any such violation.
12