Legal Alerts May 07, 2018

Ninth Circuit Gives Cities Boost in Regulating Rent Increases

Limitations on Rent Increases Imposed by Cities Not Considered a “Taking”

Ninth Circuit Gives Cities Boost in Regulating Rent Increases

City governments’ broad powers to enforce rent control and other regulations — even if that results in lower profits for landlords — were reinforced in a recent opinion from the U.S. Ninth Circuit Court of Appeals. The decision in Colony Cove Properties v. City of Carson holds that city regulation of rent increases does not constitute a regulatory “taking” under the Fifth Amendment to the U.S. Constitution.
 
In 2006, James Goldstein purchased Colony Cove Mobile Estates, a mobile home park, for $23 million — $18 million of which was funded by a loan to Goldstein’s company, Colony Cove Properties. In 2007, Colony Cove sought to increase the rents at the park. The City’s “Mobile Home Space Rent Control Ordinance” requires a seven-member Rent Review Board to hear and determine applications of property owners for rent adjustments.
 
At the time Colony Cove purchased the park, the guidelines for the Board permitted, but did not require, the Board to conduct a “Gross Profits Maintenance Analysis” comparing the gross profit level expected from the last rent increase to the gross profit shown by the current application. Acquisition debt service can be relevant to a GPM Analysis. Just after Colony Cove purchased the park, the City amended the guidelines to also permit the Board to conduct a “Maintenance of Net Operating Income Analysis”, which compares the net operating income level expected from the last increase to the net operating income level demonstrated in the pending application. Changes in debt service expenses are not considered in an MNOI Analysis.
 
In 2007, when Colony Cove sought a rent increase of roughly $600 per space, later adjusted to $200 per space, the Board conducted both a GPM Analysis and an MNOI Analysis and approved a rent increase of $37 based on the MNOI Analysis. In 2008, Colony Cove again sought to increase rents at Colony Cove by $340. Again, the Board conducted both analyses and approved an increase of $25 based on the MNOI Analysis.
 
Colony Cove sued the City in 2008, claiming that the rent control limitations imposed by the Board resulted in a $5.7 million loss. Colony Cove argued that the Board’s actions constituted a regulatory taking premised on Penn Central Transportation Co. v. City of New York. The jury agreed with Colony Cove and awarded $3.3 million in damages, later increased to nearly $7.5 million after including prejudgment interest, attorneys’ fees and costs.
 
The City appealed, arguing that the court should have granted its motion for judgment as a matter of law since the conclusion reached by the jury was contrary to the evidence presented. The Ninth Circuit evaluated three factors to determine whether a regulatory taking occurred, as required by Penn Central:

1.) the regulation’s economic impact on the property owner
2.) the extent to which the regulation interferes with distinct investment-backed expectations and
3.) the character of the government action. 

To determine economic impact, the court compares the value taken from the property with the value that remains in the property. The mere loss of some income because of regulation does not, by itself, establish a taking. Here, the Ninth Circuit found that there was no evidence before the lower court allowing such a comparison, but concluded that, even assuming the $5.7 million lost income asserted equated to a diminution in property value, the reduction would be less than 25 percent of the assumed $23 million “pre-deprivation” value based on the purchase price. Considering that the Ninth Circuit has previously held that a diminution ranging from 75 to 92.5 percent does not constitute a taking, a 25 percent reduction is not sufficient to show a taking occurred with regard to Colony Cove. Nor would it be proper to consider debt service in evaluating the “post-deprivation” value of the property, which could result in two identical mobile home properties with different values based only on how their owners chose to finance the purchases.
 
Colony Cove argued that it expected the Board to use only the GPM Analysis and account for debt service in determining future rent increases, and that its expectation qualified as a “distinct investment-backed expectation.” The Ninth Circuit disagreed, finding the expectation to be objectively unreasonable based on the content of the City guidelines, Goldstein’s experience as an owner of another mobile home park in Carson for two decades before purchasing the park at issue and California case authority.
 
Finally, the Ninth Circuit held that the central purpose of rent control programs counsels against a finding under Penn Central because it is a public program that adjusts the benefits and burdens of economic life to promote the common good.
 
The decision bodes well for cities seeking to impose rent control regulations. Activists in cities throughout California are attempting to put rent control measures on the ballot, though one initiative to expand local government authority to enact rent control on residential property had only 25 percent of the required signatures as of last week. In Los Angeles County, a majority of the Board of Supervisors has already asked for a rent control law to be drafted to limit rent increases at mobile home parks on unincorporated county land. The City of Carson has already changed its ordinance to follow a new method that generally allows mobile home landlords to increase rents by the lower of 8 percent of the existing rent or by a fraction of the Consumer Price Index.
 
If you have any questions about this opinion or how it may impact your agency, please contact the authors of this Legal Alert listed to the right in the firm’s Municipal Law practice group, or your BB&K attorney.
 
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Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

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