Daily Development for Tuesday, September 14, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; RESIDENTIAL; RENT CONTROL; MOBILE HOMES: In setting forth its operating profits as a basis for justifying an increase in allowed rents under a rent control ordinance, a landlord must amortize expenses that in fact are paid for with monies borrowed over a period of more than a year, and must include attorney's fees as overhead, even extraordinary attorney's fees related to environmental problems. Finally, new units (not rent controlled) are not "capital improvements" justifying an increased rate of return if they do not contribute to the attractiveness of the other units in the project.

Carson Harbor Village, Ltd., v. City of Carson Mobile home Park Rental Review Board, __ Cal. App. 4th ___ (1999 Cal. App. LEXIS 156 (2nd Dist. February 24, 1999)).

Carson Harbor Village Mobile home Park ("CHV") is an upscale 420 doublewide space mobile home park situated on 70 acres in the City of Carson. Of the park's 420 spaces, 407 are subject to Carson rent control laws while eleven new spaces, completed in 1995, are not. Under Carson's Mobile home Space Rent Control Ordinance ("Ordinance"), requests for rent increases must be submitted for approval to a Mobile home Park Rental Review Board ("Board"). In the face of decreased profitability and rising operating expenses, CHV filed an application with the Board on June 29, 1995 for a general rent increase in an amount ranging between $163.42 and $178.07. In large part, the increase in operating expenses was attributable to remediation of contaminated wetlands located on the property. The Board sent out notice to all of the park residents. A public hearing on the rent increase application was set for October 9, 1996, but continued until December 11, 1996 at the request of the park owners, tenants, and homeowners' association. On December 6, 1996, the Board's staff issued a report ("First Staff Report") in which it recommended a monthly rent increase of $ 99.37, approximately half of that requested by CHV. A few hours before the December 11, 1996 public hearing, staff issued another report ("Second Staff Report") decreasing the recommended per space rent increase from $ 99.37 to $ 76.91. The decrease resulted primarily from reducing by $100,063 the operating expenses attributable to attorneys' fees. At the December 11, 1996 hearing, despite CHF's objections, the Board granted the mobile home park homeowners' association further continuance to study and respond to the new information and issues presented in the Second Staff Report, rescheduling the hearing for January 22, 1997. CHV requested but was denied an interim rent increase as provided by the rent control ordinance. On January 2, 1997, CHV submitted additional documentation disputing the downward adjustment of $100,063 in attorneys' fees. On January 16, 1997, staff issued a final report ("Third Staff Report"), recommending a monthly rent increase of $58.70 per space, approximately one third of that requested by CHV. This amount was adopted by the Board at the January 22, 1997 public hearing. On April 22, 1997, CHV filed a petition for a writ of administrative mandate ("Petition") with the Los Angeles Superior Court that was denied on November 6, 1997. The lower court found the Board did not abuse its discretion in disallowing, as operating expenses, a portion of the costs incurred in remediating the contaminated wetlands and the cost of constructing 11 new spaces in the park. The court further found CHV failed to establish that the monthly rent increase of $58.70 resulted in an unfair return on its investment. It finally found CHV was not entitled to an interim rent increase because the time period between CHV's submission of materials on January 2, 1997 and the Board's decision on January 22, 1997 was well within the statutory time limit.

On appeal: held: Affirmed:

The appeals court noted that "Constitutionally valid rent control ordinances must be reasonably calculated to eliminate excessive rents and provide landlords a just, fair and reasonable return on their property. (Donohue v. Santa Paula West Mobile Home Park, 47 Cal. App. 4th 1168, 1177 (1996); Birkenfeld v. City of Berkeley, 17 Cal. 3d 129, 165, 130 Cal. Rptr. 465, 550 P.2d 1001 (1976).)

"Mobile home rent control ordinances are accorded particular deference as rational curative measures to counteract the effects of mobile home space shortages that produce systematically low vacancy rates and rapidly rising rents;" (Carson Mobile home Park Owners' Assn. v. City of Carson, 35 Cal. 3d 184, 189, fn. 4, 197 Cal. Rptr. 284, 672 P.2d 1297 (1983) ); and that "[t]he Board's interpretation of Carson's rent control laws merits great weight." Under this laissez faire approach, the Court determined that it must "defer to the Board's interpretation and application of the ordinance and implementation guidelines unless [it finds the Board's] construction lacks substantial evidence to support its findings." Under a "substantial evidence test" (301 Ocean Ave. Corp. v. Santa Monica Rent Control Bd., 228 Cal. App. 3d 1548, 1556, 279 Cal. Rptr. 636 (1991)), the court presumes that the record contains evidence to sustain the board's findings of fact. The board's interpretation of an ordinance's implementation guidelines is given considerable deference and must be upheld absent evidence the interpretation lacks a reasonable foundation. The burden is on the appellant to prove the board's decision is neither reasonable nor lawful. The primary issue raised by CHV on appeal related to the Board's decisions regarding the calculation of CHV's operating expenses. CHV argued that the Board erred when it disallowed attorneys' fees and misallocated other operating expenses related to a wetlands remediation project. The court disagreed, finding substantial evidence to support the board's conclusion that was "consistent with the spirit and purpose of the ordinance and implementation guidelines."

Under the Carson ordinance, profitability is protected by increasing rent levels to cover rising expenses and inflation. CHV submitted 1992 profit levels as targets to be used in computing the amount of any rent increase to be applied after 1995. CHV submitted evidence of increases in water expenses, property taxes, street maintenance, wetlands remediation and related legal expenses. A component of these expenses included $190,333 to remediate wetlands contamination and $100,063 in legal fees associated with the contamination. This remediation amount was based on the cost of the project, covered by a loan payable over a period of three years. CHV contended that "an expenditure incurred in a given year is properly allowed as an expense for the same year."

In the final staff report, the report ultimately adopted by the Board, the remediation expense was spread over three years rather than the first year in which the obligation was undertaken. Additionally, the $100,063 in legal fees related to the wetlands contamination were eliminated from the staff recommendation as an overhead expense for which any rental increase would be permitted.

As to the $190,333, the Court agreed with the Board staff's recommendation that the project amount be spread over three years. While the cost was incurred in one year, the obligation to repay the cost was spread over 28 months. Applying the entire obligation to the first year would overstate the operating expenses for that year and create a "permanent, artificially high monthly rent increase would permit CHV to realize unwarranted profits from increased revenues long after repayment of the loan obligation incurred to remediate the wetlands contamination." Regarding the attorneys fees, the Court agreed with the Board that the legal services rendered in connection with the contamination mitigation were not provided in connection with regular mobile home park operations and noted similar treatment of attorney's fees in remediation cases involving Unocal, CalTrans, as well as the cities of Carson and Compton. While excluding the fees associated with contamination litigation, the Board did permit some fees that were associated with regulation compliance and obtaining of remediation plan approval.

Regarding the new construction of eleven park spaces, the Board disallowed these costs as operating expenses, viewing the new spaces as an investment an "expansion of a valuable revenue source" and not capital improvements. The court agreed with the board's characterization of the new spaces, noting that "the spaces do not contribute to the overall use and enjoyment of the mobile home park by its residents, and in fact reduce the number of available parking spaces for residential vehicles."

In affirming every component of the board's decision, the Court also concluded that there was substantial evidence to support the Board's decision not to grant CHV an interim rent increase. Despite a provision of the municipal code permitting an interim increase when a final decision is not reached within 75 days of the completion of a rent increase application, the Board claimed that it had refused to grant an interim increase after a number of continuances in the proceedings on the grounds that any delay was caused by CHV's failure to submit material information.

Comment: Obviously, one can differ with the very premise of rent control in an "upscale" area, even if it is a neighborhood of mobile homes. California has particularly vicious rent control schemes for mobile home parks. But if one goes with the logic, the case seems to be an appropriate result. Clearly "loading up" expenses for one year could artificially skew the computations, giving the landlord an unwarranted high rent increase in future years when the costs are not likely to recur.

On the other hand one of the pet peeves of rent controlled landlords is the fact that the time lag in any rent increase application is such that the landlord already is earning an inadequate return simply because of the delay before the latest increase can be approved. The park owner's position on an interim increase, at least to the level recommended by Board staff, seems to be sound. But rent control ordinances are "political animals" and courts appropriately try to avoid micromanagement, as was the case here.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA .

DIRT has a WebPage at: http://cctr.umkc.edu/dept/dirt>http://www.umkc.edu/dirt/