City’s Rent Control Ordinance Constitutes A Regulatory Taking Of Property From Mobile Home Park Owners

In Guggenheim v. City of Goleta, (— F.3d —, C.A.9 (Cal.), September 28, 2009), the United States Court of Appeals for the Ninth Circuit considered whether a city’s mobile home rent control ordinance constitutes a regulatory taking of property from mobile home park owners. The Court of Appeals held that the rent control ordinance does amount to a regulatory taking and ordered the city to provide the owners with just compensation.

Facts

The County of Santa Barbara (“County”) first enacted its rent control ordinance (“RCO”) for mobile homes in 1979 and amended the RCO in 1987. The City of Goleta (“City”) incorporated within County in 2002. City immediately adopted County’s code by reference and then approximately two months later City re-adopted most of County’s code provisions, including the RCO provision. The purpose of the RCO is “to prevent mobile home park owners from charging exorbitant rents to exploit local housing shortages” because “mobile home owners [can] not easily move their homes.”

The RCO has an “automatic increase” provision which “limits any increases in mobile home rents on an annual basis to 75 percent of the increase in the local Consumer Price Index (“CPI”).” Owners of mobile home parks may also institute a “discretionary increase” to pass along costs of increases in operating costs and capital expenses and improvements. However, the RCO mandates an arbitration process pursuant to which park owners and mobile home owners must work with an arbitrator to determine the total amount that rent can be increased each year. The RCO sets out a complicated formula to be used by an arbitrator to determine increases in excess of the automatic increase. A vacancy control provision limits rent increases to 10 percent when a mobile home owners sells his or her home. A “just and reasonable return” for a park owner pursuant to the RCO “must always be less than or equal to exactly one half of 75 percent of the annual increase of the CPI.” Pass-through additional costs may be recouped by the park owners but these “costs must be re-captured without any return on investment.” If a home owner sells his or her unit, the park owner can only get a one-time increase of 10 percent and any subsequent increases must be capped by the regular formula.

Daniel Guggenheim, Susan Guggenheim, and Maureen H. Pierce (“Park Owners”) bought the Ranch Mobile Estates (“Park”) in 1997 when the park was located in an unincorporated part of County. The Park was subject to the RCO as amended in 1987. When City incorporated in 2002, Park fell within City’s jurisdiction. A month after City incorporated, Park brought a lawsuit in federal court to challenge the RCO. The trial court found that during the time Park Owners owned Park, housing costs in City increased 225%, but the RCO prevented Park Owners from increasing rents to keep pace with this increase. This allowed mobile home owners to sell at significant premiums. The transfer premium averaged 88% of the sale price for a mobile home. The trial court, however, ultimately granted judgment in favor of City, finding that no taking of Park Owners’ property had occurred.

Decision

The Takings Clause of the Fifth Amendment to the United States Constitution provides that the government may not take private property for public use without just compensation. The court noted that mobile homes have unique characteristics that must be taken into account when analyzing a takings claim. Although mobile homes are technically “mobile,” as a practical matter only one in every one hundred mobile homes is ever moved. The owner of a mobile home typically rents a “pad” in a mobile home park from a mobile home park owner, who provides roads and common facilities in the park. A mobile home is usually sold in place, which means that the new owner just continues to rent the pad on which the mobile home is located.

A regulatory taking occurs (1) “‘where government requires an owner to suffer a permanent invasion of property,’” (2) “‘where a regulation deprives an owner of all economically beneficial use of property,’” or (3) where the economic impact of a regulation on the property owner interferes “with investment- backed expectations.” The taking of property alleged here falls within the third option. This type of regulatory taking was detailed in Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978). When analyzing a takings claim under Penn Central a court must consider “(1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with investment-backed expectations; and (3) the character of the governmental action.”

Park Owners launched a facial challenge to the RCO, which means they claimed that the mere enactment of the RCO constitutes a taking. In contrast, an “as-applied challenge” is where a claimant “asserts that a statute or regulation ‘by its own terms, infringe[s] constitutional freedoms in the circumstances of the particular case.’” The factors of a Penn Central claim require a court to apply a balancing test in order to determine if a taking has occurred. Despite the need to balance competing interests of the government and the land owner in a Penn Central takings case, the Court of Appeals found that a facial challenge to a regulation can be made pursuant to Penn Central. The court determined that it “must look to the general economic principles that allow [the court] to interpret the statute’s effect, so that [the court] may understand the regulation’s general scope and dominant features.” Here, Park Owners presented evidence that the mere enactment of the RCO significantly impacted the value of their property.

Turning to the Penn Central factors, the court noted that there is a broad consensus that a mobile home rent control ordinance like the one at issue here causes a transfer of wealth from a park owner to the tenants of the mobile home park. If such an ordinance is in place, the right to occupy a mobile home site in a park at below-market rent has an intrinsic value that is distinct from the actual value of the land. An individual who owns a mobile home at the time a rent control ordinance is passed can capitalize on this intrinsic value by factoring it into the selling price of the mobile home. The new owner pays this “transfer premium” because he or she will in the future pay below-market site rent because of the RCO. The effect of this process “is that the cost of the home and the rental site is approximately the same whether there is an RCO or not; the difference is that under the RCO, the value of the capitalized rent is paid to the mobile home owner instead of to the park owner.”

Park Owner presented evidence that the RCO required them to rent all the sites in the Park for an 80 percent discount below market value and the transfer premiums gained by the selling tenants were approximately 90 percent of the sale of the mobile homes. The court found that “the wealth transfer from the Park Owners to their tenants is a naked transfer accomplished by the mere enactment of the RCO.” Also, the RCO not only benefits tenants but those who want to promote affordable housing but do not want to pay for affordable housing themselves. The fact that Park Owners earned some return on their investments does not signify that they did not experience a regulatory taking. Park Owners would have earned more if they were not subject to the RCO. The court found, in weighing the Penn Central factors, the economic impact of the RCO weighs heavily in favor of Park Owners.

The second Penn Central factor requires the court to consider the degree to which the RCO interferes with investment-back expectations. It is undisputed that Park Owners purchased the Park when it was already subject to the RCO because County had passed the RCO 18 years before Park Owners purchased the Park. The court found that, although Park Owners purchased the park “in a regulated state similar to the one imposed by the City,” they can still prevail on their takings claim under Penn Central because they “assumed ownership with some hope that they would also be able to challenge the RCO under the Takings Clause” and other constitutional provisions.

The final Penn Central factor requires a determination of the nature of the governmental action. The court found that the RCO is not like “zoning or other restrictions that apply broadly to businesses and residences and invariably restrict the property’s uses.” Instead, the RCO puts in place “a transfer of the rights to rents for the use of the property from the Park Owners to the tenants.” The Park Owners own the property but the tenants have the right to convey ownership of their mobile homes that will remain in the park at a much-reduced rental rate. Also, the RCO applies only to the owners of mobile home parks and not to any other property owners. Mobile home park owners have been singled out by City and City has imposed on the owners the burden to support affordable housing. The court found that the third Penn Central factor weighs in favor of Park Owners.

The Court of Appeals reversed the decision of the trial court on Park Owners’ takings claim. The court found that the RCO has caused Park Owners substantial economic hardship and constitutes a regulatory taking under the Fifth and Fourteenth Amendments to the United States Constitution. City must pay Park Owners just compensation for this taking of their property by regulation. The court, however, rejected Park Owners’ claims of Due Process and Equal Protection Clause violations. The court remanded the case back to the trial court to determine the total amount of just compensation that City must pay Park Owners.

Questions

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