A city’s denial of a mobile home park owner’s request for a major rent increase pursuant to a mobile home rent control ordinance did not violate the owner’s constitutional rights because the owner was receiving a fair rate of return on its investment. (Besaro Mobile Home Park, LLC v. City of Fremont, LLC, — Cal.Rptr.3d —-, Cal.App. 1 Dist., March 1, 2012).
Besaro Mobile Home Park, LLC (“Besaro”) operates a mobile home park within the City of Fremont (“City”). Southlake and Niles Canyon are the only other mobile home parks within the City. The City adopted a rent control ordinance for mobile home parks (“Ordinance”) in 1997. The Ordinance addresses the unique position of mobile home owners who make substantial investments in residences for which they lease or rent spaces, the shortage of mobile home spaces, and the cost of moving a mobile home to a new space.
The Ordinance limits annual rent increases for spaces in mobile home parks to the greater of ten dollars per month, three percent, or “60 percent of the percentage change in the Consumer Price Index (CPI), not to exceed six percent.” If a home is sold, rent may be increased by up to 15 percent. If a space changes hand due to lawful eviction or abandonment, or if a different mobile home is placed in a space by a dealer, rent may be increased by any amount. The Ordinance provides that it may not be applied or interpreted “in a way that would deprive a park owner of the constitutionally protected right to receive a just and reasonable return on their property.” However, an owner of a mobile home park may apply for a “major rent increase,” which is an increase in excess of the amount provided by the Ordinance.
Besaro sought a major rent increase in 2001 on the ground that the increase was needed to allow Besaro to obtain a fair return on its investment. A hearing officer allowed Besaro to raise its average rent per space by 31 percent. Besaro filed another application in 2009 seeking to raise rents from $669 per month to a “market” rate of $895 per month. Besaro did not take the position that the increase was necessary to provide a fair return on its investment. Instead, Besaro focused on the current market rents and the possibility that it would close the park if it could not increase rents.
Besaro presented evidence that market rents were $875 at Niles Canyon and $980 at Southlake but that due to rent control, the average rent charged at Niles Canyon was $701 and at Southlake was $782. An economist testified the fair market rent for spaces at Besaro’s park was $895 per month. However, the economist stated that even with a rent increase, it is not possible to get a fair return on the value of the land if the land continues to be used as a mobile home park. The hearing officer denied Besaro’s request for a major rent increase because Besaro failed to meet its burden of proof to show the rent increase was reasonable. A superior court denied Besaro’s petition for writ of mandate.
The court of appeal affirmed the decision of the superior court. The appellate court held Besaro failed to show that the hearing officer’s decision was contrary to the Ordinance or the California Constitution.
The appellate court found that the hearing officer did not abuse her discretion when she concluded Besaro was not entitled to a major rent increase. The hearing officer concluded that Besaro failed to present evidence that a rent increase to $895 would be justified. The hearing officer did not fail to consider Besaro’s evidence that the property might be more profitable if it was used for another purpose. Instead, the hearing officer “simply did not believe that a park owner earning a fair return on its investment (as Besaro admittedly was) could properly rely on some hypothetical higher use of the property as a basis for increasing that return outside the ordinary rent control provisions.” The court of appeal held this was a reasonable conclusion. A property’s potential to generate more income if converted to another use is not helpful in determining the fair rent of space that will continue to be used as a mobile home park.
Although a rent increase would result in greater profits for Besaro, it would not advance the City’s policy of keeping mobile home spaces available. The Ordinance “allows a park owner to petition for a major rent increase to ensure the fair rate of return that is constitutionally required, but it does not purport to proscribe only rents that fall above the market rate, as Besaro suggests.” Besaro failed to show that the hearing officer abused her discretion or that her construction of the Ordinance was unlawful or unreasonable.
The court of appeal also rejected Besaro’s claims under the California Constitution. Besaro failed to show that denial of its request for a major rent increase violated its right to due process. The right to due process prohibits a government from depriving a person of his or her property without due process of law. California’s due process clause guarantees that a landlord has the right to a fair return. However, Besaro did not claim that the Ordinance denied it a fair return on its investment. Instead, Besaro argued “that because rent control is designed to prevent excessive rents, it may not be used to stop owners from charging the market rate when the market rate is not ‘excessive.’”
Besaro asserts that because it could obtain a rent of $895 per month in the current market, $895 is not excessive for rent control purposes. The court rejected Besaro’s argument finding that the City enacted its Ordinance because the circumstances of mobile home ownership create an imbalance between tenants and landlords that makes mobile home owners captive to rent increases. The court held due process is not violated by a rent control ordinance designed to protect tenants where the property owner earns a fair return on its investment.
The court also concluded that Besaro failed to show that the denial of his petition violated the takings clause, which prohibits the government from taking private property without just compensation. The court found that the Ordinance did not result in a taking because Besaro is earning a fair return on its investment.
Besaro also failed to show that the denial of its petition violated the California Constitution’s prohibition against making a gift of public money for a private purpose. There has been no gift or other transfer of public money. The court also rejected Besaro’s claim that the denial of its petition violated its right to equal protection under the law. Besaro was not treated differently than the other two mobile home parks. Besaro is not constitutionally entitled to charge current market rates where those rates exceed the amount necessary for a fair return on its investment.
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