UPDATE: Mobilehome Park Owner’s Challenge To Rent Control Ordinance Fails

In Colony Cove Properties, LLC v. City of Carson, (— F.3d —-, C.A.9 (Cal.), March 28, 2011), the United States Court of Appeals for the Ninth Circuit considered whether a district court properly dismissed a mobilehome park owner’s claims that a city’s rent control ordinance amounted to a taking of the owner’s property without just compensation and that the ordinance violated the owner’s right to due process. The court of appeals held the owner’s facial takings claim was time barred, the owner’s as applied takings claim was not yet ripe because the owner had not availed itself of state procedures for the alleged injury, and the owner failed to prove a denial of due process.

Facts

In 1979, the City of Carson (“City”) enacted the Mobilehome Space Rent Control Ordinance (“Ordinance”) and guidelines for implementation of the Ordinance (“Guidelines”). Pursuant to the Ordinance, City’s Mobilehome Park Rental Review Board (“Board”) must hear and determine applications for rent adjustments and grant rent increases when it determines an increase “to be fair, just and reasonable.” The Ordinance provides that “[a] rent increase is fair, just and reasonable if it protects Homeowners from rent increases and allows a fair return on investment to the Park Owner.”

The Ordinance lists 11 factors to be used by the Board to make its determination on an application, including changes to the Consumer Price Index, rent for other spaces in the City, capital improvements to the spaces, increases in operating and maintenance expenses, and services provided to the tenant. “Pursuant to a portion of the Guidelines that has not changed since 1998, in light of the assumption that rents set prior to the adoption of the Ordinance provided a fair return when the first park owner made the first application for a rent increase, ‘each rent increase application after the first application is evaluated only on the basis of changes in income, expenses, profit, the CPI, maintenance, amenities and services that have occurred since the date of the last increase approved by the Board.'” Debt service incurred prior to the time the Ordinance was passed is seen as an allowable operating expense, but “[d]ebt service incurred after adoption of the Ordinance to purchase a park may be an allowable operating expense if the purchase price paid was reasonable in light of the rents allowed under the Ordinance and involved prudent and customary financing practices.” The Board may also consider a “Gross Profit Maintenance” analysis when evaluating an application.

Colony Cove Properties, LLC (“Colony Cove”) purchased Colony Cove Mobile Estates (“Park”) on April 4, 2006, for $23,050,060. Colony Cove financed approximately $18 million of the purchase price and incurred debt service payments of over $1.3 million per year.

City’s city council amended Guidelines on October 31, 2006, in an effort to further protect residents of mobilehome parks from excessive rents. The city council added a new section to Guidelines that allows the Board to consider a maintenance of net operating income (“MNOI”) analysis when evaluating applications for rent increases. An MNOI analysis “compares the net operating income (NOI) level expected from the last rent increase granted to a park owner and prior to any pending rent increase application (the so called ‘target NOI’) to the NOI demonstrated in any pending rent increase application.”

Colony Cove filed an application for a rent increase on October 1, 2007. Colony Cove sought an increase that would result in an average rent increase of $618.05 per rental space, or a 136% to 179% increase per space. The Board, however, only granted a $36.74, or an 8.10% to 10.62% increase per space. In its decision, the Board noted that it had “considered Colony Cove’s argument that it had a vested right in a rent increase to cover the debt service it incurred when purchasing the Park.” The Board stated that when Colony Cover purchased the Park, “the [O]rdinance and [G]uidelines both stated that there was no entitlement to a rent increase pursuant to any particular standard or formula.”

Colony Cove brought a lawsuit against City in federal district court alleging that the 1979 Ordinance, along with the implementing Guidelines as they stood after the amendment in 2006, deprived “the mobilehome park owners of the value of their property” and transferred “it to park residents, who are able to sell their mobilehomes at a premium because they are located on rent controlled spaces.” The district court dismissed Colony Cove’s claims against City.

Decision

Colony Cove asserted the Ordinance on its face amounted to a taking of its property by City without just compensation. The Fifth Amendment to the United States Constitution provides that private property may not be taken for public use without just compensation. The court of appeals held that Colony Cove’s facial takings challenge to the 1979 Ordinance has long since run. The 2006 amendment to the Guidelines did not substantively amend the 1979 Ordinance to alter the Ordinance’s effect on mobilehome park owners. The provisions and purpose of the 1979 Ordinance remain controlling. The statute of limitations for a facial challenge to an ordinance runs from the time the ordinance is adopted. The statute of limitations applicable to Colony Cove’s claim is two years. Therefore, the court held Colony Cove’s facial takings challenge to the Ordinance is time-barred.

Colony Cove also asserted that the Ordinance as applied to Colony Cove’s situation amounted to a taking of its property without just compensation. The Fifth Amendment, however, “does not ‘require that just compensation for a taking be paid in advance of, or contemporaneously with, the taking; all that is required is that a reasonable, certain and adequate provision for obtaining compensation exist at the time of the taking.’” A constitutional injury does not occur “until the plaintiff has availed himself of the state’s procedures for obtaining compensation for the injury, and been denied compensation.”

The court found that the California procedure Colony Cove was required to follow in order to assert an as applied challenge to the rent control Ordinance was a “‘Kavanau adjustment,’ which involves filing a writ of mandamus in state court and, if the writ is granted, seeking an adjustment of future rents from the local rent control board.” Pursuant to California law, a “property owner cannot claim a violation of the Just Compensation Clause until it has used the [Kavanau] procedure and been denied just compensation.”

Colony Cove did not pursue a Kavanau adjustment in state court prior to filing its lawsuit in federal court. Therefore, the court of appeals found that the district court did not err in dismissing Colony Cove’s as applied takings claim as unripe.

The court of appeals also held the district court did not err in dismissing Colony Cove’s due process claim. Colony Cove argued that it could maintain its due process claim “on the ground that the City’s rent control scheme has deprived it of a ‘fair and reasonable’ return.” The court found that “to the extent Colony Cove alleges a due process violation on the ground that the Board’s application of the 1979 Ordinance and Amended Guidelines to Colony Cove’s application for a rental rate increase denied it a fair return on its investment, [its due process claim] is subsumed by the Takings Clause.” The court further found Colony Cove failed to support its claim that the Board’s decision “was arbitrary, irrational, or lacking any reasonable justification in the service of a legitimate government interest.” Accordingly, the court of appeals affirmed the decision of the district court.

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Jeffrey L. Massey | 916.321.4500

Jon E. Goetz | 805.786.4302