Advisor Newsflash

On March 12, 2010, the Ninth Circuit Court of Appeals ordered en banc rehearing on Guggenheim v. City of Goleta, Docket No. 06-56306 (9th Cir. 2009), discussed in the Winter 2009 edition of the Advisor. As a result, the Guggenheim case cannot be cited as law at the present time.

Mobilehome Rent Control Ordinance Ruled an Unconstitutional Taking

By Amy Greyson

A recent decision by the Ninth Circuit Court of Appeals may increase the legal and financial stakes for cities with mobilehome rent control ordinances. In Guggenheim v. City of Goleta, 582 F.3d 996 (9th Cir. 2009), the court ruled Goleta's ordinance was a regulatory taking on its face, and the City must pay just compensation to the park owners. The court concluded the park's below-market rents enabled park residents to sell their mobilehomes to new tenants at higher prices, resulting in a wealth transfer of ninety percent of the mobilehome's value from the park owners to the park residents. This resulted in a taking of property, even though the park owners earned an annual return of ten percent on their investment overall.

Guggenheim is the first case finding a mobilehome rent control ordinance was facially a taking under the established regulatory taking test. In 1992, the United States Supreme Court ruled that an ordinance with vacancy control (a prohibition on raising rents upon vacancy) was not a physical taking in Yee v. City of Escondido, 503 U.S. 519 (1992). Thereafter, park owners began pursuing regulatory takings challenges. In Cashman v. City of Cotati, 374 F.3d 887 (9th Cir. 2004), the Ninth Circuit ruled Cotati's ordinance allowed a tenant to capture a premium upon sale of a mobilehome, and therefore was an unconstitutional regulatory taking on its face because it did not substantially advance the City's interest in providing affordable housing. The Ninth Circuit withdrew Cashman after the United States Supreme Court ruled that courts cannot use the "substantially advances" test to decide regulatory takings claims (Lingle v. Chevron U.S.A., Inc., 544 U.S. 528 (2005).)

The City of Goleta has filed a petition for rehearing before the entire Ninth Circuit court. Unless the court reverses or modifies Guggenheim, mobilehome park owners may increasingly challenge city ordinances. All mobilehome rent control ordinances may be vulnerable if a park owner alleges some diminution in value, even if a park owner can and does earn a fair return overall.

Background

The plaintiffs purchased their park ("Park") in 1997, when it was unincorporated county land and subject to the county's mobilehome rent control ordinance ("Ordinance"). When the City of Goleta incorporated on February 1, 2002, the City Council adopted the County Code, including the Ordinance. The Ordinance's stated purpose was to protect residents' investments in their mobilehomes from excessive rent increases due to the relative immobility of mobilehomes and residents' unequal bargaining position. The Ordinance included: (1) an automatic annual increase of seventy-five percent of the increase in the Consumer Price Index; (2) partial vacancy control (allowing rents to increase only by ten percent upon sales of mobilehomes); and (3) a discretionary formula allowing park owners to pass increases in certain costs, to be determined through an arbitration process. One month after incorporation and five years after the owners purchased the park, the Park owners sued, challenging the Ordinance on various constitutional grounds including regulatory taking. The district court granted summary judgment for the City.

The Ninth Circuit Decision

The Ninth Circuit reversed. The court found the Ordinance was rationally related to the goal of providing affordable housing, so it did not violate the Park owners' due process and equal protection rights. But the court then found that the Ordinance was a regulatory taking, based on a three-factor test established in Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978). This test examines the extent to which the regulation interferes with distinct investment-backed expectations, the plaintiff's economic loss, and the character of the government action. The court concluded:

• The Ordinance did not interfere with Park owners' distinct investment-backed expectations as they purchased the Park subject to a detailed rent control ordinance.
• But the Ordinance would cause Park owners to suffer significant economic loss because the Park's below-market rents would result in transfer of nearly ninety percent of the value of each mobilehome from the Park owners to the existing tenants. This percentage represented the higher price a new tenant would pay to buy the mobilehome and live in a rent-controlled park.
• Contrary to the expressly stated purpose set out in the Ordinance itself, the City's goal in enacting the Ordinance was to increase the supply of affordable housing, and the City unfairly imposed the costs of this goal on park owners because there are other alternatives available to the City to increase the availability of affordable housing such as tax incentives, low-cost loans, rent supports and vouchers. The Ordinance was a regulatory burden on the park owners because the Ordinance resulted in a transfer of the right to rents for the use of the property to the tenants, by giving tenants the right to convey a mobilehome, with the right to remain in the park at a reduced rent, to a new tenant. The court failed to acknowledge that residents also have legally protected investment-backed interests in their homes.

One judge dissented, arguing that the Park owners suffered no economic impact because the City merely re-enacted the Ordinance upon incorporation, with no wealth transfer from the Park owners to the Park tenants.

Mobilehome Rent Control May be Subject to Reinvigorated Legal Challenges

Based on Guggenheim, the federal courts may increasingly find that mobilehome rent control ordinances are regulatory takings, using the concept of wealth transfer, whether or not they contain a vacancy control provision and regardless whether the ordinances allow park owners to earn a fair return. The decision provides no guidance on whether a lesser wealth transfer may be permissible to avoid a regulatory taking and if so, how much. Unless the federal courts provide further guidance, this will likely require expert evidence to show that there is no wealth transfer or any decrease in value, that any diminution in value is minimal, and that the park owner still earns a fair return that outweighs any alleged wealth transfer.

Some courts have ruled that the Maintenance of Net Operating Income (MNOI) rent adjustment process provides a fair return to park owners. Other courts have ruled that park owners must be permitted to show that they still do not earn a fair return even with an MNOI adjustment. One way that cities have been able to demonstrate that a park earns a fair return is by showing that the park's return is comparable to the return on similar investments. Following Guggenheim, it remains to be seen whether future courts will still consider these to be viable defenses to legal challenges to mobilehome rent control ordinances.

The Statute of Limitations is an Important Defense

In California, the statute of limitations to facially challenge a mobilehome rent control ordinance in federal court is two years. Cities with ordinances in place for more than two years may have a statute of limitations defense. The Guggenheim court rejected this defense, and other important procedural defenses raised by Goleta including that the City's argument the Park owners' challenge was premature, because of the unique facts presented by that case.

Conclusion

Guggenheim increases the risk that mobilehome rent control ordinances may be subject to successful legal challenges, and raises questions about how the federal courts will evaluate mobilehome rent control ordinances, particularly those containing vacancy control. Cities should be prepared to thoroughly evaluate all available defenses in responding to legal challenges, carefully select their experts used in defending their ordinances, and create and maintain a well-documented record establishing the basis and reasons for their ordinance and the interests at stake.

FOR ADVICE FROM RW&G ON RENT CONTROL LAW, PLEASE CONTACT AMY GREYSON OR ANY OF THE ATTORNEYS IN THE FIRM'S PUBLIC LAW DEPARTMENT

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