Los Altos El Granada Investors v. Capitola

• Decision Date: 17 May 2006
• Docket Number: No. H027860.,H027860.
• Citation: 43 Cal.Rptr.3d 434,139 Cal.App.4th 629
• Parties: LOS ALTOS EL GRANADA INVESTORS, Plaintiff and Appellant, v. CITY OF CAPITOLA et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

43 Cal.Rptr.3d 434

139 Cal.App.4th 629

LOS ALTOS EL GRANADA INVESTORS, Plaintiff and Appellant, v. CITY OF CAPITOLA et al., Defendants and Respondents.

No. H027860.

Court of Appeal, Sixth District.

May 17, 2006.

Hart, King & Coldren, Robert C. Coldren, C. William Dahlin, Mark D. Alpert, Santa Ana, for Plaintiff/Appellant, Los Altos El Granada Investors.

Atchison, Barisone, Condotti & Kovacevich, City Attorney, City of Capitola, John G. Barisone, Jr., Santa Cruz, Endeman, Lincoln, Turek & Heater, Henry E. Heater, Linda B. Reich, San Diego, for Defendants/Respondents, City of Capitola Mobilhome Rent, Review Board.

PREMO, J.

In March 2000, plaintiff Los Altos El Granada Investors (Parkowner) applied for a $300 per month space rent increase for Castle Mobile Estates (Castle), its 108-space "all-age" rent controlled mobile home park in Capitola. In April 2001, defendant City of Capitola granted an increase of $5.68 per space per month, raising rents to about $210 per month. In July 2002, Parkowner sued Capitola and codefendant City of Capitola Mobilehome Rent Review Board (Board, collectively, City) for inverse condemnation and the "taking" of its property in violation of the California Constitution and it petitioned for a writ of administrative mandamus. Parkowner now appeals the sustaining of City's demurrer without leave to amend and denial of the writ petition. Parkowner raises claims under the California Constitution and challenges the trial court's findings and the sufficiency of the evidence.

FACTS

We state the facts in some detail because of the sufficiency of the evidence challenge. On July 15, 1987, Parkowner purchased Castle for $1.7 million. Castle was built in the 1970s within walking distance of the Santa Cruz beach. It had a laundry building, asphalt streets and streetlights. By 2000, the area, a desirable location, was booming. It was close to the beach; it had a "robust economy" and proximity to a good job market. Housing prices were rising. Parkowner alleged that the average or median cost of housing in Capitola was more than $500,000 and that "the median price of a single family home statewide, including condominiums, stood at $226,140 as of June 1999." (Underscoring omitted.) More than $30 million in public redevelopment money had been invested in the area. Amenities included a park with sports and play structures, a branch library, underground utilities, and streetscapes improved with sidewalks, bike lanes, streetlights, and landscaping. Private funds revitalized a marginal shopping center.

Mobile home rents in Capitola were regulated by its mobile home park rent stabilization ordinance which was enacted in 1979 and amended several times thereafter. Currently, the mobile home rent control ordinance is found in Capitola Municipal Code, Chapter 17.90, Rental Adjustment Procedures for Mobile Home Parks. However, when the application was heard by City, the ordinance then in effect was Chapter 2.18, and we will use the latter section's numbers and language in this opinion.¹

Section 2.18.220 permitted park owners to increase space rents annually by the lesser of 60 percent of the change in the applicable Consumer Price Index (CPI), or 5 percent of the existing base rent. Park owners could obtain additional increases to recoup expenses for capital improvements. (§ 2.18.00.) The ordinance presumed that allowed rent increases would provide park owners a fair return (§ 2.18.410) but a park owner could rebut this presumption by showing it was not receiving a fair return. In determining fair return applications, the City Council sat as the Board. (§ 2.18.410.) If a park owner was successful, additional increases would be allowed. Other increases were prohibited except as permitted under the ordinance. (§ 2.18.130.)

Castle was covered by the provisions of Chapter 2.18 when Parkowner bought it. Rents were around $156 per month. Immediately after the purchase, Parkowner asked for and received a space rent increase to about $180. (§ 2.18.140.) The record of the 1987 application included in the administrative transcript does not show that Parkowner complained then that the base rent set in 1987 deprived it of a fair rate of return on its investment. On the contrary: Parkowner notified homeowners of the $13.23 increase in rent due to pass-throughs for increased taxes, sewer charges, etc., and supplied the Board with additional information as requested. In subsequent years, additional increases were granted, and by 2000, 13 years later, rents had gone up about $50 to approximately $203 per month per space.²

In March 2000, Parkowner applied to City for the $300 rent increase even though it believed if it was successful, rents would still be "less than half of market, . . . ." Because the rent control ordinance did not specify what analytical approach should be used in requesting a rent increase, Parkowner used two alternative analyses, a "premium" approach and a "fair return on equity" approach.

Under the "premium" approach, Parkowner justified the size of the increase by claiming that market space rents were about $1,200 a month and that the resale prices of mobile homes on rent controlled spaces had soared because "full vacancy control"³ created a "premium" by precluding increases in space rent upon resale of mobile homes.

Parkowner opined that rent increases to "remove at least a sizable portion of the `premium' representing the difference between the Kelly [sic] Blue Book value of mobilehomes [sic] in the Park and sale prices would range from $785.65 to $338.68." For example, Parkowner calculated a "premium" of $33,280 from the February 1998 sale of a 1970 Galaxy 20 × 44 with a Kelley Blue Book value of $6,720. The "premium" was the difference between the Kelley Blue Book value and the fair market value. The "premium" from the November 1998 sale of a 1971 Galaxy 20 × 44 with the same Blue Book value was $46,280, the difference between the selling price of $53,000 and the Blue Book value. Using the calculation that a $100 increase in space rent corresponds to approximately $10,000 in the value of a mobile home, Parkowner concluded a $300 per month rent increase would be an "appropriate administrative remedy."⁴

In the alternative, Parkowner presented a "fair and reasonable return" on equity ("fair return") calculation based on the acquisition value of the property as adjusted for inflation. Parkowner's experts, accountants Corbin & Wertz (Corbin), initially computed the minimum rent adjustment necessary for a fair return at $151 per month (an updated report in September 2000 recalculated it to be $148 per month). Parkowner asserted that the calculation did "not account for the true value and equity of the Applicant. . . . [but was] limited to the economic criteria based upon artificially depressed rent levels. The true value of the property, without rent control, would be between [$7.5 and $11 million], depending upon market level rents."

Corbin defined "fair return" as "the measure of financial reward attributed to purchasing, holding, or reselling an investment [which] compensates the investor for capital investment and assuming risk. The unit of measurement in this case is the percentage of funds invested by the mobile home park owner that is returned on an annual basis." Using a "return-on-indexed-investment" (RII) approach, Parkowner's indexed investment in 2000 was $2,555,125 (the original investment of $1.7 million stated in current dollars). Corbin stated that "buyers evaluate real estate investments using a capitalization rate on the income stream available from the property. The fair capitalization rate for this property was calculated as 11.21%." Multiplying the indexed investment, $2,555,125, by 11.21 percent produced the "fair return on the indexed value," $286,430. Fair rent (expressed as annual revenue) is the sum of the fair return ($286,430) and current operating expenses ($152,103),⁵ that is, $455,274. "This annual amount, divided by 107 rentable spaces[⁶] over 12 months yields the minimum average rent of $354.57, a $151.30 increase, or a 74% increase over the current average rent of $203.27." (In the September 2000 update, Corbin used a fair capitalization rate of 10.73 percent producing a fair return on indexed value of $282,806. Adding that to the park's estimated 2000 operating expenses of $175,170 totals $457,976. Corbin adjusted the management fee and reached a reduced total rent of $450,577.) Divided by 107 spaces and 12 months, Corbin calculated the monthly average fair rent to be $350.92. Subtracting the then-current average monthly space rent of $203.27, Corbin reached a $147.65 rent increase for a minimum reasonable return for this project.

The homeowners (Homeowners) objected. They challenged some expenses in Parkowner's ledger in detail and they contended the park's potential appreciated sales price should be considered in determining an appropriate rate of return because "at some point in the future, [Parkowner is] very likely to make a very healthy profit on the sale of Castle Mobile Home Park [sic]." They claimed that "the owners of Castle Mobile Home Park [sic] follow a business practice of purchasing mobile home parks with the goal of later selling them at a profit to the homeowners." They had had such an offer from Doug Davis, the owner of Parkowner's off-site management company and a junior partner in the ownership of the park, who had called a meeting with Homeowners on September 13, 2000. He renewed a 1994 offer to sell Castle to Homeowners, this time at from $50,000 to $95,000 per space, up from $45,000 per space. The park had appraised at $1.97 million on November 19, 1998. Homeowners stated that if Parkowner's 1994 offer had been accepted, Parkowner would have received $4.8 million for the park four years before the $1.97 million appraisal. If Davis's 2000 offer had been accepted, Parkowners would have gotten between $5.4 and $9.7 million for the...