Colony Cove Props., LLC v. City of Carson

Decision Date18 November 2013
Docket NumberB227092
Citation163 Cal.Rptr.3d 499,220 Cal.App.4th 840
CourtCalifornia Court of Appeals Court of Appeals
PartiesCOLONY COVE PROPERTIES, LLC, Plaintiff and Appellant, v. CITY OF CARSON et al., Defendants and Respondents.

OPINION TEXT STARTS HERE

See 12 Witkin, Summary of Cal. Law (10th ed. 2005) Real Property, § 581 et seq.

APPEAL from judgments of the Superior Court of Los Angeles County, David P. Yaffe, Judge. Affirmed in part, reversed in part. (Nos. BS124253 & BS124776)

Gilchrist & Rutter, Richard H. Close, Thomas W. Casparian and Kevin M. Yopp, Santa Monica; O'Melveny & Myers, Matthew W. Close and Tamar M. Braz, Los Angeles, for Plaintiff and Appellant.

Aleshire & Wynder, William W. Wynder, Sunny K. Soltani and Jeff M. Malawy, Irvine, for Defendants and Respondents.

MANELLA, J.

Appellant Colony Cove Properties, LLC, a Delaware limited liability company, is the owner of the Colony Cove Mobile Estates, a mobilehome park (the Park) containing approximately 400 spaces, located in respondent City of Carson (the City). At the time appellant purchased the Park, it was rent controlled.1 Appellant submitted applications for rent increases in September 2007 and again in September 2008. After hearings in June 2008 and June 2009, respondent Carson Mobilehome Park Rental Review Board (the Board) approved increases in the monthly rent per unit of $36.74 and $25.02. Appellant contended that even after the rent increases approved by the Board, the rental income from Park residents was insufficient to cover its expenses, including interest payments on the $18 million loan it had secured to purchase the Park. Appellant maintained that to avoid becoming confiscatory, rents must be set at a level sufficient to provide a profit after payment of debt service. In two separate proceedings before the trial court (consolidated for appeal), the court denied appellant's petitions for writ of administrative mandamus seeking to overturn the Board's determinations. We conclude that substantial evidence supported the determination that the rent levels set by the Board provided appellant a fair return. Accordingly, we affirm the trial court's decision denying the petitions. We reverse only that portion of the court's order striking appellants' reservation of their federal claims.

FACTUAL AND PROCEDURAL BACKGROUND
A. Purchase of Property

Appellant purchased the Park for $23,050,000 in April 2006, putting $5,050,000 down and financing the $18 million balance at a variable rate, which in 2007 was approximately 7 percent.2 The Park had 404 spaces, of which 403 were available for rent.3 At the time of the sale, the Park's tenants were paying rents averaging $408 per space per month, and the Park's gross income totaled approximately $2.2 million per year, including miscellaneous income from sources other than rent. The Park's “net operating income” (a figure calculated by subtracting regular operating expenses, but not debt service, from gross income) was $1.1 million. The prior owner's debt service was approximately $350,000 per year, leaving over $700,000 in cash profit.

B. Rent Control Ordinance

Since 1979, the City of Carson has had a “Mobilehome Space Rent Control Ordinance” (Carson Mun. Code, § 4700 et seq.; (Ordinance)). The Ordinance requires the Board to “grant such rent increases as it determines to be fair, just and reasonable.” (Ord., § 4704(g).) In general, a rent increase is “fair, just and reasonable” if it “protects Homeowners from excessive rent increases and allows a fair return on investment to the Park Owner.” ( Ibid.) The Ordinance sets forth certain non-exclusive factors the Board is to consider in determining whether to grant an owner's request for rent increases, including (1) changes in the consumer price index for consumers in the Los Angeles–Anaheim–Riverside area; (2) the rent charged for comparable mobilehome spaces in the City; (3) the length of time since the last Board determination of a rent increase application; (4) any capital improvements undertaken and completed; (5) changes in property taxes or other taxes; (6) changes in utility charges; (7) changes in reasonable operating and maintenance expenses; (8) unusual repairs; and (9) services provided. ( Ibid.)

The City has adopted “Guidelines for Implementation of the Mobilehome Space Rent Control Ordinance” (the Guidelines). The Guidelines provide that the factors in section 4704(g) of the Ordinance are to be used “to focus on changes in a park's income, expenses and circumstances, including changes in the general economy, to determine whether a rent increase is appropriate to allow the owner to keep earning a fair return ...,” that [n]o one factor ... is determinative,” and “the factors must be considered together and balanced in light of the purposes of the Ordinance and all the relevant evidence.” (Guidelines, § I(C–D).) The Guidelines further provide that [t]he Board cannot reconsider its decisions on a rent adjustment application after they have been embodied in a formal written resolution setting forth the findings of the Board. Therefore, 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.” ( Id., ¶ I.E.)

With respect to debt service as an allowable expense, the Guidelines provide that allowable expenses include [d]ebt service incurred prior to adoption of the Ordinance to purchase or operate the park” and [d]ebt [s]ervice necessarily incurred to operate the park after adoption of the Ordinance ... if the financing arrangements were prudent and consistent with customary business practice.” (Guidelines, § II(A)(2), subds. (d) & (e).) However, debt service incurred to purchase a park after adoption of the Ordinance is an allowable expense only if “the purchase price paid was reasonable in light of the customary financing practices,” and the applicant has “the burden of establishing the reasonableness of the purchase price and financing procedures.” ( Id., § II(A)(2), subd. (f).) The Guidelines explain: “The reason for these general rules is that passing on increased debt service due to purchase at prices above those that can be justified by the income earned by the park under rent control or incurred by unusual financing methods, such as 100% financing, would defeat the purpose of rent control.” ( Ibid.)

The Guidelines go on to state that “in evaluating a rent increase application, the Board may consider, in addition to the factors specified in § 4704(g) of the Ordinance, a ‘gross profits maintenance [GPM] analysis,’ which compares the gross profit level expected from the last rent increase granted to the park prior to the current application (‘target profit’) to the gross profit shown by the current application.” (Guidelines, § II(B).) According to the Guidelines, the GPM analysis is “intended to provide an estimate of whether a park is earning the profit estimated to provide a fair return, as established by the immediately prior rent increase, with some adjustment to reflect any increase in the CPI”; it is “an aid to assist the Board in applying the factors in the Ordinance,” and is “to be considered together with the factors in § 4704(g), other relevant evidence presented and the purposes of the Ordinance.” ( Ibid.) The Guidelines expressly state that the GPM analysis is “not intended to create any entitlement to any particular rent increase.” ( Ibid.)

In October 2006, the Guidelines were amended to provide that the Board “may also consider, a ‘maintenance of net operating income [MNOI] analysis,’ which 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.” 4 (Guidelines, § II(C).) Such MNOI analysis “is intended to provide another method to estimate whether any applicant for a rent increase is earning a constitutional fair return, as established by the immediately prior rent increase, with appropriate adjustment(s) to reflect changes in the CPI, and is a methodology approved by the courts in which changes in debt service expenses are not to be considered in the analysis (unlike a gross profits maintenance analysis, where such changes may be considered).” (Guidelines, § II(C)(2).)

The Guidelines state that [t]he Ordinance assumes that the profit earned by park owners when the Ordinance was adopted provided a fair return because it was based on rents chosen by the owners prior to the regulation” (Guidelines, § I(C)) and further assumes that “park owners attempted to rebut that presumption when they first applied for an increase.” (Guidelines, § IV(A).) The Guidelines further explain: “Most applications submitted to the Board have been based on the factors in the Ordinance and Park Owners rarely offer evidence concerning their investment in a park, the return being earned on the park or the return being earned by comparable mobilehome parks.” ( Ibid.) However, if an applicant believes “the park cannot earn a fair return without an increase greater than that permitted by application of the factors in the Ordinance,” he, she or it may attempt to rebut the presumption by presenting additional evidence not specifically related to the Ordinance factors, including (1) the date the park was purchased; (2) the purchase price; (3) the rents charged and the net operating income of the park prior to the purchase; (4) an appraisal of the park at the time of purchase; (5) the amount of the down payment and/or current amount of equity; (6) any capital improvements made; and (7) the “Overall Rate of Return [defined as “ratio of net operating income to purchase price” of comparable] mobilehome parks in...

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