Natter v. Palm Desert Rent Review Com.

• Decision Date: 30 March 1987
• Court: California Court of Appeals Court of Appeals
• Parties: James NATTER dba Portola Palms Mobilehome Park, Plaintiff and Appellant, v. PALM DESERT RENT REVIEW COMMISSION, Defendant and Respondent. TENANTS OF PORTOLA PALMS MOBILEHOME PARK, Real Parties in Interest. E002983.

Page 718

235 Cal.Rptr. 718

190 Cal.App.3d 994

James NATTER dba Portola Palms Mobilehome Park, Plaintiff and Appellant, v. PALM DESERT RENT REVIEW COMMISSION, Defendant and Respondent.

TENANTS OF PORTOLA PALMS MOBILEHOME PARK, Real Parties in Interest.

E002983.

Court of Appeal, Fourth District, Division 2, California.

March 30, 1987.

[190 Cal.App.3d 995] Hart, King & Coldren and Robert S. Coldren, Santa Ana, for plaintiff and appellant.

Best, Best & Krieger, David J. Erwin and Barbara Kristal, Palm Desert, for defendant and respondent.

OPINION

KAUFMAN, Associate Justice. ^*

Petitioner James Natter, manager of the Portola Palms Mobilehome Park acting on behalf of the park's owners, appeals from the superior court's denial of his petition for a writ of administrative mandate. His mandate petition sought to overturn a decision of the Palm Desert Rent Review Commission (Commission) granting a hardship rent increase of $19.05 per space per month instead of the $33.13 increase requested.

The previous owner of Portola Palms noticed and effectuated a $25 rent increase shortly before the present owner purchased the mobilehome park in 1983. Subsequently, while the property was in escrow, Palm Desert enacted and made effective its mobilehome park rent control ordinance. The crux of this dispute is the question of what weight should have been accorded the previous owner's $25 rent increase in the determination of the present owner's 1985 hardship rent increase.

Natter asserts the Commission's refusal to "annualize" the previous owner's rent increase, i.e., to give it a full year's effect in calculating the park's base net operating income (NOI), unconstitutionally deprived the owner of a fair return on the property. We are not required to resolve appellant's constitutional contentions because we have concluded the Commission's failure to annualize the park's rents was based on an erroneous interpretation of the ordinance and the hardship rent increase guidelines adopted thereunder.

The Ordinance and the Guidelines

Chapter 9.50 of the Code of the City of Palm Desert, entitled "Mobile Home Park Rent Review," was added by Ordinance No. 329 on June 23, 1983, and became effective 30 days later. The ordinance recites it was enacted to counter an "inequitable market situation" which resulted in a shortage of vacant mobilehome park spaces and a corresponding increase in rent levels. The ordinance's preamble states: "[T]he City Council finds and declares it necessary to protect the residents of mobile homes from unconscionable changes in rental rates and unreasonable changes in park rules and regulations while simultaneously recognizing and providing for the needs of park owners to receive a just and reasonable return on the present fair market value of their property...."

The ordinance created the Palm Desert Rent Review Commission consisting of five members appointed by the City Council. ¹ The Commission is authorized to receive, investigate and rule upon requests for rent increases and to adopt administrative guidelines to effectuate the purposes of the ordinance.

The basic system of rent control established under the ordinance is as follows. Mobilehome park owners are allowed an automatic, annual increase in space rents which they may notice and effectuate without filing any formal request. Section 9.50.060 of the ordinance, entitled "Maximum rent," states: "Except as otherwise provided in this chapter, the maximum rent for each mobile home space that management of a mobile home park shall request, demand or receive shall not exceed three-quarters ( 3/4ths) of the increase in the cost of living as indicated in the Consumer Price Index. Said increase shall initially be calculated from the monthly space rent charged on April 28, 1983 and shall be determined based upon the latest available Consumer Price Index for the twelve (12) month period preceding the date of the rate increase." (Emphasis added.) Counsel for the Commission indicated at oral argument that April 28, 1983, was selected as a base date because that was when rent control first was proposed in the Palm Desert City Council. Before then the possibility of rent control was not yet "in the wind" and thus the rents up to that time had been adjusted in a free market environment.

Ordinance section 9.50.070 establishes the procedure under which a park owner may seek a hardship rent increase in excess of the maximum allowable under the automatic annual rent increase formula. Hardship rent increase requests are first considered by a hearing officer appointed by the Commission, who conducts an adjudicatory hearing on the matter and issues a summary of the evidence with proposed findings and recommendations for decision by the full Commission. When any party requests it, the Commission then holds its own hearing on the materials provided by the hearing officer and then may adopt the proposed findings and recommended decision as is, make amendments and deletions for adoption, or remand the entire matter to the hearing officer for further proceedings.

The ordinance states a hardship rent increase "... shall be given where the [Commission] finds that the application of the ordinance apart from such authorized increase ... results or would result in undue hardship to the mobile home park owner or would prevent a mobile home park owner from obtaining a just and reasonable return on the mobile home park owner's property. In determining whether a hardship rent increase should be authorized, the [Commission] may consider, among other relevant factors, increased cost to the mobile home park owner attributable to increases or decreases in master land and/or facilities lease rent, utility rates, property taxes, insurance, advertising, government assessment and fees, incidental services, normal repair and maintenance, capital improvements, upgrading and addition of amenities or services, net operating income, as well as just and reasonable return on the mobile home park owner's property." (Ord. § 9.50.050, subd. (E).)

Shortly after the effectuation of the rent control ordinance and pursuant to it, the Commission adopted its Guidelines for Hardship Rent Increases (guidelines). The guidelines provide a hardship rent increase formula intended "... to permit rent to be established at a level which will provide landlords with a fair return on their property...." (Guidelines § 100.) The formula is based on the selection of a "base" time preceding the introduction of rent control in Palm Desert when a free-market situation last operated without the influence of governmental controls on rents. This theoretical basis for the formula is evidenced by the following introductory statement in the guidelines: "[I]t shall be presumed that the net operating income produced by a property during the base year provided a fair return on property." (Id.)

The formula for calculating allowable hardship rent increases is set out in the guidelines at section 101: "[T]he landlord's net operating income will be increased by fifty per cent (50%) of the increase in the Consumer Price Index (CPI) over the base year." The guidelines in turn define the net operating income (NOI) as gross rental income minus allowable operating expenses. The gross rental income of a mobilehome park includes the gross rents computed at the rate of 100 percent paid occupancy, any interest earned on security deposits, and all other miscellaneous income received for park services less any uncollected rents which result from vacancy or bad debts to the extent that the same are beyond the landlord's control. The operating expenses subtracted from gross income to calculate NOI include reasonable management fees and expenses, reasonable attorney's fees incurred in the normal conduct of business, repair and maintenance, owner-performed labor, real property taxes, license and registration fees, utility costs, and reasonable capital expenses. Excluded from allowable operating expenses are unreasonable expenditures, mortgage principal and interest payments, lease purchase payments, depreciation, penalties, attorney's fees attendant to litigation, and expenses for which the landlord has received reimbursement through security deposit, settlement, or payment of damages.

Guidelines section 102, subdivision (D), states: "Base year for purposes of this regulation shall be calendar year 1982 or the most recent fiscal year ending on or prior to April 30, 1983, if the records of that property were kept and reported to the Internal Revenue Service on a fiscal-year basis." The guidelines also create a formula for calculating the Consumer Price Index differential, half of which is to be applied to the pre-rent-control NOI to maintain a fair return on the owner's property: "The increase in CPI shall be calculated by subtracting the CPI for December 1982 from the CPI for the most recently reported month at the time of filing of the petition [for hardship rent increase], and dividing the resulting figure by the CPI for December 1982." (Guidelines § 101.)

While the ordinance and guidelines presume the pre-rent-control NOI represents a fair return on a mobilehome park owner's property, the guidelines provide a method for owners to rebut this presumption and to request the Commission to adjust the base year NOI accordingly. Guidelines section 103, subdivision (B), creates a conclusive presumption the base year NOI was not providing a fair return on the owner's property if that NOI was less than 50 percent of the gross income in that year. "In such a case, for purposes of determining base year net operating income, gross income shall be adjusted upward to twice the amount of adjusted base year operating expenses." When this conclusive presumption is not applicable, an owner seeking a hardship rent increase may still rebut the presumption the NOI provided a fair return on the property by showing either (1) that his operating and maintenance...