Tg Oceanside, L.P. v. City of Oceanside

• Decision Date: 19 October 2007
• Docket Number: No. D049387.,D049387.
• Citation: 156 Cal.App.4th 1355,68 Cal.Rptr.3d 320
• Court: California Court of Appeals Court of Appeals
• Parties: TG OCEANSIDE, L.P., Plaintiff and Appellant, v. CITY OF OCEANSIDE et al., Defendants and Appellants.

68 Cal.Rptr.3d 320

156 Cal.App.4th 1355

TG OCEANSIDE, L.P., Plaintiff and Appellant, v. CITY OF OCEANSIDE et al., Defendants and Appellants.

No. D049387.

Court of Appeal, Fourth District, Division 1.

October 19, 2007.

As Modified on Denial of Rehearing November 16, 2007.

Robert S. Coldren, C. William Dahlin, Mark D. Alpert, Hart, King & Coldren, Santa Ana, CA, for Plaintiff and Appellant.

Rochelle Browne, Richards, Watson & Gershon, Los Angeles, CA, John P. Mullen, City Atty., Barbara L. Hamilton, Asst. City Atty., for Defendants and Appellants.

O'ROURKE, J.

The City of Oceanside (City) and the City of Oceanside Manufactured Home Fair Practices Commission (the Commission) appeal from a judgment issuing a petition for peremptory writ of administrative mandamus (Code Civ. Proa, § 1094.5) in favor of TG Oceanside, L.P. (Owner), a mobilehome park owner who had filed the petition challenging the decision by City and the Commission to deny it a rent increase. On Owner's administrative appeal of City and the Commission's decision, the administrative hearing officer affirmed the Commission's denial of a rent increase, concluding the evidence and City's expert demonstrated Owner was already earning a fair return and Owner had not overcome a presumption that the mobilehome park's base year rate of return was just and reasonable. The hearing officer nevertheless awarded Owner a $10.07 increase in monthly rents per space. On Owner's writ petition, the trial court set aside that decision and remanded the matter to the Commission to apply a return on investment approach that accounted for the effect of inflation on Owner's original and subsequent capital investment, and commanding City not to depreciate the investments. City contends (1) Owner's petition should have been dismissed for failure to join the administrative hearing officer as an indispensable party; (2) the trial court erred in rejecting City's expert economist method for determining fair return; (3) Owner did not meet its burden to present evidence demonstrating it was not earning a fair return; and (4) the decisions of the hearing officer and the Commission are supported by substantial evidence.

Owner cross-appeals, contending (1) City and the Commission inconsistently used income tax based-data to deny a deduction for interest expenses, thus substantially overstating Owner's rate of return; and (2) no evidence justified the hearing officer's inclusion of rent-control exempt income in determining fair return.

Though we reject City's indispensable party argument, we agree that the evidence presented by Owner on its special adjustment application did not serve to rebut an evidentiary presumption that existing rent adjustment formulas contained within City's rent control ordinance provide a fair return. Because the administrative hearing officer was required to presume this fact absent evidence to the contrary, the trial court erred in granting Owner's writ petition. We reject Owner's cross-appeal contentions, and consequently reverse the judgment with directions that the superior court deny the petition.

FACTUAL AND PROCEDURAL BACKGROUND

Since 1980, Owner has operated Terrace Gardens Mobilehome Park, a 74-space mobilehome park in Oceanside (the Park). A portion of the Park (60 spaces) is subject to City's rent control ordinance—the Manufactured Home Fair Practices Ordinance 82-27 (the Ordinance), enacted in 1982.¹

In April 2004, Owner submitted an application for a $204 per month "special adjustment" rent increase under the Ordinance (Ord., §§ 16B.10(d); 16B.15(a)(l)), seeking to raise the rents from approximately $279 to $475 a month per space. In a letter brief supplied by its counsel, Owner argued the rent increase was mandated by other rents for comparable mobilehome spaces, the Ordinance's automatic rent increases would not allow a fair return, and City could not presume the fairness of those increases. Owner offered alternative methodologies in support of its request for a special adjustment. It applied a 12 percent return on value method to reach a proposed rent increase of $218.98 per space based on a real estate appraisal report by its expert John Neet, who estimated the market value of the Park at $2.15 million. Owner also proposed adjusting the park's original purchase price ($1.2 million) for inflation, reaching an inflation-adjusted investment of approximately $2.10 million, justifying a $212.61 rent increase to make up the shortfall. Owner also sought a capital improvements monthly space rent increase of $37.97, explaining that that increase would become unnecessary if City allowed 100 percent of the increase sought under Owner's other alternative approaches.

To evaluate Owner's application, the Commission's staff hired two independent consultants for the matter: real estate appraiser James Brabant of Anderson & Brabant, Inc., who conducted an appraisal and comparable rents analysis, and James Gibson, Ph.D., of NewPoint Group Management Consultants, who performed a "fair return" analysis. Brabant compared the Park with other mobilehome parks in Oceanside and reached an overall rental value range of $279 to $300, calculating to an rental increase of 0 to $21 per month as of July 1, 2004. Dr. Gibson's analysis was based on his calculation of the Park's return on estimated assets for calendar/fiscal years for which he was provided Park financial data: 2001 through 2003, and also for the same three-year average. He divided the Park's estimated net income before interest and taxes by its estimated total book assets and compared the Park's three-year return on assets with data in a publication compiling real estate-related business rates of return (Troy, Almanac of Business and Industrial Financial Ratios (2004) (Almanac)). Applying Almanac benchmarks of a 9 percent return for the entire 74-acre park (based on businesses with total assets of just above $1 million and $5 million), and a 10.40 percent return for the rent-controlled 60-space park (based on businesses with total assets of between $500,000 and $1 million), Dr. Gibson concluded Owner would not be entitled to a rent increase for the 74-space park having received a 9.72 percent return on total assets, and it would only be entitled to a $1.18 per space, per month rent increase for the 60-space, rent-controlled portion of the Park.

The Commission denied Owner's application, basing its determination on the entire 74-acre Park on the theory it was not reasonable to treat the Park as separate businesses in determining a fair return on investment. It found the Park was already earning a fair return and Owner had not rebutted the presumption the Park was earning a fair return as shown by Dr. Gibson's and Brabant's reports.

Owner appealed the Commission's decision to an independent hearing officer (Ord., § 16B.15(j')), retired Superior Court Judge David Moon, who reviewed the evidence presented to the Commission and, based on detailed factual and legal findings, determined that Owner had not overcome the presumption that the Park's base year rate of return was just and reasonable. Nevertheless, following Dr. Gibson's recommendation, the hearing officer granted Owner a small upward monthly rental adjustment of $10.07, to "accomplish the purposes of the rent control ordinance."

Owner filed a verified petition for a writ of administrative mandamus naming City and the Commission as defendants. In part, it alleged City's return on investment methodology used by Dr. Gibson—using a depreciated value of the investment without adjusting it for inflation—punished long-term owners because it caused real returns to diminish over time, thus denying the park owner a fair return. It alleged the methodology violated the state and federal Constitutions and was inconsistent with the Ordinance's limited purpose of protecting residents from unreasonable rents.

The trial court issued a tentative ruling granting the petition. It first found Judge Moon was not an indispensable party to the action. On the fair return question, it ruled Owner had "met its burden of proof to demonstrate with substantial evidence that the Commission's final decision ... is unreasonable or unlawful." Specifically, the court found Owner provided substantial evidence that the Commission had not accounted for inflation or capital improvements as respectively required by, H.N. & Frances C. Berger Foundation, v. City of Escondido (2005) 127 Cal.App.4th 1, 25 Cal.Rptr.3d 19 (Berger) and Palomar Mobilehome Park v. Mobile Home Rent Review Comm'n (1993) 16 Cal.App.4th 481, 20 Cal.Rptr.2d 371 (Palomar). The court rejected Owner's remaining arguments, finding City did not act contrary to law in including the rent control-exempt spaces in calculating Owner's income. The court adopted its tentative as a statement of decision and issued a peremptory writ of mandate setting aside the Commission's decision, as well as the hearing officer's decision and commanding the Commission to reconsider its action, directing that it hear no new evidence on remand and instructing: "Any return on investment approach applied by the Commission must account for the effect of inflation on the park owner's original and subsequent capital investment and [ ] City shall not depreciate the investments[.]"

City filed the present appeal. Owner's cross-appeal followed.

DISCUSSION

I. Indispensable Party

Relying on Kaczorowski v. Mendocino County Bd. of Supervisors (2001) 88 Cal.App.4th. 564, 106 Cal.Rptr.2d 14 (Kaczorowski), City contends the court should have dismissed Owner's petition for failure to join the hearing officer to which they appealed the Commission's decision. It asserts that under the Ordinance, it is the hearing officer's decision, not the Commission's decision, that is final and subject to judicial review, and it is now too late for Owner to join the hearing officer in the action.

A. Applicable Legal Principles

Code of Civil Procedure section 389...