Woodstone Ltd. P'ship v. City of Saint Paul

• Decision Date: 22 May 2023
• Docket Number: 22-CV-1589 (NEB/DLM)
• Parties: WOODSTONE LIMITED PARTNERSHIP and LOFTS AT FARMERS MARKET LLC, Plaintiffs, v. CITY OF SAINT PAUL, MINNESOTA, a Minnesota Charter City, CITY COUNCIL OF THE CITY OF SAINT PAUL, ANGIE WIESE, in her official capacity as the Director of the Department of Safety and Inspections of the City of Saint Paul, MAYOR MELVIN CARTER, in his official capacity as Mayor of the City of Saint Paul, and JOHN DOE, Defendants.
• Court: U.S. District Court — District of Minnesota

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WOODSTONE LIMITED PARTNERSHIP and LOFTS AT FARMERS MARKET LLC, Plaintiffs, v. CITY OF SAINT PAUL, MINNESOTA, a Minnesota Charter City, CITY COUNCIL OF THE CITY OF SAINT PAUL, ANGIE WIESE, in her official capacity as the Director of the Department of Safety and Inspections of the City of Saint Paul, MAYOR MELVIN CARTER, in his official capacity as Mayor of the City of Saint Paul, and JOHN DOE, Defendants.

No. 22-CV-1589 (NEB/DLM)

United States District Court, D. Minnesota

May 22, 2023

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

Nancy E. Brasel United States District Judge

In the November 2021 general election, voters in the City of St Paul (the “City”) approved a rent-stabilization ordinance, the first of its kind in the Midwest. The ordinance limited annual residential rent increases to 3% but permitted exceptions for property owners to earn a reasonable return on investment. Plaintiffs Woodstone Limited Partnership and the Lofts at Farmers Market LLC are residential property owners in the City that are subject to the ordinance. They sue the City and the other above-captioned defendants (collectively “Defendants”) claiming that the law is unconstitutional under the United States and Minnesota Constitutions. The parties with the Court's permission, agreed to file expedited cross-motions for summary judgment. This matter is accordingly before the Court on Plaintiffs' motion for partial summary judgment and Defendants' motion for full summary judgment. For the reasons below, the Court grants summary judgment to Defendants on all claims.

BACKGROUND

I. The City's voters approve rent stabilization.

In 1984, the Minnesota legislature enacted a statute permitting cities to pass rent-stabilization^[1] ordinances in a general election. See Minn. Stat. § 471.9996. No city in Minnesota had taken advantage of this law until St. Paul in 2021. That summer, a group of voters drafted a rent-stabilization ordinance and petitioned the City to put it on the November ballot. (See ECF No. 37 at 60.) The petition satisfied the City's Chapter 8 requirements for ballot initiatives, which meant that the City Council was required to put it to voters as written by the authors. See St. Paul, Minn., City Charter § 8.04. The following question was asked of the voters in the general election:

Should the City adopt the proposed Ordinance limiting rent increases? The Ordinance limits residential rent increases to no more than 3% in a 12-month period, regardless of whether there is a change of occupancy. The Ordinance also directs the City to create a process for landlords to request an exception to the 3% limit based on the right to a reasonable return on investment.

(ECF No. 37 at 60.) A narrow majority of voters-52.8%-passed the ordinance. (See id. at 58.) In so doing, the City became the first in the Midwest to approve rent stabilization.

As the ballot initiative explains, the ordinance permitted property owners^[2] to increase rent up to 3% annually, and it directed the City to establish a process for property owners to request exceptions for increases above 3%. The ordinance instructed the City to consider many factors in determining exceptions, including changes in property taxes, unavoidable changes in maintenance or operating expenses, costs of certain capital improvements, changes in the number of tenants, substantial deterioration of the rental unit, compliance with state and local housing and health and safety codes, and the pattern of recent rent increases or decreases. (Id. at 70.) The ordinance exempted some forms of affordable housing, (id.), but those exemptions affected only “a very small number of housing units.” (ECF No. 53-1 at 35.)

II. The City implements the voter-initiated ordinance.

The voter-initiated ordinance went into effect on May 1, 2022. (ECF No. 37 at 70.) After it passed and before it went into effect, the City altered the ordinance slightly to “define certain terms contained therein and ensure consistency of language used throughout.” (Id. at 73-79.) It made no substantive changes. (See id.) The City also amended its legislative code to task its Department of Safety and Inspections (“DSI”) with implementing the ordinance. (Id. at 106.) After reviewing the roughly 200 comments that the public submitted, DSI issued its final administrative rules a few days before the ordinance's May 1 effective date. (Id. at 119.)

In its administrative rules, DSI created two paths for property owners to request rent increases above 3%, each of which requires the completion of a Rent Increase Exception Request Form. (ECF No. 53-1 at 445.) First, if a property owner wants to increase rent above 3% but less than 8%, they must submit a “self-certification” application explaining why the increase is necessary. (Id.) Property owners are “strongly encouraged” to complete a Maintenance of Net Operating Income (“MNOI”) Worksheet as well, (id.), which is a 22-page form that asks about the property owner's property, income, and expenses. (See generally ECF No. 37 at 452-73 (sample worksheet).) DSI may audit any self-certification application, but pre-approval is not required before property owners implement the rent increase. (See ECF No. 53-1 at 445-46.)

Second, for requested increases greater than 8%, property owners must follow DSI's “staff-determination” process. (Id. at 446.) Here the property owner must complete the MNOI Worksheet, and DSI must approve the increase before a property owner implements it. (See id.) Under each process, property owners are entitled to a reasonable return on investment. (Id. at 445.) But DSI's rules set a maximum 15% annual limit on rent increases, with increases above 15% deferred into the next year. (ECF No. 37 at 125.)

III. The City substantially amends the ordinance.

Throughout the process of drafting, voting, amendments, and DSI rulemaking, various members of the City's leadership expressed concerns about the voter-initiated ordinance. Mayor Melvin Carter, for example, shared reservations about aspects of the voters' proposal in the leadup to the November 2021 election. (ECF No. 53-1 at 6.) Soon after his victory, Mayor Carter signaled his desire for an amendment exempting new housing, and in February 2022, he announced his proposal for a 15-year “rolling” exemption for newly-constructed residential properties. (Id. at 6-7; see also ECF No. 38 at 11 (describing Mayor Carter's pitch in his State of the City address for a 15-year new-construction exemption).)

It is easy to see the reasons for concern. In the first few months after voters approved the ordinance, the City's residential housing supply took a hit. New multifamily building permits decreased over 80% in a three-month period relative to the previous year. (ECF No. 38 at 6.) The ordinance increased risk for new-housing developers, which dried up their financing pipeline. (Id. at 8-9.) Many developers, large and small, paused their projects in the City. (ECF No. 33 ¶¶ 2-7.) Those stoppages included affordable-housing developments. (ECF No. 38 at 16.)

Mayor Carter convened a 41-person rent-stabilization stakeholder group (“RSSG”) to analyze the voters' ordinance and consider “the medium to long-term perspective about how rent stabilization should operate in Saint Paul and to balance critical goals of equity and growth.” (ECF No. 53-1 at 4.) The RSSG's members included tenant advocates, real estate developers, and property owners. (Id.) The City contracted with the Center for Urban and Regional Affairs (“CURA”) at the University of Minnesota to facilitate the group's deliberations. (Id. at 9.) The RSSG reviewed information about rent-stabilization programs nationwide, heard from the public and experts, and ultimately negotiated and delivered a set of recommendations to the City. (Id. at 4.) In the summer of 2022, the RSSG issued its report and presented to the City Council. (Id. at 2, 394.)

The RSSG made two recommendations. First, 60% of the group's members approved a package of proposals: an annual rent-increase cap of 3%, a provision for a reasonable rate of return on investment, a provision for the banking of preferential rents in some form,^[3] a new-construction exemption of 15 years, and just-cause eviction protection for tenants. (Id. at 39.) Second, 83% of the RSSG approved “some form of partial vacancy decontrol.”^[4] (Id.) But the group did not endorse a specific partialdecontrol policy. (Id.)

While the RSSG completed its work, the City entertained amendments to the voters' ordinance, holding numerous hearings throughout the summer and fall of 2022. (Id. at 453.) The City approved a second set of amendments by a five to two vote in September 2022, and the amended version of the ordinance (the “Amended Ordinance”) went into effect on January 1, 2023. (See generally ECF No. 69-1.) The Amended Ordinance is operative today, and it is the basis of this dispute.

In the September 2022 amendments, the City acknowledged several problems with the voters' program. The City recognized that it issued only 200 residential building permits in the first four months of 2022, a substantial drop from the 1,391 permits it issued over the same period in 2021. (Id. at 2.) It warned that developers may pull out of existing development agreements, which would decrease the availability of Tax-Increment Financing that fuels the City's affordable housing. (Id.) And the City noted that it had “forecasted a loss of capital investment, relocation of developers and builders to more predictable locations and asset types, negative impacts on housing supply, and long term increases to housing costs” because of the voter-initiated ordinance. (Id. at 2-3.)

To combat these issues, the September 2022 amendments altered the voter-initiated ordinance in several...