HomeMy WebLinkAbout1994-12-02 RRC Minutes •
MINUTES
PALM DESERT RENT REVIEW COMMISSION MEETING
FRIDAY, DECEMBER 2, 1994
9:00 A.M.
CIVIC CENTER COUNCIL CHAMBER
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I. CALL TO ORDER
Commissioner Coates convened the meeting at 9:00 a.m.
H. PLEDGE OF ALLEGIANCE
III. ROLL CALL
Present: Excused Absence:
Commissioner Jim Ainsworth Vice Chairman Joyce Wade-Maltais
Commissioner Henry Armstrong
Commissioner Robert Coates
Commissioner Ulrich McNulty
Also Present:
Sheila R. Gilligan, City Clerk/Public Information Officer
Doug Phillips, Deputy City Attorney
Rick Erwood, Hearing Officer
Mary P. Frazier, Deputy City Clerk
IV. NEW BUSINESS
NOTE: ITEM "B" WAS TAKEN OUT OF ORDER AND DISCUSSED PRIOR TO ITEM "A".
A. SELECTION OF CHAIRMAN AND VICE CHAIRMAN.
Mrs. Gilligan noted that Commissioner Coates had been acting as Chairman but that this had
not been formally acted upon by the Commission. She asked for nominations for the Office
of Chairman.
Commissioner McNulty nominated Commission Coates as Chairman and asked that nominations
be closed and that a unanimous ballot be cast. Motion was seconded by Armstrong and carried by a 3-0-1
vote, with Chairman Coates ABSTAINING.
Commissioner McNulty nominated himself as Vice Chairman. Motion was seconded by Coates
and carried by a 3-0-1 vote, with Vice Chairman McNulty ABSTAINING.
MINUTES
PALM DESERT RENT REVIEW COMMISSION MEETING DECEMBER 2, 1994
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B. DESIGNATION OF TERMS OF OFFICE FOR RENT REVIEW COMMISSION.
Mrs. Gilligan noted that the Commission had never had terms of office and that the ordinance
did provide for that staggered terms. She noted her memorandum dated October 27, 1994,
recommending term expirations as follows (terms to expire in September of the noted years):
1995 Expiration - Commissioners Joyce Wade-Maltais and Jim Ainsworth
- 1996 Expiration - Commissioner Robert Coates
1997 Expiration - Commissioners Henry Armstrong and Ulrich McNulty
Commissioner Coates moved to accept the recommendation of Mrs. Gilligan and set the terms for
the Rent Review Commission as outlined in the memorandum dated October 27, 1994. Motion was
seconded by Commissioner McNulty and carried by unanimous vote.
C. CONSIDERATION OF THE PARK OWNER'S REQUEST FOR REVIEW OF THE
HEARING OFFICER'S RECOMMENDATION IN THE CASE OF THE APPLICATION
FOR HARDSHIP RENT INCREASE BY SILVER SPUR MOBILE MANOR.
NOTE: VERBATIM TRANSCRIPT OF THIS PORTION OF THE HEARING IS ATTACHED HERETO
AND MADE A PART HEREOF AS EXHIBIT "A". MOTIONS WERE AS FOLLOWS:
Commissioner Armstrong moved to accept the recommendations of the Hearing Officer and adopt
the findings and recommendation. Motion failed for lack of a second.
Commissioner McNulty moved to close the presentation of arguments, comments, and/or evidence
prior to moving onto any of the Hearing Officer's recommendations. Motion was seconded by
Commissioner Armstrong and carried by a 3-1 vote, with Commissioner Ainsworth voting NO.
Commissioner McNulty moved to adopt the Hearing Officer's finding that there is insufficient
evidence to establish a deficiency in the Net Operating Income that would require an increase in rent.
Motion was seconded by Commissioner Armstrong and carried by unanimous vote.
Commissioner McNulty moved to adopt the further findings of the Hearing Officer that the
application for discretionary hardship rent increase is not frivolous, that the rental rates in the park cannot
be rolled back, and that each party be responsible for their own fees. Motion was seconded by Mr.
Armstrong and carried by a 3-0-1 vote, with Chairman Coates ABSTAINING.
2
MINUTES
PALM DESERT RENT REVIEW COMMISSION MEETING DECEMBER 2, 1994
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V. ORAL COMMUNICATIONS
None
VI. ADJOURNMENT
With Commission concurrence, Chairman Coates adjourned the meeting at 10:55 a.m.
RESPECTFULLY SUBMITTED,
MARY P. F IER, SECRETARY
3
MINUTES
PALM DESERT RENT REVIEW COMMISSION MEETING DECEMBER 2, 1994
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EXHIBIT "A"
ATTACHED
(81 PAGES)
4
rArli
ALIFORNIA DEPOSITION REPORTERS
A California Corporation •
fir P.O.Box 108 (800)242-1996‘\11k
Covina, California 91723 WHEN EVERY WORD COUNTS . . . (818)915-1996
PALM DESERT RENT REVIEW COMMISSION MEETING
Consideration of the Park Owner ' s Request
for Review of the Hearing Officer ' s
Recommendation in the Matter of the
Application for Hardship Rent Increase
by Silver Spur Mobile Manor
REPORTER ' S TRANSCRIPT OF PROCEEDINGS
Civic Center Council Chambers
73 -510 Fred Waring Drive
Palm Desert , California
Friday , December 2 , 1994
9 : 04 A . M . to 10 : 55 A . M .
Reported by :
Melanie A . Vizenor
Certified Shorthand Reporter
License No . 4026 ORIGINAL
Corporate Office: Eastland Securities Bldg. • 599 S.Barranca Ave. • Penthouse • Covina,CA 91723
ORANGE COUNTY LOS ANGELES SAN BERNARDINO PALM SPRINGS SAN DIEGO
Newport Center Broadway Plaza Andreson Building Wells Fargo Bank Building Imperial Bank Tower
(714)648-243b (213)387-9630 (909)888-8992 (619)323-9908 (619)233.1996/
1 APPEARANCES
2
3 RENT REVIEW ROBERT COATES , Chairman
COMMISSION : ULRICH McNULTY , Vice Chairman
4 JAMES AINSWORTH
HARRY ARMSTRONG
5 JOYCE WADE-MALTAIS ( not present )
6
7
8 CITY OF PALM RICHARD ERWOOD , Hearing Officer
DESERT STAFF : DOUG PHILLIPS , Deputy City Attorney
9 SHEILA R . GILLIGAN , City Clerk
MARY P . FRAZIER , Deputy City Clerk
10
11
12
13 FOR THE SILVER ANTHONY C . RODRIGUEZ
SPUR RESERVE : Attorney at Law
14 1300 Clay Street , Suite 600
Oakland , California 94612
15 ( 510 ) 464 - 8022
16
17
18 FOR THE SILVER LAW OFFICES OF KURT DELSACK
SPUR HOMEOWNERS 4695 MacArthur Court , Suite 1040
19 ASSOCIATION : Newport Beach , California 92660
( 714 ) 553 -8002
20 BY : KURT DELSACK , ESQ .
21
22
23
24
25
2
CALIFORNIA DEPOSITION REPORTERS , INC .
1 PALM DESERT , CALIFORNIA , FRIDAY , DECEMBER 2 , 1994
2 9 : 04 A . M .
3 -o0o-
4
5
6 CHAIRMAN COATES : We ' re down to item C on the
7 agenda : Consideration of Park Owner ' s Request for
8 Review of the Hearing Officer ' s Recommendation in the
9 Case of the Application for Hardship Rent Increase by
10 Silver Spur Mobile Manor .
11 MS . GILLIGAN : If I could just ask each of the
12 commissioners to pull their microphones closer
13 because the tape recorder is not picking it up .
14 Thank you .
15 CHAIRMAN COATES : Okay . If you could you
16 please introduce yourselves .
17 MR . RODRIGUEZ : Yes . My name is Anthony
18 Rodriguez , and I ' m the attorney for the owners of the
19 mobile home park , Silver Spur Reserve .
20 CHAIRMAN COATES : And yourself ?
21 MR . DELSACK : Yes , good morning , gentlemen . My
22 name is Kurt Delsack . I represent the Silver Spur
23 Homeowners Association .
24 MS . GILLIGAN : Perhaps at this point it would
25 be appropriate for the hearing officer or the
3
CALIFORNIA DEPOSITION REPORTERS , INC .
1 deputies of the hearing to make a staff presentation .
2 MR . ERWOOD : Members of the commission , I ' ll
3 just - -
4 CHAIRMAN COATES : We would like to know who you
5 people are too , please .
6 MR . ERWOOD : My name is Rick Erwood . I was the
7 hearing officer in this matter .
8 With respect to my report , I believe you
9 each have a copy of that . I ' m just going to briefly
10 go through some highlights .
11 I think it ' s important to emphasize from
12 the start that the guidelines with respect to the
13 rent control ordinance in the city of Palm Desert
14 presume that the net operating income formula allows
15 a fair return on property . This presumption is
16 listed in guideline number 100 . Guidelines Section
17 102 indicates that the net operating income equals
18 the gross income less allowable operating expenses .
19 Now , the reason I bring up this code
20 section is because the main dispute in this case is
21 whether or not some refinancing that was done on the
22 property would be an allowable operating expense
23 according to our ordinance .
24 Furthermore , you probably recognized in
25 my report that there is an issue with respect to the
4
CALIFORNIA DEPOSITION REPORTERS , INC .
1 management expenses in the park . The testimony by
2 the park owner indicated that his management fees , or
3 the management fees that were charged to the park ,
4 were 6 percent of the gross income . Now , the
5 guidelines only allow for a 5 percent of gross income
6 to be used as a management expense , management fees .
7 Anything in excess of that is presumed to be
8 unreasonable . And this presumption must be overcome
9 by clear and convincing evidence . The park owner
10 only produced one item of evidence that he felt was
11 justification for charging this 6 percent of gross
12 income amount for management expenses , and that was
13 the sewer hookup .
14 Now , in my report I ' ve indicated to you
15 that this rebate of $ 1 , 500 per unit for the sewer
16 hookup was offered to everyone who lived within the ,
17 I believe it was , the Coachella Valley Water
18 District , and this park exercised its management
19 authority and was able to get -- was able to get the
20 benefit of that waiver that was given to everybody
21 else . There were some people in the Coachella Valley
22 in the district that did not receive the benefit of
23 this sewer hookup waiver , but basically it was
24 offered to everybody . There appears to be nothing
25 extraordinary , no evidence to indicate that the
5
CALIFORNIA DEPOSITION REPORTERS , INC .
1 management of the park did anything extraordinary to
2 receive a benefit that was not offered to anyone else
3 who didn ' t have their management company working for
4 them .
5 Lastly , with respect to operating
6 expenses , I think it ' s important to look at Section
7 102 C . 2 . , which defines what operating expenses are
8 not allowed under our ordinance . And in subsection
9 a . of that section it says , avoidable or unreasonable
10 or unnecessary expenses are not allowable as
11 operating expenses . Section B . indicates , mortgage
12 principal and interest payments are not allowable as
13 operating expenses . And section , I believe it ' s E . ,
14 talks about attorney ' s fees that are used - - that are
15 incurred when an attorney appears before this board
16 for hardship rent increase .
17 Therefore , using those sections as a
18 basis , if you look through my report , it is my
19 position that the refinancing of this park for 4 . 3
20 million is , one , an avoidable or unreasonable or an
21 unnecessary expense , and , two , is basically a
22 mortgage principal and interest payments which are
23 not allowed as operating expenses .
24 My position with respect to why this
25 expense is unreasonable is as follows : When this
6
CALIFORNIA DEPOSITION REPORTERS , INC .
1 park was refinanced , the owner indicated that it was
2 primarily refinanced to pay off some other investors ,
3 and maybe to do some more things for the park . But
4 Dr . Fabrikant testified that in his review of the
5 records when he was making his analysis , he didn ' t
6 see any of this $4 . 3 million going back into the
7 park . You had before you an application that
8 consisted of approximately 600 pages . Each and every
9 capital expense that the owner made for this park is
10 in fact listed in that document . So if any of this
11 4 . 3 million was used for that , they ' re already taking
12 care of that with respect to the capital improvement
13 that ' s listed in their application .
14 If you take out the refinancing charges
15 that are now being - - well , they want to pass through
16 to the park owner - - or , excuse me , the residents ,
17 you ' ll find that this park is making an adequate
18 return on the investment . Even with those interest
19 expenses and principal of 38 , 000 per month , the
20 income to the park is over 500 , 000 per year .
21 Dr . Fabrikant was an expert economist
22 called by the park owner to talk about the rate or
23 return on investment . I think it ' s interesting to
24 note that his estimates on his calculations range
25 from an increase of $62 per space per month to $88 . 65
7
CALIFORNIA DEPOSITION REPORTERS , INC .
1 per space per month . That ' s quite a spread . And the
2 reason I point that out is I think it points out the
3 weakness of his testimony .
4 In other words , you ' re talking about a
5 difference of over $26 per space per month from his
6 low to high estimate , and yet there 's really no
7 reasonable basis to determine of any of the estimates
8 that he made , which one is the best one for this
9 park , or which one is the most accurate . We ' re
10 dealing in economic theory here , according to his
11 testimony . And in actuality , I ' m not sure that that
12 has any relevancy to the real world . He could not
13 pin down what he felt was really the most appropriate
14 space rent per month .
15 I would further indicate that when you
16 talk about rent and the rental increase that ' s asked
17 for by the applicant , I think you have to look in
18 terms of real figures what really we ' re talking about
19 and the impact to the residents . We ' re talking about
20 an average space increase , if you take
21 Mr . Fabrikant ' s figures and apply it to the average
22 rent of the park , of a 17 . 7 increase to a 25 . 3
23 percent increase . Now , he indicates that this is
24 really only to the park a 10 or 11 percent increase
25 for a return on their investment . However , the
8
CALIFORNIA DEPOSITION REPORTERS , INC .
1 impact to the homeowners is much more substantial .
2 Lastly , I would like to point out a
3 couple -- I would like to comment on a couple of
4 points raised by Mr . Rodriguez in his brief . First ,
5 he indicates that not only if you don ' t give this
6 park the $62 per space per month rent increase that
7 he will institute litigation against the city , and
8 that he will file a new application for a hardship
9 rent increase , he would have the right to do that
10 regardless of anything that this commission does .
11 And I would just ask you , and if your lawyer ,
12 Mr . Phillips , has any comment , you can make it , but I
13 would just ask you not to be intimidated by threat of
14 litigation or filing of a new hardship petition .
15 There was evidence produced that some of
16 the people that lived in the park were snowbirds .
17 That ' s a term that ' s used by people in the Coachella
18 Valley to describe individuals who come down here in
19 the winter and live , and then in the summer when it ' s
20 too hot and the rest of us are stuck here , they ' re
21 gone up north somewhere to enjoy cooler weather . He
22 uses that as a justification for saying these people
23 can afford to pay the increase .
24 If you look through the ordinance and our
25 guidelines , there is no provision for creating two
9
CALIFORNIA DEPOSITION REPORTERS , INC .
1 classes of citizens for people who live in mobile
2 home parks in the city of Palm Desert , and you may
3 have recognized by Mr . Delsack ' s response , and it ' s
4 my position also , that it would be unconstitutional
5 to create two classes of citizens , one who are
6 snowbirds and those who aren ' t , to justify rent
7 increases . Obviously , these people , the application
8 does not say we ' re only going to give the rent
9 increases to the snowbirds . So the relevancy of that
10 issue , I think , is pretty weak .
11 Obviously , this is a park that increased
12 in value during the early period that it was owned by
13 Mr . Bedig . It was refinanced for over twice the
14 amount of money that the purchase agreement
15 originally called for after a few years . If you
16 think about this just as I think a layperson would ,
17 if this park is losing money and is losing it to the
18 extent that the owner claims , how has it been able to
19 stay in business this long and how has it been able
20 to increase in value so much . Because let ' s face it ,
21 we all know that the real estate value , the value of
22 this park , does depend to a certain extent on the
23 rents that are generated for the space ownership .
24 Furthermore , I would point out that this
25 park is 100 percent occupied . And that was the state
10
CALIFORNIA DEPOSITION REPORTERS , INC .
1 of the testimony . There is some turnover . But if
2 you look at it in viewing Dr . Fabrikant ' s report , I
3 think you should consider whether or not this is as
4 high a risk in investment as is claimed by the
5 applicant .
6 That basically concludes my report . The
7 burden was on the applicant to prove by a
8 preponderance of the evidence that he was entitled to
9 a discretionary hardship rent increase ; that the
10 hardship rent increase , using the NOI formula , and
11 using the 75 percent of the CPI regular rent
12 increase , were insufficient . And in that regard he
13 has failed to produce any evidence to my satisfaction
14 that either of those methods would not give him a
15 fair rate of return on his investment .
16 And I ' ll answer any questions that you
17 have .
18 MR . McNULTY : Mr . Erwood , with respect to the
19 hardship with the 75 percent increase of the Consumer
20 Price Index for the hardship , although there was no
21 testimony presented to that , there are figures in
22 Mr . Rodriguez ' s documentation which provided , at
23 least me , with some information .
24 Do you have those figures or did you
25 consider those figures that would result from
11
CALIFORNIA DEPOSITION REPORTERS , INC .
1 computing the 75 percent that you could increase it
2 under the hardship statute?
3 MR . ERWOOD : Well , it ' s not the .75 percent for
4 the hardship statute . The hardship statute requires
5 50 percent of the increase in the Consumer Price
6 Index from the base year and you apply that to the
7 net operating income .
8 Now , with respect to that , the city
9 provides a form, and also with respect to that , there
10 are certain number of expenses that are allowed and
11 that aren ' t allowed . My position is that they were
12 still using the principal and interest when they
13 refinanced the loan to make those calculations , and
14 that was improper . The 6 percent management fee was
15 improper . And if you recall , there was a vast amount
16 of increase in one year in attorney ' s fees from 6 , 000
17 to 76 , 000 . Whether or not any of those fees dealt
18 with rent control matters , I think is an issue .
19 Because if they did deal with rent control matters ,
20 then I think under the ordinance those may not be
21 expenses that can be used to calculate the NOI .
22 So basically what I ' m saying is , no , I
23 was not satisfied that they followed the proper
24 procedure in calculating the NOI under the
25 traditional , which I ' ll call traditional hardship
12
CALIFORNIA DEPOSITION REPORTERS , INC .
1 evaluation . I didn ' t see anything with respect to
2 the 75 percent CPI that I recall . Mr . Elias
3 testified , though , that using the normal CPI increase
4 has never kept pace with the increased costs of
5 operating the park .
6 I don ' t know if that answers your
7 question .
8 MR . McNULTY : In a roundabout way I think it
9 does .
10 CHAIRMAN COATES : I have only scanned the
11 testimony - - there was days and days of testimony .
12 Somewhere in there what I was looking for was a
13 presentation of some financial data , like income tax
14 returns or other things . The way I read this thing ,
15 the park is actually owned by a partnership? Is that
16 correct?
17 MR . ERWOOD : Well , I believe that Mr . Bedig now
18 is the sole owner . It started with more owners . And
19 the financial records indicate - - in the original
20 application , they deleted this from their claim, but
21 there were figures given for the buyout of different
22 individuals on a stepped-up basis . I believe that
23 may have been for income tax purposes . A lot of the
24 records that they presented were prepared by their
25 CPA for their income tax . But I didn ' t see per se an
13
CALIFORNIA DEPOSITION REPORTERS , INC .
1 income -- a federal income tax return for something
2 like that .
3 CHAIRMAN COATES : What I ' m driving at is that
4 every partnership is required to file an information
5 return form 1065 with the Internal Revenue Service .
6 There is no tax associated with the return ; simply ,
7 an information return . And what I wanted to know
8 was , A , did the partnership own any other income
9 property , and , B , did anybody ever try to present the
10 hearing officer with any of those returns ?
11 MR . ERWOOD : Mr . Rodriguez can probably answer
12 that question better than I could .
13 MR . RODRIGUEZ : Oh , do you want me to answer it
14 now?
15 CHAIRMAN COATES : Yes , please .
16 MR . RODRIGUEZ : Well , first of all , I believe
17 the evidence was that when the partnership originally
18 purchased the park , there were perhaps three or four
19 or even five partners . And when this buyout
20 occurred , it was not Mr . Bedig buying up all of the
21 partners , it was Mr . Bedig and one of the other
22 partners buying out the remaining partners . So there
23 has been since approximately 1982 two major
24 partners . Mr . Bedig is one and Warren Epstein was
25 the other one . Warren Epstein passed away , and now
14
CALIFORNIA DEPOSITION REPORTERS , INC .
1 it ' s the estate of Warren Epstein who is the other
2 partner . And Mr . Epstein , or Epstein ' s estate ,
3 actually owns about 60 to 65 percent of the
4 partnership and Mr . Bedig owns 35 to 40 percent , and
5 I believe there was testimony to that effect .
6 With respect to other income properties
7 owned by this partnership , I do not believe that
8 there are any other ones . I don ' t know that for a
9 fact , but I do have substantial experience
10 representing Mr . Bedig and I know that he usually
11 will set up a separate partnership for each property
12 that he becomes involved in . So --
13 CHAIRMAN COATES : So the chances are that this
14 is the only rental property that the partnership
15 owns .
16 MR . RODRIGUEZ : Yes . This partnership is known
17 as Silver Spur Reserve , and it was formed for the
18 purpose of purchasing Silver Spur Mobile Home Park ,
19 for example .
20 CHAIRMAN COATES : That ' s an important point .
21 Because if it doesn ' t own any rental properties , then
22 the partnership return would contain information
23 applying only to Silver Spur . Correct?
24 MR . RODRIGUEZ : I don ' t know . I mean I ' m
25 willing to take your word for it , if that ' s the
15
CALIFORNIA DEPOSITION REPORTERS , INC .
1 case . But there was an exhibit , Tab 9 to Exhibit 1 ,
2 there was a statement of revenues and expenses on the
3 income tax basis for 1992 , the year in question . I
4 don ' t know if anybody ' s looked at that , but I believe
5 that that ' s probably the most important document in
6 this entire application , and it really underlines
7 everything that Mr . Erwood has been telling you .
8 Because , first of all , if you ' ll look at
9 Tab 9 , you ' ll see that the revenues for the park were
10 $ 949 , 000 and the expenses for the park were $ 373 , 000 ,
11 and that left a profit of $576 , 000 . But that profit
12 was before the interest was paid , not after . They
13 did not try and include the interest as an expense .
14 Then on the next page , they go and show
15 what happened to their $576 , 000 profit , and they
16 showed that 498 , 000 of it in fact went to interest .
17 But they never have tried to make the tenants pay for
18 that interest or to include that in their profit .
19 They are willing to concede , and have always
20 conceded , that the return that should be judged is
21 the $ 576 , 000 that they had before they paid the
22 interest .
23 And so I don ' t understand how Mr . Erwood
24 can sit there and ignore that evidence and all of the
25 testimony on that point .
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 And he. also is really trying to mislead
2 the board with some of these other statements . For
3 example , under the NOI maintenance approach , which I
4 believe you call your regular hardship method , all
5 you do is you take the 1982 profit , which was
6 provided , the entire operating statement , and it
7 showed a net operating income of $ 311 , 000 before
8 interest . We did not include interest as an expense
9 in determining that $311 , 000 , and everybody has
10 that . And under your approach , under your
11 regulations , you would increase that $311 , 000 by 75
12 percent of the CPI over the next ten years , to 1992 ,
13 which was the relevant year .
14 Well , we did it at page 15 in our brief .
15 We said even if you increased it by 100 percent of
16 the CPI , you would only be up to $477 , 000 . So the
17 most you could possibly get under your hardship
18 approach would be 477 . Well , we ' re already making
19 576 , 000 . So it ' s obvious that we ' re entitled to
20 nothing under your hardship approach . We concede
21 that . And it ' s futile to go through a process when
22 you ' re entitled to nothing . There ' s just no point in
23 it .
24 And the statements about - -
25 Are you guys following me?
17
CALIFORNIA DEPOSITION REPORTERS , INC .
1 CHAIRMAN COATES : Yes .
2 MR . RODRIGUEZ : Okay . And these statements
3 about -- so his three major points for complaining
4 about the 1992 expenses and why he ' s still not
5 convinced that the NOI approach wouldn ' t give us a
6 fair return - - well , the first one is he says that we
7 included the debt service in the 1992 expenses .
8 That ' s absolutely false . The second one , he refers
9 to some $ 76 , 000 in attorney ' s fees . That was
10 incurred in some previous year , in 1988 . It ' s
11 totally irrelevant to this . What we ' re looking here
12 at is 1992 expenses , comparing them to 1982 expenses ,
13 and you can see from Tab 9 that in 1992 , for legal
14 and accounting combined , it was $ 14 , 277 . And the
15 invoices for the accountants and the attorneys are in
16 the record , and you can see that none of that was
17 incurred for rent control . And so that entire amount
18 should be included .
19 And the third thing that he talks about
20 is the management fee , which he says there ' s no
21 evidence to show that it should be 6 percent instead
22 of 5 percent . Well , I say fine , go ahead , discount
23 it . Whatever our management fee was in 1992 ,
24 $59 , 954 , if that ' s 6 percent of income , go ahead and
25 reduce it to 5 percent of income . You know , reduce
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 that 56 , 000 down to 48 , 000 or whatever it would be .
2 We ' re still not making a fair return .
3 That ' s what you should do . That ' s the
4 appropriate - - you don ' t just say , Well , we disagree
5 that the management fee is 6 percent , it should only
6 be 5 percent , so therefore we ' re not going to rule on
7 the entire application . The appropriate thing to do
8 is say we find that there ' s not appropriate evidence
9 to give them a 6 percent fee , but they didn ' t rebut
10 that one little presumption , so therefore we ' re going
11 to lower your management fee to 5 percent .
12 And that ' s what Mr . Erwood should do . He
13 should lower that $56 , 000 number from 6 percent to 5
14 percent . Maybe that reduces 56 , 000 down to 50 , 000 or
15 48 , 000 . I don ' t really know ; anybody can do that
16 math real quickly . And then that would increase our
17 profit in 576 , 000 to maybe 582 , 000 or 583 , 000 . Well ,
18 we still , the uncontradicted expert testimony was
19 that we needed $736 , 000 to get a fair return . That
20 was the minimum . And if there ' s a difference between
21 what is required , 736 , 000 and 570 , 000 or 580 , 000 or
22 600 , 000 , whatever that difference is , that ' s what
23 we ' re entitled to in terms of a rent increase .
24 And Mr . Erwood ' s statements about , you
25 know , what - - that the expert ' s testimony about a
19
CALIFORNIA DEPOSITION REPORTERS , INC .
1 range of fair returns is too difficult for him to
2 understand or too imprecise is totally contrary to
3 the law . The U . S . Supreme Court and California
4 Supreme Court , and every court I know of that has
5 ever addressed this issue , has said there is no
6 precise formula for determining fair return . There ' s
7 a range of returns .
8 You know, you could go very simplistic .
9 You could go to Bank of America and maybe get 3
10 percent and go to Wells Fargo and get 3 . 1 percent and
11 go to some other bank and get 2 . 8 percent . Those are
12 all returns on your passbook savings account . And
13 that ' s the range .
14 The same is true when you invest in
15 mobile home parks or rental properties . There ' s no
16 11 . 2 percent and that ' s the only number . There ' s a
17 range from maybe 11 percent to 13 percent . And when
18 Mr . Fabrikant is saying that is the range , it could
19 be anywhere in that range . And what he said , and
20 what we ' re willing to take , is the minimum . If the
21 range is 11 to 13 , we ' re willing to take the 11 .
22 That ' s all we want , the absolute minimum, and that ' s
23 what he asked for , and that ' s where this $ 62 comes
24 from . And that ' s the very first sentence of
25 Mr . Fabrikant ' s report , is that a $ 62 per space rent
20
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1 increase is required to get a fair return .
2 MR . McNULTY : Mr . Rodriguez , I have a question
3 in terms of this commission needs to determine what
4 your investment - - I put that term in quotes - - is so
5 that we can determine what a fair rate of return on
6 that is .
7 Would you agree with that?
8 MR . RODRIGUEZ : Yes .
9 MR . McNULTY : Okay . Part of the problem that I
10 had with Professor Fabrikant ' s economic theories and
11 computations was it appeared to me that for each
12 capital expenditure that was made , and then the
13 inflation rate was added thereto for subsequent
14 years , he was making an assumption that for every
15 dollar spent for capital expenditure for improvement ,
16 the park property or investment likewise increased by
17 that same amount . It does not appear to me in real
18 life , setting aside economic theory , that for every
19 dollar you spend in capital improvement necessarily
20 increases that property ' s value by the same amount
21 spent .
22 So it would appear to me that if you
23 would use some common-sensical approach , the
24 inflation-adjusted investment would be less than what
25 he indicated to some amount , which I do not know .
21
CALIFORNIA DEPOSITION REPORTERS , INC .
1 But with a net operating income of 576 , 000 , you might
2 approach that 10 percent or 11 percent that he
3 required as the minimum for a fair rate of return on
4 this park .
5 Where would I be wrong in thinking along
6 those lines ?
7 MR . RODRIGUEZ : Well , I think there are two
8 main reasons . The first one is that Mr . Fabrikant
9 was also given copies of the relevant case law to
10 help him see how economic theory would coincide with
11 what the courts were saying . And the case that he
12 relied on was the case called -- which is cited at
13 page 5 of our brief ; and it ' s very interesting that
14 you used the exact words that that court used : every
15 dollar invested in capital improvements - - and if you
16 turn to page 5 of the brief , you ' ll see that ' s
17 exactly what the Ninth Circuit Court of Appeals said
18 in the Sierra Lake Reserve ' s case - - which ,
19 incidentally , is the other mobile home park owned by
20 Mr . Bedig that he went up to the Ninth Circuit on
21 this particular issue - - where it says exactly that :
22 " Every dollar the landlord puts into the property by
23 way of capital improvements constitutes an investment
24 in the property for which a fair and reasonable
25 return must be allowed . Breaking even is not
22
CALIFORNIA DEPOSITION REPORTERS , INC .
1 enough . " Then it goes on to say , "The rent control
2 ordinance must do more than allow plaintiff to pass
3 through certain costs ; it must ensure that plaintiff
4 will receive a reasonable return on those
5 expenditures . " And then it goes on to say , "To the
6 extent plaintiff alleges that the rent increases
7 allowed on account of capital improvements merely
8 offset the cost of those improvements ( or less ) , it
9 has stated a claim for a violation of substantive due
10 process . "
11 So , one , he was basing it on this court
12 decision , saying you should do that . But two , and
13 maybe more importantly from an economic point of
14 view , is that if you also look at the evidence ,
15 Mr . Taylor , who was an appraiser , testified and
16 submitted a report , which I believe was at Tab 8 ,
17 where he said that the fair market value of the
18 property as of September 9 , 1992 , was somewhere
19 between 7 million and 7 , 900 , 000 . So Mr . Fabrikant ' s
20 total inflation adjustment only comes to 6 , 800 , 000 .
21 So even with all of those inflation adjustments , he ' s
22 still actually below the real value of this property .
23 And I think that ' s the economic answer to
24 your question , is that even with this inflation
25 adjustment , Mr . Fabrikant still hasn ' t gotten up to
23
CALIFORNIA DEPOSITION REPORTERS , INC .
1 the real value in terms of what is really invested
2 out there , because it ' s clear that Mr . Bedig and his
3 partners , if something was to go wrong , if there was
4 to be an earthquake , or who knows what it would be
5 that would totally devastate that property , if
6 something like that happened , they would be out $7
7 million to $ 7 . 9 million .
8 MR . McNULTY : I wanted to discuss the fair
9 market value issue with you later , because I have a
10 problem with that also . But with respect to what
11 Sierra Lake Reserve v . The City of Rocklin that you
12 cited quotes , "every dollar , " and you underlined
13 that , that " the landlord puts into the property by
14 way of capital improvements constitutes an investment
15 in the property , " I read that language from the
16 court ' s decision to mean every dollar that you
17 contribute toward a capital improvement increases the
18 value of that property , and you ' re entitled to a fair
19 rate of return for what you ' ve invested . But nowhere
20 do I read this , nor do I believe the Ninth Circuit
21 meant to state , that you get a 1 - for- 1 investment and
22 rate of return .
23 From a reasonable approach of reading
24 this , yes , every dollar you put into your property
25 constitutes an investment in the property . The court
24
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1 did not state , and I checked , did not state you ' re
2 entitled to a 1 -to- 1 increase wherein you ' re entitled
3 to a reasonable rate of return .
4 MR . RODRIGUEZ : Well , I beg to differ . If you
5 would look at the last sentence of the quote , what
6 they say is that to the extent that the rent
7 increases merely offset the cost of those
8 improvements , that is a violation . If you don ' t even
9 get the cost , you ' ve got a violation . Here we can ' t
10 get costs - - we can ' t get anything for it . We ' ve
11 gotten zero .
12 MR . McNULTY : But then that factors in , this
13 increase in the capital improvement factors into the
14 fair market value of the 7 . 5 million , which you ' ve
15 discussed . So for every capital improvement you make
16 in the real world from Mr . Bedig ' s perception , should
17 he want to sell the property , he ' s going to be
18 looking at 7 . 5 million for the appraised value ,
19 correct , or some amount above that .
20 MR . RODRIGUEZ : Somewhere in that range .
21 MR . McNULTY : Okay . So you are getting your
22 increase for capital expenditures even with the
23 1 - for- 1 , if we were to do it for 1 - for- 1 , under
24 Professor Fabrikant ' s formula , correct?
25 MR . RODRIGUEZ : Well , let me put it this way .
25
CALIFORNIA DEPOSITION REPORTERS , INC .
1 If the city is willing to guarantee to Mr . Bedig that
2 when he sells that property he will get that money ,
3 then maybe you have something to talk about . But I
4 don ' t think the city is willing to do that , and
5 Mr . Bedig is still out there taking the risk until he
6 sells that property , and we all know that lots of
7 properties in Southern California have depreciated in
8 the last few years , and in fact some people have
9 bought homes for $400 , 000 and saw them go down to
10 300 , 000 and lost a hundred thousand dollars in one
11 year . The same thing happened in the Texas in the
12 late 1980s . It happens everywhere . And Mr . Bedig is
13 always going to be at risk until he sells that
14 property . He will never know whether or not any of
15 that will come true .
16 MR . McNULTY : With respect to - -
17 MR . RODRIGUEZ : And can I just say one other
18 thing?
19 I would also point out that I was also
20 the attorney on the Sierra Lake ' s case , from
21 inception all the way to the end , and the issue was
22 in fact that we were entitled to a dollar- for-dollar
23 increase on capital improvements . That ' s exactly why
24 we sued , because the city of Rocklin didn ' t give us
25 that in one of these rent control -type proceedings .
26
CALIFORNIA DEPOSITION REPORTERS , INC .
1 MR . McNULTY : With respect to the fair market
2 value assessment , I have a particular problem with
3 your contention that if we ' re going to make apples to
4 apples in our comparison in your papers , that we need
5 to consider the servicing of the debt .
6 You know , when I went through and went
7 through the case Cotati , I noticed the court in there
8 specifically stated that one could expect to subtract
9 from that formula the amount of payment for mortgage
10 principal , and that was at the top , I believe , of
11 page 278 of that opinion .
12 I do not see how you can in good
13 conscience expect the members of that park to finance
14 the interest of 4 . 3 million that the owner took out
15 when he admits in his testimony , as Mr . Erwood
16 indicated , that it did not go back into the park and
17 that Dr . Fabrikant could not find the investment back
18 in the park .
19 If you take pure equity , pure equity , in
20 that property of 7 . 5 minus 4 . 3 or 3 . 2 million , it
21 appears to this commissioner that 576 , 000 is an
22 adequate rate of return .
23 Where have I missed the boat in that
24 thinking?
25 MR . RODRIGUEZ : Well , first of all , I believe
27
CALIFORNIA DEPOSITION REPORTERS , INC .
1 that Mr . Erwood again misconstrued the evidence
2 because Mr . Fabrikant was never asked to make those
3 kinds of determinations . And all Mr . Fabrikant says ,
4 " I haven ' t seen anything one way or the other on
5 that issue . " He didn ' t say , " I went and looked and
6 tried to find where that refinancing money went . "
7 MR . McNULTY : But whose burden is that?
8 MR . RODRIGUEZ : It ' s totally irrelevant . I
9 mean I read Mr . Erwood ' s decision over and over
10 again , and it boggles my mind . I think , What is he
11 trying to say here? I mean if you read the
12 application , you see that we even have --
13 MR . McNULTY : Well , it seems to me , Counsel ,
14 that you anticipated the equity argument in your
15 papers .
16 MR . RODRIGUEZ : Of course .
17 MR . McNULTY : Would you not anticipate the
18 equity argument at the hearing? Why would you not
19 present evidence from Dr . Fabrikant or from somebody
20 to that issue when you address it in your papers and
21 then call Mr . Erwood unreasonable in his conclusion?
22 It appears to me that there should have been some
23 testimony to that issue , then , since you did expect
24 to see that as you indicate in your papers .
25 MR . RODRIGUEZ : I don ' t understand what either
28
CALIFORNIA .DEPOSITION REPORTERS , INC .
1 one of you are saying about - - I mean you have equity
2 in the property . You have a fair market value , and
3 when you subtract out the loan , that gives you your
4 equity . What does that have to do with the source of
5 the money for the capital improvements ? Does it
6 really matter if the money for the capital
7 improvements came from Mr . Bedig winning the lottery
8 or if it came from him refinancing the property?
9 What is the difference?
10 MR . McNULTY : There is no difference , except
11 there was no testimony that I could find that
12 indicated that loan money went into capital
13 improvements . So that loan money is taken out ,
14 Mr . Bedig has the money for whatever purpose , if he
15 wishes to put it in the stock market , mutual funds ,
16 to try to increase his rate of return greater than
17 his interest rate on the borrowing of that money , yet
18 you want this commission to factor that in in
19 determining the rate of return . And I don ' t think
20 you can do that , particularly in light of the
21 language in Cotati that talked about principal ,
22 servicing the debt payment toward principal not
23 toward interest . I looked for your citation and
24 quotation , and what I found was something at the top
25 of page 278 that I ' ve already stated .
29
CALIFORNIA DEPOSITION REPORTERS , INC .
1 If you take the equity approach to this
2 particular piece of property of 3 . 2 million , and your
3 net operating income is 576 , 000 , you ' re right ,
4 Mr . Erwood was wrong , you did not include debt
5 servicing with respect to interest . I ' m not sure
6 what the figure would be for principal . However , it
7 appears , just on an equity standpoint , 576 , 000 as
8 opposed to 3 . 2 million is roughly a 16 -percent rate
9 of return , roughly . That seems fair . Why or how can
10 we consider financing the interest rate?
11 MR . RODRIGUEZ : Well , that ' s why we said
12 because of the refinancing , we were rejecting that
13 theory . That if the board wanted to consider it ,
14 fine , here ' s what the evidence says , but that once
15 you start refinancing properties , everything gets
16 skewed . And that ' s why we wanted to concentrate on
17 the inflation-adjusted investment method .
18 But then we went on to say - -
19 MR . McNULTY : Excuse me . But that method
20 benefits you , if we concentrate on that benefit , as
21 opposed to an equity method , which would benefit the
22 homeowner .
23 MR . RODRIGUEZ : But then we went on to say
24 because this financing can lead to skewed results and
25 we don ' t want skewed results , we then said , let ' s
30
CALIFORNIA DEPOSITION REPORTERS , INC .
1 assume that there never was a refinancing . Let ' s
2 assume that Mr . Bedig and his partners borrowed that
3 money and paid it off , because the loan would have
4 been over by now . And so , therefore , their equity ,
5 if they had never refinanced , would in fact be
6 $7 , 500 , 000 , or whatever the fair market value of the
7 property and the equity in the property would be
8 exactly the same . So they would have paid off the
9 entire original loan if that ' s the way you want to
10 look at it to say that the second refinancing was
11 unreasonable for whatever reasons . And I would also
12 state that Mr . Bedig , I ' m sure , did testify that part
13 of that money went into the property . I believe
14 that ' s totally false .
15 MR . DELSACK : He did not .
16 MR . RODRIGUEZ : Regardless of that , the bottom
17 line is that we tried to show that we agreed that
18 getting into this refinancing issue makes it very
19 difficult . But there was a refinancing , so we tried
20 to look at it in a way that didn ' t - - in two
21 different ways that did not affect the refinancing at
22 all .
23 MR . McNULTY : But that provides a benefit to
24 Mr . Bedig , doesn ' t it? He takes out 4 . 3 million
25 against the property .
31
CALIFORNIA DEPOSITION REPORTERS , INC .
1 MR . RODRIGUEZ : And he has to pay it back .
2 MR . McNULTY : That ' s right . But he ' s getting
3 the benefit . From the lack of reinvestment in that
4 property , Mr . Bedig is the sole beneficiary of that
5 loan that he must pay back , none of the homeowners .
6 MR . RODRIGUEZ : That ' s probably true .
7 MR . McNULTY : I would give you --
8 MR . RODRIGUEZ : Unless he - -
9 MR . McNULTY : If he had put in 1 million in
10 capital improvements , then I would say let ' s consider
11 that 1 million that he put back in . But he could
12 have spent that $4 . 3 million for a fantastic home in ,
13 say , Bighorn or the Vintage .
14 MR . RODRIGUEZ : That ' s true .
15 MR . McNULTY : So I cannot believe , this
16 commissioner does not believe that you can avoid , in
17 your terms , the skewed result looking at
18 inflation-adjusted investment versus an equity . It
19 appears that for what happened with this particular
20 money under this particular fact setting , the most
21 fair approach is the equity in the property , and what
22 return is received on the equity in the property in
23 light of the nature of that loan .
24 How would that provide a skewed result
25 for all parties involved?
32
CALIFORNIA DEPOSITION REPORTERS , INC .
1 MR . RODRIGUEZ : Because Mr . Bedig has to pay
2 back that money .
3 MR . McNULTY : But Mr . Bedig has the 4 . 3
4 million .
5 MR . RODRIGUEZ : Right , but has to pay it back .
6 MR . McNULTY : But if I take a loan , I have to
7 pay it back , plus interest . I can ' t pass that on to
8 the tenant if I have not reinvested the capital into
9 that property .
10 MR . RODRIGUEZ : I don ' t know that that ' s true
11 or not .
12 MR . McNULTY : It appears to me that you want
13 the tenants to pay for that personal loan , for lack
14 of a better term , without evidence that part of that
15 money was put back into capital improvement . That ' s
16 the problem that this commissioner sees , and agrees
17 with Mr . Erwood that that ' s the prime focus of why
18 we ' re here today .
19 MR . RODRIGUEZ : Well , there ' s nothing I can do
20 about what the facts are . The facts are is that he
21 refinanced the property , and what you ' re really
22 saying is that he should be punished because he
23 refinanced the property because if he hadn ' t
24 refinanced the property , the loan would have been
25 paid off and their equity would be $7 , 500 , 000 and
33
CALIFORNIA DEPOSITION REPORTERS , INC .
1 their net operating income would still be $576 , 000 .
2 There ' s no way around that . So really you ' re
3 punishing him because he refinanced the property .
4 That ' s what you ' re doing .
5 And he did -- you know , we can -- there
6 are four volumes of transcripts , but - - and we can
7 all disagree -- but whatever the record says is what
8 the record says . My recollection is that he did
9 testify that part of it went into the property and
10 part of it went into something between him and his
11 partners , and there were all sorts of other reasons
12 where it went to . But even if he took a dollar of
13 that 4 . 3 million and bought a lottery ticket and made
14 50 million , so what? That ' s totally irrelevant , what
15 he makes with money that he takes out of this
16 property for determining whether this property is
17 making a fair return .
18 You know , that ' s my view . You may
19 disagree with it . But my view of the law is that you
20 must look at the Silver Spur partnership and say ,
21 What did the Silver Spur partnership make on this
22 investment? Not - - I mean Mr . Bedig , we all can see
23 that he makes $576 , 000 a year . He may have taken
24 that money and reinvested it somewhere else , too , and
25 done really well with that , or he may have paid for
34
CALIFORNIA DEPOSITION REPORTERS , INC .
1 his kids ' college education . We don ' t really know
2 what he did with it . Well , we do . We know he paid a
3 lot of it to interest . But if there were profits in
4 certain years after interest , he could do anything he
5 wants with that money , and if he hits the jackpot
6 with it , it really should not matter because then you
7 could just go on forever .
8 MR . McNULTY : Perhaps you misunderstand what my
9 concern is . My concern is not what he does with the
10 money . My concern is how he wishes to charge rents
11 with what he ' s done with the money . I don ' t care if
12 he takes that 4 . 3 million and he blows it on a night
13 in Las Vegas or he makes the most prudent investment
14 that a man could ever make . What I am concerned is
15 that he wants to take that 4 . 3 million and say , as
16 you have said , Well , if I hadn ' t refinanced it , it
17 would be worth 7 . 5 million , and 576 , 000 would fall
18 well short . My response to him, and to you , and
19 you ' re not satisfied where it is I ' m coming with
20 this , is , "Mr . Bedig , you ' ve got your increase . You
21 pocketed 4 . 3 million . "
22 MR . RODRIGUEZ : Yeah , I understand what you ' re
23 saying .
24 MR . McNULTY : Okay .
25 MR . RODRIGUEZ : My only response is , he hasn ' t
35
CALIFORNIA DEPOSITION REPORTERS , INC .
1 pocketed because he has to pay it back .
2 MR . McNULTY : But that ' s true of every loan you
3 take .
4 MR . RODRIGUEZ : Of course .
5 MR . McNULTY : You have the money for that
6 particular time to spend . His investment in that
7 property now , as far as I can see from a
8 common-sensical approach , is 3 . 2 million because he
9 pocketed 4 . 3 . He took out of that investment 4 . 3
10 million . So now what is his rate of return on the
11 remaining equity of 3 . 2 ? It appears that that is a
12 sufficient amount . I mean you would concede that
13 576 , 000 is a fair rate of return if you consider 3 . 2
14 million as the investment , wouldn ' t you?
15 MR . RODRIGUEZ : If that was , for example , the
16 current fair market value of the property , yes .
17 MR . McNULTY : Thank you .
18 MR . ARMSTRONG : There seems to be another area
19 of disagreement between Mr . Erwood and
20 Mr . Rodriguez . Mr . Erwood states that the interest
21 on this 4 . 3 million was deducted from expenses as an
22 expense , and Mr . Rodriguez says that it wasn ' t . I
23 don ' t find that 1992 thing in my - - the report of
24 expenses and income in my green book here . Perhaps
25 you can lead me to it . I know I ' ve seen it when I
36
CALIFORNIA DEPOSITION REPORTERS , INC .
1 read through the large volumes of testimony , but I
2 don ' t find it in here . Do you have --
3 MR . RODRIGUEZ : Yeah , I can show it to you
4 right now , if you want to see it .
5 MR . ARMSTRONG : Is it in my book?
6 MR . RODRIGUEZ : I ' ve never seen what you
7 received , but I ' ve got it right here in my hand if
8 you want to look at it . It ' s Tab 9 to Exhibit 1 .
9 MR . ARMSTRONG : Thank you .
10 MR . RODRIGUEZ : Did you find it?
11 MR . ARMSTRONG : Yes . That sheet that he shows
12 me , Mr . Erwood , shows that the interest is an
13 after-the- fact deduction , after the 576 , 000 profit
14 was determined . Can you help me with that?
15 MR . ERWOOD : I tried to find the exhibit that
16 was a worksheet that showed the -- it was printed in
17 landscape fashion . I still haven ' t been able to find
18 that yet .
19 CHAIRMAN COATES : That ' s in the back of the
20 tab .
21 MR . DELSACK : That ' s in the back of the
22 Fabrikant report . I think I have a copy of it , too .
23 MR . McNULTY : Well , Mr . Erwood , are you
24 satisfied that if we take Mr . Rodriguez at his word ,
25 which I believe is accurate , and the fact that the
37
CALIFORNIA DEPOSITION REPORTERS , INC .
1 interest was not included in the NOI , would the NOI ,
2 based upon your hearing of the testimony and
3 consideration of the investment of that property, is
4 there still an adequate rate of return?
5 MR . ERWOOD : Well , if you follow your example
6 of an individual who takes out the 4 . 3 million , he ' s
7 received a return on his investment at that point .
8 Then his equity in the property is whatever , you
9 know , it ' s less , because he ' s taken a lot of the
10 money out of that property . Then you factor in what
11 they ' re making on the property , and I think that
12 shows what it ' s fair rate of return is . I think I
13 indicated in my report that that was one of the
14 problems : He took out the money , but there ' s no --
15 nobody says that that was a rate of return that he
16 got because he had to pay back the money . Well , that
17 doesn ' t make any difference . He was able to take
18 that money out of the property that appreciated in
19 value after six , seven years of ownership , and use
20 that money for something else . But then he turns
21 around and is saying , I ' m not making an adequate
22 return because my property is worth
23 7 . so-many-million , that should be my equity in it .
24 Well , it ' s not because he ' s already moved it out .
25 And if you follow your logic , that ' s much
38
CALIFORNIA DEPOSITION REPORTERS , INC .
1 more of a return than he claims , their expert claims
2 is a fair return . Because I think the top rate was a
3 12 - or 13-percent rate of return , and yours is more
4 like a 15 -percent rate of return .
5 CHAIRMAN COATES : Gentlemen , I don ' t really
6 understand why you ' re discussing all this about the
7 interest on the loan when they indicated that they
8 didn ' t take it as a deduction and the city ordinance
9 says that it ' s not allowable as a deduction . As far
10 as I can see , you ' re arguing over something that is
11 moot . I don ' t really understand where this
12 discussion is going . The discussion , as far as I can
13 see , is centered around a rate of return on
14 investment . And the rate of return on investment ,
15 the $576 , 000 , as far as I can see , the investment is
16 2 million . If that ' s what it is , then that ' s a
17 pretty good rate of return . I ' d like to get that
18 myself .
19 MR . DELSACK : In fact , if I may just comment on
20 that for a minute , Mr . Bedig ' s actual investment was
21 $ 60 , 000 of the 2 million .
22 CHAIRMAN COATES : That ' s even better .
23 MR . DELSACK : Yeah , that ' s not a bad rate of
24 return . So that ' s number one .
25 Number two , I might add that we ' ve been
39
CALIFORNIA DEPOSITION REPORTERS , INC .
1 sort of throwing different terms out here , but the
2 Supreme Court and other court cases clearly say that
3 the preferred method of analysis is a net return on
4 investment , not on market value and not on equity .
5 CHAIRMAN COATES : I read that part .
6 MR . DELSACK : And we ' re sort of tossing those
7 terms around together . So the 7 . 5 million value that
8 it now has --
9 CHAIRMAN COATES : Doesn ' t matter .
10 MR . DELSACK : - - less the 4 . 3 really doesn ' t
11 matter . We ' re talking about , What did the man invest
12 in the property?
13 And another thing we have to take into
14 account is as you were referring to the Sierra Lake ' s
15 case , I believe , which talks about a dollar return
16 for a dollar investment , if you look at the
17 investment in this park , at one point Mr . Bedig
18 claimed that he had laid out $ 800 , 000 in investment
19 on capital improvements , and they entered into a
20 five-year agreement with the homeowners wherein those
21 homeowners paid off $800 , 000 in investment that he
22 had made . So he doesn ' t have any additional
23 investment over what he originally made , which is
24 $ 60 , 000 .
25 MR . PHILLIPS : Mr . Delsack , my name ' s Doug
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 Phillips . I ' m a deputy city attorney .
2 MR . DELSACK : Yes , sir .
3 MR . PHILLIPS : Would you please explain a bit
4 more fully what you just said . Because I was
5 wondering also , I had heard the return on investment
6 versus return on equity versus return on fair market
7 value , and I have read some of the cases on it and ,
8 as I recall , the cases have made a point of what you
9 use as a dollar upon which to -- or a dollar value
10 upon which to base a rate of return , and I was
11 wondering if you could explain that to the
12 commission .
13 MR . DELSACK : I would be glad to .
14 Actually , in the opposition brief that I
15 filed , the opposition to the request for this review,
16 I cited the Fisher case , I believe , and there were
17 two long footnotes . I don ' t know if you gentlemen
18 have had the opportunity to read my response or my
19 opposition , but I go into that quite a bit , as I did
20 in the original opposition that was filed to the
21 petition .
22 But basically , the courts held that if
23 you use the concept of return on value , you wind up
24 in circular reasoning . And that goes back to some
25 antitrust cases going back to the 1920s . Because if
41
CALIFORNIA DEPOSITION REPORTERS , INC .
1 you just take a simple real estate appraisal , if
2 you ' re going to look at the value , the value is
3 determined by the rental flow , by the income stream,
4 let ' s say , on a piece of commercial property . The
5 more the income stream is , the higher the value . The
6 higher the value , the more , then , that you ' re going
7 to be able to charge for rent . And so you wind up
8 going around and around , it ' s a self- feeding type of
9 thing . So the courts have reject that theory . And
10 on the same basis say , Well , look at either net
11 return on equity or net return actually on
12 investment . And they find the investment one to be
13 the most solid basis .
14 MR . PHILLIPS : Could you please apply that
15 reasoning , then , to the facts of this case . What is
16 the investment , what is the equity , as far as you ' re
17 concerned?
18 MR . DELSACK : Well , from what we can tell from
19 the figures that have been made available to us - -
20 And I might just say , talking about those
21 figures for a moment , it also came up at the hearings
22 that the CPA ' s report that had been provided is not a
23 certified report . It ' s a report based upon the
24 information which has been provided by Mr . Bedig and
25 his associates . So we don ' t really know what those
42
CALIFORNIA DEPOSITION REPORTERS , INC .
1 figures are .
2 Second , there is a great deal of question
3 as to some of the investments , the capital
4 improvements that have been made in the park ,
5 because , for example , there are charges in there for
6 a lot development , there are charges in there for the
7 on-site manager ' s home , there are charges in there
8 for personal property that was purchased , all of
9 which we really would contest but we didn ' t want to
10 belabor it and get into nitpicking . But certainly
11 one can question the basis .
12 The major investment , however , was the
13 original purchase price of , let ' s assume it ' s $2
14 million , of which Mr . Bedig actually contributed
15 $ 60 , 000 . Mr . Bedig then briefly explained at his
16 testimony that through a series of buyouts and death
17 of some of the partners , he actually wound up being ,
18 I believe , the - - well , certainly he ' s the chief
19 partner at this point because we ' re dealing with a
20 managing partner because we ' re dealing with the
21 estate of the other partner . It never did come out
22 at the testimony to my recollection that this
23 gentleman Epstein owned 60 percent and that Bedig
24 only owns 40 percent .
25 However , as to Mr . Bedig , not only did he
43
CALIFORNIA DEPOSITION REPORTERS , INC .
1 get a very handsome return on the $60 , 000 investment ,
2 but he also has a management company which collects
3 the 6 percent and then in turn pays for the off-site
4 management company which does the actual physical
5 labor of managing , who in turn has hired or manages
6 supervisors , the on-site manager . So Bedig is very,
7 very far removed . He ' s removed not only in distance ,
8 but he is removed from the actual day-to-day
9 operations of the park .
10 I ' m digressing slightly , but let me go
11 back to investment . So we ' ve got his 60 , 000 . He
12 claims -- and in fact , that spreadsheet , and I don ' t
13 know whether you found it , Mr . Erwood ; I found a copy
14 of it here and I can pass it on down to you -- but
15 there was a spreadsheet that was provided to us , and
16 you ' ll see that consistently with the exception of
17 one year , I believe , when they made some capital
18 improvements early on , there ' s very handsome profits
19 or returns from each of those years from ' 77 on .
20 MR . PHILLIPS : Where is that spreadsheet? Sir ,
21 what spreadsheet are you referring to?
22 MR . DELSACK : I ' m referring to a spreadsheet
23 that was attached as an exhibit to Mr . Fabrikant ' s
24 Rate of Return on Investment of Rent Adjustments , is
25 the title of it , dated December 6 , revised February
44
CALIFORNIA DEPOSITION REPORTERS , INC .
1 2 , 1993 , and although I do not see an exhibit number
2 on here , it is the last exhibit in Appendix A- 1 , of
3 which there are a series of exhibits . It ' s a
4 two-page spreadsheet entitled Income Statement , 1977
5 through 1992 , and it just lists each of those in
6 columnar fashion as you would in a profit-and- loss
7 statement .
8 MR . PHILLIPS : That ' s in the administrative
9 record , is it not , sir?
10 MR . DELSACK : Yes , it is , as was the report ,
11 and it also was part of some of the conversation - -
12 excuse me , of the testimony .
13 The last item on that , 1992 , showed the
14 figures that we ' re talking about here of the
15 $576 , 000 . Although those figures that are shown in
16 the report actually are somewhat different and they
17 made some corrections to them as part of the
18 testimony .
19 But anyway , to get back to the investment
20 point , which is really the basis for this whole
21 analysis , that investment was $60 , 000 . Now , true ,
22 there is an inflationary impact . True , that there is
23 a growth on that , if you will look at it from that
24 standpoint , as to what the dollars in 1977 were worth
25 as opposed to the dollars of today . But the
45
CALIFORNIA DEPOSITION REPORTERS , INC .
1 additional investments that were made were admittedly
2 reimbursed in their entirety . The $800 , 000 by the
3 five-year settlement agreement , wherein the
4 homeowners agreed to pay four increases , $30 , $ 15 and
5 $ 15 every second year , and then every alternate ,
6 in-between year , it was the CPI increase . So that
7 $ 60 now we figure is worth probably about $ 67 , $68 ,
8 when you figure the accumulated interest on it . But
9 I might add , parenthetically , they ' re still paying ,
10 which I made a point of in my opposition . But that
11 money was designed to pay back Bedig the $ 800 , 000
12 that he made , that he claims he made in improvements ,
13 most of which went to sewer improvements and to
14 street improvements .
15 So I don ' t know where you ' re going to
16 find additional money on investment . And it seems to
17 me the $576 , 000 , for that year , and if we ' re looking
18 cumulatively , I have that figured out somewhere , it
19 comes to the millions of dollars of return , is a
20 very , very handsome return .
21 I might - - there ' s just one other comment
22 I would like to make , and I cited the case also in
23 here because the Sierra Lake ' s case , there is some
24 question later on , and that whole string of Ninth
25 Circuit cases have basically been addressed in Yee
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 v . Escondido , which is a Supreme Court case which
2 came down with a 9 -0 ruling , and it relies upon other
3 cases , and the cases say very simply this : The city
4 has got a right to a rent control ordinance ; the city
5 must not guarantee - - does not have to guarantee a
6 maximum return on investment , but only a fair and
7 reasonable return on investment ; the city can even
8 ordain or order that the rents be below market value
9 for an indefinite period of time . And that came out
10 of Yee v . Escondido .
11 Therefore , I can see no validity to a
12 challenge to this ordinance because not only have you
13 met those requirements of Yee v . Escondido , but you
14 have a very fair ordinance which includes within it a
15 mechanism to keep up with the inflationary impact ,
16 not only by way of the CPI increase , but also allows
17 a provision for the hardship increase where there is
18 a legitimate need for an additional return . And all
19 of those say - - and again , I cited the cases - - if
20 there may be a problem in other communities wherein
21 the courts have said that the ordinance was fair , the
22 argument may be that the boards or the commissioners
23 may not have interpreted the ordinance fairly , but
24 certainly the ordinance stood up in those other
25 cases , as I think this ordinance stands up in this
47
CALIFORNIA DEPOSITION REPORTERS , INC .
1 case . So I don ' t see the threat of litigation here
2 as being a real threat to be concerned with .
3 MR . PHILLIPS : May I ask another question?
4 MR . DELSACK : Surely .
5 MR . PHILLIPS : What about the estate ' s
6 investment?
7 MR . DELSACK : You know , we had no testimony as
8 to the estate ' s investment . The only thing that we
9 know is that of the $2 million that was originally
10 invested , $ 1 . 4 million was a loan . So actually the
11 total cash that went in presumptively , and again , we
12 have no testimony , would have been 600 , 000 , with the
13 rest of it being financed . And that note would have
14 been paid off prior to the $4 . 3 million that was
15 refinanced .
16 And as to the issue of the refinancing ,
17 what happened with the money , we had long and
18 involved questioning of Mr . Bedig , of Mr . Fabrikant ,
19 of anyone else who was willing to testify as to what
20 happened to that money . Where did that 4 . 3
21 million - - or show us one dollar that went back into
22 the park , and none did .
23 And on a final note , Mr . Rodriguez says ,
24 you know , the high risk that he ' s taking because the
25 value of homes going down . I challenge Mr . Rodriguez
48
CALIFORNIA DEPOSITION REPORTERS , INC .
1 or Mr . Bedig to show me a mobile home park that has
2 gone down in value during that period . The homes in
3 there might have gone down because the rents have
4 gone up , but there ' s no park that ' s gone down in
5 value . If you look around today , the park spaces ,
6 the per space value of the parks that are being sold
7 today , has had a steady and continuous growth . And
8 that ' s where we ' re getting this value . So the risk
9 here is very , very minimal .
10 MR . PHILLIPS : Sir , if I could ask , what is
11 your position on the refinance , on the $4 . 3 million?
12 MR . DELSACK : Well , I ' m not quite sure . You
13 know , that ' s a broad question . I ' ll give you a broad
14 answer . It seems to me that from what the testimony
15 shows , I ' m not trying to point any fingers , but what
16 we asked Mr . Bedig , What happened to that money? It
17 was used for purposes , he said , of paying off other
18 partners , of paying them for their time , for their
19 effort , and so on . We could get no definite answer
20 on that .
21 My position is that just like any other
22 businessman who finances their personal loan , he has
23 an obligation to pay it back . And Mr . Rodriguez
24 keeps saying that Mr . Bedig ' s got to pay it back .
25 Well , he ' s got $576 , 000 . That ' s what he ' s using --
49
CALIFORNIA DEPOSITION REPORTERS , INC .
1 you know , he can pay it back out of the profits of
2 the park . But that ' s no reason to burden the park
3 residents to pay off a loan that is being used for
4 personal purposes . Let him take out the $576 , 000 ,
5 pay the taxes on it , and then the net amount is used
6 to pay off the 4 . 3 million . Plus he ' s getting a
7 return on that money somewhere else , obviously .
8 Now , in the meantime what ' s happened ,
9 interestingly enough , not only would you burden the
10 residents - - or not only would Mr . Rodriguez burden
11 the residents with having to pay off that debt -- and
12 I might add , again , parenthetically , they helped to
13 pay off or they did pay off the 1 . 4 million for
14 Mr . Bedig in the first place - - but not ly would he
15 now have them pay off the debt , but by asking for an
16 increase in rents , what you ' re doing is you ' re taking
17 it out of the pockets of the homeowners . Because the
18 rule of thumb applies that for every $ 10 rental
19 increase , the value of the home decreases by $ 1 , 000 .
20 So if you pass through a $60 or $70 increase , you ' re
21 taking $6 , 000 to $7 , 000 out of every homeowner in
22 that park .
23 And the logic of it is very simple . It ' s
24 a very , very rough rule of thumb that if you have to
25 finance a home , for every thousand dollars you have
50
CALIFORNIA DEPOSITION REPORTERS , INC .
1 to finance , you ' re going to be paying $ 10 on the
2 mortgage payment , roughly , on a long-term - - you
3 know , we ' re using ballpark figures here , whether it ' s
4 $8 or $9 , depending on interest rates . So when a new
5 purchaser comes in to buy a home in the park , and if
6 he says I can pay $ 1 , 000 a month and if he says I can
7 pay $500 for the home and $500 for rent , well , if the
8 rent now goes to 560 , that means he can only pay 440
9 for the home , for the mortgage .
10 So there ' s a direct correlation in the
11 courts , and the courts - - in fact , Yee also has
12 pointed it out - - that there ' s a direct correlation
13 between rental and equity value that the homeowner
14 has in the home .
15 So for all of those reasons , I don ' t
16 believe that they are entitled to this increase . I
17 think they made a lot of money on this park .
18 MR . McNULTY : See , then the issue as
19 commissioner , Chairman Coates indicates , what is the
20 investment , then . I relied on the equity , despite
21 the circular reasoning , because that was the most
22 easily understandable by myself . I do believe the
23 investment is more than 2 million , because over the
24 time period there has been capital improvement to
25 some extent , although most of it , apparently , the
51
CALIFORNIA DEPOSITION REPORTERS , INC .
1 800 , 000 in the sewers and pavement have been covered ,
2 but what , if you can , and I ' m not sure you can
3 because you each represent a client , but where in
4 reality would the true investment in this property
5 lie for Mr . Bedig?
6 MR . DELSACK : Are you asking me or
7 Mr . Rodriguez ?
8 MR . McNULTY : Both of you .
9 MR . DELSACK : I don ' t know . It ' s his client ,
10 so maybe he can better answer it . I told you what we
11 believe it to be based upon the testimony .
12 MR . RODRIGUEZ : My belief is that the true
13 investment is the fair market value of the property .
14 That ' s what Mr . Bedig has at risk . If that property
15 was to be lost somehow - - and there are mobile home
16 parks that have been lost in earthquakes or for other
17 reasons they ' ve been shut down , they ' ve been sued out
18 of existence , there ' s been lots of places where that
19 can happen - - but I think any businessman will tell
20 you that , that ' s what his investment is , is what he
21 has at risk , and he has 7 . 5 million at risk , or
22 whatever this thing is worth , and if something was to
23 happen , he ' s still going to have to pay off that $4 . 3
24 million loan . So you can ' t say that his equity is
25 the only thing that he has at risk , because the loan
52
CALIFORNIA DEPOSITION REPORTERS , INC .
1 is already a risk that if he borrowed that money at
2 10 or 12 percent , whatever it was , he knows he not
3 only has to pay that back , but he has to pay it back
4 at that rate .
5 MR . DELSACK : But he has the 4 . 3 million . So
6 he can pay off the loan anytime he wants to .
7 CHAIRMAN COATES : Gentlemen , I don ' t think the
8 issue is what he did with the 4 . 3 million . The issue
9 is what he did not do with the 4 . 3 million . And as
10 far as I can see , he did not reinvest it in the
11 property .
12 MR . RODRIGUEZ : Well , I believe that if you go
13 through the record , you can see Mr . Bedig ' s testimony
14 as to all the things that he believes that he did
15 with it .
16 But I would just like to make a few other
17 points . First of all , with respect to the threat of
18 litigation . The park owner understands that there
19 are various procedures in this ordinance for getting
20 rent increases , and that generally it does seem to be
21 drafted to be a good ordinance . You know , there may
22 be a couple little nitpicky things that somebody
23 could challenge if they wanted to . But by and large ,
24 we agree that on its face in most aspects it does
25 provide for a fair return on investment . So nobody
53
CALIFORNIA DEPOSITION REPORTERS , INC .
1 should worry about the things Mr . Delsack is saying ,
2 that we might make some sort of facial challenge to
3 the ordinance .
4 What we ' re really arguing about here and
5 what we ' re talking about if we go ahead and sue , we
6 would sue based on the way the ordinance is being
7 applied to us in particular . And really based on - -
8 and I ' m sorry, I forgot your name -- but I think
9 it ' s , you know, his position seems to be at odds with
10 the park owner ' s position , and it really appears to
11 me that it is boiling down to this 4 . 3 million loan ,
12 if you want to just rely on the return on equity
13 standard . But your regulations themselves say that
14 one of the factors to be considered is return on fair
15 market value . That was a brand new regulation that
16 your board or your city just enacted a couple of
17 years ago . And the fair market value analysis shows
18 that we still are entitled to a rent increase
19 actually in excess of $62 .
20 CHAIRMAN COATES : Pardon me , sir , but with
21 respect to the ordinance that you ' re citing about the
22 fair market value enacted by the city a couple of
23 years ago , I think the city , like every other
24 municipal entity in the land , is governed by the
25 decisions of the Supreme Court . And the Supreme
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 Court in this brief , I have read , says that the
2 definition of the return on value is a circular
3 definition and is therefore not acceptable .
4 MR . RODRIGUEZ : No , that ' s not what they said .
5 They said it ' s circular , so therefore it ' s not
6 constitutionally required . The fact that it ' s not
7 required doesn ' t mean that a city can ' t do it if it
8 wants to . If a city wants to , it doesn ' t have to
9 have rent control at all . But here you have rent
10 control , and you ' ve decided that you ' re going to
11 allow that . So you can allow it . And I ' m sure the
12 Supreme Court would agree that if the city wants to
13 do it , they can .
14 But about this circular thing , I know
15 that was something that we raised , I believe , in our
16 brief as well , but if we didn ' t , I would like to
17 address it right now, that we understand that there
18 is a problem with the circular argument , because
19 every time we get a rent increase , it increases the
20 fair market value of the property and it increases
21 the equity in the property , so therefore you come in
22 and say , Well , now I ' m not making a fair return
23 anymore because the value went up . And that ' s why we
24 believe that the better standard is return on
25 inflation-adjusted investment , because even if the
55
CALIFORNIA DEPOSITION REPORTERS , INC .
1 rents go up , you ' re not entitled to any other rent
2 increase unless inflation goes up . And all the park
3 owner ' s trying to do through this whole application
4 is to be compensated for all the inflation that has
5 occurred since 1977 or ' 78 when he purchased this
6 property . And it ' s been phenomenal .
7 I don ' t think anybody could say that it
8 would be fair that if you bought your house in 1977
9 for $50 , 000 and every house around you went up to
10 $ 350 , 000 that the government could come in later and
11 say , Well , your return is going to be based on that
12 $ 50 , 000 and 10 percent ' s plenty fair , so the most you
13 can sell your house for is $55 , 000 , that ' s your
14 return . That ' s totally unfair and I think everybody
15 realizes that .
16 Something has to be done with inflation .
17 It somehow has to be taken into account . And we
18 believe that the inflation-adjusted investment method
19 is best because it takes inflation into account , it ' s
20 not circular , and it actually comes up with an
21 investment lower than the return , than the fair
22 market value . And also , you should also look at the
23 market rent survey prepared by Mr . Taylor , where he
24 went out and looked at other comparable parks in the
25 area , and he concluded that a similar rent increase
56
CALIFORNIA DEPOSITION REPORTERS , INC .
1 was needed , that this park was really below the other
2 parks in this particular area .
3 CHAIRMAN COATES : You began your paragraph with
4 a sentence that this was not presented at the
5 hearing , and I would like to point out to you , the
6 only thing we can consider at today ' s meeting is
7 evidence that was presented at the hearing . So if
8 your position is being stated new to us , we can ' t
9 consider it .
10 MR . RODRIGUEZ : Well , I ' m not giving you any
11 new evidence . And I said I believe it was
12 presented . This was not evidence . I mean it was an
13 argument . But I believe that we did put that in our
14 brief that one of the reasons why we rely on the
15 inflation-adjusted investment method and why we think
16 it ' s the best method is specifically because we did
17 recognize that not only return on current fair market
18 value , but return on equity standard is also circular
19 because whenever your fair market value goes up , your
20 equity goes up as well .
21 MR . ARMSTRONG : Can you define your
22 inflated- investment base that you just said you want
23 to go by?
24 MR . RODRIGUEZ : Yes . All we did was we took --
25 MR . ARMSTRONG : Is that defined in the evidence
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 any place?
2 MR . RODRIGUEZ : Yes . We took the original
3 purchase price and the original cost of the various
4 capital improvements and adjusted them all for
5 inflation since the date of each expenditure . So ,
6 you know , if the park was purchased in 1977 for 2
7 million , we adjusted that for inflation .
8 MR . ARMSTRONG : Where does that number end up?
9 What is the number? Fair market value is 7 million
10 or something .
11 MR . RODRIGUEZ : Right .
12 MR . ARMSTRONG : What ' s the number that you ' re
13 talking about?
14 MR . RODRIGUEZ : $6 , 859 , 000 , the 6 . 8 . It ' s
15 about - - it ' s about $700 , 000 less than the fair
16 market value .
17 MR . ARMSTRONG : The homeowner says that
18 Mr . Bedig only has $60 , 000 invested in it .
19 MR . RODRIGUEZ : Well , they can say whatever
20 they want .
21 MR . ARMSTRONG : In the evidence that I read , he
22 did invest another 800 , 000 , which the homeowners paid
23 back according to the evidence . Is that not true?
24 MR . RODRIGUEZ : Well , all - -
25 MR . ARMSTRONG : Just answer - - just , you know ,
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 did the homeowners pay back the $800 , 000 in rental
2 increases ?
3 MR . RODRIGUEZ : I don ' t know .
4 MR . ARMSTRONG : Okay .
5 MR . RODRIGUEZ : You know , they can laugh and
6 say whatever they want , but the agreement speaks for
7 itself . And the way I read the agreement was that
8 there was a dispute in 1987 or 1988 as to what the
9 rents should be . Mr . Bedig was asking for a higher
10 rent , the residents wanted a lower rent , and this
11 agreement was a compromise agreement that said these
12 are what the rent increases are going to be . In the
13 beginning they referred to certain capital
14 improvement projects that had been made , but I don ' t
15 know that if you read that agreement that it
16 specifically says that this rent increase is to
17 reimburse Mr . Bedig for those capital improvements .
18 What there really was , was there was a dispute and
19 Mr . Bedig wanted a rent increase much higher than
20 what he ultimately accepted . So to say that they
21 paid for that - - and Mr . Delsack can construe it that
22 way if he wants to . I don ' t believe that that ' s
23 really what happened .
24 I believe that the residents were
25 represented by an attorney , Ms . Joan Baumgarten , in
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 1988 ; that we sat down , I was there , and we
2 negotiated an agreement over the course of many
3 months that took into consideration a 'lot of
4 factors -- the capital improvements , the purchase
5 price , what a fair return would be - - and each side
6 gave up something in order to avoid litigation . And
7 you can construe that , if you want , as them paying
8 for the capital improvements , but the agreement
9 speaks for itself . And I don ' t interpret it that way
10 at all . I interpret it as a settlement of disputed
11 claims .
12 MR . DELSACK : Well , my only comment to that is
13 that Mr . Rodriguez during the course of the hearing
14 stated that he drafted that agreement . So if anyone
15 should know what the purpose of it was , then
16 certainly he was there and should know .
17 Secondly , it very clearly ties in , if you
18 look at the amount of the five years times the 215
19 homes that are paying that amount , the number that
20 you come up with is virtually identical to the
21 $ 800 , 000 that was claimed . And it ends at the end of
22 five years . So it wasn ' t just a rent increase . It
23 was designed for a particular purpose , which was the
24 reimbursement of the $ 800 , 000 that was in dispute .
25 And the only dispute was that he laid it out and he
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 wanted it back .
2 MR . RODRIGUEZ : I would just say that if you
3 look at the formula , the formula that was used was
4 based on unknown factors at the time . It was based
5 on what the increase in the inflation rate would be .
6 So if by coincidence it came out close to
7 800 , 000 - - I don ' t even know that it did , you know ;
8 maybe it did , maybe it didn ' t , but that ' s a
9 coincidence . Because if the inflation rate would
10 have been zero , we would have got a lot less than
11 800 , 000 . And if the inflation rate would have been
12 30 , we would have gotten a lot more . The inflation
13 rate is what it was , and nobody knew in 1988 what it
14 was going to be .
15 CHAIRMAN COATES : Gentlemen , I would like to
16 terminate this discussion about this particular
17 issue . As I understand it , it ' s the subject of a
18 lawsuit and it really has no place in this particular
19 forum .
20 MR . RODRIGUEZ : I don ' t think there is any
21 lawsuit regarding this issue .
22 MR . AINSWORTH : I would like to make one
23 statement . Wasn ' t that supposed to terminate , your
24 payment of that , in five years ?
25 MR . RODRIGUEZ : Absolutely not .
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 MR . AINSWORTH : Was it?
2 MR . RODRIGUEZ : No way in the world .
3 MR . AINSWORTH : Well , it certainly says that
4 here .
5 MR . DELSACK : I think the document speaks for
6 itself , and that ' s what the best evidence rule is .
7 CHAIRMAN COATES : Okay . Hold it .
8 MR . AINSWORTH : The other thing I would like to
9 bring up , if you compared that loan he got of 4 . some
10 million to the lottery, you don ' t pay back the
11 lottery .
12 MR . RODRIGUEZ : That may be true . Well , what
13 we ' re talking about is what he did with the money .
14 We ' re saying that if he got 4 . 3 million --
15 MR . AINSWORTH : Regardless of what he did , he
16 didn ' t have to pay back the lottery .
17 MR . RODRIGUEZ : Well , that ' s not what we ' re
18 talking about . We ' re saying that if he took some of
19 that borrowed money and won the lottery with it , you
20 couldn ' t very well say that that ' s his return on
21 Silver Spur . If he won $ 50 million from a lottery
22 ticket he bought with his profits from Silver Spur ,
23 you can ' t turn around and say that ' s part of his
24 return on investment from Silver Spur . I mean you
25 can say it , but I don ' t think that legally it ' s going
62
CALIFORNIA DEPOSITION REPORTERS , INC .
1 to be upheld .
2 MR . AINSWORTH : One other thing I would like to
3 ask you on capital improvements . What ' s the
4 difference between that and the regular upkeep of the
5 park?
6 MR . RODRIGUEZ : Well , I believe that a capital
7 improvement is defined in the Internal Revenue Code
8 as something that contributes to prolonging the life
9 of the investment . And I think that the standard
10 would be - -
11 MR . AINSWORTH : Well , improvement would be that
12 they ' ve made an improvement over what they had .
13 MR . RODRIGUEZ : Well , I beg to differ . I think
14 that if you look at the Internal Revenue Code and
15 what they consider to be capital improvements , you
16 will see that replacing a road that ' s already there
17 is a capital improvement , or replacing a fence that ' s
18 already there is a capital improvement , or even doing
19 substantial repairs to a roof without replacing it
20 can even be a capital improvement .
21 CHAIRMAN COATES : And I think the way that the
22 issue is decided is whether or not if it adds to or
23 materially extends the life and use of the asset ,
24 then it ' s an improvement and it must be capitalized ;
25 otherwise , it ' s an item of repair .
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CALIFORNIA DEPOSITION REPORTERS , INC .
1 MR . AINSWORTH : Putting on a new roof is a
2 repair .
3 CHAIRMAN COATES : Well , what about patching a
4 hole on a roof ?
5 MR . AINSWORTH : That ' s a repair . It was on my
6 roof .
7 MR . RODRIGUEZ : Well , I would agree that
8 probably patching a hole in a roof is probably a
9 repair and can be deducted during that year . But I
10 think that if you have to replace a substantial
11 portion of a roof , that it ' s probably a capital
12 improvement . And if you have to replace the entire
13 roof , it ' s almost certainly a capital improvement .
14 And , you know , we don ' t make these rules , the
15 Internal Revenue Service does . There ' s really
16 nothing we can do about that .
17 CHAIRMAN COATES : Are there any more questions
18 from any of the committee members , commission
19 members ?
20 MR . McNULTY : I have a question for
21 Mr . Phillips . If this commissioner were to make his
22 decision based upon not having a comfortable feeling
23 as to the rate of investment as espoused by
24 Mr . Rodriguez , that is , inflation adjustment , because
25 I ' m not sure what he cites here or necessarily is
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1 what Sierra Lake means for capital improvements , but
2 were to rely upon the equity , which I believe some of
3 the cases do mention it ' s within our discretion to
4 try to find out what the investment is , do you
5 perceive any type of unconstitutionality or further
6 litigation on that type of decision?
7 MR . PHILLIPS : No .
8 MR . McNULTY : Thank you .
9 CHAIRMAN COATES : In my view what the rent
10 review commission is here to do is to either validate
11 or invalidate the hearing officer ' s conclusions .
12 Do any other commissioners have a
13 different view? What do you think we ' re here to do?
14 MR . McNULTY : Well - -
15 MR . AINSWORTH : I think we should have some
16 time to decide on the results , not just render a
17 decision right here .
18 MR . ARMSTRONG : I think that we can validate
19 the hearing officer ' s findings . But if we invalidate
20 them , I think we have to come up with some other
21 method of - - we have to tell - - we would have to tell
22 them what to do , have to tell the hearing officer
23 what to do . Is that right , Doc ?
24 CHAIRMAN COATES : You have to tell them to hold
25 another hearing .
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1 MR . ERWOOD : The commission can modify , based
2 upon their view of the evidence that was submitted
3 both in my report , the documentation that was
4 submitted , the evidence that both the counsel have
5 referred to , that if you wish to modify the
6 recommendation , you have the right to do that also .
7 You have a lot of discretion . You can send it back
8 for further hearing , you can modify it , you can adopt
9 it , you can reject it .
10 MR . ARMSTRONG : The other thing I understand
11 from discussion before the meeting is that any
12 decision made by this commission has to be made right
13 here . We cannot go into a private meeting anyplace
14 and discuss it among ourselves .
15 MR . PHILLIPS : Correct .
16 MR . ARMSTRONG : It has to be done right here .
17 MR . PHILLIPS : Yes .
18 MR . RODRIGUEZ : Pressure ' s on .
19 MR . ARMSTRONG : As a commissioner , I move that
20 we support the hearing officer ' s finding .
21 MR . RODRIGUEZ : Could I just make one last
22 point that I really -- on this whole return on equity
23 thing . If that ' s what the commission thinks is the
24 appropriate standard , that what you really do is take
25 the fair market value and subtract out the loan and
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1 then determine what the park owner ' s equity is . and
2 then give him a fair return on that equity , you know ,
3 obviously we ' re going to challenge that , saying that
4 that ' s unfair , that that ' s improper .
5 But in a more realistic sense , what
6 you ' re saying is that all Mr . Bedig then has to do is
7 tomorrow go pay off that $4 . 6 million loan and he ' ll
8 have his $7 . 5 million equity and his NOI will still
9 be $576 , 000 . So all he has to do to get the entire
10 return under your theory is to pay off that loan .
11 That ' s all he has to do . And that really makes no
12 sense .
13 MR . DELSACK : And then you ' re back to a return
14 on market value , which shows that the return on
15 equity makes no sense whatsoever , and the entire
16 analysis should be done as a return on investment
17 analysis .
18 MR . McNULTY : Which , at least from my position
19 in this seat , I ' m not comfortable with what that
20 amount is .
21 CHAIRMAN COATES : Neither am I .
22 MR . DELSACK : We can only go based upon what
23 was presented at the hearings . We had three days of
24 hearings . We had reams and reams of paper , over 600
25 pages provided by them . If you can ' t figure it out ,
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1 you know , we couldn ' t figure it out any better at the
2 time of the hearings , either . But based upon what we
3 could ascertain and based upon the examination and
4 cross-examination , all we came up with are the
5 numbers that we ' ve recited here , plus those capital
6 improvements and less the $ 800 , 000 that - - and I can
7 refer you to the agreement , I have it in front of me
8 here .
9 So even if you take an inflation-adjusted
10 factor , and if you ' re going to use inflation , then
11 you have to take the inflation-adjusted value of the
12 $800 , 000 that was paid off , and all the other
13 pass -throughs . It ' s not fair to have it on one side
14 and not have it on the other side . So the only hard
15 facts that we know of is 60 , 000 or , if you will , $2
16 million , even if you want to use that figure as the
17 initial investment , plus these other factors that I
18 mentioned to you .
19 But all of that seems to me to say that
20 $576 , 000 per year -- remember , gentlemen , that we ' re
21 not dealing with , we ' re not just looking at this one
22 year , we ' re looking at the cumulative return on
23 investment here as well that has taken place . And
24 when you add all of that , it ' s a very , very healthy
25 return .
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1 MR . PHILLIPS : So I understand Mr . Armstrong ' s
2 motion , is the motion to accept and confirm the
3 recommendations of the hearing officer and to adopt
4 his findings and recommendations ? Is that correct ,
5 sir?
6 MR . ARMSTRONG : Yes , sir .
7 MR . PHILLIPS : All right .
8 CHAIRMAN COATES : Do I hear a second?
9 There is no second . The motion fails .
10 MR . McNULTY : At this time , I would move that
11 we close the presentation of argument , comment and/or
12 evidence prior to moving onto any of the rent review
13 hearing officer ' s recommendations .
14 CHAIRMAN COATES : Second . All in favor .
15 MR . McNULTY : Aye .
16 MR . ARMSTRONG : Aye .
17 MR . AINSWORTH : No .
18 CHAIRMAN COATES : One nay . Or was that an
19 abstention?
20 MR . AINSWORTH : That ' s no .
21 CHAIRMAN COATES : Okay . What I would like to
22 do - -
23 MR . McNULTY : Perhaps we could take a
24 five-minute break .
25 ( A recess was taken . )
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1 CHAIRMAN COATES : This commission has ended
2 hearing testimony . And now , because we want to
3 comply with the Brown Act , we ' re going to consult
4 among ourselves in public .
5 And speaking only for myself , I am not
6 comfortable with the two positions that I regard as
7 extremes : One is to validate the hearing officer and
8 grant no increase at all , and the other extreme is to
9 give the mobile home park owners the amount that they
10 had requested . And I ' m not comfortable with either
11 one of those positions .
12 And so what I would like to do is find
13 some way to tell the hearing officer to go back and
14 gather more evidence and , based on that , determine or
15 make a recommendation as to a specific dollar amount
16 of a rent increase .
17 What do my fellow commissioners think of
18 that?
19 MR . AINSWORTH : No , I ' m not for it --
20 MR . McNULTY : I think it would be most
21 productive if we just started off at this end and
22 worked our way back .
23 MR . AINSWORTH : No , I think we should decide
24 here , really . This is what these people are here
25 for . We don ' t want another continuance . We ' ve had
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1 three or four continuances already . Getting people
2 together , we just can ' t get them .
3 MR . McNULTY : I am comfortable with the state
4 of the evidence , with the argument of counsel , with
5 the report by Mr . Erwood , and the input of
6 Mr . Phillips in rendering a decision today .
7 CHAIRMAN COATES : Could I ask why neither one
8 of you gentlemen seconded the motion that my fellow
9 commissioner to my left made .
10 MR . McNULTY : Because as stated , he moved to
11 adopt the hearing officer ' s proposed findings as they
12 existed . I do not agree with all of his proposed
13 findings .
14 MR . AINSWORTH : I feel that we should have
15 input from the audience before we make a decision ,
16 really .
17 CHAIRMAN COATES : I don ' t . The audience has
18 their point of view , and I really feel it wouldn ' t be
19 productive to this rent review commission .
20 Sir , what ' s your opinion?
21 MR . ARMSTRONG : I believe that we should make
22 some kind of a motion here today that denies any rent
23 increase because of insufficient evidence to show
24 that it ' s needed based on investment and return on
25 the actual investment that this man made in this park
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1 over the years .
2 CHAIRMAN COATES : Would you like to make
3 another motion?
4 MR . McNULTY : How about if we proceed in terms
5 of - - Mr . Ainsworth , at this time would you move that
6 this commission take a vote whether we would hear
7 testimony from the people or hear what the people in
8 the audience have to say? Is that a motion that you
9 would like to make or - -
10 MR . AINSWORTH : No , I just thought it was on
11 the agenda .
12 MR . McNULTY : Seeing that there is not a
13 motion , then I would move that this commission go
14 through the proposed findings one by one , discuss
15 them , and then vote .
16 CHAIRMAN COATES : I don ' t agree with you . I
17 think the only thing we ' re here to do , like I said ,
18 is to either validate or invalidate the hearing
19 officer ' s conclusions . I don ' t want to get into any
20 further - - I don ' t want to expand the scope of this
21 meeting at all . What we ' re trying to do , I thought ,
22 from both of these gentlemen , was limit the scope of
23 this hearing , and that ' s not what it ' s about .
24 MR . PHILLIPS : You have another option . Your
25 option would be to accept what the hearing officer
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1 has done and adopt his findings . Your second option
2 would be to accept what the hearing officer ' s
3 conclusion is and come up with some findings of your
4 own that in your opinion support the ultimate
5 conclusion . Your third option , as I read the
6 ordinance , would be to send the matter back to the
7 hearing officer for further hearings . Those are
8 really your three options as I see it .
9 So perhaps your first choice here would
10 be to decide if you want to select one of those
11 options and then focus in on one of those if you
12 could . That would help us .
13 MR . McNULTY : Thank you , Mr . Phillips .
14 Mr . Chairman , perhaps if I tell you I am
15 inclined to follow Mr . Erwood ' s findings , but I
16 believe that Mr . Rodriguez has provided , at least to
17 my satisfaction , with respect to the testimony and
18 the numbers in his papers from the testimony , that
19 the hardship would be insufficient as it stands , and
20 that we need to determine the discretionary hardship ,
21 wherein I would rely upon Mr . Erwood ' s
22 recommendation .
23 CHAIRMAN COATES : I thought it was Mr . Erwood ' s
24 job to determine the discretionary hardship . That
25 was what I thought .
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1 MR . McNULTY : But if you look at his first
2 proposed finding , it says , " insufficient evidence to
3 overcome the presumption that the maximum rent
4 defined in Palm Desert Municipal Ordinance Section
5 9 . 50 . 060 and hardship increases defined in Palm
6 Desert , " et cetera - -
7 MR . PHILLIPS : Mr . McNulty , that covers , as far
8 as you can tell , your standard hardship increase .
9 MR . McNULTY : That is correct .
10 MR . PHILLIPS : Not the CPI , but the standard
11 hardship increase .
12 MR . McNULTY : Correct .
13 MR . PHILLIPS : Now would you address the
14 discretionary hardship increase .
15 MR . McNULTY : With respect to discretionary
16 hardship increase , I believe that Mr . Erwood ' s report
17 and findings are substantiated by the evidence , and I
18 believe that Mr . Rodriguez , much to the dismay of
19 Mr . Bedig and himself , have failed to meet their
20 burden ; and , therefore , I would uphold the rest of
21 Mr . Erwood ' s findings .
22 MR . PHILLIPS : Would that be a finding -- would
23 you make a finding now specifically for the record so
24 we have something to look at with respect to the
25 discretionary hardship increase .
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1 CHAIRMAN COATES : You mean make a motion?
2 MR . PHILLIPS : No , not a motion , but to give us
3 a finding or point to Mr . Erwood ' s report and tell us
4 which finding it is you ' re now referring to with
5 respect to the discretionary hardship .
6 MR . McNULTY : The finding that I ' m specifically
7 referring to is that there is " insufficient evidence
8 to establish a deficiency in the net operating income
9 that would require an increase in rent . "
10 The reason I would support that finding
11 is I ' m uncomfortable with the state of evidence as it
12 is provided with respect to the inflation-adjusted
13 investment . I do not find the evidence , in light of
14 the language in Sierra Lake , necessarily convincing
15 to me . Under the facts , unusual facts of this case ,
16 and the lack of testimony as to what Mr . Bedig did
17 with that money , I agree with Mr . Erwood that this
18 loan is an important issue . And for purposes of this
19 hearing under these facts , I would adopt the equity
20 approach and find , as Mr . Erwood has concluded ,
21 " insufficient evidence to establish a deficiency in
22 the net operating income that would require an
23 increase in rent . "
24 MR . ARMSTRONG : I could support that .
25 MR . McNULTY : At this time I so move .
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1 MR . ARMSTRONG : Second .
2 CHAIRMAN COATES : Wait a minute . I ' m not
3 entirely clear on what Mr . McNulty is moving .
4 What is the motion?
5 MR . McNULTY : That this commission adopt
6 Mr . Erwood ' s finding that there is insufficient
7 evidence to establish a deficiency in the net
8 operating income that would require an increase in
9 rent .
10 MR . PHILLIPS : And with respect to
11 discretionary hardship , does that cover both?
12 MR . McNULTY : As to both of those , relying upon
13 the NOI evaluation .
14 MR . PHILLIPS : I understand .
15 CHAIRMAN COATES : Okay . There ' s been a motion
16 and there ' s been a second , and now I would like to
17 have a vote . All in favor , say aye .
18 MR . ARMSTRONG : Aye .
19 MR . AINSWORTH : Aye .
20 MR . McNULTY : Aye .
21 CHAIRMAN COATES : Aye . The motion has been
22 made and moved and carried .
23 MR . PHILLIPS : Now , as I understand it , the
24 findings have been adopted , and are you agreeing ,
25 then , with the recommendation of the hearing
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1 officer?
2 CHAIRMAN COATES : Yes .
3 MR . McNULTY : As stated , yes .
4 MR . AINSWORTH : Yes .
5 MR . PHILLIPS : Give us a moment , if you would .
6 MR . ERWOOD : Mr . Chairman and members of the
7 commission , there were a couple other issues that
8 were raised during that hearing , and I think they ' re
9 both raised in Mr . Delsack ' s brief . One with respect
10 to the request for attorney ' s fees . I don ' t know if
11 Mr . Delsack -- he didn ' t argue that before the
12 commission today . I ' m assuming that he still wishes
13 that matter addressed .
14 Is that correct , Mr . Delsack?
15 MR . DELSACK : I do indeed , thank you , yes , and
16 I have addressed it .
17 MR . RODRIGUEZ : Well , I would object , because
18 Mr . Delsack did not file a timely appeal as Silver
19 Spur did . There are time limits from filing an
20 appeal from Mr . Erwood ' s decision , and if that ' s not
21 appealed from, it ' s a moot point . He did not exhaust
22 his administrative remedies by filing an appeal .
23 MR . PHILLIPS : Here ' s the issue . The findings
24 and recommendations from Mr . Erwood are four in
25 number , and we are referring now to the latter two .
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1 We have heard nothing from our commission about the
2 last two . That ' s what we ' re trying to get at .
3 MR . McNULTY : That was my fault ; Mr . Phillips .
4 I was just trying to establish whether to give the
5 rent increase or not .
6 With respect to the further findings , I
7 would adopt those findings as Mr . Erwood has stated ,
8 that the application for discretionary hardship rent
9 increase is not frivolous and that the rental rates
10 in the park cannot be rolled back , and that each
11 party be responsible for their own fees .
12 MR . PHILLIPS : Thank you .
13 MR . McNULTY : I believe that is supported based
14 upon the totality of Mr . Erwood ' s documentation . And
15 at this time I so move .
16 MR . ARMSTRONG : Second .
17 MR . PHILLIPS : There ' s a motion and a second .
18 Mr . Chairman , would you like to have the
19 commissioners vote?
20 CHAIRMAN COATES : Excuse me . I ' m still reading
21 this .
22 MR . PHILLIPS : I beg your pardon .
23 CHAIRMAN COATES : There ' s been a motion and a
24 second . All those in favor say aye .
25 MR . McNULTY : Aye .
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1 MR . AINSWORTH : Aye .
2 MR . ARMSTRONG : Aye .
3 CHAIRMAN COATES : I abstain .
4 The motion is carried .
5 MR . DELSACK : For the record , may I make a
6 comment at this point . I have addressed the issue as
7 to the so-called rollback , which in reality , that ' s a
8 misnomer , it wasn ' t a rollback . It was merely a
9 termination of an agreement . And , for the record , I
10 would like to state that , and as stated in the papers
11 that were filed , that I don ' t believe that this
12 commission has the jurisdiction to determine the
13 validity of a contractual agreement . So for the
14 record , I am saying that that is , I believe , a moot
15 issue and one to be determined by the courts .
16 CHAIRMAN COATES : So noted .
17 MR . DELSACK : Thank you .
18 CHAIRMAN COATES : There being no other business
19 to come before this commission - -
20 MR . PHILLIPS : Mr . Chairman , I think that takes
21 care of the hardship increase . We do have oral
22 communications , I think , on the agenda , which would
23 give an opportunity for anybody in the audience to
24 make any comment on anything that is not on our
25 agenda - - or that ' s on the agenda .
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1 CHAIRMAN COATES : I beg your pardon?
2 MR . PHILLIPS : They can make any comment that
3 they would like about most anything , if they want to .
4 CHAIRMAN COATES : I think I heard an invitation
5 there .
6 MR . McNULTY : Do we have any takers ?
7 CHAIRMAN COATES : The podium is vacant .
8 UNIDENTIFIED SPEAKER : We appreciate your work .
9 MR . DELSACK : Well , may I make one comment . I
10 just want to thank you all for your analysis and your
11 discussion here today . I want to thank Mr . Erwood
12 for his time and Mr . Phillips for his participation .
13 Also , we would like to extend our thanks on behalf of
14 all of us to Sheila Gilligan , and her staff , Mary
15 Frazier , who have really done a yeoman ' s job on this ,
16 and everyone else that ' s been involved . Thank you .
17 CHAIRMAN COATES : Hearing no further business
18 to come before this commission , the meeting is
19 ended .
20 ( The proceedings concluded
21 at 10 : 55 A . M . )
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1 REPORTER ' S CERTIFICATE
2
3
4 I , MELANIE A . VIZENOR, C . S . R . No . 4026 , a
5 Certified Shorthand Reporter in and for the State of
6 California , do hereby certify :
7
8 That said proceedings were taken before
9 me at the time and place therein stated , and was
10 thereafter transcribed into print under my direction
11 and supervision , and I hereby certify the foregoing
12 transcript is a full , true and correct transcript of
13 my shorthand notes so taken .
14
15 WITNESS my hand this 14th day of
16 December , 1994 .
17 / '
18 t-C-�(0
i1
19 MELANIE A . VIZENOR
20 C . S . R . NO . 4026
21
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