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HomeMy WebLinkAbout15A Ord 456 Dr. K.Baar - Amendments to Mobile Home Rent ControlMEETING DATE'_ 07 CITY OF PALM DE E CONTINUEDTO UV 0 PASSED TO 2N0 READING COMMUNITY SERVI ES STAFF REPORT REQUEST: Approve the amendments to Ordinance 456 (Rent Review) recommended by Special Council Ken Baar and instruct the City Attorney to draft a new Ordinance for Council consideration. SUBMITTED BY: Robert Kohn, Director of Special Programs DATE: February 26, 2004 CONTENTS: 1. Report by Ken Baar. 2. Recommended changes to Title 9, Chapter 9.50 Mobile Home Park Rent Review. Recommendation: Approve the amendments to Ordinance 456 (Rent Review) recommended by Special Council Ken Baar and instruct the City Attorney to draft new Ordinance for Council consideration. Executive Summary: Ken Baar was hired through the City Attorney to provide professional services in the nature of reviewing the City's Mobile Home Rent Review Ordinance and making a recommendation in report form to the City regarding proposed amendments to Chapter 9.50, as well as rules and regulations under the same. Mr. Baar has prepared a written report with his recommendations and the reasons for them. Discussion: Due to the litigious nature of rent control throughout the country and significant changes in the law and interpretation of various rules and regulations staff felt it was appropriate to bring in special counsel to review and recommend amendments to the City's Rent Control Ordinance. Staff spoke with the City of Sonoma's Deputy City Manager, Mary Neilan regarding their ordinance. According to Mary there was significant opposition to modifying their ordinance by the park owners and tenants. The City of Sonoma hired a consultant (Attorney Ken Baar) that specialized in the area of rent control to spearhead their ordinance changes. Mary indicated it would have been brutal to assign this challenge to City staff and the cost of the consultant was worth it. She also indicated their revised ordinance has been in effect for three years and they have had no litigation involving rent control. Mr. Baar was hired and began with discussions involving park owners and their legal counsels, park tenants and their legal counsel as well as City staff and Rent Review Commission members. Mr. Baar has incorporated the comments of all parties involved he felt appropriate in his report and the recommended amendments. Submitted by: 41-44 partm ROBERT KOHN, Director Special Programs SHEILA GILLIG , ISTANT CITY MANAGER Approval: City Manager Table of Issues Addressed in Review of Palm Desert Mobilehome Rent Review Ordinance by Kenneth Baar, February 2004 Issue No. in Report Issue Opposed, or Unopposed Comment (lack of opposition does not indicate affirmative approval) Changes in Regulations 1. Repeal Discretonary Rent Increase Standard, Replace with General Authorization to Provide a Fair Return Unopposed 2. Replace Presumption that management expenses equal 5% of gross with presumption that management expense ratio remains constant in "mnoi standard" ("mnoi standard" = maintenance of net operating income fair return standard Unopposed 3. Exclude consideration of master- metered utility expenses in mnoi standard Unopposed Legally required pursuant to judicial doctrine 4. Adopt interest allowance for all capital improvements Opposed by residents (see Eggebraatan memo, p.3) Legally required pursuant to judicial doctrine 5. Legal costs in fair return proceeding can be passed through to residents in mnoi standard Opposed Residents want the provision to be reciprocal 6. Change methods of calculating park owners income in fair return hearings, interest on deposits in mnoi standard, no longer imputed to be 5%. Unopposed Legally required pursuant to judicial doctrine 7. Readjust allowance for park owners for self -labor in mnoi standard previously set in 1983 Unopposed 8. Remove allowance for park depreciation from mnoi standard Unopposed 9. Remove allowance for increases in park owner lease expenses from mnoi standard Unopposed 10. Modify method for projecting unknown expenses in mnoi standard Unopposed 11. Modify base year in mnoi standard to reflect decision in prior fair return hearing and use determination as new base year Unopposed 12. Under mnoi standard, for parks in newly annexed areas, base year is two years prior to annexation Unopposed 13. Increased discretion to adjust expense claims under mnoi standard Unopposed 14. Authorization of advance determinations of allowable capital improvement increases, subject to completion of capital improvement Unopposed 15. Require annual notice to residents of expiration date and amount of capital improvement increases Unopposed Modifications of Ordinance 16. In fair return standard replace list of relevant factors with direction to use mnoi standard and to grant whatever rent increase is constitutionally required Unopposed 17. Require Board to supply forms to mnoi fair return petitions Unopposed 18. Repeal of section awarding attorneys fee to prevailing party in judicial proceeding Repeal of Ordinance Provisions that are Covered and/or Preempted by State Law and "Mechanical" Changes to Ordinance 19.a,b,c. Move sections within ordinance Unopposed 19.d. Delete exemption from rent regulation for spaces covered by leases (covered by state law) Unopposed The city could provide additional exemptions 19.e. Delete new construction exemption (preempted by state law) Unopposed 19.f. Mechanical change 19.g Delete provision setting forth rent reduction standard when a utility cost is transferred to residents (preempted) Unopposed 19.h. Delete provision setting forth procedural standards for appeal of Board decision (covered by state law) Unopposed 19.i. Clarify language in section 9.50.065, no substantive change Unopposed Administrative Changes 20. (formerly no. 19) Increase in Administrative Fees and Petition Fees Opposed by residents 21. (formerly no. 20) Administrative fee no longer applicable to spaces which are exempt from local rent regulations because they are on long term leases (preempted by state law) Unopposed Review of the Palm Desert Mobilehome Rent Review Ordinance Kenneth K. Baar, Ph.D. February 2004 This report was commissioned by the City of Palm Desert. The opinions and conclusions herein are those of the author and do not necessarily represent the views of the City. Table of Contents About the Author i I. Introduction 1 II. Recommended Amendments to the Ordinance and Regulations 2 III. Comparison of the Palm Desert Mobile Home Rent Review with Other Ordinances ......... 11 IV. Proposed Administrative Measures 12 V. Background Information About the Mobilehome Parks and Mobilehome Rent Review in Palm Desert 12 VI. Expanded Discussion of Selected Modifications to the MNOI Regulations 14 (Management Costs, Gas and Electric Expenses, Financing Capital Improvements, and Attorneys Fees) VII. Expanded Discussion of Rationale for Replacing the Discretionary Rent Increase Standard 17 Appendix - A. Author's Resume A-1 i The Author A copy of the author's resume is attached as Appendix A. The author has a Ph.D in urban planning and is an attorney. He has researched and published extensively on housing policy issues. Over the past 20 years, he has served as a consultant to numerous California jurisdictions and to New Jersey jurisdictions on rent control issues. His articles on rent control have been extensively cited by appellate courts. Court Opinions Citing Law Review Articles of Kenneth Baar Westchester West No.2 Limited Partnership v. Montgomery County, 348 A.2d. 856 (1975) Maryland Court of Appeals [highest Civil Court in the state] Helmsley v. Borough of Fort Lee, 78 N.J. 200; 394 A.2d. 65 (1978) New Jersey Supreme Court Fisher v. City of Berkeley, 37 Ca1.3d. 644; 209 Ca1.Rptr. 682 (1984) California Supreme Court; affirmed, 475 U.S. 260, 106 S.Ct. 1045, 89 L.Ed.2d. 206 (1986) Oceanside Mobile Home Park Owners Association v. City of Oceanside, 157 Ca1.App.3d. 887; 204 Cal.Rptr. 239 (1984) California Court of Appeals Mayes v. Jackson Township, 103 N.J. 362; 511 A.2d. 589 (1986) New Jersey Supreme Court; cert. denied, 479 U.S. 1090, 107 S.Ct. 1300, 94 L.Ed. 2d. 155 (1987). Yee v. Mobilehome Park Rental Review Board, 17 Cal. App. 4th 1097, 23 Ca1.Rptr.2nd. 1 (1993) California Court of Appeals Palomar Mobilehome Park v. City of San Marcos, 16 Cal.App.4th 481, 20 Cal.Rptr.2d. 371 (1993) California Court of Appeals Guimont v. Clarke, 121 Wash. 2d. 586; 854 P.2d.1(1993) Washington Supreme Court; cert. denied, 510 U.S. 1176, 114 S.Ct. 1216, 127 L.Ed.2d. 563 (1994) Kavanau v. Santa Monica Rent Control Board, 16 Ca1.4th. 761; 66 Ca1.Rptr. 2d. 672 (1997) California Supreme Court); cert. denied, 522 U.S. 1077, 118 S.Ct. 856, 139 L.Ed. 2d. 755 (1998) Rainbow Disposal Co., Inc. v. Mobilehome Park Rental Review Board, 64 Ca1.App.4th 1159, 75 Ca1.Rptr. 2d. 746 (1998) Quinn v. Rent Control Board of Peabody, 45 Mass. App.Ct. 357, 698 N.E.2d.911(1998, Massachusetts Court of Appeal) Galland v. City of Clovis, 24 Ca1.4th 1003, 103 Ca1.Rptr.2d. 711 (2001) California Supreme Court ii I. Introduction This report was prepared pursuant to a request by the City to review and comment on its Mobile Home Park Rent Review ordinance and regulations and to propose amendments. The discussion in this report is subject to the caveat that judicial doctrines regarding the constitutional requirements for mobile home park space rent ordinances have been in flux and there can be no guarantees as to what provisions will be valid in the future. The report is organized in the following manner: II. Recommended Amendments to the Ordinance and Regulations III. Comparison of the Palm Desert Mobile Home Rent Review with Other Ordinances IV. Proposed Administrative Measures V. Background Information About the Mobilehome Parks and Mobilehome Rent Review in Palm Desert VI. Expanded Discussion of Selected Modifications to the MNOI Regulations. (Management Costs, Gas and Electric Expenses. Financing Capital Improvements, and Attorneys Fees) VII. Expanded Discussion of Rationale for Replacing the Discretionary Rent Increase Standard Palm Desert is one of approximately one hundred jurisdictions in California that controls mobilehome space rents. The Palm Desert ordinance is typical of mobilehome rent ordinances. It authorizes annual across-the- board rent increases tied to 75% of the percentage increase in the CPI and authorizes additional increases pursuant to fair return and capital replacement rent increase standards. Under regulations which were adopted pursuant to the ordinance, the fair return standard contains a maintenance of net operating income (MNOI) standard. In addition, the regulations contain a "discretionary" rent increase standard which authorizes consideration of other fair return factors. While the provisions of the ordinance and regulations reflected the "state of the art" when they were drafted, the judicial precedents and "lessons" of the last decade lead to the need for the modifications that are proposed in this report. This report does not address issues related to the potential conversion of mobilehome parks to condominium ownership or to other uses. 1 II. Recommended Amendments to the Ordinance and Regulations Recommended Modifications of the Regulations 1. In the regulations, the "Discretionary" Rent Increase factors should be replaced by a general provision authorizing the Board to grant whatever rent increase is required to meet constitutional fair return standards (Section 101(B)) replaced by Ordinance Sec. 9.50.067. The issue of what constitutes a fair return is particularly complex. Furthermore, judicial doctrine on this issue is not definitive. The last section of this report contains a lengthy discussion of fair return issues. Under the current regulations park owners may obtain a "hardship" increase pursuant to a "maintenance of net operating income" (MNOI) standard. In addition under a "discretionary" hardship standard, apark owner may present evidence to rebut the presumption that the MNOI standard provides a fair return. Under this standard, if the presumption is rebutted, the regulation list five methods which may be "relevant." "Commission may consider any and all evidence ... it deems relevant to valuing the landlord's property such that the result is in conformity with existing law and operates to prevent a confiscatory taking. Relevant methods for valuing a landlord's property may include, but are not limited to the following: 1. Present Fair Market Value 2. Capitalization of Income 3. Comparable Sales 4. Replacement Cost 5. Original Investment" The discretionary rent increase standard was adopted out of concern that a maintenance of net operating income standard might not be sufficient to guarantee a fair return. However, the foregoing list of factors which may be considered, if the presumption is rebutted, would not work well in reality and could result in a host of problems. The present fair market value approach is circular, because rental income determines market value therefore, it is circular to use market value to determine the allowable rental income. This view has been set forth by the appellate courts on numerous occasions and is now generally accepted. The comparable sales approach (which considers the value of comparable properties as evidenced by sales prices) is a variant of the return on fair market value approach, which uses the market value of comparable properties, instead of the regulated subject property, in order to determine what rent should be permitted. The Capitalization of income approach uses rental income to determine value; therefore, it would be circular to use this approach to determine allowable rental income. The use of original investment presents serious practical problems. The courts have continually reiterated the concept that owners of rent controlled properties are entitled to a fair return on investment. However, the courts have not resolved the issues of how investment should be measured (original investment, original investment adjusted downward by depreciation, or original investment adjusted upward by the increase in the CPI since the time of the investment) or of what constitutes a 2 fair rate of return. Replacement cost has not been accepted as a factor in measuring fair return. This author is not aware of its use in any cases. It has not been mentioned with approval in any reported decision. There is no guarantee that the application of any particular fair return standard will be upheld in the courts. Since the discretionary rent increase regulation was adopted, in one case the California Court of Appeal concluded that the "MNOI approach adopted by the Board is a "fairly constructed formula" which provided [the park owner] a sufficiently "just and reasonable" return on its investment." However, judicial doctrine in this area is not conclusive, it has fluctuated, and it has not been completely consistent. Therefore, it is necessary to provide the Board with authority to use a standard other than the MNOI standard. But, in such instances, the regulations should give the Board flexibility rather than designating the use of the foregoing standards. Recommended Amendments to the MNOI Regulations 2. Treatment of Managements Costs (Section 102.C.1.a) Under the MNOI regulations, management fees of 5% or less of gross income are presumed to be reasonable and fees in excess of 5% of gross income are presumed to be unreasonable. This standard is common in mobilehome park rent regulations. When the MNOI standard is applied the amount by which costs have increased between the base year and the current year is the critical issue. The 5% presumption does not address the issue of how to treat instances in which there are claims for large increases in management expenses between the base year and the current year, although there has been no change in the level of management services for the benefit of the residents. The presumption should be replaced by a presumption that management expenses either are the same percentage of gross income in the base year and the current year or that they have not increased by more than the CPI since the base year. This presumption could be rebutted by showing that there has been a significant change in the level of management services provided to the residents since the base year. (See expanded discussion of this issue in Section VI of this report.) 3. Utility Expenses (Section 102.C.1.h) The section of the regulations authorizing consideration of utility expenses should be amended to exclude consideration of gas and electricity income and expenses associated with the provision of submetered gas and electricity service. The pricing of submetered gas and electricity has been preempted by state law. This pricing provides for an allowance for the costs of maintaining gas and electricity systems as well as for reimbursing the utility company for the provision of gas and electricity. (See expanded discussion of this issue in Section VI of this report.) 3 4. Financing Costs Associated with Capital Replacements (Sections 101.C,102.C..1.i, and Section 102.C.2.b) Under the regulations financing allowance for capital replacements is tied to actual financing obtained by a park owner. Instead, the financing allowance for capital replacements should be uniform rather than dependent on the particular financing arrangements of a park owner. Otherwise, park owners who use their own capital will be penalized while park owners with the least favorable financing will obtain the greatest rent increases. Differences in allowable rent increases based on differences in financing arrangements has been brought into question by judicial precedent of the last decade. Here it is suggested that the financing allowance should be equal to the prime mortgage interest rate plus one percent. Also, the exclusion of mortgage payments from allowable operating expenses should be clarified to indicate that the exclusion does not apply to mortgage interest payments associated with capital replacements. This exception to the exclusion is now implicit, but should be made explicit. (See expanded discussion of this issue in Section VI of this report.) 5. Reasonable Attorney's Incurred in the Course of Obtaining a Rent Adjustment should be allowable expenses which may be passed through (on an amortized basis). (Section 102.C.2.e) "Attorney's fees and other costs incurred for preparation and presentation of current proceedings before the Board, or in connection with civil actions or proceedings against the Board. ordinance" are not considered as operating costs under city's maintenance of net operating income standard. However, an underlying theory of the maintenance of net operating income approach is that reasonable expenses may be recovered through rent adjustments. If resort to the MNOI adjustment procedures is necessary in order to obtain a fair return, then reasonable costs of obtaining such an adjustment should be an allowable operating expense. In 2001, the State Supreme Court indicated such expenses should be considered in the application of an MNOI standard. This expense allowance should be amortized since it is a type of expense that typically occurs only once in a five or ten year period, rather than annually. Treatment of attorney's fees as an allowable operating expense will also help address the City's concern about its liability for the attorney's fees that park owner's incur in the course of obtaining fair return rent adjustments. (See expanded discussion of this issue in Section VI of this report.) 6. The Imputed Interest Allowance on Security Deposits Should be Modified (Section 102.B.(3)) Interest on security deposits is imputed to be 51/2 % unless such deposits earn a greater rate of interest. Currently, interest rates on bank deposits are well below 51 %. One court has held that precisely the same rule (in another jurisdiction) was not valid in light of current market conditions. 4 The amount of security deposits held by park owners is limited by the fact that all security deposits have to be refunded to mobilehome owners after they have paid the rent promptly for twelve consecutive months. (California Civil code section 798.39(b)) 7. The Allowance for Labor Costs Should be Modified (Section 102.C.1.e) In the absence of prevailing wage data from the State Department if Industrial Relations, the current allowance for owner performed labor is $7.00 for general maintenance and $13.00 for skilled maintenance, unless the owner can show by clear and convincing evidence that a higher rate should be permitted or a prevailing wage for that type of labor has been published by the California Department of Industrial Relations. These $7.00 and $13.00 allowances were established in 1986. Since then, the CPI has increased by 65%.' The proposed regulations increase these allowances by 65% and provide for a CPI adjustment of these allowances in future years. Also, this section has been revised to authorize an adjustment of these compensation levels upon a showing by either party of clear and convincing evidence that a different rate should be allowed. Under the current regulations, only the park owner may make such a showing. 8. All Depreciation Should Be Excluded from Allowable Operating Expenses, Rather than Only Depreciation Occurring Prior to 1983 or the Purchase Date of the Park (Section 101.C.2.f) Depreciation is allowed as an expense under the income tax regulations in order to provide an incentive for capital investment. However, under the rent regulations an incentive for investment is provided through the MNOI fair return regulation which insures that rent increases are adequate to cover operating costs increases including the amortized cost of capital replacements. 9. The Allowance for All Increases in Lease Payments as an Operating Expense Should Be Removed (Section 102.C.2.c) Under the MNOI regulations increases in lease payments are allowed as an operating expense. However, lease payments are a cost of acquiring an interest in a mobilehome park rather than an expense of operating a mobilehome park. Allowable rent levels should not be dependent on whether a park owner has an outright ownership interest or only a leasehold interest. Furthermore, lease payments are a payment from the owner of one interest in the park to the owner of another interest in the park. ' In 1986, the annual CPI was 109.5 and in 2003 the annual CPI was 180.3. (The use of CPI for urban wage earners and clerical workers is specified by the ordinance.) 5 10. The Schedule of Projected Increases in Operating Expenses Should Be Modified (Sec. 105) The regulations direct that where projections of expenses are required, it shall be presumed that operating expenses increase at 10% per year. This projection should be modified to contain a presumption that these expenses increase at the same rate as the CPI.. Also, the presumption that management expenses are equal to 5% of gross income should be deleted. 11. Modification of the Base Year in the Event that the Park Owner Previously Petitioned Pursuant to the MNOI Fair Return Standard (Section 101) If a mobile home park owner has petitioned pursuant to the MNOI standard, a determination has been made of the park income and expenses were in the "current" year. Under these circumstances the "current" year in the previous case should become the new base year for the purpose of reviewing future MNOI applications. If the same base year is used in reviewing successive applications a process of reevaluation of prior decisions might occur. 12. Base Year For Mobile Home Parks in Areas Annexed to The City After 2003 (Section 106) If a mobile home park first becomes subject to the rent review ordinance by virtue of a municipal annexation after 2003, the base period shall be the calender year that includes the date which is two years prior to the date of the annexation. It would not be appropriate to apply a twenty year old base date (1982) to parks that come under regulation for the first time after 2003. 13. Discretion in Evaluation of Operating Expenses in Fair Return Cases A maintenance of net operating income (mnoi) analysis centers on a comparison of base year and current year expenses in order to determine what rent adjustment is required to cover ongoing changes in expense levels . Often there are particularities of expense patterns within a particular year (for example two years of a particular type of expense are grouped within a single year or a specific expense is exceptionally low in a particular year.). As a result, some adjustments need to be made to provide a reasonable comparison between the base year and the current year. Here a regulation is proposed that grants discretion to address such situations. (Proposed Section 102.c.2) 14. Advance Determinations of Allowable Capital Replacement or Capital Improvement Increases Park owners should be able to obtain an advance determination of what increase would be permitted for proposed capital improvements. Such a determination would be made contingent on completion of the project and verification of its actual cost. (Proposed Section 101.D) 6 15. Periodic Notice of the Amount of Rent Increases Based on Capital Improvement and Replacements and of the Date of their Expiration (Proposed Section 107) Several interviewees indicated that park residents did not have an adequate knowledge about when capital improvement and/or capital replacement rent increases would expire. Some method of providing periodic notice should be incorporated in the regulations. Here, it is proposed that annual notice should be provided of the amount of the rent increase attributable to each capital improvement and the termination date of that increase. Recommended Modifications of the Ordinance 16. The Individual Rent Adjustment Section of the Ordinance Should be Revised (Section 9.50.050) The individual rent adjustment section authorizes rent increases in order to avoid "undue hardship". It lists factors that should be considered without setting forth a specific methodology. The factors include specified types of operating costs and a "just and reasonable return on the mobile home park owner' s property." In lieu of its current provisions, this section should reflect the actual policy set forth in the regulations - the use of a maintenance of net operating income (MNOI) fair return standard. It should state that an MNOI standard shall be used and that in addition the Rent Review Board shall have the power to grant whatever rent increase is required to meet constitutional fair return standards. At a minimum, the section should be amended as follows: (1) the concept of "undue hardship" and "hardship" should be replaced by terms "fair return", since there is no common understanding about the meaning of the terms "undue hardship". (2) "just and reasonable return on the mobile home park owner's property" should be replaced by the term "fair return", so that there is no possibility of introducing terminology that can be interpreted to mean something different than "fair return" (3) the provision for consideration of increases in land and/or facilities rent should be deleted for the reasons set forth in Section 11.9 of this report.. (4) the provision for consideration of "utility rates" should be modified to include an exception for income and expenses associated with submetered gas and electricity to the extent that consideration of these income and expenses is preempted by state law. 17. The Board Should Be Required to Provide Forms for Fair Return Petitions (Section 9.50.070) The ordinance states that "hardship" petitions shall be filed on a form designated by the Board if the Board designates a form. The Board should be required to designate a petition form. Otherwise, there is no certainty as to what information is required in a petition. 7 18. Repeal of Attorney's Fees Provisions (Section 9.50.090) The ordinance provides that the prevailing party shall be awarded attorney' s fees in any court proceeding involving a violation of the ordinance. This provision has resulted in City liability for attorney's fees in cases in which the court has ruled that the ordinance was not correctly interpreted. Consistent with the City's objective of reducing liability for attorney's fees a portion of Section 9.50.090 is removed. 19. Repeal of Ordinance Provisions that are Covered by State Law and "Mechanical" Changes to Ordinance a. Move the Section Providing for the Selection of a Tenant Representative from the Definitions Sections of the Ordinance to the Appropriate Section The section requiring that tenants designate a representative when a petition is filed by more than one tenant should be moved from Sec. 9.50.020. K. (Definitions Section) to Sec.9.50.070 (Initiation and Review of the Hearing Process). It is an "operative" section of the ordinance, rather than a definition. b. Move the Section Setting Forth the Qualifications and Duties of the Hearing Officer from the Definitions Sections of the Ordinance to the Appropriate Section (Section 9.50.020.L) The section setting out the qualifications and duties of the hearing officer should be moved from Sec. 9.50.020.L. (Definitions Section) to Sec.9.50.070 (Initiation and Review of the Hearing Process). It is an "operative" section of the ordinance, rather than a definition. c. Move the Section Authorizing Individual Park Rent Adjustments from the "Powers of the Board" (Section 9.50.050.E) to the "Maximum Rent" Section (Section 9.50.067) This section sets forth criteria for rent adjustments. Typically such sections are included among rent adjustments section rather than listed as a power of the board. The section setting forth powers of the Board should simply state that it has the power to make rent adjustments pursuant to the section which authorizes individual park rent adjustments. d. Delete Lease Exemption Set forth in the Ordinance and add a Cross -Reference to State Law in Exemptions Section (Section 9.50.030.E) The ordinance exempts spaces covered by leases that are more than one month length. However, an exemption from local mobile home space rent laws has been created by state law. It applies to all spaces covered by leases of one year or more which meet specified conditions. The existence of this exemption should be noted in the City ordinance. 8 e. Deletion of New Construction Exemption.(Section 9.50.030.B) The ordinance exempts newly constructed parks for the first two years after their construction. Since the ordinance has adopted a law which exempts all mobilehome parks constructed after january 1, 1990. California civil code sections 798.7 and 798.45. As a result the ordinance provision has been preempted. f. Termination of Use of Base Date as Reference Point for Measuring Changes in the Cost of Living (Section 9.50.065.D) This section states that changes in the cost of living shall always be measured from the base date, which is April 28,1983 (Section 9.50.065.C.) However, annual allowable rent increases are based on the percentage increase in the CPI since the prior rent adjustment (Section 9.50.065.A). Therefore, this section should be removed from the ordinance. g. Repeal of Section Governing Transfers of Utility Costs to Park Residents (portions of Section 9.50.130) This section provides that when utility costs are transferred by a park owner to residents by separate metering or other lawful means, then the park owner must provide a rent reduction to offset the decrease in costs resulting from the transfer. Now the treatment of such transfers is also covered by the mobilehome residency law (California Civil Code Sec. 798.41). Under these circumstances the provisions in the Mobile Home Park Rent Review ordinance governing such transfers should be repealed. h. Repeal of Section Setting forth Procedure for Appeal of Board Decision to the Courts and Authorizing Petition for Rehearing (Section 9.50.100) The first portion of this section sets forth procedural conditions for filing an appeal of a Board decision. However, state law (California Civil Code Section 1094.5) also sets forth the preconditions for filing a writ of mandate appealing a Board decision. Under these circumstances coverage of these issues by the City' s ordinance is unnecessary. The second portion of this section permits a request for "reconsideration" of a board decision on the basis of newly discovered evidence (within thirty days after a decision is issued) or fraud. A waiver of this time limit may be granted based upon a showing of "proper circumstances". This type of provision is appropriate for judicial proceedings, but is not likely to be useful in the case of administrative proceedings, which are governed by less formal procedural rules. According to the information received by this author, this provision has not been used and has caused confusion about whether a request for reconsideration is a precondition to the right to bring a judicial challenge to a decision. i. Modifications of Language without Changes in Substance The provisions covering annual across-the-board rent increases have been segregated and redrafted in order to provide greater clarity. (Proposed Section 9.50.065). Minor wording changes have been made in other sections. 9 19. An Increase in Administration Fees and Petition Fees The City has expressed a concern about the costs of administering the rent review program. The question of what portion of rent administration expenses should be covered by registration and petition fees is a policy question. Currently, the City imposes an annual administration fee of $9.50 per year per mobile home space. In addition, petitions for rent increases have to be accompanied by a deposit equal to one-half of the anticipated cost of the hearing. Some jurisdictions charge annual administrative fees in the range of $24 to $57 per mobilehome space.2 This cost is commonly split between park owners and park residents. Some jurisdictions impose a petition fee of several thousand dollars. Others require apayment adequate to cover the city' s full cost of retaining an outside expert to review the petition. Under the proposed regulations, if the park owner demonstrated the need for a rent increase pursuant to a petition, the cost of the petition would be treated as an allowable operating expense. From a practical point of view, the costs of the administering the program are small when compared with costs of other city programs designed to address housing issues and are small compared with the benefits that residents realize as a consequence of the protections provided by the ordinance. 20. Exemption from City Administrative Fees of Spaces Exempt from Rent Regulation by State Law Under the City's "Registration Plan"the annual administrative fee of $9.50 per mobilehome space applies to all spaces within parks subject to the rent review ordinance. However, state law requires an exemption from such fees for spaces that are exempt from local rent regulations.3 The resolution should be modified to reflect this requirement. 21. Adoption of Hearing Procedures The City should adopt some basic hearing procedures, in lieu of delegating all of this task to the hearing officer who is conducting the hearing. This author's main concern is that the procedures insure that each party has adequate time to review and respond to the opposing parties contentions. In too many cases, this author has seen situations where new information and new theories are presented at a hearing or within a very short period before the hearing. A very basic provision has been added requiring that parties receive written submissions and notice of the substance of planned testimony in advance of hearings. (Section 9.50.070.J) 2 For example, Escondido charges an annual administrative fee of $32.27 per space subject to its mobilehome rent ordinance and charges a petition fee of $3,800. In sonoma county, jurisdictions charge the following annual administrative fees: sonoma county - $24; city of sonoma - $24; rohnert park - $41.00; santa rosa - $57.36. California Civil Code, Sec. 798.17(e). 10 III. Comparison of the Palm Desert Mobile Home Rent Review with Other Ordinances 1. The portion of the CPI increase covered by the automatic increase standard A substantial majority of the mobilehome rent ordinances in the state include provisions for automatic annual across-the-board increases in allowable rents. In these jurisdictions, the annual increase is generally the principle tool for periodic adjustments of rents and usually the volume of individual park rent adjustments granted through a hearing process is at a minimal level. This approach is consistent with the concept that park owners should be permitted reasonable rent increases, while being prevented from imposing unreasonable increases.' A substantial portion of automatic increases standards limit the annual automatic increase to less than 100% of the percentage increase in the CPI. However, a significant number of ordinances permit annual increases equal to 100% of the percentage increase in the CPI.5 One representative of a park owner recommended that annual increases should equal 100% of the percentage increase in the CPI.. On the one hand, due to leveraging of investments (with purchase financing) park owners may obtain a substantial yield on their investments even if rents increase by less than the full rate of increase in the CPI.6 Also, they always have a right to petition for a fair return increase in excess of the automatic increases. On the other hand, if 100% of CPI increases were granted, the ordinance would still achieve its goal of preventing "excessive" increases resulting from exploitation of the de facto monopoly nature of the landlord -tenant relationship in the case of mobilehome park space rentals. It is possible, but not certain, that full CPI increases may reduce the number of petitions filed pursuant to the fair return regulations. a However, automatic annual increases are not constitutionally required as long as an owner may obtain a fair return without unreasonable delay. In Carson Mobilehome Park Owners' Ass'n v. City of Carson, the State Supreme Court ruled that "the absence of general rent adjustment procedure does not make the Carson ordinance constitutionally deficient." 35 C.3d. 184, 194 (1983). Berkeley's rent control ordinance was struck down on the basis that it did not contain a general adjustment mechanism and its individual adjustment process was so burdensome that most landlords would not be able to obtain rent increases within a reasonable period of time. Birkenfeld v. City of Berkeley, 17 C.3d. 129 (1976). The Court distinguished the Berkeley case from the Carson case on that basis that Berkeley's ordinance precluded the creation of an administrative mechanism adequate to process rent increases for the thousands of apartment owners governed by the ordinance. 5 E.g. The Riverside Country mobile home space rent ordinance authorizes annual increases equal to 100% of the percentage increase in the C.P.I. (Riverside County Code, Sec. 5.36.090) 6 For example, during a period in which there was a 50% increase in the CPI, if the value of a park increased by 25% (for example from $1,000,000 to $1,250,000), the owners equity in the park may have doubled from $250,000 to $500,000). 11 2. Limited Increases Upon Vacancies In between the alternatives of vacancy controls and vacancy decontrols when mobilehomes are sold in place, some jurisdictions allow limited increases upon in place sales of mobilehomes, e.g. 5% or 10%.' IV. Proposed Administrative Measures 1. Unification and Publication of the Ordinance and Regulations All ordinance provisions and all regulations should be available in a single unified document. This document should be available in one or two files that can be easily downloaded from the internet, as well as being available at the City Clerk' s office. 2. Compilation of Prior Records The City should maintain a file containing all petitions, hearing officer decisions, trial court decisions, and appellate court decisions in rent review cases. 3. The City Should Consider Making Contact with the Neighboring Cities with Mobilehome Space Rent Regulations to see if there is a possible interest among them in contracting out administration of their programs to a single entity. The County of Sonoma and six cities in the County , which have differing mobilehome rent control ordinances, have contracted with a single County agency to administer their ordinances. These ordinances are administered by a single administrator. In the Palm Desert area, at least four cities (including Palm Springs, Rancho Mirage, Cathedral City, and Indio) have mobile home rent review ordinances. These ordinances are quite similar. V. Background Information About the Mobilehome Parks and Mobilehome Rent Review in Palm Desert A. Mobilehome Park Spaces in Palm Desert Three mobilehome parks with a total of 545 mobilehome spaces are covered by the city's mobilehome rent review ordinance. 7 For example in Ventura county the following increases are allowed upon in -place transfers of mobilehomes. Ventura county ordinance - the lesser of 7% or $50, Oxnard - the lessor of 15% or $80; Santa Clarita 10% (Santa Clarita municipal code sec. 6.02090) 12 B. State Exemption from Pahn Desert Rent Review Ordinance Under state law mobilehomes spaces which are leased for one year or more are exempt from local rent regulations, provided that the leases meet specified conditions.' As of September 2003, 213 out of 545 mobilehome spaces in the three parks which are covered by the Rent Review ordinance, are exempted from the ordinance by virtue of being on exempt leases.' If these leases are not extended after their expiration, those spaces would become subject to the ordinance. In addition, apark with 360 spaces will become subject to the city's ordinance if aproposed annexation goes through. C. The Cost of the Rent Review Program A principal motivation for the city's request for this report was concern about the cost of administering the rent review program. The costs include staff time administering the program, city attorneys fees, and judgments against the city in cases where other parties prevail against the city. In FY 2001/02 legal expenses defending the Ordinance and actions of the Commission totaled $59,242.24. This total did not include staff time, supplies, and the use of facilities associated with the administration of the ordinance.1° In August 2002, in one case (Indian Springs) an award of $21,605 was granted pursuant to the reversal of the award of a capital improvements increase by the rent review board." The city will be liable for half that expense. Also, an additional $6,000 in attorney fees has been requested to cover the cost of the resident's successful defense of an appeal of that decision. Until recently, a cost of an additional $85,501 was expected as a consequence of on award of attorney's fees to a park owner who prevailed in an action overturning a board decision. However, the trial court decision awarding that fee was remanded to the trial court. A subsequent trial court decision in denying the motion for attorney's fees12 is now on appeal. Under the proposed modifications to the regulations, reasonable attorney' s fees incurred pursuant to successful requests for fair return adjustments would be considered as an operating expense and, California Civil Code, Sec. 798.17. 9 Information provided by Robert Kohn, Director of Special Programs, Dec., 2003. io Id. Indian Snrings Mobilehome Park Homeowners Ass'n v. City of Palm Desert, No. INC 019015 (Riverside Country Superior Ct., Order - Aug. 9, 2002) affirmed in unreported decision (Court of Appeal, Fourth Appellate District, Division 2, No. E032485, Opinion, Oct. 23, 2003) 12 Van Alstine v. City of Palm Desert. 13 therefore, would be recovered through the rent adjustment process rather than being a liability of the City. The costs of administering the program exceed the average for mobilehome space rent review programs. On the other hand, they may be compared with the average annual municipal expenditure per resident, which is over $2,000.13 Various city programs designed to create or preserve affordable housing either have costs of more than $5,000 per year per dwelling unit or have a total cost of over $30,000 per dwelling unit. VI. Expanded Discussion of Selected Modifications to the MNOI Regulations A. Treatment of Management Costs. Under the Fair Return MNOI regulations, there is a rebuttable presumption that management expenses in excess of 5% of gross income are unreasonable.14 In MNOI cases, issues related to management expenses most commonly emerge when management by owners, which is not recorded as an expense, is replaced by management by employees or a management company. Alternatively substantial increases occur when a professional management company replaces in house employees and/or manages a limited partnership which owns the park. In these circumstances, park owners have claimed large increases in management expenses although the level of management services may be unchanged. In fact, the difference between the base year and the current year may be simply a difference in "recorded" expenses rather than a difference in real costs in terms of time and effort and in the real level of service provided to the residents. Under an MNOI analysis the critical determinant is any change (increase) in management expenses between the base year and the current year, rather than the ratio of management expenses to rental income. The current presumption that management expenses should not exceed 5% of rental income should be replaced by a presumption that the cost of management expenses shall not exceed the percentage increase in the CPI, unless the park owner can demonstrate that there has been an increase in the level of management services provided to the residents. If the park owner demonstrates that there has been increase in management services the increase in allowable management expenses should reflect the reasonable costs of providing the increased services. B. Treatment of Utility Expenses and PUC Preemption of Gas and Electricity Rates. Under the MNOI regulations "utility" expenses are listed among allowable operating expenses.15 However, a series of judicial opinions of the past decade have clearly established that the regulation of gas and electricity income is preempted by regulation by the California Public Utilities 13 The population of the city is about 42,000. The annual budget is about $90 million. 14 Rent Review Board Guidelines for Hardship Rent Increases (Fair Return on Property) Sec. 102.C.1.a. 15 Rent Review Board Guidelines for Hardship Rent Increases (Fair Return on Property) Sec. 102.C.1.h, 14 Commission (PUC).16 Those regulations have authorized charges for gas and electricity expenses which include an allowance for the maintenance of the gas and electricity system as well as recovery of gas and electricity payments to the utility company. In the past few years, a substantial number of jurisdictions with mobilehome rent regulations have amended their ordinances and/or regulations to reflect this preemption. The regulations should clearly state that income and expenses associated with the delivery of master -metered gas and electricity should not be considered in a fair return case; instead only expenses associated with their provision to common areas should be considered. C. Financing Costs Associated with Capital Improvements. Under the MNOI fair return regulations covering capital expenses, in the case that "a capital expenditure is proposed for the prospective year and is to be paid for through financing, the amortization of such expenditure may reflect the terms of such financing."17 The standard does not provide for any consideration for a financing allowance for capital expenditures that have already been undertaken. If a financing allowance is provided, it should be provided for all capital expenditures whether or not they have been incurred prior to the application or were approved of in advance. Furthermore, the allowable financing cost should not vary depending on the particular financing arrangement selected by the owner or the particular circumstances of the owner. Instead, the allowable interest rate should be uniform. Otherwise, parks may be allowed substantially differing rent increases for undertaking the same improvements. In the past decade, two California appellate courts have ruled that the policy of tying rent increases to the individual financing arrangements of park owners has no rational basis.'$ Those cases involved the treatment of purchase financing. However, their underlying logic, that owners should not be treated differently depending on whether they financed their purchase with cash or mortgages with differing interest rates, is as compelling in cases involving the financing of capital replacements.19 16 See Rainbow Disposal Co., Inc. v. Mobilehome Park Rental Review Board, 64 Ca1.App.4th 1159, 75 Ca1.Rptr. 2d. 746 (1998) California Court of Appeal and Hillsboro Properties v. Public Utilities Commission, 108 Cal. App. 4°i. 246 (2003) California Court of Appeal. 17 Sec. 102.C.1.i. 18 Palomar Mobilehome Park Ass'n v. Mobile Home Rent Review Commission [of San Marcos], 16 Ca1.App. 4th 481, 488; 20 Ca1.Rptr.2nd.371, 374-375 (1993);.Westwinds Mobile Home Park v. Mobilehome Park Rental Review Bd., 30 Ca1.App.4th 84, 94 (1994). 19 In one of the cases, the court explained: Assume two identical parks both purchased at the same time for $1 million each. Park A is purchased for cash; Park B is heavily financed. Under Palomar's approach, calculating return based on total historic cost and treating interest payments as typical business expenses would mean that Park A would show a considerably higher operating income than Park B. Assuming 15 It is suggested that the financing allowance should be equal to the prime mortgage interest rate plus one percent as published in the weekly reports of Freddie Mac. This rate is available on the Internet home page of Freddie Mac. A one percent addition to the prime rate is proposed because some park owners would have to obtain second mortgages to finance capital improvements; such mortgages would have a higher interest rate than first mortgages. On the other hand other owners may self -finance capital improvements or cover their costs through refinancing. D. Treatment of Attorneys Fees Associated with Rent Increase Petitions. The City has been concerned about the legal costs associated with the administration of the rent program. These fees have consisted of a combination of the costs of defending legal challenges to Rent Review Board decisions, court awards against the city for the costs incurred by park owners in successful challenges to Rent Review Board decisions, and the cost of advising the City on legal issues related to the ordinance. Under the current regulations attorney' s fees incurred in the process of obtaining a fair return adjustment are not considered in calculating the operating expenses of the park owner. The maintenance of net operating income (MNOI) regulations exclude: Attorney's fees and other costs incurred for preparation and presentation of current proceedings before the Board, or in connection with civil actions or proceedings against the Board. ordinance (Regulation, Sec. 102.C.2.e). At this point it is not clear if such an exclusion is valid. For the past two decades exclusions of the type contained in the Palm Desert regulations have been common. In 1983, a California Court of Appeal upheld this type of provision in the Oceanside mobilehome rent ordinance.20 But in 2001, in Galland v. Clovis, the State Supreme Court held that a park owner's legal expenses incurred in the processes of seeking a rent increase should be considered: The Gallands are correct that the substantial legal and administrative costs attributable to the rent review process, discussed at greater length in the next part of this opinion, should be properly included as expenses when calculating the proper rent readjustment. Under the fair ROI method used in practice by Clovis, it may not arbitrarily exclude the reasonable expenses of seeking legitimate rent increases.21 a constant rate of return, the owners of Park B would be entitled to charge higher rents than the owners of Park A. We see no reason why this should be the case. Palomar Mobilehome Park Ass'n v. Mobile Home Rent Review Commission [of San Marcos], 16 Ca1.App. 4th 481, 488; 20 Cal.Rptr.2nd.371, 374-375 (1993). 20 Oceanside Mobilehome Park Owners' Ass'n. v. City of Oceanside, 157 Cal.App.3d. 887; 204 Cal. R. 239 (1984). 21 24 Ca1.3d. 1002, 1028 (2001) 16 In addition, an underlying theory of the maintenance of net operating income approach is that reasonable expenses may be recovered through rent adjustments. If resort to the MNOI adjustment procedures is necessary in order to obtain a fair return, then the costs of presenting an MNOI application are a reasonable cost of operating the park. On the other hand, it would not be reasonable to permit an applicant to expense these costs in one year, and treat them as if they annually recurring costs. Typically, MNOI applications are five or more years apart. State legislation regarding apartment rent control ordinances requires that professional expenses incurred in fair return proceedings shall be treated as a legitimate expense in calculating what rent should be permitted.' The law provides for the amortization of these expenses23 and sets forth a list of factors that shall be considered in determining the reasonableness of the claimed expenses.24 However, the law specifically excludes consideration of expenses incurred in obtaining a reversal of an adverse administrative decision.25 VII. Expanded Discussion of Rationale for Replacing the Discretionary Rent Increase Standard This section of this report sets forth reasons why the maintenance of net operating income should be used and why the "discretionary" rent increase standard should be replaced by a general provision authorizing the Board to grant the whatever rent increase is required to meet constitutional fair return standards. Due to the complexity of the issue the discussion is lengthy. Overview of Fair Return Issues The primary purpose of individual rent adjustment standards in rent control ordinances has been to insure that regulated property owners can obtain a "fair return" under the rent ordinance. Park owners have a constitutional right to a "fair return". The issues of what constitutes a fair return and what fair return standard is most reasonable and have been the subject of continual debate since rent controls were first introduced in the U.S. just after World War I. Since then, courts have reached diametrically opposite opinions as to which types of standards are constitutional and/or what factors must be considered in the rent setting process. In 1993, in Palomar v. City of San Marcos, a California Court of Appeal commented: The principal question is whether the San Marcos City Council acting as the City's Mobile Home Rent Review Commission, denied this mobilehome park owner its constitutionally guaranteed fair rate of return on its investment by 22 California Civil Code, Sec. 1947.15. 23 California Civil Code, Sec. 1947.15(d)(1). 24 California Civil Code, Sec. 1947.15(e). 25 California Civil Code, Sec. 1947.15(c). 17 refusing to grant a proposed rent increase. What appears at first blush to be a simple question of substantial evidence turns out to be something considerably more complex when one realizes that the formula for determining a "fair return" is hotly debated in economic circles and has been the subject of sparse, scattered, and sometimes conflicting comment by appellate courts. In particular, only the broad outlines have been discussed in California decisions 26 In 1997, in a rent control case, the California Supreme Court noted that the rate setting process is " 'often hopelessly complex.' i27 In 1999, another California Court of Appeal commented: ... courts continue to struggle with the meaning of the "just, fair and reasonable return" standard. e Since the current generation of rent controls were introduced in California in the late 1970's, the State Supreme Court and state appellate courts have consistently reiterated certain principles in regards to fair return standards under rent controls. These principles are:29 - no particular type of fair return formula is required, - a rent control scheme does not have to contain a specific fair return formula, - the standard "as applied" must permit a fair return, - some growth in net operating income must be permitted. - return on value standards are not constitutionally required and they are circular in the context of rent regulations.3° However, the courts have not set forth specific standards for determining what constitutes a fair return. The types of individual adjustment (fair return) standards that have been common under rent controls are: 1. A non-exclusive list of factors without a specific formula 2. Return on Investment 3. Maintenance of Net Operating Income (MNOI) 26 16 Cal. App. 4'h. at 484 (1993). 27 Kavanau v. Santa Monica Rent Control Bd. (1997) 16 Ca1.4th 761, 778 (1997) 28 Carson Harbor Village, Ltd. v. City of Carson, 70 Cal. App.4th 281, 289 (1999). 29 See Fisher v. City of Berkeley, 37 Ca1.3d. 644 (1984) and Kavanau v. Santa Monica Rent Control Board, 66 Ca1.Rptr. 672 (1997). 30 See e.g. Fisher v. City of Berkeley, 37 Cal.3d. 644, 680, n.33; Cotati Alliance fro Better Housing v. City of Cotati, 148 Ca1.App.3d.280, 287-289 (1983, Court of Appeal); Palos Verdes Shores Mobile Estates, Ltd. v. City of Los Angeles, 142 Cal.App.3d. 72, 86 (1983, Court of Appeal). 18 California mobilehome ordinances usually either contain a non-exclusive list of factors to be considered in fair return hearings or contain a maintenance of net operating income fair return formula or a combination of both. 3. Comment on Regulations without a Specific Fair Return Standard The advantage of setting forth a non-exclusive list of factors without setting forth a specific formula is that the State Supreme Court specifically quoted the full text of a provision of this type in a mobilehome rent ordinance and upheld this approach.' This type of standard cannot be challenged on the basis that it precludes a commission from taking into account factors which a court might deem to be necessary to permit a fair return. These considerations have been very important in the face of the realities of conflicting judicial precedents regarding what factors must be considered and what factors may not be considered. If the policy objective is to provide a rent review board with a great deal of discretion, a list of factors without a formula meets this objective. However, in the absence of a specific standard, in each rent adjustment case the issue becomes what the standard should be. As a result, the hearing body has to perform a highly discretionary policy making task, in addition to performing in a fact finding role. The process of debating what the standard should be, in itself, may require a lengthy hearing. Also, in the absence of specific standards, the individual rent adjustment process is speculative in the sense that the outcome cannot be predicted in advance even though all the facts are known. In contrast, if the regulations contain a specific formula, rent review boards do not have to "set policy" in the course of considering applications. Instead, their task largely consists of evaluating the reasonability and categorization of particular income and expense claims and plugging them into the particular formula. Also, park owners can "estimate" the outcome in advance and decide whether it makes sense to file an application and residents can determine whether or not an application should be opposed. While Palm Desert's fair return regulations include a specific maintenance of net operating income formula, the "discretionary" fair return standard lists relevant factors without setting forth how they should be weighed. As a result, their implementation requires the adjudicating body to perform a policy -making as well as a fact finding function. The Maintenance of Net Operating Income (MNOI) Standard Palm Desert's regulations include a detailed maintenance of net operating income standard. 31 Carson Mobilehome Park Owners Ass'n v. City of Carson, 35 Ca1.3d. 184, 188 n.2 (1983). 19 The MNOI standard is now set forth in a least 20 of California's mobilehome space rent control ordinances. In addition, boards commonly use an MNOI approach when their ordinance does not set forth a specific standard. This type of standard has gained increasing acceptance over the past decade. General Description of Maintenance of Net Operating Income (MNOI) Standards Under a maintenance of net operating standard, fair return is defined as base period net operating income adjusted by a specified percentage of the increase in the CPI since the base period. 32 "Net operating income" is defined as gross income minus operating expenses. Mortgage interest is not considered as an operating expense. The formula for setting rents under an MNOI standards is: FAIR RENT = OPERATING EXPENSES + BASE YEAR NOI ADJUSTED BY CPI The standard assumes, subject to specified exceptions, that the rent level and net operating income as of a specified date was reasonable and preserves that income level. In effect, it permits park owners to pass through the increases in their operating expenses and obtain some growth in net operating income tied to inflation (as measured by the CPI). The Rationale for the Maintenance of Net Operating Income (MNOI) Standard Under this standard, pre -rent control (base period) net operating income is presumed to be fair, in lieu of designating a particular rate of return as fair. Owners are permitted a uniform rate of growth in their net operating income above base date levels. Rationale for the MNOI standard include the following: 1) The NOI standard assures that owners will have the right to cover their operating cost increases and realize growth in net operating income. 2) Designating base period NOI as fair is more reasonable than designating a particular rate of return on investment as fair because in a competitive market rates of return vary greatly depending on the purchase dates and financing arrangements for individual properties. For example, long term owners may charge very low rents yet have high rates of return because they purchased the property at a price that is low by current standards. In contrast, recent purchasers may charge high rents but have low rate of return (or a negative cash flow). 3) A "rate of return" concept becomes circular in a regulatory context. If an owner is guaranteed a fair rate of return on whatever investment is made, the investment rather than the rent control ordinance regulates the rent level. 32 For example, if NOI is $100,000 in the base year and fair NOI is defined as base year NOI adjusted by 100% of the increase in the CPI, if the CPI increased by 30% since the base year, the fair NOI would be $130,000. 20 4) An MNOI standard cannot be manipulated through financing or investment arrangements and it does not discriminate among owners based on financing arrangements. The MNOI standard also meets the judicial direction that rent controls must permit growth in net operating income. The criticism of the MNOI standard has been that it perpetuates pre-existing profit and rent levels which may be high or low. However, this result is inherent in the concept of rent "stabilization". Some ordinances adjust "low" rent levels by providing for minimum net operating ratios and/or authorizing adjustments based on comparability or historically low rents. The MNOI approach has received judicial approval and support in several instances. In Oceanside Mobilehome Park Owners' Ass'n v. City Oceanside (1983)33 and Baker v. City of Santa Monica (1986),34 California appellate courts upheld maintenance of net operating income fair return standards. In Oceanside the Court found that the fair return standard was reasonable because it allowed an owner to maintain prior levels of profit.3s In 1984 in Fisher v. City of Berkeley, the State Supreme Court listed maintenance of net operating income as one of the commonly used types of formulas.36 In 1993, a California Court of Appeal commented: "The maintenance-NOI approach has been praised by commentators for both its fairness and ease of administration. ... It was approved by this court in Oceanside Mobilehome Park Owners' Assn. v. City of Oceanside (1984) 157 Ca1.App.3d 887 [204 Ca1.Rptr. 239]."37 In a 1998, the Court of Appeal upheld the use of the MNOI standard by the Escondido Rent Review Board. Rainbow Disposal v.Mobilehome Park Rental Review Board38. The Court concluded that the MNOI formula is a "fairly constructed formula" which provides a 'just and reasonable" return on ... investment," even if another formula may provide a higher return. ... [A] governmental entity may choose to regulate pursuant to any fairly constructed formula even though other formulas might allow for higher prices." (Palomar Mobilehome Park Assn. v. Mobile Home Rent Review Com. (1993) 16 Cal.App.4th 481, 487, italics added; Yee v. Mobilehome Park Rental Review Bd., supra, 17 Cal.App.4th 1097 at 33 157 Ca1.App.3d.887; 204 Ca1.Rptr.239 (1984). 34 Baker v. City of Santa Monica„ 181 Ca1.App.3d. 972 (1986) . 35 157 Ca1.App.3d.887, 902-905; 204 Ca1.Rptr.239, 249-251 (1984) . 36 37 Ca1.3d. 644, 680 (1984). 37 Palomar Mobilehome Park Assn. v. Mobile Home Rent Review Com., 16 Ca1.App.4th 481, 486 (1993) 38 The author of this analysis also prepared the analysis used by Escondido in the Rainbow case. 21 p. 1104; San Marcos Mobilehome Park Owners' Assn. v. City of San Marcos (1987) 192 Cal.App.3d 1492, 1498.) Baar's MNOI approach adopted by the Board is a "fairly constructed formula" which provided Rainbow a sufficiently "just and reasonable" return on its investment.... The Board was not obliged to reject Baar's MNOI analysis just because an historical cost/book value formula using Rainbow's actual cost of acquisition and a 10 percent rate of return would have yielded a higher rent increase.39 Comment on the "Discretionary" Rent Increase Standards Under the regulations a park owner may apply for a discretionary increase if he/she successfully rebuts the presumption that the Maintenance of Net Operating Income guidelines provide for a fair return.40 The discretionary guidelines do not contain a specific formula. Instead, they state that: Relevant methods for valuing a landlord's property may include, but are not limited, to the following: 1. Present Fair Market Value 2. Capitalization of Income 3. Comparable Sales 4. Replacement Cost 5. Original Investment Present Fair Market Value This author recommends that these methods should replaced. The first methodology: "Present Fair Market Value" has been rejected as circular and is no longer used as a fair return methodology. As the California Supreme Court noted in 1984, in Fisher v. City of Berkeley, return on "value" is a circular approach in the context of rent regulations, because value is dependent on rental income and, therefore, it would be circular to use value in order to determine what rents should be permitted. The Court explained: Whereas the return on investment standard determines "just and reasonable return" by focusing on the landlord's investment, the return on value standard 39 64 Ca1.App.4th 1159,1172, 75 Cal.Rptr. 2d. 746, 754 (1998, California Court of Appeals) 40 "If a landlord successfully rebuts the presumption that the mandatory rent increase provided by Palm Desert Municipal Code Section 9.50.060 and the hardship rent increase authorized by subdivision A of this section of the guidelines provides the landlord with a fair return on his or her property, or for other good and sufficient reasons the Board may award the landlord a discretionary rent increase in the amount the Board deems necessary to achieve a fair return." Regulations Section 101.B. 22 determines fair return by focusing on the market value of the landlord's property. The fair return on market value standard advocated by plaintiffs and amici was used by the United States Supreme Court in an early railroad rate case, Smyth v. Ames (1898) 169 U.S. 466 [42 L.Ed. 819, 18 S.Ct. 418], decree mod., 171 U.S. 361 [43 L.Ed. 197, 18 S.Ct. 888], in which the court held that railroads were entitled to rates sufficient, after deducting reasonable operating expenses, to produce a fair return on the fair market value of their assets. (169 U.S. at p. 547 [42 L.Ed. at p. 849].) The Supreme Court later changed its position, and approved use of an approach designed to ensure a fair return on investment. (Hope Gas, supra, 320 U.S. at pp. 599-605 [88 L.Ed. at pp. 343-346]; see Siegel, Understanding the Lochner Era: Lessons From the Controversy Over Railroad and Utility Rate Regulation (1984) 70 Va.L.Rev. 187, 215-259.) Rejecting the idea that rates set by the Federal Power Commission must be based on the present "fair value" of property, the Hope Gas court observed: "[t]he heart of the matter is that rates cannot be made to depend upon 'fair value' when the value of the going enterprise depends on earnings under whatever rates may be anticipated." (Id. at p. 601 [88 L.Ed. at p. 344].) Implicit in this statement is the suggestion that a return on fair value standard is circular and unworkable. "Value" is the current worth of future benefits that may be derived from an investment. The "value" of a utility company, for example, depends in part on the rates that the utility company may charge for its product. Thus, to set rates by reference to the company's "value" is a circular process. (Siegel, supra, 70 Va.L.Rev. at p. 246 & fn. 253.) The same circularity problem exists when fair market value concepts are applied in the rent control context. (See Helmsley v. Borough of Fort Lee (1978) 78 N.J. 200 [394 A.2d 65, 71-72]; Baar, supra, 35 Rutgers L.Rev. at pp. 798-803; Reasonable Return Doctrine, supra, 33 Rutgers L.Rev.) "Value is an expression of a building's potential capacity to generate rental income and incidental or intangible benefits of ownership during its useful life." (Fair Return, supra, 12 Rutgers L.J. at p. 640.) The current "value" of a rental property thus depends in large part on the amount of rental income the property is expected to generate. As in the utility rate cases, the process of using value to determine what rental income shall be permitted becomes circular. (Accord, Cotati Alliance, supra, 148 Cal.App.3d 280, 287-289; Palos Verdes Estates, supra, 142 Cal.App.3d 362, 370-371.) The Cotati Alliance court thus rejected a landlord's claim that a return on value standard is mandated for an ordinance to be facially constitutional: "The fatal flaw in the return on value standard is that income property most commonly is valued through capitalization of its income. Thus, the process of making individual rent adjustments on the basis of a return on value standard is meaningless because it is inevitably circular: value is determined by rental income, the amount of which is in turn set according to value. Use of a return on value standard would thoroughly undermine rent control, since the use of uncontrolled income potential to determine value would result in the same rents as those which would be charged in the absence of regulation. Value (and hence rents) would increase in a never-ending spiral." (148 Cal.App.3d at p. 287; accord, Helmsley, supra, 394 A.2d at pp. 71-72; Niles v. Boston Rent Control Administrator (1978) 6 Mass.App. 135 [374 N.E.2d 296, 300-303].)41 41 37 Ca1.3d. 644, 681, fn. 33 (1984) 23 Capitalization of Income The "Capitalization of Income" is a standard appraisal technique in order to determine fair market value. Under that approach value is a multiple of the net operating income of a property.42 The New Jersey Supreme found that the "capitalized income" method is not appropriate in the context of rent regulations. The capitalized income method begins with a prediction of future income and thus tends to become circular in the rate- making context. FPC v. Hope Natural Gas Co., supra, 320 U.S. at 601, 64 S.Ct. 281. To establish current 'value' under this method, the appraiser supplies a Desired 'rate of return' as one element in his initial calculations. Because, in the context of rate regulations, the court will use the resulting determination of value to calculate the Actual rate of return, the process exhibits circuitous reasoning 43 Comparable Sales The third methodology "Comparable Sales" is a form of a "Fair Market Value" approach, because comparable sales are a measure of fair market value (with appropriate adjustments for differences between comparable properties and the subject property). Comparable Sales are one of the three standardly used measures of market value that is used in an appraisal.. In the course of noting shortcomings of the "capitalized income" approach, the New Jersey Supreme Court also found that the comparable sales approach was not appropriate. Market value based upon sales of comparable properties is sound only insofar as the comparable sales involve properties situated in a rental market that approximates the hypothetical rental market described above.fFN91 In addition, it may be misleading because *626 the current market value of rental housing depends in large measure upon the earning which can be derived from it. Wilson v. Brown, 137 F.2d 348, 353 (Em.App.1943) °4 42 In the actual capitalization formula, value is divided by a capitalization rate. Value = noi/rate The rate is typically in the range of 7 to 10% (or .07 to .10) 43 Troy Hills Village v. Township of Parsippany -Troy Hills, 68 N.J. 604, 394 A.2d. 34, 45 (1975, New Jersey Supreme Court). as Id. 24 The Court also concluded that the "depreciated replacement" approach would not be appropriate. The depreciated replacement cost method also may tend to be misleading when, as appears to be true at the present time, the high cost of construction is a major cause of housing shortages. Cf. Southern Burlington Cty. NAACP v. Mt. Laurel To., 67 N.J. 151, 204--05, 336 A.2d 713 (1975) (Pashman, J. concurring) 4s Original Investment On its face, the concept of fair return on investment sounds reasonable and fair. Rent ordinances commonly state that one of their purposes is to permit a "fair return on investment" or a "fair rate of return on investment" and/or list return on investment as a factor in setting rents, but do not set forth a formula for determining what constitutes a fair return. As previously indicated, Vallejo's ordinance includes provisions of this type. Typically, specific return on investment formulas either permit a fair return on cash investment, using the following type of formula: FAIR RENT = OPERATING EXPENSES46 + MTG INTEREST+X%of CASH INVEST. or measure "investment" by the total investment (including the mortgaged portion), in which case the formula is: FAIR RENT = OPERATING EXPENSES + X% OF PURCHASE PRICE In practice, return on investment formulas are not usually used, even when an ordinance contains language about providing a fair return on investment. In fact, they are conceptually illogical in the context of a price regulation. Under such an approach, the "regulated" owner can regulate the allowable rent by determining the size of the investment. In 1984, in a case involving a zoning amendment which reduced maximum area floor ratios, a U.S. District Court commented: ... In addition to being inconsistent with the case law, appellants' [return on investment] approach could lead to unfair results. For example, a focus on reasonable return would distinguish between property owners on the amount of their investments in similar properties (assuming an equal restriction upon the properties under the regulations) favoring those who paid more over those who paid less for their investments. Moreover in certain circumstances, appellants theory "would merely encourage property owners to transfer their property each time its value rose, in order to secure ... that appreciation which could otherwise be taken by the government without compensation..." [cites omitted]47 45 Id. 46 Variants of this type of formula,which have been used mostly outside of California, are cash flow standards (under which fair return = operating expenses + mortgage payments) or return on gross rent standards (under which gross income is a specified percentage above operating expenses and mortgage payments.) 47 Park Avenue Tower Associates v. City of New York, 746 F.2d. 135, 140 (1984). 25 In a subsequent case, the same District Court found that such reasoning applied equally in the context of rent regulation and that "neither the case law nor common sense supports the reasonable return definition of economic viability."48 While the courts continually state that the determination of what fair return formula may be used is a legislative matter and/or reiterate their adherence to a return on investment concept, they continually find that particular applications of a return on investment formula have no rational basis or must be modified in order to be rational. Under a Return on Investment Formula The Allowable Rent is a Function of Length of Ownership Under a return on investment formula, to the extent that there is overall inflation and/or increases in the real value of property, the allowable rent becomes a function of the length of ownership. Typically, longer term owners have investments that are low by current standards and recent purchasers have large investments relative to the initial returns from their property. Therefore, the formula benefits recent purchasers but not long term owners. In one California Court of Appeal case, the Court upheld a return on investment formula. However, it noted that: "... it is conceivable that in extreme circumstances application of the 'historical cost' formulation might deny a property owner a fair rate of return ..." 9 Clearly foreseeable "extreme circumstances" include long term ownership with an original investment that is very low by current standards. When this historic investment formula is applied to a long term owner the investment may be brought down to one quarter the level of a "reasonable" investment based on current values and the inequity of the approach in that case would be obvious. Courts Have Held that the Original Investment Must Be Adjusted to Reflect Inflation while in Other Cases the Use of Original Investment or Even Depreciated Investment Has Been Upheld In Cotati Alliance for Better Housing v. City of Cotati,50 the Court of Appeal concluded that the reasonability of a return on investment standard is hinged to adjusting ("indexing") the original investment by the inflation that has occurred since the investment was made. It concluded that Cotati's return on investment standard was not confiscatory because "[t]he landlord who purchased property years ago with pre -inflation dollars is not limited to a return on the actual dollars invested; the Board may equate the original investment with current dollar values and assure a fair return accordingly."51 However, California Courts have also upheld the use of historic investment standards which have provided for an adjustment of the historic investment to compensate for the impact of inflation.52 48 Rent Stabilization Ass'n v. Dinkins, 805 F.Supp.159,163 (1992). 49 Yee v. Mobilehome Park Rental Review Board (City of Escondido', 17 Cal.App.4th 1097, 1104, n.5 (1993). 50 148 Ca1.App.3d. 280 (1983). 51 Id., 148 Cai.App.3d. at 289. 52 Palomar Mobilehome Park Assn. v. Mobile Home Rent Review Com., 16 Ca1.App.4th 481, 488 (1993). 26 After a trial court in New Jersey reached a conclusion similar to the one reached in Cotati; on appeal the State Supreme Court concluded that: "although increasing an investment base to adjust for inflation is not a constitutional imperative, it would be an almost complete answer to a claim of confiscation if the return on the original investment was reasonable in itself.i53 While a California Court of Appeal upheld a return on investment formula in Yee, it noted that "While it is conceivable that in extreme circumstances application of the 'historical cost' formulation might deny a property owner a fair rate of return, we have no occasion to explore that issue here."S4 Clearly foreseeable "extreme circumstances" include long term ownership with an original investment that is very low by current standards. When this historic investment formula is applied to a long term owner the investment may be brought down to one quarter the level of a "reasonable" investment based on current values and the inequity of the approach in that case would be obvious. On the other hand, the Courts have held that owners do not have a right to a fair return on excessive investments. In Fisher v. City of Berkeley, the State Supreme Court commented: At the same time that mechanical application of the fair return on investment standard may have the potential to produce confiscatory results in some individual cases it is also recognized that the standard has the potential for awarding windfall returns to recent investors whose purchase prices and interest rates are high. If this latter aspect were unregulated, use of the investment standard might defeat the purpose of rent price regulation....55 The Formula May Work in a "Circular" Manner as a Return on Value Formula When the courts have repeatedly indicated that a return on value is not constitutionally required and that such a formula is not reasonable in the context of rent regulation, they have noted the circular nature of the return on value approach. The rent determines the value which in turn is used to determine the fair rent. Each increase in rent justifies a higher value which in turn justifies a higher rent. The return on investment approach also works in a circular manner. When a certain rate of return on investment is permitted, the investment (and, therefore, the investor) determines the allowable rent level. If a rent increase is granted that may in turn increase the price (investment) by a subsequent purchaser, which in turn would justify an increase in the rent. The difference between the return on value approach and the return on investment approach is that under the return on value approach the increase in value occurs when the rent is increased. In contrast, under the return on investment approach a purchase (investment) must be made in order to trigger the increase in the rate base. 53 Mayes v. Jackson Township, 511 A.2d. at 596, n.7. sa Yee v. Mobilehome Park Rental Review Board fCity of Escondido) 17 Ca1.App.4th 1097, 1104, n.5 (1993). ss Fisher v. City of Berkeley , 37 CaI.3d. 644, 691-92 (1984). 27 Problems Associated with Selecting a "Rate" of Return In order to apply a return on investment formula a "rate" must be selected. While ordinances commonly indicate that one of their purposes is to permit a fair return on investment and courts have repeatedly adopted or approved the return on investment concept, they have never been able to define a fair rate of return on investment except in theoretical terms. This reality explains why ordinances and courts rarely designate a particular rate as being reasonable, even though they frequently state that an owner is entitled a fair return on investment. A 1996 Court of Appeal opinion demonstrates the theoretical nature of the return on investment guidance that has been provided by the courts: Constitutionally valid rent control schemes must allow park owners to earn a "just and reasonable" or "fair" return on their investment. (Apartment Assn. of Greater Los Angeles v. Santa Monica Rent Control Bd. (1994) 24 Cal.App.4th 1730, 1737; Cole v. City of Oakland Residential Arbitration Bd. (1992) 3 Cal.App.4th 693, 700). The term "fair return" is incapable of precise definition (City of Berkeley v. City of Berkeley Rent Stabilization Bd. (1994) 27 Cal.App.4th 951,984) but is generally considered to include returns that are "commensurate with returns on investments in other enterprises having comparable risks[,]" (Fisher v. City of Berkeley, supra, 37 Cal.3d. at p. 683), or "high enough to encourage good management, discourage the flight of capital, and enable operators to maintain their credit." Cole v. City of Oakland Residential Arbitration Bd., supra, 3 Cal.App.4th at p.700.)56 A recent decision by the California Supreme Court, Kavanau v. Santa Monica Rent Control Board contains similar statements.57 The dichotomy between facial acceptance of return on investment standards and the reality that such formulas are not practical may have been unintentionally presaged in a 1978 New Jersey Supreme Court decision, Helmsley v. Borough of Fort Lee. In that case, the Court commented: "Although an investment -based standard may not be as easy to apply as some income -based criteria, there are no obvious theoretical obstacles to using an investment -based standard.iS8 In another part of the same decision, the Court declared that differences in allowable rent levels based on financing differences have no rational basis.59 In fact, such differences are inherent in return on investment formulas. 56 Donahue v. Santa Paula West Mobile Home Park, 47 Cal.App.4th 1168, 1177 (1996) 57 66 Ca1.Rptr.2d.672, 679 (1997). ss 394 A.2d. 65,72, n.8 (1978). 59 Id., 394 A.2d. at 81. 28 In three decisions in the 1990's, the Fourth District Court of Appeal found that a return on historic investment approach was acceptable, but found that the Rent Boards' determinations of what rate of return on investment was reasonable were not acceptable.60 This is no accident, instead it is a problem that is inherent in the methodology. In light of the uncertainties and difficulties associated with the use of any fair return other than maintenance of net operating income it is better not to proscribe the use of any particular alternate formula. At the same time, it is essential that the Board have the power to consider factors other than maintenance of net operating income to the extent required by the law. 60 Palomar Mobilehome Park Ass'n v. City of San Marcos, 16 Cal. App.4th 481 (1993); Yee v. Mobilehome Park Rental Review Board, 17 Cal. App.4th 1097 (1993); and Westwinds Mobile Home Park v. City of Escondido, 30 Cal. App.4th 84 (1994). In Palomar, the Court concluded that the rent board erred by including appreciation when calculated yield and that instead it should have taken appreciation into consideration when determining what rate of return would be reasonable. 16 Cal.App.4th. 488-489. 29 Appendix A RESUME Kenneth Kalvin Baar 2151 Stuart St. Berkeley, Ca. 94705 tel: (510) 525-7437 Urban Planner & Attorney Education: B.A., 1969, Wesleyan University, Middletown, Conn. major: government J.D., 1973, Hastings College of Law, Univ. of California, San Francisco, Ca. M.A., 1982, Urban Planning, University of California at Los Angeles Ph.D., 1989, Urban Planning, University of California at Los Angeles (Dissertation topic: "Explaining Crises in Rental Housing Construction: Myth and Schizophrenia in Policy Analysis") Foreign Languages: French and Italian Teaching: Visiting Professor, Fulbright Scholar, Technical University, Tirana, Albania (Introduction to urban planning) (2002 and 2003) Visiting Assistant Professor, Urban Planning Department, School of Architecture, Planning,and Preservation, Columbia University, New York (1994 - 1995) (courses: planning law, introduction to housing, comparative housing) Visiting Professor, Fulbright Scholar, Budapest University of Economic Sciences (Sept. 1991- June 1993) Instructor, San Francisco State University, Urban Studies Program (1983-1984) (short courses, series of lectures) Technical University of Budapest, Planning Department Series of lectures Professional Extension Courses and Undergraduate Courses (1991-1992) Kiev University Law School, real estate law (1992, one week course) Warsaw Technical University, Planning Department, urban planning (1992) Netherlands Ministry of Housing (1997) Projects: 1980-2003 30 Consultant to California cities (Azusa, Capitola, Carpenteria, Carson, Clovis, Cotati, Escondido, Fremont, Milpitas, Montclair, Oceanside, Palmdale, Rohnert Park, Salinas, San Marcos, Santa Rosa, Santa Cruz County, Santee, Simi Valley, Sonoma, Vallejo, Ventura, Watsonville, Yucaipa) on mobilehome park policies. (1980-present) Institute of Transportation and Development Policy (New York City), Preparation of study on European policies governing location of shopping malls (2002) Open Society Budapest (Soros Foundation), Preparation of study on contracting out of public services and freedom of information in Czech Republic, Romania, and Slovakia (2000-2001) Consultant to World Bank (Budapest office), Preparation of studies on municipal contracting out of public services in Hungary and on policies for the provision for the provision of district heating (1998-2000) Urban Institute, U.S. Aid for International Development (A.I.D.) funded technical assistance, Hungarian Subnational Development Project (1998 & 1999) Consultant, Institute for Transportation and Development Policy, to East European Organizations on Transportation Policies (1997-98) Studies for the Golden State Mobilehome Owners League on Issues Related to Mobilehome Ownership and Statewide Referendum on Mobilehome Owners Rights (1995-96) U.S.A.I.D. funded technical assistance to Albanian Ministry of Construction (Sept. 1993- March 1994) Consultant, East European Real Property Foundation, (U.S. A.I.D. funded), development of education and training in Hungary (July 1993) Study of Hungarian Land Use Regulations (1992, publication and technical assistance sponsored by Urban Institute, Wash. D.C.) Report for Hungarian Ministry of Justice, Comparison of Landlord -Tenant Law in France, United States, and Hungary (1992, funded by Urban Institute, Wash. D.C.) Consultant, City of Santa Monica, Cal., Incentive Housing Program Consultant, State of New Jersey Attorney General and Public Advocate, on fair return standards under state statute regulating evictions of senior citizens from condominiums Studies of Impacts of Local Regulations on Housing Supply, Cities of Santa Monica and Fremont, Cal. Preparation of a Guide for New Jersey Rent Control Boards on Fair Return Standards and Landlord Hardship Applications (National Housing Law Project) Research and Writing Articles on Inequalities in Property Tax Assessments (Legal Services Corporation, Washington, D.C.) 31 Consultant, Peter L. Bass & Associates, Development of Contracts with Developers under the California Coastal Conservancy Lot Consolidation Program Expert Witness, City of San Francisco, on the impacts of city policies on apartment construction in litigation involving applicability of antitrust regulations Project Director, survey of merchants and commercial property owners for City of Berkeley, Cal., Planning Dept. Preparation of apartment operating cost studies for the cities of Berkeley, Santa Monica, and Cotati, California) Consultant, Real Property Division, First Nationwide Bank on disposition of assets in operations inventory Assistant (on contract) to Deputy City Attorney of San Jose, California on drafting of environmental and subdivision regulations Publications: Articles Baar, "Legislative Tools for Preserving Town Centres and Halting the Spread of Hypermarkets and Malls Outside of Cities" published in Etudes Foncieres (Land Studies) No. 102, pp. 28-34 (March -April 2003, Paris, translated into French); also published in Falu, Varos, es Regio (Village,Town, and Region), 2003, issue no. 2, pp. 11-22 (Budapest, translated into Hungarian) Baar, Contracting Out Local Public Services in a Transition Economy, Review of Central and Eastern European Law, Vol. 25, No. 4, 493-512, September 2000, (Leiden, Netherlands) Baar, "Contracting Out Municipal Services: Transparency, Procurement, and Price Setting Issues", Hungarian Public Administration, Vol. 49, No. 3, May 1999 (translated into Hungarian) Baar, "Laws Protecting Mobilehome Park Residents", Land Use and Zoning Digest Vol. 49, 3-7 (Nov. 1997, American Planning Association) Baar, "The Anti -Apartment Movement in the U.S. and the Role of Land Use Regulations in Creating Housing Segregation", Netherlands Journal of Housing and the Built Environment, Vol. 11, no.4, 359-380 (1996) Baar, "La resistance au logement collectif", Etudes Foncieres, Vol. 67, 44-48, (June 1995, Paris, Association des Etudes Foncieres) and "II Movimento Contro GIi Edifici Multifamiliari Negli Stati Uniti, Storia Urbana, Vol 66, 189-212 (1994, Milan, Italy) (translated versions of "The National Movement to Halt the Spread of Multi -family Housing (1890- 1926)", Journal of the American Planning Association, Vol. 58, no. 1, 39-48 (Dec. 1991)) Baar, "Impacto del precio del suelo y de las normas sobre su use en el precio y la distribucion de las viviendas en USA", La Vivienda, no. 23, 43-51 (1993, National Mortgage Bank of Spain) ["The Impact of Land Costs and Land Regulations on the Cost and Distribution of Housing in the United States"] 32 Baar, "A Teruletrendezes Dilemmai a Demokratikus Piacgazdasagokban", Ter es Tarsadalom, Vol.6, no. 1-2, 89-99 (1992, Budapest) ["Dilemmas of Land Use Planning in a Democracy with a Market Economy", Space and Society] Baar, "The Right to Sell the 'Im'mobile Manufactured Home in Its Rent Controlled Space in the'lm'mobile Home Park: Valid Regulation or Unconstitutional Taking?", Urban Lawyer Vol. 24, 107-171 (Winter 1992, American Bar Ass'n) Baar, "The National Movement to Halt the Spread of Multi -family Housing (1890-1926)", Journal of the American Planning Association Vol. 58, no. 1, 39-48 (Dec. 1991) Baar, "El Control de Alquileres en Estados Unidos" Estudios Territoriales , Vol. 35, 183- 199 (1991, Madrid) ["Rent Control in the United States"] Baar, "Would the Abolition of Rent Controls Restore a Free Market?", Brooklyn Law Review Vol. 54, 1231-8 (1989) Baar, "A Choice of Issues" (Introduction to articles on the impact of rent controls on the property tax base), Property Tax Journal Vol. 6, no. 1, 1-6 (March 1987, International Ass'n of Assessing Officers). Baar, "Facts and Fallacies in the Rental Housing Market", Western City, Vol. 62, no. 9, 47 (Sept. 1986, California League of Cities) Baar, "California Rent Controls: Rent Increase Standards and Fair Return", Real Property Law Reporter, Vol. 8, no. 5, 97-104 (July 1985, California Continuing Education of the Bar) Baar, "Rent Control: An Issue Marked by Heated Politics, Complex Choices and a Contradictory Legal History", Western City, Vol. 60 (June 1984) Baar, "Rent Controls and the Property Tax Base:The Political -Economic Relationship", Property Tax Journal Vol. 3, no. 1, 1-20 (March 1984) Baar, "Guidelines for Drafting Rent Control Laws: Lessons of a Decade", Rutgers Law Review, Vol. 35, 723-885 (1983) Baar, "Property Tax Assessment Discrimination Against Low -Income Neighborhoods", Urban Lawyer, Vol. 13, 333-405 (1981, American Bar Ass'n) abridged versions: Clearinghouse Review, Vol. 15, 467-486 (1981), Property Tax Journal, Vol. 1, (no. 1) 1-50 (March 1982) Baar, "Land Banking and Farm Security Loans", Economic Development Law Project Report, Vol. 8, no. 4, 1978) Pearlman and Baar, "Beyond the Uniform Relocation Act: Displacement by State and Local Government, Clearinghouse Review, Vol. 10, 329-345 (1976) 33 Chapters in Books Baar, "Open Competition, Transparency, and Impartiality in Local Government Contracting Out of Services" (Chapter 2), Navigation to the Market Regulation and Competition in Local Utilities in Central and Eastern Europe, ed. Peteri and Horvath (2001, Local Government and Public Service Reform Intitiative, Open Society Institute, Budapest) Baar, "New Jersey's Rent Control Movement" (Chapter 10) and "Controlling "Im"Mobile Home Space Rents", (Chapter 13), ed. Keating, Tietz, & Skaburskis, Rent Control: Regulation and the Rental Housing Market (1998, Center for Urban Policy Research, Rutgers University. Baar, Hungarian Land Use Policy in the Transition to a Market Economy with Democratic Controls", Land Tenure and Property Development in Eastern Europe (1993, Association des Etudes Foncieres, Paris) 34 Title 9 PUBLIC PEACE, MORALS AND WELFARE Chapter 9.50 MOBILE HOME PARK RENT REVIEW 9.50.010 Title. The ordinance codified in this chapter shall be known as the Mobile Home Park Rent Review Ordinance of the city. (Ord. 456 § 2 (part), 1986) 9.50.020 Definitions. The following definitions shall govern the construction of this chapter: A. "Management"- is the owner of a mobile home park or an agent or representative authorized to act on his behalf in connection with matters relating to a tenancy in the park and also referred to as "mobile home park owner." B. "Mobile home" for the purpose of this chapter shall be defined by the statutes of the state of California. C. "Mobile home park"- is an area of land where two or more mobile home sites are rented, or held out for rent, to accommodate mobile homes used for human habitation. D. "Park" - is a mobile home park. E. "Rent" or "space rent"- is the consideration, including any bonus, benefit or gratuity demanded or received in connection with the use and occupancy of a mobile home space in a mobile home park. F. "Rental agreement"- is an agreement between the management and the tenant establishing the terms and conditions of a tenancy and regulating the amount of a monthly space rental and the allowable increases therein. A lease is a rental agreement. G. "Rent schedule" - is a statement of the rent charged for each tenancy in a mobile home park, together with any supporting data therefor. H. "Services" - iin-a,itlnm.. facilities which enhance the use of the mobile home site, including, but not limited to, repairs, replacements, maintenance, water, utilities, security devices, security patrols, storage, bath and laundry facilities and privileges, janitorial services, refuse removal and recreational and other facilities in common areas of the mobile home park. "Service" does not include charges for interest, depreciation, amortization, financing or refinancing of the mobile home park. I. "Tenancy" - is the right of a tenant to the use of a site within the mobile home park on which to locate, maintain and occupy the mobile home, site improvements and accessory structures for human habitation, including the use of the services and facilities of the park. 1 J. "Tenant" is an owner of a mobile home, responsible for paying rent to management. K. "Representative." In the event that a petition is filed by more than one tenant, they shall designate -one -of -them to be-thei, I .picsentative. L. d'bythk, Rcnt Rcvi�w Board. The hca(iag vffce, it shall be l,iS duty to cvi1dact a,tiary llca,i,lg p,a,S,za,lt to tlic t„i,Viai0,la of tliia I�w,l„f1L►►dation an d to urco mnc,lilati0,1or atIOiiS tO thk Rcn . This section has been moved to section 9.50.070.J) M. The "Rent Review Board"- the board appointed pursuant to Section 9.50.040. N. "Consumer Price Index"- is the index published by the United States Department of Labor, Bureau of Labor Statistics, known as the "Consumer Price Index for Urban Wage Earners and Clerical Workers for the Los Angeles, Long Beach, Anaheim Area." (Base year = 1967). If this index is changed so that the base year differs from the one defined in this chapter, the index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the index is discontinued or revised, such other governmental index or computation with which it is replaced shall be used, or such other action as shall be necessary shall be taken in order to obtain substantially the same result as would be obtained if the index had not been discontinued or revised. O. A "contested hearing" is a hearing which results from a petition for adjustment which is filed pursuant to the provisions of this chapter. P. "Capital improvement costs" are all expenditures which are required to be "capitalized" rather than "expensed" for state or federal income tax purposes. (Ord. 456 § 2 (part), 1986) 9.50.030 Exemptions. The provisions of this chapter shall not apply to the following tenancies in mobile home parks located in the city: A. Mobile home park spaces rented out for nonresidential uses; B. , vrdina,i. , tlrat Such ,,/,� a,sat c, the iva„cc Of tlm LuipL,,,,it f0, tli , l,y-fiVc pc,c�,tt occut,ied, for the lnzrposL, "COI1St,dl•tiOn means -the -erection -of structures,- Mobile home parks and mobile home spaces which are exempted from rent regulation by state law; 2 C. Mobile home parks managed or operated by the United States Government, the State of California, of or the City of Palm Desert; D. Tenancies fur *1 icl, a,ry fti,dtoral or Stag... la' or rcgalatlon Wt.. 1 iY,a11y piohibits teat ,egulat,ol► Other tenancies which are excluded from rent regulation by state or federal law; E. Te,ra,lc,evLred by a rental ag11 mCo Lis c11aptu► bt.l.V,11GJ effective; or enterect-into-at-any-tnrte-thetsuctragreement-hara- duration exceeding -that -of tr - - only for the Llu,attu„ of the agtccmc„l, n1clud 1g any ,c,n.Wal 01 tc„sion thc,cfo,. UFun tl,� �xpii , ntb for siich space 1Bay only b 1„u,t,'aSLd lit a4� v,tla„cc ,vitl, the toms of tlib chapter, Tenancies excluded from regulation pursuant to California Civil Code Sec. 798.17, which exempts spaces covered by leases which meet specified conditions. F. Mobile home parks which sell lots for mobile homes, factory -built or manufactured housing, or which provide condominium ownership of such lots, even if one or more homes in the development are rented or leased out; G. Mobile home parks with twenty or less mobile home spaces. (Ord. 456 § 2 (part), 1986) 9.50.040 Rent Review Board. A. There is established within the city a mobile home park Rent Review Board consisting of five regular members and two alternate members. The Rent Review Board shall be appointed by the city council and serveing at the pleasure of the city council. Alternates shall serve only to the extent necessary to form a quorum of three members. The secretary of the board shall determine whether the attendance of one or more alternates at a given meeting is necessary to ensure a quorum and notify them accordingly. Regular and alternate board members shall serve a term of four years, at the end of which he/she may be considered for reappointment. All regular and alternate board members shall be residents of the city during their terms. B. Any member who is absent from three regular meetings of the board during any calendar year shall be deemed to have vacated his/her office. C. Except as expressly provided in this chapter, the board shall establish the time and place of its meetings. All meetings of the board shall be conducted in accordance with the provisions of the Ralph M. Brown Act. 3 D. Disclosure. All candidates for appointment to the board shall disclose in a verified statement all present holdings and interests in real property, including interests in corporations, trusts or other entities owning real property within this jurisdiction as defined by California Government Code Section 82035. Such disclosure statement shall be made available to the city council prior to appointment of members of the board, and shall be filed with the City Clerk not less than ten days after appointment. Disclosure of holdings required herein shall be in addition to any other disclosure required by state or local law for holders of public office. E. The board shall make and adopt its own rules and regulations for conducting its business consistent with this chapter and laws of the state, subject to the approval of the city council. Such rules and regulations shall be reduced to writing and shall be on file with the City Clerk at all times and shall be published on the city's web page. The board shall appoint such officers as may be necessary. F. The board shall keep a record of its proceedings, which shall be open for inspection by any member of the public. G. Each member of the board shall be entitled to such compensation as may be set by the city council by ordinance, to be paid entirely from filing fees paid to the city. H. The City Manager shall designate an employee who shall serve as the secretary of the board. The City Clerk shall be responsible for the maintenance of all its permanent records. I. Three members of the board shall constitute a quorum. Three affirmative votes are required for a decision including all motions, orders and rulings of the board. (Ord. 800 § 1, 1996; Ord. 560 § 1, 1988; Ord. 456 § 2 (part), 1986) 9.50.050 Powers of the Rent Review Board. Within the limitations provided by law, the Rent Review Board shall have the following powers: A. To meet at such times as may regularly be scheduled by the board, or from time to time at the call of the chairman, to herein determine the petitions filed hereunder at the request of the City Manager, or otherwise to conduct the business of the board. All meetings shall be conducted at City Hall; B. To appoint and designate hearing officers for the conduct of evidentiary hearings to be conducted hereunder; C. To receive, investigate, hear and determine petitions of landlords for fair return (hardship) adjustment of rent pursuant to Section 9.50.070; 4 D. To make or conduct such independent hearings or investigations as may be appropriate to obtain such information as is necessary to carry out their duties; E. To authorize an increase in the maximum amount of rent otherwise permitted to be charged by a mobile home park owner pursuant to this chapter. Such a;aat;ons au t iviic,A,d i[icicase, iL il� horrlc �1ark ►,t a1id fc�s, • additkni f amcnrtics o2 Sci tic s a1i, ic,ta«i OL1 tl1G an,pai , thruu h tuntLcVssariiy L.rrcd, c, tliG , F. To adopt, promulgate, amend or rescind administrative rules to effectuate the purposes and policies of this chapter, subject to the approval of the city council; G. To maintain and keep at the City Hall rent review hearing files and dockets listing the time, date and place of hearings, the parties involved, the address involved and the final disposition of the hearing; H. To recommend to the city council the adoption of a fee schedule setting such fees and charges as appear necessary or desirable to defray in whole or in part the costs of administration of the board and conduct of its assigned duties; I. To recommend to the city council the imposition of a registration program for implementation of this section, including any registration fees in connection therewith. (Ord. 800 § 2, 1996; Ord. 456 § 2 (part), 1986) 9.50.060 Maximum rent. A. Except as otherwise provided in either this chapter or state law (e.g., a f,xcd-twiir re►ltal agrct,►1t or a hatdJllip icnt atljust.,lcnt), the maximum rent that a mobile home park owner may request, demand or receive for a mobile home space shall not exceed the monthly rent that was charged for that space on base date (as defined below). 5 9.50.065 Annual Across -the -Board Rent Adjustments aates. In -other words, tl,e i%-creas-over tine as on flactct tiolis (up or down) A. Not more than once in a twelve-month period, a park owner may increase the rent for a space by seventy five percent (75%) of the percentage increase in the CPI since the prior rent adjustment pursuant to this section. All rent increases within a single mobilehome park pursuant to this subsection shall be instituted on the same date each year. B. Notwithstanding the foregoing, no rent increase in a given twelve-month period shall cause the previous rent charged for the space to increase more than six percent unless expressly permitted by the Rent Review Board. years, until utilized to , expressly permitted by the Rcnt Review Board. If an increase of more than six percent would occur, then excess increase may be carried forward for a period of up to eight years, until utilized to allow an automatic, annual increase up to six percent in any future years in which the permitted increase in the rent would be less than six percent. C. If the CPI decreases Lost of living goes &w►r, the maximum chargeable rent will decrease by seventy-five percent (75%) of the percentage decrease in the CPI since the prior rent adjustment pursuant to this section. Decreases pursuant to this subsection shall be instituted within twelve months after the prior rent adjustment pursuant to this section and shall be measured by considering the CPI used in the prior rent adjustment calculation and the CPI in effect twelve months later. e. D. If the CPI Lust of livin6 remains constant, then the maximum chargeable rent also remains shall remain constant. , shall aut iilcrcas. -- ,rug -- Ly a ��ca ny the xciit tccvrc e. E. The "base date" shall be April 28, 1983, for any space that was rented on that date and not governed by a fixed -term rental agreement permitted by this chapter. For all other spaces, the base date shall be the first date after April 28, 1983, that the space was rented and not governed by a fixed -term rental agreement permitted by this chapter. 6 B47eirarrges-i-rrthe-cost-of-iivirrg-sfrali-aivrays-me-asure-fronrthe-base-date7For purposes -of this sectioge-hr the -cost -of of the «ct �,llaiig� ILL tlh� Cvu,uinc1 Priw L►d (CFI) fILAn lift-'va3L, date until airy suate, imthc . Tl,c CPI used for tSquii La L eau. B. A. F. Raising rent during a twelve-month period in accordance with this section shall not prevent a park owner from subsequently filing a fair return (hardship) rent petition during that same period. Nor shall the filing of a fair return (hardship) rent petition preclude the subsequent imposition of an otherwise allowable rent increase while the petition is pending, provided any such increase is brought to the attention of the city official or board considering the petition. At all times daring the hardship pvtithin pro . s, llivst iL... itt CPI da. G. Non -imposition of a rent increase permitted by this section during a twelve-month period shall not affect the maximum rent that a park owner may charge in a later twelve- month period. But a park owner may never retroactively collect rent from tenants that could have been charged but was not. That is, rent increases allowed by this section shall only apply prospectively. (Ord. 800 § 3, 1996: Ord. 456 § 2 (part), 1986) Section Moved within ordinance, formerly section 9.50.085 9.50.066 Vacancy increase. When a mobile home space becomes vacant or the ownership of a mobile home is changed or transferred, the park owner may not raise the monthly rent, and such rent shall be at the rate previously approved and set by the board for the space occupied. A mobile home owner who has entered into an agreement which violates the terms of this section has the right to rescind the rental provisions of such agreement to bring the rent into compliance. Such right of rescission shall exist for twelve months from the date of the agreement, and is thereafter waived. (Ord. 456 § 2 (part), 1986) 9.50.067. Fair Return Rent Increases Park owners shall be entitled to a fair return. In order to determine what rents would provide a fair return, a maintenance of net operating income (MNOI) regulation shall be adopted. Pursuant to the MNOI regulation an owner shall be entitled to maintain base period net operating income adjusted in accordance with any fair return regulations adopted pursuant to this ordinance. Whenever a fair return (hardship) petition is filed a determination shall be made as to whether an adjustment would be required pursuant to the MNOI standard, and, if so, the amount of that adjustment. The Board shall also be authorized to take into account any factors which it is required to consider by law and grant whatever rent increase is constitutionally required in order to yield a fair return. 7 9.50.070 Initiation of review and hearing process. A. Any resident of a park or a park owner may petition for a rent adjustment authorized by this ordinance. A mobile home park owner, or any representative of the mobile home park owner, operator or manager of a mobile home park space affected by this chapter, upon payment of such filing fee as shall be duly established, may petition the board for a fair return (hardship) increase of the maximum rent permitted to be charged pursuant to this chapter. hall l,� filed upoirsuz.h form. The petition shall be on a form provided by the City Clerk - If ao-sueig, atL,d, ,uL.l1 The petition shall be in writing, verified by the applicant, and shall contain the name, address and telephone number of the applicant; the name and address of the resident of each mobile home space which would be affected if the petition were granted; a statement of the facts giving rise to the petition for fair return (hardship) increase, in sufficient detail that if established, such facts would demonstrate the existence of a hardship upon the mobile home park owner warranting such a fair return (hardship) increase; A petition by a park owner shall be accompanied by a statement that each resident of a space to be affected by the fair return (hardship) increase, if granted, has been served a notice of the filing of the petition; such notice shall inform each such resident of the location where the petition may be obtained or reviewed. B. Any resident of a mobile home park, or mobile home park owner, affected by this chapter, upon payment of such filing fee as shall be duly established, may petition the board for an interpretation of this chapter, for a determination of whether a particular course of action, either proposed or actual, is legal, valid and within the terms of this chapter. If the board shall establish forms for such petitions, the petition shall be prepared and submitted upon such form. In the absence thereof, the petition shall contain the name, address and telephone number of the person requesting the interpretation or opinion; the name, address and telephone number of the mobile home park owner, manager or other person authorized to represent the mobile home park owner; the names, addresses and telephone numbers of any other residents of mobile home space of individuals requesting such determination; and a brief statement of the facts giving rise to the request for interpretation or determination. The procedural rules with respect to petitions for interpretation shall be those applicable to petitions for fair return (hardship) rent increases, except that, should the City Manager determine to do so, petitions for interpretation which raise issues of a legal nature may be referred to the city attorney for final response, or; in the alternative, for preparation of an opinion and recommendation to the Rent Review Board. Under the first alternative, the city attorney's opinion shall be final. Under the second alternative, the city attorney's opinion and recommendation shall become final within fifteen days after the filing of the same with the City Clerk, and without further action of the Rent Review Board unless a petition to review the city attorney's opinion and recommendation is filed by the requesting party with the City Clerk. 8 C. In the event that a petition is filed, the petitioner shall serve a notice of the filing of same. If said petition is by management, service shall be on each tenant within the mobile home park on a form provided by the city; if said petition is by a tenant or tenants, service of a notice of the filing of the same shall be on management. D. Within twenty days after the filing of the proof of service of the notice under the preceding subsections, the opposing party may file opposition. E. The hearing officer shall establish a date for hearing, giving notice to all parties thereof, and shall promptly consider and decide all petitions filed pursuant to this chapter. The matters shall be considered and decided in the order filed. The party filing any petition shall deposit with the city the estimated cost, as estimated by the City Manager, of all costs to the city, including without limitation the cost of the meeting of the Rent Review Board, the full cost of conducting the hearings as herein provided, the cost of the hearing officer, and the cost of preparation of any record. In the event the funds so deposited exceed the city's costs, any excess shall be refunded to the parties so depositing the same, and any deficiency must be agreed to be paid by such party. Additional deposits may be required to cover costs when it is determined that the initial deposit is not sufficient to satisfy the same. In the event such deposits, when required, are not made in a timely manner, the petition shall be deemed withdrawn and the proceeding terminated. The hearing officer shall consider all relevant facts presented at the hearing, and may require additional information to be presented by the manager or others to determine what adjustments, if any, should be made. F. For any contested hearing, if there is more than one party on a side, the hearing officer may require the parties on one side to designate a representative to receive service of notice and papers and documents with respect to the same; and after such designation, the service on the representative so designated shall be deemed to be giving service to all such parties on that side. G. In the event of any contested hearing, each tenant in the affected mobile home park, (or the tenants' representative if one has been designated), shall be mailed a notice of the time and place of the commencement of the hearing and the possible effect upon his or her rent. Said mobile home park tenants shall be given a chance and an opportunity to be heard at the contested hearing. No further notice shall be required to be given under this chapter for any continuances of the hearing. H. All meeting and hearings shall be open to the public and notice thereof given as required by law. Meetings shall be held as necessary to hear and decide petitioners. I. The City Manager shall notify the petitioning party upon receipt of opposition to the petition, and as soon as possible thereafter shall notify both parties of the time, date and place of hearing 9 J. Upon receipt of a valid petition pursuant to this chapter, the Rent Review Board, unless it conducts the hearing itself under the provisions of this section, shall refer the petition to the opposition and to a hearing officer who shall conduct an evidentiary hearing upon the petition. The "hearing officer" shall be appointed by the Rent Review Board. The hearing officer shall be knowledgeable in the rules of evidence. The hearing officer shall be impartial and it shall be his duty to conduct an evidentiary hearing pursuant to the provisions of this chapter to obtain evidence from the parties that he deems necessary to make his recommendation and to make recommendations for findings and determinations to the Rent Review Board. At the evidentiary hearing, the hearing officer shall take all evidence, and may require any party to the proceedings to provide him with pertinent books, records, papers, etc. In furtherance of this power, the hearing officer may request the city council to issue a subpoena for the same if they are not voluntarily produced, or he may take a refusal to produce the same as evidence that such evidence, if produced, would be adverse to the party refusing to produce the same. Hearing procedures shall insure that each party receives written submissions and notice of the substance of planned testimony in an adequate time before the hearing to enable a reasonable period for the preparation of a response. K. The management may substitute for any books, records and papers a certified audit by an independent certified public accountant, using generally accepted accounting principles consistently applied, or a verified statement under oath by an independent certified public accountant of what the information sought from such books, records and papers consists of. Notwithstanding this subsection (K), the hearing officer may require production of the books, records and papers. L. The hearing officer shall rule upon the admissibility of all evidence at the evidentiary hearing, and shall have the power and authority to conduct the evidentiary hearing in all respects. M. The hearing officer shall keep detailed notes of the evidence produced and provide for recording of all of the testimony presented at the evidentiary hearing. N. The evidence presented at the evidentiary hearing shall constitute the exclusive record for the decision of the issues involved. O. At the conclusion of the evidentiary hearing, the hearing officer shall prepare a summary of all testimony and evidence admitted at the evidentiary hearing and a statement of all materials officially noticed, and prepare proposed findings of fact and a recommended decision to the Rent Review Board, and shall promptly submit the same to the Rent Review Board, along with copies of all documentary evidence received. Copies of the hearing officer's summary, matters officially noticed, and proposed findings and recommendation for decision shall be mailed to all parties participating in the hearing. The hearing officer's proposed findings and recommended decision shall become the final findings and decision of the Rent Review Board within fifteen days after the filing of the 10 same with the clerk of the Rent Review Board (i.e., the City Clerk) without further action of the board, unless any party participating in the hearing shall file a petition to review the hearing officer's proposed findings and determination with the clerk of the Rent Review Board. P. Upon receipt of the hearing officer's summary, proposed findings, official noticed material and recommendations, the documentary evidence admitted in the proceedings, and a petition to review filed pursuant to subsection (0) of this section, the Rent Review Board shall hear arguments by the parties based upon the material submitted to it by its hearing officer. Any party at a proceeding may also have prepared, at his expense, a transcript of the hearing to be presented to the Rent Review Board. No further evidence shall be permitted nor allowed at the hearing before the Rent Review Board, but it shall be based solely upon the materials presented to the hearing officer at the evidentiary hearing. Q. 1. At the conclusion of the hearing on the proposed findings and recommended decision of its hearing officer before the Rent Review Board pursuant to subsection (P) of this section, the board shall, within thirty days after the date of the hearing: a. Accept and confirm the recommendations of the hearing officer and adopt his findings and recommendations; or b. Amend the findings and recommendations of the hearing officer; or c. Send the matter back to the hearing officer for further hearings on the issue pursuant to any instructions provided by the Rent Review Board. 2. Upon issuing the findings of fact, pursuant to subdivisions (a) or (b) of this subsection, the Rent Review Board shall render its final decision. The final decision shall be final and conclusive upon all parties. The final decision by the board may include a provision equalizing the rents among all of the tenants of the mobile home park, based upon the location, size and improvements supplied by management of each mobile home site, notwithstanding any previous disparity between rents charged on equivalent mobile home sites. Any tenant whose rents will be so equalized upwards shall be given special notice of the same and chance to be heard. R. Any order of the Rent Review Board shall, unless otherwise specified in its final decision, be effective as of the date thirty days after the filing of the petition for adjustment. S. Any party to a hearing may be assisted by attorneys of the party's choice. T. No member of the Rent Review Board may participate in the hearing or decision concerning a mobile home park in which he resides or has a financial or management interest. U. The Rent Review Board shall keep minutes of its meetings and make an official record of a hearing. 11 V. Decisions of a Rent Review Board shall be supported by a preponderance of the evidence. W. The evidentiary hearing need not be conducted according to technical rules relating to evidence and witnesses. Any relevant evidence may be admitted if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs, regardless of the existence of any common law or statutory rule which might make improper the admission of such evidence over objection in civil actions. X. The Rent Review Board may in its final decision direct that the prevailing parties' cost in these proceedings, including any funds paid to the city pursuant to the provisions of this section, shall be reimbursed by the losing party. Such an order for costs may be enforced by a court of law of appropriate jurisdiction. In the event that the Rent Review Board determines that any petition or opposition is frivolous, it may award reasonable attorney's fees to the other party or parties. Y. The Rent Review Board or its hearing officer may spread any retroactive rent adjustment under subsection (R) of this section over several months of future rent. (Ord. 773 § 1, 1995; Ord. 456 § 2 (part), 1986) 9.50.075 Forced exemption from chapter prohibited. A. It shall be unlawful for any mobile home park owner or manager to require anyone, as a condition of tenancy, to accept a rental agreement that upon execution would be exempt from any provision of this chapter, including, but not limited to, a rental agreement in excess of twelve months' duration. B. Nothing in this section shall prevent anyone from knowingly and voluntarily accepting a rental agreement that upon execution would be exempt from this chapter, including, but not limited to, a rental agreement in excess of twelve months' duration. However, any such rental agreement shall bear the following notice in all capital letters and no less than 10- point bold type and shall be initialed by the tenant or prospective tenant: IMPORTANT NOTICE REGARDING THIS RENTAL AGREEMENT. PLEASE BE ADVISED THAT THIS RENTAL AGREEMENT, IF SIGNED, CREATES A TENANCY THAT WOULD BE EXEMPT FROM THE PROVISIONS OF THE PALM DESERT MOBILE HOME PARK RENT REVIEW ORDINANCE WHICH, ALONG WITH THE STATE MOBILE HOME RESIDENCY LAW (CALIFORNIA CIVIL CODE SEC. 798 et seq.), GIVES YOU CERTAIN LEGAL RIGHTS. YOU MAY WISH TO CONSULT A LAWYER BEFORE SIGNING. UNDER STATE AND/OR LOCAL LAW, YOU HAVE THE RIGHT TO BE OFFERED A RENTAL AGREEMENT THAT IS NOT EXEMPT FROM THE PALM DESERT MOBILE HOME PARK RENT REVIEW LAW. BY PLACEMENT OF YOUR INITIALS BELOW, YOU ARE ACKNOWLEDGING THAT YOU RECEIVED THIS NOTICE AS REQUIRED BY LAW. 12 Initials -- Tenant/Prospective Tenant The foregoing notice shall be provided in addition to, and not instead of, any other notices required by state law. C. Unless otherwise dictated by state law, anyone who is required to sign a rental agreement that does comply with this section on or after the effective date of the ordinance codified in this section may rescind the agreement without penalty and instead insist upon a rental agreement that complies with this section. (Ord. 731 § 1, 1993; Ord. 730 § 1, 1993; Ord. 728 § 1, 1993) 9.50.080 Agreements. Nothing in this chapter shall operate to restrict the right of tenants and management to enter into agreements providing for a fixed term and/or a fixed rent for mobile home tenancies. Such an agreement may be entered into by an individual tenant and management. Such agreement shall apply to all the spaces in a mobile home park provided that four -fifths of the occupied spaces consent to such agreement. The parties to the agreement shall provide the city with satisfactory proof of consent. If the tenants are represented by an association, then if otherwise permitted by law, a majority of the association's board of directors, or similar governing body, may enter into such agreement with the consent of four -fifths of the occupied spaces. (Ord. 560 § 2, 1988: Ord. 456 § 2(part), 1986) Moved to Section 9.50.066 9.50.085 Vacancy increase. tranafkii , , at tht, iatC cntcrcd into an agixIll cA 1-1/10latCS the tt ins of th,s sc. t,on has 1l,J1.111J tl�� 2 (part), 1986) 9.50.090 Enforceability. In the event of a violation by the management of a mobile home park of any maximum rents, an effective rent schedule, or a final decision and order of the Rent Review Board, relief for such a violation shall be enforceable by the individual tenants of that park in a court of the appropriate jurisdiction in which injunctive relief may be granted, and damages shall be allowed for any rent paid in excess of the effective rent schedule or any final determination of the Rent Review Board. 13 aid The court, where applicable, shall be empowered to order treble damages for any rents charged in excess of any effective rent schedule or maximum rent, or in violation of the final decision of the board (i.e., three times any excessive rent or over charge). (Ord. 456 § 2 (part), 1986) 13-Ai1y gac inx& i.ty the bow inu�t be -made . W thin thirty days o,t,on of the d�c,3lvn; a,f . Vffiy upon ont of rtf vwi,g g a. Thin, is nkwly disthe-requesting pal was reaoflably affably tv piat the l,eariilg, of b. Than was ff aad or o C7-There-warfratrci-m-otherimpropriety-nraterialicrthe-otttcome-afthe-beardir decision -committed y a fnm,bcr of tlfc bvaf d or tlhc hcaf al/Jig offi ficcr. ,rty play hm,tnidy be war td upofl showing proper eirettmstarree, -1986)- 9.50.110 Negative declaration. A negative declaration of environmental impact is hereby approved. (Ord. 456 § 2 (part), 1986) 9.50.120 Discrimination and retaliation prohibited. It is unlawful for a mobile home park owner, or any agent or representative of the owner, to discriminate or retaliate against any person because of their exercise of any rights provided by this chapter. Such discrimination or retaliation shall be subject to suit for actual and punitive damages, injunctive relief and attorneys' fees. Such discrimination or retaliation shall also be an available defense in an unlawful detainer action. In any action in which such discrimination or retaliation is an issue, the burden shall be on the mobile home park owner to prove that the dominant motive for the act alleged to be discriminatory or retaliatory was in fact other than discriminatory or retaliatory. (Ord. 728 § 2, 1993: Ord. 456 § 2 (part), 1986) 14 9.50.130 Termination of service. No mobile home park owner shall reduce or eliminate any service to any mobile home space so long as this chapter is in effect, unless and until a proportionate share of the cost savings resulting from such reduction or elimination is passed on to the resident in the form of a decrease in space rent. If a um) pails uvvuti t,iuviJGi vi.,es to a 1110l,1 G hVint. oya�A., ii[ the „atui . �f tatility Jci vices, shall IC dut o u1 oliiiuuatv y JGpaiab.. iisctvii11 ui vwful iiiaiioftransferring-frorrrthe-mobite410111C-park-ownerto-the-resident-the-obligatiotr for payment -for ,utli t,ivik,k,s, du- L.o3t savings, if any, icsulting from sudi ivduL.tivus Oi elimination to Lt. pasb .1 oirtu t%wilt th►, fo11n .,f a acc, GGII1Gil to bG tl1G Gvst VfuGlr ility JGi vice at t11G tulic, Of If �► vb1 park owner or resident shall prrotcst the use of For tlic pulposs of this Seib , ' fcsldvl�t ul the c park vnt, stalkat.a 1 ,ihall be L,Oilbtfli.,d to piul„t it 01 pnLveut a mobile holm pair , eommissiorr or -other (Ord. 456 § 2 (part), 1986) 15 REGULATIONS 100. Fair Return It is the intent of this regulation to permit rent to be established at a level which will provide landlords with a fair return on their property consistent with the Palm Desert Mobile Home Park Rent Ordinance, and the laws of the State of California. Except as otherwise provided hereinbelow, it shall be presumed that the net operating income produced by a property during the base year provided a fair return on property. 101. Allowable Rent Increases Upon filing of an individual fair return (hardship) petition by a landlord, the Board shall permit rent increases, unless otherwise proscribed by law, such that the landlord's net operating income in the base year will be increased by 50% of the increase in the Consumer Price Index (CPI) over the base year. If the base year is 1982, the increase in CPI shall be calculated by subtracting the CPI for December 1982 from the CPI for the most recently reported month at the time of filing the petition, and dividing the resulting figure by the CPI for December 1982. If the base year is after 1982, the base year CPI shall be the CPI last reported as of mid -point of the base year and the current year CPI shall be the CPI last reported as of the mid -point of the current year. . Liscr Lion a tlataSlllp 111Ci Cia.SG t iidc1111CS Cilabk. fail 01 tO I CLi' . a falf 1GtU111 Oil t1i ii pitiYCity. Ilvv�vv�i, OiIGG a lalltllvit111aa and csent evidence lrataLlc, all . riesoilt 1'ali 1Vlalt.�t vcthn, • • pltailzatloli Oi lllcom . l..vinpaiav1G Ja1C.J . KGpIaCCi1itail 16 . vllgilial hr eJt1nc1 anm V y rt nts file pi nip ttlat the mdnttatury lent 1ncrcase provicietl t y t'atm V ert MurilCipand tllc hardJi111-tcnt1ntrcasc atttllonzcabdtvision A the amount-the--B-card-deerns-necessary-to-achieve-a-fatrret. urn- C. Capital Improvement Increase Without regard to whether a landlord qualifies for an increase pursuant to Guidelines Section 101(A), a landlord who invests new or additional money into mobilehome park facilities may file a petition for a capital improvement increase. Upon the filing of a capital improvement increase petition by a landlord, the Board may permit a capital improvement rent increase in order that the landlord receive a fair and reasonable return on expenditures for capital improvements where those capital improvements are for one of the following, only: 1. The capital improvements are new and did not exist before, and have been approved by a two-thirds vote of the tenants of the particular mobilehome park, based on one vote per mobilehome space; or 2. The capital improvements are to modernize, upgrade or refurbish already existing improvements and have been approved by a majority vote of the tenants of the particular mobilehome park, based on one vote per mobilehome space; or 3. The capital improvements are "involuntary" improvements, such as, but not limited to: (a) improvements required by a governmental entity such as a required sewer connections, handicapped access or the earthquake retrofit; or (b) unreimbursed expense for repair or damage from natural disaster. 4. Upon request by the landlord to convert a mobilehome park from septic or cesspool to sewer. A landlord shall not be entitled to receive a rent increase based on capital improvements alone except for capital improvements of the type listed in this section. Any capital improvement increase granted under this section shall not be subject to an automatic CPI increase. Any capital improvement increase granted under this section shall remain in existence only so long as necessary to reimburse the cost of the improvement plus a fair return to the owner. Any increase pursuant to this subsection shall include an interest allowance in accordance with Section 102.C.1.i of this regulation. 17 D. Advance Determination of Allowable Increase A park owner shall be permitted to obtain an advance determination of the amount of a rent increase that would be authorized for a proposed capital improvement or replacement increase. Such a determination shall be conditioned upon completion of the proposed improvements and verification of their costs and other reasonable preconditions. Such a determination may also be made as a part of a determination pursuant to determination on a petition for an increase under the fair return standard regulations. D. E. Notification of Residents Consistent with Section 9.50.070 of the Palm Desert Municipal Code, a landlord seeking a fair return (hardship) increase pursuant to this section of the guidelines shall attest in writing to the Board at the time his or her petition is filed that he or she has served on each affected resident written notice that the landlord is applying to the Board for a fair return (hardship) ordiscrctie,iary hardship rent increase, that said petition may be obtained or reviewed, and that the affected residents have a right to be present at the hearing and to present arguments or evidence to the Board for or against sought increase. Landlords shall notify residents of the hearing date once it is set. Failure to comply with such notice requirements shall be grounds, in the Board's discretion, for recission of any rent increase granted pursuant to this section of the guidelines. 102. JOHN Calculation of Net Operating Income A. "Net Operating Income" equals gross income, less allowable operating expenses. B. "Gross Income" equals (1) gross rents computed as gross rental income at paid 100% paid occupancy, plus (2) interest from rental deposits unless directly paid by the landlord to the tenant (interest shall be imputed at the rate of 51 % of all deposits unless such deposits actually earn greater interest), plus (3) income from laundry facilities, vending machines, amusement devices, cleaning fees or services, garage and parking fees, plus (4) all other income or consideration received for or in connection with the use of occupancy of rental units or housing services, minus (5) uncollected rents due to vacancy and bad debts to the extent that the same are beyond the landlord's control. Uncollected rents in excess of 3% gross rents shall be presumed to be unreasonable unless established otherwise by the landlord by clear and convincing evidence. Where uncollected rents must be estimated, the average of the preceding three years' experience shall be used or in the discretion of the Board some other comparable method. 18 (6) gross income shall not include income obtained from the provision of submetered gas and electriCity service C. Operating Expenses 1. Operating Expenses shall include the following: a. Reasonable Management fees (contracted or owner -performed) of -5670-ortess-ef grvs, irn Fees which have not increased by more than CPI since the base year or are the same percentage of gross income in the base year and the current year shall be presumed to be reasonable. Such presumption may be rebutted by clear and convincing evidence. Rebuttal evidence may include evidence that the fees are exceptionally high by industry standards and/or exceptionally high relative to the value of the services provided or by evidence that the level of management services has increased or decreased since the base year.. b. Other reasonable management expenses including but not limited to necessary and reasonable advertising, accounting and insurance. c. Reasonable attorneys' fees and costs incurred as normal and reasonable costs of doing business, including but not limited to good faith attempts to recover rents owing and good faith unlawful detainer actions not in derogation of applicable law, to the extent same are not recovered from tenants. Reasonable fees, expenses, and other costs incurred in the course of successfully pursuing rights under or in relationship to this ordinance and regulations adopted pursuant to the ordinance including costs incurred in the course of pursuing successful fair return petitions. Said expenses shall be amortized over a five year period, unless the Board finds that a differing period is more reasonable. The allowance for such amortized costs shall include an interest allowance set in accordance with Section of the Regulations. Any determination of the reasonableness of the expenses claimed, of an appropriate amortization period, or of the award of an upward adjustment of rents to compensate the owner for expenses and costs incurred shall be made as part of, or immediately following, the decision in the underlying administrative proceeding. Any and all of the following factors shall be considered in the determination of the reasonableness of the expenses, fees, or other costs authorized by this section: (1) The rate charged for those professional services in the relevant geographic area. (2) The complexity of the matter. 19 (3) The degree of administrative burden or judicial burden, or both, imposed upon the property owner. (4) The amount of adjustment sought or the significance of the rights defended and the results obtained. (5) The relationship of the result obtained to the expenses, fees,and other costs incurred (that is, whether professional assistance was reasonably related to the result achieved). For purposes of this section, the rights of a property owner shall be deemed to be successfully pursued or defended if the owner obtains an upward adjustment in rents, successfully defends his or her rights in an administrative proceeding brought by the tenant or the local rent board, or prevails in aproceeding, brought pursuant to Section 1947.8 concerning certification of maximum lawful rents. d. Normal repair and maintenance expenses, including but not limited to painting, normal cleaning, fumigation, landscaping, and repair of all standard service, including electrical, plumbing, carpentry, furnished appliances, drapes, carpets, and furniture. e. Owner -performed labor which shall be compensated at the following hourly rates upon documentation of the date, time and nature of the work performed. 1. At the general prevailing rate of per diem wages for the Palm Desert area for the specific type of work performed as determined and published by the Director of the Department of Industrial Relations of the State of California, pursuant to Section 1770 et seq. Of the Labor Code of the State of California. 2. If no such general prevailing rate has been determined and published, then the rate shall be: General maintenance $ 99 $11.50/hour Skilled Labor -13.00 $21.50/hour Said rate shall be adjusted by the percentage increase in the CPI between the annual CPI for 2003 (152.1) and the CPI last published as of the mid -point in the current year in a fair return application. Notwithstanding the above, a landlord may receive a greater or lesser compensation for self -labor if the lanrllurd either party proves by clear and convincing evidence that such excess labor expenses resulted in proportionately greater or lesser services for the benefit of the tenants. 20 f. Real Property Taxes g. License and registration fees required by law to the extent same are not otherwise paid by tenants. h. Utility costs, other than the costs of providing submetered gas and electriCity service and maintaining the facilities that provide those services. i. Capital expenses. The amortized portion of capital expenditures applicable to the year in question. Amortization of capital expenditures made in prior years shall be based upon the reasonable useful life of the capital asset in accordance with Exhibit A. An interest allowance shall be allowed on the cost of amortized capital expenses: the allowance shall be interest rate on the cost of the capital replacement equal to the "average rate" for thirty year fixed rate mortgages plus one percent. The "average rate" shall be the rate Freddie Mac last published in its weekly Primary Mortgage Market Survey (PMMS) as of the date of the initial submission of the petition. Pald fvrtlit 6 fiifdilGiilg, tl,G diiioiticatiuii if Juch twApG1Idituie ii►ay i%.f1CGt llt� tviiii� �f such f aaaciag. The Board shall have the discretion to allocate such expense to certain units without allocating to all units if it should be found by the Board that the units to which the allocation is made are specifically benefitted as a result of the particular capital expense. The Board may limit the duration of the allocation to such period as it finds reasonable. 2. Evaluation of Operating Expenses When an expense item for a particular year a. is not representative, or b. in the case of base year expenses, is not a reasonable representation of average expenditures for that item in the years preceding and following the base year, or c. in the case of current year expenses, is not a reasonable projection of future expenditures for that item, Said expense shall be averaged with expense levels for other years or amortized or adjusted by the CPI or some other reasonable methodology in order to establish an expense amount for that item which most reasonably serves the objectives of obtaining a reasonable comparison between the recurring level of the expense(s) in the base year and the current year. 2.3. Operating Expenses shall not include: a. Avoidable and unreasonable or unnecessary expenses; b. Mortgage principal and interest payments, except when specifically authorized to cover the cost of a capital replacement or improvement; 21 c. Lease purchase payments and rent or lease payments to landlord's lessor, cxccpt that the incn,ase i11 such pay,ncntb in any ycar may be included, d. Any penalties, fees or interest assessed or awarded for violation of this or any other law; . Atton cy's tees and otllci cost) iilcartcd for picpdfat1oh and pies%A a pgard, or in connection with civil actions or proceean1gs-agacil,t tnc Uoat0. f. Depreciation ithcr (1) pL;or to , , NaiLhasc of the ,ncbilc hone tail. by the p�zSG►it Owing g.e. Any expenses for which the landlord has been reimbursed by any security deposit insurance settlement, judgment for damages, settlement or any other method. D. Base year for the purpose of this regulation shall be the calender year 1982 or the most recent fiscal year ending on or prior to April 30, 1983, if the records of that property were kept and reported to the Internal Revenue Service on a fiscal year basis. Lo1is1nnci price index is the consatncr price r,idca ror uinan w age Latncrs anca Woillergcics - Long Beach - Anctlopol;tan area (all ;tc,ns, 19G; 103. Rebutting the Presumption A. If the Board determines that the base year NOI yielded other than a fair return on property it shall adjust the base year NOI accordingly. The Board shall not make such determination unless it has first made one of the following findings: 1. That the landlord's operation and maintenance expenses in the base year were unusually high or low. In such instances; the expenses for each of the three years last preceding the base year shall be adjusted in accordance with Section 105 and the average of such expenses shall be substituted in calculating the base year NOI. Such average shall be presumed to reflect reasonable average annual expenses; such presumption may be rebutted by clear and convincing evidence. In the event that the property shall not have been continuously occupied as a rental unit for three years last preceding the base year, the base year operating expenses shall be adjusted to reflect average expenses over a period of time deemed to be reasonable by the Board. 22 In determining whether the landlord's expenses were unusually expenses were unusually high or low, the Board shall consider: a. The landlord made substantial capital improvements during the base year, which were not reflected in the rent levels on the base date. b. Substantially unreimbursed repairs were made due to damage caused by fire, natural disaster or vandalism. c. Maintenance and repair were below accepted standards so as to cause significant deterioration in the quality of housing service. d. Other expenses were unreasonably high or low notwithstanding the following prudent business practice. In making this determination the fact that property taxes prior to 1982 may have been higher than in the base year shall not be considered. 2. That the rent on the base date was disproportionate due to one of the enumerated factors below. In such instances, adjustments shall be made in calculating gross rents consistent with the purposes of these standards; a. The rent on the base date was established by a lease or other formal rental agreement which provided for substantially higher rent at other periods during the term of the lease; b. The rent on the base date was substantially higher or lower than at other times during the year by reason of seasonal demand or seasonal variations in rent; c. The rent on the base date was substantially higher or lower than preceding months by reason of premiums being charged or rebates given for reasons unique to particular units or limited to the period determining the base rent. B. It shall be presumed that where net operating income is less than 50% of gross income in the year which includes the base date as defined in the Mobile Home Rent Review Ordinance, Section 9.50.060, after making adjustments as permitted by Subsection A of this section, the landlord was receiving less than a fair return on property. In such a case, for the purposes of determining the base year net operating income, gross income shall be adjusted upward to twice the amount of adjusted base year ii t upkaatiii6 iin..0iin...operatingexpenses. 23 104. Determination of Base Year Net Operating Income A. Base year net operating income shall be determined by deducting from the base year gross income the actual or adjusted operating expenses for the base year except as provided in Subsection B. B. In the event that the landlord did not own the subject property on January 1, 1982, the operating expenses for 1982 shall be determined in accordance with one of the following: 1. The previous owner's actual operating expenses as defined in Section 102C; or where petitioner has established to the satisfaction of the Board that same are unavailable; 2. Actual operating expenses for the first calender year of ownership discounted to 1982, in accordance with Section 105. 105. Schedule of Increase in Operating Expenses Where scheduling of rent increases, or other calculations require projections of income or expenses, it shall be assumed that operating expenses, exclusive of property taxes and management fees, increase by i►o 1uuio than 10% a yl,ai the rate of increase in the CPI, and that property taxes increase at 2% year. aii L o1n�. 106. Base Year The base year shall be the 1982 calender year. If a prior determination of the allowable rent ceiling of a park has been made pursuant to the maintenance of net operating income standard or the discretionary rent increase standard, the base year shall be the year that was used as the "current" year in that determination. The "current" income and expenses in the prior the prior determination shall be used as the new base year income and expenses, unless there is good cause for using differing base year income and expense amounts. The new base year CPI shall be the latest reported CPI as of the mid -point in the new base year. If a park first becomes subject to the Rent Review Ordinance by virtue of an annexation occurring after 2003, the base year shall be the calender year that includes that date which is 24 months prior to the annexation. 24 107. Notice of Rent Adjustments Based on Capital Improvements or Capital Replacements Park owners shall annually notify each resident of the amount of rent adjustments attributable to each capital improvements and/or capital replacements and of the expiration date(s) of each of the allowances for those improvements. Said notice shall accompany the annual rent increase notice in years in which an increase is noticed pursuant to 9.50.065 of the Mobile Home Rent Review ordinance. 1068. Required Form of Petition Petitioners for individual fair return (hardship) rent increases shall be prepared and submitted upon the form or forms designated by the Board. Failure to use the proper form(s) or to provide any information requested on the form(s), except for good cause shown to the satisfaction of the Board, shall be the grounds for dismissal of the petition. Documentation of the content of the petition may be submitted at the time of filing of the petition; such documentation shall be provided by the landlord upon demand of the Board. Failure to provide documentation within a reasonable time after demand of the Board, except for good cause provided to the satisfaction of the Board, shall be grounds for dismissal of the petition. 10-79. Retroactive Effect In no event shall retroactive rent increases be authorized by application of this regulation, except as permitted by the rent control ordinance or by other duly adopted regulation of the Board, and in no event shall any rent increase be retroactive to a date preceding the filing of the petition for fair return (hardship) adjustment of the rent. +O 110. Partial Invalidity If any provision of this regulation or application thereof to any person or circumstances is held invalid, this invalidity shall not affect other provisions or applications of this regulation which can be given effect without the invalid provision or application, and to this end the provisions of this regulation are declared to be severable. This regulation shall be liberally construed to achieve the purposes of this regulation. 115111p %UStIL 11 �] 7 , all tl1c h0.1UJhip adJUJt111Cillt iu1Qy he 111111tGd CLGI.Vl mg y. T114 Boar 1110.y llllllt t11G dthat lelr rdship im . 25 GOOD AFTERNOON MR MAYOR, COUNCILLORS MY NAME IS PAT BELL, PRESIDENT OF THE INDIAN SPRINGS MOBILEHOME OWNERS ASSOCIATION I AM HERE TO REPRESENT THE RESIDENTS IN THAT PARK FIRST LET ME SAY THAT MY UNDERSTANDING OF THESE ORDINANCE REVISIONS WAS PRIMARILY TO CLARIFY THE MNOI PROVISIONS AND ULTIMATELY TO PROTECT THE CITY FROM PROSPECTIVE LEGAL EXPENSES. THAT BEING THE CASE, LET ME POINT OUT THAT INDIAN SPRINGS WAS THE ONLY TENANT -GENERATED SUIT AGAINST THE CITY THAT WAS USED IN THIS REPORT AS AN EXAMPLE OF EXCESSIVE LEGAL EXPENDITURES. THE OTHERS WERE PARK OWNERS. WITH RESPECT TO THE LEGAL COSTS THAT THIS ASSOCIATION WAS RECENTLY AWARDED: THE CITY AND THE PARK OWNER WERE CO- RESPONDENTS... THE CITY'S DEBT TO THE ASSOCIATION WAS ABOUT $15,000...PROBABLY LESS THAN DR. BAAR'S STUDY COST ANI) CERTAINLY LESS THAN THE OTHER 3 SUITS UPON WHICH THIS STUDY WAS PREDICATED. PALM DESERT'S RENT CONTROL ORDINANCE, ALONG WITH THE CALIFORNIA CIVIL CODE (AS IT APPLIES TO MOBILEHOMES) AND SOMETIMES, GSMOL ARE THE ONLY PROTECTION WE AS MOBILEHOME OWNERS HAVE. WE BELIEVE THAT THE REVISED ORDINANCE LARGELY REFLECTS PARKOWNER INTERESTS AND CORRESPONDINGLY, WATERED-DOWN MOBILEHOME OWNERS INTERESTS AND PROTECTION. THIS GROUP OF HOMEOWNERS IS IN A PARTICULARLY DIFFICULT POSITION...WE OWN OUR HOMES BUT NOT THE LAND WE SIT ON. WE CAN'T JUST PICK UP AND GO IF WE DON'T LIKE RENT INCREASES OR THE CAPITAL EXPENDITURE PASS-THRU THAT THE PARK OWNER DECIDES HE WANTS. PEOPLE LIVE IN MOBILEHOMES BECAUSE THEY ARE AFFORDABLE. MOST RESIDENTS ARE ON LIMITED INCOMES AND IN OUR PARK, 75% OF THEM ARE WIDOWS. THESE PEOPLE ARE THE LEAST ABLE TO AFFORD THE VACILLATIONS OF A PARK OWNER WHOSE BUSINESS IT IS TO MAKE MONEY... THEY NEED THE PROTECTION OF THE CITY, THE COURTS AND THE STATE. WE NEED RENT CONTROL AND WE NEED THE ABILITY TO RESPOND TO THE PARK OWNER IN COURT IF NECESSARY. IF THE CITY WANTS TO AVOID BEING SUED BY MOBILEHOMEOWNERS THEY SHOULD WRITE THAT INTO THE ORDINANCE...NOT DILUTE OUR ONLY LEGAL MEANS OF RESPONDING TO THE PARK OWNER WHICH IS WHAT THIS ORDINANCE NOW RELECTS. IF THIS REVISION HAD BEEN IN FORCE AT THE TIME THE RECENT JUGEMENT WAS MADE.... THE COURT WOULD HAVE INSTRUCTED THE PARK OWNER TO REPAY OUR LEGAL COSTS BY DROPPING THE RENT SPACE ACCORDINGLY. THAT WOULD EFFECTIVELY PREVENT A SUCESSFUL PARY FROM PERSUING LEGAL ACTION..THEY WON'T HAVE ANY MONEY. AND MAY I ADD THAT A PARKOWNER CAN RECOUP HIS LEGAL EXPENSES AND CLAIM BOTH DEPRECIATION AND INTEREST ON THEM. THIS IS LOPSIDED IN CONCLUSION, MR. SPANGENBERG'S LETTER (WHICH YOU HAVE IN FRONT OF YOU) MR. S. STATES THAT ALL YOUR LEGAL TROUBLES WILL BE OVER IF ONLY YOU TAKE HIS 3 SIMPLE SUGGESTIONS...THEY ARE: 1. RAISE THE AUTOMATIC ANNUAL INCREASE FROM 75% F CPI TO 100% OF CPI...TENANTS PAY 2. RAISE THE MNOI FORMULA TO ALLOW 100% OF CPI INCREASES OVER BASE OPERATING INCOME. IT IS CURRENTLY 50% TENANTS PAY 3. DELETE THE PROVISION IN THE CURRENT ORDINANCE WHICH REQUIRES A 2/3 APPOVAL OF THE TENANTS FOR A CAPITAL IMPROVEMENT EXPENDITURE. DR. BAAR SUGGESTED ONE THAT EVEN THE PARKOWNER DID'NT THINK OF...PERHAPS BCAUSE IT WOULD NOT BENEFIT THEM: RAISE THE ANNUAL RENT CONTROL FEE FROM $9.50 TO "WHATEVER THE TRADE WOULD BEAR" (MY ITALICS) AND MR. S. IS RIGHT. IF TENANTS AND TENANT ASSOCIATIONS ARE STIFLED BY THESE MEASURES...IT WOULD RELIEVE THE CITY OF FUTURE SUITS FROM US... BUT REMEMBER..WE ARE ALL VOTERS I URGE YOU TO CAREFULLY CONSIDER THESE POINTS AND THE ISSUES THAT OUR LEGAL COUNCIL HAS SUBMITTED I RESPECTFULLY REQUEST THAT THESE DOCUMENTS BE ENTERED INTO THE PERMANENT RECORD PATRICIA K BELL, PRESIDENT INDIAN SPRINGS HOMEOWNERS ASSOCIATION 49305 HIWAY 74 #171, PALM DESERT, CA. 92260 TEL.773-3771 MEMORANDUM TO: City Council FROM: Indian Springs Mobilehome Park Homeowners' Association DATE: February 24, 2004 RE: Proposed Amendments to Rent Control Ordinance & Regulations The following represent the tenants continuing concerns with respect to the proposed Rent Control Ordinance. 1. In preface, it is very difficult to evaluate the ordinance as a whole in the redline version. A clean copy, in addition to the redline version should be made available so that the provisions can be studied in the context of the section to which they are limited. 2. As for owner's suggestion to increase the rates of return, the ordinance already guarantees the owner a net operating income that is at least equal to his operating expenses as the base for calculating any future increases. (See Section 103(B).) If for some reason the owner wasn't enjoying a net equal to his expenses, the MNOI formula is adjusted to set such a return as the base rate for all future hardship increases. Because the base from which all future hardship increases are calculated is already generous, 50% of CPI is an exceedingly fair factor for the MNOI formula. 3. Nothing in the ordinance specifically provides that a homeowner or other organized association might appear in a board proceeding on behalf of its members. Representation by the HOA simplifies and streamlines the proceedings.) While this might seem unnecessary, in other jurisdictions attorneys for park owners have attempted to prevent such participation by pointing to the literal language of the rent control ordinance that provides for petitions by individual tenants. That leads to litigation over the threshold issue of whether the appearance by the association is permitted! Further, the language expressly allows filing by representatives of park owners — why not allow filing by representatives of tenants? 4. At Section 9.50.080 (page 13), the ordinance provides that the park owner can enter into an agreement with a tenant whereby the rent control ordinance shall not apply. It provides further that, by 4/5t vote of the tenants, the agreement can apply to all the tenants. How can 4/5th of the tenants contractually obligate the remaining 1/5 who otherwise refused to enter into the agreement? The 4/5t vote provision should be deleted. 1 There is a provision whereby the hearing officer may require one side with multiple parties to designate one of their number as representative for service. (Section 9.50.070(F) page 9.) However, this is not the same thing as allowing the original petition or opposition to be filed by the tenants' representative association. 1 5. Section 101(B) of the regulations, as originally written, has been deleted in its entirety. (See page 16.) However, the proposition that an owner should not be permitted to seek a discretionary increase until he has rebutted the presumption that an MNOI increase does not provide a fair return should be left intact. It should be clear that an owner should not be permitted to pursue a discretionary increase unless and until the owner has established that the MNOI formula is insufficient. Why delete this language? Cases have already held that a MNOI formula is sufficient; the discretionary provision is just added as a precaution and to provide flexibility — not to replace the MNOI presumptions. 6. While the proposed changes include a notice by the park owner of the amount of capital improvement increases (new Section 107 of the regulations at page 25), and the dates that such increases expire, there is nothing in the Ordinance that requires the order granting the capital improvement increase to state the expiration date in the first place. In other jurisdictions, the ambiguity in the order as to the intent that a capital improvement increase expires after it is fully amortized, has led to litigation. The procedures should specifically provide for the inclusion of the expiration date in any order granting amortized increases, clearly reciting the various amounts that are amortized, the period of amortization, and the date that such amounts are to be removed from the rent charged. 7. The original ordinance did not allow the landlord to include attorney fees as an operating expense for the purpose of a hardship rent increase. It is now proposed that such expenses be allowed, plus an interest allowance. (See Section 102(C)(1)(c), page 19.) The rent control ordinance is intended to protect tenants, yet there is nothing in the ordinance that provides some mechanism for the tenants to recover, or get credit for, their expenses in defending their rights under the ordinance. Further, the proposed changes delete a prior provision that permitted the tenants to recover fees against the landlord in the event that judicial action is necessary. (Section 9.50.090, page 13.) With that deletion, there is now no mechanism for the tenant to recover its fees. Yet it is the tenants whom are presumably to be protected by the rent control ordinance. Without a mechanism for recovering fees, the tenants are not protected. If the landlord is to recover fees when successful, then the tenants should be afforded a reciprocal protection. The provision for fees to the prevailing party should be left intact at Section 9.50.090. 8. The proposed Section C(1)(e) increases the presumptions for fair rates of owner - performed labor to $11.50 (unskilled) and $21.50 (skilled) per hour, and provides that such rates shall increase annually by amount of CPI. Owner should have payroll records to rebut presumption that rates in original ordinance ($7.00/$13.00) are fair compensation for labor. 9. The original ordinance permitted the park owner to include actual interest/mortgage expenses in the calculations for appropriate capital improvement increases. The proposed changes provide for a presumed interest expense that would apply whether or not the owner financed the improvements. (See Section 102.C(1)(i) on page 21.) The proposed changes also call for an interest allowance on attorney fees. While the tenants do not object to setting a standard interest rate for any capital improvements that are financed, it is improper to escalate expenses by presumed finance expenses even where the improvement was not financed. It is also improper to add a finance 2 change to amortized attorney fees as well. The whole point of calculating actual expenses is to create a formula whereby the owner recovers his expenses, plus a reasonable rate of return. If you inflate the actual expenses with interest, then apply a reasonable rate of return, you are more than doubling the rate of return that you have already found to be "reasonable." The provision for interest on attorney fees, for purposes of determining a capital improvement increase, should be deleted. The provision for a standard interest calculation on capital improvement expenses should be limited to that portion of a capital improvement expense that is actually financed by the owner. 10. Section 103(A)(1) (page 22) creates a formula that is impossible to apply. You read it and tell me how to apply it! 11. Regulations, Section 108 (as renumbered and shown on page 25) requires the owner to provide documentation for a rent increase only if requested by the Board. Documentation should be mandatory, not discretionary. Tenants are entitled to documentation of the expenses claimed by the park owner, and such documentation should be filed with the petition and/or well in advance of the hearing so that the tenants have time to review and investigate the documentation and otherwise prepare opposition to the petition. 12. Regulations, original Section 109 (page 25) has been deleted. The language allowing the Board to consider an imminent annual adjustment when considering a petition for a hardship increase, and allowing the Board to limit a hardship increase as it fords reasonable, should be returned. Otherwise, nothing in the ordinance prevents the owner from obtaining a hardship increase and then, the next day, taking a further increase of 75% of CPI since the last annual increase. The Board should have the authority to reconcile such a possibility. 13. Protection in the event of conversion: Rancho Mirage has added a section to their Rent Control Ordinance that provides that rents charged shall remain subject to rent control until the conversion of the park has been achieved. It states that conversion of the park is achieved when fifty-one percent of the mobilehome spaces have been purchased by the existing mobilehome residents. Palm Desert residents need a similar protection. 3 ' From:707 473 0656 02/20/2004 12:59 #287 P.002/004 LAW OFFICE of DAVID C. SPANGENBERG 420 Hudson Street, Suite A Tel: (707) 473-4340 Healdsburg, California 95448 Fax: (707) 473-0656 February 20, 2004 Robert A. Spiegel, Mayor City Council Members City of Palm Desert 73510 Fred Waring Drive Palm Desert, CA 92260 RE: Amendments to the Palm Desert Mobile Home Park Rent Control Ordinance Dear Mayor Spiegel and members of the Council: This office represents Indian Springs Limited, the owner of Indian Springs Mobile Home Park located in the City of Palm Desert. As the Council is well aware, the Patin Desert Mobile Home Park Rent Control Ordinance has generated substantial and on going litigation which has been extremely expensive to all concerned. Recently, the Council engaged the services of Dr. Ken Baar to review and advise the City on its Rent Control Ordinance with an eye toward reducing the substantial costs associated with the City's Rent Control Program. This office not only represents Indian Springs but also has represented mobile home park owners under rent control for almost twenty years. As a result, this office has observed substantial differences between cities and the amount of litigation generated as a result of their mobile home park rent control programs. Because of that experience, we believe that three changes to the ordinance would substantially eliminate future litigation over mobile home park rent control. These changes will not create a windfall to parkowners. These changes will retain controls to adequately protect the interest of the residents of Palm Desert mobile home parks. This office has observed that cities with these three provisions experience little, if any, rent control litigation. Currently, the ordinance provides for an automatic rent adjustment of 75 % of the Consumer Price Index (CPI). A mobile home park is much like a small city in its operation. Like a small city it is required to deliver services such as sewer, water, trash collection, electricity, gas, maintenance, management and administrative to name but a few. The increases in these costs of operation are closely tied to the Consumer Price Index. Accordingly, an amendment to the ordinance allowing an automatic rent increase Fran:707 473 0656 02/20/2004 12:59 #287 P.003/004 February 20, 2004 Page Two on an annual basis of 100 % of CPI would radically reduce the need of park owners to file special rent adjustment petitions. Accordingly, our first proposed change is to amend the automatic CPI rent increase adjustment to 100% of CPI. The second suggested change involves the net operating income formula for a fair rate of return. Currently, the ordinance provides that the net operating income of the park owners may only be increased under the fair rate of return formula by 50% of the Consumer Price Index. The practical effect of this adjustment mechanism is that the park owner's income in constant dollars continues to erode, This erosion of the income in constant dollars is the primary reason that park owners have and will continue to put forth alternative theories of fair rate of return resulting in board confusion and on going litigation. This problem can be easily remedied by amending the ordinance to provide that the park owner's net operating income be adjusted by 100% of the Consumer Price Index so that the park's fair return remains constant in constant dollars. This will not only alleviate alternative theories for fair rate of return petitions but also substantially protects the residents in that the park owner's return on his investment is pegged and will be continuously pegged at a return that is the same in constant dollars. The ordinance as presently formulated with 50% of CPI on the income to the park owner places the park owner in a position where he must either accept a constantly eroding income or litigate alternative theories. This office's second recommendation is that the net operating income formula be revised to provide for 100% of CPI on the park owner's net operating income from the base year. Finally, the ordinance provides a series of capital improve rent increases all of which are functionally tied to a favorable vote by the residents. In this office's years representing mobile home park owners it has never seen a group of mobile home park residents vote themselves a rent increase. This leaves the park owner with the only available means to obtain a rent increase to cover the costs of a capital improvement is to petition for a fair rate of return hearing which starts the litigation cycle over again. This office strongly recommends the adoption of a stand alone capital improvement pass - through provision which allows a park owner faced with an extreme and non -reoccurring capital cost (such as replacing the roof on a clubhouse or repaving the streets) with the opportunity to pass the costs of this major improvement along to the residents over the capital improvement amortization period. This office strongly believes that amending the current Palm Desert Rent Control Ordinance to provide for an automatic rent increase of 100% of CPI, changing the NOI formula to reflect 100% of CPI and authorizing stand alone capital improvement pass- throughs where the capital improvements were legitimately incurred, necessary and as a result of the normal disintegration of a capital items will virtually eliminate all litigation From:707 473 0656 w 02/20/2004 13:00 #287 P.004/004 February 20, 2004 Page Three over rent control issues in the City of Palm Desert. I plan on attending the Council meeting to discuss these proposals and would be happy to answer any questions the Council may have. DS/ca cc: Jim Goldstein Richard Close Ken Saar David Erwin Doug Phillips 0:\X10028 Mayor 1v Z.20.04.wpd