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Law Kept Rents Down But Raised Sale Prices
Court: Unconstitutional Law Did Not Accomplish Its Goal

By Carol W. LaGrasse

The United States District Court of the Central District of California struck down the rent control ordinance of the City of Goleta in California on October 29, 2004 as an unconstitutional taking because it failed to substantially further its stated goal of creating affordable housing.

Confusion over Statute of Limitations

The dispute arose out of the adoption of a mobile home rent control ordinance by the recently incorporated City of Goleta. The plaintiffs, Daniel Guggenheim and others, purchased Rancho Mobile Estates Mobilehome Park in 1997, in what is now Goleta, but was then an unincorporated area of Santa Barbara County. Their mobile home park was subject to a mobile home rent control ordinance that the County of Santa Barbara had in place since 1987. The City of Goleta adopted mobile home rent control as part of a generalized adoption and subsequent readoption of the Santa Barbara County Code when the City was created, but there was a gap in time when no rent control was in effect as to the Rancho mobile home park.

The Rancho owners won a significant round when they passed the statute of limitations test. The City of Goleta argued that the Rancho owners had lost the case because the statute of limitations for challenging the ordinance had run out, if measured from the date when the County adopted the original ordinance, but the court ruled that the statute of limitations ran from the date when the City "newly adopted" the same ordinance.

Effect of Rent Control on Cost of Housing

The purpose of the ordinance focused on the housing cost to mobile home renters, who are also the owners of the homes, but do not own the improved ground in mobile home parks on which the homes rest. For all practical purposes, the mobile homes cannot be moved, and are sold from one tenant/owner to the next.

The ordinance cited a "critically low vacancy rate and rapidly rising and exorbitant rents exploiting this shortage [which] constitutes serious housing problems…" Rent control was enacted to keep down the cost of housing. The ordinance also had the stated purpose of allowing a fair return for mobile home park owners.

In real life, the situation was turned upside down. The mobile home park owners did not get a fair return and the cost of housing was nearly ten-fold the cost of the mobile homes themselves. During the time that the plaintiffs owned Rancho, housing costs in Goleta increased about 225%. However, rent control restricted the annual increase in rents at Rancho park to the lesser of 75 % of the increase in the Consumer Price Index, or 5%. In addition, when a mobile home was sold, the ordinance limited the rent increase for the new tenant/owner to 10%.

As a result of lower-than-market value rents, the mobile home tenant/owners sell their homes at a significant premium. The Rancho owners hired an expert, who found that based on the sale of 64 mobile homes from January 15, 1999, through July 21, 2004, the premium averaged 88% of the sale price. An average mobile home worth $12,000 would sell for approximately $100,000. The City did not dispute this.

Judge Florence Marie Cooper, writing the decision, concluded that because there is no mechanism to keep those who sell their mobile homes from reaping this premium, the ordinance is an unconstitutional taking.

In a Ninth Circuit 1997 ruling, Richardson v. City and County of Honolulu, which the judge cited, "The court held that the rent-control ordinance constituted an unconstitutional taking because it failed to substantially further the goal of creating affordable housing due to the premium paid by the buyer to purchase a condo on rent-controlled land:

"[The challenged ordinance] does not substantially further the goal of creating affordable housing. The absence of a mechanism that prevents lessees from capturing the net present value of the reduced land rent[,] in the form of a premium, means that the Ordinance will not substantially further its goal of creating affordable owner-occupied housing…Incumbent owner occupants who sell to those who intend to occupy the apartment will charge a premium for the benefits of living in a rent controlled condominium. The price of housing ultimately will remain the same. The Ordinance thus effects a regulatory taking."

In the Goleta rent control ruling, Judge Cooper wrote, "The ordinance at issue contains no mechanism for preventing mobile home owners from capturing the present value of the reduced rents as a premium on the sale of their mobile homes. As such, the ordinance fails to substantially advance its stated purpose. Therefore,…the ordinance is an unconstitutional regulatory taking…"

The Rancho Mobile Estates Mobilehome Park owners were represented by attorney Mark Alpert, Rob Coldren and Bill Dahlin of Hart, King & Coldren of Santa Ana, California.


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