The City of Escondido erred when it approved a lower-than-requested mobile home rent increase, but the city's action did not constitute a taking of private property, the Fourth District Court of Appeal has ruled.

The court determined that the city did not have evidence to support the $31 rent increase. But rather than find that a taking occurred, the court simply directed the city to conduct a new hearing on the mobile home park owner's rent increase request.

Escondido voters approved mobile home rent control in 1988. The ordinance and its application have been litigated virtually nonstop ever since. The H.N. & Frances C. Berger Foundation brought the case at hand. Berger owns a 155-unit, senior mobile home park. In February 2002, Berger applied for a $90 increase, equal to 25% of the average rent. The City Council, acting as the Mobilehome Rent Review Board, approved an increase of $31. Berger sued, seeking damages based on inverse condemnation and a violation of due process.

San Diego County Superior Court Judge Lisa Guy-Schall ruled for the city. On appeal, a unanimous three-judge panel of the Fourth District, Division One, reversed part of Guy-Schall's decision.

Escondido's rent control ordinance lists a number of factors for the Rent Review Board to consider in granting increases, but the ordinance does not specify a method or formula. For Berger's request, the city's expert on the question of a fair return on investment was Kenneth Baar, author of Guidelines for Drafting Rent Control Laws: Lessons of a Decade. He recommended an increase of $26.50 to cover higher operating costs, two capital improvements and an application fee. He recommended an additional $11.94 increase based on an indexing of the increase in the consumer price index (CPI) - for a total rent rise of $38.44.

The board accepted Baar's recommendation, but it also considered two other figures, $31.67 and $25. The $31.67 was based strictly on 60% of the increase in the CPI. The $25 figure was based on a study of comparable mobile home spaces, excluding non-rent-controlled spaces. The board averaged the three figures and rounded down to $31.

The Fourth District ruled that the “averaging method was faulty because there was no showing that two of the figures the board relied on were within the range of reasonable rents under the fair return criterion.” The $25 figure was based on the single factor of comparable rents, but only for rent-controlled spaces. The city could not make that distinction because, under the ordinance, “the mobile home park spaces must be comparable, not the manner in which rents are set,” the court ruled.

As for the $31.67 figure, there was no evidence to support that a straight 60% of the CPI increase amounted to a fair rate of return, the court ruled. In fact, Baar stated that a fair rate of return had to consider increased operating expenses and capital improvements.

The court, however, rejected Berger's argument that rents must rise by 100% of the CPI. Berger's operating expenses increased at less than the CPI, the court noted. “Moreover, as Dr. Baar explained in his report, the use of indexing ratios may satisfy the fair return criterion because park owners typically derive a return on their investment not only from income the park produces, but also from an increase in the property's value,” Presiding Justice Judith McConnell wrote for the court.

As for the inverse condemnation and due process contentions, the court ruled that Berger had not properly briefed the issues. Additionally, the court held, “when the remedy of future rent adjustments is available as a matter of due process, as here, there can be no taking or other civil rights violation.”

The court directed the city to give Berger a new hearing.

The Case:
The H.N. & Frances C. Berger Foundation v. City of Escondido, No. D043829, 05 C.D.O.S. 1686, 2005 DJDAR 2257. Filed January 26, 2005. Ordered published February 24, 2005.
The Lawyers:
For Berger: Ronald St. John, Barton, Klugman & Oetting, (213) 621-4000.
For the city: Donald Lincoln, Endeman, Lincoln, Turek & Heater, (619) 544-0123