When reading the Ninth Circuit's latest foray into the regulatory takings doctrine which holds that a muncipal rent control ordinance did not qualify under Penn Central (MHC Financing Ltd P'ship v. City of San Rafael, No. 07-15983 (Apr. 17, 2013), we were reminded of the opening line in Andy Williams' signature tune "Love Story" --
"Where do I begin ..."
But before we begin, two preliminary thoughts. First, the district court's decision finding that San Rafael's mobile home rent control ordinance worked a taking of the mobilehome park owner's property because it reduced the value by more than 80% was not some one-off aberration by a conservative district judge out on a lark. No, the decision was by the now-retired Vaughn R. Walker, the same judge who invalidated California's Proposition 8 in one of the same-sex marriage cases currently before the Supreme Court. Apparently a proponent of actual judicial review for all constitutional rights, he also found a taking in another case we've covered here, Yamagiwa v. City of Half Moon Bay, No. 05-4149 VRW (Nov. 28, 2007), in which he concluded that the city was liable for $37 million in compensation.
Second, San Rafael is not in some backwater, but is the heart of Marin County, which a source no less than Wikipedia tells us "is well known for its natural beauty, liberal politics, and affluence" (they forgot to mention hot tubs). San Rafael is the place where Frank Lloyd Wright designed the county courthouse, and is up the street from Tiburon and just south of George Lucas' broken dream of expanding his Lucasfilm studio. In other words, you need some serious coin to live in Marin County. Indeed, the property at issue in this case is no "trailer park" but is quite tony and just a stone's throw from Skywalker Ranch.
But the city fathers and mothers apparently thought it important to insure that owners of mobile homes could enjoy the bounty that Marin County has to offer. So they adopted a rent control ordinance in 1989, amended it in 1993, and then in 1999 amended it yet again. We'll leave it to you to read the ordinance in its entirety, but here's the short version. The ordinance initally tied the park owner's ability to increase the ground rent to the CPI, with a sliding scale. The 1993 amendment added vacancy control which gave the mobile home owner the ability to transfer the lower-than-market rent to the purchaser of a mobile home. The 1999 amendment removed the sliding scale, and all pad rent increases are limited to 75% of CPI.
The rent-control-as-a-taking issue has been before the Ninth Circuit before with pretty much the same results, most recently in Guggenheim v. City of Goleta, 638 F.3d 1111 (9th Cir.2010) (en banc), cert. denied, 131 S. Ct. 2455 (2011). [Disclosure: in that case, we filed an amicus brief for the Manufactured Housing Institute, arguing the Ninth Circuit was wrong, and that the Supreme Court should grant cert.]. See also this case and this case for more examples of challenges to mobilehome rent control ordinances.
In MHC, after a bench trial (two, actually) the district court held the ordinance was a taking under Penn Central, but not a due process violation:
"[p]urchasers of mobilehomes in Contempo Marin after the 1999 Amendments have paid a premium reflecting the present value of expected rent savings due to San Rafael rent regulation. This premium averages $67,000 for the right the enjoy the below market regulated rent." Because the premium is being paid to the Contempo Marin mobilehome owners, “the amendments reduced MHC’s revenue streams from Contempo Marin and the value of its property by $10,609,136." The district court also held that "the whole Ordinance reduced MHC’s net operating income by 75 percent and reduced the value of the park from $120 million to $23 million."
Slip op. at 11-12.
The Ninth Circuit, as we mentioned above, reversed. According to the panel, the central fact that made hash of the plaintiff's Penn Central claim was that when it purchased the park in 1993, the original 1989 ordinance had already been adopted. Thus, analysis of each of the three Penn Central factors results in no taking:
Economic Impact: The property owner didn't suffer a huge economic impact because the district court should only have measured the diminution in value by comparing present market value with the market value of the property at the time of MHC's acquisition, instead of at the time of the amended ordinance. Apparently, the original ordinance had already depressed the market value of the park, and the district court should have measured the economic impact as "only" $10 million, and not $97 million (the value of the park with no rent control at all). See slip op. at 17-18. However, even if measured against the value of the park unencumbered by any ordinance, an 81% reduction in value would not be sufficient according to the court. Slip op. at 18-19. Read that again, to make sure you got it: a transfer of $97 million is not enough. Wow. Maybe this is just Marin County, and you know, a dollar doesn't go as far here as elsewhere.
Investment-backed Expectations: the Ninth Circuit rejected the district court's conclusion the property owner expected that the rent it charged would be set by the market, not by the city. "[T]hat is, MHC's expectation was that Contempo Marin would be subject to no rent control at all." Slip op. at 19. This was not a reasonable expection to the Ninth Circuit because "MHC had even less reason to expect that the rent control regime would disappear altogether." Id. Renting property is a "regulated field," and those who choose to participate in it "cannot object if the legislative scheme is buttressed by subsequent amendments to achieve the legislative end." Slip op. at 19-20. Relying upon the rationale in Guggenheim, the court held this is the "primary factor," and surmised that the "price they paid for the mobile home park doubtless refected the burden of rent control they would have to suffer." Slip op. at 20.
Character of the Government Action: This was not a physical invasion (allowing mobile home owners to occupy space in the park, or a physical taking of the rent premium), but rather a mere adjustment of the benefits and burdens of economic life. In other words, you knew the regulatory environment was harsh when you decided to buy a mobile home park. Slip op. at 22-23.
Presuming Expectations. First, the Ninth Circuit reached its conclusions as a matter of law, not because the district court misunderstood the facts. In other words, when you buy property already subject to a regulation that takes property, you simply cannot form investment-backed expectations that you can operate free of the regulation, even if it may be a taking. This was a case where the district court held two trials before concluding that the ordinance was a taking under an "essentially ad hoc, factual inquiry." But even though appellate courts usually defer to a trial court's factual findings, the Ninth Circuit didn't do so because it was simply legally impossible for those expectations to be formed when a restrictive ordinance predates purchase. But aren't someone's "expectations" and how property is priced questions to be decided by the trier of fact and not by appellate judges who surmise about what the price "doubtless" reflected? Instead, the court substituted its view that it was "doubtless" that MHC's acquisition price for the park was already discounted to account for the rent control regulation. But was there any testimony on this? Even if there was, would it matter to the Ninth Circuit?
Where's Palazzolo? Second, where's the Ninth Circuit's analysis of Palazzolo v. Rhode Island, 533 U.S. 606, 626 (2001), in which the Supreme Court rejected the proposition that "postenactment purchasers cannot challenge a regulation under the Takings Clause[?]" The Ninth Circuit cited that case only in the section of the opinion dealing with ripeness, not in the Penn Central discussion. Our read of Palazzolo is that a property owner's right to make reasonable use of her land does not evaporate simply because restrictive regulations predate her acquisition. Purchasers of property subject to restrictive regulations maintain all of the rights protected by the Fifth Amendment and may assert a takings claim, and regulations do not become part of a parcel’s "background principles" simply because the property is transferred to a new owner. As the Court put it, the government cannot “put an expiration date on the Takings Clause." Id. at 627. The Ninth Circuit doubled down on its Guggenheim rationale, which ignores the above principle.
The Armstrong rationale. Finally, even if a rent control ordinance does not allow another to physically occupy property (we thought that in Yee v. City of Escondido, 503 U.S. 519 (1992) the Court held that rent control was a physical occupation, but that hey, you threw open your property by offering to rent it, so that's on you), the San Rafael ordinance in particular seems designed to effectively create "affordable" housing in Marin County. If so, then isn't MHC being required to provide this public benefit at its own cost, and therefore doesn't the ordinance run up against the central principle of regulatory takings theory? Shouldn't the cost of providing affordable housing be provided by the public as a whole?
Will this case result in another cert petition challenging rent control as a taking, asking the Supreme Court for clarification on how to apply the Penn Central factors? As Andy Williams sang, "I have no answers now but this much I can say" it should.