Do we really need to tell you how a rent control regulatory takings claim fared in the Ninth Circuit? We didn't think so.
In Colony Cove Properties, LLC v. City of Carson, No. 16-562655 (Apr. 23, 2018), a three-judge panel reversed a district court jury verdict which concluded that the City was liable for a Penn Central regulatory taking for the mobilehome Rent Board's setting of a rent increase artificially low. The total award to the park owner, including damages for lost rental income, attorneys' fees, and interest, was over $9 million.
As we wrote in this post, the city and its amici predictably went ballistic and argued that the upholding the verdict threatened the very existence of mobilehome rent control. The court concluded that as a matter of law, the owner failed each of the three Penn Central factors.
First, the owner did not prove that the economic losses it suffered were sufficient, by comparing the before and after values of the land (overlooking the fact that the land wasn't the property interest which the property owner was alleged to have been taken).
The jury concluded that Colony would have received approximately $3.3 million in additional income over an 8-year period if the Board had adopted the alternative GPM Analysis and factored debt service into the 2007 and 2008 rent increases. But the mere loss of some income because of regulation does not itself establish a taking. Rather, economic impact is determined by comparing the total value of the affected property before and after the government action. See MHC Fin., 714 F.3d at 1127. Projected income streams can contribute to a method for determining the post-deprivation value of property, but the severity of the loss can be determined only by comparing the post-deprivation value to pre-deprivation value. Id.....There was no evidence before the district court allowing a comparison of the pre-deprivation and post-deprivation values of the Property. Colony purchased the Property for approximately $23 million, and we assume that this number establishes the pre-deprivation value. But Colony presented no evidence, expert or otherwise, about the Property’s post-deprivation value. Rather, the only evidence concerned the amount of rent claimed to be lost over an 8-year period because of the Board’s refusals to approve higher increases. Even assuming that the lost rental income asserted by Colony—$5.7 million—equates to diminution in property value, that reduction would only be 24.8% of the assumed $23 million pre-deprivation value of the Property, far too small to establish a regulatory taking. Colony argues that post-deprivation “sale value is not the only permissible basis to consider economic loss.” We agree—for example, the discounted future cash flows produced by an income-producing property can provide an appropriate valuation methodology. See, e.g., Cienega Gardens v. United States, 503 F.3d 1266, 1282 (Fed. Cir. 2007) (determining economic impact by “compar[ing] the lost net income due to the restriction (discounted to present value at the date the restriction was imposed) with the total net income without the restriction over the entire useful life of the property (again discounted to present value)”). But Colony presented no evidence, by virtue of analyzing diminished income streams or otherwise, of the post-deprivation value of the Property.
Slip op. at 10-12 (footnote omitted).
The court also held that the owners failed the "investment backed expectations" prong of Penn Central, concluding the owners had no reasonable expectation that the Rent Board would take into account the owners' debt service when it considered a rent increase, as it had done in the past:
Goldstein’s experience as an owner of another mobile home park in Carson in the two decades before his purchase of the Property did not establish a reasonable expectation that the Board would consider debt service in all rent increase applications. As a general matter, an investor must account for “the burden of rent control” in its expectations about future increased rental income. Guggenheim v. City of Goleta, 638 F.3d 1111, 1120–21 (9th Cir. 2010) (en banc). And, the Implementation Guidelines, adopted in 1998—long before the purchase of the Property—made plain that use of a GPM Analysis created no expectation to a particular rent increase. Moreover, the Board did not consider acquisition interest expenses in Goldstein’s first application for a rent increase at his other park. Goldstein initially applied for a $57.85 rent increase for that park, $41.38 of which related to increased debt service. The Board, however, granted only a $12 rent increase, which did not account for the debt service. Thus, an objectively reasonable person could not have expected that all future rent increase applications seeking increases because of debt service would be granted.
Slip op. at 15. At most, the Board may consider debt service, but isn't bound to. And it certainly isn't compelled to raise rents to a particular level, according to the court.
Finally, the panel concluded that the "character of the government action" was mere rent control regulation, and we know that in the Ninth Circuit, rent control isn't one of those things that property owners are supposed to be worried about:
The City’s rent control ordinance is precisely such a program, striving to “protect[ ] Homeowners from excessive rent increases and allow[ ] a fair return on investment to the Park Owner.” This central purpose of rent control programs “counsels against finding a Penn Central taking.” MHC Fin., 714 F.3d at 1128.
Slip op. at 18.
Colony Cove Properties, LLC v. City of Carson, No. 16-56255 (9th Cir. Apr. 23, 2018)