Loading...
HomeMy WebLinkAbout05-23-1985 MHRRB Minutescity san lois ouspo * San Luis Obispo, CA 93403-8100 * 549-7150 HUMAN RELATIONS COMMISSION Post Office Box M I N U T E S MOBILE HOME RENT REVIEW BOARD May 23, 1985 (TAPE #1) SUBJECT OF HEARING: Application for rent increase from Chumash Village Investments, Inc. MOBILE HOME RENT REVIEW BOARD MEMBERS PRESENT: Tom Swem, Patricia Barlow, Gaye Benson, Denny Wheeler and Naoma Wright. STAFF PRESENT: Steve Henderson and Roger Picquet CALL TO ORDER: Chairperson Tom Swem called the meeting to order at 3:07 p.m. and introduced members of the Board. STAFF REPORT: Steve Henderson explained the contents of the packet distributed to the Board as well as to Mr. Olpin and Mr. Buttery. It includes a survey regarding utilities provided by other mobile home parks in the city of San Luis Obispo as requested by the Board in a previous meeting and several letters from mobile home park owners. RELINQUISHMENT OF THE CHAIR: At this time Chairperson Swem relinquished the Chair to Co -chairperson, Gaye Benson. APPROVAL OF MINUTES: ACTION: Denny Wheeler moved, Patricia Barlow seconded to approve the minutes of the April 11, 1985 meeting as submitted. (APPROVED) Page 2 Mobile Home Rent Review Board May 23, 1985 LETTERS FROM MOBILE HOME OWNERS: Steve Henderson submitted the following letters received in his office from mobile home owners: DATE: RECEIVED FROM: May 15, 1985 Rev. and Mrs. Severin Bernas May 15, 1985 Zenita B. Hunt (TAPE #2) May 17, 1985 Melvin E. Seaton May 14, 1985 Orlena and Lyle Stipp May 27, 1985 Mrs. Adele Raymond Not dated Lynda Carpenter May 20, 1985 Zenita B. Hunt (second letter) Roger Picquet recommended that the above letters be identified by author and date rather than as exhibits. Mr. Buttery objected to introduction of the letters into evidence, however, the Board re- ceived the letters taking into consideration cautionary measures as recommended by Mr. Picquet. SWEARING IN OF WITNESSES: Ronald D.`Gerant and several members of the audience were sworn in as witnesses by Deputy City Clerk, Sharon Turner. RONALD D. GRANT'S TESTIMONY: EXHIBIT #12 (Memo dated May 22, 1985 from Ronald D. Grant to Ed Olpin - 12 pages) Mr. Olpin questioned Mr. Grant concerning his qualifications as an appraiser and developer as well as his experience in that field. Mr. Olpin requested that Mr. Grant explain his calculations to determine Over All Rate of Return (Exhibit 12, Page 2 & 3) and his access to several Exhibits previously submitted to the Board. (TAPE #3) Mr. Grant continued his explanation of calculations in Exhibit 12 through Page 6. Mr. Buttery questioned Mr. Grant establishing that he was retained by Lee Willard of the Tenants Association. He also asked Mr. Grant to clarify his estimation of the value of Chumash Village and his 12 -month Projected Income and Expense Statement (Exhibit 12, Page 9) . Mr. Buttery submitted EXHIBIT 13 (Breakdown of Sales/Purchase Price -Seller, Terry D. Huer, Buyer, Chumash Village Investments). (TAPE #4) Mr. Grant discussed Exhibit #13 regarding sales commissions and purchase price. Mr. Buttery questioned Mr. Grant regarding his feelings on the approach which should be taken to determine a "fair and just return" on property, the sale of San Luis Bay Mobile Estates and its comparison to Chumash Village, as well as his understanding of "over all Page 3 Mobile Home Rent Review Board May 23, 1985 rate of return". Mrs. Barlow questioned Mr. Grant regarding over all rate of return and Mr. Wheeler asked about the exclusion of operating and replacement reserves in Exhibit #12. RECESS: Acting Chairperson Benson declared a recess from 4:30 p.m. to 4:40 p.m. ADDITIONAL SWEARING IN OF WITNESSES: Deputy City Clerk, Sharon Turner swore in additional witnesses from the audience. (TAPE #5) CHARLES GOLDBERG'S TESTIMONY: Mr. Olpin called Charles Goldberg, CPA with the firm of Bourdon and Burkhart of San Luis Obispo. Mr. Olpin submitted EXHIBIT 14 (Chumash Village Investments Analysis of Benefits Received by Owners for the Year Ended December 31, 1982 - 3 pages). At Mr. Olpin's re- quest, Mr. Goldberg explained his computation of the Management Expenses shown on Page 1, (Exhibit 14), the Net Operating Income on Page 2, and the methodology used in the calcu- lation of Exhibit #6 (Gerald Taylor Testimony Recap). Mr. Buttery questioned Mr. Goldberg concerning his background in appraising mobile home parks, established Mr. Goldberg's employment status by the Tenants Association as review- ing the financial statements prepared by the owner of the property, his understanding of mobile home park management fees, his computation of the figures on Page 2 (Exhibit 14) regarding Return on Total Property Price, his explanation of the deletion of Interest Ex- pense and his calculation of the Net Income figure on Page 1 of Exhibit 14. (TAPE #6) Mr. Oplin asked Mr. Goldberg to explain his calculation of the Net Income figure on Page 1, Exhibit 14. PAULA MCDOUGAL'S TESTIMONY: Mr. Olpin called Paula McDougal, CPA with the firm of Bourdon and Burkhart, San Luis Obispo. Mrs. McDougal clarified the computation of figures on Page 3 of Exhibit 14. Mr. Buttery questioned Mrs. McDougal regarding her calculations of the value increase of $155,000 on Page 3 of Exhibit 14. Mrs. McDougal corrected dates for the CPI increase (Page 3, Exhibit 14) from June, 1980 - June 1983 to June, 1980 - January, 1983. Chairperson Benson indicated that the 23% figure should be on the line "% of Increase attributed to 1982 - 4.28" (Page 3, Exhibit 14). RECESS: Acting Chairperson Benson declared a recess from 5:30 p.m. to 7:00 p.m. Page 4 Mobile Home Rent Review Board May 23, 1985 (TAPE #7) ADDITIONAL SWEARING IN OF WITNESSES: Mr. Picquet swore in other members of the audience who may wish to testify. PAUL BOVAIS' TESTIMONY: Mr. Bovais inquired as to why Mr. Swem removed himself from the Chairmanship of the last two meetings. Mr. Picquet explained that Mr. Swem is a member of the Board and declared a conflict of interest and stepped down on this matter. Mr. Bovais commented on Mr. Lefler's position in the firm of Chumash Village Investments. Mr. Wheeler questioned Mr. Bovais concerning the industry "norm" with regard to the man- agement of mobile home parks. Mr. Bovais replied he didn't feel he could answer the question but commented that the duties are the same in a small park as in a large park. CHARLES LONG'S TESTIMONY: Mr. Long is the owner of the Village Mobile Home Park in San Luis Obispo. (EXHIBIT #15) (Foothill Journal item titled "City of San Bernardino Reaches Mobile Home Agreement"). Mr. Long spoke on the methodology to determine a fair rate of return on a mobile home park citing the above mentioned news item. Mr. Buttery questioned Mr. Long regarding his ownership of Village Mobile Home Park, the number of spaces (75) and flood insurance coverage. Mrs. Wright asked Mr. Long to explain his statement regarding a mobile home owner assis- tance program in San Bernardino County. Chairperson Benson questioned Mr. Long concerning rent control. Mrs. Barlow asked Mr. Long to clarify his statement about flood damage repair. GERALD TAYLOR'S TESTIMONY: Mr. Buttery called Mr. Taylor who expressed his concern about the use of the term, "rate of return" explaining it is a unit of comparison and not a measure of return on yield. (TAPE #8) He discussed CAP rate, (measure of net operating income), management fees, which in his opinion, are necessary, expected and anticipated and vary from 4% to 7%. Mr. Wheeler requested Mr. Taylor to clarify for the Board the terminology used in his statements. Mr. Taylor made and explained the following equations on the blackboard: OAR = NOI Divided by Value - CAP Rate Price OAR: Over All Rate NOI: Net Operating Income CAP RATE: The net ratio between the annual net operating income and the value or sales price. Page 5 Mobile Home Rent Review Board May 23, 1985 RATE OF RETURN: Total yield on property YIELD: Money paid or earned as a return or capitol Total cash flows Appreciation Increase/Income Reversion Depreciation and Tax Benefits Mr. Picquet asked Mr. Taylor to further explain "Over All Rate" which, according to Mr. Taylor's first blackboard equation, equals the Net Operating Income over the Value Price and also equals CAP Rate. Mr. Picquet further clarified that the term "Value" refers to replacement price or cost or market value of the investment and that the "Over All Rate (OAR) is not the Rate of Return (ROR). Referring to Mr. Taylor's second blackboard equation, Mr. Picquet clarified that "Yield" equals total cash flows, appreciation in- come, reversion, depreciation and tax benefits and that the second equation (Yield) is the one used to determine just and reasonable Rate of Return on the owner's property. Mrs. Barlow questioned Mr. Taylor regarding a rule -of -thumb percentage for maintenance and repairs for mobile home parks. Mr. Taylor explained his basis for a figure of $115,000 for reserves and stated he would provide the Board with the breakdown of his computation. Mr. Buttery addressed the subject of management fees. Mr. Taylor replied the management fee range is 4% to 7% and that the figure is in addition to on-site fees for managers, repairs, office expenses, etc. Mr. Wheeler commented on the differences in the operation of a large park as opposed to the operation of a small park. In response to Mr. Buttery's question regarding the method in which one would ascertain the "Yield", Mr. Taylor stated that the investment would have to be terminated to have all the ingredients accounted for to determine the yield. Mrs. Wright asked the date of Mr. Taylor's Wallstreet Journal article concerning percen- tages. Reply - April, 1985. Mrs. Wright requested Mr. Taylor to provide the percentage figures for 1981-1982. Mrs. Benson questioned Mr. Taylor regarding the comparison of San Luis Bay Mobile Estates and Chumash Village. Mr. Wheeler reviewed his past notes concerning fair return standards. (TAPE #9) Mr. Picquet discussed the methods for determining "Rate of Return" listed in the Barr Article - Law Review, Volumn 35, Page 784, 785: 1. Cash Flow Standard 2. Return on Equity Standard 3. Return on Value Standard 4. Percentage Net Operating Income Standard 5. Maintenance of Net Operating Income Standard RECESS: Acting Chairperson Benson declared a recess from 8:15 p.m. to 8:25 p.m. Page 6 Mobile Home Rent Review Board May 23, 1985 Continuation of Gerald Taylor's Testimony: Mr. Olpin referred to studies Mr. Taylor has done concerning this application (Replace- ment Cost Approach and an Income and Market Approach), asking him to give the market value of this property as of April, 1983. Mr. Taylor responded that under rent control, there is a high probability the property would have sold for less than in 1980. Without rent control, the probability would have been a figure between $4,600,000 and $5,000,000. Mr. Olpin asked Mr. Taylor for his interpretation of depreciation in "The Evaluation for Real Estate Decisions" by Dr. Radcliff of the University of Wisconsin. (EXHIBIT #16, Page 110). Basically, Mr. Taylor agrees with the excerpt (Exhibit #16). RENT Sl1RVFY Mr. Buttery referred to Mr. Wheeler's request for a survey of rents being paid in other mobile home parks in 1983. This information will be submitted to Mr. Olpin (at his request) for his perusal before it is submitted to the Board. CLINT LEFLER'S TESTIMONY: Mr. Buttery called Mr. Lefler who clarified the actual purchase price of the property at $3,977,000 plus a real estate commission of $123,000 bringing the total price to $4,100,000. Mr. Lefler feels the property has been operated in a competent manner. (EXHIBIT #17 - Chumash Village Property Taxes) was distributed and explained by Mr. Lefler. Mr. Lefler addressed the issue of management fees explaining the responsibilities of the various levels of management including on-site managers, property managers and principle manager.(which would be Mr. Lefler.) He further discussed Fair Rate of Return, Apprec- iation of Property with and without rent control and Reasonable Cash Flow. Mrs. Barlow questioned Mr. Lefler concerning thecomputation of the 6% management fee figure, and the result of an engineering firm's evaluation of the park with regard to its material affect on the reserve fund. Mr. Lefler responded that the 6% management fee is figured on Gross Income, not counting the income from utilities. He also stated that a Replacement Cost Engineer evaluated the property and determined that the value of the property was in excess of the amount paid for the property. Reserves were not considered at the time of purchase. Mrs. Barlow mentioned the local discussion of rent control at the time of the purchase. Mr. Lefler reflected that although it was discussed, there was no rent control on the books at that time. Mrs. Wright requested a breakdown on the figure of $23,559 for repairs and maintenance (Exhibit #2) for 1981. Mr. Lefler responded that in 1981, repairs and maintenance in- cluded sewer expenses, TV system and pool maintenance. In 1982 these expenses were separate. (TAPE #10) Mr. Wheeler asked about the amount of deferred maintenance at the time of purchase. Mr. Lefler stated there was some deferred maintenance but not a considerable amount. Mr. Picquet clarified that the primary reason for these hearings is because the Board is under obligation to allow a level of rent "necessary to permit a just and reasonable re- turn on the owner's property". He asked Mr. Lefler to define the "just and reasonable Page 7 Mobile Home Rent Review Board May 23, 1985 return" Chumash Village Investments is looking for. Mr. Lefler replied he has not gone through that analysis, however, in today's market- place he would have to have somewhere between 15% and 18% yield in order to entice him to make such an investment. The percentage would change from time to time due to fluctuating interest rates. The pre-tax percentage would be in the neighborhood of 15%. Mr. Lefler further clari- fied tax benefits for the Board stating they are a direct function of the percentage of down payment. He stated pre-tax return is approximately 15% and discussed certi- ficates of deposit (a fixed rate investment), as opposed to real estate investments. Mrs. Benson asked for clarification in terms of expenses, i.e., statements under income for gas utilities and electric utilities as well as operating expenses with, as she understands it, a charge back to the residents which is represented under the income column. Mr. Lefler stated that is correct and the figure is larger than the figure indicated as expenses because it is built in to cover the cost of the utilities, billing, meter read- ing, collection and maintenance of the utility system within the park. Mr. Lefler further responded to a question from Mrs. Benson that there were no vacancies in the park at the time of the application and only one vacancy at the time of purchase. He further explained why he was not concerned with the number of vacancies before that time. Mrs. Benson also asked about CPI increases and whether Chumash Village Investments took a CPI increase in the year preceeding the investment, but not in the year before the application. Mr. Lefler responded that a CPI increase was taken in the year preceeding the investment but not in the year before the application, however, it was taken in November losing three or four months without an increase. Mr. Picquet stated that the Court has ordered the CPI Increase that was allowed under the Ordinance to the park comers, which they would be eligible to take in July of 1983 was not relevant to the determination of appropriate Rates of Return. There was a lengthy discussion on the subject of CPI Increase. Mrs. Wright inquired as to who reads the meters at Chumash Village. Mr. Lefler replied that in 1983 the meters were read by an outside service. Mr. Olpin referred to Exhibit #13 clarifying the $123,000 commission paid to Townsgate Realty was a fee of approximately 3% charged by that company and was paid by the buyer through escrow. He also established that the figure of $7,370 was paid to the LaCumbre Mortgage Company, a firm in which Mr. Lefler has no financial interests. Mr. Olpin requested that Mr. Lefler present the cost study (which a Cost Engineer did at the time of purchase) to the Board at the next meeting. Mr. Lefler will comply with this request. BYRON GRANT'S TESTIMONY: Mr. Olpin called Mr. Grant, a Real Estate Appraiser who stated he worked with his father, Ronald D. Grant, who testified earlier in this hearing, in preparing the Memorandum pre- sented to the Board as Exhibit #12. At Mr. Olpin's request, Mr. Grant clarified Village referring to the Barr Article, Page is a logical interest expense. (TAPE #11) Mro Grant also referred to Pages 741 through is 7% to 8.5%, however, taking into account points regarding Rate of Return on Chumash 786 to 789 which explain why Rate of Return 745 of the Barr Article showing that an OAR depreciation, income tax benefits and possible Page 8 Mobile Home Rent Review Board May 23, 1985 appreciation, the Rate of Return to the original investment can be quite high. Mr. Grant also established that OAR stands for Overall Annual Rate. Mr. Grant feels that Chumash Village expenses were in line in comparison to the gross income with the mobile home industry in 1982 at 43.6%. Mr. Buttery questioned Mr. Grant as to his qualifications as an appraiser. (EXHIBIT #18 - Qualifications of F. Byron Grant, B. SC.) was distributed listing Mr. Grant's qualifications. ACTING CHAIRPERSON GAYE BENSON'S COMMENTS: Acting Chairperson Benson stated that a number of people have been in attendance through both these extended hearings, many of whom have given testimony regarding this appli- cation. The Board is well aware that they are dealing with some very critical issues for the applicant and others who will be applicants before the Board in the future. The Board is also dealing with very critical issues for the tenants. The responsibility does not rest lightly and the Board appreciates the cooperation and assistance of the participants as well as the audience. RECONVENTION DATE: The Board will reconvene on Monday, June 3, 1985 at 3:00 p.m. for the purpose of hear- ing summary arguments and beginning deliberations. Respectfully submitted, 4-111 Lois Barton, Recording Secretary Mobile Home Rent Review Board