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HomeMy WebLinkAbout12-18-1986 MHRRB Minutes�I@IIIIIIpp;jI�II�h��Vkilgl�'�F TAPE #1 city of sAn lois oBispo 990 Palm Street/Post Office Box 8100 • San Luis Obispo, CA 93403-8100 M I N U T E S MOBILEHOME RENT REVIEW BOARD DECEMBER 18, 1986 I. WELCOME/INTRODUCTIONS --------------------- Chairperson Pat Barlow declared the regular- meeting o+ the :obi 1 ehome Rent Review Board code to order at 2:00 p.m. with the +ollowing in attendance: BOARDMEMBERS: Barlow, Grden, Label, Wheeler, Wright STAFF: Henderson, Kemper II. REVIEW OF PACKET ---------------- Mr. Henderson reviewed the packet presented to the Board, which included: 1. minutes and agenda; 2. memo from Steve Henderson to the Board, re: Adele Raymond document concerning CPI; 3. letter from Steve Henderson to Dennis Law, re: Findings on Silver City Application. III. APPROVAL _Or' _THE _ MINUTES_ OF DECEMBER_ 41_19136 -------- -- ---------- -- -- -- -- - The minutes of the meeting of December 4th were approved with the request that one line be added under Tape #4, Page " concerning the availability of leases. IV. PRESENTATION: Fair_ and Reasonable Rate _of_Return - Mr. Ken Barr --------------- Mr. Ken Barr, author of the Rutger's Law Review article concerning rent stabilization and practices and methods to determine fair and reasonable rate of return, 4ave a _-:,-hour presentation on the above topics. Mr. Barr explained that his tali; concerns "Fair Returns." He broke his talk: into three main parts: 1. How Real Estate Investment Works; 2. History of Court Decisions Dealing with the Fair Return issue; -y. Critiques o+ the Fair- Return formulas - Strengths and Weaknesses. MHRRB Minutes - 1/18/86 page PRENSENTATION: Fair and Reasonable Hate of Return - Mr. ------------------------------------------------------- (continued) The following outline notes the general points of the presentation: 1. How Real Estate Investment Works Ken Barr A. real estate investments work: differently than other investments B. comparing real estate with other investments is impossible - they do not compare 1. appreciation i. tai: laws '. leveraging factors 4. aggravation/headache of managing/owning real estate J. liquidity 6. risk_ factors C. different types of rate of return 1. before/after debt service rate of return . before/after tam, rate of return �. appreciation/non-appreciation rate of return 4. rate of return on real estate varies over the life of the investment D. real estate as an anti-inflation investment 1. tax benefits E. real estate industry methodology -Internal Rate of Return 1. accounts for time factor �. present value vs. future worth . History of Courts' Dealing with Fair Return Issue ---- - -- ---- - ------ ---- ---- ------ ----- a. constitutional issue-' b. fair return is what judges say it is - judicial doctrine c. social doctrine d. court opinions are internally inconsistent, vague, and often reversed e. gap between how issues are framed before the court (the legal argument presented) and what's actually happening in the administration on the law 1. courts do not want to legislate but do want to uphold the constitution A. 1920's - Fair Return on Value = 10% of value of property 1. return on value is circular what i s "value" of property'' 3. what is "fair return"" 1' MHRRB Minutes - 1/18/86 Page 3 w History of Courts' Dealing ith Fair Return Issue --- -- ------ ------ ---- ---- ------ ----- (continued) A. 19'20's - Fair Return on Value = 107. of value of property 4. value is = to assessed value B. 1940's - WWII > Rent Control 1. national rent control law 2. 1949 -maintain fair net operating income -what is n.o.i. C. M.N.O.I. w/out inflation adjustment (cost increase only) D. 194.' - M. N. O. I. challenged in court 1. fair return on investment standard was unworkable - diff. owners receiving diff. % R. of R. on investment E. return on value standard was inappropriate in a rent regulation context because values were high, reflecting the shortage during the war F_ WWII - 60% tenants in U.S. -- today, 66 homeowners G. % N.O.I. formula adopted under federal rent controls H_ post WWII - manY states ?< cities adopt rent control I. rent control unlawful unless justified by emergency J_ 1970's - rent control re-emerged in the U.S. i. first peacetime rent controls in U.S. ?. owners had right to cover operating expenses and mortgage payments with no consideration for investment . full CFI increases were the standard K. Rent Control regulations became stricter- - 50! CRI 1. facial challenges . regulations not confiscatory even if prop. value decreases 3. return on value is circular type approach LR ordinance limited rent increases to 2.5%/yr. 1. steady decline of N.O.i. is confiscatory . % N.O.I. standard ios o.k. (gross income ratio) M. Return on Invest. standard -court didn't approve/disappr. 1. investment based standards have no theoretical problems but are complex to administer as compared to income -based standards ?. fair return standards are a type of return on investment standard which tied the rate of return to th mortgage interest rate court said the fair return standards cannot discriminate according to finance arrangements N. Return on Value standard is circular 1. could work: backwards to determine rent levels - first determine desired rent, then calculate "value" needed to obtain that rent level *California Rent Control* O. Berkely adopted 1st. Calif. peacetime R.C. law in 1972' 1. no housing emergency :-> ordinance is unconstitutional �. no termination date ordinance is unconstitutional 3. did not need emergency to adopt r. c. regulations as long as they have a rational basis MHRRB Minutes - 12/18/86 1 Page 4 Hist_o_r_y of Courts Dealing with Fal -r- Return issue (continued) P. Owners have a right to just and reasonbie return on their property; and, an adjustment mechanism is constitutionaly necessary to provide for a change in circumstance Q. R.C. re-emerged after Prop. 12 - 2 models 1. Berkel y- s new ord owners had right to fair return on investment using weighted factor=, but no definition of what fair return is 2. City of Carson - fair « reasonable rate of return with factors not weighted R. Other cities copied Berk_`ly & Carson ord.-very vague 1, vague are difficult to administer 2. these standards are unconstitutionally vague S. Baker v. City of Santa Monica 1. court said owners had right to positive cash flow - this favored new purchasers 2. courts said owners had right to cover- negative cash flow - this penalized long-term owners 3. court ruled return on value standard was constitution- ally onstitution- ally required 4. court said that M.N.O.I. formula gave owners a fair return on their investment T. Gregory v. City of San Juan Capistrano 1. court said owners are entitled to a return on value 2. appreciation is a part of "value" U. Return on Value standards are not constitutionally required and are circular- in the context of rent regulation 1. N.Q.I. standards were upheld a. Oceanside M.H.P. v. City of Oceanside b. Palos Verdes Mobile Estates v. City of Los Angeles 2. Cotati case a. return on investment standard must adjust to consider the effect inflation 3. rent regulations may not freeze N.Q.I. V. Agencies are not required to use a specific formula in regulating rents, so long as the result is constitutionally acceptable W. Rent control laws that indefinitely freeze the $ amount of N.O.I. are confiscatory and thus unconstitutional X. a reduction in value is not confiscatory, but inevitable with regulation The Board took: a break: from 0:00 - 0:30 IV MHRRB Minutes - 12/18/86 Rage 5 D I FFMNI TYF'FS OT FORi ULOS * Aperopriate Fair- _:e_urn Formula Criteria (Ken Barr) - - - - ---- - --- ------- -------- a. objective b. cannot be manipulated C. easy to administer d. not "circular" e. encourages maintenance f. does not discriminate on the basis of finance or purchanse arrangements i. Return on investment = oper. expenses + mort. + '/.R.R. on $ ------ -- ---------- A. this is circular in a regulatory context - investor regulates the rents B. this formula discriminates against long-term owners C. many diff. R.R.'s on investments - could lead to adjusting rent=_. (+,-) rather than stabilizing them D. agencies have to come up with a % R.R. that is "fair" . Return on Value A. circular - value=income derived from owning the property B. value should determine rent, but rent determines value C. subjective standard - what is "value" D. still have to determine % rate of return that is fair 0. Maintenance of .Jet Oiler-at=ng Inco�T�e ----------- -- --- - ------ A. does not look: at investment B. does not look_ at rate of return C. looks at the return > N.D.I. (+ indexing?) D. this is a base year formula so it perpetuates inequities Can owner is stuck_ with his base year N.O.I.; if his base was low, he is penalized -- if his base was high, he is rewarded E. the inherent inequity in the M. N. O. I . formula can be addressed by establishing a minimun % base year N.D.!. to Cross Income ratio; F. growth in :: the N.D.!. should be tied to some type of indexing such as CPI, and should parallel the % of CPI used for automatic adjustments Mr. Barr summarized his Presentation and opened -up the discussion to questions from the Board. The Board responded with questions concerning the following topics: market -value approach; which CPI to use; M.N.O.I. formula disadvantages; how rent control affects new investments/development; and trends in the "safe harbor" Provision now used in ordinances. Mr. Barr closed i i s discussion by advising the our city look at making our rent stabilization ordinance as objective as possible, while also considering using a hearing officer, rather than the Board, to deal with the administration of the ordinance. V. ADJOURN: 4:55 p.m.