REPORT TO MAYOR AND COUNCIL PROPOSED REVISIONS TO MOBILHOME RENT STABILIZATION ORDINANCE

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1 AGENDA ITEM NO. 5.a REPORT TO MAYOR AND COUNCIL TO THE HONORABLE MAYOR AND COUNCIL: DATE: SUBJECT: PROPOSED REVISIONS TO MOBILHOME RENT STABILIZATION ORDINANCE Report in Brief The purpose of this report is to recommend revisions to the City of Concord s Mobilehome Rent Stabilization Ordinance clarifying language in the Ordinance determining how Base Year Net Operating Income is calculated for purposes of a Special Rent Increase request. Additionally, staff recommends revisions to the Ordinance underscoring that Special Rent Increases may only be assessed on a prospective basis. Background a. Calculation of Base Year Net Operating Income Under the City s Mobilehome Rent Stabilization Ordinance (Concord Municipal Code Sections through ), park owners are entitled to assess residents a yearly space rent increase, referred to as a General Annual Adjustment, equal to the lesser of 80 percent of the increase in the Bay Area Consumer Price Index (CPI) for the 12 month period ending 90 days before the Notice of Rent Increase is given, or 5 percent. The ordinance encompasses a Maintenance of Net Operating Income formula, which assumes that with General Annual Adjustments, park owners will continue to receive the same Net Operating Income ( NOI ) that they received when the Mobilehome Rent Stabilization Ordinance was first adopted in 1993, which is referred to in the Ordinance as the Base Year. In the initial version of the Ordinance, the allowable General Annual Adjustment was 60 percent of the relevant CPI increase; however, in 2008 that figure was increased to 80 percent on a going forward basis. In addition to General Annual Adjustments, park owners are allowed to assess a Special Rent Increase, if that increase meets the criteria set forth in the Ordinance. In late fall 2011, the owners of the Dalis Gardens Mobilehome Park filed a notice of a proposed Special Rent Increase in the amount of $61.54 per space. Reduced to essentials, Dalis Gardens owner, Santiago Homes, asserted that notwithstanding the General Annual Adjustments it has assessed over the years, it was receiving less in Net Operating Income than it received in 1993, due to increases in allowable expenses. The park owner asserted that the Special Rent Increase that it was proposing was necessary to remedy this shortfall. In February 2012, a Special Rent Increase hearing was conducted to determine whether Dalis Gardens proposed Special Rent Increase should be allowed. Presiding over the hearing was the Honorable

2 Page 2 James Trembath, a retired Contra Costa County Superior Court Judge who had been mutually selected by the park owners and the residents from a list of potential hearing officers assembled by City staff. As one component of the Special Rent Increase determination, Judge Trembath was required to evaluate the NOI to which Dalis Gardens is entitled. This process required him to calculate the adjustments to Base Year NOI permitted as a result of General Annual Adjustments assessed in the period since the Ordinance was first adopted. During this aspect of the proceedings, questions were raised as to whether, in determining allowable NOI, the 2008 increase in allowable General Annual Adjustments should be applied retroactively, extending back to the adoption of the Mobilehome Rent Stabilization Ordinance in 1993, or only for the period from 2008 forward. Although Judge Trembath ultimately ruled against retroactive application of the 2008 General Annual Adjustment increase, staff believes that the ordinance should be revised to clarify and confirm that in calculating adjustments to Base Year NOI, the increase in General Annual Adjustments adopted in 2008 should be incorporated only from 2008 forward. b. Clarifying When Special Rent Increases Take Effect As part of the 2008 revisions to the Ordinance, Council approved a new provision, Section , making clear that Special Rent Increases should only be permitted on a going forward basis, and not applied retroactively. With respect to the Special Rent Increase sought by the Dalis Gardens owners, the hearing concluded on February 21, 2012; however, Judge Trembath did not issue his Final Order until October 11, In his order, Judge Trembath allowed an increase of $56.66 ($4.88 less than the sum sought by Dalis Gardens). Despite the language of the Ordinance, however, Judge Trembath made that order retroactive to February 21, 2012, when the hearing ended. Because the Special Rent Increase was retroactively imposed, the residents are now required to pay a lump sum of back rent of at least $400, in addition to the monthly rent increase they must pay on a going forward basis. In order to avoid future misapplications of the Ordinance, staff recommends tightening up the language of Section so that there is absolutely no room for a hearing officer to conclude that Special Rent Increases can be applied other than on a going forward basis. Discussion In 2008, Section of the Concord Municipal Code was amended to increase allowable General Annual Adjustments from 60 to 80 percent of the relevant CPI. That section (re-numbered as Section 58-94) now reads as follows: Sec General adjustment of rent authorized; amount.... (b) Once every 12 months, the park owner shall be permitted to increase the rent on mobile home spaces covered by this division 80 percent of the percentage increase of the CPI for the 12-month period ending 90 days before such notice of rent increase is given; provided, however, that the annual automatic increase shall be no more than five percent of the base rent charged prior to the increase. 1 The delay was due to an extended post-hearing briefing schedule agreed to by the parties, followed by a considerable amount of time taken by Judge Trembath before he issued his Final Order.

3 Page 3 Corresponding changes were made to Section (a) of the Ordinance. The original version of that Section read: Sec Calculation of Fair and Reasonable Return for Special Rent Increase. (a) It shall be presumed that the base year net operating income adjusted by 60 percent of the percentage increase or decrease or decrease in the Consumer Price Index since the base year yields a fair return. The Board shall make a determination whether the park owner will receive a fair return under this standard. 2 In tandem with the language increasing the allowable General Annual Adjustments from 60 to 80 percent of the relevant CPI increase, Council amended Section as follows: Sec Calculation of fair and reasonable return for special rent increase. 3 (a) It shall be presumed that the base year net operating income adjusted by general annual adjustments of rent since the base year yields a fair return. The Hearing Officer shall make a determination whether the park owner will receive a fair return under this standard. The intention of Staff and the Council, when the 2008 revisions were made, was that for purposes of determining adjustments to Base Year Net operating income, this language captured the two levels of permitted General Annual Adjustment amounts: 60 percent from 1993 to 2008, and 80 percent thereafter. Given the dispute over the meaning of this provision evidenced at the Dalis Gardens Special Rent Increase Hearing, Staff recommends clarifying this provision as follows: Sec Calculation of fair and reasonable return for special rent increase (a) It shall be presumed that the base year net operating income annually adjusted by (1) sixty percent of the increase in the consumer price index between the Base Year and December 31, 2008, and (2) eighty percent of the annual increase in the consumer price index between January 1, 2009 and the present yields a fair return. The Hearing Officer shall make a determination whether the park owner will receive a fair return under this standard. With respect to the related issue of when a Special Rent Increase takes effect, Concord Municipal Code Section was drafted to only permit Special Rent Increases on a prospective basis. CMC Section provides: Sec Same--Effective date of rent increases. In the event that a petition [seeking a Special Rent Increase Hearing] is properly and timely filed by mobile home owners pursuant to section 58-98, that portion of a requested rental increase (and only that portion) which exceeds the 80 percent increase in CPI limitation described in this division or five percent, whichever is less, shall not take effect unless and 2 In the original version of the Ordinance, Special Rent Increase determinations were made by the Mobilehome Rent Review Board. In the 2008 amendment to the Ordinance, the Board was eliminated, and replaced by a third party hearing officer. 3 As part of the 2008 revisions, Section was renumbered to Section

4 Page 4 until such time as such increase or portion thereof is allowed after hearing pursuant to the provisions of this division. (emphasis added) As noted above, in the Dalis Gardens matter, Hearing Officer James Trembath did not issue his Final Order until October 11, 2012, yet he retroactively applied that increase to commence on February 21, 2012, the final date of the hearing. Staff believes that this aspect of Judge Trembath s ruling was erroneous, since the increase wasn t allowed (approved) until the date his Final Award was issued, 8 months after the hearing. To prevent future misapplications of this section, staff recommends the following revision to Section : Fiscal Impact Sec Same--Effective date of rent increases. In the event that a petition is properly and timely filed by mobile home owners pursuant to section 58-98, that portion of a requested rental increase (and only that portion) which exceeds the 80 percent increase in CPI limitation described in this division or five percent, whichever is less, shall not be applied retroactively, and shall not take effect unless and until such time as such increase or portion thereof is allowed after hearing and following issuance of the Hearing Officer s final order pursuant to the provisions of this division, unless otherwise required by law. 4 The proposed ordinance revisions will not have any fiscal impact to the City. Public Contact The agenda has been posted as required by law. A copy of the agenda and this report has also been provided to the managers/owners all of the City s mobilehome parks, as well as the resident representatives at each of those parks. Alternative Courses of Action 1. Adopt suggested revisions to Concord s Mobilehome Rent Stabilization Ordinance. 2. Adopt alternative revisions to Concord s Mobilehome Rent Stabilization Ordinance. 3. Retain present version of Concord s Mobilehome Rent Stabilization Ordinance. 4 Under certain circumstances California courts have allowed retroactive application of special rent increases. Such rulings have largely been limited to cases in which the involved agency has acted unreasonably, such as by improperly denying a special rent increase at the outset, or otherwise engaging in violations of the substantive due process rights of a mobilehome park owner. (Kavanau v. Santa Monica Rent Control Bd., (1997) 16 Cal 4 th 1761; Galland v. City of Clovis (2001) 24 Cal. 4 th 1003.) For this reason, staff believes that it is prudent to include the unless otherwise required by law language in the proposed ordinance revision.

5 Page 5 Recommendation for Action Staff recommends that the City Council introduce Ordinance No. 12-6, revising Concord Municipal Code Chapter 58, Article II, Sections and as described in this report, by reading of the title only and waiving further readings. Prepared by: Mark S. Coon City Attorney Mark.Coon@cityofconcord.org Valerie J. Barone Interim City Manager Valerie.Barone@cityofconcord.org Attachment A: Ordinance No Proposed Revisions to Concord Municipal Code Sections and

6 Attachment A ORDINANCE NO AN ORDINANCE AMENDING CONCORD MUNICIPAL CODE CHAPTER 58, ARTICLE II (MOBILE HOME PARKS), DIVISION 3 (RENT STABILIZATION), SECTIONS (EFFECTIVE DATE OF RENT INCREASES) AND (CALCULATION OF FAIR AND REASONABLE RETURN FOR RENT INCREASE) THE CITY COUNCIL OF THE CITY OF CONCORD DOES ORDAIN AS FOLLOWS: Section 1. Concord Municipal Code Chapter 58, Article II, Division 3, Sections and are hereby amended to read as follows: ARTICLE II. MOBILE HOME PARKS Sec Same--Effective date of rent increases. In the event that a petition is properly and timely filed by mobile home owners pursuant to section 58-98, that portion of a requested rental increase (and only that portion) which exceeds the 80 percent increase in CPI limitation described in this division or five percent, whichever is less, shall not take effect unless and until such time as such increase or portion thereof is allowed after hearing and following issuance of the Hearing Officer s Final Order pursuant to the provisions of this division, unless otherwise required by law. Sec Calculation of fair and reasonable return for special rent increase. (a) It shall be presumed that the base year net operating income adjusted by (1) sixty percent of the annual increase in the Consumer Price Index between the Base Year and December 31, 2008, and (2) eighty percent of the annual increase in the consumer price index between January 1, 2009 and the present yields a fair return. The Hearing Officer shall make a determination whether the park owner will receive a fair return under this standard. 22 (b) Base year Consumer Price Index shall be the CPI level in the sixth month of the base year. The applicable percentage increase or decrease in the Consumer Price Index shall be determined by comparing the base year CPI with the CPI level on the filing date of the current owner petition. 26 (c) In evaluating whether or not the park owners are receiving a fair return on their 27 investment, the Hearing Officer shall consider other relevant factors without limitation. 28 // Ord. No

7 Section 2. This Ordinance No shall become effective thirty (30) days following its passage and adoption. In the event a summary of said Ordinance is published in lieu of the entire Ordinance, a certified copy of the full text of this Ordinance shall be posted in the office of the City Clerk at least five (5) days prior to its adoption and within fifteen (15) days after its adoption, including the vote of the Councilmembers. Additionally, a summary prepared by the City Attorney s Office shall be published once at least five (5) days prior to the date of adoption of this Ordinance and once within fifteen (15) days after its passage and adoption, including the vote of the Councilmembers, in the Contra Costa Times, a newspaper of general circulation in the City of Concord ATTEST: Mary Rae Lehman, CMC City Clerk (Seal) Mayor Ordinance No was duly and regularly introduced at a regular joint meeting of the City Council held on, and was thereafter duly and regularly passed and adopted at a regular joint meeting of the City Council and Redevelopment Agency held on January the following vote: AYES: Councilmembers NOES: Councilmembers ABSTAIN: Councilmembers ABSENT: Councilmembers, 2013, by I HEREBY CERTIFY that the foregoing is a true and correct copy of an ordinance duly and regularly introduced, passed, and adopted by the City Council of the City of Concord, California Mary Rae Lehman City Clerk 28 Ord. No