Resolution Number 87-2-17-3RESOLUTION NO. 87-2-17-3
191
FINDINGS RE CAPISTRANO TERRACE MOBILE HOME PARK RENT PETITION
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN
JUAN CAPISTRANO, CALIFORNIA, RENDERING FINDINGS AND A
DETERMINATION REGARDING CAPISTRANO TERRACE MOBILE
HOME PARK RENT REVIEW PETITION
WHEREAS, Capistrano Terrace Mobile Home Park residents filed a timely rent
review petition on August 25, 1986, with the City of San Juan Capistrano pursuant to the
rent review provisions of the Municipal Code (Section 2-2.902 et. seq); and,
WHEREAS, said petition protests rent increases imposed upon certain residents
of the park in the amount of $50.00 to be effective October 1, 1986, and January 1, 1987;
and,
WHEREAS, said petition was certified as proper as to form and in accordance
with Municipal Code Section 2-2.902 et. seq; and,
WHEREAS, on October 16, 1986, a City -appointed Hearing Officer conducted a
hearing on the rent petition; and,
WHEREAS, the Hearing Officer rendered an advisory recommendation to the
City Council dated November 26, 1986; and,
WHEREAS, on December 2 and 16, 1986, the City's Mobile Home Review
Committee reviewed the Hearing Officer findings and backup materials and rendered a
recommendation to the City Council; and,
WHEREAS, the City Council on January 20, 1987, considered the rent petition
pursuant to the rent review procedure set forth in Municipal Code Section 2-2.905(e).
NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of
San Juan Capistrano, hereby resolves as follows:
SECTION I. Evidentiary Record.
The City Council, in review of the rent petition, had before it the following
documents which comprise the administrative record:
Exhibit A:
Municipal Code Section 2-2.902 et. seq.
Exhibit B:
Proposed rent increase notice.
Exhibit C:
Residents' rent petition.
Exhibit D:
Residents' response to questionnaire.
Exhibit E:
Owner's response to questionnaire.
Exhibit F:
Residents' submittal to Hearing Officer.
Exhibit G:
Owner's submittal to Hearing Officer.
Exhibit H:
Court Reporter's transcript of Hearing Officer proceedings.
Exhibit I:
Hearing Officer's written findings.
Exhibit J:
Review Committee's minutes of meetings of December 2 and
16, 1986.
In addition, Council received a staff report dated 3anuary 20, 1987.
-1-
19
The City Council has thoroughly reviewed all of these materials in reaching a
final determination.
SECTION II. Findings of Fact.
1. Richard Hall, owner of Capistrano Terrace Mobile Home Park,
purchased this park on December 31, 1985.
2. Basic terms of the purchase of the park were:
Purchase price of $3,838,000.
Down payment of $575,700.
Note and First Deed of Trust for $3,262,300.
The note is for a 30 -year term with an initial interest
rate of 11.5%. The interest rate is variable, subject
to quarterly fluctuation per index formula. Total
principal and interest monthly payments are $32,324
per month.
3. The $575,700.00 down payment is 15% of purchase price down
payment.
4. Factoring the interest of 11.5% with the total indebtedness of the
note, the park owner paid approximately $1,000 per month toward
principal on the note during the first year of ownership.
5. After approximately seven (7) months of ownership, the owner
sent notices of rent increases to most of the residents of the park
(Exhibit B).
6. The rent increases were $50.00 for each space and represented
approximately a 20% increase for each space. There are a total
of 150 spaces in the park, 139 of which were subjected to the rent
increase.
7. Park owner has presented an income/expense statement showing a
monthly negative cash flow of $7,120.00.
8. The rent increase, if granted, would generate' -6,950.00 per month
in rental income (139 spaces x $50.00 per month).
9. Under City rules (Resolution No. 84-12-4-4, 2,g.), the park owner
has the burden of proof to show that the proposed rent increases
are fair and reasonable. The park owner stipulated to this burden
of proof during the Hearing Officer proceedings.
10. During the Hearing Officer proceeding, the park owner stipulated
that any improvement costs which park owner may have incurred
during the first year of ownership were not a basis for the
increase, or any part thereof.
11. Current average rents at the park are approximately $260.00 per
month per space.
-2-
193
12. The park owner stipulated that since his purchase of the park, 11
spaces changed hands permitting the owner to escalate rent from
an average of $260.00 per month per space to $380.00 per month
per space.
13. The Capistrano Terrace income/expense statement, referred to as
Exhibit B in the owner's submittal to the Hearing Officer (see
Exhibit G), was presented as owner's representation of income and
expenses for the park. Residents objected to the propriety of two
listed expenses, that is, $1,900 for "property management" and a
portion of the "miscellaneous management fee expense." The
residents also objected that the income/expense statement shows
$32,324 per month mortgage expense when in fact this figure
includes payment on principal which fairly cannot be treated as a
loss.
14. The $50.00 rent increase notice constitutes a second rent increase
within a 12 -month period for some of the residents. A second rent
increase within a 12 -month period is not permitted under
Municipal Code Section 2-2.902(dx2) without prior City Council
approval.
15. The amount of minimum rent increase permitted under the
modified CPI formula pursuant to Municipal Code Section 2-
2.902(d), known as the maximum allowable increase, is in the
amount of 2.2%. Both parties so stipulated.
16. The park owner represented to the City Council that his legal
counsel reviewed City's rent control ordinance prior to park
purchase.
SECTION III. Analysis.
1. The City Council is mindful of the following principles in carrying
out its role of final arbiter of this rent increase petition.
(a) The purpose of the City's rent review ordinance is to
"... protect the residents of mobile home parks from
unreasonable space rent increases, recognizing the need
of mobile home park owners to receive a fair, just and
reasonable return" (Municipal Code Section 2-2.901,c.).
(b) The standard to be applied in review of this rent
increase petition is the fair and reasonable standard set
forth in Municipal Code Section 2-2.905(gx2). More
specifically, this provision provides that the Council is
to determine whether the rent increase is fair and
reasonable by applying a set of non-exclusive criteria.
The park owner incorrectly argues that the standard to
govern these proceedings is a "return on investment"
standard. Municipal Code Section 2-2.905(g)(2) and (3)
make clear that the Municipal Code does not require the
application of a specific formula or method to
determine what is fair and reasonable. Rather, the
Council is to consider all relevant circumstances,
factors, and facts in making a judgment as to what is
fair and reasonable.
-3-
194
(c) Municipal Code Section 2-2.902(d) permits park owners
to annually increase rent to at least an amount as
determined by the modified CPI formula. Any increase
over the amount permitted by the formula can be
protested by park residents providing they file a petition
signed by a majority of the park residents. The
minimum permitted under the formula for the last 12
months has been set at 2.2%. The City Council now ^
considers whether the proposed $50.00 increase, which is
nine (9) times greater than the permitted 2.2%, is fair
and reasonable in light of the non-exclusive criteria set
forth in the code.
(d) The park owner has the burden of proof to establish that
his proposed rent increase of 20% is fair and reasonable.
2. The park owner has made three arguments in support of the 20%
rent increases.
(a) A number of physical improvements were made to the
park during the first year of ownership.
(b) The cost of spaces in this park are below market
compared to different areas such as Santa Ana.
(c) A substantial rent increase is needed to eliminate the
monthly negative cash flow.
The first argument concerning physical improvements is not
persuasive in that the park owner has already stipulated that
such costs were not a basis for any part of the rent
increases. The Hearing Officer received testimony on these
costs only for the limited purpose of rebutting potential
arguments from the residents that service levels had
diminished.
The argument regarding space rents in the Santa Ana area is
equally non -persuasive for the obvious reason that rent levels
within the City of San Juan Capistrano mobile home parks are
the most relevant in assessing whether a particular rent is fair
and reasonable. The Council finds that San Juan Capistrano is
uniquely different from the Santa Ana area and therefore
space rents and the conditions of parks in San Juan Capistrano
should not be compared to those in Santa Ana.
3. The negative cash flow argument.
The park owner has mainly stressed that he is entitled to
eliminate his negative cash flow and even make a profit after a
very short period of ownership. He represents a monthly negative
cash flow of $7,120.00. The park owner proposed a huge 20% rent
increase to accomplish this purpose.
The Council finds that the mere existence of a negative cash flow,
under the circumstances in this case, is not adequate grounds to
assess an extraordinary increase of 20% on park residents. The
following factors are noted in support of the Council's conclusion
-4-
that this increase is in conflict with the goal of protecting
residents from unfair and unreasonable rent increases:
(a) The park owner has owned the park for only a very short
period of time. In less than one year, owner is
attempting to reach a break-even position by assessing
an extremely large increase of 20%. To permit this is to
shift the negative financial burdens of the owner's sales
transaction and the first-year operational problems of
the park to the park tenants.
(b) The owner has intentionally structured the terms of the
purchase of the park so as to constitute a "leveraged"
transaction, that is, a 15% down payment; thus, the debt
service is higher thereby exacerbating the level of
negative cash flow.
(c) The owner was aware of the terms of the City's rent
control ordinance prior to the purchase of the park.
(d) The Council agrees with the residents' argument that
the $7,120.00 is not a truly accurate reflection of the
actual negative cash loss in that the $1,900.00 in alleged
management expenses is really income paid directly into
the pocket of the owner. Therefore, the ostensible
negative cash flow should be discounted by this income
to the owner.
(e) The weight of the evidence offered suggests that the
residents of this park pay substantially more for rent on
a square footage basis than other parks in San Juan
Capistrano, yet enjoy fewer amenities than are offered
at other parks.
(f) During the first year of ownership, the park owner
experienced a turnover factor of 11 spaces out of a total
of 150 spaces, or in other words, a 7% turnover rate.
This 7% turnover rate enabled the park owner to
increase rents on the 11 spaces from an average rental
fee of $260.00 to $380.00 per month. The City's
ordinance does not restrict rent increases on space
turnovers. It can be reasonably expected that the park
owner will continue to experience a turnover ratio in
this same general range from year to year.
(g) As the residents point out, the monthly mortgage
expense listed in the income/expense statement includes
principal and interest payment. Payments on principal
(about $1,000 per month) are substantial for the first
year in relation to projected monthly negative cash
flow. The real negative monthly loss should also be
discounted to reflect these monthly principal payments.
In light of the above factors, it would be patently unfair to allow the
park owner to assess a 20% increase in rents after only one year of
ow ershi Thhe caner. has clearlyfaded to Bust i his burden of proof
to s ow iRiat this�iuge increase is air and reasonable.
-5-
195
196 SECTION IV. Conclusions.
The Council has considered the park owner's need for a return on property. In
looking at this factor, the Council has considered what it believes to be the important
financial aspects of the park sales transaction. Council has considered the fact that the
owner has a debt service and a negative cash flow problem.
The Council does not believe that there is any obligation to relieve this
sophisticated investor from a negative cash flow position after only one year of
ownership when it is considered that (a) the owner structured a leveraged transaction and
(b) did so with the knowledge that the park was subject to rent review under the City's
ordinance.
Annually, there will be a certain amount of turnover in spaces which will
enable the park owner to raise rents to market level. The first year of ownership yielded
a turnover ratio of 7%, resulting in new revenue of about $1,300 per month. The Council
finds that it is reasonable to assume that a turnover ratio will continue from year to year
in the same general range. Given this assumption, increased income from new lessees
can be reasonable projected at approximately $1,000.00 per month per year.
Assuming that the owner received no rent increases at all for spaces not
involved in turnover, the owner would be in a break-even position just through space
turnover space rent increases within about three to five years.
Taking into account payments toward principal, space turnover rent increases,
and automatic increases guaranteed by the modified CPI formula of the Municipal Code,
it is reasonable to assume that the owner could even be in a profit position within the
same three- to five-year period.
The Council agrees with the Hearing Officer that there is no evidence to
justify the disproportionate burden of a second rent hike on those residents who received
a second increase within a 12 -month period.
The Council recognizes that the Hearing Officer's approach involved a "Return
on Investment" methodology in recommending a rent increase based on current prime
rate times down payment. This was within the Hearing Officer's discretion, but an
approach not accepted by the Council. The Municipal Code does not mandate any
particular methodology.
The Council also notes that the rent control ordinance was intentionally
structured to permit space turnover rent increases without limitation so as to allow the
owner to increase rental income over a reasonable period of time. This approach
provides one equitable method by which owners can obtain a fair return on property.
The Council finds that considering all of these factors, including debt service,
a total of three percent (3%) increase per space is fair and reasonable. ^
With this increase, the second year of ownership will be brighter with respect
to negative cash flow in that:
(a) the increase will generate an additional $1,076.00 per
month in rental income at some point during the second
year;
(b) the owner should be able, by the end of the second year,
to realize significant additional monthly rental income
from space turnovers; and,
t�
(c) payments toward principal should be at least $1,000.00 197
per month.
Accordingly, the Council concludes that:
1. The proposed rate increase of $50.00 per month is hereby modified
so as to constitute a 3% increase of each resident's existing
monthly rent. The 3% increase shall take effect on the effective
date called for in the notice of rent increase previously issued by
the owner.
2. With respect to those tenants who have received a second notice
of rent increase within a 12 -month period, the owner will be
awarded a 3% increase in monthly rent for these residents;
however, the rent increase shall not take effect until the 12 -
month anniversary date is first reached.
3. The rent increase for space 25 is reversed and the Hearing
Officer's findings are hereby incorporated by reference in support
thereof.
PASSED, APPROVED, AND ADOPTED this
of February ,1987.
ATTEST:
17th
C �
KENNETH E. FRIE S, MAYOR
CITY CLER -
-7-
day
198
STATE OF CALIFORNIA )
COUNTY OF ORANGE ) ss
CITY OF SAN JUAN CAPISTRANO )
I, MARY ANN HANOVER, City Clerk of the City of San Juan Capistrano,
California, DO HEREBY CERTIFY that the foregoing is a true and correct copy of
Resolution No. 87-2-17-3 adopted by the City Council of the City of San Juan
Capistrano, California, at a regular meeting thereof held on the 17th day -.
of February , 1987, by the following vote:
AYES: Councilmen Schwartze, Buchheim
and Mayor Friess
NOES: Councilmen Bland and Hausdorfer
ABSENT: None
(SEAL)
MA Y AN OVER, IT CLERK
10