Legal Column, July 2004
By Rosario Perry, Esq.

SM City School Supporters Learn How To Intimidate City Council Members To Pay Out Money To Their Causes

The city has been beset with many problems. Primarily from those private interest groups that wish to impose a financial clamp on the city’s budget. Take for instance the schools. A high profile of SMRR members have joined to blackmail the city into promising that 6 million dollars of our city taxpayers income, will be gifted to the local schools. If the city had not agreed to that, the school supporters had threatened to file an initiative for the November, 2004 election. This initiative would have mandated that the City council designate certain funds each year from its budget to the schools. Now one may ask, inquisitive minds might ask, what is the difference between making the school supporters deliver on their threat to pass an initiative than just give into their demands. Well, it seems that the City Council is prone to give this money anyway, and they do not want a SMRR split in this upcoming November City Council election. However, it is clear that any initiative on how the City would budget its money is not binding on future city council members, and it is also clear that any agreement entered into between this City Council and the schools is not binding on future council members either. However, the entire spectacle of SMRR backed school members siphoning off hard-paid tax dollars for school projects which will not reach the public’s eye for approval, is too crooked for words. The College Board is now proposing a 178 million bond measure for the November, 2004 ballot. Where will all these millions of hard earned tax dollars be going? Where is the accountability? The last school bond measure to be placed on the ballot, just did pass. There has never been any discussion or explanation as to why this money is needed, and why more and more money is needed.

ACTION WINS ANOTHER BIG LAWSUIT:
TENANT HARASSMENT ORDINANCE UNCONSTITUTIONAL!

Well, it has been a short while, and ACTION members were asking its Board of Directors, when are we going to push back City Bureaucracy ? It happened like lightning. The case is entitled ACTION APARTMENT ASSOCIATION v. City of Santa Monica. (You can read the decision in its entirety on the ACTION web site). Special thanks must go to our ACTION member Doreen Dennis, for volunteering to be a class representative in this lawsuit. Doreen had received a threatening letter from the City Attorney’s office, simply because she sought to have her daughter move into her property. Doreen had the courage to stand up to the City and participate as a named plaintiff in this lawsuit. Without members like Doreen, ACTION could not maintain its high standard of service to the community.

The Court of Appeals, in a published opinion that has statewide implications, has ruled that the City’s Tenant Harassment Law is unconstitutional in certain respects. If you remember, ACTION’s Board decided to file a lawsuit against the City because of their harassment of housing providers over whether they were allowed to serve their tenants with 3-day notices and file unlawful detainer complaints. This City, in anger over the state legislature passing the Costa-Hawkins law (vacancy decontrol/recontrol) and with no factual support for their allegations that housing providers were allegedly harassing tenants, passed their much advertised (tenant vote getting) Tenant Harassment Ordinance. This law was totally unnecessary. However, one section of the law was very troublesome in that it made it illegal for housing providers and their attorneys to serve a letter, or 3-day notice, or file an unlawful detainer complaint against a tenant under certain very vaguely defined circumstances. Well, this section had the clear effect of scaring the housing provider and the attorney with jail time and thus interfering with a housing provider’s right to seek resolution of disputes in court. In other words, the City was maintaining that if the housing provider (or the attorney) filed a lawsuit in court over a dispute with a tenant, the City would decide if the dispute was in good faith, and if it the City decided it was not in good faith, the City would sue both the housing provider and the attorney for criminal and civil penalties. It did NOT matter that the housing provider won the lawsuit against the tenant, the City had the right (so goes their diatribe) to still prosecute the housing provider and his attorney for criminal and civil violations. (Maximum of one year in jail).

Well, it is no wonder that ACTION needed to attack this law.

First of all, the City’s track record of implementing the law, was atrocious. The City Attorney’s office would write the most threatening, one-sided letters to the housing provider whenever a tenant filed a complaint with the City. The City always believed the tenant and always disbelieved the housing provider. Indeed many times the City would write a threatening letter without even listening to the housing provider’s side. Faced with City Attorney’s letters threatening criminal prosecution, many housing providers simply gave up, caved in, and forgot about the tenant’s improper conduct (which lead to the issuance of the 3-day notice in the first place). Now, in many instances, the offending tenant conduct was that which bothered many other tenants at the property. So the effect of all of this was to not only interfere with a housing provider’s ability to manage his/her property, but also to foist on other tenants a continuing course of bother from the offending tenant. The entire situation was a mess, but one which the City (and the SMRR backed city council which passed the ordinance) relished in. Indeed for the 250 or so threatening letters sent out by the City, there were only 5 or 6 actual lawsuits filed by the City. And of these 5 or 6 lawsuits only 1 or 2 were tried or settled. The rest were dismissed. One such case which was dismissed, started off with the arrest and imprisonment of the housing provider after a tenant complaint, which normally would have been ignored. Such a record shows that the City Attorney’s office was only interested in intimidation, and had been greatly overstepping known legal principles to further their ill-conceived ends.

ACTION, with its win, has brought an end to most of this illegal coercion. However, a housing provider must act carefully, to bring himself within the safe harbor of this Court of Appeal ruling. See the discussion below:
Some of the more memorable quotes of this case: The court found that there is a statutory privilege which protects the housing provider’s right to petition the government for redress of grievances, a right which includes the right to sue. Housing providers have the utmost freedom to access the courts to secure and defend their rights. The housing provider’s need for access to the courts is an unusually vital one, in that a housing provider cannot terminate his dealings with a tenant without access to the court. The City’s ordinance threatens the housing provider’s free access to the courts.

ACTION has gone a long way in furthering a housing provider’s right to manage and protect his/her property, and provide a safe and peaceful environment for all other tenants at the property. ACTION needs to be congratulated on a job well done in creating a safe harbor for housing providers to live within.

The City plans to ask the Court of Appeal to re-hear their decision, and then to ask the Supreme Court to either decertify the decision (i.e., wipe it off the Books) or to hear the case themselves. ACTION is pleased with the decision as it is, and will resist any attempt to have it altered in any way.

How To Avoid Criminal Prosecution Under the Tenant Harassment Law.
Safety Within The Harbor that ACTION Built.
Housing providers need to understand how to protect themselves under the newly won victory, ACTION v. City of Santa Monica. First, ACTION attacked the Tenant Harassment Ordinance only as it dealt with the City’s attempt to make it illegal to send notices to tenants or file unlawful detainer (and other lawsuits) against tenants. Housing providers must still be careful as to what they say or do with tenants to avoid Government entanglements. The first lesson housing providers must learn is NOT to talk directly to tenants about their breaches of lease, but rather do everything in writing. Send letters or 3-day notices, or file complaints, but do NOT attempt to talk to tenants directly. This is harsh advise, and many housing providers will be saying to themselves, that it is a poor state of affairs we have fallen to, when a housing provider cannot discuss with his or her tenant the problems that tenant is causing. However, if you wish to be 100% protected by ACTION’s recent victory, then keep everything in writing. If you believe that the first amendment’s freedom of speech provisions protect you, and you have the right to speak to tenants, then OK go ahead at your peril, and if you get a threatening letter from the City Attorney’s office, then come to ACTION for help, for round two of the litigation. However, if you wish to avoid threatening letters from the City Attorney’s office, then send a letter or 3-day notice and in it you can explain that everything is in writing out of necessity because of the City’s illegal laws.

If you do take advantage of the safe harbor ACTION has built for you (i.e., if you live within the rules set forth herein), then you will be protected against the storms of City threats and lawsuits.

Here are the rules:
First, if there is a dispute with a tenant about that tenant’s violation of the terms of the rental agreement (either oral or written), or if the tenant is creating a nuisance, or is otherwise doing something or not doing something that you believe could result in that tenant paying you damages or being evicted, then you have a controversy.

Second, if there is a controversy, then you have your choice of either sending the tenant a letter of warning or sending the tenant a 3-day notice to cure or quit (or simply to quit if appropriate). You should either send a letter or a 3-day notice, but you should not contact that tenant verbally. Your letter can be as nice as you want, but it should state somewhere in the letter the following language or language like this “Your conduct as described herein can result in the filing of a lawsuit. I urge you to stop this conduct to avoid the necessity of such an event.” This puts the tenant on notice that your letter concerns the potential of the litigation, and as such will encase you in the litigation privilege established by our recent victory.

Third, if you decide to serve a 3-day notice (either to quit or to cure or quit) then the above quoted language is not necessary because the 3-day notice itself refers to the housing provder seeking possession. It should be remembered that the service of a 3-day notice is a statutory requirement to the filing of a complaint. As such, it automatically comes within the litigation privilege of the ACTION decision.

Fourth, remember, if you serve any type 3-day notice (except one solely for the non-payment of rent) you must also file a copy of that notice with the Santa Monica Rent Control Board within 3-days of the service on the tenant. This is a law that was added to the Rent Control Charter amendment to make it harder for housing providers to evict tenants. A trap for the unwary. However, as always, be prepared, be advised, be ACTION. If you have hired an attorney to help you write and serve a 3-day notice, tell that attorney to serve the Board. Don’t take anything for granted. Many attorneys do not know the special rules of Santa Monica. That attorney will appreciate your helping her or him to better serve your needs. Remember, failure to serve the Board within the 3-days may result in your losing the eviction at trial. If for some reason, the 3-day notice is not served within the 3-days, then reserve the 3-day notice on the tenant, and then on the Board within 3-days of the new service on the tenant.

RECENT CASES OF IMPORTANCE

ACTION is not alone in wining important cases. A 9th Circuit Court of Appeal decision has just been issued that has far reaching impact on rent control as we know it. The case is Chevron USA, Inc. v. Bronster. It is also called Cayetano II. Paid up subscribers will remember our discussion of Cayetano I (i.e., Chevron USA, Inc. v. Bronster, 224 F.3d 1030, 1041 (9th Cir.2000) Indeed in ACTION’s very important lawsuit against the Rent Control Board over Interest on Security Deposits, ACTION cited Cayetano I, and the Court of appeals in their published decision also cited it as well. Cayetano II (or Chevron USA, Inc. v. Bronster, 363 F.3d 846 C.A.9 2004 Hawaii) as the reported decision is named) re-affirms the holdings of Cayetano I. The rule of law is that legislation that effects real property, that does not have a legitimate public purpose is a taking of property in violation of the 5th amendment, and thus is unconstitutional.

Ocean Park Associates v. Santa Monica Rent Control Bd.,114 Cal.App.4th 1050 (Jan 2004). In this Second District, Court of Appeal decision the court ruled that Santa Monica Rent Control Board’s practice of filing building-wide decreases on behalf of tenants who do not wish to file rent decreases against their housing providers, is unconstitutional. The court held that the rent control board exceeded its authority by initiating a petition to decrease rents. This brought to an end once and for all the Board’s practice of harassing housing providers with hugh rent decreases when there were few if any tenants who wished to complain.

ACTION Set To File Lawsuit To Declare Rent Control Unconstitutional

Sometimes victory goes to one’s head and one gets cocky. Well, maybe its the victory in the air or maybe the time has finally come, but ACTION’s Board of Directors has given it’s tentative approval to the ultimate of all lawsuits. A federal lawsuit based on the recent decision Chevron USA v. Bronster, 363 F.3d 846 C.A.9 2004, a federal 9th circuit decision. The case holds that legislation that effects real property, that does not have a legitimate public purpose is a taking of property in violation of the 5th amendment, and thus is unconstitutional.

Rent control as we know it in Santa Monica, West Hollywood, and Los Angeles, has no legitimate public purpose, in that it does not allocate reduced rents to people in need whatsoever. There is no relationship between reduced housing rents and people who need reduced housing rents. Indeed, as we see, the rich tenants get the lowest housing units. A system of laws which allows rich tenants to occupy below market rental units has no legitimate state interest. SMRR’s attempts to get votes by giving housing providers’ units to rich tenants is NOT a legitimate state interest.

ACTION is about ready to file its ultimate lawsuit against the City of Santa Monica based on this theory if we can raise the needed funding from donations from our members. This lawsuit is the mother of all lawsuits, and will seek to have the federal court declare that Santa Monica, West Hollywood’s and Los Angeles’ rent control law is unconstitutional. Once and for all, we will wipe out the regulatory processes of this SMRR city council which seeks to harbor rich tenants on our properties to enrich their economic life style. Can we file this lawsuit and win? The answer is within the ACTION members desire to contribute to our cause. Cocky or not, we shall preservere.

COSTA-HAWKINS HAS SAVED SANTA MONICA RENTAL HOUSING

A study of the City of Santa Monica’s residential rental housing market, including how the City’s April 10, 1979 rent control law has impacted it, shows beyond a doubt that Costa-Hawkins has increased the quality and quantity of rental housing in our City. Indeed without Costa-Hawkins, rental housing in Santa Monica might have all but disappeared. A detailed explanation of the problem created by rent control would take a book. However, a short discussion of the Santa Monica story will show that Costa-Hawkins has preserved rental housing in Santa Monica.

Rent Control came to Santa Monica on April 10, 1979. Prior to that time there was never a problem with rental housing shortages. Rents would fluctuate from time to time, as well as would vacancy rates within the city. Like all other commodities, supply and demand played an important role in its cost and availability. The shortages we experience today are a result of over regulation by city government. Rent control is just one of the regulations which create the shortage. The city has imposed zoning, building code, and land use restrictions as well.

Rent control brought two major economic evils to our City: First, the owners could no longer adjust rents to cover the cost of maintaining their buildings, nor to raise rent to reflect the true value of their properties. Second, those owners who had lower than market rents on April 10, 1979 were punished and required to keep those rents at that level until Costa-Hawkins was passed, regardless of vacancies and turnovers. These buildings with lower than market rents all belonged to the senior citizen mom and pop owners. They were the ones who normally lived on their properties and rented out units to supplement their retirement income. To these people the system was the most vicious. The larger corporate owners (prior to April 10, 1979) were consistently keeping their rents at market, and they did not suffer as great an economic burden as the smaller mom and pop owners.

Of all the many economic hardships rent control brings to residential rental housing, the four most wicked are (1) disincentive to build more rental housing, (2) disincentive to RENT units when they become vacant, (3) disincentive to make needed repairs and renovations in existing apartment buildings, and (4) most importantly of all, disincentive to continue in the residential rental housing market. There are two reason rent control creates these four negative factors. First, rent control imposes a heavy governmental bureaucratic burden on housing providers which imposes mental and economic hardships on the housing providers; and Second, Santa Monica rent control prohibited the Housing Provider to increase rents when they obtained a vacancy. Costa-Hawkins has brought needed relief from most (but not all) of these economic hardships.

In Santa Monica, from April 10, 1979 to Jan. 1, 1996 (the implementation date of Costa-Hawkins) the typical apartment building was in a definite state of disrepair, and disintegration. Initially, the housing industry was not overly impacted. However, after just a few years, and beginning in the early 1980s, the City saw a market decrease in repairs and renovations to its rental housing stock. This, of course, was due to the simple economic realities that with vacancy control, rents could not keep up with the cost of maintaining the rental housing stock, and there was no economic incentive for owners to renovate and repair their buildings to obtain market rate rentsundefined rents were controlled at levels 50% below market rate.

Most of the apartment buildings in Santa Monica were build in the late 1950s and throughout the 1960s. This was a time of little governmental restraint on construction. Some 35,000 rental units were built during this time. The City obtained the nick name of a “Bedroom Community” because there were so many rental units compared to the small amount of commercial business taking place. Thus when rent control passed the housing stock was already some 20 to 30 years old. Buildings were in desperate need of repair and renovation, but the rental stream was not there to pay for it. Furthermore, the housing provider industry, primarily made up of mom and pop owners, were psychologically depressed and politically upset with the government system that stole management and control of their properties away from them. The love and pride of ownership, once so strongly displayed by them, was buried in an anger amounting to almost a guerrilla warfare atmosphere. The last thing housing providers wanted to do was make a property wonderful for tenants who were stealing from them with highly reduced rents.

Furthermore, many owners simply stopped renting out units once they became vacant. Best estimates, based on ACTION IN SANTA MONICA members’ input, put the refusal-to-rent vacancy rate at approximately 5% to 8%. There were 32,500 registered units in Santa Monica when rent control passed, this meant that approximately 2,000 units were kept vacant, or kept for out of town family and friends to stay in, or for storage. This refusal-to-rent vacancy rate increased as time went on, as housing providers got more and more disgusted with the Rent Board bureaucracy.

Finally, absolutely no apartment buildings were constructed in Santa Monica after rent control passed, except for government sponsored ones which were heavily subsidized, and as all things built by government, way over cost. The average subsidized apartment unit built by the City’s affiliate groups were built at twice the cost per square foot as the condominiums being built by private parties during the same time periods. This disgraceful waste of funds is further besmirched when one recognizes that condominiums construction costs 20% to 25% more than market rate apartment buildings, because of their respective quality of finishes.

Like any good bureaucracy intent on economic meddling, the Rent Control Board did not sit still in the face of deteriorating housing stock. They passed regulations which made things worse. In response to the obvious reduction in maintenance, the Board passed the Chapter 4 set of regulations which allowed tenants to apply for rent decreases based on failure of owner to repair. This only further incensed owners, led to greater animosity between tenants and housing providers, and was a strong factor in housing providers increasing the number of intentionally kept vacate units. However, while it did lead to a few units being repaired, (i.e., those units where the tenants stepped forward to file complaints) when one considers that there were approximately 30,000 controlled units in the City in the early 1980s, one instantly sees that it could not do anything to stem the tide of disintegration.

The housing crisis was further worsened in that starting around 1986 after 7 long and horrid years of rent control, many mom and pop owners were giving up on owning rental housing, and selling out to condominium developers. The developers would buy the apartment buildings very cheaply because in the mid 1980s through the mid 1990s (prior to Costa-Hawkins) the sale price of a rental property would be based on its annual rental income. The normal sales price during that time period was between 7 to 9 times gross rental income. What this meant was that the lower the rents were (a policy the Rent Control Board religiously maintained to accomplish) the cheaper these rental properties were, and the quicker they were purchased, demolished and replaced with new condominium buildings. Thus, the Board faced another disaster: loss of rental units altogether.

The problem got so bad that the Board itself sponsored a Rent Control amendment which initiated a limited vacancy decontrol system, so that the housing provider could obtain a rent increase upon vacancy to a below market rate rent, based on which section in the city his/her property was located. The City Council amended the Board’s proposal, because they felt that the amount of increases were not high enough. The city council submitted its limited vacancy rent increase to the voters (since Santa Monica’s rent control law is a Charter Amendment any change must be approved by the Voters). However since 55% of the voters are tenants in rent controlled units, the voters defeated the City Council’s proposed amendment. Thus the City was in the difficult position of not being able to implement a vacancy decontrol policy, and losing rental units at a tremendous rate. In 1994 there were approximately 28,000 rent controlled units, down from the April 10, 1979 count of 32,500.

Then along came Costa-Hawkins. What Costa-Hawkins did for Santa Monica can only be described as miraculous. First, by implementing a system of vacancy decontrol, those remaining owners could see the light at the end of the tunnel. The psychological effect was therapeutic. Immediately, the value of apartment buildings increased from a factor of 7 to 9 times gross rental income to 10 to 11 times gross rental income. This was based on the implication that rents would be going up to market in the future. Remember, by nature the mom and pop owners in Santa Monica are very patient. Now that they could see that there would be economic relief ahead, they were will to wait for it to arrive. With this increased price of apartments, the sale for demolition for condominium construction dramatically decreased. What the City could not do to stem the loss of units, the State legislature did through Costa-Hawkins.

Second, the deliberately left vacant units came on the market for rent. There were approximately 2,000 units which were rented between 1996 and the end of 1997, which were previously kept vacant. There would have been more released to rental use, except for the fact that Costa-Hawkins only allowed a 15% increase over the controlled rent, from 1996 through 1998.

Third, almost all the buildings in the City went through a renovation, as owners who anticipated renting units at market rates, now sought to fix up their buildings so that they could attract the highest possible rents. There was so much repair and renovation going on that the Board (in their bureaucratic wisdom) passed a regulation which allowed tenants to apply for a rent decrease if there was too much noise, dust, disturbance based on renovation work. The entire city was going through a renaissance. Every where one drove, he or she would see buildings being painted, re- roofed, remodeled, landscaping, repiped and rewired. Amenities were being added. These additions, while intended to benefit the soon to come market-rate tenant, actually benefited the existing low paying tenants as well. Indeed a study done by the Rent control board shows that as of December 2003, of the 27,500 remaining controlled rental units, only 30% of them have gotten any Costa-Hawkins rent increase since January 1, 1996. Thus the overwhelming majority of renters benefited by this waive of repairs, has been the existing low rent paying tenants.

Fourth, Costa-Hawkins has allowed minorities and families with children to move into Santa Monica. Pre-Costa-Hawkins, the Santa Monica housing providers could only rent at the artificially low controlled rents. The typical housing provider would thus seek to rent to only one tenant, using a rental agreement which outlawed pets, and subtenants. Thus, even 2 and 3 bedroom apartments were occupied by only 1 person. This negatively impacted surrounding cities in L.A. County, in that the population of Santa Monica actually went down from 92,000 in 1979 to 83,000 in 1996. The City of Santa Monica was not providing for housing its proper percentage of population. However, after January 1, 1996 and especially after January 1, 1999 (when full vacancy decontrol was the rule) housing providers were renting units at the highest possible price, and that meant that minorities and families could literally pay for their right to live in Santa Monica. And they did. While vacancy control was the law in Santa Monica (pre-Costa-Hawkins) the percentage of families and the percentage of minorities actually decreased from pre-rent controlled days. Now it is on the rise (after Costa-Hawkins).

So in summation, what Costa-Hawkins has brought to Santa Monica is a new lease on life for residential rental units, the rush to demolish to build condominiums is now over. Considering the high sales prices of condominiums today, had it not been for Costa-Hawkins there would have been a considerably greater amount of rental units demolished. Only the higher value of apartment buildings, imposed by Costa-Hawkins rent increases, has saved Santa Monica from a substantial loss of rental units.

We can clearly state that Costa-Hawkins has done the following: 1.) It has brought about substantial improvement in the quality and safety of the rental housing stock in Santa Monica; 2.) It has allowed families and minorities to move back into Santa Monica; 3). It has stopped the eroding of the rental housing stock in Santa Monica; and 4). It has brought fairness of economic return on value to the mom and pop owners in our city. The only thing which it has not done is to over come the city’s concerted effort to discourage rental housing; there still are very few rental units being built in Santa Monica. Clearly the negative effects of rent control still linger to discourage even the bravest from building rental units. However, we cannot expect Costa-Hawkins to do it all. Someday, Santa Monica will have to admit that their antagonist zoning and building laws, must be changed if we are to have any substantial construction of rental housing units. Someday some statespersons will have to get elected to City politics and throw out the city bureaucracy which seeks to enslave us all.

By Paul F. Utrecht, SPOSF Board Member

This is not an April Fool's joke, but it might as well be an early Christmas for small property owners. On April 1, 2004, the federal Ninth Circuit Court of Appeals decided in Chevron v. Lingle that Hawaii’s rent control for gas station is an unconstitutional “taking.” While “takings” law is complicated even to those steeped in constitutional law, the implications of this decision are not: it is a startling and remarkably good step towards finding that residential rent control is also unconstitutional. In 1997, Hawaii adopted rent control for gas prices. In Hawaii, a major oil company often owns the property under a gas station, which is then rented to a franchise who operates the station. The Legislature believed that gas prices would go down if the oil company could not raise the rent charged to the franchisees for the land. (Why hasn’t our Board of Supervisors adopted this easy solution to San Francisco’s skyrocketing gas prices?)

Chevron’s reaction to this new rent control law was immediate: It filed suit, contending that the law would not accomplish its purpose of lowering gas prices. Chevron argued that rent control would only shift wealth between the oil company and the franchisees: the franchisees would continue to charge the market price, but would make more money because their rent was fixed. Moreover, when a franchise is sold, the seller could get a higher price for the business because future profitability would be enhanced by the existence of rent control. Chevron argued that there is a heightened test for constitutionality under the Takings Clause: To be constitutional, it is not enough that the government thinks that a law will work; the government must prove that the law will (or does) work. In 1998, a District Court Judge in Hawaii agreed with Chevron. The judge found that there was no factual dispute and ruled, without a trial, that the rent control law is an unconstitutional taking because it would not lower gas prices; it would simply take money from oil companies and give it to franchisees. Attorneys for the state of Hawaii responded by appealing to a higher court, the Ninth Circuit. That time, in 2002, the decision came down in Hawaii’s favor. The Ninth Circuit held that the trial judge should not have ruled in favor of Chevron without having a trial because there was a factual question of whether the price of gas would go down. It was theoretically possible that the franchisees would pass the lower rent on to consumers in the form of lower gas prices. The Ninth Circuit sent the case back for a trial to resolve that fact question.

Chevron fought back in the lower court with a different judge at the trial. The judge, not surprisingly, found that the franchisees would charge market price and would not reduce the price of gas because their rent was lower. The judge also found the law unconstitutional. Again, Hawaii appealed to the Ninth Circuit Courtundefined with a stunning outcome. By a 2-1 vote, the Ninth Circuit agreed with the lower court that the rent control law is unconstitutional. The most important part of the ruling of small property owners is that all rent control laws are now subject to a heightened test for constitutionality under the Takings Clause. Essentially, the Ninth Circuit agreed with Chevron that the government cannot just say that it thinks rent control works; instead, the federal courts must look at the facts and determine whether rent control works in the real world. If not, the law is an unconstitutional taking. While the Ninth Circuit’s ruling only applies to gas station rent control, its implications are far-reaching. Just listen to the words of the dissenting judge: As a result of this ruling, “virtually all rent control laws in the Ninth Circuit are not subject to (a heightened test under the Takings Clause) and many of those laws may well be held unconstitutional under that test.”

While dissenting opinions are never the final word, they can be prescient. Take Justice Scalia’s dissent from the Supreme Court’s decision that state laws prohibiting homosexual conduct are unconstitutional: He predicted that the decision would lead to same sex marriages. The City Attorney is now relying on that very dissent to argue that Mayor Newsome was simply observing the constitutional right of everyone to marry. The Ninth Circuit’s decision in Chevron shines a new beacon of hope on SPOSF ultimate goal of abolishing rent control.

Reprinted from the Small Property Owners of San Francisco Journal. SPOSF Board member Paul F. Utrecht is an attorney specializing in property law.

Sacramento Report , April 2004
By Greg McConnell

THE SPLIT ROLL TAX INITIATIVE

It amuses me to hear about the debate about the appropriate name for people who rent residential units. On one end of the spectrum is the term “landlord” which some of the more hostile tenant activists equate to “greedy bloodsucker.” The moniker used at the other end of the spectrum is “housing provider”, a.k.a., “benevolent benefactor sent from high above.”

The truth is that rental property owners are neither devils nor angels. They are business people who sell a product.

The commercial or business nature of landlords/ housing providers will be put on full display this fall. In November, California voters will decide the Split Roll Tax Initiative that is being circulated by the California Teachers Association and universally regarded as a shoe-in to make the ballot.

SPLIT ROLL TAX– A BRIEF DESCRIPTION

The Split Roll Tax Initiative is a proposed constitutional amendment sponsored by the California Teachers Association (CTA) and Robert Reiner. It would scuttle the tax protection provisions of Proposition 13 and significantly increase taxes for all commercial property, including residential rental property valued over $700,000.

The initiative defines commercial residential property as “that portion of a building that contains one or more dwelling units that are not owner occupied.” As to such property, it maintains the current property tax and imposes an additional ad valorem property tax on the assessed value of the property. The rate increases with the assessed valuation of the property from a rate of .10 ($700,000-$799,999) to .55 ($1,000,000 or more). 

According to CTA, this measure is necessary to raise revenues for a new pre-school program and K-12 education, including teacher salaries. One third of the revenues are dedicated to the pre-school program. The remaining two-thirds go to K-12 education.

HOW SPLIT ROLL AFFECTS APARTMENT OWNERS

Taxes will increase on residential rental properties that have assessed values of more than $700,000. This includes rented single-family homes and condominiums.

For properties assessed at $700,000, the increase will be an additional $700 per year. For properties with an assessed value of $1million or more, the tax burden will increase by an additional $5,500 for every million dollars of assessed value.

For properties currently assessed below the $700,000 threshold, the major impact will be felt at point of sale. That is when properties will be reassessed and buyers who face new tax loads will undoubtedly try to reflect their added burdens in their offers.

Owners in rent control cities would have a really big problem. They cannot pass the cost of new taxes through to sitting tenants unless the local rent control law allows a pass through. Berkeley owners, for example, would have to absorb the costs for sitting tenants. Nor, can rent controlled owners pass through increased costs under vacancy decontrol. Those units are already renting at market prices and try as one might, owners cannot charge rents that are higher than market.

Owners in non-rent controlled cities will be able to pass some of their costs through to tenants who have long tenancies and pay below market rents.

SPLIT ROLL'S IMPACT ON TENANTS

The proponents of the measure argue that it is necessary to increase funding for pre-schoolers and teachers. What they don’t tell voters is who pays for the tax. In the case of apartment tax increases, that would be, among others, the pre-school operators, teachers, and other long term apartment residents who rent below market and cannot afford to buy California’s medium priced $400,000 plus homes.

Unlike owners who may be able to take tax deductions on some of the loss, the tenant who pays for the increase just eats it. And it is a big bite. On a hypothetical eight-unit building valued at $1 million, the tax increase under the CTA Split Roll Initiative would be $5,500 per year. That translates into rent increases of approximately $57 per month and would necessitate a 5.7% increase on an average asking rent of $1,000 per month. This number will be compounded annually.

Teachers and pre-school operators who are long term tenants with below market rents and who rank amongst the 75% of California residents who cannot afford to purchase a home will be hurt badly by this measure. I wonder if CTA and Rob Reiner thought this through. They raise taxes on the very people they say they want to help. Is this the kind of thinking that led Archie Bunker to call him “Meathead”?

I am sure that many people want to improve our schools. And, in fact, some readers of this column may think that raising taxes is morally the right thing to do. But, if that is the case, why did CTA and Rob Reiner not include new taxes for homeowners in the initiative? Don’t homeowners who have kids in school benefit from the measure? The answer is simple. The proponents didn’t include homeowners because they know that homeowners would vote the measure down.

Bottom line, this is just another deal that tries to pass things on to business people. If it succeeds, it will be another nail in the coffin of what was once a thriving and prominent state.

DEFEATING THE INITIATIVE

Over the next several months, we will report more about the CTA Split Roll Tax Initiative and efforts to defeat it and protect owners from its impact. Suffice it to say that this will be a huge battle that will unify California businesses in unprecedented ways. California apartment owners represented by The McConnell Group will play a significant role.

For now, you can view the full text of the measure on the Attorney General’s website: www.caag.state.ca.us/initiatives/activeindex.htm .