January 21, 2014 -- On January 15, 2014, the California Supreme Court denied review of a “landmark” ruling from the Second Appellate District in favor of the City of Carson and reported as Colony Cove Properties, LLC v. City of Carson (2013) 220 Cal. App. 4th 840 . Aleshire & Wynder’s Rent Control and Mobilehome Park Team (including partners Bill Wynder, Sunny Soltani, and Associate Jeff Malawy) successfully defended two rulings of the City’s Mobilehome Park Rental Review Board rejecting park-owner efforts to more than double rents paid by the largely senior-citizen residents of one of the City’s largest mobilehome parks.
In April, 2006, Colony Cove Mobile Estates was purchased by Colony Cove Properties, LLC, a business owned and controlled through a series of “shell” entities by Mr. James Goldstein, for $23 million, putting $5 million down and financing the $18 million balance at a variable rate. At the time of the sale, the largely senior-citizen residents of this mobilehome park were paying rents averaging $408 per space per month. The prior owner’s debt service was approximately $350,000 per year, leaving over $700,000 in cash profit annually.
Goldstein made his purchase knowing full well that his rental income would not permit him to make a profit from park operations. In fact, Goldstein knew that his annual debt service expenses alone would exceed the Park’s total net operating income. So, in September 2007, Goldstein submitted applications for a general rent increase and a supplemental or “fair return” rent increase seeking to raise rents by $618.05 per space per month. A year later, Goldstein submitted more applications for a general rent increase and a supplemental or “fair return” rent increase seeking a rent increase of $342.46 per space per month.
The Carson Mobilehome Park Rental Review Board awarded a rent increase in the amount of $36.74 per space per month for the 2007 applications and $25.02 per space per month for the 2008 applications. Goldstein sued the City arguing that he was entitled to a profit or specific rate of return on his investment no matter how he financed his purchase of the property.
The Second Appellate District, in a 50+ page published opinion, disagreed. After conducting an exhaustive review of the law to determine whether granting a mobilehome park owner a “fair return” meant the park owner was entitled to a “profit” or a specific “rate of return” on his purchase price, the Court of Appeals expressed serious reservations about the “inequities that would result from permitting a party [to] finance . . . its purchase of rent-controlled property [in order] to obtain higher rents . . . .”
Quoting one of the experts retained by A & W to advise the City, the Court observed that “debt service arrangements could easily be manipulated for the purpose of obtaining larger rent increases, by applying for an increase based on servicing a high interest loan and then refinancing at a lower interest rate or paying off the loan after the increase was granted. Alternatively, an owner might periodically tap the equity in a valuable piece of rental property, thus increasing the debt load” in order to pass those costs onto residents.
Bill Wynder, Carson City Attorney, commented that “this ruling is among the most important issued by an appeals court on the subject of what constitutes a ‘fair return on investment’ in the past decade.” “We are pleased to have helped the City in this important litigation,” noted lead trial counsel, Sunny Soltani, “which will prove to be ‘must’ reading for mobilehome law practitioners up and down the State of California.”
For further information regarding the Colony Cove decision, and its application to pending lawsuits, or to discuss A & W’s Mobilehome Park Litigation practice group, please contact William W. Wynder, Sunny K. Soltani, or Jeff M. Malawy, at (949) 223-1170.