On September 28, 2009, the Federal Ninth Circuit Court of Appeal issued a three-Judge decision in the case of Guggenheim v. City of Goleta, which found that Goleta's Mobilehome Rent Ordinance constitutes a regulatory "taking" of property under the United States Constitution for which just compensation must be paid. The decision sent shockwaves throughout cities and counties which either have or are contemplating a rent ordinance, as well as mobilehome resident organizations throughout California. If left to stand, the ruling could provide a means for park owners everywhere to bring new challenges to rent ordinances, and could discourage jurisdictions now considering an ordinance from adopting their own protections. A number one priority must be to overturn this decision.

The decision is the latest chapter in the long history of park owner challenges to mobilehome rent control. Many of the 107 existing mobilehome rent ordinances throughout California (called "RCO" for short) were adopted in the 1970's. By the 1980's park owner lawsuits were being filed challenging the constitutionality of mobilehome rent control. The prime theory of these attacks was that the RCOs caused a "taking" of the park owner's property without just compensation in violation of the 5th and 14th Amendments. The original "taking" arguments claimed that the RCO constituted a "permanent physical invasion" of the park owner's property, much like cases involving low flying airplane flights or noxious odors. In 1989, a Federal court case called Hall v. City of Santa Barbara held that mobilehome rent control ordinances did constitute a physical taking, with specific reference to vacancy control provisions limiting rent increases at the time of resale. Faced with this decision, many local jurisdictions amended their ordinances to suspend vacancy control until further Hall was reviewed. That came in 1992, when the United States Supreme Court unanimously held in the case of Yee v. City of Escondido that mobilehome rent control did not constitute a physical taking of a park owner's property. GSMOL played a vital role in the Yee case, raising $100,000.00 from its members, organizing an attorney "strike force" and hiring a top notch legal team to prepare and file a "friend of the court" amicus curiae brief. This was a major mobilization of mobilehome residents comparable only to the fight to defeat Proposition 199 in 1996. GSMOL leaders even attended the oral arguments in Washington. Once Yee was announced, local ordinances restored their vacancy control protections, and the "physical taking" threat was averted.

A second "taking" theory, called a "regulatory taking" was not decided in Yee. This theory argues that the RCO, as a law or regulation adopted by the city or county, has an economic impact upon the park owner which deprives it of beneficial use of its property. Following Yee, several cases were filed in both State and Federal courts based on this theory. The U. S. 9th Circuit Court of Appeal, which hears appeals from the U. S. District Court trial courts, dealt with several such challenges since 1992 but never reached the merits of any regulatory taking claim, save in one 2004 case. That decision, known as Cashman v. City of Cotati, held that vacancy control was a "regulatory taking" which required compensation to be paid to the park owner. The court based its decision upon a U. S. Supreme Court case known as Agins, and found that the RCO did not "advance a legitimate state interest". Cashman was subsequently overruled when a 2005 U. S. Supreme Court decision titled Lingle v. Chevron USA held that the "Agins test" cannot be used to analyze a "taking" claim. With the sole legal basis for the Ninth Circuit's opinion in Cashman having been destroyed, it withdraw its 2004 opinion and affirm the ruling of the District Court in favor of the City. This represented the most serious post-Yee challenge to mobilehome rent control to date, until this latest decision in Guggenheim v. City of Goleta.

Santa Barbara County enacted an RCO in 1979, and amended it in 1987, at a time when Goleta was not yet its own incorporated City. When Goleta incorporated in 2002, it adopted all of the County laws into its own Municipal Code, including the RCO. The statement of purpose drafted in 1979 remained unchanged. The RCO limits automatic annual increases to 75% of CPI, and allows for discretionary increases after arbitration pursuant to a complex formula. It also limits rent increases upon resale to 10%. Thus, Goleta had been subject to the County ordinance prior to its incorporation, and then adopted the same ordinance language into its new City laws in 2002. The park thus transferred from the County's jurisdiction to the City's jurisdiction in 2002, but the same ordinance essentially continued in effect.

The park owner (Guggenheim) which had owned the park since 1997, filed suit in both State and Federal Court a month after the City incorporated. It challenged the ordinance on its face (i.e. a "facial challenge"), rather than first seek a rent increase and then challenge the ordinance once the increase was denied (i.e. an "as applied challenge"). The State Court action had a trial, followed by a settlement of those claims. In the Federal District Court, a decision was entered in 2004 which followed the Agins test and found a taking based upon the argument that the RCO did not substantially advance a legitimate state interest. Once Lingle (see above) issued, the Goleta court did much as the Cashman court did, and reversed itself, holding that the City was the winner and that no taking had occurred. The park owner appealed to the Ninth Circuit.

It is important to note the nature of the evidence admitted at the District Court trial. The park owner submitted evidence of the alleged effects of the RCO in a report prepared by its expert. The City did not object to this report, band produced its own report that did not completely disagree with the park's expert. The court reviewed each, and relied upon their "core findings" in its decision. The park's expert estimated the average mobilehome would be worth only $14,037.00 in the absence of rent control, but because of the RCO the average mobilehome sold for $119,091.00. Thus, the park's expert thus attributed 88% of the sales price to the RCO, and estimated that the RCO forced the park owner to rent the entire park at close to an 80 percent discount below the market rate (i.e. about $10,000.00 per year below what the park could collect). It argued that there was a transfer of wealth (called a "premium" by the park owners) of 88% of the sale price of mobilehomes. This premium argument has been repeated often. It argues that mobilehome sales prices are artificially inflated by rent control, and that the resulting windfall to the homeowner seller is really due to the land, and not the structure, thus creating a transfer of wealth to which the park owner should be entitled. In other words, they argue there has been a taking of property for which payment of compensation is required.

An immediate problem with the Goleta decision, and one which perhaps distinguishes it from other cases, is the unchallenged factual record upon which first the trial court, and then the 9th Circuit, relied. It is doubtful most jurisdictions would have allowed the park's expert to go unchallenged. This is now a part of the record in this case and cannot be erased.

The court decided three issues in this case:

The court's first considered if the park owner had "standing" to file suit. This step tripped up other park owners who had tried similar challenges. The court examined whether the park owner had a "personal stake in the outcome". It noted two previous 9th Circuit cases which held that a park owner who purchased the park after the RCO was passed did not have standing to challenge the ordinance on its face, since any "taking" would have occurred when the ordinance was enacted prior to the park's ownership. Thus, a subsequent owner of property was ruled to be too late to have standing. The court found a way around these prior decisions, holding that because Goleta did not officially adopt the Ordinance until 2002, after a brief gap in time between the County ordinance and the effective time of the City ordinance, the "taking" occurred at the time of the 2002 adoption. This despite the fact that the park was acquired five years earlier subject to the 1979 County ordinance. The dissenting Judge noted that the Guggenheims "purchased the park after the regulatory takings that mattered", and that their 1997 purchase "did not breathe life into the dry bones of the takings claim that had died years before." But he was outvoted 2-1.

Relative to the "standing" issue, this is admittedly a unique set of facts which is not likely to often occur; i.e. where a City becomes incorporated and adopts a previously enacted County ordinance without doing its own investigation. But the court also sounded an ominous note by saying that rationale of its prior decisions might be weakening in light of a 2001 U. S. Supreme Court case, which held that subsequent property owners may indeed have standing to challenge laws which predate the time of purchase. This could signal the 9th Circuit's desire to find standing in future suits where new park owners buy into existing RCO jurisdictions.

A takings claim also cannot be brought to early. A park owner typically must first show an attempt to obtain just compensation for its loss through the local and state courts, or must file a rent application with the city or county. But the court found that the City had waived and thus forfeited its right to challenge ripeness by not raising or briefing the issue at trial. And the court held that by filing its Superior Court lawsuit (even though it was settled) the Guggenheims had "substantially satisfied" the ripeness requirements. This is yet another unique part of the case, for presumably other cities or counties would not place themselves in such a waiver position.

The court then examined and weighed together certain factors found in a U. S. Supreme Court case called Penn Central Transp. Co. v. New York City, which was the sole basis of the park owner's facial challenge to the Goleta ordinance. It first noted that a facial challenge to an RCO, without requiring the RCO to be applied first, was proper. A challenge to an ordinance on its face seeks to prove that its mere enactment, regardless of how it is actually applied to a park owner, constitutes a "taking" of its property. This means that a park owner faces an "uphill battle" to prove a "taking". But the court stated that it needed to look at not only what the law says, but what its enactment does. Thus the court considered evidence illustrating the economic impact of the RCO on the park owner, so as to prove whether the park owner had suffered the injury alleged. The "core findings" of both experts were examined and quoted by the court as it applied the Penn Central factors, including the "undisputed factual findings" of the District Court about property values in the City. This shows how critical expert opinions at trial are, since they become a fixed part of any record on appeal. The Court then analyzed each Penn Central factor.

A government regulation which "goes too far" is a "taking" of property. A park owner must show "a loss of value that may be less than 100%, but high enough to have ‘gone too far'". Here the court went into its "transfer of wealth" discussion, quoting the park's expert as showing a 90% increase in sales price due to the RCO, which was captured by the selling resident. The court found that even the City's own expert had recognized this "premium". This is NOT a correct argument, for increased resales price- or site value- is premised largely upon scarcity and limited supply, rather than only rents. The court went on to call the "wealth transfer from the Park Owners to their tenants a "naked transfer accomplished by the mere enactment of the RCO", and that the "RCO takes wealth from the Park Owners and transfers it to the in*****bent tenants, who reap the benefits in the form of mobile homes worth several times their original value."

Given the factual record, the City could only make weak attempts to argue around the "premium" theory. It correctly argued that even if a "wealth transfer" was present, the RCO's economic impact did not "go to far" if the park owner was still earning a return on its investment. The District Court found that Guggenheims had enjoyed a rate of return "comparable to other real estate investments", although the evidence "tends to suggest that they would have earned more- perhaps much more- in the absence of the RCO." It held that even if the park's return was less than its wealth transfer loss, because some return was being received there was no taking.

The 9th Circuit significantly departed from past caselaw, and the trial court, holding that even if a park owner is earning some return on investment a "taking" can still occur. It found that whether compensation is adequate is an inquiry separate from whether there has been a taking. This is contrary to several U. S. Supreme Court cases, which held that economic regulation of a land owner's profit does not constitute a taking if the owner is allowed a reasonable return on investment. The Goleta RCO does not deprive park owners of a reasonable return, but requires that they receive one. The court found that $100,000.00 per space had been lost by the park, and concluded that "undisputed evidence shows that the mere enactment of the RCO has caused significant economic loss", and that this factor weighs heavily in the Park Owner's favor.

Because Guggenheim acquired a park in 1997 that was already subject to a RCO, the court noted that the park owner "got exactly what they bargained for" when it purchased; i.e. a mobilehome park subject to a rent control ordinance. The dilemma was that the park owner purchased the park knowing that the RCO existed, but took ownership with some hope that it could be challenged. Since the exact "expectation" was difficult to ascertain, the court found that this factor was "not determinative" but must be considered along with the other factors.

The Court found that the transfer of wealth caused by the RCO "is substantially more like a regulatory taking." It found that "the tenants have the right to convey the home with the right to remain on site at a much-reduced rent. This looks more like a classic taking than a mere regulatory burden." The court found that this test "weighs in favor" of Guggenheim. The court also found that the RCO placed a higher burden on the few mobilehome park owners by singling them out and imposing "solely on them a burden to support affordable housing", a burden that should be more fairly apportioned amongst the broader tax base. The thus court found a "kind of expense-shifting to a few persons that amounts to a taking".

Having reviewed each Penn Central factor individually, and then weighing them together, the court concluded that "the RCO has caused substantial economic hardship" to Guggenheim. The loss to the park owners of rental income had become the gain of the tenants in the form of premium shifting, and was more than a simple "shifting of benefits and burdens", a "zero-sum game" where park owners are forced to rent at "below-market" prices. This lead the court to rule that the RCO "goes to far" and that it "constitutes a regulatory taking" for which compensation must be paid. If Goleta wishes to increase affordable housing in this manner it may do so, but money must be paid to the park owner. Guggenheims' claim shall likely be in the millions.

The effects of this case will be widespread and immediate. In a pending administrative rent hearing in Fremont the park owner's closing brief dated October 5th quoted the Guggenheim decision in the first headnote, repeating the "singled out" argument in favor of its rent increase application. Jurisdictions without a RCO will be advised to avoid the risk of litigation which this case creates, since the statute of limitations will take two years to reach, "standing" and "ripeness" will be unquestioned and the Court's taking analysis will present an imposing precedent. A park owner, such as ELS, which purchases into an existing jurisdiction will bring the same arguments, alleging that Goleta provides an avenue to file suit. Only the 2-year statute of limitations might save an existing RCO in such a case. And where an existing park owner in an RCO jurisdiction desires a rent increase, it will introduce Goleta-like evidence and argue that fair return has nothing to do with a regulatory taking. This means that "as applied" challenges, following an obligatory rent application, might more easily succeed. In effect, no jurisdiction, and no factual situation, is completely safe despite the unique facts of the Goleta decision.

Swiftly and immediately all resident organizations need to support the Petition for a Rehearing En Banc before the entire 9th Circuit which Goleta has filed. Supporting briefs are due by October 19th. This type of petition is tough to obtain, and if denied, the next stop is to seek review by the U. S. Supreme Court. GSMOL is supporting the request for review, and if granted will file an amicus "friend of the court" brief along with the California League of Cities which focuses upon:

-Because the Ordinance had already "taken" everything from Guggenheim's predecessor in interest in 1979, it could take nothing from Guggenheim in 2002, and there is no "standing";

-The unfair weight given to t
he "premium" factor;

-The failure to give enough weight to the return on investment and follow previous cases;

-The unfairness to the "investment expectations" of the current generation of residents, who bought at current prices but will have their investments "gutted" by the abolition of the RCO.

The job before us will require mobilization and a "wake up call" to all living in RCO jurisdictions. GSMOL is ready, willing and able to take on the lead role. A first step will be to gather the resident organizations. Every single mobilehome resident throughout California needs to be aware of the risk…and each one needs to join an organization and fight to overturn the Goleta decision.