Introduction. Why gamble?
Ever wonder why mobilehome buyers didn’t demand leases before installing new homes back in the 1970’s? Back when tenants had superior bargaining power? When tenants could “just say no” and walk away? Demand a “lease or no deal?” Tenants could have said all that – for security, certainty, predictability… and security! A lease encumbers a homesite with possessory rights for years. It endures through tenancy transfers, and beyond death. Leases specify rent adjustments even at time of transfer. No unexpected changes. Buyers could have just walked away. What happened? They didn’t. Tenants chose to assume risks of the market by not standing firm for leasing. They chose freedom over lease commitments. Tenants made the choice. They are not victims.
Even tenant lawyers tell me: “My client must be crazy!!” said one. Why? Buy a home on a month to month. Really? Anyone would choose lease to protect from sudden, unexpected, rent increases. So, it is puzzling that many chose freedom over stability.
Then what happened? Economic turmoil. High interest rates. We lived through an oil supply/cost-spiking crisis, Nixon’s price controls. And, a quite unremarkable capitalist response was groundlessly blamed. Then the lawmakers rescued tenants faster than the snail darter. Simply, the “majoritarian faction” (as feared by founding father James Madison) trumped governmental promises of protection for minority interests. In other words, there are more tenant voters than landlord voters. CPI increases? Egregious! So, we have rent control; but worse, we have wealth transfers through vacancy control and “tenant class bifurcation.”
Bifurcation? The “haves” are selling tenants who take market value of under-priced tenancy rights, and the opposing “have-not’s” are all the next generation home buyers who pay full market price: a class struggle we see from the sidelines. Vacancy controls mean we just stand by and watch our property rights get flipped between the classes.
Protection of property rights today? The courts are an abject failure. Legislatures are an embarrassment. Rather, a simple axiom sums it all: “majority rules.” The judicial branch mollycoddles the rampant irresponsibility of lawmakers (despite occasional platitudes of limited deference). This is our government. And it has failed here. Example? El Monte. The City consultants say no rent controls are needed. What does the City do? Passes them anyway. Why? Because they can.
My point: Mobilehome park rent controls do not exist if tenants demanded leases or “just walked away” from a bad deal. “No lease, no sale” one may demand. A prudent home buyer would demand no less. Example: The 4000 leaseholds in Irvine is proof positive: valuable residential property on ground leases, like mobilehome spaces. And no rent controls ever mentioned. Because there were leases.
Origins of the Vacancy Control Regulatory Taking Legal Theory. Simple as “A” -> “B”.
For park owners, rent controls usually mean no increase on sale (“vacancy control”). In fighting rent control in the early 1980’s, I came up with a novel theory for a regulatory taking and first briefed it for owners in the City of Westlake Village and then in the Oceanside appeal we were fighting. Incidentally, Judge Bea (9th Circuit Court of Appeals) recently agreed, calling it a “wealth transfer, pure and simple.”
I observed that for mobilehome parks, tenancy transfers included an under-market lease which resembled a life estate. The usual taking paradigm is illustrated as “A” -> “B.” But here, the premium was being transferred between classes of tenants: “B” -> “C.” But “A’s” property and at market profits. Peddling market lease prices, if legitimate, was “A’s” property. Over time, the difference between low rent ceilings and true market grows.
But if tenants sell the premium lease at full market value, the next generation of buyers is exposed to the market. Vacancy control bifurcates tenants into two classes that pit sellers against buyers. If that is acceptable profit, that profit belongs to the park owner. That discrete interest is the park’s property. Selling a future under-market lease at market value is, simply, a transfer of a property right from the park owner to the seller. “A” -> “B.” That’s a “taking,” pure and simple. I graphed the theory in 1981-2, and shared it with the boss, Brent Swanson. He agreed, and so we used it in a dispute in Westlake Village. It then made its way up the coast to Santa Barbara owner Jean Hall. Meanwhile:
Our firm was attacking Oceanside rent controls and Brent succeeded in obtaining 3 injunctions before the City finally appealed. I wrote the first drafts of the briefs in Oceanside Mobilehome Park Owners Association v. Oceanside (1984) which advanced the vacancy control argument for the first time. The justices did not understand the argument (which is to say we lost). The court said we said: “. . .where rents are reduced . . . an artificially reduced rent ceiling results, which constitutes a valuable interest to the existing tenant which may be sold to a buyer of the mobilehome. . . ” (a taking). I also wrote for amicus and reiterated the claim. The opinion is the first judicial treatment addressing vacancy control.
Then, in Yee v. Escondido, the same court (with new counsel) again rejected the vacancy control theory: “Plaintiffs. . . ask us to revisit an issue . . . we first considered . . . in Oceanside . . . we rejected an argument . . . that a rent control ordinance constituted a compensable “taking” because tenants were able to realize a premium on the sale of their mobilehomes. . . ” Since then, a writer for the Notre Dame Law Review said:
“[T]he court also responded to a more tailored taking challenge. The plaintiffs argued that when the ordinance reduces rents below market levels, the result is not affordable mobile home park rents, but simply a transfer to the selling tenant of the unregulated profit which, in the absence of rent control, belonged to the park owner. . . The court found that the initial premise of this argument was flawed. “. . . Rents will not be ‘reduced more than required for the purposes of the police power.'” Id. 1
Of course, the court entirely misses the point. It is like a response to the argument that: “The brakes are faulty and you may crash!” But says the court, “the initial premise is flawed, because we keep the windshield scrupulously clean.” Vacancy control effects a taking of a discrete “stick in the bundle” of rights–a wealth transfer– by selling under-market lease rights which belong to the park owner. Rent levels and fair return are the unobstructed windshield.
Meanwhile, the vacancy control theory was advanced by Jean Hall’s lawyers in Santa Barbara, re-cast as a physical taking. (Hall v. Santa Barbara) Well, no. The courts saw to that. In the Supreme Court’s Yee case, Justice O’Connor’s asserted that vacancy control may fit into a regulatory taking analysis. Sure, we all did. Well most everyone. We still have the courts to conquer.
In sum, the vacancy control taking theory (I first sketched on a legal pad with arrows and notes) remain viable for park owners if they did not acquire their properties after the rent control law was passed into local law. And the law was passed within the last two years. Vacancy controls are clearly a taking. Still, statistically, our batting average cannot qualify for anyone’s farm team.
Since the vacancy control bifurcation enables the selling and transfer of premium leases at market value, it is a certainty that the legislature feels that class conflict between sellers and buyers is licit. Stated differently, market premiums are not against the public interest. It is thus, simply, a property interest. But who does that interest belong to? The land owner. And by leasing, the controversy and “rate shock” which results from the absence of leasing can be avoided.
The value of a lease can be determined by a fee which may be requested from the tenant for the opportunity to sign a lease.
Leasing is of great value to tenants because among other benefits, assignment of tenancy rent adjustments can be adjusted to suit. The stability, sanctity of possession and investment of the tenant is guaranteed. Maybe charge a fee for that valuable transfer? That value may be estimated and charged for a lease at inception (or in installments or abated until future sale).
Is it permissible to charge a fee for a long term lease agreement? Yes. Civil Code §798.31 (“A fee may be charged for a lease of more than one year if the fee is mutually agreed upon by both the homeowner and management.”). So, a fair fee may be required to be accepted in order for a lease to be offered. But how much?
There is no protection but a lease. “Don’t’s sign a lease?” Really? Look Closely at the Motives.
Leases are a great value, security, and assurance to residents. Now, some resident organizations may say “never sign a lease.” Why? To the contrary, leasing protects, stabilizes, assures and is certain. Such claims are aimed to create need to join and pay dues. Rent controls are supposed to help tenants, and do level rents after the initial base rent increases, but cannot save them from hearing costs, and fees, exposure to administrative tithing to the city or county. Nor match the security of a long term lease (without government intervention that is costly and unsettling). That is not in the resident’s best interests. GSMOL would never publish its leasing handbook if otherwise.
Like buying a car. Some are good, some are not. But no one except Ralph Nader says–“no matter what, do not buy a car.” (Author of “Unsafe at Any Speed”). Each needs to be judged on its own merits. Some leases may not be fair. In my experience, long term leasing is not just fair, but necessary for a resident’s protection. Even Consumer’s Union states that “without a lease you have no rights.”
Rent controls cannot provide that security, but do guarantee litigation. Disputes damage relations and produce anxiety, cost and uncertainty. What? A dispute with the landlord? Most buyers will run like heck the other direction. It sullies community reputation and deflates home values. Rent control tenants are always at risk of surprising rent increase applications, petitions, “meet and confers” with management, all manner of time away from happy retirement. Owners must seek the maximum rent possible (or else waive it). Rent control guarantees acrimony and legal proceedings. Adjudication of rents is guaranteed in all rent control ordinances. Having a lease means both sides avoid all this grief. I recently represented an owner in a rent hearing in Los Angeles County area where the administrator awarded attorney’s fees, expert fees and hearing costs – more than $50,000 in all – as rent adjustments. This is the face of rent control.
How much do you charge for a lease.
What is a lease worth? It is based on several factors. For example, one considers voluntary price leveling and fixed adjustments. This means a waiver of rights to rent adjustment applications, hearings, and petitions. Peace of mind. For another, the benefit of a regulated adjustment process is tied to actual cost, not one-way whim or discretion.
Leases avoid rate-shock on sale. So, determine the amount of the current premium, reduced to present value. One of several methodologies to achieve this result assumes the premium is like a loan balance. That amount can be financed at residential rates, or, very roughly, about one point of the principal loan balance on a monthly basis. Example: so, if the total purchase price of a home is “comp’d” at $100,000, and the NADA estimate for the mobilehome per se is $40,000 (including hardscape, landscape and site improvements), the premium leasehold has a total value of $60,000 (which explains the listing price). Assume a loan is taken to finance $60,000, for 30 years, at fixed 4.99% interest. The debt service to pay off the premium is roughly $325 per month for 30 years. This finding might reveal some observations:
- The rent is too low. To neutralize the premium, increase rents to the amount of $321.00 per month (the amount the seller can command by selling the right to live at the space), doing so over time to avoid rate shock. Else, you are allowing the value of your park percolate up from the dirt into the chattel home, space by space. Keep the value of your park in the dirt.
- If you keep the rents under-market, you are de facto selling the park to the tenants. If all the value percolates into the leaseholds and chattel, you have transferred all your wealth to your tenants. If you close the park, ever, you will have to buy your park a second time.
- Lenders buy into the park owner’s relinquishment of value by financing leasehold value. They will finance that “comp’d” value. The premium of $60,000 is the property of the owner, but taken by the seller and financed by the buyer.
- If given the opportunities to lease as presented by the park owner, tenants should run, not walk, to sign up for leasing with a fair and reasonable fee, for the benefits to be provided and secured for the long term, including the vesting and preserving of their leasehold premium.
Why is leasing smart for your residents? Leases Protect Value. Leases Protect Resident Investment.
- Leases are “user-friendly.” They offer the security of the “seamless assignment” without hang-ups in selling the mobilehome investment. Where there is leasing and continuity, there are happy and contented residents. Vacancy controls are negotiated. They are fair. Reasonable. Help residents sell their homes. Other leasing benefits in summary:
- Owners make a big commitment when offering a lease: it guarantees long term tenancy terms without change from new owners or management. Small, affordable and fixed adjustments.
- Leases require management to follow a fixed formula for determining rent increases.
- Other Lease Advantages: Take it from a neutral consumer-protection voice. Consumers Union (the publishers of Consumer’s Guide magazine) say that “without a lease you have no rights.”
- Fixed annual increases (makes personal finance budgeting a breeze!)
- Obligates park owner to adhere to all lease terms, without unilateral change by owner or management.
- Lease can to be assumed by any subsequent buyer or owner, if sale, relocation becomes necessary.
- A long-term lease protects against possibly dramatic changes in the economy, cost increases, operating costs and all other increases in the cost of ownership, management and operations of the park from being reflected in rent increases.
- Residents are also protected against discretionary rent increases based on factors which are not related to park operation.
- Why do park owners care? Leases are a benefit to management for more secure future planning and improvement prospects for convenience and value of residents.
- Leases may make the mobilehome more valuable and easier to finance and sell. A buyer may wish to have a measure of certainty as to future rent increases during tenancy.
- Mobilehomes may be more marketable when under lease.
- Leasing may make mobilehomes easier to finance.
- It is so simple and clear. The transfer of wealth from vacancy control bifurcation is clean, discrete and identifiable. Yet the courts have yet to see this.
- Leasing is the best protection and security for both sides. As for the courts. Whether by a haze of judicial platitudes (having no application or meaning but as window dressing to justify a desired result), or sandbagging by meaningless double-speak (to avoid erosion of public confidence in the stability of government institutions), the court decisions fail to address the discrete issue presented. Or maybe it is just plain intellectual dishonesty. Reaching for a result only backed up by familiar generalities and vague principles which support either side, support neither side. The price paid by property owners for the continuing but disingenuous flexion of judicial muscle cannot compensate for the owner’s loss, nor rationalize mollification of an indifferent public. A soporific trance-like public is fine if they vote.
- The City of Santa Cruz structured their ordinance to regulate home pricing in order to have the benefit of rent controls–which protect the market and the buyer, thus eliminating tenant class bifurcation. And even that cacophony can be silenced by the secure vault of leasing assurance. Leasing is of such value that the mere opportunity to accept a lease has significant value.
You may wish to consider charging for the lease. In some areas, you should. As an elective housing cost for the buyer, he or she may explore the possibility of financing it. It seems that offering a lease at no charge is an unfair debasement of its real value to the resident and the community as a whole. Evidence? Drive through a leased community, and compare it to the not leased community under rent controls. You may be awestruck by the differences.
1 COMMENT:Yee v. City of Escondido: Will Mobile Homes Provide an Open Road for the Nollan Analysis?, 67 Notre Dame L. Rev. 821. As a USC graduate, this marks the last time I will say anything positive about Notre Dame.