In MHC Limited Financing v. City of San Rafael, the Court of Appeals for the 9th Circuit considered, among other things, whether the City of San Rafael’s mobilehome rent control ordinance (the “Ordinance”) constituted either a regulatory taking under Penn Central Transportation Co. v. New York City or an impermissible “private” taking in violation of the Fifth Amendment, which prohibits the taking of private property for public use without just compensation. With respect to Penn Central, the court held that economic impact, investment backed expectations, and the character of the Ordinance all led to the conclusion that the Ordinance did not constitute a taking. The court also rejected plaintiff’s “private taking” theory, novel in this context, in which MHC argued that the Ordinance did not qualify as a “public” use and therefore the taking was prohibited, regardless of compensation.
MHC had purchased a mobilehome park (the “Property”) while the Ordinance was in effect. The Ordinance restricted property owners’ ability to increase rents but allowed an increase to market rate rents for new tenants after a vacancy. While MHC’s owned the Property, the City amended the Ordinance. The amendment further restricted the ability to charge higher rents by implementing “vacancy control,” which gave any new resident the right to rent a mobilehome pad at the same rate as the previous tenant. MHC argued that such amendment constituted both a Penn Central taking and an impermissible “private taking.”
In reaching its conclusion, the court analyzed the Penn Central factors: economic impact, investment backed expectations and character of the Ordinance. With regard to economic impact, the court noted that the district court did not use the correct analysis. The district court had compared the value of the Property without the Ordinance versus the value of the Property with the Ordinance in place. As the Ordinance was in place at the time of acquisition, the court noted that the correct analysis should have been the value of the Property with the Ordinance in place versus the value of the Property after amendment of the Ordinance. Further, relying on Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 645 (1993) the court also pointed out that even if the district court’s financial analysis had been appropriate, diminution in value of property less than the 100%, the categorical taking established by the Supreme Court in Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), is insufficient by itself to establish a taking.
Similarly, the court determined that MHC’s expectation that it would be able to increase rents was, in essence, unreasonable. Since the Ordinance was in place at the time of acquisition, MHC’s expectation with regard to its investment in the Property had to take into account the value of the Property with the limited ability to increase rents. The court also analyzed the character of the Ordinance. The court noted that, as found in Penn Central, a taking may more readily be found when the interference with the Property is physical in nature. Here, the court noted that the Ordinance was more of an economic adjustment for the common good and as such, that factor also weighed against MHC.
MHC also argued that the Ordinance constituted a “private taking” in violation of the Fifth Amendment, which permits the taking of private property only for public use, and therefore the taking was prohibited, regardless of compensation. MHC further argued that the City was not allowed under the Fifth Amendment to take property under the “mere pretext” of a public purpose, when its actual purpose was to bestow a private benefit to the tenants of the Property. Accordingly, MHC urged the court to apply a heightened standard of scrutiny to its review of the Ordinance. Here too, however, the court held against MHC and determined that the applicable standard is whether the Ordinance is rationally related to a conceivable public purpose, as opposed to the heightened standard that MHC proposed. The court explained that there is extreme deference given to the legislature and that a rational legislator could have concluded that the Ordinance would further the stated goals of protecting tenants. Therefore, the Ordinance was rationally related to a conceivable public purpose, and there was no private taking.