Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County No. 37-2008-00053735-CU-WM-NC Robert P. Dahlquist, Judge.
IRION, J.
Villa Vista Estates, LLC and Villa Vista Associates, LLC, doing business as Villa Vista Mobile Estates (collectively Villa Vista), the owners of a mobilehome park in the City of San Marcos (the City), appeal from a judgment denying their petition for writ of mandate challenging the adequacy of rent increases approved by the City's Mobile Home Rent Review Commission (the Commission). We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. The City's Mobilehome Park Rent Control Ordinance
The City adopted an ordinance to regulate rent increases at mobilehome parks within the City limits in 1978 and has amended the ordinance several times. (See San Marcos Mun. Code, § 16.16.010 et seq. (the Ordinance).) At all relevant times, the Ordinance applied to mobilehome parks containing 10 or more spaces and designated the City Council as the Commission. (Id., §§ 16.16.030, subd. (a), 16.16.040, subd. (a).)
The Ordinance requires any park owner that wants to increase rents to provide written notice to the City and to affected tenants. (San Marcos Mun. Code, § 16.16.055, subd. (a).) The tenants may initiate Commission review of the proposed rent increase by filing a petition signed by more than half of the affected tenants. (Id., § 16.16.060, subd. (a).) The filing of a petition (unless rejected by the City Clerk) stays the rent increase until the Commission makes a final decision regarding the proposed increase. (Id., § 16.16.060, subd. (d).) The Commission must schedule a public hearing to determine whether the proposed rent increase is "reasonable." (Id., § 16.16.070, subd. (a).)
The Ordinance puts the burden of proof on the mobilehome park owner to show "by a preponderance of the evidence that a proposed space rent increase is reasonable and is necessary to enable the mobilehome park owner to receive a just and reasonable return on his investment." (San Marcos Mun. Code, § 16.16.070, subd. (g), italics added.) The Ordinance does not specify any particular formula or method for setting rents. Instead, it contains a nonexclusive list of seven factors the Commission "shall consider" (such as changes in the owner's income and expenses, changes in the consumer price index (CPI), and cost of capital improvements) and requires consideration of unspecified "other factors the Commission deems relevant." (Ibid.) The Ordinance does not specify how the Commission is to weigh these various factors.
The "consumer price index" is "an index measuring the change in the cost of typical wage-earner purchases of goods and services expressed as a percentage of the cost of these same goods and services in some base period." (Webster's 3d New Internat. Dict. (2002) p. 490.)
The factors enumerated in the Ordinance are:
After the public hearing, the Commission must issue findings and render a final decision on the tenants' petition. (San Marcos Mun. Code, § 16.16.070, subd. (d).) Depending on its findings, the Commission must do one of three things: (1) require the mobilehome park owner to continue the existing rents, (2) allow the owner to increase rents to a rate set by the Commission, or (3) approve the rent increase requested by the owner. (Id., § 16.16.070, subd. (e).)
B. Villa Vista's Purchase of the Mobilehome Park and Notice of Rent Increase
Villa Vista Mobile Estates (the Park) is an 86-space mobilehome park originally constructed in San Marcos in 1972. Villa Vista bought the Park in March 2006 for $5,120,174.60.
According to the closing statement, Villa Vista Estates, LLC and Ocean Avenue Associates, LLC bought the Park through the same intermediary, RPM Investments, Inc. Ocean Avenue Associates, LLC later transferred its interest to Villa Vista Associates, LLC.
In June 2007, Villa Vista sent a notice of rent increase to the City and the tenants of the 32 rent-controlled spaces in the Park. The monthly rents on these spaces then ranged from $363.30 to $638.25, and Villa Vista sought to increase the rent for each space to $650 effective October 1, 2007. According to Villa Vista, $650 was the monthly rent that reflected " 'general market conditions.' "
The other spaces were apparently subject to long-term leases, which are exempt from the Ordinance. (See Civ. Code, § 798.17.)
If the monthly rent for the 32 rent-controlled spaces were increased to $650, it would have produced rent increases ranging from 2 percent to 79 percent. Villa Vista later offered to "phase in" the monthly rent increases by limiting the increase to $100 on October 1, 2007, and following this initial increase with additional annual increases of $50, until each tenant's monthly rent reached the market rate of $650.
Alternatively, Villa Vista contended that if it were not permitted to raise the rents on the 32 rent-controlled spaces to $650 per month, it "require[d] a rent increase of at least $195.03 per month [on all rent-paying spaces] in order to receive a fair return, with no rent to exceed $650.00 per month." The $195.03 figure was calculated by assigning to each of the Park's 85 rent-paying spaces (one space was occupied by a Park manager) an equal share of the amount that would be needed to increase net operating income to a level that equaled 9.5 percent of the inflation-adjusted value of Villa Vista's investment, which amount Villa Vista contended would constitute a " 'fair return' " on its investment.
C. The Tenants' Rent Review Petition
Within a month after receiving the notice of rent increase, tenants from 28 of the 32 affected spaces signed and filed with the City Clerk a petition protesting Villa Vista's proposed rent increase and requesting a hearing before the Commission. (See San Marcos Mun. Code, § 16.16.060, subd. (a).) The City Clerk certified the petition and notified Villa Vista that a hearing on the proposed rent increase would be scheduled and that the rent increase was stayed pending a decision by the Commission. (See id., § 16.16.060, subds. (b)-(d).)
D. The Initial Written Submissions to the Commission
In early September 2007, Villa Vista submitted written materials in support of its proposed rent increases. Among these materials were (1) income statements, budgets, and a capital improvement schedule for the Park; (2) rent rolls for the Park; (3) a chart listing the CPI for Los Angeles, Orange and Riverside Counties at various times; (4) a declaration from Peter Jorde, a Park manager who discussed the Park's income and expenses; (5) a declaration from John Neet, an appraiser who conducted a survey of rents for non-rent-controlled spaces and concluded the market monthly rental value for a space at the Park was $650; and (6) a declaration from Richard Fabrikant, an economist who analyzed "viable alternatives for an on-going investment in Villa Vista" (i.e., investments in real estate investment trusts and real estate limited partnerships) and "the business and financial risks of owning Villa Vista" and concluded a fair rate of return on Villa Vista's investment in the Park would be 9.57 percent.
Approximately one week later, the tenants responded with their own written submission. In a 20-page letter to the Commission, the tenants' representative complained about the "tradition of perpetual leases and vacancy increases" at the Park, which she contended produced an "aberration" of high rents; included a chart that showed rents at the Park were higher than rents at other mobilehome parks in the City; accused Villa Vista of having overpaidfor the Park; challenged many of Villa Vista's claimed operating expenses; described the conditions of the Park as "deplorable"; and alleged gas utility charges were not being allocated fairly among the rental spaces. The letter contained much additional hyperbole, none of which is relevant.
The tenants also submitted many exhibits in opposition to the proposed rent increases. These included, among others, a long-term lease, documents from prior litigation concerning the Park, photographs of various portions of the Park, and documents from a prior rent increase hearing concerning the Park. According to the tenants' filing, these documents demonstrated the "tyrannical [e]ffects of investor owner oppression" on the tenants.
Villa Vista and the tenants both submitted written rebuttal materials. Significantly, the tenants did not include in their submission any analysis by a qualified expert on what would constitute a fair return on Villa Vista's investment in the Park.
E. The Reports of Experts Retained by the Commission
The Commission retained its own experts to assist in evaluating Villa Vista's proposed rent increases. James Brabant, an appraiser, prepared a report on the current rental value of spaces at the Park. Kenneth Baar, an urban planner and attorney, "provide[d] an opinion on what rents should be authorized for [the Park] pursuant to [the Ordinance], taking into consideration the factors set forth in [the Ordinance], [a] fair return based on alternate methodologies, and the theories underlying [Villa Vista's] contentions."
Brabant surveyed rents charged in six other mobilehome parks in the City and concluded that the average monthly rental value of spaces at the Park was $440, plus utilities, as of October 1, 2007. He noted this value was below the then-existing average monthly rental of $505 for the 32 spaces at the Park for which Villa Vista sought rent increases and opined that no increases were warranted.
Brabant also criticized the analysis done by Neet, the appraiser retained by Villa Vista. According to Brabant, Neet's appraisal was not reliable because Neet excluded from his analysis the rents charged for all rent-controlled spaces, which Brabant contended constitute the vast majority of spaces at comparable mobilehome parks.
In his report, Baar briefly discussed each of the factors listed in the Ordinance, except capital improvements, which he considered inapplicable. (See San Marcos Mun. Code, § 16.16.070, subd. (g).) Baar noted that gross income for the June 2006-May 2007 period, as reported by Villa Vista, was 18.1 percent higher than that for the November 2000-October 2001 period, the last period for which he had data. Baar also noted that for the same period, operating expenses at the Park increased by 33.9 percent and that if Villa Vista's proposed rent increase were approved, the Park's net operating income would increase by 17.8 percent. According to Baar, the CPI increased 2.3 percent from mid-2006 to mid-2007 and by 20.1 percent from 2001 through 2006. He also noted, based on Brabant's report, that the Park was of " 'average quality' " and " 'in overall good condition.' " Baar excluded from his analysis net income from Villa Vista's provision of utility services to tenants, either because regulation of charges for such service is preempted by state law or because the costs were already passed through to tenants.
Baar attributed a "substantial portion" of this increase to the increase in real property taxes triggered by the sale of the Park from the prior owner to Villa Vista.
See Public Utilities Code section 739.5, subdivision (a); Hillsboro Properties v. Public Utilities Com. (2003) 108 Cal.App.4th 246, 259 (rent board has no jurisdiction to set utility rates for mobilehome park tenants); Rainbow Disposal Co. v. Escondido Mobilehome Rent Review Bd. (1998) 64 Cal.App.4th 1159, 1167 (Rainbow Disposal Co.) (mobilehome park owners may not recoup cost of maintaining or improving gas and electric systems from submetered tenants through rent increases).
Baar discussed at great length in his report the topics of what constitutes a "fair return on investment" and how to calculate such a return. According to Baar, the "most appropriate" way to calculate a fair rate of return under a return-on-investment standard is to use a capitalization rate, which Baar stated was a rate of return investors are accepting in the marketplace. Baar defined the capitalization rate as the quotient of net operating income and purchase price. He said that in 2005-2006, capitalization rates for mobilehome parks in California ranged from 6 to 8 percent. The capitalization rate for the Park was reported as 6.3 percent in March 2006, when Villa Vista bought the Park. To maintain this rate of return on Villa Vista's purchase price adjusted for inflation, Baar calculated that a rent increase of $23.79 per month per space would be required.
For example, under Baar's approach, a property purchased for $1 million that generated $70,000 in net operating income would have a capitalization rate of 7 percent.
Villa Vista contends for the first time on appeal that the capitalization rate was mistakenly reported by the listing broker as 6.3 percent and that the correct rate was 6.72 percent. We ordinarily do not consider issues raised for the first time on appeal. (E.g., Cardinal Health 301, Inc. v. Tyco Electronics Corp. (2008) 169 Cal.App.4th 116, 155.) We need not address the alleged error in any event because the specific capitalization rate is irrelevant to our decision. (See Hiser v. Bell Helicopter Textron Inc. (2003) 111 Cal.App.4th 640, 655 (Hiser) ["Ordinarily, courts of appeal decline to decide questions not necessary to the decision."].)
Baar also proposed the use of a maintenance-of-net-operating-income (MNOI) approach as the best method for determining what level of rents would provide a fair rate of return. As explained by Baar, "[r]ather than designating a particular rate of return as fair, [the MNOI] approach preserves the yield from the property by passing through operating cost increases and adjusting the net operating [income] by a CPI factor." (Boldface deleted.) Under this approach, a base year is chosen, the net operating income (NOI) from that year is "maintained" in future years by adjusting the NOI for increases in operating costs and inflation, and the difference between the adjusted NOI and the base year NOI is passed through to tenants in the form of increased rents. According to Baar, the MNOI approach "meets the twin objectives of 'protecting' the mobilehome owners from 'excessive increases' and providing park owners with a 'fair return on investment.' "
In applying the MNOI approach to Villa Vista's proposed rent increases, Baar selected as the base year the 12-month period from November 2000 through October 2001, the last period for which income and expense data were submitted to the Commission as part of a rent increase application by the prior owner of the Park. Baar made certain adjustments to these data and to the corresponding data submitted by Villa Vista for the June 2006-May 2007 period. He then performed the necessary calculations to prepare a table of the rent increases for the 32 spaces that would be required to maintain the NOI, using alternative indexing ratios of 50 percent, 75 percent and 100 percent of the CPI. The calculated monthly rent increases ranged from $0 to $96 per space.
According to Baar, "the selection of an indexing ratio is [a] policy issue, subject to the caveat that no recent MNOI standard has ever provided for less than 40% indexing."
Baar also criticized the opinion of Fabrikant, Villa Vista's expert, that Villa Vista was entitled to a 9.57 percent return on its investment in the Park. In Baar's opinion, Fabrikant "overlook[ed] the standard use of capitalization rates" in the mobilehome park context and improperly used as a "benchmark" the rate of return on an investment (a real estate investment trust) that was not comparable to investment in a mobilehome park.
F. The Hearings Before the Commission
The Commission held two hearings on the tenants' petition. At the first, the Commission heard testimony from an attorney who represented Villa Vista in the purchase of the Park, Neet, Fabrikant, two tenants of the Park, Brabant and Baar. The testimony from these witnesses, who were subject to cross-examination, was generally consistent with the written submissions of the parties on whose behalf they testified. At the conclusion of the hearing, the Commission adjourned for a month and requested that Baar supplement his report to clarify whether he had included certain utility reserves as income in his MNOI analysis and to calculate what his recommended rent increase would be if the total increase were spread equally among all 32 affected spaces.
At the second hearing, the Commission heard additional testimony from Baar, and received his supplemental report and documentation. Baar stated he had not included the utility reserves as income in his MNOI analysis. He also provided a handout and related testimony concerning what his recommended monthly rent increase would be if the total increase needed to maintain the base year NOI were averaged over the 32 affected spaces. Using indexing ratios of 50 percent, 75 percent and 100 percent of the CPI as alternatives, Baar calculated the per-space monthly increase as negative $8.49; $6.75; and $19.99, respectively. Baar also testified that an additional $1.72 should be included in the monthly rental for each affected space to compensate Villa Vista for increased utility costs. After allowing Villa Vista's attorney to cross-examine Baar and hearing from several tenants, the Commission unanimously approved a monthly rent increase of $8.47 ($6.75 + $1.72) for each of the 32 affected spaces.
Based on the numbers Baar used to derive this amount, it appears the correct amount is $5.75, not $6.75. Although the Commission recognized this error as well, it awarded a rent increase based upon the erroneous figure of $6.75. No one challenges this error on appeal.
G. The Commission's Decision
The Commission adopted a formal resolution containing its findings and decision on January 22, 2008. It approved a rent increase of $8.47 for each of the 32 rent-controlled spaces at the Park.
The Commission found Neet's appraisal "unpersuasive" because Neet had excluded all rent-controlled spaces from his analysis. Further, the Commission noted the Ordinance does not require consideration of " 'market' rent of spaces" as part of the fair-return-on-investment analysis.
The Commission also found "unpersuasive" Fabrikant's opinion that Villa Vista was entitled to a 9.57 percent return on its investment in the Park. It noted this rate of return exceeded the capitalization rate based on Villa Vista's purchase price. The Commission also found Fabrikant had not considered the tenants' interests in his analysis.
The Commission considered "persuasive" Brabant's appraisal, which found the space rents at Villa Vista exceeded those at other comparable mobilehome parks. The Commission chose not to give the appraisal "undue weight, " however, because comparable rent is not one of the factors specifically listed in the Ordinance and, in the Commission's view, comparable rent is not a fair return standard.
The Commission ultimately concluded Baar's recommended MNOI approach was best suited to provide Villa Vista a fair return. It noted the MNOI approach has been approved by the courts. The Commission found the November 2000-October 2001 base year used by Baar was appropriate for three reasons: (1) the Commission had received income and expense data from the previous owner of the Park for that year, (2) it had determined the rents then in effect provided a fair return on investment, and (3) the previous owner did not challenge that determination. The Commission then concluded, based on the calculations Baar had presented in his written reports and at the hearing, that a "monthly space rent increase of $8.47 provides [Villa Vista] a fair return on its investment while at the same time protecting the Tenants from unreasonable space rent increases as required by the Ordinance."
The rates of return for the years ending October 31, 2000, and October 31, 2001, were calculated on an historical cost basis and reported to the Commission by the previous owner of the Park as 6.8 percent and 7.1 percent, respectively.
H. Villa Vista's Petition for Writ of Mandate and Related Trial Court Proceedings
Villa Vista challenged the Commission's decision by filing a petition for a writ of mandate, which it later amended. (See Code Civ. Proc., § 1094.5.) Although Villa Vista leveled many charges against the City and the Commission, the gist of the petition was that the Commission's adoption of Baar's proposed MNOI approach and his recommended $8.47 monthly rent increase were contrary to law, not supported by substantial evidence, and deprived Villa Vista of a fair return on its investment in the Park. Villa Vista requested that the Commission's decision be vacated and that the Commission be ordered to increase rents to a level that would allow Villa Vista to receive a fair return on its investment.
After receiving opposition and reply papers, the trial court heard oral argument. The court subsequently issued a statement of decision denying Villa Vista's petition and entered a corresponding judgment.
DISCUSSION
We begin by setting forth some general principles that govern the nature and scope of judicial review of rent control decisions. We then consider Villa Vista's specific challenges to the Commission's decision in this case.
A. General Principles of Rent Control
Rent control is a form of economic regulation that involves the balancing of competing interests of landlords and tenants and is subject to rational basis review under due process principles. (Pennell v. San Jose (1988) 485 U.S. 1, 11-13 (Pennell); Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 158-159, 165 (Birkenfeld).) The federal and state Constitutions prohibit, as deprivations of property without due process of law, "confiscatory" price controls, i.e., those that deprive owners or investors of a "fair return" (or a "just and reasonable return") on their investment. (U.S. Const., 14th Amend., § 1; Cal. Const., art. I, § 7, subd. (a); Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 307, 310 (Duquesne Light Co.); Birkenfeld, supra, 17 Cal.3d at p. 165.) A rent control regulation or decision is constitutional if it represents a rational balance that protects tenants from excessive rent increases and at the same time guarantees landlords a fair return on their investments. (Pennell, supra, 485 U.S. at p. 13; Galland, supra, 24 Cal.4th at pp. 1021-1022; Concord Communities v. City of Concord (2001) 91 Cal.App.4th 1407, 1414.) Such a regulation or decision deprives a landlord of property without due process of law, however, if it prevents the landlord from charging rents sufficient to generate a fair return on investment. (Birkenfeld, at pp. 165, 173; San Marcos Mobilehome Park Owners' Assn. v. City of San Marcos (1987) 192 Cal.App.3d 1492, 1501 (San Marcos).)
The term "fair return on investment" has no precise definition. In the context of rent control, California courts have employed various verbal formulations to describe a fair return as one that: (1) is "commensurate with returns on investments in other enterprises having comparable risks" (Fisher v. City of Berkeley (1984) 37 Cal.3d 644, 683 (Fisher)); (2) " 'may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed' " (Kavanau v. Santa Monica Rent Control Bd. (1997) 16 Cal.4th 761, 772 (Kavanau)); (3) does "not prevent an efficient enterprise from ' " 'operating successfully' " ' " (Galland v. City of Clovis (2001) 24 Cal.4th 1003, 1021 (Galland)); or (4) is " 'high enough to encourage good management including adequate maintenance of services, to furnish a reward for efficiency, to discourage the flight of capital from the rental housing market, and to enable operators to maintain and support their credit' " (Oceanside Mobilehome Park Owners' Assn. v. City of Oceanside (1984) 157 Cal.App.3d 887, 907 (Oceanside)).
No specific percentage rate of return or dollar amount of return on the investment is constitutionally required. What is "fair" varies with the risk of the investment and the amount of capital on which investors are entitled to a return. (Duquesne Light Co., supra, 488 U.S. at p. 310.) Thus, "[t]here is a range of rents which can be charged, all of which could be characterized as allowing a 'just and reasonable' return." (San Marcos, supra, 192 Cal.App.3d at p. 1502.) The term "fair return" (or "just and reasonable return, " or "fair rate of return"), as used in the context of rent and other price controls, "refers to a constitutional minimum within a broad zone of reasonableness." (Galland, supra, 24 Cal.4th at p. 1026; see also Power Comm'n v. Pipeline Co. (1942) 315 U.S. 575, 585 [lowest reasonable rate is not confiscatory in constitutional sense].) Only when "the arbitrary imposition of unreasonably low rent ceilings" causes the return on investment to fall below that constitutional minimum does rent control become unconstitutionally confiscatory. (Birkenfeld, supra, 17 Cal.3d at p. 169.)
B. Villa Vista's Challenge to the Commission's Decision
Although Villa Vista's briefs contain numerous separately headed arguments, its challenge to the Commission's decision can be reduced to two basic contentions: (1) the Commission may not use the MNOI approach to determine what constitutes a fair return on investment; and (2) there is no evidence that the rent increases approved by the Commission provide Villa Vista with a fair return on its investment in the Park. We will consider each of these contentions and then briefly address other, minor contentions made by Villa Vista.
1. The Commission May Use the MNOI Approach
Villa Vista contends that because the Ordinance authorizes rent increases that are necessary to enable a mobilehome park owner to earn a fair return on investment but does not mention the MNOI approach, the Commission must use a " 'return on investment' " standard and may not use the MNOI approach when evaluating proposed rent increases. We agree the Ordinance requires the Commission to set rents at a level that allows Villa Vista to earn a fair return on its investment in the Park, but we do not agree the Ordinance prohibits the Commission from using the MNOI approach in determining the amount of return that is fair.
a. The Ordinance Permits Use of the MNOI Approach
We must interpret the Ordinance to determine what it requires the Commission to do in setting rents at a level that allows a park owner to earn a fair return on its investment. Interpretation of a municipal ordinance presents a pure question of law for a court to decide. (H.N. & Frances C. Berger Foundation v. City of Escondido (2005) 127 Cal.App.4th 1, 12 (Berger).) Here, the Ordinance does not even mention, much less require the use of, any specific rent-setting methodology. It simply requires the Commission to set rents at levels that both protect tenants from "unreasonable space rental increases" and allow the park owner to "receive a just and reasonable return on his investment." (San Marcos Mun. Code, §§ 16.16.010, 16.16.070, subd. (g).) The Ordinance sets forth a nonexclusive list of factors (e.g., changes in gross income, expenses, the CPI and services) that the Commission "shall consider" when evaluating a proposed rent increase. (Id., § 16.16.070, subd. (g).) The Ordinance also requires the Commission to consider "other factors [it] deems relevant." (Ibid.) Thus, as long as the Commission considers the information the Ordinance requires it to consider and the method or formula it chooses to set rents results in a fair return on a park owner's investment, the Commission may select whatever method or formula it prefers. (See, e.g., Duquesne Light Co., supra, 488 U.S. at pp. 315-316 [rate-setting agency need not use any single method in setting rates]; Kavanau, supra, 16 Cal.4th at p. 784 [setting rent ceilings is legislative task; agencies, not courts, choose administrative formula]; San Marcos, supra, 192 Cal.App.3d at p. 1498 [rent control agency need not use particular formulaas long as it considers factors in governing ordinance and avoids confiscatory results].)
Among the formulas and methods for setting rents available to rent control boards is the MNOI approach. Under the typical MNOI approach, a base year is selected in which the landlord's NOI provided a fair return on investment, and that NOI is maintained in future years by allowing the landlord to recoup increases in operating expenses and costs of capital improvements by passing them through to tenants in the form of increased rents. (Kavanau, supra, 16 Cal.4th at pp. 768-769.) Most MNOI formulas also allow periodic rent increases to counteract the effect of inflation on the purchasing power of the dollar. (Id. at p. 769.) Because the MNOI approach provides a fair return on investment by preserving the landlord's base-year profit, this court and many others have approved its use by rent control boards. (See, e.g., Fisher, supra, 37 Cal.3d at pp. 679-684 & fn. 32 [rejecting facial challenge to variation of MNOI approach]; Stardust Mobile Estates, LLC v. City of San Buenaventura (2007) 147 Cal.App.4th 1170, 1181 (Stardust) [approving use of MNOI approach because it permitted continuation of just and reasonable return]; MHC Operating Limited Partnership v. City of San Jose (2003) 106 Cal.App.4th 204, 221 (MHC Operating) [MNOI formula is "[o]ne permissible rent control approach"]; Rainbow Disposal Co., supra, 64 Cal.App.4th at p. 1172 [MNOI approach provided just and reasonable return on investment]; Donohue v. Santa Paula West Mobile Home Park (1996) 47 Cal.App.4th 1168, 1178 [MNOI approach is "constitutionally valid"]; City of Berkeley v. City of Berkeley Rent Stabilization Bd. (1994) 27 Cal.App.4th 951, 971 ["use of a standard designed to protect against the loss of landlords' NOI is legally valid"]; Baker v. City of Santa Monica (1986) 181 Cal.App.3d 972, 988 ["[NOI] standards, ... essentially a return on investment standard, have been approved by California courts"]; Oceanside, supra, 157 Cal.App.3d at pp. 902-905 [approving use of MNOI approach as reasonable means to ensure just and reasonable return]; Palos Verdes Shores Mobile Estates, Ltd. v. City of Los Angeles (1983) 142 Cal.App.3d 362, 372 [maintenance of profit approach was reasonable means of ensuring just and reasonable return].) Thus, the Commission may choose the MNOI approach to calculate rent ceilings.
b. Villa Vista's Arguments Against Use of the MNOI Approach Are Unpersuasive
Villa Vista contends our decision in Palomar Mobilehome Park Assn. v. Mobile Home Rent Review Com. (1993) 16 Cal.App.4th 481 (Palomar), which involved the same rent control ordinance at issue here, precludes the Commission from using the MNOI approach. We disagree. Although in Palomar we held the City could not rely on the MNOI approach to deny a rent increase merely by pointing to the fact that the plaintiff's NOI had not decreased, we did so because the plaintiff contended it had never received a fair return since rent control began and the City had not set a base year that would have allowed comparison of the plaintiff's current and base-year NOI's. (Id. at pp. 486-487.) Thus, the problem we addressed in Palomar was that the essential factual predicate for application of the MNOI approach, i.e., a base year in which the landlord's NOI provided a fair return on investment, was absent. The problem was not a legal prohibition against use of the MNOI approach. To the contrary, we stated, albeit in dictum, that the Ordinance "could be read to suggest that [MNOI] is the standard to define a 'fair' rate of return" and that the MNOI approach "has been praised by commentators for both its fairness and ease of administration." (Id. at p. 486.)
We also disagree with Villa Vista's contention that the use in the Ordinance of the phrase "return on investment" requires the Commission to calculate fair return on investment simply by multiplying the dollar value of the investment by a "fair" percentage rate of return. According to Villa Vista, to calculate a fair return on its investment, the Commission must first adjust for inflation the price Villa Vista paid for the Park (which Villa Vista calls its "investment") and then multiply this inflation-adjusted price by a market rate of return for an investment having comparable risks. Although Villa Vista calls the price it paid for the Park its investment, that price presumably represents the value Villa Vista assigned to the income-producing potential of the Park at the time of purchase. (See Fisher, supra, 37 Cal.3d at p. 680, fn. 33 [value of rental property depends largely on potential income generation].) Villa Vista's proposed method for calculating a fair return based on its inflation-adjusted purchase price is merely a variation of the fair-return-on-value method, which this and other courts have repeatedly held is not required and, in fact, have criticized as unworkable. (See, e.g., Duquesne Light Co., supra, 488 U.S. at pp. 308-310; Fisher, at pp. 680-681 & fn. 33; TG Oceanside, L.P. v. City of Oceanside (2007) 156 Cal.App.4th 1355, 1381 (TG Oceanside); Westwinds Mobile Home Park v. Mobilehome Park Rental Review Bd. (1994) 30 Cal.App.4th 84, 91, fn. 4; Yee v. Mobilehome Park Rental Review Bd. (1993) 17 Cal.App.4th 1097, 1104; San Marcos, supra, 192 Cal.App.3d at p. 1498.)
As one court explained: "The fatal flaw in the return on value standard is that income property most commonly is valued through capitalization of its income. Thus, the process of making individual rent adjustments on the basis of a return on value standard is meaningless because it is inevitably circular: value is determined by rental income, the amount of which is in turn set according to value. Use of a return on value standard would thoroughly undermine rent control, since the use of uncontrolled income potential to determine value would result in the same rents as those which would be charged in the absence of regulation. Value (and hence rents) would increase in a never-ending spiral." (Cotati Alliance for Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 287.)
In short, we conclude the Ordinance permits the Commission to use the MNOI approach when evaluating a park owner's application for a rental increase, provided the resultant rents set by the Commission allow the park owner to earn a "just and reasonable return on his investment." (San Marcos Mun. Code, § 16.16.070, subd. (g).)
2. Substantial Evidence Supports the Commission's Decision
Villa Vista also contends the evidence does not support the Commission's decision that a monthly rent increase of $8.47 for each of the 32 rent-controlled spaces at the Park is sufficient for Villa Vista to earn a fair return on its investment in the Park. Specifically, Villa Vista complains the Commission's decision must be set aside because: (1) there is no evidence that the previous owner of the Park earned a fair return on investment in the base year chosen by the Commission, and (2) there is no evidence that indexing at 75 percent of the CPI is sufficient to allow a fair return on investment. As we explain below, we are not persuaded.
a. We Review the Commission's Decision for Substantial Evidence
Initially, we note the narrow scope of our review over this aspect of Villa Vista's appeal. "It is not our task to weigh conflicts and disputes in the evidence; that is the province of the [Commission]." (Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 630 (Howard); accord, Escamilla v. Department of Corrections & Rehabilitation (2006) 141 Cal.App.4th 498, 514 (Escamilla).) Instead, we consider the entire record to determine whether it contains substantial evidence supporting the Commission's decision - i.e., relevant evidence a reasonable person would accept as sufficient to support the decision. (Code Civ. Proc., § 1094.5, subd. (c); In re J.K. (2009) 174 Cal.App.4th 1426, 1433; Berger, supra, 127 Cal.App.4th at p. 7.) If the record contains such evidence, we must affirm the decision even if that evidence is contradicted by other substantial evidence. (E.g., Jessup Farms v. Baldwin (1983) 33 Cal.3d 639, 660-661; Green Trees Enterprises, Inc. v. Palm Springs Alpine Estates, Inc. (1967) 66 Cal.2d 782, 784; Howard, at pp. 630-631.)
b. Substantial Evidence Supports the Choice of Base Year
The administrative record amply supports the Commission's choice of a base year. The previous owner of the Park had submitted income and expense data to the Commission for the 12-month period from November 2000 through October 2001 as part of a prior rent control proceeding. Calculations using these data and employing an historical cost approach yielded a 7.1 percent rate of return on investment. This rate fell within the range of rates of return earned at other mobilehome parks in San Diego at the time, which the Commission's expert, Baar, reported as being between 6 percent and 10 percent. Baar also testified at the hearing before the Commission that the return the prior owner of the Park earned in the base year was fair. Based on the prior Park owner's financial data and Baar's report and testimony, the Commission could reasonably infer the prior owner's NOI during the November 2000-October 2001 period constituted a fair return on investment and use that period as the base year when employing the MNOI approach to calculate a fair return for Villa Vista in a later year. We therefore hold the Commission's choice of a base year is supported by substantial evidence. (See, e.g., Berger, supra, 127 Cal.App.4th at p. 7 [evidence is substantial if it is relevant and a reasonable person would accept it as adequate to support conclusion].)
This approach has been approved as a valid method of calculating return on investment. (See, e.g., Duquesne Light Co., supra, 488 U.S. at pp. 309-310; Palomar, supra, 16 Cal.App.4th at pp. 487-490.)
c. Villa Vista's Contentions Regarding the Choice of Base Year Have No Merit
Villa Vista objects to the Commission's use of November 2000-October 2001 as the base year on several grounds. None is persuasive.
First, we reject Villa Vista's contention that the Commission could not use a base year that postdates the inception of rent control simply because the Ordinance itself does not specify a base year. It is true that rent control schemes that employ the MNOI approach typically specify a pre-rent-control base year, on the assumption that pre-rent-control rents reflect free market conditions and provide the landlord with a fair return on investment. (See, e.g., Kavanau, supra, 16 Cal.4th at pp. 768-769; Stardust, supra, 147 Cal.App.4th at p. 1181; Oceanside, supra, 157 Cal.App.3d at pp. 893, 902.) A rent control board, however, may select a base year that postdates the start of rent control when there is evidence that the NOI the landlord earned in the selected base year provided a fair return on investment. (Los Altos El Granada Investors v. City of Capitola (2006) 139 Cal.App.4th 629, 655.) As we have already explained, the record before the Commission contained substantial evidence that the prior owner of the Park earned a fair return on investment in the November 2000-October 2001 period. Accordingly, the Commission could select that year as the base year.
Second, we reject Villa Vista's contention that the Commission's selection of November 2000-October 2001 as the base year was invalid because it was based on profits of the past instead of then-existing market conditions. In making this argument, Villa Vista quotes language from two cases concerning the insurance rate rollback provisions of Proposition 103: 20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216 and Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805. The former case held a rate is unconstitutionally confiscatory only if it prevents the insurer from "operating successfully during the period of the rate and subject to then-existing market conditions" (20th Century, at p. 295), and the latter case held that " '[p]rofits of the past cannot be used to sustain confiscatory rates for the future' " (Calfarm, at p. 819). These holdings do not apply here because: (1) rents at the Park were not rolled back to past levels; (2) Villa Vista has not shown the rents set by the Commission are "confiscatory, " i.e., that they will prevent it from operating successfully during the time the rents are in effect; and (3) Villa Vista was not denied a rent increase based on excessive profits earned by the prior owner of the Park. In fact, Villa Vista was allowed to increase rents to account for existing market conditions, such as increases in operating expenses and inflation since the base year. The Commission's decision therefore does not run afoul of either 20th Century or Calfarm.
Third, we reject the contention that the Commission's consideration of materials from the 2001 rent control proceeding involving the prior owner of the Park violated Villa Vista's constitutional rights. The Commission properly could consider the prior owner's financial information in evaluating Villa Vista's proposed rent increases. (See MHC Operating, supra, 106 Cal.App.4th at pp. 210, 225 [income and expense data for same property from 1985 could be used in 1998 rent control proceeding]; Fox v. San Francisco Residential Rent etc. Bd. (1985) 169 Cal.App.3d 651, 657 [history of rent increases was "relevant factor" under rent control ordinance].) In its written submissions to the Commission, Villa Vista vigorously challenged Baar's reliance on this information in his MNOI analysis; and at the hearings before the Commission, Villa Vista had the opportunity to cross-examine Baar about the prior owner's financial information and also presented oral argument about it. Villa Vista therefore had a full and fair opportunity to challenge on the merits both the substance of the previous Park owner's financial information and Baar's reliance on it in his MNOI analysis. The Commission did not "bind" Villa Vista by the decision in the earlier proceeding involving the prior owner, in violation of Villa Vista's due process rights. (See Blonder-Tongue v. University Foundation (1971) 402 U.S. 313, 329 [due process prohibits estopping party from litigating claim when party never had chance to present evidence and arguments on claim].)
Fourth and finally, we reject Villa Vista's contention that the Commission could not use capitalization rates in determining the prior owner had earned a fair rate of return on the Park in the base year. What constitutes a fair rate of return on investment in a mobilehome park is a matter for expert opinion. (Berger, supra, 127 Cal.App.4th at p. 11; Whispering Pines Mobile Home Park, Ltd. v. City of Scotts Valley (1986) 180 Cal.App.3d 152, 161.) Here, the Commission's expert (Baar) opined that using capitalization rates was "standard" among appraisers and was "the most appropriate method of measuring fair rates of return under a return on investment analysis since these rates reflect the returns that the market is providing for similar investments." Villa Vista's expert (Fabrikant) disagreed and proposed other measures. Since the evidence on how to determine a fair rate of return was conflicting, it was up to the Commission to resolve the conflict, and it could do so by accepting Baar's opinions and rejecting Fabrikant's. (See Escamilla, supra, 141 Cal.App.4th at pp. 514-515 [trier of fact resolves conflicts in evidence]; Howard, supra, 72 Cal.App.4th at p. 630 [same]; Lauderdale Associates v. Department of Health Services (1998) 67 Cal.App.4th 117, 127 ["the trier of fact is the exclusive judge of credibility and may reject expert testimony in favor of nonexpert testimony or other evidence"].) We have no power to reweigh the evidence and substitute our judgment for that of the Commission. (See Kelly v. CB&I Constructors, Inc. (2009) 179 Cal.App.4th 442, 454 [not function of appellate court to reweigh evidence]; Carson Harbor Village, Ltd. v. City of Carson Mobilehome Park Rental Review Bd. (1999) 70 Cal.App.4th 281, 294 [court should not substitute its judgment for that of rent control board even though court might decide case differently on merits].)
Even if Fabrikant's opinion on what constituted a fair rate of return were undisputed, as Villa Vista suggests, the Commission did not have to accept it. The trier of fact may totally reject the testimony of an expert witness even though the testimony is not contradicted, provided the trier of fact does not do so arbitrarily. (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 890.) In calculating the fair rate of return for Villa Vista's investment in the Park, Fabrikant considered as investment alternatives only real estate investment trusts and real estate limited partnerships. Although Fabrikant stated that real estate investment trusts with mobilehome park portfolios "[t]ypically" contain rent-controlled and non-rent-controlled properties, he did not state that such trusts themselves are subject to price regulation; whether the particular trusts he analyzed in this case contained any rent-controlled properties; or what percentage, if any, of their portfolios consisted of rent-controlled properties. In his analysis of real estate limited partnerships, Fabrikant included no information about whether such partnerships are subject to price regulation or to what extent such partnerships invest in rent-controlled properties. Our Supreme Court has noted, however, that comparing the rate of return on a price-regulated investment with those on investments that are not price-regulated "is of limited utility in establishing the constitutional minimum rate of return." (Galland, supra, 24 Cal.4th at pp. 1026-1027.) Because it is unclear from the record whether the investments included in Fabrikant's alternative investment analysis were price-regulated or not, we cannot say the Commission acted arbitrarily when it rejected his analysis as "unpersuasive."
d. Substantial Evidence Supports Indexing at 75 Percent of the CPI
The Commission's decision to index at 75 percent of the CPI is also supported by substantial evidence. Baar's written report and testimony indicated that application of his suggested MNOI formula would yield a fair return on Villa Vista's investment in the Park whether base-year NOI were indexed at 50 percent, 75 percent or 100 percent of the CPI. (See San Marcos, supra, 192 Cal.App.3d at p. 1502 ["There is a range of rents which can be charged, all of which could be characterized as allowing a 'just and reasonable' return."].) According to Baar, the choice of what specific indexing ratio to adopt was a "policy issue" for the Commission, "subject to the caveat that no recent MNOI standard has ever provided for less than 40% indexing." Villa Vista's expert, Fabrikant, suggested indexing at 100 percent of the CPI was required because if revenues increase at a fraction of the inflation rate while expenses increase at or above the inflation rate, the rate of return on investment will approach zero. The Commission resolved this conflicting evidence by rejecting Fabrikant's analysis as "unpersuasive" and "find[ing] that Baar's MNOI formula is a fairly constructed formula to use to determine the space rent increase needed to provide [Villa Vista] a fair return." Thus, contrary to Villa Vista's complaints, the Commission did not "conclusively presume" that adjusting the prior owner's base-year NOI at 75 percent of the CPI would result in a fair return on investment or "blindly apply" Baar's suggested MNOI approach in concluding the calculated return was fair. Rather, the Commission's "decision was the result of thorough expert analysis of the relevant evidence and exhaustive debate over its proper use in the [Commission's] fair return determination. The evidence sufficiently supports the [Commission's] finding that Baar's recommended increase... provided [Villa Vista] a fair return on its... investment." (Rainbow Disposal Co., supra, 64 Cal.App.4th at p. 1170.)
The Commission was not prohibited from selecting the 75 percent indexing ratio simply because, as Villa Vista accurately asserts, "no court has ever held that adjusting 'base year' profit for 75% of the increase in the inflation rate always results in a fair return." As we have already pointed out, when it comes to setting rent ceilings, "agencies, not courts, choose which administrative formula to apply." (Kavanau, supra, 16 Cal.4th at p. 784.) In selecting a rent-setting formula that allows for adjustments for inflation, indexing at 100 percent of the CPI is not required as a matter of law. (Carson Mobilehome Park Owners' Assn. v. City of Carson (1983) 35 Cal.3d 184, 195 (Carson); Berger, at p. 15.) Indeed, courts have rejected challenges to indexing ratios of 75 percent and lower. (See, e.g., Stardust, supra, 147 Cal.App.4th at p. 1182 [indexing at 50 percent of CPI]; Sandpiper Mobile Village v. City of Carpinteria (1992) 10 Cal.App.4th 542, 545 [indexing at 75 percent of CPI]; Oceanside, supra, 157 Cal.App.3d at p. 902 [indexing at 40 percent of CPI].) Since application of the MNOI formula chosen by the Commission resulted in a fair return on investment for Villa Vista, the Commission's choice must be upheld. (See Carson, at p. 191 ["The method of regulating prices is immaterial so long as the result achieved is constitutionally acceptable."]; Rainbow Disposal Co., supra, 64 Cal.App.4th at p. 1172 [upholding MNOI approach that provided mobilehome park owner "sufficiently 'just and reasonable' return on its investment"].)
3. Villa Vista's Other Contentions Have No Merit
Villa Vista raises additional, minor contentions on appeal, none of which has merit. In the interest of completeness, we will address each briefly.
Villa Vista argues that the record contains no evidence it paid too much for the Park. Since the Commission did not rely on any alleged overpayment in denying Villa Vista the full rent increases it sought, we need not address this issue. (See Hiser, supra, 111 Cal.App.4th at p. 655 ["Ordinarily, courts of appeal decline to decide questions not necessary to the decision."].)
Villa Vista also argues that it did not "waive" its right to contest the argument that the Commission could have relied on Brabant's rent survey to deny Villa Vista any rent increase. Since the Commission did not totally deny a rent increase but granted a monthly increase of $8.47 for each of the 32 rent-controlled spaces, we need not address the waiver argument. (See Hiser, supra, 111 Cal.App.4th at p. 655.)
Villa Vista's vague argument in its reply brief - that the Ordinance is somehow invalid because it does not allow automatic rent increases each year but instead requires park owners to apply for increases - is not well taken. We ordinarily do not consider points raised for the first time in a reply brief. (Varjabedian v. City of Madera (1977) 20 Cal.3d 285, 295, fn. 11; American Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453.) We do note, however, that Villa Vista's contention, only weakly urged, is contrary to controlling authority. Our Supreme Court has ruled that "the absence of a general rent adjustment procedure does not make [a rent control ordinance] constitutionally deficient." (Carson, supra, 35 Cal.3d at p. 194; see also Fisher, supra, 37 Cal.3d at p. 687 ["a rent control ordinance need not have a general adjustment provision to pass constitutional muster"].)
Finally, we point out the serious misconception that underlies Villa Vista's entire approach to this case. Villa Vista submitted reports from an appraiser who analyzed rents only for non-rent-controlled spaces and from an economist who apparently considered only (or largely) non-price-regulated investment alternatives (see fn. 16, ante), and insisted, based on these reports, that the Commission had to increase rents to market levels. Villa Vista thus assumes it is constitutionally entitled to charge rents that it would be able to charge in the absence of rent control. Villa Vista is mistaken.
The whole point of rent control, of course, is to place an upper limit on the amount of rent a landlord can charge. Rent control strives "to eliminate excessive rents and at the same time provide landlords with a just and reasonable return on their property." (Birkenfeld, supra, 17 Cal.3d at p. 165.) Rent control thus "has the inevitable effect of reducing the value of regulated properties. But it has long been held that such reduction in property value does not by itself render a regulation unconstitutional." (Fisher, supra, 37 Cal.3d at p. 686.) It is only when rent ceilings are set so low that a landlord cannot stay in business and operate successfully that the constitutional minimum return on investment has been breached and the rents become confiscatory. (Galland, supra, 24 Cal.4th at p. 1026; Birkenfeld, at p. 169; TG Oceanside, supra, 156 Cal.App.4th at p. 1373.) "Here, there is no contention, nor does the evidence suggest, that if the Commission denied the requested rent increases, [Villa Vista] would be in such an unfavorable economic position [it] would go out of business." (San Marcos, supra, 192 Cal.App.3d at p. 1502.)
To the contrary, the record shows that, although application of Villa Vista's preferred method for calculating a fair return on its investment in the Park would have produced a higher NOI than application of Baar's MNOI method, the latter produced a fair return. As we have previously held, "[t]he [Commission] was not obliged to reject Baar's MNOI analysis just because [Villa Vista's preferred method] would have yielded a higher rent increase." (Rainbow Disposal Co., supra, 64 Cal.App.4th at p. 1172; see also Palomar, supra, 16 Cal.App.4th at p. 487 [price regulator may use any fairly constructed formula even though other proper formulas permit higher prices].) Rather, for investors in price-regulated investments that are earning a return above the constitutional minimum but are nonetheless disappointed (such as Villa Vista), "the solution is not constitutional litigation but, as with nonregulated investments, the liquidation of the investments and the transfer of capital to more lucrative enterprises." (Galland, supra, 24 Cal.4th at p. 1026.)
DISPOSITION
The judgment is affirmed.
WE CONCUR: McCONNELL, P. J., HALLER, J.
"1) Changes in the mobilehome park owner's gross income from the operation of the mobilehome park;
"2) Changes in the reasonable operating expenses relating to the operation of the mobilehome park;
"3) Whether the proposed rent increase will result in an increase in net income to the park owner from the operation of the park;
"4) Changes in the [CPI] for the time period from the last rent increase;
"5) Changes in the services, amenities, maintenance and condition of the mobilehome park and the extent to which the rent increase is necessary to provide the services or amenities or to insure maintenance and good operating condition of the park;
"6) The extent to which the rent increase is necessary to pay for capital improvements and the amount of money allocated by the owner to a capital improvement or maintenance fund, along with the park owner's budget for maintenance, care and capital improvements for the park; and
"7) The extent to which the landlord receives net income from fees or charges for utilities, or incidental fees or charges for services billed separately from rent." (San Marcos Mun. Code, § 16.16.070, subd. (g).)