*1 Dist., A031219. Div. First Twо. June [No. 1987.] al., THOMAS et ANDERSON Plaintiffs and v. Respondents, SAN FRANCISCO RENT AND STABILIZATION ARBITRATION BOARD, Defendant and Appellant; al.,
RICHARD KLEIN et Real Parties Interest and Appellants. *3 Counsel Renne,
George Agnost and Louise H. City Attorneys, Kathryn and A. Pennypacker, City Attorneys, Deputy for Defendant and Appellant. Pearl, M. Richard Mark K. Me Gillespie and Pearl Neill Gillespie & and Plaintiffs Respondents.
Peter J. Zouras Raymond Levy H. for Real Parties in Interest and Appellants.
Opinion SMITH, J.San Francisco’s residential rehabilitation loan more program, commonly known rehabilitation assistance or RAP program (San Code, Francisco Admin. 32.1 et seq.), provides property desig owners § nated city areas of the with low-interest loans to rehabilitate residential Since property. its inception has program been administered so tenants, as to allow borrowers to pass through to under a prescribed (id., formula 32.73), “monthly increased loan payments” secured § made, at the time the loan including unrelated to and, rehabilitation of the property. uphold We interpretation accord ingly, overturn a judgment superior court rehabili directing tation-related payments be included. City are
Appellants County of San Francisco on behalf (city), the San Francisco Rent (rent Stabilization Arbitration Board board), interest, and real partiеs three co-owners of rental who bor- rowed under the RAP program. are six of Respondents their tenants.
Background city’s administered chief (CAO), administrative officer who is assisted in all rehabilitation financing aspects program city’s Code, real estate (San 32.20; Admin. department. Francisco all § undesignated section references hereafter are to that code.) designated is first neighborhood follows. A functions as standards code building targeted area” and “residential rehabilitation 32.11-32.12, A 32.41-32.44.) (§§ enforcement and public improvements. are (ARC) committee an area rent advisory (CAC) committee citizens 32.30, 32.34.) (§§ formed for each area. act, Marks-Foran enabling
City under bond issues authorized Act) (Health orAct (Marks-Foran Act Residential Rehabilitation owners Code, loans to property & Saf. et fund low-interest seq.), which, many sources funding as an alternative to conventional (§ 32.10) *4 (Board areas, matter. as a practical be unavailable deteriorating might of Cal.Rptr. 244 & fn. v. Dolan Supervisors (1975) Cal.App.3d [119 32.61.) Owners years. (§ as 20 347].) long The term of the loan can be as up their bring properties who do not in RAP still have participate code. the CAO satisfy and
RAP borrowers eligibility requirements must meet 32.30, In limitеd circum- ability (§ (a).) of their loan. subd. repay the stances, of part as a can debt the preexisting property borrower refinance and 32.60) a (§ (§ RAP loan. a 32.53.) signs promissory The borrower named gives city a of as security, deed trust on the as with property pay- and beneficiary. a loan becomes due (§ 32.63.) The balance of unpaid reasons, where, able on sale or transfer for ownership except hardship (§ 32.66.) CAO allows to a new owner. assignment qualified for may qualify Tenants of their units displaced rehabilitation during 32.69, borrower city (§ (2)(b)), relocation assistance from the subd. of first right a condition the loan to tenants agrees give displaced 32.60, 32.69, see (§ (2)(a); refusal to the units afterward subd. reoccupy subd. (a)). limited are
Another loan rents rehabilitation following condition is that on or designated the life areas of the loan. For residential rehabilitation 1, 1977, Stabili- Residential Rent July by city’s after governed rents are 37.1 et ordinance) (§ seq.) (rent zation and Arbitration Ordinance control July July before passed (§ 32.73-1.) designated For areas shall owner formula: “The three-part rents are limited this rent outstanding, conventional RAP loan agree during time any dwelling unit in rehabilitated residence shall not exceed [1] monthly in the form to the base rent actual increased costs owner plus [2] payments, taxes, insurance, maintenance, [3] annual ad- (a), (§ Cost of Index.” justments Bay Living tied to the Area numbering added.)
Tenants feel a who rent increase exceeds allowable limits can seek reduction and a rebate of amounts overpaid. program originally provid- a side, ed for petition to the CAO an A either to the ARC. appeal, July 1982 amendment jurisdiction transferred over such the rent disputes board, ordinance, created under the rent control but disputes arising designated July areas before 1977 continue to be controlled 32.74, 37.8, section-32.73 formula quoted (§§ (a) (e)(5).) above. subds. The sanction for an owner who refuses to rebate excess rents or otherwise with comply a board decision termination the RAP loan. (§ 32.75.) Richard and Eva Klein
Appellants bought one-half interest a 12-unit $175,000, building in Ashbury the Upper They paid December 1980. $50,000 $125,000 down and putting financing remaining with pur- money $1,509.25. chase Their mortgage. were Appellant Lena Field held the other one-half interest free apparently property, of mortgage payments.
The Upper Ashbury had in been a RAP area June 1974. designated Appellant owners performed a RAP-mandated work without plumbing then, in 1982, loan year May first in a loan received RAP $7,100 to do electrical and painting work. Their monthly pay- loan $63.33. ment was The rent formula of section because area applied 32.73 loan, had been designated before 1977. July When for the applying appel- Hoo, lant Richard Klein Mr. spoke with a a loan for the real Soo officer estate department. Soo Hoo described the program depth explained that the costs of the purchase money along could be mortgage passed as “monthly tenants loan payments.” formula,
Under section 32.73’s a dwelling initial “base rent” for unit ordinarily its rent as aof “base rent date” six months preceding at least 32.73, the area’s designation under (§ RAP. For (c) (d).) appel- subds. units, lant owners’ charged date was and the rents at that time $165, $145 varied from unit. depending on the particular “[A]ctual increased costs” added to “base rent” under the are the amounts formula taxes, which “monthly loan payments, insurance mainte- [and] nance” at the time of the RAP existing loan exceed such costs that existed on the “base rent date.” There monthly were no loan payments thus, 1973; appellants’ all them monthly allowable payments were “actual increased costs” that they could on to their tenants. pass Finally, section 32.73’s cost-of-living adjustment is and added to the applied case, “base figure. adjustment rent” ultimately allowed this calculat- ed as of was 82.7 percent. they received of increased rents tenants to a notice objected
Respondent then-recently through misdirected initial efforts Following board, rent to the took the matter they ARC abolished appeal procedure, of the increase. several challenging aspects whether regarding actions
The instant involves the board’s appeal as in- through be passed could monthly mortgage payments the Kleins’ first heard before The matter was creased under section 32.73. costs officer, the full board On hearing payments. appeal who disallowed 37.8, tenants then (§ were allowed. (f)), Respondent subd. payments Proc., Civ. (Code writ of mandate. petitioned the court for superior discretion and rent abused its 1094.5.) The court concluded that the board § (id., 1094.5, calculating the contrary “by (b)) acted to law subd. § to in- Program increase ... under the Rehabilitation Assistance allowable rehabilitation clude increased unrelated to entry judgment grant- timely This follows court’s property.” appeal its decision. to vacate writ rent board ing peremptory directing the mortgage (1) allowing that the court erred Appellants urge un- would (2) interpretation that the court’s payment pass-through and invest- return on their constitutionally deny RAP loan holders a fair rate of their Code, We with (see agree Health & Saf. (a)). ments argument first and so not reach the do second.
Appeal *6 promissory This printed case came about because whoever drafted the to the signed by provi- note RAP three words borrowers added qualifying the owner can sion about loan The ordinance states that monthly payments. on, rent, loan monthly as ... in the form of pass “actual increased costs 32.73, “monthly loan The payments,...” (§ added.) phrase subd. italics (a), anywhere the ordi- is is else payments” and it not defined qualified, same, promulgated in the rules nance. The is mirrored unqualified language 7.19, rules; cited to RAP hereafter implement (Rule 3(A), the program. par. found, of trust by the deed rule.)1 again qualification, It is without that borrowers must sign.2 costs, monthly including responsibility calculating 1 The vest increased rules allowable department head. property, payments, department’s
loan with the real director of estate 1.2, 7.0, 7.19, (Rules “The owner shall par. 3(B).) Paragraph 3(A) rule 7.19 directs: def. of any agree outstanding, rent for dwell during the time conventional loan his/her plus increased rent actual ing the base unit the rehabilitated residence shall not exceed added.) (Italics monthly payments, to the loan ...” costs owner in the form of begins: Lim “Rent Increase 2 Paragraph signed appellant 32 of trust owners the deed of being this Deed of (a) obligation secured agrees during Trustor the time the itations. note, however, The promissory “I reads as that so as agree long follows: loan, thereof, this any or portion rent for unit ... unpaid, dwelling shall not exceed the plus base rent actual loan increased costs the form of rehabilitation, payments to ...” (Italics added.) finance There is no accounting for the note’s language. testimony According board, taken before the city attorney’s someone officedrafted note, but the words “to finance rehabilitation” overlooked apparently were at the time and then went anyone city attorney’s unnoticed office or the real estatе until late after herein owners appellant noticed, signed had their As note. soon as the was discrepant language real estate department loans. began crossing words out on all new Borrowers had never been told that to be had rehabilitation, related to far as the record shows.
The only administrative support promissory language comes from two way consolidated cases that made their superior to the court petition for writ of In mandate. Dodson v. Area Ashbury Rent Com- Upper S.F., mittee City Ct. (Super. County & West 802210) Upper No. v. Ashbury S.F., Area Rent City Committee (Super. County Ct. & No. (the Dodson 717) cases), the court an ARC decision disallow upheld pass-through monthly mortgage payments unrelated to rehabilitation. evidently The cases involved who their property owners refinanced hilt just loan, before a RAP taking advantage out planning take ordinance, the pass-through and to avoid the rent which perhaps control exempts RAP-loan in RAP July areas before designated 37.8, (§ subd. (e)(5); see were never (e).) Dodson cases Nevertheless, to this court and appealed thus have no precedential value. they directly influenced the officer’s in this hearing proba- decision case bly were what the city attorney’s called department’s office and real estate limited, attention to the promissory note We note them for that language. explanatory purpose. note language is at odds with the RAP ordinance and
rules, trust, the deed of and a decade of relied administrative interpretation on by borrowers.
The central question correctly us is whether the court superior 32.73, “monthly the term interpreted loan rule payments” (§ (a); 7.19, par. 3(A)) as restricting rehabilitation-related pass-throughs to Trust, thereof, any portion or unpaid, any dwelling rent for unit the rehabilitated resi plus dence shall not base exceed the actual the increased costs to Trustor the form of (Italics payments, added.) loan ...”
1343 rules we to stat apply We construe ordinances the same loans. 665, 668 Cal.App.3d Madera v. Court 39 (County Superior (1974)
utes. of ultimately 283].) of a statute Cal.Rptr. interpretation [114 Nevertheless, construc “the contemporaneous of the courts. responsibility with its administra agency charged tion of statute an administrative necessarily great tion and not is entitled interpretation, controlling, while clearly it is erroneous should bе the courts unless weight respected has been or unauthorized This is true where there particularly [citations]. in such interpretations. continued reliance public upon acquiescence 100 (City City (1979) Santa Ana v. Garden Grove [Citations.]” of of 521, omitted; Truck Engs 530 fn. Motor Cal.App.3d Cal.Rptr. 907], [160 1458, v. Bd. 1471 Equalization (1987) Co. State 189 Cal.App.3d [235 of 117].) Cal.Rptr. great weight. The administrative in this case merits interpretation of the was for all rehabilitation Responsibility financing aspects 32.20; rules delegated (§ to the real estate the CAO. department through 1.2, 7.0, 7.6, 3.) always pass allowed par. department service, loan throughs preexisting debt rehabilitation-related just contrary payments, loan officers out the began crossing obviously note promissory language as soon as it was discovered. Borrowers debt, have relied must on able to their being pass through mortgage cost single city’s to most owners. The board of greatest supervisors was aware of the presumptively department’s long-standing interpretation many amendments of which passed years, qualified when over the none “monthly language payments.” acquiescence That implies Co. v. Bd. 25 department’s practice. (Coca-Cola Equalization (1945) State 375, 382 1]; Cal.2d P.2d Horn v. 41 Swoap (1974) Cal.App.3d [156 113]; Cal.Rptr. Engs Equalization, Motor Truck Co. v. State Bd. [116 think that the board of supra, Cal.App.3d 1471.) We do not clarify failure to the Dodson cases supervisors’ following ordinance any preceden the Dodson The cases had no implies acquiescence holding. Besides, the record department, tial value. shows that the real estate after with city attorney’s office, promissory discussions out began crossing decisions, refutes idea note That was the Dodson which language. after view.3 Dodson as to the acquiescence opposed department’s defer, department’s interpretation, but to Respondent tenants would have us not to the because, they say, represents promissory language promissory “it is the note office, long-standing interpretation by City Attorney’s Depart Estate whereas the Real note, ment, ‘interpretation’ informal conversations which never read the based its ordinance, not among Respondents perspective. interpretation its staff.” lose It is note, Also, promissory that concerns us. even if there was evidence that *8 ordinance, city attorney’s department, “interpretation” the real estate note was the it is 1344
Was the real estate consistent with department’s interpretation “The rule is that the program? statutory fundamental of construction court should ascertain the intent of the so as to effectuate Legislature of the law. Base Materials v. purpose (Select Equal. Board [Citations.]” 640, (1959) 51 645 are 672].) Cal.2d P.2d “If the words of the statute [335 clear, the court should not add to or alter them to accomplish purpose that does not history. on the face of the statute or from its appear legislative Certainly liberty meanings the court is not at to seek hidden [Citations.] by the suggested statute or the available extrinsic aids. [Citation.]” 175, v. 35 (People Knowles Cal.2d 183 P.2d cert. den. 340 (1950) 1], [217 639, U.S. 879 L.Ed.2d v. 117]; City 71 S.Ct. Terminal Plaza Corp. [95 County San Francisco (1986) Cal.App.3d Cal.Rptr. [230 875].) The ordinance says “monthly increased costs the form of can be payments” (§ on to the tenant after rehabilitation. passed subd. (a).) The words clear. are to them the “to Adding limiting phrase ordinance, finance rehabilitation” is if its permitted legislative history or available extrinsic evidence it. requires
The limitation is manifestly not here. RAP’s required enabling legisla tion, the Marks-Foran (Act), Act “was passed urgency legislation fall of 1973 in order fill federal to be created gap [citation] government’s Federally discontinuance of its Assisted Code Enforcement (FACE) program, away as the federal moved from government grants specific into revenue The FACE purposes sharing, program, operation [fl] since had been successful the decline of several areas in arresting San Francisco as well as in other California communities.” (Board Super Dolan, 237, 243, visors v. supra, omitted.) fns. Cal.App.3d
The Act allows local make “to agencies long-term, low-interest loans finance residential areas in rehabilitation residential order depressed that, encourage without local upgrading property” predicts gov- assistance, ernment “many residential areas will deteriorate at an depressed accelerated because owners are not able to obtain rehabilita- pace Code, tion loans from Saf. The Act private (Health 37911.) sources.” & also local grants agencies authority limited rent hikes help prevent steep that the loans “A might engender. agency, prevent precipi- local order to tous increases in rent engender which the loans wоuld as to residential rental ..., property, may as a condition of a loan that the borrow- require, making er contract the term of the loan not to the rental amount during raise over office, city attorney’s Only interpretation charged not the whose matters. was administering program. with the loan *9 by yield an which will a fair rate amount the establishes agency regulation for similar increases that are rea- of return investments will allow for the necessary to continue maintenance of sonably provide prop- proper (Id., 37922.5, erty.” (a), added.) subd. italics §
We think it the crucially agency that the Act local significant empowers loans”—i.e., precipitous agency’s to limit rent increases that “the the reha- bilitation loans—would That is also reflected in engender. narrow purpose that, of grant authority the Act’s to tenants so require to advance notice the of tenant may, event “the amount rehabilitation work at the protest, of discretion local be limited in rent agency, precipitous order to prevent Code, 37922.5, which may increases Saf. cause & displacement.” (Health § (b), subd. italics It is the Act’s added.) again from relocation apparent assistance provisions: every local shall take action to agency possible “[T]he prevent displacement of all as a residents result operation of of residential rehabilitation include program----Such actions shall relocation ... persons and families of low or income who are moderate rehabilitation, displaced tenants because rent resulting increases from of... 37922.2, ...” (Id., added.) italics ordinance reflects same of rent narrow control. Its scope general purpose is “to improve condition and the housing of of quality life in San Francisco by providing property means which owners through in designated residential ... may areas which are deteriorating obtain finan- cial assistance to rehabilitate their It of RAP property. policy shall be maintain of existing diversity San Francisco’s neighborhoods, encour- the existence of age low and moderate and to income housing, preserve residential character of the general areas.” While lan- designated (§ 32.1.) about guage maintaining “existing diversity” encouraging existence low moderate housing income broad might suggest ranging control, RAP’s specific loan-related sections are to limit rent in- designed Thus, caused creases the loan criteria for program. deciding example, whether refinancing debt as a RAP loan existing part should be allowed include “the need to prevent significant which rent increases would result tenants, hardship and the need to from prevent speculators profiting 32.53, from use of residential rehabilitation subd. (§ (c).) To financing.” benefits, be for relocation eligible tenants must be Rehabilita- “displaced activities____” tion Assistance Program (RAP) (§ (a).) rules also caused show concern for increases loan. For example, deciding refinancing part whether approve loan, Director for the department] real estate shall be “[t]he [of that an satisfied applicant purchase did or refinance with *10 money
the intent a RAP refinance debt and using loan to purchase consequently improve applicant’s position acquiring property.” (Rule 7.4.)
The trouble limiting pass-throughs preexisting pay- with course, ments on the does not reduce rent increases is that it property, engendered without the by the RAP loan. The debt would be there with or existence, loan. We have to remember that in when RAP came into therе A on as much city-wide was no rent control. landlord could pass monthly debt service as the market allowed.
We conclude that neither the Marks-Foran Act nor the ordinance was at the already existing intended to limit of debt service pass-throughs time of Legislature the rehabilitation loan. It makes sense that the good city’s to an owner for board of would not want supervisors penalize the loan of both enactments is to using One evident program. purpose prevent by any windfall rent increases caused sudden appreciation very resi- improved property, something unfairly that could displace dents whose exist- presence important retaining neighborhood’s was to However, ing character. enactment nothing convincingly suggests either any an brought to interfere with the market forces that about attempt increased value before the RAP loan and rehabilitation. occurring resulting RAP’s use of a date base rent derived from a figure pre-RAP-designation does show concern for artificial rises in rental values that mere preventing cause, of RAP 32.73’s designation might cost-of-living a area but section adjustment year-to-year takes care of that on inсreases putting cap commensurate with the overall rental market.
Extrinsic evidence in the our of the ordi- interpretation record buttresses nance as intended to because of RAP-loan occurring control rent hikes Teichman, work, an Judy rehabilitation assis- preexisting debt service. tant city attorney involved in of the Marks- negotiations leading passage Act, Foran and the board of community super- also worked with members author, ordinance, visors in its principal with drafting especially “[Ojur assumption John Teichman then-Supervisor Barbagelata. explained: was in a rent control drafting that we were not drafting [section 32.73] measure, but that about what neighborhood there had been concern was a lot effect be on the tenants of the might program----There area, at the time. The activity in the a lot on things going of sales this. The concern was that as a result of idea tenants be forced out might was not to make rent but enact some kind of measure that control rent. raise their might would limit the amount which landlords [A]nd that the any activity neighborhood allocate windfall benefits from the might rather than landlords. To generate, put to the tenants []f] any the idea let the incrеased costs simply: pass more was to landlord had, but amount been obtainable they additional that have might in the market because would be to the neighborhood!)] of the enhanced the tenant.” comments reflect benefit of To the extent that Ms. Teichman’s ordinance, they discussion and legislative leading events enactment of *11 v. Diego illuminate intent. Teachers Assn. San Com- legislative (California 692, 817, CollegeDist. 621 munity (1981) Cal.Rptr. 28 Cal.3d 769-770 [170 856].) P.2d
We that the rent correctly hold board allowed the and that pass-through court, otherwise, the in concluding the superior improperly interpreted We ordinance. further hold that the statute enabling ordinance and its not simply do authorize the exclusion of service from the preexisting debt Thus, “monthly term loan to the extent that payments” (§ (a)).
the court was to enforce the note as a superior seeking promissory language ordinance, of “ambiguity” resolution erred. The real court estate had no such a department power to exact condition.4
Our conclusion is bolstered The compelling practical considerations. RAP success of has on owners depended the loans. Without that using deterioration, rental financing, have been housing accelerating would lost to owners many could not have obtained or private afforded financing. Ironically, program’s aim enforcement could stepped-up code have hastened loss of units rental had the loan not offered a solution for practical caught owners in the squeeze.
It safe to say many seems or most of RAP’s borrowers potential matter, been a away, would have driven as practical they had been told that service existing debt could be passed not Consider this through. simple illustration:
The rent date Ashbury base for an RAP apartment area is Upper 1, $100 July for the unit on a paid that date was month. This is rent” the “base on which real estate calculates the initial inconsistent, internally leaving We note that the is also room for serious disagreement really promise pass as to whether it a embodies loans related to reha agrees paragraph bilitation. The borrower to limit in numbered of the note rents to However, creased costs the form of “loan to finance rehabilitation.....” very agree paragraph next sentence of the same states: “I the rent increase limita to abide (32), (33), (34) provisions they paragraphs securing tion are set Deed Trust forth noted, (Italics already added.) paragraph this note.” As we the deed have 32 of of trust mir ordinance, “monthly language qualification (see payments,” rors the of the loan fn. without 2, ante). made. This
maximum rent for the unit at the time the loan is is 1982, case even if until and the 1982 loan not taken for example, $100. buys X tenant is rent much in excess of In paying then rata share of the money mortgage. a property, incurring purchase pro $150 In a month. X monthly payment assignable the apartment $20 loan, rata of which is apartment’s secures RAP share pro interpretation month. The real estate consistent with its department, initial maximum al- “monthly term would calculate the payments,” $100 (base 1973) rent from way: lowable rent for the this apartment plus taxes, $150 $100 (monthly (increases mortgage payment) plus insurance, maintenance, etc., since cost-of-living adjustment, 1973) plus However, $370. $20 (RAP loan). The total rent would be plus of the term respondents’ under and the court’s superior interpretation $150 “monthly for the would be mortgage payment loan payments,” disallowed, $220, $370. a maximum rent leaving *12 should, $150 X at least in his as we that had covered
Assuming, 1976, costs, taking tenant’s befоre out the insurance and other plus loan, $220 RAP a monthly nega- reduction total rent creates sudden loan, tive cash RAP Twenty dollars to cover the a goes flow. of that amount before, $200 cost that he all only did not have to cover other costs. leaving likelihood, $150 $100 His actual costs are in all or more in (mortgage) plus, insurance, maintenance, in the taxes He red. and other costs. is operating those
Who or take on a loan under circum- willing would be able to Also, stances? if we in our hypothetical exacerbated assume problem 1982, in, far date the owner would have more for purchase say, paid when yet have been limited to property, greater mortgage, incurred still Recall, too, $100. prospective that the cost-of-living adjustments based on borrower of that many years forward as more formula. could look to as takers, years its first Chances are RAP would have few after especially had of operation.5 Contrary
The mandate. to the court’s superior court erred granting conclusion, law in contrary allowing the rent board was not acting only Ashbury Inner RAP areas Upper record Richmond are sub shows ject areas to thе last RAP made those were section 32.73 rent formula and that the loans import, limited respectively. 1984 and in this case is thus of issue we confront only many years. affecting from the record that have been We assume loans existence language that the at was not used after which narrows issue here impact still further. many contrary holding generate A for rent rebates as decision to our could tenant actions matter, however, practical far back as tenants find relief. Rather than 1974. As a few would rents, probably past flee the rebate exorbitant sums of most borrowers would either impose on their It rent board can own or be forced out. seems that the sanction the 7.19, 32.75; par. 6.) (§ an rents loan. rule owner who refuses to rebate is to terminate the (Code pass-through. agency. There was thus no abuse discretion Proc., Civ. (b).)
Disposition The judgment granting of mandate is reversed. peremptory Appel- writ Court, lants shall 26). recover costs on rule appeal (Cal. Rules J., Benson, concurred.
KLINE, respectfully P. J.I dissent.
The majority’s conclusion—that a owner participating rehabilitation assistance program (RAP) may on to tenants pass entirely loan payments unrelated rehabilitation the рrogram—under- mines one of the major of the RAP This unfortunate purposes program. conclusion results from a of the Marks-Foran Act and the misreading ordinance, from undeserved deference to the administrative agency from policy considerations are highly the record and unsupported speculative.
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tate and is cannot be elevated to the level an “administrative of judicial not entitled to deference. ordinance, its RAP Act and predecessor, like the Marks-Foran (FACE)
federally federally program, funded assisted code enforcement decay to achieve low purposes arresting preventing seeks the dual of the charac- maintaining and moderate urban residential areas while income of moderate ter In to avoid low and neighborhoods. flight of those order both the state invariably income tenants that accompanies gentrification, against statute and the protect precipitous local ordinance tenants hikes. as a condi- Marks-Foran Act example, specifically provides
For loans, to prevent precipitous of RAP and “in order making tion certain rent,” not to may agree that the borrower agency require increases local beyond yield a fair return and necessary permit proper raise rents Code, 37922.5, (a).) agency subd. The local (Health maintenance. & Saf. § if that actually the amount of rehabilitation work empowered also limit by the engender “precipitous owner of residential would proposed (Id., 37922.5, subd. may (b).) rent increases which displacement.” cause § moderate income tenants is sensitivity Such to the needs of low and For similarly the RAP ordinance. ex apparent numerous of provisions ordinance, 32.1, provides section which ample, purpose declares diversity be of San that “It shall of RAP to maintain the policy existing neighborhoods, Francisco’s the existence low and moderate encourage designated income character of housing, and to the residential preserve 32.41, areas...” areas for (See also the selection of (c), regarding subd. § 32.53, effect consideration of the designation; (c), regarding § 32.69, refinancing; concerning rents speculation prior approving § displace tenant first refusal in case moving right temporary costs 32.73, areas; ment; to rent increase limitations for pertaining § 32.75, providing rent increase establishing protest procedures; § *14 32.75-1, limitations; setting forth sanctions violation of rent increase § 32.90, procedures regarding in safeguards proceedings; eviction § clearly The RAP note itself relocation assistance for displaced tenants.) objectives achieving states that “This loan is made ... for the purpose and moderate income of low neighborhood preservation, preservation set forth these objectives and other as are more housing, particularly public laws.” tenants of all authority for the to
My colleagues pass-through find Code, Safety which is debt in section 37922.5 of the Health preexisting majority, According set to part margin forth material below.2 agency, (a): pre in order to Safety “A local Health and Code section subdivision engender as residential rental precipitous vent in rent which the loans to increases would this “crucially section of the Marks-Foran Act is because it significant” demonstrates a authorize a to limit legislative agency intent to local those it rent increases the RAP loan and precipitous engendered deprive of the ability to limit all other increases in rent. This interpreta- precipitous tion of the statute is much too far a reach. all,
First of readily closely section 37922.5 more resembles apparent, a rent control statute than any other the Marks-Foran Act. provision Since this section of the act does not a context in one provide which would to expect major find a the ability constraint on of the local to limit a agency sort, rent precipitous increase of it seems reasonable to think that if the Legislature did have that intention it would have included a clear to proviso that effect. There is no such caveat in the acknowledges statute. Although rent, the obvious fact that RAP may engender loans increases in precipitous section 37922.5 limit ability does not make the of the local to agency increases at all depend the nature of the upon debt the landlond attempts indeed, pass-through tenants; section 37922.5 does not in terms of speak pass-throughs at all. of the Regardless basis which the borrower upon increase, endeavors to justify a rent the statute local simply empowers agency to require the borrower to “contract of the loan not during term to raise the rental amount over an amount agency by regulation which the establishes yield will a fair similar rate of return for investments and will allow increases that reasonably are necessary to and continue provide Code, 37922.5, proper maintenance of the (Health & Saf. property.” It is (a).)3 simply unreasonable to authority legisla- discern this grant tive intent to bar the local from agency prohibiting pass-through tenants of loans unrelated to rehabilitation. Such a intent seems to putative me not consistent with but inimical to the central idea in section embodied 37922.5: that the local agency to limit possesses power increases steep rent.
The permissive pass-through of all debt secured means the property that the amount of rent a heavily tenant will be will required pay depend on the financing arrangements of the owner This property. practice inevitably will result in of rents real estate manipulation speculators property, may require, as a making pursuant part, condition of a loan to this that the borrow- during er contract the term of the loan not to raise the rental amount over an amount which agency by regulation yield establishes will a fair rate of return for similar investments *15 will reasonably necessary allow for increases that provide proper are mainte- to and continue property. only nance of the apply This subdivision 12 shall to structures which will contain dwelling or more units after exceeding rehabilitation and structures five to for which loans ($5,000) per dwelling thousand dollars pursuant part.” unit have been extended to this 3 record, So far as is shown regulation the the the never established yield meaning amount of rent that will a fair rate of return within the of section 37922.5.
1352 lenders, heavily leverage are reason and their who now another provided city of units in the under designated rental certain areas of acquisition program For such of the RAP program. investors attraction not other- permits necessary not that them to that could repairs finance made, ability have commercial they demonstrably wise be as obtain is that it loans for that of the RAP for them program value purpose. By provides loophole participating the rent control ordinance. level is they RAP are free to raise rents to whatever program precipitously much debt as necessary to shift to their tenants the burden of as repaying secure, borrowed their will of the for which the property regardless purpose of be the basis funds were оbtained or used. To this to done on permit 37922.5—which, indicated, the limita- section was intended to authorize tion, facilitation, irony. cruel not the of to me a rent increases—seems cannot unless the a fair of return be received assumption that rate by the borrower is to tenants all debt secured permitted pass-through is not case law4 and only to reconcile with property impossible pertinent RAP with the numerous the Marks-Foran Act and the ordi provisions of tenants, very nance clear designed to and inconsistent with protect note, wholly matter is unnec language practical but as promissory essary to landlords. protect provisions, its limitation Notwithstanding RAP program contains incentives for owner significant participation. foremost, First and market rate loans lower than program provides code bring property mandatory housing requirements. into with compliance For some obviously owners (though appellants) offers In Board Super source of funds for this purpose. of Dolan, court, 237, v. city visors 45 advised this supra, Cal.App.3d noted, matter, we which neighborhoods “as a some of the practical unofficially have been FACE been areas or which will be RAP areas have available, institutions, lined’ if funds have been “red and even lending they higher have been usual or periods available either for shorter than (Id., 244, than 8.) usual interest rates.” at fn. p. who subse- date owners
Although
requires
base rent
of 1973
1973,
existing
to those
quently obtained
loans to roll back rents
4
judicial
abundantly
limitations such as
Federal and state
clear that rent
decisions make it
unconstitutionally deprive
of a fair re
landlords
that set forth
do not
See,
644
e.g.,
City
Berkeley (1984) 37 Cal.3d
turn on their
v.
investment.
Fisher
[209
682,
206,
1045];
Cal.Rptr.
261],
(1986)
106 S.Ct.
693
For the to “loan foregoing limiting pass-throughs note, rehabilitation,” finance in the would prescribed or program eliminate the incentive for owners to participate property otherwise obstruct its goals.
The urged by city by majority— and endorsed interpretation which allows landlords any by property— debt secured pass-through far The is more difficult to of the RAP purposes program. reconcile with real estate rent increases to cover department pay- would allow ments on loans but only incurred not for the purpose acquiring property, children, to finance a college gambling trip education for the owners’ Reno, The sole any or other investments of the borrower. interests or by necessary thinks is whether the loan was secured inquiry which of rent increases for these property. purposes, authorization be such as the involved in this would otherwise properties one case ordinance,5 barred owners wealthy the rent control will induce This really who do not need its benefits. participate program the limited will defeat the of the goals diverting depleting program deteriorating housing. funds available to urban public improve debt secured Permitting pass-throughs to tenants alerts is also hard to in the RAP ordinance which square language with from those to prevent speculators who administer the to “the need 32.53.) financing.” (§ from the rehabilitation profiting use of residential pro- converts the RAP city’s Judicial acceptance permissive practice accelerating into a rents and gram highly increasing attractive device for permit those provision prohibiting rent increases that exceed the RAP ordinance July designated on or after applies ted under the rent control to RAP areas ordinance (See 32.73-1.) *17 tenants the
departure from areas of the moderate income gentrified low and effect, majority In program large part was conceived to protect. permit rents to be tenants were by very speculators against set whom supposed to be protected. “administra-
The of the its deference to the linchpin majority opinion is tive RAP real interpretation” department ordinance estate supervi- claimed in that the board acquiescence “interpretation” consistently sors. majority that the loan suggests officers department’s could be explained to borrowers debt service prospective that all preexisting passed just through, pay- or other rehabilitation-related Therefore, ments, the department always pass-throughs. allowed such concludes, must relied such majority “obviously” borrowers have pass-throughs. (Maj. 1343.) p. opn.,
This is no evidence view the facts is not the record. There supported through loan told officers all debt could be passed borrowers service tenants; nor there such advice. evidence that relied on any borrower testify any proceed-
John Rathsam was loan of the officer to say he ings Mr. ever below. Nowhere in his does Rathsam testimony borrowers, borrower, any that affirmatively told let all prospective alone was to rehabili- permissible to loans unrelated pass-through debt service on tation. All Mr. he never told a stated in was that regard Rathsam this words, witness it was since the impermissible borrower to do In other so. matter, the only never states whether borrower about the ever inquired Mr. Rathsam inference that can record is that safely be drawn from the in question never gratuitously advised a the pass-throughs borrower that advice to a were ever this gave we cannot be that he permissible; certain single borrower. officer by loan majority states Klein was told appellant Richard Hoo, money Soo of the testify, purchase who did not himself the costs “that ” “ ‘monthly payments.’ could be
mortgage passed along tenants as self-serving, by (Maj. 1340.) testimony, though Mr. Klein’s opn., p. actual else from anyone no Hoo or means so clear. When asked whether Mr. Soo into through told him all loan could be passed increases Hoo some with Mr. Soo Mr. Klein “I sat program, responded just the time I think depth and he me the explained some counsel by his way further you.” pressed Mr. Rathsam described it to When actually pass-throughs as to Mr. that permissive whether Soo Hoo statеd certainly were the Klein that “I—I had policy replied program, he that this in terms of what impression on-going program had been *18 very He’s a man.” presented. competent invariably
Though the record does not establish that borrowers were loans, induced to believe nonrehabilitation it does they could pass-through establish legal question. that never considered this Rathsam, note,
When asked he found of the language when out about officer, who to have been the appears replied most experienced “To you enough by be honest with it out some brought embarrassingly was over, think attorney checking I in the Dodson case. We went on an assump- they [i.e., tion that and those of the were terms of the ordinance note] years. one and the same all these I admit to that. Once that turned over was City Attorney’s to the officeI to sit read the terms never bothered down and short, of the In note. I have even overlooked the words.” promissory might it was not until the in after 1983—nearly Dodson cases were filed a decade Francisco, was first after year established in San and one became of the appellants in the participants program—that representatives real estate department realized that the terms of the note which promissory they restricted provided to “loan to finance reha- pass-throughs bilitation.”
It deserves to be at that the emphasized language question this point was not obscure either in two-page its or its meaning placement note. promissory At the the note in boldface top type appeared following warning: “Notice to Borrower: This Document Contains FOR RENT INCREASE Rate, Provisions for a Variable Interest Right LIMITATIONS, for Reoccupy, First Tenant’s Refusal Open Housing Employment Opportunity Equal Employment added.) (Italics and Subcontractors.” Contractors Thus, even if it be was assumed for the sake of that a borrower argument told that all she relied on that pass-throughs were and that he or permitted, representation, the reasonableness of such reliance seems highly question- able light contrary to the contained unambiguous language note and like highlighted. It is in this regard, appellants, pertinent, borrowers, most RAP were owners of multiunit residential who properties cannot be assumed to v. (Cf. Strassburger (1984) be Easton unsophisticated. 90, 102, They fn. Cal.App.3d 521].) 46 A.L.R.4th Cal.Rptr. [199 note,
knew or should have nature of a legally binding promissory known they read or no they should have read thе document works signed; conditions, injustice to hold them ordinance. to its clear required borrowers record leaves considerable doubt whether RAP Though were that all relied on told debt could be to tenants and passed through information, opposite such no were provided it leaves doubt borrowers advice, note to all for the real estate department provided who them to it. The fact that the loan officers required sign borrowers were the note read it those who provided signed did not does mean that funda- bound the document failed so or should be excused from that as a mental The RAP responsibility. specifically provides ordinance to all agree condition of borrower “shall participating program, The real estate (§ (a).) conditions of the loan agreement____” *19 case, failed the at in this and there- department to enforce condition issue ordinance, fore failed as well the RAP due to its to enforce ignorance fact that the condition existed. In this failure of enforcement countenancing the does majority not have even that weak excuse.
There is no this case conclude that the board of bаsis the record of to to supervisors in the tenants nonrehabilitation acquiesced pass-through loans. until Dodson cases any The issue was never raised in forum the public were There board filed. is no reason to that before then the knew presume from that or had reason to believe differed department’s practice city attorney. in the prescribed prepared cases While it is true in the Dodson is that the court’s superior opinion us, decision precedent city failure of the binding appeal upon issue, that, certainly indicates in the at all aware of the they event were to all city order would responsible apply officialsunderstood that the court’s loans, us, the time the outstanding such that were at as the one before Dodson The amended supervisors cases were decided. fact that board Dodson several after the decision in the ordinance on occasions certainly does cases without explicitly authorizing permissive pass-throughs not indicate acquiescence that policy. an of a administrative principle that construction statute weight is entitled to
agency charged ordinarily great with its administratiоn case for be invoked in this respected by should courts is improperly them, however, never was an is that there among several reasons. Chief In can be attached. great weight “administrative to which interpretation” colleagues my to which reality, interpretation” the so-called “administrative is hoc rationalization fashioned pay homage more than a nothing post of embar- attorney incompetence city argument justify legal defer- My colleagues’ rassed loan of real estate. officers they statutory construction ence argument perverts to this the principle judicial from close rely shielding for it results in the purport upon; scrutiny of an in ignorance administrative that was carried out practice rather than as the result of considered construction contemporaneous of the ordinance and the note. implementing
The majority many claims “that or most of RAP’s borrowers potential matter, would have been driven away, they as a had been told practical debt service In existing through.” (Maj. 1347.) could not be passed opn., p.
effect acknowledging that there is no for this statement support record, the majority cоncocts an elaborate situation to ostensi- hypothetical bly its which it are so prove point. critical is based assumptions upon unwarranted, however, manifestly as to reveal the weakness of the case the hypothetical to make. purports which, $100
The hypothetical a 1973 base rent of even with posits period ic adjustments, assertedly too the debt permit servicing low incurred to acquire un property. Preliminarily, such a predicament *20 common, because responsible ordinarily real estate investors do not acquire properties that do not generate a cash flow the adequate support pur money chase mortgage, city in a like a rent particularly San Francisco with control ordinance that prohibits the & pass-through (Rules such debt. Bd., event, S.F.
Regs., Residential Rent Stabilization 6.10.)6In any given § the low, of a problem base rent that is unreasonably the owner’s indicated, recourse is to seek to have it RAP already revised. As the rules that “if the provide owner believes that the rent on the base rent charged date was unreasonably low” he or may she to have the base rent petition 7.19, ¶ increased. (RAP rule 2(A).) The rules indicate such revision upward should be allowed if the materially base rent was that charged lower than for comparable units within the in building neigh same or the immediate borhood or “any special or unusual circumstances the rent affect[ed] words, charged on the base rent date.” In other RAP (Ibid.) the program 6 regulations The rules and implement that permit rent control ordinance such debt passed only through be acquired price instances which the owner for a purchase by which price percentage exceeds seller’s than the increase in the “[less] [con price sumer previous purchase plus between the date of and the date of current sale index] capital improvements cost of energy per rehabilitation made or conservation work and/or by (Id., (d).) formed the seller.” provide 6.10 The ser rules also that “an increase debt § refinancing vice as a result of existing financing, to obtain con funds excess of will be justification sidered as a proceeds borrowing for a rent increase if the are reinvested maintenance, building purposes repairs improvements for capital needed and or which quality (Id., increase the (e).) of the rental units.” 6.10 conjured
includes аn procedure addressing administrative for the problem majority.7 The ma- majority’s yet for reason. hypothetical artificial another $100, jority base rent owner’s actual assumes the new $150 $100 or more in costs include mortgage payment “insurance, maintenance, 1348.) taxes costs.” (Maj. p. and other opn., in rent majority further assumes that upward adjustment the total taxes, maintenance, insurance, would be allowed for “increases in property $100. 1348.) etc. ... since This plus cost-of-living (Maj. p. 1973” is opn., adjust- latter understates the assumption grossly magnitude generous ments that As actually have been under the RAP earlier allowed program. noted, years two they acquired appellants after example, property, were 82.7 base to reflect the just allowed an increase over the percent increase in allowed as living, the cost of aside additional increases leaving costs, taxes, insurance, other adjustments for increased maintenance and loan, adjust- including leaving the cost of the aside subsequent ments in the cost of expenses allowed for further increases in such living. short,
In The extent to majority’s case is a chimera. hypothetical reality whiсh distorts the fact that in 1982 appellants dramatized increased over the amount respondent percent Anderson’s rent charged year. If previous participating had been appellants under they the maximum would have been allowed increase ordinance, the rent 7 percent. control which then was apply, would *21 by because it hypothesis majority unjustified contrived the is the landlords of ignores adjustments that cushion the generous impact is program rent limitation and the fact that the RAP provisions, far more to ordinance that magnanimous appellants than the control would but of which absolutely otherwise because there is no evidence apply, inability owners to may this court take the of properly property notice that debt have “driv- pass-through all secured the would preexisting property away” any en contains borrowers. To the extent the record potential evidence sug- the of bearing upon pass-through policy economic impact used that the been effect has been gests permissive policy that has noted, connection, pursued It this administra appellants deserves to be this that never demonstrated, could, remedy they if tive and never RAP rent limitations cre indeed the negative a I do not ated cash flow or otherwise them a fair return on their investment. denied show, why majority willing appellants failed to as it understand assume that which to opposite. appropriate seems to me to much more assume the i.e., tenants; that some property exploit owners to improperly property other- they are RAP not because program owners are participating they otherwise but because are their property wise unable to rehabilitate out, majority points their rents. As the unable to increase “[t]he [Dodson] to refinanced their property owners who involved evidently cases loan, of the advantage to take hilt out a just taking planning before ordinance, which ex- rent control to avoid the pass-through perhaps July before 1977.” designated in RAP areas RAP-loan empts used a pur- case Similarly, appellants in the instant (Maj. 1342.) opn., p. $125,000 to finance more than amount of money chase mortgage which, located because it was also of the cost of percent acquiring property 1977, if from rent control exemptеd in a RAP to was designated prior area Therefore, by obtaining owner in the RAP program. participated $7,100, to were able relatively appellants RAP loan in the small amount of to their tenants most evade the rent pass-through control ordinance the cost of acquiring property. (which
By one critical ignoring provisions my to) agree borrower is pursuant every required ordinance materialize than the one colleagues likely have far more danger created income tenants they imagine.8This of low and moderate danger—the flight rent increases— city from rehabilitated as a result precipitous areas avoid. one the RAP was designed reasons, judgment. For the I would affirm the foregoing J., Kline, P. was of A 1987. July for a was denied petition rehearing petition granted. Respondents’ should be opinion petition Mosk, J., and review the Court denied October was Supreme Broussard, J., be granted. should that the opinion petition were of the *22 import” RAP loans majority “of limited because in this case is assumes that the issue However, implementing rules and currently and the being are not the RAP ordinance made. regulations be made at time. are still in new loans can effect and