This is a takings case. Appellants are forty-two partnerships (“Owners”) formed to develop and operate residential apartment buildings, primarily in California. Owners’ claims arise from Congress’ enactment of the Emergency Low Income Housing Preservation Act of 1987, Pub. L. No. 100-242, 101 Stat. 1877 (1987) (pertinent parts reprinted in 12 U.S.C. § 17151, note (1994) (Preservation of Low Income Housing) (“ELIHPA”)) and the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (codified at 12 U.S.C. §§ 4101-4147 (1994)) (“LIH-PRHA”), both of which prohibited the prepayment of Owners’ federally subsidized mortgage loans after 20 years without pre-approval from the Department of Housing and Urban Development (“HUD”). Asserting that ELIHPA and LIHPRHA abrogated their contractual rights to prepay their mortgages (and thus to convert their federally regulated housing into market-rate residences), Owners sued the United States on January 3, 1994 for breach of contract, for just compensation under the Takings Clause of the Fifth Amendment, and for allegedly unlawful administrative actions.
On March 27, 1995, the U.S. Court of Federal Claims granted summary judgment in favor of the Owners on their breach of contract claims, but denied their motion for summary judgment on their takings claims. The court dismissed their administrative law claims for lack of jurisdiction. Cienega Gardens v. United States,
On remand, the trial court granted summary judgment in favor of the government that the Owners’ takings claims were not ripe. Finding the case controlled by Greenbrier v. United States,
As discussed in detail in the prior opinions of this court and the trial court in this case, the present dispute arises out of federal legislation enacted in the 1950s and 1960s to encourage private developers to construct, own, and manage housing projects for low and moderate-income families. To implement this legislation, Congress authorized the Federal Housing Administration, and later HUD, to provide mortgage insurance to enable private lending institutions to provide low-interest mortgages to housing developers.
Typically, when a developer received a HUD-insured mortgage, the developer signed a long-term deed of trust note with a private lender. HUD would then endorse the note. In 1970-1972, the Model Plaintiffs, all HUD-approved mortgagees, each executed 40-year deed of trust notes. These deed of trust notes bore a “Rider A” agreement. Importantly, Rider A to the HUD-endorsed deed of trust notes expressly prohibited prepayment of the mortgages before 20 years from the date of endorsement, except under certain conditions which included HUD approval of the prepayment. The riders further stated that, after making payments for 20 years, owners may prepay their mortgages in full without prior HUD approval. For example, Rider A to the Sherman Park Apartments deed of trust note provided in relevant part:
The debt evidenced by this Deed of Trust may not be prepaid in whole or in part, prior to the final maturity date hereof without the prior written approval of the Federal Housing Commissioner, except a maker which is a limited distribution mortgagor may prepay without such approval after twenty (20) years from the date of final endorsement of this Deed of Trust Note by the Federal Housing Commissioner.
(emphasis added). Simultaneously with entering into the deed of trust notes, the developers entered into “regulatory agreements” with HUD, which placed certain conditions on the mortgagors. The regulatory agreements imposed restrictions on the operation of the projects, including: the income levels of tenants; the maximum rents that could be charged; and the rates of return that the developer could receive (collectively, “affordability restrictions”). These agreements, as well as the mortgage insurance provided by HUD, were to remain in effect as long as the mortgage loan remained outstanding. However, they contained no reference to the Owners’ right to prepay their mortgages after 20 years.
The regulations in place in 1970 provided that participating Owners could prepay their mortgage upon the expiration of 20 years. See, e.g., 24 C.F.R. § 221.524(a) (1970) (enumerating circumstances under which “mortgage indebtedness may be prepaid in full” after 20 years). The regulations, however, were subject to amendment, so long as the interest of the mortgagee or lender under existing mortgages or loans was not adversely affected. See 24 C.F.R. § 221.749 (1970) (“The regulations in this subpart may be amended by the Commissioner at any time and from time to time, in whole or in part, but such amendment shall not adversely affect the interests of a mortgagee or lender on any mortgage or loan to be insured on which the Commissioner has made a commitment to insure.”).
By the late 1980s, Congress had become concerned that a large number of owners might take advantage of the prepayment clauses, thus reducing the supply of low-income housing throughout the country. See S.Rep. No. 101-316 at 105 (1990), reprinted in 1990 U.S.C.C.A.N. 5763, 5867. As a result, Congress enacted two pieces
In 1990, Congress enacted LIHPRHA, superseding ELIHPA. LIHPRHA, like ELIHPA, authorized HUD to provide incentives to owners to maintain the affordability restrictions on their properties. See Pub. L. No. 101-625, 104 Stat. 4249, codified at 12 U.S.C. §§ 4101-4147 (1994). LIHPRHA also prohibited participating owners from prepaying their mortgages after 20 years absent approval of HUD. To request such approval, an owner must file a Notice of Intent (“NOI”) with HUD. 12 U.S.C. § 4102(a). The property must then be appraised by two independent appraisers to determine its “preservation value,” which in turn becomes a basis for any incentives that are ultimately offered to the owners to induce them to maintain affordability restrictions on the properties. 12 U.S.C. § 4103; see also id., §§ 4104(a), 4110(d). Within nine months after receiving an NOI (or six months if the NOI proposes to terminate affordability restrictions), HUD must send the owner a report containing the results of the appraisals and other information necessary for the owner to proceed. 12 U.S.C. § 4106. The owner must then, within six months, file a Plan of Action with HUD, indicating whether the owner wishes to prepay the mortgage (terminating the affordability restrictions), extend the affordability restrictions by requesting incentives, or sell the property to a buyer who will agree to maintain the affordability restrictions. 12 U.S.C. § 4107.
LIHPRHA further provides that HUD may approve a request for termination of affordability restrictions through prepayment of the mortgage only upon its making a written finding that implementing the plan will not materially increase “economic hardships” on existing tenants, involuntarily displace such tenants, or decrease the availability of decent, safe, sanitary low-income housing. 12 U.S.C. § 4108. In particular, section 4108(a) precludes HUD from approving a prepayment request unless it finds that:
(1) implementation of the plan of action will not—
(A) materially increase economic hardship for current tenants, and will not in any event result in (i) a monthly rental payment by any current tenant that exceeds 30 percent of the monthly adjusted income of the tenant or an increase in the monthly rental payment in any year that exceeds 10 percent (whichever is lower), or (ii) in the case of a current tenant who already pays more than such percentage, an increase in the monthly rental payment in any year that exceeds the increase in the Consumer Price Index or 10 percent (whichever is lower); or
(B) involuntarily displace current tenants (except for good cause) where comparable and affordable housing is not readily available determined without regard to the availability of Federal housing assistance that would address any such hardship or involuntary displacement; and
(2) the supply of vacant, comparable housing is sufficient to ensure that such prepayment will not materially affect—
(A) the availability of decent, safe, and sanitary housing affordable to low-income and very low-income fami
(B) the ability of low-income and very low-income families or persons to find affordable, decent, safe, and sanitary housing near employment opportunities; or
(C) the housing opportunities of minorities in the community within which the housing is located.
12 U.S.C. § 4108 (1994). Commentators have expressed the view that the requirements for allowing HUD to approve a prepayment request would be met in only the rarest of circumstances. See, e.g., Sheldon P. Winkelman, Low-Income Housing Preservation and Resident Ownership Act of 1990, 73 Mich. B.J. 1160, 1161-62 (1994) (“It is generally felt that it would require an extremely unique set of facts and circumstances to lead to HUD’s granting permission for prepayment; that is, all areas arguably need low-income housing ... Therefore, the option of prepayment is probably a fiction.”).
One important factor in evaluating eligibility for prepayment is whether conversion of the Model Plaintiffs properties to market rentals would have caused the current tenants’ rents to increase by more than 10%, thereby inflicting “material economic hardship” as defined by § 4108(a)(l)(A)(i), and thus strictly and expressly precluding HUD from approving a prepayment request. As set forth in the parties’ Joint Stipulation of Facts, during the mid-1990s, after their original 20-year prepayment dates had expired, the four Model Plaintiffs each submitted Plans of Action to HUD seeking incentives under ELIHPA or LIHPRHA. As part of the process of offering incentives, HUD determined the market rate for apartments at the Owners’ locations. With Sherman Park, St. Andrews Gardens, and Independence Park, HUD completed formal determinations of the prevailing market rental value of such apartments and approved the owners’ plans of action for receiving incentives. Pico Plaza also submitted a Plan of Action seeking incentives under LIH-PRHA. Although Pico Plaza never progressed far enough into HUD’s process for obtaining a final “Form 9607” determination, HUD commissioned an appraisal that was completed on August 25,1995. Based on HUD’s own data, as set forth in the Joint Stipulation of Facts, the Owners have composed the following table setting forth the HUD-restricted monthly rent at the four Model Plaintiffs’ properties, the market rent as established by HUD, and the percent increase over HUD-restricted monthly rents. “B.R.” stands for “bedroom.”
Percent Increase Market Rent Over HUD-HUD-Restricted as Established by Restricted Monthly Monthly Rent _(A)_ HUD Rent Property_(A)_OB)_(B-A)/A_
Sherman Park_1 B.R. = $356_1 B.R. = $600_1 B.R. = 69%_
St.Andrews Gardens_1 B.R. = $349_1 B.R. = $605_1 B.R. = 73%
_2 B.R. = $443_2 B.R. = $720_2 B.R. = 63%
_3 B.R. = $479_3 B.R. = 850_3 B.R. = 77%
Independence Park 1 B.R. = $320_1 B.R. = $545_1 B.R. = 70%_
_2 B.R. = $365_2 B.R. = $650_2 B.R. = 78%
Pico Plaza_1 B.R. = $416-454 1 B.R. = $520_1 B.R. = 15-25%
_2 B.R. = $495-522 2 B.R. = $630_2 B.R. = 21-27%
Importantly, it is undisputed that, based on HUD’s best estimates of prevailing market rates, allowing the four Model Plaintiffs to charge market rate rents would uniformly cause the monthly rent of those owners’ tenants to increase by more than 10%. Indeed, in most cases, the rents would rise from between 63% and 78%.
LIHPRHA also prohibits HUD from approving prepayment requests when the supply of vacant, comparable housing is insufficient to allow termination of the affordability restrictions without materially affecting the availability of decent, safe, and sanitary housing. 12 U.S.C. § 4108(a)(2). Addressing this issue, Carole Glodney, President of G&K Management Co., Inc. (the Owners’ management company), submitted an uncontested declaration that the demand for low-income rental housing exceeded the supply in the Los Angeles communities within which the Model Plaintiffs’ properties were located. Specifically, Glodney attested that each of these properties operated at full occupancy and had a waiting list of interested low-income tenants, and that other low-income rental properties that G&K managed in the vicinity of the properties likewise were operating at full occupancy and had waiting lists. James Tahash, who had formerly served as Division Director of the Planning and Procedures Division of HUD’s Office of Multifamily Housing Management, and who was responsible for drafting the agency’s implementing instructions and regulations for ELIHPA, stated in his declaration that “low-income properties in California, including Los Angeles or the surrounding areas, would not even arguably have been able to meet the statutory and regulatory requirements for approval of prepayment under ELIHPA or LIH-PRHA.”
The Owners did not file Plans of Action with HUD seeking prepayment under EL-IHPA or LIHPRHA, asserting that it would have been futile to do so given the differentials between market rental rates and HUD-controlled rates, as well as the shortage of low-income housing in the communities where their properties were situated. Instead, the Owners sought other incentives available under ELIHPA and LIHPRHA. See ELIHPA § 224; 12 U.S.C. § 4109 (LIHPRHA). Glodney testified during the damages trial in the breach of contract claim that preparing a Plan of Action to receive the incentives was time-consuming and costly, and that it often took years for HUD to approve one. Sherman Park and St. Andrews Gardens eventually obtained tenant-based subsidies under ELIHPA that approximate market rents, in exchange for extending the affordability restrictions on their properties for another 20 years. Independence Park and Pico Plaza sought low-income preservation incentives under LIHPRHA, but later obtained approval to prepay their mortgages after Congress enacted the Housing Opportunity Program Extension Act of 1996, Pub. L. No. 104-120, 110 Stat. 834 (“HOPE Act”).
As represented in the Owners’ briefing, the Owners are now earning rents closer to market levels on their properties. However, the Owners allegedly received no reimbursement from the government for the fair-market rents to which they were entitled during the period between
As stated above, the trial court granted the government’s motion for summary judgment that the Owners’ regulatory takings claims are unripe for failure to exhaust administrative remedies, and that the application of ELIHPA and LIH-PRHA did not effect a per se taking of the Owners’ property. For the reasons discussed below, we conclude that the regulatory takings claims of the four Model Plaintiffs were ripe for review, reversing the trial court as to the regulatory takings issue. The futility exception to the pre-approval process applies here. However, we agree with the trial court that, as a matter of law, the application of ELIHPA and LIHPRHA does not constitute a per se taking.
DISCUSSION
A. Standard of Review
This court must review the trial court’s rulings on summary judgment de novo, construing the facts in the light most favorable to the Owners and giving the Owners the benefit of all reasonable inferences. See Helifix Ltd., v. Blok-Lok, Ltd.,
B. Regulatory Takings
The Takings Clause of the Fifth Amendment prohibits the federal government from taking private property for public use without just compensation. U.S. Const, amend. V. A “regulatory taking” may occur when government action, although not encroaching upon or occupying private property, still affects and limits its use to such an extent that a taking occurs. Palazzolo v. Rhode Island,
The government insists that the Owners must first file Plans of Action with HUD, and receive final decisions from HUD denying their requests, before the Owners’ takings claims ripen. The government relies on a wealth of cases, and especially those concerning land use restrictions, wherein the Supreme Court has held that a party alleging a regulatory taking must obtain a final decision from the governmental agency charged with administering challenged regulations be'fore the claim is properly justiciable. The Court recently reiterated the “important principle that a landowner may not establish a taking before a land-use authority has the opportunity, using its own reasonable procedures, to decide and explain the reach of a challenged regulation.” Palazzolo,
In the context of these land use cases, seeking a final decision from the pertinent land use authority is essential to determining the existence and scope of the taking, allegedly due to the “high degree of discretion characteristically possessed by land-use boards in softening the strictures of the general regulations they administer.” Palazzolo,
The Owners contend that the final decision requirement is not applicable to them because it would be futile to submit a prepayment request to HUD,-as HUD has no discretion under ELIHPA or LIH-PRHA to grant such requests under the undisputed facts of their cases. The Owners rely in particular on Suitum v. Tahoe Regional Planning Agency, 520 U.S, 725,
Palazzolo recently reaffirmed the futility exception to the final decision rule. In that case, a landowner was not required to
[O]nce it becomes clear that the agency lacks the discretion to permit any development, or the permissible uses of the property are known to a reasonable degree of certainty, a takings claim is likely to have ripened.
Ripeness doctrine does not require a landowner to submit applications for their own sake. Petitioner is required to explore development opportunities on his upland parcel only if there is uncertainty as to the land’s permitted use.
Where the state agency charged with enforcing a challenged land use regulation entertains an application from an owner and its denial of the application makes clear the extent of development permitted, and neither the agency nor a reviewing state court has cited non-compliance with reasonable state law exhaustion or pre-permit processes ... federal ripeness rales do not require the submission of further and futile applications with other agencies.
Id. at 2462 (internal citation omitted). Other cases cited by the Owners also conclude that where an agency has no discretion in the application of a contested regulation, an aggrieved party does not need to obtain a final decision from the agency determining the scope of the regulation. See City Nat’l Bank of Miami v. United States,
We conclude that that Owners present an even more compelling case of futility than in Suitum, Palazzolo, and the other land use cases cited above. Here, HUD lacks the “high degree of discretion characteristically possessed by land-use boards in softening the strictures of the general regulations they administer.” Palazzolo,
As recited above, HUD lacks discretion to grant a prepayment request unless (1) implementation of the plan will not materially increase economic hardship for current tenants; and (2) the supply of vacant, comparable housing is sufficient to ensure that prepayment will not materially affect the availability of decent, safe, and sanitary housing affordable to low-income persons in the area. As to the first prong, the Owners have compiled HUD’s own data, tabulated above, to show that allowing the four Model Plaintiffs to charge market rate rents would uniformly cause the monthly rent of those owners’ tenants to
The only arguable factual dispute in this case is whether the Los Angeles Rent Stabilization Ordinance (“LARSO”) would limit the rents that the Owners could charge if they were able to prepay their mortgages and terminate their affordability restrictions under federal law. LARSO makes it “unlawful for any landlord to demand, accept or retain more than the maximum adjusted rent permitted pursuant to [LARSO] or regulations or orders adopted pursuant to [LARSO].” Cienega Gardens,
§ 4122 Preemption of State and local laws
(a) In general. No state or political subdivision of a state may establish, continue in effect, or enforce any law or regulation that—
(1) restricts or inhibits the prepayment of any mortgage described in section 229(1) [12 U.S.C.S. § 4119(1)] or the voluntary termination of any insurance contract pursuant to section 229 of the National Housing Act [12 U.S.C.S. § 1715t] on eligible low-income housing; ...
Any law, regulation, or restriction described under paragraph (1), (2), (3), or (4) shall be ineffective and any eligible low-income housing exempt from the law, regulation, or restriction, only to the extent that it violates the provisions of this subsection.
12 U.S.C. § 4122(a).
During the damages trial in the breach of contract claim, the trial court concluded that LIHPRHA preempts LAR-SO, because the latter would “restrict or inhibit prepayment” of the Owners’ mortgages, as the ongoing effect of LARSO “is to interfere materially with the intent of the federal subsidized housing program.” Cienega Gardens,
The government’s final argument, which the trial court found persuasive, is that our court has already ruled in Greenbrier v. United States,
The four Model Plaintiffs in the present appeal, as opposed to the 249 owners in Greenbrier, have set forth uncontested facts demonstrating that it would be futile for them to file prepayment requests with HUD. Whereas our court in Greenbrier was required to determine the ripeness of the owners’ claims without the aid of the facts of their particular circumstances, the four Model Plaintiffs have set forth a compelling case of administrative futility. Our conclusion that the takings claims of the four Model Plaintiffs are ripe is applicable only to the circumstances of the Model Plaintiffs and those other owners that demonstrate on a case-by-case basis in future proceedings that it would have been futile to submit prepayment requests to HUD. Under Greenbrier, we cannot hold that all forty-two of the Owners are entitled to proceed with their takings claims, as HUD may have discretion to grant some of the Owners’ prepayment requests. On remand, the trial court will have to determine, under the applicable facts, whether each plaintiff has demonstrated that it would have been futile to apply to HUD for prepayment.
C. Per Se Taking
The Owners further contend that they have suffered a per se taking, asserting that ELIHPA and LIHPRHA, by prohibiting prepayment except under conditions that the Owners could not meet, forced the Owners to use their properties to house government-approved, low-income tenants and prohibited the Owners from converting their properties to other uses. We disagree that ELIHPA and LIHPRHA give rise to a physical occupation of the Owners’ property as required to show a per se taking. We agree with the trial court’s ruling that “the effect of the prepayment restrictions ... is merely to enhance an existing tenant’s possessory interest,” and that they do not authorize a “permanent physical occupation” of the Owners’ property. Cienega Gardens,
CONCLUSION
We conclude that the undisputed facts show that, if the four Model Plaintiffs had been allowed to convert their federally-regulated apartments into market-rate residences, the conversion would have imposed a materially increased economic hardship on the Model Plaintiffs’ tenants, as defined by 12 U.S.C. § 4108(a), and that such a conversion would reduce the supply of vacant, comparable housing available to those tenants. We find the government’s arguments concerning LARSO unconvincing as to the ripeness issue, and thus we conclude it would have been futile for the four Model Plaintiffs to submit prepayment requests to HUD. Accordingly, the takings claims of the four Model Plaintiffs are ripe for adjudication. If the factual circumstances of any or all of the remaining Owners present a similarly compelling case of administrative futility, then the trial court should adjudicate their takings claims, as well. Thus, we reverse as to the ripeness of the Owners’ regulatory takings claims. However, we affirm the trial court’s grant of summary judgment in favor of the government on the Owners’ claims for a per se taking.
COSTS
Each party to bear its own costs.
AFFIRMED-IN-PART, REVERSED-IN-PART, and REMANDED.