*1 6.04

the ordinance. The eviction provisions ordinance are invalid.

Modified and remanded for further in con- proceedings herewith. formity

For and remandment —Chief Justice Hughes, modification Mountain, Sullivan, Pashman, Justices Clifford Judge Schreiber Conford —7.

Opposed—None. VILLAGE, AL., PARTNERSHIP, A ET PLAIN TROY HILLS TIFFS-APPELLANTS, v. OF THE TOWNSHIP COUNCIL AND TOWNSHIP OF PARSIPPANY-TROY TOWN HILLS HILLS, SHIP OF A PARSIPPANY-TROY MUNICIPAL CORP., DEFENDANTS-RESPONDENTS. Argued May 27, December 1975 Decided 1975.

'605 *7 Mr. Lester P. Duboiv the cause for argued appellants (Mr. Labendz, Hubow, brief; W. Ralph of counsel and on Mr. attorney).

Mr. Bertram J. Latzer the cause for argued respondents Latzer and Mr. R. (Mr. Roy of counsel Claps, and on the Luther, Latzer, brief; Messrs. Pendleton & attorneys). The opinion Court was delivered by J. This which involves appeal, issues closely Pashman, related to those in Hutton Park today decided Gardens v. Council, West Town Orange 68 N. J. 543 (1975) (Hutton v. and Brunetti New N. J. Park) Milford, 68 576 (1975), concerns the constitutionality the Parsippany-Troy Hills rent control Township Plaintiffs, ordinance. vir owners of all the tually rental dwelling units in the at municipality, *8 tack the ordinance both facially unconstitutional and as unconstitutional as applied.

In a Morris County, region of the State in which single family owner-occupied dwellings overwhelmingly predom- inate, is Parsippany-Troy Hills It unique. contains 7300 ren- tal in units half multifamily the buildings, total number of in rental units the entire county. More than 45% dwelling units in the municipality apartments. garden Parsippany-Troy Hills burst of experienced enormous apartment construction between 1962 and which during most of present the apartment stock has was erected. There been little new construction since and two acres only presently zoned for within mu- multifamily housing remain nicipality undeveloped.

The a municipality ordinance, rent control Or- adopted dinance 73.449, No. 1973. or No April public hearings of local expert study rental housing market this preceded action. That ordinance has since been amended three times (Ordinances Nos. 73.464, 73.472, most 74.4S3), recently 1974. May form, its present ordinance declares the a existence of housing emergency, establishes rent charges as of April rents, effect and as base limits rent in- creases over those rents to fraction of the in- percentage crease in the Consumer Price Index (CPI)1 during the pre- year calculated ceding by to the CPI applying increase a formula set out in the ordinance2 which earlier gives price 1 generally, Labor, Dept. Statistics, See U. S. Bureau Labor Description (1971). Consumer Price Index: A The Short 2Section 2. Establishment rents between a landlord multiple dwellings by tenant in all shall hereafter be determined provisions expiration this ordinance. At of a lease periodic tenant, or termination of a land the lease no may request percentage

lord or receive increase in rent greater percentage by using following than the calculated formula: percent per (Consumer Maximum increase 60 cent Index Price housing weighted average factor) by quar- cost X the annual ters of the Price Consumer Index increase. average weighted by quarters The annual of the Consumer Price by monthly taking per- Index will be determined the sum of the centage Consumer Index Price increase for each of the quarters, January through March, April through June, available July through September through December; and October by multiplying preceding quarterly then the fourth sum available by 4; preceding pre- quarterly 3; by the third sum the second ceding quarterly preceding quarterly sum 2 and the first sum

614 than later ones. The ordinance weight fluctuations greater addition, to tax increases landlords, pass through permits to a but limits such surcharges to as rent surcharges tenants ratio of the square tax increase to the equal percentage total square footage to the occupied by tenant footage surcharges such pay the tenant permits the building a land- permits The ordinance also 12 installments. monthly to the increases, apply lord, foregoing in addition to the has if he rent increases rent board leveling municipal ser- or improvements improvements made major capital mort- his he cannot meet if vices or increases for “hardship” or- its terms the By costs. and maintenance gage payments by by 1, by adding dividing and then values and the sum these percentage of 4. The maximum will then he determined increase by multiplying figure percent. this 60 example An follows: February 1, Effective date: Monthly 1974 increase, computation, quarterly weighting, and O. P. I. averaging annually. (monthly percent) increase) 1 Jan. O.P.I. percent) percent (sum monthly Feb. 1 increase 3 O.P.I. equals percent) (weighting factor) 4 X percent 12 percent) Mar. 1 April percent) 1 May percent) percent equals percent 1 3 X 3 .......... 9 percent) June 1 ' July percent) 1 Aug. percent) percent equals percent 1 3 2 .......... 6 X Sept. percent) 1 percent) Oct. 1 percent) percent equals percent Nov. 1 1 .......... 3 X percent) Dec. percent percent average percentage Annual .......... 7.5 increase housing O.P.I. cost factor ................... 60 X percent percent Maximum ................ 4.500 increase equal percen- This formula results in an increase 37.5% tage steady Ap- increase in the ifOPI the OPI increases at a rate. plied figures, permit to 1973 the formula would rent increase of 3.46%.

¿finance 1975 unless July beyond terminates after extended that date.3 *10 writ in

Plaintiffs filed lieu of complaint prerogative Court, Law Division in Morris chal- County, the Superior on the that the limitations grounds the ordinance lenging arbitrary, rent increases were unreasonable and con- upon that the ordinance denied fiscatory, plaintiffs equal protec- the laws in tion that it the same limitations on imposed multi- to subject upon previously increases properties rent to subject as it properties previously leases did year upon ex- housing shortage critical leases, that no single-year After ordinance. such justify municipality isted in the ruled the judge the trial testimony, extensive hearing one.4 Plaintiffs except all issues on municipality defp.nda.-nt own our motion on certification and we granted appealed Divi- in the Appellate unheard was case pending while the J. 103 (1975). 67 N. sion.

I — Emergency Due Process Recital Substantive that no housing consider contention plaintiffs’ We first of rents justify municipal regulation that would shortage in the municipality. exists Court, pending present Par- was before this case 3While Township adopted sippany-Troy Ordinance 75: No. Hills Council provisions continuing for an additional in effect rent control 507 through July years

two 1977. hy 20, 73:449, No. 73: amended Ordinance No. § 4Ordinance may beyond 464, 5, provisions provides be extended its its § by township expiration date resolution of the council. The trial provisions may held that be continued in court ordinance adoption hy adoption only hy ordinance, not effect of a new aof Accord, Albigese Jersey City, 567, Super. resolution. v. N. J. mere 129 Barry (App. 1974); Passaic, 569-70 Div. Gardens v. 130 J. Su N. per. 369, (Law 1974). extending July Div. the ordinance in 1975, township by by did act ordinance rather than resolution. pressed No. Ordinance 75:507. The issue has been defend express opinion ants this Court and we before no on its merits. on the The burden is parties attacking validity of a rent control ordinance to show the legislative body within could not have had set of facts its any contemplation it rationally which would have conclude that permitted market was not competitive operating rental housing Park, Hutton 68 N. J. at 564- supra, interest. public 565. statutory or constitutional specific require Absent ment to the mu upon there no contrary, obligation spe to hold or make hearings, any special public nicipality cial local market study prior adopt rental housing Passaic, 130 rent v. ing Barry control ordinances. Gardens J. N. Construc Super. 1974); Div. (Law cf. Ufheil Oradell, tion Co. v. J. Div. 123 N. Super. (App. McQuillan, see 1973); generally, Municipal Corporations ed. 16.10 1969), at 145. (3d § *11 this carry offered by plaintiffs evidence principal The the in complexes a of 10 apartment 1) survey burden was which showed rental units 3,956 municipality containing over in 39%, turned units, approximately that the 2) for and a turnover rate and similar projected Gardens, a Knoll garden agent of the rental testimony that, units, to the effect 1,108 apartment complex containing ad- including daily advertising program despite vigorous Newark newspapers in New York and vertisements an aver- had billboards, always complex the large roadside of 20 vacancies. age rate, annual turnover the initially

We note hands per units that is, change of rental percentage mobility popu a measure of the year, principally of the state is, indication best, only oblique lation and Run of manager Partridge market. Thus the of housing of units, testified on behalf with Apartments, complex turnover rate of a substantial to the existence plaintiffs zero. near rate was vacancy but stated that his his buildings rates particular apart vacancy evidence of the Isolated of limited value demonstrat- likewise is complexes ment the absence aof v. Fort ing housing Helmsley shortage. Lee, 362 F. 581, 594 A N. J. va Supp. (D. 1973). high rate in a cancy particular indicate of complex may absence it housing but also shortage; may poor indicate manage ment, construction, substandard location, undesirable or grossly excessive rent levels. Village Parkview Associ Cf. ates v. 62 N. J. 21 In Collingswood, (1972). general, proof of the absence of a careful housing shortage analy requires sis of the of needs income levels housing various of who live in categories persons actively desire to the com munity and evaluation of the of rental availability units within the suitable and financial municipality to the needs of those capacity tenants. v. potential Albigese Jersey City, 127 N. J. 110-11 Super. (Law 1974), Div. modified on J. grounds, other 129 N. Div. Super. (App. 1974). Hence, even without more detailed of evaluation plaintiffs’ evidence or consideration of the counter tendered proofs clear that municipality, it is have not plaintiffs borne heavy their burden of proof.

In actuality, has municipality supported the strongly existence conditions of John T. housing shortage. Chad- wick, the whom municipality’s expert, the trial judge found credible, that a highly testified rate less than vacancy 3% of a is indicative serious housing the 1970 shortage. census federal housing, government found vacancy rate rental among units Hills Parsippany-Troy 1.5%. then the Since population has increased municipality without construction of new rental any units. corresponding Two witnesses who plaintiffs’ vacancy testified as rates particular apartment complexes reported vacancy *12 of rates zero and Such evidence would surely have 1.9%. the council to conclude that permitted township rationally competitive the housing rental market operating is public the interest.

Plaintiffs alternative any the that short- urge housing the that does exist is of solely age consequence zoning of the which restricts new con- policy municipality, sharply

struction of multifamily A this dwellings. origin, shortage contend, they should not be deemed for legitimate ground imposition rent regulation.

Given the unusual of the receptiveness municipality toward development multifamily housing during 1960’s, it is somewhat difficult to credit the factual assertion that is the of re housing shortage the present consequence Nevertheless, the ac assuming strictive zoning practices. matter, of this as factual conclusion drawn curacy legal follow. is concerned with by plaintiffs Zoning long- does not rent control with immediate ones. range housing problems; How a chosen with its grapple long- has to municipality term is its efforts validity needs irrelevant to the housing to with its short-term If believe cope problems. plaintiffs that ordinance Parsippany-Troy zoning illegally Hills contributes to the condition of exclusionary thereby are free to attack that ordinance di housing shortage, they will rectly. They not be the asserted permitted employ of the ordinance obstruct a illegality zoning municipal with the ity’s cope otherwise efforts immedi legitimate ate which the state of the market problems present housing for local tenants. poses aof

Einally, we note that the existence although serious factual housing most common shortage provides rents, for are other there justifying regulation basis sets of from body may rationally facts legislative not in conclude that free market is operation housing Park, Hutton 68 N. J. 564. supra, interest. public Therefore, their to sustain burden of must proof, plaintiffs there is no factual basis finding establish is in the interest. regulation public rent control

II — Substantive Due Process Confiscation control We have discussed claims that rent municipal case facially confiscatory companion ordinances

619 Park, Hutton While the or supra. Hills Parsippany-Troy dinance differs in details from the significant ordinances considered in that opinion, points none those of difference is snch as to us to the conclusion lead that the ordinance any issue here is <i:so as to restrictive facially preclude aof J. possibility just and reasonable 68 N. at 571. return.” Unlike the plaintiffs in cases, the companion present plaintiffs that allege confiscatory the ordinance is as applied and have presented evidence in claim. of that Jerold support a Goldberg, certified accountant, testified as public financial condition a Cambridge Village, garden apart ment complex units, containing identified by plaintiffs aas typical small garden apartment fiscal complex.

the gross income of $313,162,4 was complex increase over the gross $293,460 income of received during 6.7% fiscal 1973. Expenses for the year, fiscal excluding manage ment fees and payroll to officers parties,5 or interested were $178,212, an increase of over the 1973 expenses 19.2% $149,516. No evidence was on reason presented bearing ableness of these expenses, or, on complex the value most important, on the the net possibility operating income did not provide fair return on the owners’ invest ment. Weiss, accountant,

Jacob a certified testified public as Gardens, the financial condition Knoll garden apartment units, to be containing represented by plaintiffs typical 1974,6 In fiscal income large gross totaled apartment complex. $2,503,707 over $2,600,311, a increase fiscal 3.8% figures by Goldberg by not both Weiss were testified to 4The experts solely explaining figures. audited The accountants testified significance figures given owners of them the financial property question. expenses any appear allowance 5It include would did depreciation. operates year running a fiscal from March 6Knoll Gardens on February 28. income. fiscal

gross Expenses for officers’ excluding salaries, fees, and state management depreciation expenses, *14 franchise and taxes, $857,943, business totaled unincorporated an increase over the fiscal year figure 24.6% $688,645. Once there was no to the again evidence as rea- as sonableness to the value of the expenses, apartment or to complex as whether the net income was a fair operating return on investment.

Although the subsidization of housing may deemed a desirable or necessary response social or economic ills, landlords cannot be compelled by municipal ordinances to subsidize the housing needs of their tenants. The legis lative power to set rates does not a give municipality “power to compel the doing of services without .” reward . . York, Budd v. New 517, 547, U. S. 468, 477, 12 S. Ct. 36 L. 247, Ed. Park, As discussed in Hutton (1892). 68 N. J. supra, a 565, rent control to survive a regulation, constitutional challenge, must he as as nonconfiscatory applied well as nonconfiscatory on its face. The test for confiscation is whether the ordinance permits efficient landlord to obtain a “just Park, and reasonable” return on his Hutton property. 68 N. supra, J. at 568-569.

We do not regard this appeal or the companion cases as a appropriate vehicle for comprehensive or definitive formulation of the methodology whether a determining landlord is a fair return under a receiving rent given control ordinance. The law fair concerning return in the context of rent control is still in its Moreover, nascent stages. none of the cases decided has today the landlord to demon sought strate the of its net return. inadequacy Consequently, records before us are not suited to full treatment of fair question return.

We further consider that from a procedural point of view it is desirable highly (though mandatory) enact, municipalities as of their part ordinances, rent control provisions under which will be assured a just landlords and reasonable return. These provisions should set forth standards and criteria rent the local control parties, agency and tribunals can be reviewing guided determining of returns adequacy received under the ordinance. actually See, e. L. g., 1966, 168, c. L. c. 16(h) § § To 4(e). say more, for than that nothing example, landlord may seek relief if he cannot realize reasonable from profit his would be investment since it fails to inadequate provide useful guidelines by virtue of which landlords can seek such However, relief. courts still final arbiters as to whether a landlord is able to obtain a just reasonable return under a rent control ordinance.

Therefore, in the interest tribunals in the assisting cases, resolution of future deem it we appropriate provide some on the of whether an ordinance is guidance question confiscatory applied. we set forth Consequently, guidelines in more detail than would be necessary par- resolve the *15 ticular issues by raised this also examine some appeal. We of the factors which should land- be considered cases where lords challenge leveling rent ordinance as We confiscatory. not, do wish to for- however, any that reliance on one imply mula or for method the relevant to this determining figures question mandated this opinion. Therefore, our com- ments are intended to general. expect We cases as are and records of litigated expert testimony fully de- veloped, more will become available refine and, information be, if need alter these guidelines.

We perceive whether a rent deciding regula lation just and reasonable return con permits requires sideration of value the of the rental the property, reasonable the expense operating income, the the property, rate return on the value property actually permitted by the rent regulation, the minimum rate of return which just would be and reasonable for that property. Basically, this involves procedure two separate of calculations. stages First, tribunal must make factual as finding rate of return on value of property which the landlord will in fact under receive rent governing leveling ordinance.

622

Second, the tribunal make a must factual determination as to that rate of return below which an actual rate of return would be confiscatory. This second determination can be designated “just and reasonable” rate of return on the value of a rental unit. If given the rate of which the return landlord actually receives falls below the and reason- just rate, able then the ordinance must be as con- invalidated fiscatory. for just

The and rea general procedure determining law return is familiar to the utilities. public sonable Cf. State, Public Coordinated v. N. J. Service Transport Rates, In re Intrastate Industrial Sand 66 N. J. (1950); Co., 12, 21-22 FPC v. Natural Gas (1974); Pipeline 575, 584, 736, 742, U. S. 86 L. Ed. S. Ct. See Eco generally, Utility Public (1942). Lovejoy, Garfield &

nomics, Utility Public Rates (1964); Bonright, Principles of Kahn, The (1961); Regulation Economics To this (1970). extent utilities law our may provide pur some guidance However, poses. because of fundamental differences nature of the involved property purposes limited only are of regulations, public utility precedents value to the field of should rent control. it particular, be noted that constitutional to rent ordi challenges leveling nances are not eases. Courts should not be con rate-fixing cerned with interests and competing determining balancing “best” Rather, what is the rate level. their sole task is determine the lowest That constitutionally permissible rate. which follows is examination of the various factors which should be considered in making this determination. *16 Rate Return Which a Landlord A. Determination of of Receives under the Ordinance being rate return actually of order to establish ordinance, must deduct reason under a one given received income, and then cal- from the rental able expenses gross

623 culate the between the “net percentage relationship resulting income” and the value of the landlord’s property.

Value. is, Valuation of the landlord’s property course, a critical whether a step determining rent regu lation is effect. In re Intrastate Indus confiscatory Cf. Rates, trial Sand 21; 66 N. J. Public supra, at Service Co State, ordinated v. Transport 5 N. J. supra, at 217. We must care, take however, to define with what we precision mean by “value,” because, the term as Justice ob Brandéis served 50 years “Value is a ago, word of many meanings.” ex rel. Missouri Southwestern Bell Telephone Co. v. Missouri Comm’n, Public Service 262 276, 310, 544, U. S. Ct. S. L. 554, 981, 67 Ed. 995 (1923) J. See (Brandéis, concurring). Valuation 1166-81 generally, Bonbright, Property, The term (1937). meaning of the must from derived which the valuation made. FPC v. is purpose being Co., Natural Gas Hope 591, 320 U. 601 n. 9, S. Ct. S. 9, 281, 287 n. 88 L. Ed. 333, 344 n. 9 (1944).

Rent control with the begins that rents are premise being inflated as a unfairly result of failure in the free operation — the rental market e. housing g., mo housing shortages, A nopoly power, etc. standard valuation which itself in this failure will corporates the purpose defeat quickly Thus, rent control. valuation based on inflated rents would inevitably lead the erroneously courts to conclusion which regulation fails to such inflated rents permit Moos, Hall confiscatory. Realty Co. v. 115 Misc. Y.N. S. 858 Ct. aff’d 200 (Sup. 1921), 66, 192 App. Div. N. Y. S. 530 1923); Div. (App. Bonbright, Valuation of 1104; I.L.F.Y. Property, supra Co. v. Temporary cf. Comm’n, State Rent N. Housing 10 Y. 263, 219 N. Y. S. 2d 2d 176 N. E. 822 (Ct. 2d App. Hence em 1961). we the term “value” ploy in the present context to refer to the value of the rental property market free housing the aberrant forces led to the imposition of con trols. Where inflated rents are the result of a short housing “value” refers to worth age, property the eon- *17 avail- of supply market which

text of a hypothetical of meet the needs able to housing just adequate rental is apart- rent desiring various of categories persons actively of in the This technique hypothesizing ments municipality. and de- market of comparable supply rental with levels for control legislation mand been utilized rent English has Journal 496 Rent,” several “The Pair 115 Solicitors’ years.7 1971). (July fairly such a valuation would do not that pretend

We for per rental property owner of residential compensate of the free use property. manent and total his deprivation in the con That, however, present is its purpose. not Yalue employ text is no more than a meterstick which the courts to receive. what a landlord entitled fairly rents is measuring “ex and Brandéis’ value position “rate-making” Justice coincide, need and value serve different functions change” Bell Co. v. Missouri Missouri ex rel. Telephone Southwestern Comm’n, 43 Ct. at S. supra, Public Service U. S. 289 - L. J. 547-554, concurring), at Ed. 985-995 (Brandeis, FPC v. Na Hope has become the law of the land. since long Co., Co., tural FPC v. Natural Gas supra; Pipeline Gas supra. hy- value used here to some degree

Because the sense it pothetical, admittedly poses problems proof. difficult for conventionally methods are used real valuing prop- Three provides: Britain’s Act of 1968 7Section Great Kent — determining pur- (1) rent for Determination tie of fair poses of this of this Act is or would be a fair Part what rent tenancy regulated regard dwelling-house, under a of a shall rent subject had, following provisions section, of this to the (other personal circumstances) all than and in the circumstances locality particular age, dwelling- to the character repair. its house and to state of (2) purposes of the For the determination it shall be assumed persons seeking number to become tenants of similar dwelling-houses locality (other in the on the terms than those relating rent) regulated tenancy substantially is not dwelling-houses greater locality such the number of in the than letting on such terms. available erty: cost, market value based on depreciated replacement sales of income. See comparable properties,8 capitalized *18 Real 10-16 generally, Encyclopedia Estate App-aising of ed. The (Ereeman 1968). method of income is capitalized one commonly used in connection most with build- apartment Id. at 197. under ings. the most Except extraordinary market conditions, these three methods will ordinarily lead to not Wendt, the same value. Real Estate 50-54 Appraisal (1956). In the real terminology of estate appraisal, they must be e., “correlated,” i. for adjusted which discrepancies arise out their differing of bases and theoretical practical shortcomings applied as to the particular in property question. Encyclo- pedia Real Estate Appraising, supra at 120-28. of

None of these methods is wholly prob suitable lem of value in the determining present context. The capital ized income method begins with of prediction future in come and thus tends become circular in the rate-making Co., context. FPC v. Natural Hope Gas supra, 320 S.U. at 601, 64 Ct. 287, S. at L. Ed. 344. To establish current “value” method, under this appraiser desired supplies “rate of return” as one element in his initial calculations. Be cause, in the context rate regulations, of the court will use the determination of value resulting to calculate the actual rate return, of the process exhibits circuitous Market reasoning. value upon comparable based sales is properties sound only as comparable insofar sales involve situated in properties a rental market approximates that the hypothetical rental addition, market described above.9In may it be be- misleading 8Valuation in the context of rent control differs from public utility regulation that, among things, context of rate other public essentially unique assets of utilities are often so that it is meaningful speak Apartment of their market value. build ings, hand, bought on the other all sold the time. It is meaningful value, although to consider may their market that value accuracy any given difficult to ascertain with case. English recently noted, alia, 9One Court inter the sale value comparable properties method must account the existence of shortages housing . in the rental market: housing depends value rental the current market cause it. can he from derived earning upon measure large Brown, 1943). App. F. 2d Ct. (Emer. v. Wilson to be may cost also tend The depreciated replacement method time, when, at the present to be true appears misleading is cause housing major of construction cost high v. Mt. NAACP Burlington Cty. Southern shortages. Cf. 204-05 (Pashman, Laurel 67 N. J. J. con (1975) Tp., on methods, though, may light All of these shed curring). here, once as the term used their property the value value, the court recognized. determining deficiencies are of the enlightenment take full which these advantage should as well may provide, provided methods valuation as that any other conceived method which the soundly parties may witnesses such as assessed valuation expert suggest their Coordinated or cost Public Service original depreciated. Cf. *19 State, 5 N. Transport v. J. at 217. supra, ex Expenses. landlord is entitled to The reasonable may taxes and penses including depreciation. These expenses include, to, utilities, but are not limited for in expenditures maintenance, surance, for repairs, depreciation reasonable un taxes, allowances improvements, for vacancies and capital mu collectibles, and a property. Frequently, on depreciation ordinance, case, rent in the wiil as instant nicipal leveling tenants permit landlords to direct on their impose surcharges comparable properties registered been within has the rent ‘Where determination, year previous the evidence the best or two to may dwelling-house registered for be the rent fair for a the rent naturally registered comparable properties: will rent so such the scarcity any com Where is no element. there have excluded recently registered property parable no for has or rent it been fair rent seem to be evidence of evidence of the would best percen type dwelling-house less such market rent rent, represent scarcity tage appears if in the element as capital A fair return on the landlord’s it is substantial. ... may guide or check on rental values but it investment be — Tenant, on Landlord and means conclusive’ Woodfall no 762, Landau, 27th ed, 2, para. [Tormes v. 3 W.L.R. 766 2674. vol. C.J.)] Parker, (1970, Lord tax cover the cost or realty increases increased services. To the extent that from these income surcharges reimburses the landlord items, for the cost of certain the surcharges should either be included in gross income included anas or expense be operating totally axe disregarded, they so excluded from income and from gross excluded ex- operating penses. Naturally, during the examination of ordinances which do not contain such ad- provisions, there will be no ditional from income surcharges; however, costs incurred by the landlord will be reported by landlord operating expenses.

Finally, it should be noted that constitution does require inefficient operators permitted Park, return same as efficient Hutton 68 N. J. managers. supra, 570; Cases, at Permian Area 747, 769, Basin Rate 390 U. S. 1344, S. Ct. 20 L. 1361, 312, Ed. 2d Hege (1968); Baldwin, man Farms Corp. 7, v. S. 55 Ct. S. U. L. Ed. & Rd. 259 (1934); Covington Lexington Turnpike Co. v. 205- Sandford, 578, 596-98, 164 U. S. 17 S. Ct. 06, 41 Ed. 560, L. 566-67 When an unreasonable ex (1896). pense been sub incurred, reject has court should it and stitute more reasonable alternative its Plaintiff’s place. are, best, books prima expenses. facie evidence merely They always for lack of reasonableness. open question State, Public Service Coordinated Co. v. Transport supra, Cf. 5 N. J. at 218. Gross rental income. the income evaluating permitted by a rent each leveling regulation, individually administered should be apartment complex treated separately. *20 A owner will be property not to subsidize permitted projects which an yield return out of his inadequate derived profits from other Nor projects. may the fact that one is project more than an return receiving adequate concealed it with averaging together projects in lesser returns. bringing Insofar projected future, as income is into the the landlord is to reasonable deductions for entitled rates due to vacancy for accounted as turnover, already if

ordinary they operating cost. Rale Return

B. and Reasonable Determination Just of of which rate of return The determination of minimum fact. There one of constitutionally largely is is permissible in determin- may are a be taken number of approaches be found may of fair return. ing Examples existence such and and other states statutes and in this regulations 1953, e. c. See, g., L. years. over the federal government for 1966, 168, L. c. which fixed criteria 216, and 4(e), § § of net given op- income terms of ratios operating fair net class, income of of that buildings income erating gross 46, 1968, British Rent Act also Sec. and other factors. See supra. of the

We cases a fuller examination leave subsequent However, to and methods. advantages these disadvantages cases, do assist the lower courts in future we resolution of evaluating set forth when general to be followed guidelines which various figures parties as proffer representative “just and reasonable” or minimal rate constitutionally return. a “just what and reasonable” determining consumer

return, must evaluate interests of the the court well landlord. as the interests public general Park, J. 68 N. at 570 cases therein. supra, Hutton cited It that rental levels under the ordinance in is no objection value Hutton cidentally cause the to decline. property 569; Park, J. Permian Basin Area Rate supra, N. at Cases, 769, Ed. 1361, 88 S. Ct. at 20 L. 390 U. S. at supra, Co., 337; FPC v. Natural Gas 320 U. Hope supra, 2d S. at at L. Furthermore, Ct. Ed. at 344. S. work on may permissibly rent levels landlords hardships cases, drive inefficient out may operators atypical who may preclude persons paid market and have inflated pur (chase from a fair Hut- buildings return. prices recovering

639 Park, ton Basin Area Rate 570; 68 N. J. Permian supra, at Cases, 20 L. Ed. 1361, Ct. supra, 769, 390 S. 88 S. at U. at Baldwin, 293 337; supra, 2d at v. Hegeman Farms Corp. 262-63; Ed. at 9-10, U. S. 79 L. 170-71, at 55 S. Ct. at Sandford, & Co. v. Covington Rd. Lexington Turnpike L. Ed. at 205-06, 41 supra, 164 S. 596-97, U. at 17 S. Ct. at Utility 566-67; J. Public N. Central v. Traction Co. Bd. of Comm’rs, 96 N. J. L. 90 However, be (Sup. Ct. to 1921). and a “just reasonable” rate of return enough must high to encourage good mainte management including adequate nance services, to furnish efficiency, reward discour age flight market, from the rental capital housing to enable to maintain A operators their credit. support just and reasonable return is one which is commen generally surate with on returns investments in other enterprises having On corresponding risks. the other hand is one also it high so not defeat of rent control nor purposes landlords permit to demand of tenants more than the fair value of the property and services which are provided. Cf. Cases, Permian Basin Area Rate supra, 390 U. S. at 792, S. Ct. 1373, at 20 L. Ed. 2d 350; at v. FPC Natural Hope Co., Gas 320 U. supra, 603, S. at 64 S. Ct. 88 L. 288, at Ed. 345; at Missouri ex rel. Southwestern Bell Co. v. Telephone Comm’n, Public Missouri Service supra, 291, 262 U. at S. S. Ct. at 986; 67 L. Ed. Public at Service Coordinated State, Transport v. supra, N. J. 225. The at rate need not be as as existed high prior nor regulation as high as an investor obtain might his placing capital elsewhere. Hutton ark, P N. supra, 68 J. 569-570; at & Covington Lexington Tu v. rnpike Rd. Co. Sandford, supra, 164 U. S. 596- 98, 17 S. Ct. at L. Ed. at 566 - 67. above, As noted 205 - the task of the tribunal tois determine the lowest constitu- 10It should be noted rent control ordinances under con appeal companion sideration in this and in the cases also decided today rate-fixing merely price are not ceilings. cases but establish public utility regulations Unlike State, they in this do alto- no obstacle rate. There is constitutional

tionally permissible re- rate of *22 higher to rent control ordinance which permits of assuring The the courts is limited to duty turn.10 efficient landlord to oblige accept the ordinance does not the less. con exclusively are almost proofs

Plaintiffs’ in of the rent to adoption the cerned with prior periods does This in itself appeal. issue in this formula at crease and in expenses Where attack premature. mot render the accuracy with reasonable forward can be projected come of the regulation return and the rate of upon the effects have they owners need wait until property computed, before returns unjustly depressed suffer already begun themselves, however, are relief. The judicial proofs seeking burden of sustain plaintiffs’ heavy insufficient to manifestly evidence respect no with Plaintiffs have tendered proof. of in Their evidence the value of the properties question. documented, and and inadequately was expenses fragmentary' no effort to rate of return would prove have made what they in On present be the context. the constitutionally required Court, attack plaintiffs’ record before on the ordinance as fail. as must confiscatory applied

Ill Substantive Due Process and Unreasonable Arbitrary — final The various question to is whether the considered of provisions the ordinance so unreason- arbitrary are and able as to violate of sub- principles equal protection due stantive process.

Plaintiffs contend formula that the rent increase of violates principles substantive due in it fails process to- permit landlords to pass all in- through to their tenants gether merely upper displace competitive market, they put an operations. consequence, limit on its As a the observation made public permits utility regulation cases that which excessive rates just power, police of is return an unconstitutional abuse of as is regulation permits only inadequate rates, g., e. In re which Intra Rates, supra, 23-24, appli state Industrial N. Sand J. at has no cation to these ordinances. creases in review operating judicial costs. The standards of under those principles discussed case companion Park, Hutton supra, and need not be The con repeated. ceptual soundness fashion in which the particular municipality has used the Consumer Price Index the wisdom of the regulatory it has policy adopted,11 11The measure of Consumer Price Index is a fluctuations living wage cost the families of urban clerical earners and widely buying power workers. It used as measure of computes dollar. The Bureau of the index U. S. Labor Statistics by calculating percentage price changes of a so-called consumer consisting commonly purchased by “market basket” items weights percentage price change such families. It then for each importance item accordance with the relative of that item in spending average families. such The index consists of the weighted price changes. percentage generally, of these See U. S. Dept. Labor, Statistics, The *23 Bureau Labor Price Consumer of of Description (1971). A Index: Short employed by municipality The rent increase formula the first re percentage change by duces the annual planation given in the OPI The ex 40%. adjustment weighted for this is that of the items 40% compute in the “market used basket” to the OPI are not relevant to — apartment operating building. the cost of The intent to ob — tain a more realistic of measure fluctuations in landlord’s costs is, course, commendable, and, indeed, by of has been undertaken the g., See, Dept. Labor, Bureau e. of Labor Statistics U. S. itself. 1975 Price of Statistics, Operating Bureau Labor Index Costs of of for Apartment City (1975). Rent Stabilized House in New York To accomplish however, task, simply this it is not sufficient to eliminate from the “market basket” which items do not contribute to those addition, remaining (and any landlord costs. In the items additional necessary representative basket”) items to obtain a landlord “market reweighted importance must be in accordance with their relative in adjusted spending. employed by municipality landlord’s The OPI the systematically underrepresent tends to operating fluctuations in cost the of housing. rental employed by municipality changes weights formula the then The adjusted preceding year over CPI so that increases which place year took earlier in the will contribute more the formula to changes place explanation given than will The which took later. for adjustment this is it fact ac- that reflects the that landlords have tually period pay longer had to for the earlier increases adjustment than time for the later is to ones. The effect this change fairly the rent increase formula from one intended to enable operating coming year the landlord to meet the costs to one

is constitutional made to pertinent challenge not to the not con ordinance. The constitution that rent require does form; nor trol ordinances take particular predetermined uni does landlords to permit it to oblige municipality their to their tenants. The ordi formly pass through costs an effort nance does on its face to purport represent not to mini landlords more than the constitutional guarantee reject mum. which us the same reasons led to Precisely us contention lead confiscatory -that the ordinance is also to conclude that it does violate of substantive principles not Park, J. due Hutton 68 N. Bru process. supra, at 572-574. netti v. New 68 N. Milford, supra, J. at 591-592. equal formula violative of the attack

Plaintiffs also this the federal fourteenth to amendment clause protection fails permit greater that it to on the grounds constitution than leases multi-year rent at the termination increases a single year. over extending of leases at the termination irrationally against discriminates that this They contend not they leases multi-year who grant landlords reflecting rent increases on to the tenant pass permitted lease. previous over the entire life in prices increases have suffered insofar as injury landlord need reality, no after multi-year granted leases the ordinance applies to Ordi- of the amendment the effective date July and multi- one-year No. 73 :464 requires nance Such could have injury the same. leases be treated year This, leases. multi-year been avoided simply granting witnesses, testimony plaintiffs’ according Hills have Parsippany-Troy which landlords course *24 undoubtedly who do suffer some fact followed. The parties land- this the injury through operation provision in effect the time of who had leases multi-year lords amendatory ordinance. enactment that preceding year. closely his over This linked to cost increases lag” very “regulatory linkage other builds the formula the into struggling g., regulatory agencies E. been eliminate. State have Co., 16, Telephone (1959). N. J. 28 N. J. Bell 30 v. In it is well allegation, this to remem evaluating ber have broad legislative discretionary powers bodies classifications: making legislative might Equal protection regulatory is denied not because statute might gone did, persons or have farther than it have included some persons par- Regulatory or in a classes who excluded. need were may appear legislative mind in dimen- ticular field to the different proportions; acute than sions as more in one area in another. Consequently may proceed step time, addressing the reform one at a aspect problem pressing. itself which seems most s}: ?}(cid:127)» # H* * * * equal short, protection logical In does demand not immediate tidiness; legislation it does nor is violated because the enacted bring produced. or not about the full reform intended to he result many competing pressures is satis an area of constitution living Legislature, responding fied it conceived to be if the to what calling drawing regulation, disregard for did reason facts its suitably might lines. That those have been drawn more lines light problem judicial of the whole is not a matter re-examina capable perennial problem, tion. Classification and difficult Chapter, no [N. doctrinaire solution. Plan J. American Inst. of Planners, 581, ners v. N. J. Bd. 48 N. State J. of Professional (1967), appeal 8, 70, dismissed 389 U. S. Ct. 2d 8 88 S. L. Ed. (1967)] Branch, N. J. Accord, Long v. Pleasure Bay Apartments Williams, 471, v. 397 U. S. 79, Dandridge 93-95 (1974); 1162-63, 25 L. Ed. 2d 502-03 Ct. 486-87, S. a classification on equal protection To overturn (1970). council township must demonstrate that grounds, plaintiffs the classification have concluded that rationally could not end. Absent legislative proof legitimate would advance body that the say municipal governing we cannot contrary, base of apart- concluded rents rationally have could not well subject leases as as those to multi-year subject ments would that no landlord sufficiently were high year to one con- administratively excessively harmed adopting in- for rent the same standard course applying venient to both. creases the Law Division is affirmed.

The judgment *25 P. J. A. D., Temporarily Assigned, (concurring). Conford, I join the of opinion the court to extent that it decides the the specific ease before I also and how it does so. explains us agree thoroughly with the rent con- suggestion municipal that trol ordinances fix should for determi- criteria and guidelines of nation of complaints landlords that regulations deprive the them of a fair return. I join do not that portion opinion in extenso how a con- discourses rent upon trol board to, or court is or determine whether the rent may, a regulations landlord and depriving “just of reason- able” or “fair” return on his in the absence property therefor provisions in an ordinance. Neither the instant nor plaintiffs any those in the under- companion cases took either at trial level or on even or appeal prove that were they Thus, assert a fair deprived of return. extended exploration return, complex fair question beyond the unexceptionable assertions may that the landlord not be it, deprived and the ordinances should deal with it, is extraneous to the appeal the record as presented; and to dwell on it on purely theoretical not, basis does in my view, serve any tribunal which may someday face the but may rather tend question, to confuse it.

I have particular objection “that court’s observation whether a deciding rent and rea- regulation permits just sonable return requires consideration of the value of the rental property, reasonable expense of operating prop- erty, income, the rate of return on the value of property actually permitted by rent regulation, minimum rate of return which would just and reason- able for that property” mine). (emphasis This is the jargon adjudication public utility rate as evidenced purposes, by the cases in that field cited tire court. It seems to me that court implying method will be the rule for control administration, rent with general its detailed as to supporting explication methodology. This is plainly inconsistent with the separate court’s “pub- observations that lic utility precedents are of only limited value field to the this appeal it does “regard and that control” of rent * * * or for a vehicle comprehensive appropriate as the *26 determining for methodology formulation definitive return under a given a fair is receiving a landlord whether theory both in view is that My ordinance.” rent control utility have minimal cases utility rate public and practice In- in this case. be discussed and not should purpose for this becomes “value” context for in this whole search deed the out, apart- itself points court’s since, opinion as the circular, the basis of on normally value approached ment house income, very purpose whereas the of net capitalization raised, de- is to when the issue is the rent control agency, pur- for valuation fair rent on which the net termine the would be predicated. poses subject into the

Were it in to get these cases appropriate all, agency I would that a local rent control submit rudi- under the typically inexpert part-time people, operating — un- before here mentary kinds of ordinance us — Bor. et al. v. fortunately prevail today Inganamort see al., Fort Lee J. 521, 538, et 62 N. 544-545 (dissent- (1973) ad- needs and practical inexpensively ing opinion), simple, rules, as, for ministrable such those example, provided fair return 1953, 216,1 determination of L. c. the last by gen- eral rent control statute this State. Such agency cumbersome, by would be ill-served resort to the complex, and, think, I irrelevant expensive, techniques, pro- largely cedures and theoretical field. utility bases of the rate public availability suggesting

The is useful in court’s opinion and than (other public of a of criteria guidelines variety but I would there purposes, stop for fair return utility) specify preferred approach, case particular this court. that advanced especially op 16(h) presumptively provides for fair ratios of net 1Section gross erating See also c. income to income. L. Section 4(e). joins Justice this concurring opinion. Clifford J., and P. J. A. D., concurring Clifford, Conford, the result.

For Justice Justices Hughes, Moun- affirmance—Chief and Schrexber tain, Sullivan, Pashman, Cliifford Judge Conford — 7.

For reversal —Fone.