Paying the Piper

A recent federal district court ruling may have set the stage for multimillion-dollar payments to property owners by cities with rent control laws. The preliminary ruling, finding that Santa Barbara, California's rent control law constituted a "taking" from the owner of a mobile-home park, represents the first time a court has declared that rent control in effect confiscates property. Since the Fifth Amendment prohibits any taking unless "just compensation" is paid, Santa Barbara could be forced to pay up.

Assistant City Attorney David Hughes argued that just compensation has already been paid, because the statute permitted rent increases of 75 percent of inflation even though the owner was at the time only raising rents by 60 percent of inflation. Also, the effect of the statute was to permit the owner to charge more for utilities. For these and other reasons, Hughes has asked the judge not to award any damages.

The plaintiff's attorney, Robert Jagiello, argues that substantial appreciation of the park's land has accrued to the tenants, rather than to the owner, because of rent control. "During the trial," Jagiello explains, "I proved that mobile homes were selling for as much as $150,000 that are worth $10,000. The real thing that has value is the property."

If Jagiello wins, his client could get as much as $1–2 million. And if a victory leads the owners of the five other mobile home parks in Santa Barbara to sue, Jagiello estimates they could win $5–7 million. "That'll be a shock to the city," he says, not resisting a chuckle, "because the mobile-home park housing is about 1 percent of their total housing stock. So all the rest of the taxpayers get to subsidize this 1 percent that managed to live at a greatly reduced rent for the past six years. And so they get, basically, to pay the piper for a dance they never attended."

The Santa Barbara law affects only mobile-home parks, but any federal decision on rent control could form the basis for attacks on more-sweeping laws. Jagiello is already challenging Santa Monica's notorious rent control.

His client is Lena Schnuck, a 91-year-old ailing woman who lives on the top floor of a two-story house in Santa Monica. Unable to negotiate the steps, she wants to move onto the first floor. But the young woman who rents the first-floor apartment from Schnuck refuses to move out. Because of rent control, Jagiello estimates the tenant pays about $400 a month for an apartment worth $1,500, and Schnuck cannot evict her under the law.

If the Santa Monica law is deemed a taking, residents will face one granddaddy of a tax hike. Every landlord in the city will sue for compensation, and claims could total in the billions. When asked whether the city of Santa Monica has a plan for paying the huge liability if it loses the Schnuck case, Deputy City Attorney Barry Rosenbaum sputters: "It's not going to happen. I mean, it's just not going to happen. I'm not going to speculate. It's not going to happen."