ACTION LITIGATION UPDATE

GIVE ME THAT OLD TIME ECONOMIC RECOVERY

ELLIS LAW UNDER SEVERE ATTACK ONCE AGAIN

THE KUEHL ELLIS AMENDMENTS ARE A TAKING OF PROPERTY
WITHOUT JUST COMPENSATION

ACTION LITIGATION UPDATE

Action v. Santa Monica Rent Control Board
(Our Very Own Interest Rate On Securities Case)
IT'S FINAL! The Supreme Court has refused to either depublish or review the case. This is wonderful news for ACTION, because it means that we can now go forward with the trial and prove up all the money that our members have over paid to their tenants. This overpayment will have to be reimbursed to our members from the Rent Control Board. To add insult to injury, the Santa Monica Rent Control Board during its March 2002 meeting passed a new regulation imposing a 1.5% interest on security deposit requirement for housing providers. The current interest rate (as of March 15, 2002) paid to on demand accounts by the following banks show the unfairness of the Board’s regulation: Wells Fargo Bank 0.10%; City National Bank .20%; Bank of America 0.20%; Downey S&L 0.25%; Washington Mutual Bank 0.25%; California Federal Bank 0.25%; Union Bank 0.25%; World Savings Bank 0.26%. Now that ACTION is going forward with its damages trial in superior court, we will be looking at a difference of approximately 1.3%, which relates into $700,000 per year in interest overpayment to tenants.

Action’s Lawsuit Against
The Tenant Harassment Law
The meaning of this law is becoming clear. It is a law which allows Tenants (and the City Attorney’s office) to Harass our Members. This law attempts to tie the hands of our Members in dealing with tenants, under threat and fear of criminal prosecution by the City. Where else but in Santa Monica could a Housing Provider be thrown in jail because the Housing Provider filed a civil lawsuit to resolve civil disputes with tenants? Thus, ACTION’s lawsuit seeks to overturn those sections of the Tenant Harassment law which directly violate our members’ 1st Amendment rights to “obtain justice” from our courts (the “right to petition government for redress of grievance).” Access to our court system has been called “The most precious of the liberties safeguarded by the Bill of Rights.” If our Members are excluded from going to court, they are excluded from justice.

Action’s Lawsuit Against
The City’s Jim Crow Laws
What is not generally known, is that the City has certain laws on its books from 1986 which make it illegal for non family members to live together in Ellised properties. This restriction is exactly like the old Jim Crow laws of the segregated south after the Civil War. By restricting occupancy to family members, the City is prohibiting different people of color from living together on the same property. In addition, the city adds a new twist to Jim Crow laws, it is also illegal for gays and lesbians to live together in Ellised buildings as well. At least the old South did not discriminate against gays and lesbians. However, the City of Santa Monica has left no stone unturned. ACTION seeks to have all City laws which discriminate against owners or which seek to promote segregation declared unconstitutional. It is an embarrassment top each resident of our City that SMRR (the rent controlled political party which has run this City since 1981) can impose such immoral laws, all in the attempt to preserve what they perceive to be their political voting base. But this is exactly what the Southern States did after the Civil War to keep their supremacist political power.

GIVE ME THAT OLD TIME ECONOMIC RECOVERY

In a recent report by Cushman & Wakefield, issued in March 2002, there is nothing to worry about. The Industrial market is coming back strong, and recession will be a sickness of the past come mid year 2002. Healthcare, pharmaceutical, education and defense continue to grow despite the downturn,” said Cushman & Wakefield Senior Managing Director, Research, Maria T. Sicola. “Old-line manufacturing firms in the Rust Belt and the South should be among the first to recover.” This sentiment is felt from other sources as well. The U.S. market composite index of mortgage loan applications, a seasonally adjusted measure of loan purchases and refinances, increased 14.5 percent for the week ended March 1 to 631.2 from 551.1 the previous week, according to the Mortgage Bankers Association of America’s weekly survey. The seasonally adjusted Purchase Index increased to 335.4 from 315.5 the previous week. The seasonally adjusted Refinance Index increased to 2351.7 from 1921.6 the previous week. Refinancing activity represented 51.7 percent of total applications, increasing from 48.6 percent the previous week. The average contract interest rate for fifteen-year, fixed-rate mortgages was 6.27 percent, increasing from 6.19 percent the previous week.

According to Freddie Mac, the U.S. 30-year fixed-rate mortgages made slight gains last week on reports of economic strength during the first week of March 2002. The thirty-year long-term mortgage averaged 6.87 percent for the week ending March 8, 2002. The rate was up from last week’s 6.80 percent. The mortgage averaged 6.97 percent at this time last year. The fifteen-year fixed-rate mortgage averaged 6.37 percent this week, also higher than last week’s average 6.28 percent. The rate averaged 6.52 percent during the same week a year ago. In Los Angeles, interest on single family home loans rose to 6.81 percent from 6.76 percent.

All across the country, mortgage interest rates edged up over the end of February 2002, and into the first week of March 2002, as early economic indicators suggest the economy is expanding and will cause the Federal Reserve Board to raise rates later this year,” said Frank Nothaft, Freddie Mac chief economist. Nothaft added that positive economic news last week on the fourth-quarter gross domestic product, consumer income and spending, and purchasing reports pushed rates higher.

What we are seeing then, is a better economy, fears of raising interest rates, increased refinancing due to these fears, and actual increases in interest rates. It appears that for the near foreseeable future we have indeed reached the bottom of the interest rate market, and will only see increases in the future. The time to refinance or purchase is fast slipping by our fingers. If you are interested in refinancing now is the time, tomorrow may be too late.

ELLIS LAW UNDER SEVERE ATTACK ONCE AGAIN

In what will be the greatest test of property rights to come long in the state legislature in many a year, Sheila Kuehl has introduced yet another killer amendment to Ellis. In this most recent amendment, SB 1403, Ms. Kuehl has proposed that anyone Ellising their property will be subject to a five-year penalty period from the date that they first re-enter the res-idential market. Under current law, if an owner Ellising their property, they must wait two years to go back into residential business. The first tenant they rent to after this two-year period must be at the old rent controlled rate. Once that tenant vacates, the owner is allowed to rent at unrestricted amount (called Market Rate Rent). Under Kuehl’s latest proposal, once some one files a notice of intent to Ellis, that person must still wait two years to go back into the rental business, however, once that person does go back into the residential rental business, that person’s rents must be kept at the old rent controlled rate for five years from the date that the person first re-rents the unit after the two-year period.

Thus, under Kuehl’s proposal, if an owner had an apartment with $500.00 per month rents per unit, and on January 2, 2003 filed his Ellis notice, the following would apply: First, the existing tenants would have to move out within four months (May 2, 2003) and if senior citizen or handicapped by January 2, 2004. Then the owner (or successor owners) could not go back into rental business for two years from either May 2, 2003 or January 2, 2004 (i.e. if any tenants were senior citizen or disabled and elected to stay the full year, then the two year non-rental period would run from end of the one year). Two years after May 2, 2003 the owner could go back into rental business, i.e. on May 2, 2005. However, for the next five years (i.e. from May 2, 2005 to May 2, 2010) the rent on the unit would have to stay at the rent controlled rate of $500.00 per month, plus any annual adjustments the Board would give). What is really counter-productive about this law is that no matter when the property is brought back into rental business (i.e. even after ten years or more) the old rent con-trolled rent is in effect on that unit for five years thereafter. This will make it impossible for owners to bring their buildings back into the rental market, and will result in the permanent loss of rental units.

Who is covered by this new law if it does pass? This question is hard to answer. It appears to be that any property owner who has Ellised at any time in the past will be covered by this new law. What this means is that any owner who in the past Ellised in reliance of the workings of the old law, and or any person who purchased an Ellised property under the belief that the property was governed by the old law, will be punished with this new law. Make no mistake about this; the new law is nothing more than a punishment of owners who have exercised their rights under state law to avoid the harsh and unfair dictates of local rent control laws. However, Kuehl, ever so anxious to do the bidding of the local rent control political parties who keep her in office, is ready to pass any unconstitutional law at all to their liking. What possible purpose is there to punish prior owners who have already Ellised their property?

True harsh provisions like this will prevent owners from Ellising in the future, however, this deterrence can do nothing to those who have already Ellised, except keep them from going back into the rental business, and thus keeping rental units off the market. What will no doubt happen to the existing Ellised units will be that the owners will sell to developers, who will demolish and build new condominiums. This will just increase the need for apartments in rent controlled cities.

What can we do to protect ourselves? The first thing you can do is protest loudly and clearly and resist this proposed law. Write to all state legis-lators your concerns about the unfair-ness of this law. In the past, Ellis amendments only applied prospectively (i.e. applied only in the future, to properties Ellised after the new amendment went into effect). Kuehl with this bill falls to new lows, punishing people after the fact. This is called an ex post facto law. To be at least basically fair this new law should only apply to owners who file an Ellis withdrawal after January 1, 2003. The second thing an Ellised owner can do is insure that they go back into business this year, and the earlier the better. Paragraph (e) of this proposed amendment states:

“(e) The amendments to this section enacted by SB ____ of 2002 shall apply to all new tenancies after December 31, 2002.”
This probably means that the five-year restrictions start to apply to only new tenants who move in after January 1, 2003 and not to tenancies that exist as of December 31, 2002 for as long as those tenancies stay in effect.

Once the December 2, 2002 tenant vacates, however, it would appear that the new tenant’s rent would be returned to the rent controlled rent. But to pro-tect one self, going back into business this year and getting to market rate rents on or before December 31, 2002 will at least bring in rental income until the December 31, 2002 tenant vacates. (It would appear that if the December 31, 2002 tenant sublets, that the reduced rental rates do not come into play, and the owner can continue to collect market rate rents from the subtenant). Thus for as long as an owner can keep a pre-January 1, 2003 tenant in place, the owner can collect market rate rents. The five-year restriction applies from the first rental after the owner goes back into business (i.e. for those who are currently Ellised and go back into business this year, then it would run from this year; for those who have gone back into business before, then it would run from when they first rented their units after the Ellis). The existence of a market rate rental during this year does not stop the five-year period running. Thus to the extent that an owner can rent their property this year, and keep that tenant in place after January 1, 2003, the five-year period would run and the owner can collect market rate rents. Once the December 31, 2003 tenant leaves, the owner has two choices, either rent the unit at the old Rent Controlled rent, until the five years is up, or keep it empty and allow family and or friends to live there for free (or at the rent controlled rent). There is nothing in the Ellis law or the Santa Monica law that requires and owner to rent a vacant unit.

All in all, if Kuehl’s amendment passes, all Ellised apartment buildings will be demolished and replaced with new condominiums. This will only hasten the end of the residential rental market in Santa Monica. Those owners who decided to opt out of business and see what the future would bring, i.e. either demolish or maybe return to residential rental business, will now have only one choice: demolition. The properties Ellised tend to be the properties that have the lowest rental rates. In the past, these buildings were brought back into the rental market, albeit after some time, but at least these units were not lost to the rental market. Now Kuehl, with her angry, bitter and disgraceful amendment, seeks to up the ante. Well she and her rent control cohorts will get what they deserve, the loss of more and more ren-tal units from the market. With this loss comes a reduction in voting support for her and SMRR, and as the old adage goes, give them enough rope and they will hand themselves.

In the meanwhile, there are a number of property owners who will become hurt in this process. There are immediate actions they must take to lessen their economic loss, and they might wish to seek damages for the taking of their property under federal and state constitutional rights.

THE KUEHL ELLIS AMENDMENTS ARE A TAKING OF PROPERTY WITHOUT JUST COMPENSATION

The recently proposed Kuehl amendments are discussed above in this article. What one sees in the retroactive application of the Ellis amendment to properties which have already been Ellised under the old law, is that Kuehl is vindictively trying to punish those owners who have Ellised already, for no legitimate governmental purpose. In other words, Kuehl has proposed a law that severely restricts the use of property without any legitimate state interest, other than landlord bashing. The restrictions imposed on the property, when an owner went out of business under the current Ellis act, was set forth in a deed restriction and placed on the property. This deed restriction acted as a contract, in effect, with government. The restrictions (and only these restrictions) applied to the owner and all subsequent owners who purchased the property for the owner who Ellised.

Now, Kuehl wants to change the terms of this contract, and undo all the economic expectations that the government created with their recorded deed restrictions. This clearly amounts to a taking without just compensation.

Currently, there is a case before the U.S. Supreme court entitled Franconia Assocs. v. United States No. 01-455 (Cert. granted January 4, 2002). This case should decide whether a Takings claim arises when the government enacts a law alleged to abridge a con-tractual right established between the citizen and the government. In other words, can the government override its contracts with a citizen by passing a law? This case will have great impact on our Ellis taking argument. In our situation, the state of California set certain restrictions on property that was Ellised. These restrictions were incorporated into a deed restriction, which was recorded against the property, so that they would bind the current and new owners. Once a new owner purchased the Ellised property, he would only be bound by these restrictions if the deed restriction was recorded. Clearly, the State of California was attempting to establish a contract between property owner and the State, whereby the property owner knew what the limitations on the use of the property would be based on the deed restrictions. Now, Kuehl wants to change those deed-recorded restrictions after the fact. This is a taking of property without just compensation. It will enable the property owner to damages based on the difference between the fair market rental value of the property minus the actual rent controlled rental rate. These damages could run in the millions for the State and for the city of Santa Monica as well. We will track that case for you. Expect a decision in the summer of 2002.