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Fighting for Rent Control Reimbursement: Road Resealing as a Capital Expense

By: Terry R. Dowdall, Esq.facebook-emblem-DLO-pic-identifier-jan-28-2017_V_1.jpg

Some rent controls disallow park expenses (despite courts' lip service to requiring recoupment of reasonable expenses). Take road upkeep. Street appearance principally benefits residents, adding to home value. Paradoxically, rent-deciders hate increases and disfavor any such costs, no matter the direct harm to residents. Instead of suit, a program to aggregate costs within a category of activity has received a positive nod-as a capital expense.

Why do rent controls fail to encourage quality housing?

Because "rent-deciders" (boards, commissions, panels, officers) are tone-deaf to housing policy. Realistically, they exist to stop rent hikes. And by default, they are the unbridled and final, albeit well-meaning, saboteurs of hope for decent housing. Here is what is happening.

We know that allowing "all relevant evidence" is legally required in a rent hearing. But looking at evidence doesn't mean using it. Evidence can be left on the sidelines so long as there is "substantial" evidence for another decision. And there usually is. And suing is often pointless in such matters of degree vs. plan legal error. Unwittingly, housing policy is relegated and forgotten, abdicated into the hands of sympathizers striving to deny rent adjustments. The delegated "rent-deciders" may seldom try to improve and advance housing quality. Locked into study of the minutiae of stopping rent increases, the quest is usually to refuse adjustments for work and money already spent. The result is to hasten elimination of decent housing already in critical short supply. The result is also to deter owners from trying to seek increases and hence trying to do the work in the first instance.

"Rewards for efficiency," was a judicial promise, and never, not once, anything but meaningless rhetoric. Rents are kept at the minimum, bereft of regard for revenues essential for robust, vibrant and improving housing, long term. This regressive pathology is killing the patient. Parks are not kept comparable to other real estate investments. This is the aftermath of failure to implement well-intended policy which has been truly lost in translation. Remember that California has no regard for property rights. My favorite example: HFH v Superior Court, where property was denuded to 25% of its value by zoning to residential from commercial use. The court sustained the action, citing "police powers" in California. Res Ipsa Loquitur. Street maintenance programs can be a capital expense.

Your buyer's first impression is street appearance. A prospect's initial reaction, plus or minus, is based on what you see. A freshly slurried or re-sealed park looks brand new.

Boosting value also prolongs function and promotes longevity of usefulness, sealing out moisture which compromises compaction and integrity. City streets can be a base-line. Custom and standards for rent-controlled parks is, of course, less than a leased up happy facility with assured cost recovery. But many rent-deciders usurp requested reimbursement of expenses like road work. In fact, road maintenance is at the heart of all CAM charges in the private sector. This assures everyone's investment interests are served.

So the "ma and pa" owner must consider ways to work within the system. For some, suing is not really possible. And when suit is inescapable, Court scrutiny cannot sometimes reach the error of rent-deciders. Denials of increases are often protected by many hostile precedents. So, as property rights drain away, owners adapt. Here is one way we have succeeded in doing so.

Refusing to allow expenses for roads can be responded to, without a lawsuit, by comprehensive aggregation of costs. When part of a larger, comprehensive plan, the collective expenditure is a capital expense. All rent laws allow for capital expense. Some require majority approval, which is plainly not enforceable for due process reasons (and because a particular rejected expense is the subject, there is no statute of limitations issue). Ordinances that only allow 50% of a capital exepnse are unconstitutional; a long past suit in Los Angeles involing their RSO proved this, but the City never appealed and went right on enforcing the code in all subsequent cases. Sierra Lake Reserve v Rocklin should also be looked at for this and due process violations from resident approval requirements.

Now, courts follow an "overriding precept" that an expenditure made for an item which is part of a "general plan" of rehabilitation, modernization, and improvement... must be capitalized, even though, standing alone, the item may appropriately be classified as one of repair. Most rent controlled parks are strapped for cash and cannot afford a capital expense like streets. So, balkanizing capital expense by schedule is unavoidable sometimes. This reality was argued and accepted in a recent rent hearing I argued, seeking a pass through for re-seal costs. Consider it if your rent controlled city purports to bar reimbursement of expenses.

[Further reading: See, United States v. Wehrli, 400 F.2d 686, 689-690. See also, 4A Mertens, Law of Fed. Income Taxation, §25.41. This rule was first enunciated in 1930 in I. M. Cowell v. Comm., 18 B.T.A. 997, 1002, 5. See Home News Publishing Co. v. Comm., 18 B.T.A. 1008; Coca-Cola Bottling Works v. Comm., 19 B.T.A. 1055; Ethyl M. Cox v. Comm., 17 T.C. 1287; Cal. Casket Co. v. Comm., 19 T.C. 32; Joseph Merrick Jones v. Comm., 24 T.C. 563, aff'd, 242 F.2d 616; Bank of Houston, Par 60,110 P-H Memo TC; Seahill Co., Par 64,056 P-H Memo TC; Stoeltzing v. Comm. of Internal Revenue, 3rd Cir., 266 F.2d 374.]

Terry R. Dowdall, Esq. Practicing mobilehome park law throughout his career. At Dowdall Law Offices, A.P.C., he exclusively represents park owners and management. DOWDALL LAW OFFICES, A.P.C. 714|532|2222; 916|449|3959. All rights reserved.

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