In Pursuit of the Free Lunch — The Guggenheim Fiasco

The U.S. Supreme Court has denied certiorari in the inverse condemnation case of  Guggenheim v. Goleta. That’s the in banc decision by the U.S. Court of Appeals for the 9th Circuit, holding that a “rent control” ordinance that effectively transfers the capitalized value of below-market rents that are imposed by a local rent control ordinance, from the landlord to the tenants, and allows them — not the landlord — to sell them at uncontrolled prices on the open market, is not a taking of the landlord’s property. There has been much commentary on that case, so we won’t go through the whole megillah again, except to call attention to what that case has failed to deal with, that renders the Goleta rent control scheme irrational. But first, the basic facts.

The ordinance is in a way deceptive because to the uninitiated mind it raises the question of “what’s the fuss all about?” Haven’t rent control ordinances been upheld before? Yes, they have. But as applied to a mobile home park, which is what Guggenheim did, and as disclosed by the evidence developed in this litigation, mobile home rent control has a wrinkle to it that other rent control ordinances don’t. To begin with, the “mobile homes” located in mobile home parks aren’t mobile. Once put in place on a “pad” within a mobile home park, most of them are never moved again. And since they are owned by the tenant (who rents the pad from the landlord) an interesting problem arises when a mobile home park tenant moves out. The departing tenant usually can’t take his “mobile” home with him, so he leaves it behind and sells it to the successor tenant. And here is where the fun begins.

A mobile home which is inexpensive when new, becomes very cheap when used. But the catch is that to acquire one that is in place in a rent-controlled mobile home park, carries with it the right of occupancy at  below-market, controlled rent which is a very valuable right. So the departing tenant is in a position to ask his successor tenant for a premium over and above the value of the “coach,” and that premium represents the value of the cheap occupancy. This is done through the fiction of the departing tenant purporting to sell the “coach,” as it is called, to the incoming tenant for an outlandish amount. And that overage — the sum over and above the actual market value of the used coach valued apart from the pad it sits on — is the price that the incoming tenant must pay if he wants to occupy the pad at a controlled rent. To give you an idea of the sums involved here, in the Guggenheim case, used coaches worth, say, less than $5000 if sold on the used coach market were being “sold” by the departing tenants to their successor tenants for over $100,000. Why quotation marks? Because the six-figure price was not really for the used coach — it was for the right of occupancy at low, controlled rents.

So if you stop at this point and think about it, it becomes obvious that (except for the mobile home park tenants who happened to live there when the rent-control ordinance was first enacted) the [new] tenants are not actually paying controlled rent; they are paying market rents not-so-cleverly disguised as inflated prices of the old coaches they must buy from the departing tenant if they want to live there. In other words, no rational person will pay $100,000 for an old, used coach that is worth $5000, or that may have to be scrapped. But they do. Why? Because without doing so they can’t live there. So the bottom line of all these machinations is that mobile home tenants (except the ones who lived there when the rent control ordinance was first adopted) are actually paying market rents, largely disguised as the price of that used coach.

In the Guggenheim case, the landlord argued that thus diverting the value of market-rent occupancy from him to the tenants, and allowing them to sell his rental rights to a stranger for full, uncontrolled price, was a taking of his property without compensation, because if anyone had the right to sell the right to occupy his premises, it was he, not his tenants. That is what the Guggenheim case was about, and the landlord was right as a matter of economics if not simple arithmetic. To say nothing of elemental fairness. After all, outside the loony world of takings law, people who sell other people’s property go to jail.

If you take into consideration the time factor, eventually all mobile home tenants become “new” tenants — the original ones, eventually die or move out for a varietry of reasons, and are replaced by successor-tenants. So in the end, the “rent control” ordinance does not control rents — it only disguises market rents as coach prices. Which means that the current tenants are de facto paying market rents, not cotrolled rents, even if they have to pay in the transparently disguised form of paying for the coach. The whole rent-control scheme thus becomes irrational.

As we are endlessly told, the basic purpose of rent control is to afford low-income folks the opportunity to live in decent homes at rents they can afford. Right? Isn’t that what [mobile home] rent control, is all about?

But the Guggenheim rent control ordinance was first imposed in 1979. That’s over 30 years ago. That means that most, if not all, original tenants who were the intended beneficiaries of that ordinance, have died or moved on, and the current successor tenants do not enjoy the benefit of low rents because in order to become tenants they had to pay de facto market rents thinly diguised as the price of the coach left behind by their predecessor-tenant.

So the bottom line of all this is that this supposed rent “control” does not control rents as far as the tenants are concerned. It only allows the departing tenants to rip off the landlord by pocketing a six-figure benefit of living in a rent-controlled coach, and sticking the successor tenant with the tab. After all, if low rents are what mobile home rent control otrdinances are about, then they should be available to all mobile home tenants, not just those few who happened to live in a mobile home park when the ordinance was enacted back in 1979.

So what the court actually did by upholding this bizarre scheme that in operation negates its stated purpose of providing low rents to low-income mobile home park dwellers, is to create some sort of local rump aristocracy — people who by law have the right to pay low, controlled rents, while charging their successor tenants high, market-rate rents through the subterfuge of selling them the old coach for an outlandish price, even if the coach is an old wreck that has to be scrapped.

So why it is OK for the departing tenants to gouge their successor tenants (and their landlord) under the banner of “rent control,” the Guggenheim court did not bother to explain. But the fact is that under the guise of providing low, controlled rents, the court placed its imprimatur on a scheme that facilitates the charging of high, uncontrolled rents to new mobile park tenants, while calling it “rent control.”

Oh, we almost forgot. One reason for having all those mobile home park rent control ordinances is the lament that there is  a shortage of low-cost housing, and mobile home parks fill that need. The problem is growing more acute, we are told, because people increasingly don’t build new mobile home parks. Hmm. We wonder why.

 

 

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