Fair Return

FAIR RETURN PETITIONS

Have the courts identified a single method for calculating a fair return? Yes/No/Maybe

The correct answer is No. The fair return issue has become the most complex issue in the drafting and administration of rent stabilization ordinances. Every ordinance must provide park owners with the opportunity to petition for rent adjustments based on claims that they are not getting a "fair return.” While the courts have mandated that owners subject to rent controls are entitled to a fair return, there is no judicial consensus as to what that constitutes, or as to the proper methodology to be used in calculating fair return. In fact, appellate court conclusions on fair return issues contradict each other, leaving ordinance drafters with no definitive legal direction.

FAIR RETURN METHODS

Is maintenance of net operating income one method for determining a fair return? Yes/No/Maybe

The correct answer is Yes. Traditionally, the methodologies used under rent controls have included return on value, cash flow, return on investment, percentage of net operating income, or maintenance of net operating income (1).  In administering fair return standards which have not mandated the use of a particular formula, some jurisdictions have used return on historic investment or internal rate of return approaches.

JUDICIAL PRECEDENTS

Have the courts concluded that park owners are entitled to a fair return on the value of their property? Yes/No/Maybe

The correct answer is No. The judicial precedents which address what constitutes a fair return leave basic issues unresolved and in some cases pronouncements in court opinions actually compound rather than resolve uncertainty.

But the courts have clearly and unequivocally concluded that park owners are not entitled to a fair return on the "value" of their property on the basis that such an approach is "circular.” Circularity results from the fact that value is determined by rents and, therefore, cannot be used as the yardstick to determine what rents should be permitted.

The State Supreme Court has also concluded that no particular type of fair return formula is required, (2) and that ordinances are not required to have a specific formula.

REFERENCES

1. For discussion of fair return issues see Baar, Guidelines for Drafting Rent Control Laws: Lessons of a Decade (1983) 35 Rutgers L. Rev. 721, Chapter VII.
2. Fisher v. City of Berkeley, supra.

Source: The GSMOL Mobilehome Rent Stabilization Ordinance Handbook, Second Edition: Guidelines for Drafting and Enacting a Mobilehome Rent Stabilization Ordinance.

Prepared by: Bruce Stanton, Esq., Corporate Counsel

Image courtesy of Stuart Miles at freedigitalphotos.net