In October, a panel of the California Court of Appeals decided a challenge to some amendments to the San Francisco Administrative Code and rendered a decision that California local governments will find troubling. And given California’s influence
Single-room-occupancy hotels (SROs) provide basic, cheap accommodations and shelter to people who might otherwise be on the streets. In tourist destinations, such as San Francisco, SRO hotels are also economically desirable as rentals. Owners, seeking greater returns on their investments, often seek to convert them into tourist accommodations, exacerbating the homelessness problem. For almost four decades, these owners have been in conflict with the city, which has amended its code several times to limit or offset those conversions.
Two previous efforts by the city illustrate this conflict. The city had previously imposed moratoriums on these conversions and put in place a prohibition on the same unless the hotel owner made substitute accommodations available or paid a substantial fee for the city’s use to provide shelter for a target population. More recently, the city required that SROs be available for at least a week at a time. These city actions survived legal challenges.
In the case decided recently, the city extended the minimum SRO occupancy period to 32 days. That odd number can be explained by another section of the city’s code that provides for landlord-tenant protections to “kick in” for rentals in excess of one month. The city’s actions further limit the ability of SRO owners to convert these units to more profitable tourist accommodations. The SRO owners sued, alleging that their property had been “taken” without just compensation and also requested a preliminary injunction against the new code provisions. A trial judge denied the preliminary injunction and the SRO owners appealed.
At first glance, the owners’ case seemed weak, for they still had both their property and an income stream which, although it would certainly have been enhanced by conversion to tourist hotel use, would normally have been sufficient to avoid a taking. The SRO owners were clever in their approach, however, for the case was not brought under the federal Constitution, but that of California – the case law of that state was used instead.
The SRO owners cited a 1954 case involving a Los Angeles code provision that sought to “amortize” a lawful nonconforming plumbing business in a residential zone. Los Angeles provided that after a period of time to recoup its physical investment, the plumbing business must move. The California courts upheld that decision, finding no taking, so long as the investment had been recouped. The SRO owners argued for a similar amortization approach and contended that, without such a period, the San Francisco code amendments amounted to a taking and that a preliminary injunction should be issued to prevent the amendments from being effective.
The appellate court agreed and remanded the preliminary injunction request for further proceedings below, rejecting the city’s contention that the change in the minimum stay provisions was not “property” that could be taken and for which compensation must otherwise be paid. The court observed that there was a situation before the code was amended in which stays between 7 and 31 days were permitted without the onerous landlord-tenant regulations being effective. That situation ended with the challenged code amendments, so the court ruled that the city could not undertake a new rental regime without providing for amortization and that to do so otherwise could be a taking under the California Constitution.
The decision is odd for several reasons. Unlike the Los Angeles plumbing business case, determining which physical investments in the SRO hotel are subject to amortization will be difficult because hotel improvements will be the same whether for SRO or tourist occupancy. Secondly, the decision was not ordered to be published and thus cannot be used as precedent in California courts. This approach usually occurs when a decision follows, rather than makes, law, which is not the case here and suggests the court may be uncertain about its reasoning and could revisit the same in a subsequent appeal on the merits of the case.
The decision is also disquieting, for it suggests that normal regulatory changes may require a delay in implementation so as to allow the regulated party the opportunity to amortize its investments. Even if the court were to apply such a delay only to real property regulations, there would be disputes in determining which aspects of property (physical or otherwise) qualified for amortization and how they would be appraised. For example, would the city have to delay new fire or record-keeping regulations or pay for their earlier implementation? A similar dilemma was posed by Oregon’s Measure 37, when new land use regulations would generally require taxpayer payments under a novel “just compensation” theory set out in the measure in order to be effective.
Both the SRO owners and the city have legitimate concerns over property regulations and dealing with the homeless. However, the California decision in this case does not appear to be an ideal solution, and the precedent it sets may be constitutionally problematic.
Edward Sullivan is a retired practitioner of land use and municipal law for more than 45 years. Contact him at email@example.com.
Carrie Richter is an attorney specializing in land use and municipal law at Bateman Seidel. Contact her at 503-972-9903 or firstname.lastname@example.org.