City of Hayward Spanish Ranch I Proposed Rent Increase:Meet and Confer Meeting #4 Notes
Wednesday, November 12, 2008 Hayward City Attorney’s Office Hayward, CA
Call to Order and Approval of the Agenda
Mr. Hexter called Meeting #4 to order and briefly reviewed the evening’s agenda.He informed the HOA Team that the Facilitation Team held a caucus with theOwnership group immediately prior to the evening’s session. All parties approvedthe agenda for Meeting #4.
Review/Approval of Meeting #2 Notes
The Facilitation Team distributed hard copies of draft Meeting #2 and Meeting #3notes with all changes based on the parties’ requests tracked in the document.The Facilitation Team agreed to strike reference to the RAP in Meeting #2 notes.Following agreement related to this change, both groups approved Meeting #2notes.
Review/Approval of Meeting #3 Notes
Meeting participants discussed the content of Meeting #3 notes. Both partiesagreed that one point of discussion captured in the minutes was not accurate andshould be omitted from the record. HOA Group requested additional time toreview Meeting #3 notes.
Summary of Current Status
Mr. Hexter provided a summary of the relative interests of both parties in thisprocess. Based on information that the Facilitation Team has distilled throughmeeting conversation to date, the HOA Negotiation Committee is concerned withminimizing the impact of the proposed rent increase to residents. The OwnershipNegotiation Committee wishes to make a reasonable return on investment.Interests shared by both parties include avoiding litigation, maximizing the qualityof life of SRI residents, and ensuring that the mobile home property tax reflectsthe fair assessed value. Both parties affirmed that Mr. Hexter’s presentationreflected their respective interests as outlined here.In reviewing the proposals made by both committees, one HOA group memberprovided clarification related to the HOA’s counter-proposal as presented duringsession #3. First and foremost, the HOA representatives favor a method that
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indexes the property tax pass-through amount using calculations showing theimpact of net profit income tax on the tax increase beinig reimbursed, as well asrealistic expectation of income streams and rate of return on investment. Thegroup reiterated their two key requests: 1) Residents should be credited theincome tax percent rate on the net profit when they reimburse the tax increase;and 2) the pass-through amount should be based on what HOA believes to be acloser approximation of the real valuation, rather than the actual park purchaseprice.
Park Ownership Presentation
The Ownership group provided the following statements in response to theHOA’s arguments and counter-proposal. (Asterisks indicate assertions for whichno documentation was provided during the meeting.)
SRI HOA Issue 1:
Real estate taxes are an operating expense. By passing this expense on to homeowners, Ownership is being reimbursed for this expense at a rate of 100% rather than at a tax rate paid on the operating profit.
The Ownership representative stated that they believed that, in many cases, theHOA is relying on flawed assumptions related to these issues. He continued,affirming that real estate taxes are indeed treated as an operating expense. TheHOA’s argument assumes that there is a taxable income on this property andthat Ownership pays taxes. In fact, there is no taxable income on this propertyand so there is no savings.* He pointed out that Ownership has frontedessentially two years of increased taxes in the amount of $350,000 a year. Byvolunteering to spread out repayment over time, Ownership is recapturing onlyapproximately 85% of the expense.*
SRI HOA Issue 2: At the time that the park owners decided to purchase the park, they had already decided to pass on this increase in the real estate tax to the mobile home owners. This is a case in which owners have sacrificed home owners’ interest to further their own interest.
The Ownership representative posed a rhetorical question to the HOA Board:Why would anyone expect Ownership to act in anything but its own, long-termbest interest? Prior to making a purchase offer, any potential buyer wouldresearch the local ordinance and determine that the pass-through of propertytaxes was permitted. Ownership believes that residents of SRI have benefited foran extended period of time from the fact that ownership has not transferred andproperty taxes have not increased. Ownership asserts that virtually all parksthroughout California receive rent increases that reflect ownership’s need to passthrough property tax increases resulting from the transfer of ownership andProposition 13. The Ownership contends that it receives no benefit from the passthrough of a property tax increase. The increase merely offsets the expense.
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The Homeowner Negotiating Team disagreed with this last assertion, stating thatthe tax increase the residents pay will be used as a tax write off for the parkowners and the owners will be benefit and be reimbursed the expense theresidents pay.
SRI HOA Issue 3: The HOA Team called into question the decision to purchase the mobile home park with $11.55M in cash and a loan of $28M – they pointed out that this business decision resulted in substantial debt service costs that have substantially reduced net profit.
The Ownership representative assured the group that they paid as little aspossible for the property, pointing out that there were 11 offers. The committeerepresentative also responded to the HOA’s use of income-stream calculationsas a basis for valuating the property and hence establishing the property taxamount. They stated that in today’s market a realistic rate of return on mobilehome property is 4%, 5% maximum.* According to the HOA’s own calculationsthis would have resulted in a $38M purchase price. The reality is that the parkwas purchased for the price it was purchased for, the Assessor’s office assessedthe property based on this price, and the Hayward rent control ordinance allowsfor a tax pass-through.
SRI HOA Issue 4 Many park residents are elderly or disabled and Ownership knew that there was the real possibility that many would not be able to afford the proposed increase.The HOA Committee feels that poor people who cannot defend themselves are being victimized.
The Ownership group does not believe that Spanish Ranch I is made uppredominantly of poor, elderly or disabled residents.* Without some form offinancial means testing there is no method to ascertain the facts. Further,Ownership rejects the belief that they should assume responsibility for the poor,elderly, and disabled, and believes that this responsibility belongs to thegovernment or society as a whole.The Ownership Team then proceeded to provide direct response to the HOA’scounter-proposal and the assumptions that the HOA Committee has shared andupon which they have based their proposal. According to Ownership, the HOA’sown numbers show that the property valuation is closer to $40M than the $21Mthey have argued.First, the park ownership negotiation team member stated that they do not intendto negotiate the $63 per month increase, nor do they intend to add the additional$5 per month to recover the additional taxes assessed in the most recent tax bill.
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