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Fair Return & the California Courts

 

EXECUTIVE SUMMARY

 

This Report...

 

Defines
fair return
This report discusses the concept of  “fair return” as it has been addressed by California appellate courts in rent control cases. Written by an economist about a legal principle, the report links legal and economic concepts, exploring the economic outcomes of differing legal interpretations of fair return.
Clarifies the relationship between inflation and fair return This report breaks new ground by explaining thoroughly the link between inflation and fair return. Much confusion has been generated over the years about this connection. Municipalities across California have allowed themselves to be convinced that there is no need to allow rents to increase at the inflation rate. In fact, more than full inflation adjustments are often required, because operating and maintenance expenses may increase by more than the inflation rate. The report demonstrates that a fair return will be generated only if full inflation adjustments are allowed.
Explains fair return methods This report catalogs and explains the fair return formulas that have been employed in California’s rent control jurisdictions. The report then demonstrates that—as courts have said repeatedly from a legal point of view—it matters little what formula is employed. If any of several fair return formulas is used correctly, the result will be approximately the same. The report also identifies the bottom line—the method most likely to serve as a “constitutional” fair return rule.
Concludes that full indexing is required for true rent stabilization This report’s conclusions contrast sharply with conclusions reached by attorney Kenneth Baar, whose 1983 article has dominated the literature for more than a decade. While Baar questions the feasibility of making internally consistent fair return computations, the report makes it clear that consistent fair return computations are possible. While Baar believes that “partial indexing” for inflation is all that is required, the report demonstrates that full inflation indexing is mandatory. While Baar believes that it is permissible for municipalities to lower the real value of rents year after year, the report demonstrates that such a policy is confiscatory.
Serves as a manual for fair return calculations This report can also serve as a manual for administrators and courts interested in sound application of the principles of fair return. Comprehensive, balanced, and thoroughly documented, the report spells out the calculations that will result in fair return rents—rents that will balance the interests of property owners and tenants and protect the economic viability of the controlled housing enterprises.

 

 

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