Court ducks key issues in Prop 13 ruling: other real estate decisions this year also were limited.

At the beginning of this year, 1992 was being billed as a watershed year for real estate-related court decisions.

Legal experts marvelled at the fact that the U.S. Supreme Court had agreed to hear no fewer than four real estate cases, making this the most significant year for such cases since 1987.

But after last week's Supreme Court decision to uphold Proposition 13, local legal experts concurred that what had been billed as a watershed year has now become a disappointing legal non-event.

"This year has been very disappointing, from a legal standpoint," concluded Michael Berger, noted land-use attorney at the Santa Monica law firm Berger & Norton. "That disappointment comes from the number of (real estate) issues that were in front of the court, which the court has decided not to deal with."

The failure of the "highest court in the land" to address significant aspects of this year's real estate cases will undoubtedly result in a continuing avalanche of real estate-related litigation, industry sources said. And that avalanche will likely continue until some of these issues are finally resolved.

For example, in last week's ruling on Prop 13, the Supreme Court ruled that petitioner Stephanie Nordlinger could not legitimately claim that Prop 13 impedes peoples' "right to travel or settle" in California because Nordlinger already lived in California before she bought her house. But the court left unanswered the question of whether or not out-of-staters could legitimately file such legal claims.

Nordlinger, who rented an L.A. apartment before purchasing her house in Baldwin Hills in late 1988, sued Los Angeles County after learning her property taxes were five times higher than those being paid by longtime owners of comparable houses in her neighborhood. In her suit, Nordlinger claimed that those dramatic tax disparities deterred people from exercising their right to travel or settle in California.

The court ruled, "(Nordlinger's) complaint does not allege that she herself has been impeded from traveling or from settling in California because, before purchasing her home, she already lived in Los Angeles."

But the court opinion clearly leaves open the possibility that out-of-staters might legitimately make such a claim in the future.

"The court pointed out that she couldn't raise arguments on behalf of other persons, but it clearly leaves open the possibility of someone else raising the point," confirmed Russell Johnson, chairman of the real estate department at the law firm of Gibson, Dunn & Crutcher. "The court just doesn't deal with that possibility."

In short, last week's Supreme Court decision is not likely to be the final word on Prop 13, several local real estate experts agreed.

"Proposition 13 protects longtime property owners, and that category increasingly consists of old-line businesses and decreasingly consists of individual homeowners," explained Neal Roberts, director of real estate advisory services at Big Six accounting firm Coopers & Lybrand. "I still think Prop 13 may get changed via the voters, as single-family homeowners go after commercial property owners."

Such a revision of Prop 13 might come in the form of having commercial property treated differently than residential property, for tax purposes, sources said.

"More and more Californians are finding themselves in Ms. Nordlinger's position, as time goes on," land-use attorney Berger stated. "So the question of how to make this (Prop 13) more equitable and more palatable to the increasing number of post-1978 home buyers will eventually have to be addressed."

Just as last week's Prop 13 ruling has left a multitude of legal questions unanswered, so have the Supreme Court rulings on the other real estate cases considered this year.

The first was PFZ Properties vs. Rodriguez, dealing with a Puerto Rican landowner (PFZ) suing local Puerto Rican building authorities after they had failed to issue building permits several years after PFZ had applied for those permits.

The case was being closely watched by Los Angeles County real estate executives, and their counterparts across the country, because it was expected to settle the longstanding debate about whether U.S. property owners have a federally protected right to build on their property, as long as it conforms with current zoning guidelines.

But in March of this year, after being fully briefed and hearing oral arguments in the PFZ case, the court unexpectedly dismissed it. The justices decided the parties had to first seek relief from the Puerto Rican territorial courts before appealing it to the federal court system.

"It was just like watching Gilda Radner doing her Rosanne Roseannadanna shtick on 'Saturday Night Live'," quipped Berger. "They went on and on with this long harangue, and then said, 'Never mind.'"

The following month, in April, the Supreme Court undertook the second real estate case, John Yee vs. City of Escondido. That case involved a mobile home park owner, Yee, challenging the constitutionality of Escondido's rent control ordinance on mobile home parks.

The ordinance had resulted in mobile home park space-rental rates being dramatically below market rates. Hence, residents were able to sell their mobile home units for prices far in excess of the actual market value of the units because the buyers were getting the added value of their right to pay below-market space rent indefinitely.

Mobile home sellers were pocketing that premium, and Yee argued that constituted a "taking" of his property, for which he was entitled to receive compensation.

Lower federal courts had ruled such situations did indeed constitute a "physical taking" of property, and mobile home park owners were entitled to compensation.

Meanwhile, California state courts had ruled such situations did not constitute a "physical taking," but might constitute a "regulatory taking."

A physical taking means the property owner has, in effect, lost the entire value of his or her property. Hence, the court's only chore in such cases is to decide the value of the property to determine how much the mobile home park owner is owed.

A regulatory taking, on the other hand, requires a complex case-by-case analysis to determine how much value the mobile home park owner has lost, and which party or parties are responsible for that loss.

The Supreme Court decision was expected to clarify the conflicting federal and state laws on mobile home park rent control and, thereby, drastically reduce the skyrocketing number of cases being filed on that issue.

The court ruled in April that Yee had not suffered a "physical taking," and upheld the constitutionality of Escondido's rent-control ordinance. But it refused to rule on whether Yee's alleged losses constituted a regulatory taking, as many legal experts had hoped.

"The court indicated they would find the (regulatory taking) issue very interesting, but it wasn't the issue in front of them, so they refused to consider it," Berger explained. "And that has left the whole issue of mobile home rent control up in the air."

The Supreme Court, as of last week, had not yet ruled on the fourth real estate case of 1992, David Lucas vs. South Carolina Coastal Council.

That involves South Carolina passing coastline-protection legislation after Lucas had purchased oceanfront land. The state law prevented Lucas from building on that land, and Lucas is arguing he must be compensated for that "taking."

The Supreme Court must issue its ruling on that case, or dismiss it, before the end of this month, which is when its judicial session ends.

Reactions to Prop 13 ruling vary widely

Howard Jarvis Taxpayers Association officials are happy about last week's U.S. Supreme Court decision preserving Proposition 13, but some Los Angeles economists and consultants fear it may keep California from repairing its sagging infrastructure and prolong the recession.

The suit entitled Stephanie Nordlinger vs. Kenneth Hahn (in his capacity as tax assessor for Los Angeles County) was filed Los Angeles County Superior Court in summer 1991. The suit challenged the constitutionality of the 1976 initiative that rolled back property taxes and provided for nominal hikes until the property sold, at which time it would be reassessed to existing market values. Critics say the formula isn't realistic because tax increases didn't keep up with inflation and infrastructure demands.

"This decision was the last legal word. The political fight over Prop 13 isn't over but there will be no more frontal assaults, no more challenges to its constitutionality," said Joel Curtis, president of the Los Angeles-based Howard Jarvis Taxpayers Association.

Officials at Diamond Bar-based California Building Industry Association assessed the Supreme Court decision more moderately. Executive Director Ken Willis suggested Prop 13 be modified so voters in school and other special assessment districts can pass bond issues with a simple instead of a two-thirds majority.

"Under the existing rules, the will of the minority will always prevail," he said.

Economist Stuart Gabriel, an associate professor of finance and business economics at the University of Southern California's School of Business Administration, was worried: "Unless something is done to change the California property tax formula, there will be no appreciation in home values throughout the state. The property value bubble has burst." He suggested a formula that evenly assesses property owners and raises more money for key programs.

Fred Pierce, director of the Price Waterhouse Real Estate Consulting Group in Los Angeles, saw lower California property values if voters don't force a change in Prop 13.

"This was the right time to overturn Proposition 13. Now that the Supreme Court has refused to do so, I doubt any local group will pick up the cause and say, 'Let's raise taxes,'" he said.

Leaving Proposition 13 untouched will deny California children a proper education, services to neighborhoods, adequate police protection and enough detention facilities, Pierce said.

Had Prop 13 been overturned, Los Angeles County Assistant Tax Assessor Sid Delgado said, property taxes on most county parcels would have tripled or quadrupled. Some would have increased 12-fold. It would take the county staff 7.6 years to re-appraise Los Angeles County, he said.

Some senior citizens feared their financial security would be jeopardized if Prop 13 were overturned or modified because they would have to pay higher taxes. Even so, David Cunningham, legislative representative for the Lakewood-based Area Nine office (which includes California) of the American Association of Retired Persons, said the group never fought challenges to Prop 13. He said the group has supported modification toward a more equitable formula.

Todd White also contributed to this report