## Facts

- The City of Cotati adopted a rent-control ordinance and regulations for residential rental units, stating goals of preserving affordable housing for low-income renters, elderly or fixed-income renters, and students.
- Property-owner plaintiffs alleged the ordinance produced contrary outcomes based on Census data comparisons: reduced rental housing stock, fewer low-income renters, and fewer students in Cotati compared to similar cities without rent control.
- Plaintiffs alleged these effects amounted to “gentrification” and showed the ordinance failed to achieve its stated objectives.
- Plaintiffs also alleged they made capital improvements, applied for rent increases to obtain a fair return on those investments, and the Cotati Rent Appeals Board denied any increase.
- Plaintiffs claimed the denials would reduce the rate of return on the improvement investments to zero, constituting an unconstitutional taking.
- The trial court sustained defendants’ general demurrer to the first amended complaint without leave to amend and dismissed the action.

## Issues

1. Whether the complaint stated a regulatory takings claim by alleging the rent-control scheme failed to substantially advance a legitimate governmental interest because its actual effects undermined the ordinance’s stated affordable-housing goals.
2. Whether the complaint stated a confiscatory takings claim by alleging the scheme denied landlords a constitutionally required fair return on investment in capital improvements, without requiring a showing of total loss of economic value.

## Decision

- The Court of Appeal reversed the dismissal.
- It held the trial court erred in sustaining the demurrer without leave to amend because the complaint stated viable takings theories.
- The court vacated the judgment and remanded with directions to overrule the demurrer and allow the case to proceed.

## Legal Principles

- On demurrer, courts accept as true all properly pleaded material facts and reasonable inferences; the question is whether a cause of action is stated, not whether the plaintiff will ultimately prevail.
- A regulatory taking may be pleaded by alleging that a regulation does not substantially advance legitimate governmental interests, assessed in light of the results the regulation allegedly produces.
- Under California rent-control doctrine, a rent-control scheme must allow property owners a fair return on investment; a scheme may be confiscatory if it denies fair return.
- A takings claim based on lack of fair return does not require pleading a complete loss of all economic value of the property.

## Conclusion

The court held that landlords adequately pleaded unconstitutional taking claims where they alleged, with specific factual support, that the rent-control ordinance produced market effects inconsistent with its stated affordable-housing goals and that rent-setting decisions denied any increase needed to provide a fair return on capital-improvement investments.


152 Valparaiso Assocs. v. City of Cotati, 56 Cal. App. 4th 378, 65 Cal. Rptr. 2d 551 (Ct. App. 1997)