## Facts

- Sea Castle Apartments, Ltd. purchased a 178-unit Santa Monica apartment complex in 1987 from Monica Apartments Investment Company.
- The property had been rehabilitated using a HUD-insured mortgage; HUD managed the property as mortgagee in possession from 1976 to 1980.
- Santa Monica adopted a rent control charter amendment in 1979 that rolled back rents to April 1978 levels and allowed general adjustments and individual rent increases.
- In 1981 and 1983, Monica obtained Board-approved individual rent increases (including Petition No. I-0669 in 1983 setting a maximum annual yield of $604,848).
- While the HUD-insured mortgage remained in place, HUD twice preempted local rent ceilings and set higher rent levels (including a 1983 preemption setting a maximum annual yield of $743,212).
- In December 1986, Monica refinanced and extinguished the HUD-insured mortgage.
- After buying the property, Sea Castle claimed the HUD-established rent ceilings remained the lawful maximums even after the HUD-insured mortgage ended; the Board asserted the property returned to local rent ceilings (including I-0669, as adjusted under local law).

## Issues

1. When HUD preempts local rent ceilings for a property due to a HUD-insured mortgage, do HUD-established rents continue after the mortgage is extinguished, or do rent ceilings revert to those set under the local rent control law?

## Decision

- The Court of Appeal affirmed summary judgment for the Board on the published preemption/reversion issue.
- HUD preemption was temporary and contingent on the continued existence of a HUD-insured mortgage.
- Upon extinguishment of the HUD-insured mortgage, maximum allowable rents reverted to those established under Santa Monica’s rent control law (including the Board’s I-0669 determination and later permissible local adjustments), not the higher HUD-established levels.
- The court rejected Sea Castle’s theory that HUD-set rents permanently became the local “base” rents after federal preemption ended.

## Legal Principles

- Federal agency preemption of local rent ceilings tied to a HUD-insured mortgage supersedes local rent limits only while the federal condition (HUD-insured financing) exists.
- Ending the HUD-insured mortgage terminates the basis for HUD rent preemption; absent continuing federal authority, local rent control standards resume full effect.
- Preemption displaces conflicting local law only to the extent and for the duration authorized; it does not repeal local rent control ordinances or permanently reset local rent ceilings.

## Conclusion

The court held that HUD’s rent preemption operates only during the life of a HUD-insured mortgage; once that mortgage is extinguished, the property returns to the local rent control regime and its locally established maximum allowable rents.


Sea Castle Apartments, Ltd. v. Santa Monica Rent Control Bd., 228 Cal. App. 3d 1543, 279 Cal. Rptr. 672 (Ct. App. 1991)