Owner of downtown Santa Cruz apartment building sues city over rent cap ordinance

The owner of a downtown Santa Cruz rental building is challenging the city’s new rent cap ordinance in federal court, arguing that the restrictions breach the company’s constitutional rights and will have a “chilling effect” on affordable housing development across the city.

GVC St. George, LLC, the legal entity that owns the 122-unit St. George Residences on Pacific Avenue, filed a lawsuit against the City of Santa Cruz in the U.S. District Court for the Northern District of California on Nov. 5.

The suit challenges a rent cap ordinance that the city council approved in late September. That ordinance brings government-assisted living facilities with expiring rent restrictions, such at the St. George Residences, under the same protections as a state law, Assembly Bill 1482, that limits the size of single-year rent increases to between 5% plus inflation or 10%, whichever is lower.

GVC St. George alleges that by passing an ordinance, the city is violating the company’s constitutional rights to receive a fair return on its investment in the St. George Residences. 

“Not only does this unfairly target the apartment community, but we anticipate the city’s actions in adopting this ordinance will have a chilling effect on future affordable housing in the City of Santa Cruz,” the owners wrote in a recent notice about the lawsuit given to the building’s tenants. “As such, we feel judicial intervention is warranted.” 

The landlord is asking the court to declare the city’s rent control ordinance “unconstitutional, invalid and unenforceable,” award the company unspecified economic damages and allow the landlord to hike rents to levels it had initially proposed earlier this year.

Assistant city attorney Cassie Bronson said the city has not yet been served with the suit but she believes that the ordinance is “reasonable and in line with state law” and that the city has a strong legal argument. 

In July, Lookout broke the news that tenants in 70 low- to very-low-income units in the building between Pacific Avenue and Front Street were facing varying degrees of rent increases starting at the beginning of November that threatened to make the apartments unaffordable for some. Many of the tenants affected by the planned hikes were older adults who rely on Social Security for their incomes. Some were looking at a near-doubling of their rents overnight.

After the Santa Cruz City Council unanimously voted in September to pass the rental restrictions, William Van Roo, an attorney for the building’s owner, criticized the ordinance and threatened legal action. He did not return Lookout’s request for comment by publication time.

The St. George Residences were previously subject to a longstanding agreement between the building’s former owner and the city to keep rents low for some units.

Green Valley Corp., the parent company of San Jose-based developer Swenson Builders, rebuilt the property after the 1989 earthquake and owned it for many years. The company signed an agreement with the City of Santa Cruz in 1991, in which the city loaned Green Valley funding from American Red Cross to help rebuild damaged portions of the St. George Residences. In return, the developer agreed to limit rent increases for 30 years. 

That agreement expired in 2021, the same year that Green Valley sold the building —  and its legal entity, GVC St. George — to a company named Barron Ranches, Inc., Barron Ranches representative Van Roo previously told Lookout. 

It’s unclear whether a person or entity affiliated with Swenson still owns the property, but Barron Ranches’ CEO is Rebecca Menne. Menne is Swenson Chairman Barry Swenson’s daughter and also owned a 15.5% stake in Green Valley Corp. as recently as 2021, according to a 2019 lawsuit. 

In its note sent to tenants of the St. George Residences, Barron Ranches wrote that it plans to go ahead with the rent increases, but won’t require tenants to pay the higher amounts until the resolution of the lawsuit. Instead, it will allow tenants to accrue the increases as past-due rent without interest or penalties. If the company wins its suit against the city, the note says, “the full amount of the past due rent shall be due.”

In its lawsuit, the building’s owner argues that the city’s ordinance effectively caps increases on units in the St. George that serve low-income tenants at 8.8%, an amount it says would mean that it will take years for those units to reach market value.

“If the market rent is $2,000, under the Rent Control Ordinance it would take over nine years at 8.8% annual increases for the existing household’s rent to reach the $2,000 market rate, at which time it is unlikely that the market rent would still be $2,000,” the building’s owner wrote in its complaint. “As such, the Rent Control Ordinance prevents all owners of assisted housing developments from achieving a fair rate return on their investment so long as the low-income households remain at the property.”

The California Department of Housing and Community Development (HCD) has also joined the legal tangle. On Nov. 13, the department sent a notice of violation to Van Roo warning that the building’s owner didn’t comply with state laws governing rent increase notices sent to residents, as well as notices it was required to send to other companies that might be able to purchase the affordable housing development. Owners of government-assisted developments are required to send such notices before they can legally end rent restrictions, and post them publicly in the building.

HCD requested a written response from the owner by Nov. 27, as well as a proposed timeline for submitting proper notices, with the current rent restrictions in place, until they are compliant with state law.

Have something to say? Lookout welcomes letters to the editor, within our policies, from readers. Guidelines here.