Homelessness is a persistent problem in the U.S. According to the National Alliance to End Homelessness, 1.6 million people were homeless in 2009-2010 and this figure is projected to increase by 5% over the next few years as a result of the economic downturn. A study by Dennis Culhane of the University of Pennsylvania indicated that homeless people use up an average of $40,000 a year in public services such as hospital care and jail time, and when homeless people are offered public housing, hospital care and jail costs go down dramatically. Homelessness has been a particularly serious and urgent problem in the city of Berkeley, California.
Moneybags, a longtime resident of Berkeley, is the owner of single room occupancy dwellings (hereafter SROs), which are defined as living units which share a kitchen and/or bathroom with one or more other units. He is bringing an action challenging the constitutionality of the City of Berkeley's Local Law 25, which establishes a 5-year moratorium on the conversion, alteration, and demolition of SROs. Moneybags requests an injunction prohibiting enforcement of Local Law 25.
For generations SROs have served as an inexpensive dwelling place for persons of low income. Over the past decade there has been a significant decline in the number of SRO units available to the poor in Berkeley, due to the rapid rise in real estate values thoughout the 1990s and the repeal of rent control laws. Many SRO owners have recently found it more profitable to convert their buildings to other uses rather than to continue to operate them as SROs. At the same time that SRO unit availability declined, homelessness in Berkeley increased. A recent U.C. Berkeley study concluded that while there are numerous causes of homelessness in Berkeley there is a statistically significant relation between the decline in SRO units and the rise in homelessness. The study also identified at least 42 people who were homeless for at least six months in Berkeley after they had been evicted from SROs in Berkeley which were converted to other uses.

Throughout 2009 and 2010 there had been much informal discussion in the local press, and at Berkeley city council meetings, about the problem of homelessness and the contribution of SRO conversions to this problem. Mr. Moneybags was a regular participant in these discussions. In September of 2010, upon realizing that SRO units were disappearing at an alarming rate, with the result that the number of affordable rental housing units for the poor was shrinking significantly, and after dissemination of the U.C. Berkeley study, the City initiated formal public hearings to address the problem of SRO conversions. After over a year of public debate, the City passed Local Law 25 on November 1, 2011.

Section 2 : "Buyout Clause". SRO owners may withdraw protected SRO units from the housing market, and convert them to other uses, upon providing for the replacement of those units. A unit may be exempted from section one of the law following payment to a Housing Development Fund of an amount equal to the cost of creating a replacement unit. This cost is set at $50,000 per unit. Funds acquired from this buyout option are to be used to develop housing affordable by low income persons in Berkeley. Alternatively, an SRO owner seeking to exempt a unit can, instead of paying the $50,000 fee, provide an actual replacement SRO unit.

Section 3: "Rehabilitation Clause". SRO owners must make a good faith effort to rent all SRO units they own which are not exempted under the provisions of section 2. If a unit is uninhabitable then the SRO owner is required either to exempt the unit under the provisions of section 2, or to take reasonable steps to make the unit habitable. If the cost of making a unit habitable exceeds $1500, as determined by City officials, then the City of Berkeley will offer to the SRO owner a loan payable over 15 years at 0% interest, for 75% of the moneys in excess of $1500 necessary to rehabilitate the unit up to a maximum of $36,500 per unit. To receive this loan, a city inspector must certify that the costs of repair are necessary. These funds will come from the newly established Housing Development Fund and other sources.

Section 4: "Hardship provision". If an SRO owner can show no possibility of earning a reasonable rate of return through renting their property as SRO units, where reasonable rate of return is defined as an annual 8 percent return on the building's most current assessed value, the City may reduce in whole or part the amount that owner needs to contribute to the Fund in order to withdraw their SRO unit from the housing market. An owner may not make use of this hardship provision where his or her inability to earn a reasonable return as defined by the law is the consequence of intentional acts of mismanagement designed to destroy the property's value as an SRO dwelling.

Section 5: Local Law 25 takes effect immediately upon passage.

Section 6: "Severability". If any provision of this Law is held invalid, the remainder of this Law shall not be affected thereby.

Mr. Moneybags has been in the business of acquiring and holding real property in Berkeley for nearly twenty years. In January of 2011 he purchased two adjacent SRO dwellings on Telegraph Avenue between Durant and Ashby, containing a total of 102 SRO units, for $3.1 million at a foreclosure sale. Included in this purchase were some units in poor condition that require an investment of about $2,000 each just to meet housing code standards and make them habitable for use as SROs. All of the structures operated as SRO residential hotels at the time of purchase. Occupancy of these buildings at the time of Moneybags' acquisitions was approximately 80%--the unoccupied units include some units in poor condition which require rehabilitation to pass housing code regulations.

Moneybags acquired the dwellings with the intention of converting them into 48 luxury condominiums that would be sold at between $300,000 to $500,000 per unit. Local Law 25 prohibits the conversion of these buildings from their current use as SRO dwellings. Moneybags claims Local Law 25 is an unconstitutional taking of private property without just compensation. The City of Berkeley argues that it is a valid regulation enacted to help prevent homelessness by preserving the stock of low-rent SRO housing and that it should not be required to compensate Moneybags for the restriction on the use of his property.

It is November, 2012. The City of Berkeley, having lost its case in the state's Supreme Court, which struck down Local Law 25, petitions the U.S. Supreme Court, which has granted certiori to decide whether or not Local Law 25 is constitutional. The issue the Court has agreed to decide is whether Local Law 25 constitutes a taking of private property for public use without just compensation, or rather, whether it is a valid regulation of the state's police powers.

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