Should hotel owners be forced to provide housing to the poor? According to the city of San Francisco, yes, they should. That's why the city is arguing an appeal in front of the California Supreme Court, capping off 11 years of litigation over the San Remo Hotel.

Like most lawsuits that eventually reach the highest courts in the land, this one has a long and convoluted history. It all started at a 95-year-old Victorian mansion in the North Beach district of San Francisco. Built by Bank of America founder A.P. Gianinni after the great earthquake and fire in 1906, the San Remo Hotel operated for most of this century as a commercially licensed tourist hotel that also welcomed long-term residential tenants.

In 1971, brothers Tom and Robert Field bought the hotel and have since invested more than $1 million to authentically restore the historic building inside and out. The hotel is small and offers price-conscious travelers lodging with shared baths for $65 to $75 per night. And at the time the Fields bought the hotel, it also provided long-term housing for some San Francisco residents.

In 1981, the city passed an ordinance intended to preserve residential hotels as low-cost housing for the poor. But when that measure didn't have the effect the city wanted, San Francisco strengthened its zoning requirements in 1990.

The 1990 ordinance required small hotel owners to obtain a city permit before renting rooms to tourists, if those rooms were once used by long-term residents. And to get such a permit, the hotel owner had to agree to either replace the lost residential rooms or pay a fee equal to 80 percent of the rooms' construction costs, plus the cost of site acquisition.

This ordinance affected about 500 San Francisco hotels, which accounted for about 18,000 residential rooms. These small establishments were effectively being required to foot the bill for low-income housing in the city, a cost that typically is spread among the entire population.

When the Field brothers decided to go all-tourist, the city insisted that the San Remo provide lifetime leases to the hotel's long-term residents. And it required a $567,000 replacement housing fee to convert residential rooms to tourist rooms.

The Fields paid under protest and sued the city to demand a refund.

Filing lawsuits in both federal and state courts, the Field brothers claimed the city relied on unconstitutional provisions in the city's Residential Hotel Conversion and Demolition Ordinance, first enacted in 1981, and retroactively applied sections of the city's planning code, which were added in 1987, in classifying the hotel as residential "group housing."

Last year California's supreme court agreed to review a decision by the Court of Appeal in San Francisco that the hotel owners should not have been forced to pay the city a half-million-dollar-plus fee in 1993 to continue tourist rentals. The Court of Appeal held that the Fields were entitled to a trial on the facts of the case, to determine if the city passed an unconstitutional ordinance restricting their legal use of rooms for tourists.

The Court of Appeal even referred to the fee as a "ransom."

"The proper solution to more low-income housing would be to spend tax dollars received from a broad spectrum of our society -- not to force certain hotel owners to provide rooms against their will," said Paul Utrecht, an attorney for the San Remo Hotel. "Unfortunately the city's position thus far has more to do with politics than logic, legality or fairness."

Utrecht went on to call the city's policies "an unconstitutional regulatory scheme that amounts to organized extortion."

Initially, the brothers lost their claims in low-level courts. But the Court of Appeal again placed their case on firm footing.

"Affordable housing for the indigent may be a worthy goal, but it is also an expense traditionally and rightly borne by society as a whole," said the opinion by Justice Lawrence Stevens. "Even well-intentioned measures may create unconstitutional takings."

But the Field brothers still haven't had their day in court, and will not get a fair trial on the merits unless the state Supreme Court takes their side this month. Either way, a challenge may climb all the way to the nine wise souls in Washington, D.C.

Meanwhile, San Francisco continues to hold the brothers' cash and insist that other small hotels fork over big bucks if they want to focus on tourism. The wheels of justice turn slowly, especially in property rights cases involving government entities.

"A sensible course of action for the city would be to accept [the Appeals Court's] determination, putting an end to this 10-year litigation. Otherwise, property owners, public interest groups, cities and counties throughout the state will be compelled to join in a battle that may now reach the U.S. Supreme Court," Utrecht said.

Published: December 13, 2001

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net