THE “SHORT-TERM” RENTAL: A GROWING CHALLENGE FOR CALIFORNIA’S HOUSING COMMUNITIES

The term “short-term” rental is generally used to refer to the leasing of housing units (or portions thereof) for a period of fewer than 30 consecutive days. Sometimes such arrangements are known as “vacation rentals” because the leased location is utilized by travelers in lieu of traditional hospitality properties like hotels and inns. The use of these arrangements has spawned an industry providing information and bookings by internet communications with companies like Airbnb, VRBO and Homeaway.

State Laws

At the moment, there is no statewide California legislation focusing on short-term rentals, although some bills are pending in Sacramento addressing various topics pertaining to these types of temporary housing. There is also likely to be a measure on the November 2015 ballot statewide. One measure collecting signatures to get on the ballot contains provisions calling for the owners of short-term rentals where they are lawful to report periodically (probably quarterly) to city and county agencies in the local jurisdictions, with substantial fines for failure to do so.

While most of the potential efforts to spell out regulations are designed to limit and/or tax the short-term rental industry — which at present is exempt from “occupancy” or “transient” taxes in most localities — there is some industry pushback in proposed legislation too. For example, AB1220 (Harper R-Huntington Beach), supported by a coalition of residential property owners, would expressly prohibit local governments from levying taxes based on short-term rental income.

 How the Topic Has Been Treated So Far By Local Jurisdictions

At present, the legislative and judicial evaluation of short-term rentals by California jurisdictions is in flux. Only a small number of cities and counties have as yet adopted laws on the subject. Quite a few local governments are still evaluating what to do. That is changing rapidly with more public awareness of the topic, as witnessed by the events this week in Santa Monica. There the unanimous City Council voted, without first taking public comment, to prohibit short-term rentals of entire residential units within its city borders. As far as short-term rental of spare rooms, less than the whole unit, Santa Monica’s approach is to allow same if the owner/host complies with licensing requirements and pays the City’s 14% occupancy tax, the same percentage as required of hotels, inns and the like in that jurisdiction.

Of the other municipalities which have thus far established legal policies concerning short-term rentals, measures adopted have ranged widely in scope. For instance, San Luis Obispo has a Municipal Code which totally bans “Vacation Rentals” within the city limits, but which is vague as to whether this extends to leasing of only a portion of the unit. Anaheim and Malibu recently passed measures legalizing short-term rentals provided that the hosts register and pay taxes like other businesses offering lodging. By contrast, San Diego’s applicable code does not prohibit short-term rentals categorically but rather prescribes that, in certain parts of the town, it is unlawful to lease out a condominium for fewer than seven days (effectively eliminating this type of occupancy for normal two-day weekends as well as extended holiday weekends).

What is the current status of regulation here in the City of Los Angeles? Our Planning Department is presently reconsidering the City’s zoning regulations in light of the proliferation of short-term renting, with written proposals expected to be surfacing in a few months. In the meantime, as specified in a memo on the subject circulated by the Planning Department last year, short-term rentals are zoning violations in many residential areas but may — at least for the time being — be permissible in certain locations which are zoned for high-density, multifamily occupancy. Hoteliers have been lobbying to eliminate any short-term occupancies, whether whole or partial units, or at least to “level the playing field” by proposing transient/occupancy taxes on short-term rentals at rates similar to those charged by hotels and other lodging providers for units having “like amenities.”

Not surprisingly, the City of San Francisco, where Airbnb is based, has had a flurry of activity on this topic too. This is at least in part because of the limited rental housing stock in that municipality as well as the extremely high rental rates for apartment and condo units there. San Francisco’s Administrative Code previously precluded “tourist” or “transient” occupancy, and short-term rentals were considered to fall into those categories. Moreover, the City’s Planning Code may have been a barrier too because it restricted operation of “hotels” in areas zoned for residential, and some groups argued that short-term rentals were covered by the hotel restriction. At this time, a fairly new ordinance in San Francisco provides some exceptions in narrowly limited circumstances. However, the regulations are the object of considerable lobbying, with apartment owners’ groups trying to expand the number of exceptions and tenants’ organizations trying to cut back on those few now available.

 Litigation Concerning Short-Term Rentals

Thus far, most litigation related to short-term rentals has focused on two topics. One is whether condo HOAs can regulate and limit the number of such rentals as well as whether they possess the authority to impose fees on condo owners who are engaging in short-term rental. An appellate court decision in Los Angeles County this March supported the right of HOAs to limit short-term rentals as well as to charge fees, although the amount of the imposed fees could not exceed what its Board of Directors reasonably estimates “in good faith” to be needed to “defray the cost” generated by a short-term rental.

Considerable judicial attention in recent times has focused on online hosting platforms. Some have been initiated by tenant advocacy groups. There was also a case decided at the trial level last month reflecting the competition and bickering among those hosting companies, with Homeaway unsuccessfully challenging the new guidelines in San Francisco as being unfairly favorable to Airbnb.

What Are Some Remaining “Hot” Issues and Unanswered Questions

The explosion in the number of short-term rental operations in recent years has been enormous. It is estimated that Santa Monica alone presently has 1,700 sites. Creative efforts to circumvent the newly enacted rules are being devised. The issues left to be determined are numerous, some being rather complex and others less so. Think about just the small list of topics set out below.

  1. In locations where there is already a shortage of affordable rental properties, what can be done to maintain residential availability for lower and middle class tenants? How can the government keep short-term rentals from gobbling up houses, condos and apartments which would otherwise be available for long-term occupancy?
  2. How can the playing field be made more level to placate hotels and motels, which are losing market share to these short-term rentals, especially when the latter presently do not pay transient or occupancy taxes?
  3. How can local governments generate fees from short-term rentals which will not be the subject of substantial litigation?
  4. What impact does regulation of short-term rentals have on rights of privacy?
  5. What can developers and HOAs specify about short-term rentals when creating and/or operating multifamily residential projects?
  6. What will be the ultimate impact of short-term rentals on traffic, parking, crime and property values in the communities which allow those rentals?
  7. How can local governments effectively enforce their regulations given staff and budget constraints?

Updates

This is definitely a “hot-button” subject in California and some other locations around the country. More is assuredly to come. Stay tuned. The Firm will keep a close watch on developments regarding short-term rentals, and it will inform readers of The Joe Cobert Report of significant matters pertaining to this subject as they materialize.

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