Regulating the Uberized Short-Term Rental Market

Ten years ago, Brian Chesky and Joe Gebbia couldn’t afford the rent on their San Francisco apartment. Knowing that a design conference was coming to town and every hotel room was booked, they bought three air mattresses, set up a basic website with pictures of their apartment, and booked their first three renters for $80 each. From those humble beginnings, Airbnb was born—a company now valued at around $30 billion. (1) The huge success of Airbnb has inspired other tech-based ventures to enter the short-term rental (STR) arena—including VRBO, HomeAway, and more eclectic ventures such as Oasis, which hand-picks attractive homes in hot destinations, and Getaway, which specializes in renting out tiny homes. These and other such tech ventures have certainly uberized the lodging industry. They have also created new challenges for land use planners and government officials. STRs located in areas zoned for residential uses, for example, can create land use conflicts in neighborhoods where residents have a certain expectation of quietude and familiarity. These emerging uses can also raise zoning compliance concerns because STRs effectively convert single-family dwellings into commercial lodging establishments, which are often prohibited in residential districts. Even when lodging establishments are allowed side-by-side with residences, the standards that apply to residential dwellings are typically much less rigorous than those that apply to lodging establishments. Consequently, unregulated STRs can change the character of a neighborhood and raise public health and safety concerns arising from insufficient safety, noise, trash and septic disposal, and traffic controls. An influx of STRs can also exacerbate long-term rental housing shortages, drive up housing costs, disrupt local hospitality industry markets, burden law enforcement, and enable discriminatory rental practices. As a result, municipalities and states around the country—and, indeed, around the world—have begun to regulate these new ventures. For local officials seeking a solution to the land use issues STRs present, this sampling of regulatory approaches can serve as a springboard.

The Free Market Approach

Cities and towns have been relatively slow to impose regulatory regimes on STRs. A 2016 study from R Street Institute, a D.C.-based free market think tank, examined STR laws in the 59 largest U.S. cities to determine which cities had enacted a legal framework for regulating STRs, whether legal restrictions had the effect of curbing STRs, what tax-collection obligations were placed on these ventures, how burdensome the licensing regime was, and how hostile the enforcement regime was. Of the cities surveyed, 38 had no legal framework in place for short-term or vacation rentals at the time of the study. And, of the 21 cities that had a legal regime in place, only 14 specifically referenced STRs. (2) Although the R Street survey does not give much insight into the motivations behind local decisions as to whether or not to regulate STRs, it is not inconceivable that some governments have taken a deliberate free market approach to the STR phenomenon. Indeed, Arizona enacted a state law last year that preempts its cities, towns, and counties from totally banning STRs, although it allows local governments to narrowly regulate these uses based on nuisance-type considerations and to impose taxes on such ventures. (3) If your city or town is considering a free market approach to STRs, bear in mind that non-action might not establish a hands-off regulatory policy, since most zoning ordinances are structured to prohibit any uses that are not expressly permitted.

Zweckentfremdungsverbot (“Ban on Wrongful Use”)

At the other regulatory extreme, some governments have imposed outright bans on STRs. To address Berlin’s housing shortage, for instance, the city senate implemented a “zweckentfremdungsverbot”—that is, a total “ban on wrongful use.” The law provides that homeowners cannot rent out more than 50% of their homes or apartments without first obtaining a city permit. Homeowners have found, however, that permits are nearly impossible to obtain.4 While several court decisions challenging the Berlin law in recent years seem to have lessened the permitting burden, a landmark ruling in June 2016 upheld the ban itself as constitutional. The ruling came just a week after the European Commission warned European Union governments that total bans on sharing economy services should only be used as a “measure of last resort . . . if and where no less restrictive requirements to attain a legitimate public interest objective can be used.”5 A little closer to home, New York State enacted a law in October 2016 that imposed fines of up to $7,500 for illegally listing a property on rental platforms such as Airbnb. Airbnb sued, arguing among other things that the law violated its free speech rights. The company ultimately dropped the suit, however, after New York City—its largest market in the U.S.—agreed to enforce the law only against homeowners and tenants, not Airbnb. (6) If your city or town is contemplating a broad ban on STRs, consider that such bans may encourage an underground rental market and are generally very difficult to enforce. Total bans also tend to be a lawsuit magnet: While the municipality may ultimately prevail, it might have to contend with a costly legal battle.

Juste Milieu

There is a rich middle ground between the “free market” and “total ban” methods of regulating STRs. The approaches taken by officials in Galveston, Portland, and Rockland are just three such examples.

• Galveston, TX: Pay (Taxes) to Play

Galveston, Texas, has adopted a modest regulatory framework that involves almost no restrictions on STRs. The city allows such rentals in all of its zoning districts except for its detached single-family unit residential zone. Owners must register their rentals and either pay a $50 fee per rental unit or collect hotel occupancy taxes. Rentals that “create or cause any perceptible noise, odor, smoke, electrical interference, or vibrations that constitute a public or private nuisance to neighboring properties” are prohibited. But, because STRs are expressly excluded from the city’s definition of commercial lodging, they are not subject to any of the city’s rules for lodging establishments. (7)

• Portland, ME: Caps, and Fees

After months of debate, officials in Portland, Maine, recently adopted a comprehensive regulatory scheme for STRs. The new rules, which will go into effect on January 1, 2018, impose a ban on non-owner-occupied STRs of single-family dwellings, and restrict the number of STRs in non-owner- occupied multi-family buildings relative to the number of units in such buildings. There will also be a city-wide cap of 300 rental units in non-owner-occupied buildings. The new rules require annual inspections, limit STRs to five per homeowner, and impose a registration fee ranging from $100 for the first unit to $2,000 for the fifth unit. Finally, the rules restrict the number of renters per unit to two per bedroom plus two more in other areas of the unit. (8)

• Rockland, ME: A Board Decision

Several years ago, city officials in Rockland, Maine, adopted a rigorous licensing and permitting scheme for STRs. The regulations allow STRs in both owner-occupied and non-owner-occupied residential dwellings, but require Planning Board approval of the rental of an entire single-family dwelling or any unit within a duplex or multi-family dwelling. Homeowners of single-family dwellings and duplexes must provide for adequate management responsibility, liability insurance, and parking. Owners of multi-family dwellings must also comply with building, fire prevention, and life safety codes. Before approving an STR application, the Planning Board must consider a host of factors, including the location and character of the site and adjoining property, traffic hazards and vehicular circulation, signage and lighting, and compatibility with existing uses. (9)

PRACTICE POINTERS

Local officials and planners considering ways to regulate STRs in their communities have no shortage of models. But building a successful STR regulatory framework for your community should be founded on the following considerations:

1. Know your community. STRs have different impacts on different communities. A seaside resort village might be concerned about the impacts of STRs on its established hospitality industry and may wish to impose rules that creates a level playing field between traditional lodging establishments and emerging STR enterprises. A city with a shortage of affordable housing, on the other hand, might instead focus on regulations that prevent conversion of long-term rental properties. Don’t cut and paste: Draft a regulatory scheme based on local policies that address the adverse impacts of STRs on your community.
2. Know your stakeholders. Regulating STRs will inevitably affect stakeholders with competing objectives. Identify your stakeholders early, then reach out and find out how they will be affected by various regulatory schemes.
3. Know your capacity. Any regulation of STRs raises the specter of the paper tiger. Evaluate your in-house technical expertise and your budget to determine how licensing and registration requirements will affect your administrative staff and what regulations your code enforcement officer can reasonably enforce. And don’t adopt rules that your community cannot enforce.

If you have questions or need help with developing a regulatory approach to STRs that is customized to address your local circumstances, the municipal attorneys at Drummond Woodsum would be happy to help. Please contact Aga by email (adixon@dwmlaw.com) or phone (207-253-0532).

REFERENCES

1. Katie Benner, Airbnb Sues Over New Law Regulating New York Rentals, N.Y. Times (Oct. 21, 2016).

2. Andrew Moylan, R Street Policy Study: Roomscore 2016: Short-term Rental Regulations in U.S. Cities, R Street (Mar. 2016).

3. See S.B. 1350, Arizona 52nd Legis., 2nd Reg. Session 2016, available at https://apps.azleg.gov/BillStatus/GetDocumentPdf/442340.

4. Deanna Ting, Short-Term Rental Ban in Berlin for Airbnb and Others Appears to be Eroding, Skift (Sep. 11, 2017).

5. European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A European Agenda for the Collaborative Economy, at 4 (Feb. 2, 2016).

6. Benner, supra.

7. See Galveston, TX, Code § 2.352.A.3 & Definitions; Galveston, TX, Short-Term Rental Ordinance, Ch. 16, Art. VI, available at https://library.municode.com/tx/galveston/codes/code_of_ordinances.

8. See Portland, ME, Code Ch. 6, Art. VI, available at https://www.portlandmaine.gov/DocumentCenter/Home/View/1070.

9. See Rockland, ME, Code Ch. 11, Art. II, available at http://www.ci.rockland.me.us/vertical/sites/%7BDE9EDD66-EFF4-4A6B-8A58-AA91254C1584%7D/uploads/OA_41_STR_01-11-16_Version.pdf

This article was originally published on October 26, 2017.