Mcle Self-study Article: Is the Popularity of Short-term Rentals Sustainable, or Will Regulations Weaken Their Current Stronghold?

• Publication year: 2019
• Author: Whitney Hodges

MCLE Self-Study Article: Is the Popularity of Short-Term Rentals Sustainable, or Will Regulations Weaken Their Current Stronghold?

Check the end of this article for information on how to access one MCLE self-study credit.

Whitney Hodges

Whitney Hodges is a partner in Sheppard Mullin Richter & Hampton LLP's Real Estate, Land Use, and Environmental Law practice group. Her practice focuses on advising developers, investors, sellers, and public agencies in land use and environmental law. Whitney's practice includes obtaining federal, state, and local agency approvals, defending litigation, and securing community and political support for complex development projects, including renewable energy facilities, urban infill, master planned communities, and other mixed-use, retail, industrial, and commercial projects. She is based out of the firm's San Diego office.

I. INTRODUCTION

Like many other sectors in the "sharing economy,"¹ short-term rentals of residential property² ("STRs") have become a ubiquitous part of the national economy. Often labeled as one of the biggest disrupters in the travel industry, STRs are particularly impactful on the United States tourist sector, with one estimate putting the size of the domestic vacation rental market at $100 billion.³ The STR industry is young and, while not yet fully crystallized, flush with growing demand.⁴ The number of consumers utilizing STR options has burgeoned exponentially since 2011,⁵ with a reported seven in ten millennial business travelers preferring to stay in local host rentals over more traditional lodging options.⁶

The rapid evolution of the STR market, once a cottage industry, can be attributed in large part to new technology that is changing the industry and providing new and efficient means for consumers to access alternative accommodations. Online rental platforms such as Airbnb, Vacation Rentals by Owner ("VRBO"), ⁷ FlipKey, and hundreds of other rental websites significantly decrease the time it takes to find lodging and facilitate connections between hosts and travelers. They also enable both parties to leverage the power of peer-to-peer reviews.⁸ These platforms allow consumers to find accommodations specific to their needs, and allow hosts to obtain assurances about the people requesting accommodation in their properties. Consequently, this new niche market has unwittingly ushered a tremendous number of new hosts and consumers into the hospitality industry.

The emergence of such online marketplaces has created a global boom in the STRs of personal residences. In the U.S., this phenomenon has spread from coast-to-coast.⁹ Indeed, the number of available STR units has grown at a forty-five percent annual rate over the past five years, and there is no reason to believe that this growth will slow down in the foreseeable future.¹⁰ As a result of the market's momentous popularity, consumers are flocking into previously undisturbed (and perhaps, undesirable from a traveler's perspective) residential neighborhoods for home-based, transient lodgings.¹¹

While the staggering popularity of STRs may appear to be a clear path forward for vacation rentals, the future of STRs in California is far from certain. STRs are central to vigorous debates at local and state levels. STRs pose major issues for local governments and homeowners associations ("HOAs") because a greater influx of transient residents into traditionally residential areas has resulted in increased municipal and homeowner demand for regulations and enforcement efforts.¹² Local governments may feel that they are losing their share of tax dollars by failing to effectively regulate this new industry.¹³ HOAs are increasingly asked to respond to nuisance complaints and to request government enforcement of rental restrictions such as those found in a development's covenants, conditions, and restrictions ("CC&Rs").¹⁴ Due to the headaches over these and other issues, homeowners, local governments, community groups, and certain state policymakers are waging wide-ranging and comprehensive campaigns with the goal of severely restricting STRs. Nonetheless, the market share of STRs in the travel sector continues to grow.¹⁵ With the backing of local entrepreneurs, businesses, and online platforms like Airbnb and VRBO, it is unlikely that STRs will go down without a fight.

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STR regulations are complex and constantly evolving. This article provides a broad overview of the considerations a real property owner may encounter when contemplating whether to establish an STR. The first section addresses the advantages and disadvantages of STRs for the local community. The second section examines limited state STR-related regulations, various local land use approaches, the legality of previously enacted STR-related land use controls, and other governmental agency responses. The third and last section discusses the ability to further regulate STRs in common interest developments ("CIDs") via CC&Rs and HOA enforcement actions. This article does not address every nuance associated with land use controls, regulations, and/or negotiating a lease with a third party for either long- or short-term rentals.

II. ADVANTAGES AND DISADVANTAGES OF STRS FOR THE LOCAL COMMUNITY

Short-term renting may impact a community's economic and residential stability¹⁶ and its security.¹⁷ Whether a community has a legitimate concern about STRs often depends on the characteristics of the particular community and whether the STR units operating there do so respectfully and avoid negatively impacting the community. Given all of the competing interests, local governments bear the difficult charge of finding appropriate ways to regulate STRs so as to protect neighborhoods while preserving homeowners' property rights.

A. Advantages of STRs

At their best, STRs provide a welcome alternative to the hotel industry with potentially cheaper rates and simpler booking processes for consumers. For some jurisdictions, STRs can boost a sagging tourism sector. For example, the price advantage of STRs to consumers can cause less-popular tourist destinations or areas that lack adequate hotel accommodations to become more attractive.¹⁸ Local governments in locations with an established tourist industry also benefit from STRs.

Studies show that STRs can positively impact a local economy in several ways. First, they can provide a municipality with additional income through tax revenues.¹⁹ Second, STR guests tend to spend money on local visitor-related amenities such as restaurants, bars, and museums, thus providing a large economic benefit to the community. For example, research conducted in the City of San Diego ("San Diego") in 2015 demonstrated that, during a one-year period, STR guests spent $86.4 million on visitor-related activities compared to money spent on the lodgings subject to transient occupancy taxes ("TOTs").²⁰ Third, a study on the effects of the sharing economy found a direct correlation between STRs and job creation in the tourism sector.²¹ In San Diego alone, STRs support 3,109 jobs.²² Moreover, hosting an STR space can help local residents who are hosts supplement their income. They in turn can further contribute to the local economy when they spend this revenue locally. The total economic impact in San Diego, including the visitor-related activities, has been estimated at $482 million.²³

Lastly, the proliferation of STR units increases the supply of travel accommodations, making travel more affordable, benefiting consumers, and encouraging more travel.²⁴ STRs increase the supply of short-term travel accommodations, lower prices, and can be more cost-effective for families.²⁵ This price reduction is often attributable to not only the theory of supply and demand, but also the fact that STR platforms are not encumbered by hotel costs such as staffing, furnishings, property maintenance, and other business-related regulations.²⁶ STRs can thus pass those savings on to consumers and offer lower rates than those of traditional tourist accommodations.²⁷

B. Disadvantages of STRs

Many argue that STRs are detrimental to a community's character. Those who oppose STRs believe that, as rental properties become an increasingly attractive investment opportunity, a large number are being operated as de facto hotels that disrupt communities, consume potential affordable housing units and sites that could be used as permanent or semi-permanent residences instead, drive rent prices skyward, and leave government regulators with heartburn.²⁸ While STRs are considered a boon to consumers, the hotel industry claims that the STR business model offers unfair economic advantages.²⁹ The hotel industry also argues that local service jobs can be jeopardized due to unfair competition from unregulated and untaxed STRs, and that STRs reduce demand for local bed and breakfast establishments, hotels, and motels.³⁰ In these ways, STRs are considered to be disruptive for the traditional lodging industry.³¹

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STRs are mainly located in residential areas, so people who oppose STRs argue that tourists are renting spaces that otherwise might be used for long-term renters, upsetting a stable rental market and decreasing the availability of long-term housing.³² This impact is greater in large cities with preexisting affordable housing issues such as San Francisco and Los Angeles.³³ This instability could eventually contribute to an increase in rent and housing prices.³⁴ Many smaller jurisdictions in California, such as the City of Long Beach, are expressing concerns about the spread of STRs as well.³⁵

Opponents of STRs argue that increased tourist traffic from short-term renters could slowly transform residential communities into "communities of transients" with decreased community involvement and engagement. Local residents worry that the "infestation" of STRs in their neighborhoods will change their character and transform the residents' quality of life.³⁶ Residents express concern that...