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November/December 2018

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SHORT ORDERS
The short-term rental business is booming. Can an influx of transient weekend tenants be good for communities? How can associations protect their own well-being?
By Marvin J. Nodiff

​​​​​​​​​​​​​​​​​​©2018 Community Associations Institute

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LIKE ANYTHING IN an ever-changing society—satellite dishes, the Great Recession, and drones—community associations adapt to changes in the economy and technology. But how should association leaders deal with the latest economic innovation: home-sharing?

Through online platforms Airbnb, HomeAway, and Vacation Rental by Owner (VRBO), home-sharing or short-term rentals started as a means for homeowners to earn extra income by renting a room or their entire home for a few days or weeks. It’s blossomed into a full-grown business for some. Owners in Los Angeles can earn more with short-term rentals in just 83 nights than with an entire one-year lease, according to a 2016 report from Inside Airbnb, a website that monitors listings through the short-term rental service.

The home-sharing innovation raises questions for condominiums, cooperatives, and homeowners associations across the country. Are short-term rentals (30 days or less) good for associations or a community disrupter? Will investors, attracted by higher revenue, purchase multiple units or homes in associations and become commercial operators?​

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Each community association should be able to decide what short-term rental policy works best for their particular community.

RESIDENTIAL OR COMMERCIAL?

Home-sharing has experienced phenomenal growth in recent years. Since its start in 2008, Airbnb has grown from a site listing air mattresses, sofas, and rooms available for rent in U.S. cities with overbooked hotels to more than 4 million rooms, apartments, and houses worldwide in 191 countries, according to Business Insider. The company made $2.6 billion in revenue in 2017.

Its popularity isn’t limited to tourist destinations. In the St. Louis area alone, VRBO and Airbnb list several hundred “hosts.” (See “Sharing Spike” sidebar, below.)

Some demographics follow the original notion of home-sharing: That the homeowner/host welcomes a guest to rent a spare room. Based on a recent Airbnb survey, seniors 60 and older are the fastest growing demographic as a share of hosts. Women constitute nearly two-thirds of senior hosts. Additionally, senior women earn the highest satisfaction ratings of any gender or age demographic and are more likely to offer a private room in their homes than younger users. This demographic seeks to supplement their retirement income to afford to remain in their homes and to maintain an active lifestyle. Senior hosts—living in the home while guests rent an individual room—are more compatible with community associations.

But most short-term rentals are not for individual rooms. Data collected by online news site Curbed shows that most of the listings are for entire homes, which is the case in Los Angeles, New Orleans, and Seattle. According to Curbed, “Instead of a host welcoming a visitor into a guest bedroom, most tourists are renting out homes with lockboxes … without ever seeing the homeowner.”

One example is St. Louis, which does not limit short-term rentals. During a recent Washington University graduation weekend, a large house on a quiet residential street was advertised on Airbnb as “sleeps 16.” According to reports, 25 guests and five vehicles arrived.

With some exceptions, such as senior hosts renting a room within their homes, Airbnb’s version of home-sharing is a business model that provides a revenue stream for a huge corporate entity. As economist Thomas L. Friedman notes in Thank You for Being Late, Airbnb is now bigger than all the hotel chains combined, even though it doesn’t own a single bed.

Despite the warm and fuzzy notion of home-sharing, Airbnb is a commercial activity with the primary purpose of generating revenue. On residential streets, it’s like dropping a hotel into a neighborhood. And every time a home is converted to short-term rental, a community loses its most important asset: neighbors.

Short-term rentals can create tension between “host” properties and neighboring residents with a steady stream of strangers, noise, parties, and parking that can undermine the quality of residential communities. Such activities can directly affect community associations and yield adverse results. Replacing owner-occupant homeowners with transient weekend tenants can adversely affect marketability and resale value of nearby dwellings.

While online platforms like Airbnb and VRBO clearly are commercial entities, some court cases deem that the individual homeowner renting a room or their home isn’t a commercial use. In a recent Texas case, an owner moved from his home in a San Antonio community association but retained ownership and used the property for short-term rentals. Over five months, he rented the home for about 102 days, with guests staying from one to seven days—some rentals involved several families and as many as 10 people at one time. The association notified the owner that short-term rentals were commercial in nature and imposed fines. The owner ignored the fines and filed suit.

The association’s applicable covenant states that lots could be used solely for residential purposes, and no business could be conducted that was noxious or harmful. The Texas Supreme Court found “residential use” involved activities generally associated with a personal dwelling. Further, the covenants did not define “business” or impose time limits on occupants. Reversing the court of appeals, the court held that so long as the renters used the home for a residential purpose, no matter how short-lived, such activities did not violate the covenant.

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VALUING HOMEOWNERSHIP

No level of government understands and appreciates the value of homeownership more than community associations. Fostering homeownership and owner occupancy should be the cornerstone for policy in dealing with short-term rentals. Each community association should be able to decide what short-term rental policy works best for their particular community. A condominium in a mountain town might find that allowing short-term rentals works well for the community, but a family-oriented, single-family home community in the suburbs might find them undesirable.

Homeownership is well-recognized as a source of personal financial stability and equity. But it also builds social capital and contributes to our society by fostering civic involvement as residents sink roots in their communities. In “Incentives and Social Capital: Are Homeowners Better Citizens?” in Chicago Working Paper in Law & Economics, the authors find that homeownership builds social capital with community benefits:

■ Homeownership creates incentives for households to improve the quality of their communities since community quality is capitalized into the value of their homes.

■ Increased length of tenure encourages investments in community since homeowners will consume the benefits of community over a longer time.

■ Homeowners have a greater sense of community and are more likely to invest in gardening and upkeep of their property. In addition, homeowners are 15 percent more likely to vote in local elections, 10 percent more likely to know their U.S. representative by name, 9 percent more likely to know the identity of their school board head, and 6 percent more likely to work on solving local problems.

■ Social capital fosters communication by developing a common language with neighbors and builds trust through shared activities.

While residents have a personal self-interest in owning a home to build financial equity, homeownership and owner-occupancy provide numerous societal benefits for the entire community that would be undermined by short-term rentals.​

GOVERNMENT’S ROLE

Cities can provide an important legal backstop for community associations to protect residential neighborhoods based on zoning, building codes, and health and safety regulations.

A recent report by The McGill University School of Urban Planning found that Airbnb has created a new class of rental housing in New York City in which short-term​ rentals occupy a gap between traditional residential rental housing and hotels.

The National League of Cities (NLC) also observed in a 2015 report that sharing economic services presents cities with an overarching challenge: being receptive to innovation while protecting the best interests of the community. Considerations include neighborhood concerns, public safety, tourism, access, equity, impact on hotels, impact on housing, job creation, and revenue. Each city must tailor an approach based on its unique demographics and needs.

Cities across the country are taking varying approaches. Some react to bad behavior by guests, others take a regulatory approach by requiring permits and insurance, and some seek revenue from taxes and fines. (See sidebar “Metro Methods,” below.)

Several cities in St. Louis County have stated that short-term rentals conflict with their “sense of community.” The city of Hazelwood, Mo., for example, adopted an ordinance stating, “The short-term rental of all or a portion of residences is not in keeping to the stability, shared commitment and sense of community that give Hazelwood its exceptional quality, and that such rentals conflict with the neighborhood environment that makes both our single-family and multi-family areas special, welcoming and desirable.”

Community associations and cities are closest to and most familiar with the demographics of their communities and unique needs of residents. They are best positioned to exercise their respective authority through zoning and regulations.

However, as reported by NLC, “We see many instances where state-level politicians work to usurp the will of people in cities both through preemption and Dillon’s Rule (narrow local governing authority provisions. As a result, the work of city leaders and the mandate of the people is undermined.”

Advocated by Airbnb, state preemption would override local governments’ and community associations’ zoning and regulatory authority. These measures would redefine short-term rentals as “residential” rather than “commercial.” According to NLC, five states—Arizona, Florida, Idaho, New York, and Wisconsin—have adopted some form of preemption as of February 2018.

For tax purposes, many cities treat short-term rentals in the same manner as hotels and motels, charging tax on room sales; however, identifying all hosts is a problem. Airbnb has been seeking voluntary agreements to resolve issues of tax treatment for its transactions and now has 20 such agreements with states. Under these agreements, Airbnb pays the taxes based on host transactions through its website. Implicit is that the promise of higher tax revenue will deter local regulations.

The McGill Report yields other significant findings with respect to the impact on rental housing in New York City.

The report reveals higher revenue from short-term rentals increases median rental rates for traditional long-term rentals for entire-home and apartment units. In doing so, Airbnb could remove long-term rental units from the market. Short-term rental of individual apartment units creates “ghost hotels” and constitutes a new strategy to circumvent regulatory scrutiny. Commercial operators control large portfolios of entire-home and apartment listings: 12 percent of hosts earn more than 28 percent of the revenue. These findings can have significant impact on housing in community associations.

Short-term rentals also have an impact on hotels. Based on lower prices, Airbnb may pull tourists from hotels and motels, while not adding a net benefit to tourism or city tax revenue. And if tourism increases while hotel room sales decline, this net increase could be at the expense of community associations.​

THE COMMUNITY APPROACH

From my perspective, community associations could take one of the following approaches with short-term rentals:

■ Adopt an absolute prohibition of them. Ensure provisions of the governing documents are clear for this purpose.

■ Allow short-term rentals on a limited basis. Require hosts to be present while the guests are there or limit to dwellings that are used by the owner as primary residence at least 50 percent of the year.

■ Limit hosts and related persons or entities to two properties in the community.

■ Regulate for health and safety by requiring hosts to demonstrate compliance with local governmental occupancy regulations, insurance, and inspections.

■ Control behavioral issues by limiting the number of lodgers and prohibiting other commercial activities, such as weddings, receptions, and banquets.

■ Require registration with a fee that covers administration and fines for violations that encourage compliance and provide effective enforcement.

Each community may want to take a different approach, which is why consulting with the association’s attorney is advised during this process. Whether your community allows or prohibits short-term rentals, board members and managers should share CAI’s guide for residents. See right.

Looking to the future, if state legislation preempts the authority of cities and associations, the homeowners would lose their autonomy and ability to control short-term rentals. Association leaders must join with local governments to strongly oppose such legislation.

While cities have powerful tools to control short-term rentals through zoning, building codes, and health and safety regulations, if they fail to act, or delay a response, the results could transfer burdens to association leaders. CAI’s public policy states that associations are in the best position to decide whether short-term rentals are appropriate for their community and boards are in the best position to craft suitable policies. (See “Policy Position” below, for more.)

It’s important to remember, of all levels of government, community associations best understand the value of homeownership and the need to protect their own well-being.

Marvin J. Nodiff is a retired St. Louis attorney and a fellow in CAI’s College of Community Association Lawyers.​​​

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 Policy Position

CAI’s Government and Public Affairs Committee has developed the following public policy regarding short-term rentals:

CAI encourages policymakers to engage industry stakeholders, including community associations, on this issue. Further, CAI believes crafting regulation should always take place in an open and transparent manner, providing the opportunity for comment by all interested parties.

A board of directors, with input from homeowners, is in the best position to decide whether short-term rentals are appropriate for their community and is the appropriate governing body to craft suitable policies. This is assuming the association’s governing documents allow or could be amended to permit short-term rentals to reflect the preferences of homeowners.

CAI supports short-term rental regulation that is consistent with the association’s governing documents, federal, state and local law and serves to protect and preserve the ability of community association homeowners to manage their affairs.

CAI opposes governmental regulations that would intrude upon community associations’ board of directors’ autonomy to serve the best interest of the association. Short-term rental regulation should not impair association contractual covenants and take decision-making authority away from community association homeowners. This degrades the very core of community association governance, which is based on private contractual obligations of the community’s homeowners.

» View more public policies and sample legislative language on short-term rentals at www.caionline.org/publicpolicies​.

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 Sharing Spike

The recent growth of short-term rentals is attributable to several factors:
■ They offer residential property owners supplemental income by renting their dwellings to others while they’re out of town and incurring little or no additional expense.
■ They motivate commercial operators to acquire residential property for the sole purpose of short-term rentals.
■ It is easy to use through online services, such as Airbnb, VRBO, and HomeAway, which promote their platforms through aggressive advertising programs.
■ It is promoted by lenders through refinancing programs. By partnering with Quicken Loans, Citizens Bank, and Better Mortgage, for example, homeowners can now count income from renting their properties on Airbnb when refinancing their mortgage. The initiative has government backing from Fannie Mae.​​​​​

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 Metro Methods

Major metropolitan cities and counties across the country have a wide range of regulatory approaches to dealing with short-term rentals. These are a few:
BOSTON. Requires that the host be an owner-occupant and present while guests are on premises. Host must register and certify with the city, among other things, compliance with condominium governing documents.
AUSTIN, TEXAS; WASHINGTON, D.C.; MADISON, WISC.; PORTLAND, ORE; CHICAGO; AND SAN FRANCISCO. Require home-sharing companies include hotel taxes in their rates.
DENVER. Requires hosts obtain a business license and lodger’s tax ID, certify the property is the primary residence in a residential zone, carry insurance, have smoke detectors, pay the lodger’s tax, and obtain written permission from landlords, owners, and community associations.
ARLINGTON COUNTY, VA. Requires owners to obtain “accessory homestay” permit. Owners must protect character of their neighborhoods, implement safety requirements, comply with zoning, building, fire, and other safety codes to protect public health and safety and property values.
SEATTLE. Limits new short-term rentals to two units per host, adding a tax, and requiring a license. The ordinance differentiates between downtown and other neighborhoods. The city council considered impacts on low-income housing and gentrification.
KANSAS CITY. Bans short-term rentals in “low density residential” areas with single-family dwellings. Where permitted, hosts must be owner-occupants with an option to obtain a special use permit.
SAN LUIS OBISPO, CALIF. Requires the dwelling to be owner-occupied to ensure the owner is involved in the homestay and to temper the likelihood that homes would be converted to short-term rentals. The owner’s presence is encouraged but not mandated due to difficulty of enforcement.​​​​​

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 Before You List Your Home

Whether your community allows or prohibits short-term rentals, community association board members and managers should consider sharing the following guide with residents. 

There are extra steps you must take when thinking about listing a space on a vacation rental website.

CHECK YOUR COMMUNITY ASSOCIATION RULES.
 Make sure you have the most up-to-date version of your community rules. Search your community association governing documents for terms like short-term rentals, leasing, or vacation rentals to see if you have authority to list your home or if there is a process you must follow before listing your home or room as a rental. If you are unsure about whether you have the current governing documents, then make a written request to your association board of directors and ask for the current policy.

There are many communities, especially in vacation destination areas, where homeowners are seeking to list their home as a short-term rental. This becomes a conversation and a choice for the owners to determine a policy that is appropriate for the entire community. Likewise, there are also associations that thrive on a sense of community, one built on a foundation of long-term residents and neighbors who may determine, as a group, that visitors with no ties to the community may not be desirable for the community as a whole. Each association should have the opportunity to choose what is best for the character of their community.

CHECK YOUR LOCAL LAWS. Specifically, check your local municipality ordinances. Many have laws regarding short-term rentals that may prohibit them, or they may require you register a rental to obtain permission. Many cities have restrictions. An easy way to check is to contact your local municipality via phone or you may do a web search. Most of these local ordinances are posted on the local municipalities' website.

CHECK YOUR INSURANCE REQUIREMENTS. Contact your homeowners' insurance carrier. Check to see if your homeowner's insurance covers you for incidents related to offering your home as a short-term rental. After you have done your research, and you are sure you are complying with all laws and insurance requirements, then you can decide whether to offer your home or condominium as a short-term rental.

SHARE YOUR COMMUNITY ASSOCIATION RULES.
 Share your community association's rules with the people who will be renting your home. They should know what to expect, and your neighbors should feel confident your “guests" will be treating their neighborhood like their home. Remember: be a good neighbor!

Disclaimer: The document, developed by CAI's government affairs team, is for informational purposes only and not for the purpose of providing legal advice. ​​​

© 2018 Community Associations Institute. Further reproduction and distribution is prohibited without written consent. For reprints, go to www.caionline.org/reprints.​ 

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