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State of Short-Term Rentals in California

Article originally appeared in HALA Newsletter

Online short-term rental companies, a recent phenomenon, have gone largely unregulated in California. That is soon likely to change, however, as many cities throughout the state have either enacted or are considering legislation to govern and regulate this lucrative and ever-growing industry. In that regard, this article summarizes the major legislation and issues that are currently being considered by these municipalities and the state as a whole.

San Francisco’s Proposed Legislation – Proposition F

San Francisco made headlines last year when it became one of the first cities in the world to make short-term rentals legal. The city now finds itself in the news again as it recently decided against Proposition F (55.76 percent No, 44.24% Yes), a ballot initiative concerning short-term rental housing that proved to be the most hotly contested measure in this year’s election.

A Yes vote on Prop. F would have limited short-term rentals to 75 days per year per unit, required online rental companies to pull listings that had been rented out beyond this limit, enacted procedures to ensure that hotel taxes were being paid, and obligated the rental companies to file quarterly reports tracking short-term rental occupancy rates. In addition, the proposition would have also allowed private citizens to seek hefty civil penalties against violators, including the rental companies themselves.

The proposition, of course, had both its supporters and opponents. Those in favor argued that the popularity of online short-term rentals had made it more lucrative for landlords to rent their homes for limited durations through online agencies as opposed to through traditional longer leases, thus resulting in a shortage of affordable housing. As an example, they pointed to the fact that, earlier this year, an 1,100 square foot home in San Francisco—where a mummified corpse had been found a few months prior—sold for $1.56 million, and that the average monthly rent of a one-bedroom apartment in San Francisco is $3,500 (i.e., $400 more than in New York).

Proponents also asserted that the traditional character of S.F. neighborhoods had been lost due to the nature of short-term rentals, which cater to transient inhabitants. Residents, who take pride and ownership in their communities, had been replaced with tourists from around the world who leave no lasting mark on the cultural landscape of the city.

Meanwhile, opponents argued that Prop F would lead to decreased revenues for landlords, privacy violations, and increased lawsuits. Private owners, they stated, should not be told what they can and cannot do with their property, especially when the extra rents generated by short-term rentals may help to pay for bills and housing costs in a city that is undoubtedly extremely expensive to live in.

Likewise, with civil penalties of up to $1,000 per day for private individuals, opponents contended there was the potential and incentive for increased litigation between neighbors, thus dividing the neighborhood fabric that proponents had sought to maintain. In that regard, opponents believed the city should be the one to regulate the short-term rental market, not neighbors with a vendetta or those out to make a quick buck.

Further, opponents claimed the proposition was riddled with privacy violations. Currently, owners of short-term rentals only share personal data with the online rental companies through which they list their rental units, but under Prop F, certain data would have been shared with the municipality as well. This was of concern to voters who have a distrust of government.

Although Prop F was defeated this year, the attention it generated only highlights the significant role and impact that short-term online rentals have had in the city of San Francisco. Undoubtedly, the issue will continue to be hotly debated and we should expect to see additional ballot initiatives in the years to come.    

Anaheim and Santa Ana – Differing Paths on Moratoriums

Meanwhile, in Southern California, both Anaheim and Santa Ana have imposed moratoriums on short-term rentals while considering how to regulate them. The two cities, however, are now taking different approaches to addressing these moratoriums.

On October 20, 2015, the Anaheim City Council voted unanimously to extend the moratorium by an additional 186 days. Given the extension, no new permits for short-term rentals will be issued in Anaheim until May 3, 2016 at the earliest. Prior to imposing the moratorium, Anaheim had been receiving approximately five to 10 applications a week for new short-term rental permits. One idea the city is considering is whether to impose a minimum geographic separation between rental homes, and a requirement that neighbors be notified before a rental home permit is approved.

Meanwhile, and on the same night that Anaheim voted to extend its moratorium, the City Council for Santa Ana voted unanimously to let its moratorium expire on October 30th. However, the city will continue to study how best to legislate short term rentals so as to best balance the competing concerns of community activists, renters and landlords.

The diverging paths taken by Anaheim and Santa Ana are particularly interesting given their close proximity to one another in Orange County. Both municipalities’ unwillingness to commit to a decision on how best to proceed only serves to highlight the fact that no best practices yet exist for regulating these businesses.

Sacramento

Further north, Sacramento is also passing short-term rental legislation. On October 13, 2015, the Sacramento City Council Law and Legislation Committee passed a proposal allowing people to rent out their homes using online booking companies. Notably, in passing the proposal, the Council voted to eliminate proposed language that would have required a home owner to be present for at least 6.5 hours a night, thus paving the way for homeowners to rent out their homes as separate income properties.

If ultimately enacted, the proposal will allow as many as six people to rent two rooms in a home for less than 29 days. The details, however, are still being worked out. The committee, for example, is split on whether to require a conditional use permit. In that regard, the city would create permit options including a flat fee, as well as a tiered system linked to the number of days a home is rented. The permit could potentially be in the $3,000 range.

It will be interesting to see how the proposal evolves over time in Sacramento, particularly with respect to the hefty conditional use permit fee. A high fee would deter homeowners from renting out their properties on an occasional basis, as they would be unlikely to recoup the fee and still turn a healthy profit.  It would likely lead to a significant portion of short-term rentals being run only by professional landlords.

California

The State of California is also looking into passing statewide legislation that would regulate the short-term rental industry. In February 2015, California Senator Mike McGuire introduced a bill (SB 593) aimed at assisting local jurisdictions in enforcing their local laws and collecting tourist taxes. In that regard, the bill would require online vacation and short term rental sites to report certain booking information on a quarterly basis, including the address of each listed property, the total number of nights the property was rented, and rental fees collected. In addition, the bill would ban rental listings of properties located in a city or county in which short term rentals are prohibited, and it would require the online vacation rental site to collect the applicable transient occupancy tax if requested by that city or county.

Although the bill was initially met with much success, i.e. it passed the Senate Transportation and Housing Committee as well as the Governance and Finance Committee – it ultimately stalled. As Senator McGuire stated, the bill was “unable to find common ground prior to the Senate’s legislative deadline.”

Nonetheless, the Senator is not deterred. Despite the setback, he has vowed that in January 2016, he will reintroduce the bill as a two-year bill. In the meantime, local governments are presently left to their own devices as to how best to regulate online rental agencies.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.