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Los Angeles Proposing Strict Regulations on Short-term Vacation Rentals, But to What Effect?

Article originally appeared in HALA Newsletter

In recent years, the short-term online vacation rental market has flourished, and connecting travelers with short-term bedroom, apartment, or home rentals has become what many value as a billion dollar industry. The industry to date, however, has gone largely unregulated by state and local municipalities. That soon may change, though, as issues regarding regulations and taxing, both of which are well established for traditional landlords and hotels, has complicated, for many private owners, what has thus far been a lucrative endeavor.

Los Angeles’ New Proposed Legislation

As online rentals have become increasingly profitable, investors have begun purchasing properties for the sole purpose of converting them into quasi-hotels. In Venice, for example, investors have purchased entire apartment buildings, evicted all tenants, and turned the units into short-term rentals. While profitable for the landlords, this practice has resulted in less available long-term housing, causing rents to skyrocket. In addition, and by virtue of their short-term nature, communities have started to lose the benefits that come with long-term tenancy, including the labors of vested residents to keep their neighborhoods in good order.

In an effort to strike a balance between these competing interests, two Los Angeles City Council members recently proposed a motion aimed at preventing investors from purchasing properties for the sole purpose of becoming “professional landlords.” Under the proposed law, owners would be permitted to rent out part or all of their dwellings for 30 days or less, but only if that dwelling is their primary residence. Individuals would still be able to make additional revenue by renting out their homes, but speculators would be precluded from “creating a syndicate of short term rental properties.”

Aside from restricting participants in the short-term rental market, the proposed law also would require the owners of short-term rentals to pay the transient occupancy taxes associated with the rentals. While these taxes have always been required, they largely go uncollected through the online booking model since the online travel agency typically serves only as a broker (i.e., it receives a percentage of the proceeds), leaving the collection of taxes to the host and guest. Given that these people are not industry professionals, they generally do not collect the tax and, consequently, city and county governments lose out on tax dollars.  

Impact on Los Angeles Hotels

The proposed legislation has many potential benefits for Los Angeles hotels. Among other things, it will lessen the supply of short-term rentals available, thereby funneling more visitors into traditional hotels. Also, to the extent short-term rental owners begin assessing and collecting transient occupancy taxes, it will help to even out the playing field with hotels by eliminating their (previous) ability to offer lower rates by virtue of the mere fact that transient occupancy taxes were not included.

However, it is unlikely that passage of the law by itself will result in any significant impact. While it is already illegal in almost every part of Los Angeles to have a short- term rental, property owners have not been hindered from participating in the practice. Indeed, enforcement of these laws has been nearly impossible since the vast majority of online rentals do not list actual property addresses, leaving government officials without any clear landlord to target for violations Unless better enforcement procedures are implemented, that trend is unlikely to change even if this newest proposal is passed.

Better procedures may be on the horizon, though. In February, 2015, California Senator Mark McGuire introduced a bill that would require online vacation and short-term rental sites to report certain booking information on a quarterly basis, including the address of each property that was available and rented during the quarter, the total number of nights the property was rented, and the amounts paid for the occupancy. Additionally, the bill would prohibit the facilitating of those rentals prohibited by the cities or counties where they are located .Further, the bill would require the online vacation rental site to collect the applicable transient occupancy tax if requested by the city or county.

Should both bills pass, the online short-term rental industry will be dealt a significant blow, with Los Angeles hotels being the primary benefactors.

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.