During my summer break from blogging, I sold a home and decided to try and purchase a vacation home to rent as a short-term rental using internet apps such as VRBO (Vacation Rental By Owner) and AirBnB. I looked at the Santa Cruz/Monterey County beach area and then the Lake Tahoe area. Eventually, we decided not to buy a vacation rental. There is some good news and bad news to share about my efforts. The bad news is that I found out that the counties and cities in these tourist areas have either restricted or banned new home buyers from using their homes as short-term rentals (STR’s). The good news is that the issue provided me with a blog topic.
Let me first start with some definitions. A short-term rental is defined as a rental agreement for less than 31 days. A lease longer than 31 days is considered a long-term rental. Short-term rentals are subject to TOT (transient occupancy taxes) and collected at the city or county level. Traditionally hotels have been the main source of TOT revenue.
The emergence of internet apps has led to a transformation of several industries. In my book, I discuss in other chapters how driving apps, like Uber, have transformed the traditional taxi industry. The hotel industry has been impacted by several travel apps, like Travelocity, to make it easier and cheaper to book hotel rooms. Apps like VRBO have made it easier for homeowners to rent out their homes and earn additional income.
During the Covid pandemic period, starting in March 2020 until the present, local governments followed the state and federal lead by imposing moratoriums on rental evictions. Counties that depend on tourism, like the ones I mentioned earlier, also focused on the issue of STR’s. These counties and several others in California and other states, adopted an assortment of policies to restrict the growth of STR’s. Initially many local governments revised their ordinances to take into account the new technology of STR’s, as they did with cell phones, to make sure the taxes on these services would be collected. Most local governments required homeowners to register their STR, obtain a permit, and pay TOT’s. However, some went even farther than requiring registration. Many banned issuing new permits, while grandfathering in permits for current STR units, but not allowing these permits to be transferrable if the unit was sold. Some restricted/capped the current supply of permits and one town required current permit holders to win a yearly lottery to obtain a permit in order for a homeowner to continue operating their house as an STR. Before discussing the economic impact of these polices, I will describe the policies implemented by some local governments.
Santa Cruz/Monterey County – This area encompasses the Monterey Bay area. It is considered a prime area for tourism providing numerous beaches, famous golf courses, wharves for tourists, and many other amenities.
The Board of Supervisors for Santa Cruz County approved Vacation Rental Ordinance amendments on January 26, 2021. The amendments lifted a moratorium on the issuance of new vacation rental permits for certain beach areas. Within each designated beach area either a percentage or number of units cap is imposed on the number of permits available. Permits are non-transferable. The Planning Department has started accepting applications for new vacation rentals, however since the caps from the original ordinance are now at capacity, new applicants are placed on a waiting list. Applicants must pay an annual fee of $145.20 to remain on the waiting list. A permit will become available when an STR unit is sold or removed from the market. I am told it may take up to two years on the waiting list before a permit is granted.
Santa Cruz, which is a charter city is exempt from county ordinances, and has established its own set of rules regarding STR’s and has also capped the number of STR’s.
In Monterey County, the Board of Supervisors has a similar ordinance for all county areas near the Monterey Bay area. As of this writing, they are working on amending their current ordinance, and appear to only require registration and payment of TOT’s. However, the city of Pacific Grove has implemented stronger measures. They have capped the number of STR’s and limited them to certain areas in town. In areas that have been identified as an “over-dense block”, the city will hold a lottery to determine which units receive a permit.
Lake Tahoe Area – The Lake Tahoe Area encompasses several counties; El Dorado and Placer County in California and Douglass, Washoe, Carson City County in Nevada. The only charter city on the California side is South Lake Tahoe in El Dorado county. As of this date, Placer County supervisors passed an emergency moratorium ordinance in August. Placer County is located in the northern part of Lake Tahoe. The measure, which is in effect for 45 days, stops the issuance of new STR permits and will probably lead to a new ordinance. As an aside, emergency ordinances typically require a supermajority vote to pass and are not subject to public input. On the south shore of Lake Tahoe, most of the lakeshore is controlled by the city of South Lake Tahoe. El Dorado county passed anSTR ordinance capping them in areas located in the Tahoe Basin. The City of South Lake Tahoe, passed Measure T in 2018 and capped the number of STR permits, and announced a stated goal of eliminating STR’s in areas zoned residential.
As I researched this area, I found a number of tourist areas across that country that regulate and or restrict STR’s.
Economic Analysis and Impact.
Before discussing the economic impact of regulating/banning STR’s it is important to ask what problems are caused by STR’s and what are potential solutions. Several counties have stated what they see as problems caused by STR’s and why they need legislation. Some of the reasons stated in staff reports are excessive noise, speeding, partying, reduced housing for low-income workers, and not paying TOT taxes. As I will discuss below, most of these problems could be solved by just enforcing current ordinances. With regard to STR’s and housing shortages, a report produced by the Placer County Staff,
“expressed concern that the rise in second homeownership in the region will result in a rise in STRs which is negatively impacting available long-term rental housing stock available to the local workforce.”
Somehow staff believes that building expensive housing in a resort/tourist area makes it less likely that a county will build housing stock that could be affordable for its local workforce. Assuming the local workforce could afford to rent these expensive second homes, why would someone offer a long-term lease on a second home that they would plan to use as their own vacation home? Second, restricting STR’s would ultimately reduce income from jobs that serve the STR market. STR’s create opportunities for management, security, housecleaning, recreation, construction, and maintenance jobs that provide income for the local workforce. In my experience as a local politician, I have witnessed local governments repeatedly enact policies to restrict the supply of housing and then complain about how expensive housing is becoming. Rather than restrict expensive housing, local governments should try to produce more affordable housing by increasing density and/or building smaller units. Unfortunately, when ideas like this are proposed, they are usually denounced by the NIMBY crowd as changing the local character of their area.
As of this writing, there are seven California counties or cities that have enacted caps on STR’s. As I argue in my chapter on Banning Things, it makes very little sense to ban or artificially limit the supply of a good. Most caps on STR’s grandfather in the current permit holders and ban issuing new permits. All local ordinances restrict the transferring of an STR permit to a new owner if the house is sold. As I stated earlier, this type of restriction led me to look for vacation homes in other areas.
Besides the cap on numbers, registration, and paying taxes, there are a host of other regulations and requirements. As is typical of most local government ordinances, there is a lot of sharing between city staff, so that most of these ordinances have similar characteristics. Below is a typical list of requirements.
Local Person Contact – someone must be available by phone on a 24 hours basis and must be physically present at the rental unit within one hour of contact.
Posting Requirments - Posting of rules inside units for guests to abide by.
Special Events - no special events such as weddings, parties and other large engagements.
Parking - On-site parking required and one musty comply with street parking rules.
Trash - Each unit must have a trash collection service
Fire Safety - For homes in forests, no outdor wood-burning fires.
Noise Limits - Quiet hours shall be between 10:00 pm and 8:00 am.
Guest Safety - Units must be equipped with smoke alarms, carbon dioxide detectors, and fire extinguishers.
Occupancy Limits - Typically set at 2 guests per bedroom, plus some arbitrary number of addtional guests or children.
The above list covers the typical items that are required to operate an STR. I purposely listed the requirements in a certain order. All of the items in the above list would appear to apply to any multi-family rental unit. Items one and two are unique rules that apply only to STR’s and not to other residential units. The other items would certainly apply to all residential long-term rental units. This observation raises the question of why impose special rules on STR’s that are the same for all residents in single-family houses. All single-family housing units have noise limits, trash collection regulations, safety requirements like smoke alarms in all bedrooms, occupancy limits, and restrictions on large gatherings. So what is the point of writing the same rules for STR guests that already apply to all residents? It may make sense to let guests know what rules apply to them when they reserve STR units, but it doesn’t make sense to write a separate set of rules that apply to STR guests when they already exist in the municipal code and apply to everyone else.
As one looks at the reports that are produced by local officials, it’s clear that they have little understanding of the actual problems. The perceived problems they pose that are caused by STR’s make little sense and their proposed solutions are harmful to their local economy.
The biggest complaint appears to be the noise and parking caused by STR guests. As I have stated above, these complaints can clearly be handled by existing local ordinances. The problem of course is the ability of local officials to enforce these restrictions. In my experience as a public official, police departments are reluctant to enforce noise and parking issues. For example, most cities have a noise curfew calling for quiet hours after 10 pm. If there is a loud party and you call the police department, the first question they will ask you is, "have gone over to inform your neighbor that the quiet time starts at 10 pm?" The same response would happen with a parking issue or a trash issue. In other words, could this issue be resolved prior to sending an officer out to observe and enforce the violation? Another issue like occupancy limits is difficult for the property manager to enforce. For the police, it is next to impossible since it would have to be enforced when the renters are in bed sleeping.
Living in a tourist area has its pluses and minuses. Job opportunities are limited. No one looks to live in a tourist area like Lake Tahoe, California because there are high-paying jobs offered by Fortune 500 companies. The largest employers are high-end hotels. White-collar jobs are typically small self-owned firms. Those workers without college degrees are limited to service jobs in the tourist industry. An area like Lake Tahoe is fortunate to have two tourist seasons, one in the winter, when it snows, and one in the summer, when it warms up.
Finally, what is the political impact of banning STR’s. Who gains and who loses? Clearly, the traditional hotel industry gains from reducing the option of renting a house rather than a hotel room. For some families, it may mean looking for vacation rental homes in areas more favorable towards STR’s. As I mentioned earlier, banning STR’s will do little to help the housing situation facing local residents who work in the area. Full-time (and usually retired) residents living in tourist areas will gain because second homes purchased by nonresident owners will be quieter and used less often. The long-run impact of banning STR’s will reduce TOT money and either result in cutting local government spending on services or lead to increasing local sales taxes. In South Lake Tahoe, total TOT collections fell over 20% (3.6 million) for the fiscal year after local voters passed Measure T, which banned new permits for STR’s. City bureaucrats responded by proposing a one percent increase in the local sales tax. This measure passed, increasing the sales tax to 8.75%, providing more incentive for shoppers to travel to nearby Carson City, Nevada, where the sales tax rate equals 7.6%. At some point, land values will reflect the lower demand for second homes. Some second home buyers may be able to purchase a vacation home, let it sit empty, and use it exclusively for their personal use, while others may not be able to afford that luxury.
In my research, I found tourist areas in several states have passed ordinances either restricting or banning STR’s. In my view, this will have a long-run impact on local economies and land values. I’m not sure that these impacts will be viewed as favorable by all residents in these areas.
