Understanding the proposed short-term rental (i.e. AirBnB) regulation

Apparently this is the week that the Council chose to tackle thorny legislative matters. This morning’s topic: AirBnB and short-term lodging rentals. There are several interwoven issues making this topic complicated, so let’s begin by setting some context.

If you have a property that you would like to rent out to one or more people for a period of 30 or more consecutive days, that’s called “residential housing.” There is a whole licensing and regulatory framework for doing that. In Seattle, as well as in many other communities around the country that are experiencing economic growth, there is tremendous demand for residential housing that is driving prices up and availability down. The situation is dire enough that it has been deemed a “housing crisis,” and city leaders are scrambling to find ways to make housing more affordable (and plentiful).

The city controls residential housing development through its zoning — which quite literally says what can go where. Zoning is first and foremost use-based, meaning it specifies what land and buildings may be used for: residential, commercial, industrial, and some specialty uses such as “stadium.” The code puts requirements and restrictions on how the buildings must be constructed and maintained in order to align with the intended use, and within each zone type there can be further gradations that specify the density of development (e.g. single-family residential vs. 4- or 6-story “multi-family” residential).

Zoning’s roots are in the industrial revolution, as it became abundantly clear that people should not be living near heavy, polluting industrial sites. Historically cities had “mixed use” areas where homes, stores, and offices could be co-located (HALA calls those “urban villages”), but after World War II, when there was a rush to build huge amounts of housing at the same time that auto culture was taking off, zoning in the United States became almost exclusively “single use” for new development. There were residential neighborhoods, commercial areas where people worked and shopped, industrial neighborhoods, and lots and lots of roads connecting them. Suburbs were invented, through zoning legislation they became the law of the land (no pun intended), and we all got used to living in neighborhoods that were entirely single-family homes with their “unique character.” If you want to learn more about this ugly chapter in our history, go pick up this book.

This is important because Seattle’s zoning underpins the entire debate about short-term housing. “Residential housing,” as defined above, is only allowed in places that are zoned for it: residential and mixed-use zones. And conversely, things that are not residential housing by its strict definition are not allowed in single-use “residential” zones.  If you are trying to rent a property for less than 30 consecutive days, that is not an allowed “residential housing” use — it’s “lodging,” or “public accommodation,” and it’s a commercial use.

We’re very familiar with two common forms of lodging: hotels and “bed and breakfasts.” Hotels (defined broadly) are very clearly commercial; they can only be sited in zones that allow it, and on top of that they are heavily regulated — and taxed to pay for tourist bureaus, convention centers, cruise ship terminals, and other similar infrastructure that are co-dependent with the lodging business.  B&Bs, on the other hand, are a very carefully tailored exception to the “no commercial lodging in residential zones” law — but they are also regulated, including size restrictions, to prevent them from injuring the “unique character” of the residential neighborhoods in which they are sited. B&Bs are required to meet codes for accommodations as well as for food preparation, since they provide both.

To sum up so far:

  • Residential rental housing: more than 30 days, in residential zones, regulated.
  • Hotels: can be less than 30 days, in commercial zones, heavily regulated and taxed.
  • B&Bs: can be less than 30 days, in residential zones, regulated.

So along comes AirBnB, allowing people an easy way to rent out their spare bedroom, their mother-in-law apartment, their backyard cottage, or even their whole apartment or house for short periods of time. Which of the above three categories does this fit into? Well none, really. It’s its own thing, and it really deserves to be its own thing. And as it turns out, it’s a great way for people to make some extra money on the side; as our economy has crawled out of a horrible recession over the last several years, that has saved many people from losing their homes to foreclosure, put food on the table, paid for increasingly expensive college educations, and supplemented retirement accounts. Plus, it avoids most of the regulatory overhead associated with the other options. This morning’s Council committee hearing had over an hour of public comment from people telling the stories of what short-term rentals have done to improve their lives.

But wait, there’s more. Some people have a second home that might be used by their family when they come to visit, or a home or condo they bought as an investment or as a future home to retire to after the kids leave the nest. Rather than rent it out long-term as “residential housing” and deal with the housing regulations and the overhead of being a landlord, some have chosen to list their second property on AirBnB (or one of its competitors such as VRBO) for successive short-term rentals. There are four problems with this:

  • It takes long-term residential housing inventory out of the available pool, exacerbating the housing crisis;
  • It exploits a legal loophole to avoid the good part of lodging regulations: the safety guarantees they provide;
  • It sites a commercial activity (lodging) in a residential zone, which is illegal and affects the nature of the neighborhood with a steady stream of strangers coming and going;
  • It creates an unleveled playing field versus both hotels and B&Bs who play by the rules and deal with the regulations and overhead.

It gets worse: there are people who have set up their own small businesses managing short-term rentals for several properties by listing them on AirBnB and/or other platforms. There is some wiggle room in arguing that a family with a second home ought to be able to rent it out the same way it rents out a spare bedroom in their primary residence, but there’s no way to categorize a small business managing short-term rentals of 60 units as anything other than a commercial enterprise operating in a residential neighborhood — or more the point, a hotel. But it’s an unregulated, uninspected, and untaxed hotel. And those are 60 units that are off the long-term housing market.

So we have a spectrum: some low-key, low volume activity that has great economic benefits for ordinary people on one end, some people egregiously flouting the hotel and zoning regulations on the other extreme, and some squishy stuff in the middle. They all showed up this morning to make the case for why they should be allowed to continue their current activity unfettered; even the businesses operating multiple units, who claimed that they were job-creators since they employ people to clean and maintain the units they rent out.

This is the mess that the Mayor and Council member Tim Burgess have waded into by proposing new rules for short-term rentals. As described in the presentation this morning in the meeting of the Affordable Housing, Neighborhoods and Finance Committee, they set out three goals for their ordinance:

  1. Balancing the need to maintain the supply of long-term rental housing inventory with the economic opportunity created by short term rentals (the primary goal);
  2. Ensuring a level playing field for individuals and companies in the short-term rental market;
  3. Protect the rights and safety of owners, guests and neighbors of units under short-term rental.

In order for us to understand their proposal, we need to scope it down to the precise circumstances where it comes into effect. For starters, it only applies in single-use residential zones — short-term rentals in commercial zones are beyond the scope of their proposed ordinance. “Mixed use” zones which combine residential and commercial, such as one finds downtown and in many of the city’s urban villages, are also outside the scope of this ordinance; however, the permitted uses of the building itself, and/or the covenants and restrictions put in place by a homeowners or condo association, might restrict short-term rentals.

Within residential zones, the following chart is helpful to understand how it scopes down further:

regulatory table

If you plan to rent the property for 90 days or fewer in a 12-month period, regardless of whether it’s your primary residence or a second property, nothing changes. You still need a business license and to pay taxes. And to be clear, a “primary residence” includes a spare room, a mother in law apartment, a backyard cottage, or the whole property so long as the property is the main place you live.  If you rent all or part of your primary residence for more than 90 days in a 12-month period, then you will need to get a special new license, and do a handful of other pretty simple, reasonable things:

operator license

The bad news is for people who wish to operate a second property (or more) for more than 90 days per year: that is flatly prohibited. It’s a broad brush: it covers those people running the equivalent of a hotel on AirBnB, but it also sweeps up that squishy middle space where a family with a second home wants to rent it out for all the time it isn’t being used.

At its heart, this is a policy discussion as to whether it’s more important to preserve long-term housing than to let people generate additional income from their second homes. The 90-day threshold was chosen to ensure that owners would make more money from renting their property long-term than by renting it short-term for 90 days or less (though it was misconstrued in the meeting this morning as a comparison of renting long-term for a whole year versus renting short-term for a whole year and led to howls of protest from the audience). The decision to prohibit those operating at scale is also a policy decision, effectively saying “if you’re going to do short-term rentals at scale, then you’re a hotel and you need to operate within the regulatory framework in place for hotels… and we don’t think that’s appropriate within residential zones.”

According to AirBnB’s figures, 87% of  Seattle hosts on their platform are renting their primary residence, and 80% of their Seattle listings are rented for 80 days or less per year — which means that the vast majority of AirBnB hosts in the city will be unaffected by the proposed ordinance. There are two schools of thought on this: one is that this is good policy, a well-circumscribed law that focuses on the problem; the other is that what remains represents such a small volume that it’s insignificant in the local long-term housing market and thus the ordinance will add overhead and economic pain without delivering any real benefits. The city responds to the second viewpoint by pointing out the explosive growth of AirBnB’s listings over the last few years, what that trend means for the future, and the need to get regulations in place before the impact on the housing market represents real damage.

The city also argues that they would like to have better data that would allow them to further understand whether short-term rentals of second homes are a real issue or could be exempted along with primary residences. To that end, and to allow for enforcement of the new rules, the ordinance also requires platform operators such as AirBnB to provide quarterly reports to the city with a list of operators, their addresses, and the number of nights the property has been rented out. This is particularly important since some owners cross-list their property on more than one platform, and it means that asking platforms to de-list Seattle properties once they hit the 90-day threshold doesn’t solve the problem since a platform can’t account for the number of days on other platforms. The platform operators are being somewhat cagey about this requirement, throwing up false privacy concerns by suggesting that they would need to turn over guest information (they don’t) or more information on hosts than is available on the host’s business license application (again, they don’t).

The city staff have been doing their homework to understand what other cities have put in place to regulate short-term rentals:

comparison to other cities

Seattle’s proposal looks to be in-line with other cities; not surprisingly the second property is a point of differentiation across cities.

Council member Herbold voiced some concerns about the proposal. Her most vocal one relates to those people who have “bought into” the system as it exists now to rent out a second property (or more) for more than 90 days a year, and would either need to become a landlord with a long-term tenant, reduce their short-term rentals (and lose income), or sell the property. She was uncomfortable asking people to choose between those options. It’s easy to sympathize with that view, even if what they are doing today is, strictly speaking, illegal (but not enforced as such).  But she didn’t get much support from her colleagues who were present: Burgess, O’Brien and Johnson. O’Brien, truly on the “more long-term housing” bandwagon (and who disclosed that in addition to being a landlord has both hosted and been a guest through AirBnB), had little sympathy for anyone hosting short-term rentals off their primary residence. For his part, Johnson was more interested in diving deeper into the 90-day threshold and validating that it represented the right balance.

Curiously, many of the people who commented during the public comment period (and who would be subject to the new regulations) asked the city to tax them directly to pay for affordable housing rather than placing limits and regulations on their short-term rentals. After the Council members and city staff got over their shock at citizens asking to be taxed, they were forced to point out that  city doesn’t have the authority to levy a new tax of that sort — that is a power reserved for the state government — and that even a regulatory fee, which they could impose, could only be used to cover the costs of regulation and not to pay for new affordable housing. But O’Brien cheerfully suggested that the audience members accompany the Council to Olympia to call on state legislators with their request!

Council member Burgess, the committee chair, wrapped up the session by noting that this was just a first conversation with many more to come. The outline for next steps looks like this:

timeline

The Affordable Housing, Neighborhoods and Finance Committee will take the issue up again on July 20 with a public hearing and additional discussion. Sorting through the issues and drafting legislation will likely take the rest of the summer and possibly into September. Actual implementation of the end-result will not happen until 2017, to allow everyone a chance to prepare for the changes.

 

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