Short Term Rentals and the Sharing Economy

Single family housing that used for short-term vacation rentals through web services such as Airbnb or VRBO have gotten negative attention here in San Diego of late.  Even though the complainants point to specific behaviors they dislike, the underlying tone of the discussion is that they don't like the sort of people who come America's Finest City to vacation.  I am probably not going to persuade those folks, because their argument is rooted in emotionalism to which they will not admit.  For the rest of us who realize that sometimes real problems arise from short term rentals, I think we need to propose a light regulatory touch that purges the worst abuses.  Technology, primarily the internet, is lowering the cost of bringing underutilized assets to market, whether its vehicles, homes or spare CPU cycles on our computers; these assets can return rents to the owners.  Unfortunately, we have a tax and regulatory environment that doesn't address the mixed use of assets very well.

I have engaged with a number of people on this issue and the key complaints can be boiled down to bad behavior by the renters, to include late night loud parties, not cleaning up trash and boorish behavior.  The answer is to hold the owners accountable, who can the hold the guests accountable.  Just as owners are rated on airbnb, so are guests.  Guests whose behavior threatens owners with loss of income will give guests bad reviews which in turn create a disincentive for the bad behavior.  For serious violations one might have to call the police, but that is always true.  In the past three years, I have had the police in my neighborhood in force on two different occasions that had nothing to do with short term rentals; there aren't any guarantees in life.

Consider this scenario. Two sets of parents from Fresno have students attending San Diego State. They want to visit their kids over a long weekend, enjoying a bit of San Diego, and also bringing a bit of home to their kids. By sharing a home, they keep down expenses, it costs less than renting three hotel rooms. They can also make their stay cheaper by buying groceries instead of going to restaurants and cooking them in the furnished house. They can relax more freely in the home atmosphere provided by the short term rental.

A policy of restricting short term rentals denies them this opportunity. Do we think that only the well off should visit our city? Wouldn't we want to welcome these fine folks to our city? This is why I would like to see a light and even-handed regulation of short-term rentals. It can be a source of joy for so many guests in our city.

Consider this too, people are having a hard time making ends meet.  Renting out their home helps.  "Elise Howell, who lives off a small pension and about $11,000 a year from substitute teaching, says she depends heavily on the money she makes from renting out a room in her two-bedroom Hillcrest condo for up to $79 a night."

In a 2007 analysis of the issue, the City Attorney stated that current regulations do not prohibit short term rentals.  However, the San Diego Vacation Rentals Manager's Alliance notes that owners who rent out room short term must collect the Total Occupancy Tax of 10.5%.  This is the position of the City Treasurer's office as reported in the U-T.

If the city is going to regulate short term rentals, I look forward to minimal regulations that allow neighbors to identify abusers, but allow owners to use their property as they see fit.  We should set a level playing field and welcome the additional visitors to America's Finest City.

Council Member Lorie Zapf (CD-2) recently posted proposed regulations that looked reasonable to me.  The key points were:

 Define the term “Short-term Vacation Rental” in the Municipal Code.
 Require a renewable permit for the operation of any short-term vacation rental city-wide.
 Determine permit fees that are cost recoverable and will be used towards the management and enforcement of the permit.
 Require a posted 24/7 contact with a name and phone number on the property as part of the permit.
 Enforcement process that includes fines and revocation of permit for repeat violators.
 Identify additional funding for the Community-Assisted Party Program (CAPP) to respond to citizen complaints.
 Require TOT collection and payment from short-term vacation rental hosts per Municipal Code. 

While this might lead to possible abuse by disgruntled neighbors, these proposals seem reasonable to solving the supposed problems of short term rentals.

Short Term Rental Issue in San Diego

There is a petition on change.org asking the mayor and the city Council to ban short-term rentals in the city of San Diego. I'm not going to link to the petition because I don't want you to sign it. A total ban would be ridiculous and an invitation for people to just flaunt the law. However, there are some issues that ought to be dealt with regarding short-term rentals.  Some negative comments about short term rentals from my neighbors on Next Door.

• The vacation rental on our street is basically a hotel. New people, often for only two or three days. Lots of parties lots of noise. Sometimes they book it for a wedding.if it was the neighbor getting married, nobody would object to them having a wedding at their house.
• It makes me upset and ruins my quality of life by having a "hotel" on my street in my quiet residential neighborhood. It is not safe for my child and threatens my well being. Especially when I am verbally assaulted by a transient occupant who thinks it's ok to party until 2:30 in the morning.
• I know that some vacation rental owners do NOT pay TOT [10% tax levied only on short-term rentals], which one must remit voluntarily. Most of these owners do tend to rent for longer terms [& thus do not have to pay TOT], but 2- & 3-week rentals are common, as in the beach areas, so those who do not pay TOT on their short-term rentals are cheating the city.
• As long as the city is receiving TOT from a vacation rental, there is no reason for them to care if it is a full time mini hotel or not. Houses in residential neighborhoods should not be turned into full time mini hotels, that is why we have hotels in the first place.

Other cities have taken some steps to regulate short-term rentals.  Portland's approach, however, seems a little heavy handed.

Portland will start issuing permits for its first legal short-term rental operations in private homes as soon as September.
The Portland City Council on Wednesday gave its OK for Portlanders to rent out one or two bedrooms in their home over-the-counter, $180 permit after an inspection and notifying neighbors.

$180 permit? Why?  This will only encourage people to evade the system and reduce the extra tax revenue that Portland could receive.  Further, there is no need for an inspection. This market is very much self regulating, with renters providing feedback on the quality of their stay.

A better approach for San Diego would be very light touch regulation. Owners who want to do a short-term rental, should pay a very low fee, maybe $10, so that the city is aware of their activity. They should also pay the same transient occupancy tax (TOT) that hotels do. If owners don't control their rental properties their permits could be revoked.

Exit question: If I rent out my home on airbnb.com do I get to vote on the use of the TMD tax? Would I have standing to sue that it violates Prop 26?

California - Arizona and Tourism

Light blogging for the next few days, because we are heading to Arizona.  To launch this road trip here Swell performing a song that only recently became a favorite, "California, Arizona."

I am told that open carry is fairly common in Arizona, as well as some other cultural differences from my home town of San Diego.  That should provide fodder for a future post as well.

We are heading for the tourist resort town of Sedona.  Here in San Diego, the tourism dollars are apparently not flowing in as fast as our city fathers the hoteliers would like.

The city council has bought into this line of reasoning and approved the release of the Tourism Marketing District dollars even though a lawsuit challenging the legitimacy of the tax is pending.  The council vote was 8-1 in favor of releasing the money.  David Alvarez continued supporting Bob Filner's position that the money should not be released.  I also oppose the tax, but not for the reasons that Filner did, I just think the tax itself is illegal.

I would hope that the hospitality industry leaders would come to their senses over the current structure of the tax and propose a different process that doesn't leave them open to legal challenge, and indeed disengages them from city council politics.  If they don't, then the likes of Filner and Alvarez will continue to demand concessions demanded by labor unions in order for funds to be released to promote tourism.

I would like to see Kevin Faulconer propose an alternate way ahead, as well.

What You Should Be Reading

• Legal Insurrection because it is entertaining, and I was extensively quoted on the mayoral race, dang it.
• California rejects the President's plea to let people keep their insurance, because the fix is only temporary.  H/T LegalInsurrection.  

More Analysis of the San Diego TMD Hotel Tax

This is a follow up to yesterday's post.  Over on the sdrostra.com blog, the City Attorney responded to my criticism of Judge Denton's ruling.  He made some cogent points.  First, he affirms the ruling, stating that because the Tourism Management District (TMD) tax is a business-based assessment, only the hotels themselves have standing to sue. The business based assessment district is an exception in Proposition 26 to the definition of a tax.  One of the exceptions is:

A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.

As such, the hotel occupant is not directly assessed the tax. The fact that hotels charge it as a "pass through" seems misleading, but a guest would have to sue the hotel itself for false advertising or on some other legal theory, according to Goldsmith.  I haven't seen a San Diego hotel bill since the passage of the tax, so I don't know if the hotels are calling this out as a separate tax.

However, he doesn't appear to be a fan of the tax itself.  In a legal opinion prepared for the city council in June, 2012, he makes the following suggestion:

Due to the Risks Associated with Assessment Districts to the City, this Office
Suggests that Interested Property Owners and Businesses Consider Forming
Private Associations to Implement the Improvements Activities Desired

He explains that "The current legal landscape with respect to both business-based and property-based assessment districts is treacherous. The passage of Prop 26 has left the legality of business-based assessments in limbo until it is clarified by legislation or litigation. . . A potential solution to this dilemma is for the businesses or property owners to form their own private association and “assess” each of the members for the benefit conferred. The association could also consider recording instruments that would act as a lien on their businesses or property to ensure payment and participation."

I appreciate his willingness to patiently argue his position with me.  Closing question: Why haven't the hoteliers themselves used this option to reduce the risk to the business operations of the TMD?  Perhaps some students with connections in the hospitality industry could ferret out the answer.

San Diego Hotel Tax Update

In a ruling that certainly disappoints, Judge Steven Denton has dismissed the lawsuit of Mel Shapiro challenging the 2% hotel tax that supports the San Diego Tourism Management District (TMD).  The suit was dismissed on the technical grounds that Mr. Shapiro lacked standing to file the suit because he was not an affected hotel owner.  From the U-T:

Shapiro, the judge concluded, “does not contend he falls into such a category of persons affected by the assessment/tax. Therefore, (he) does not have a direct interest for the purposes of a validation action.”
That legal argument, if it is sustained in a final ruling, could lead to dismissal of the other two suits.
“Under this ruling, only the hotels would be able to challenge the assessment because they pay the money,” said [City Attorney Jan] Goldsmith. “It would set a strong precedent for the other two suits.”

I agree that only those with standing should be able to sue, even when I am sympathetic to the desired outcome of the plaintiff.  However, the City Attorney's comments imply that a San Diego resident who stayed in a local hotel and was forced to pay the tax would lack standing.  This seems to violate common sense.  As I posted previously, the tax is collected under the color of authority of the city government, the city clerk certified the hotelier's election result.  If so, why can't a private citizen who had to pay the tax, challenge the ruling?

Hopefully, an affected hotel that was not in favor of the TMD tax will challenge the it.  The TMD tax needs to get in front of the California Supreme Court.  The consequences of the murky legal character of the tax can only hurt the city, if they are not resolved.  To be clear, I remain opposed based on arguments presented previously.  I sincerely hope for a lawsuit that will bring clarity to the matter, because there is still risk from a lawsuit that is ruled to have standing.

Will Filner Finish His Term?

Bob Filner appears a little unhinged, and frankly unprofessional in this video from local news station NBC 7.  He hijacks a news conference by City Attorney Jan Goldsmith to make accusations of unprofessional conduct.  His view of the role of the City Attorney appears entirely unbalanced.  The City Attorney can't be fired by the mayor, because he is elected directly by the public.  Filner's tactics are those of a bully or a Congressman, not used to the necessity of working with other members of the team.  It seems irrational for the mayor to waste political capital on a personal and public fight with another official with whom he must work in the future.  His ego is writing a check he may lack the political capital to afford.

It is clear that Filner is dealing from a weak hand; so he throws a tantrum.  But his tantrum is exactly the response of a someone who feels powerless; this makes him look weak.  His strategy on the hotel tax is also incoherent.  He claims that it is illegal, but then makes a demand for a bigger cut before he will sign off on a contract to use the proceeds to fund a tourism campaign.  If the tax is illegal, then the city is not going to get its cut for public safety.  And if the tax is legal, then using the money for public safety will make it illegal.  I don't see Filner's play in this, unless he is just grandstanding.  Ultimately, the public judges the mayor on results.  Starting vendettas is not typically the way to achieve positive results.

Maybe he just has anger management issues.  I'm thinking its only 50/50 that he finishes out his term.

Here is the video, click here if the embed doesn't work.

Filner Should Speak Up

San Diego Mayor, Bob Filner, has been keeping silent about his views on the 2% hotel tax.  I previously argued that I thought the tax violated Proposition 26.  City Attorney Jan Goldsmith pointed out that the city was taking risk in the comments section on sdrostra.  City Attorney Goldsmith cited his office's legal opinion which finished with this conclusion:

Prop 26 defines every government imposition of a duty to pay funds to government as a tax unless one of seven enumerated exceptions applies.  It is not clear whether the City’s traditional businessbased assessments can meet one of those exceptions. . . .

However, it is Mayor Filner's failure to respond that is bothering me now.  The U-T reported that he has made no public statement on his failure to sign an agreement to release the tourism district's funds.

Filner has declined to respond to repeated requests for an interview. He also failed to appear Wednesday night for a scheduled appearance at the San Diego County Hotel-Motel Association's annual awards presentation and was unable to attend Thursday morning's annual tourism meeting where he was to be a speaker.

Hardly a display of leadership.  There may have been good reasons for his inability or failure to attend these events, but because they create doubt in the public mind, he owes the public a statement on the issue.  I wish he would just come out and say that he is not going to sign a contract because the tax is unconstitutional.  His prior statements that he wanted to use those tax dollars for "public safety" create doubt as to his real intentions.  On other occasions, the mayor isn't shy about sharing his opinion, why now?

A Fine Mess - The Hotel Tax

I find myself partially agreeing with Mayor Filner on the subject of San Diego's hotel tax.  He has stalled on signing the contract that would allow the hoteliers to start using the proceeds to promote tourism and the hotels of San Diego.  In an earlier post, I noted that he wanted to use the revenue for "public safety," but now he is just saying that he had said the tax is illegal.  If the tax is illegal, it can't be used for any activity, including public safety.  Meanwhile, the UT article linked above notes that there are lawsuits proceeding against the hotel tax, claiming it violates Proposition 26, passed 2010, which requires a supermajority vote of the people to raise taxes.  Here is what the state constitution says about taxes and votes, from Article XIII C, California Constitution:

Text of Section 1:
Definitions. As used in this article:
(a) "General tax" means any tax imposed for general governmental purposes.
(b) "Local government" means any county, city, city and county, including a charter city or county, any special district, or any other local or regional governmental entity.
(c) "Special district" means an agency of the State, formed pursuant to general law or a special act, for the local performance of governmental or proprietary functions with limited geographic boundaries including, but not limited to, school districts and redevelopment agencies.
(d) "Special tax" means any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund.
(e) As used in this article, “tax” means any levy, charge, or exaction of any kind imposed by a local government, except the following:
(1) A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.
(2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.
(3) A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
(4) A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.
(5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.
(6) A charge imposed as a condition of property development.
(7) Assessments and property-related fees imposed in accordance with the provisions of Article XIII D.
The local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.


Text of Section 2:
Local Government Tax Limitation. Notwithstanding any other provision of this Constitution:
. . .
(d) No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote. A special tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved.

Sorry for the extended legalese, but I am hard pressed to see how this tax, paid by hotel guests, who do not receive a direct benefit from the tax, can be passed by the hotels themselves.  The city clerk tabulated the votes for the tax, so it appears to have the force of law of the city government behind it.

The hotels could solve this problem themselves, by putting together a local association and agreeing to pay into a fund to promote tourism.  There would be a free rider problem for hotels that wanted the benefits, but didn't pay in.  Perhaps the Tourism Marketing District could omit links and mention of those hotels names in their promotional materials and web sites.  Using the police power of government to enforce the hotels association dues is out of constitutional bounds.

Meanwhile, what happens to the money piling up if the tax is found to have been unconstitutional?  It would be a nightmare to refund the customers, but if I were a judge in the case, that's what I would require.  That would also be a mess to clean up, but so would any other plan that would attempt to deal with the fees collected.  The sooner the courts resolve, the better.