MEMORANDUM. David M. Reyes, Director of Planning and Community Development Department

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1 MEMORANDUM TO: FROM: Economic Development and Technology Committee David M. Reyes, Director of Planning and Community Development Department DATE: September 15, 2016 SUBJECT: Regulation of Short-Term Rentals The purpose of this memo is to provide the Economic Development and Technology Committee with information on the background, scale, and scope of short-term rental activity in Pasadena, as well as associated challenges and opportunities. At this time, staff recommends development of an ordinance to legalize and regulate the short-term rental of one s own home, with parameters such as those outlined below: Establish a regulatory framework to legalize and regulate some short-term rentals where the owner is required to reside a certain number of months per year; Require hosts to register with the City and limit short-term rentals to a certain number of days per year; Prohibit any person from advertising a short-term rental that is not licensed; Require hosting platforms to disclose to the City on a regular basis the name of the host, the address of each listing, length of stay for each listing, and the price paid for each stay; Clarify the requirement on hosts and hosting platforms to collect and remit TOT; and Establish various tools and administrative fines to enforce illegal short-term rentals. EXECUTIVE SUMMARY In recent years, the increase in availability of short-term rental units in Pasadena has caused some residents to suggest they be subject to regulation. Unlike hotels, motels, or bed and breakfasts, which are commercial uses, vacation rentals and home-sharing involve the rental of a residential dwelling unit. Short-term rentals consist of home-sharing, where a unit is shared, in whole or part, and vacation rentals, where the home is used exclusively for guests as a way of generating income. Cities have defined home-sharing very differently, and the distinction is important. In some communities, home-sharing is described as the short-term rental to guests, where the primary resident is not required to host on-site during the guest stay. Other cities describe homesharing as the short-term rental to guests in the home, where the primary resident is required to host on-site during the guest stay. Home-sharing is not intended to include vacation rentals, where the home is not used as a primary residence and used exclusively for guests.

2 Supporters credit short-term rentals with providing financial assistance during difficult financial times, enabling travelers to find a less expensive alternative to a hotel, and that short-term rental guests end up staying longer and spending more money in the communities in which they stay. Critics argue that short-term rentals adversely impact neighborhood character, reduce long-term housing options, increase rents, skirt regulations (e.g. health and safety inspections), and potentially harm hospitality industry jobs and wages. The City is tasked with crafting regulations to address these impacts. The challenge is to create simple and enforceable local short-term rental policies that balance the rights of homeowners and renters with the interests of neighborhoods and other community members who may only experience the negative sideeffects of short-term rentals. BACKGROUND While some level of home-sharing and vacation rental has likely always occurred in touristfriendly cities, the accessibility to short-term rentals has exploded in popularity with the arrival of websites such as Craigslist, Vacation Rentals by Owner (VRBO), and Airbnb. More recently, mainstream tourist websites like Expedia and Hotels.com have also begin advertising short-term rentals, increasing the reach of short-term rental listings beyond a once niche audience. As a result, the global number of homes listed for short-term rental has grown to about 4 million, which represents a 13-fold increase over just the last five (5) years. Pasadena has experienced similar growth in the short-term rental market. As of June 2016, approximately 470 properties were being actively advertised across approximately 550 separate listings. Of the properties listed: Approximately two-thirds were entire dwelling units; the remaining one-third were rooms inside of homes; Available dwelling units are located throughout the city; they are not concentrated in one specific location in Pasadena; The size of units listed for short-term rent is evenly split between one, two, and three or more bedroom units; and Attachments A-F illustrates the trends in the Pasadena short-term rental market described above. ANALYSIS Benefits of Short-Term Rentals Short-term rentals bring significant benefits to those who operate them, as well as their visitors. Hosts may vary from students to young professionals to empty-nesters. Guests vary from vacationing families to relocating professionals to bachelor party groups. Their reasons for hosting or renting are just as varied; however, some common themes are described below: Host Perspective Short-term rentals make efficient use of a space by hosting guests in a unit or room when that unit or room might otherwise go unused. Many hosts have used short-term rentals as a way to help afford their own homes, recover from the loss of a job or health issue, and have meaningful, culturally enriching interactions with visitors from around the world. Airbnb, the largest home-sharing platform, recently published statistics claiming that nearly 23% of their Economic Development and Technology Committee Page 2

3 hosts reported that the extra income helped prevent losing their home to foreclosure or eviction. Given the affordability challenges occurring in the Los Angeles region, there is little doubt that short-term rentals may help to offset the housing cost burden. While this may be true, looking specifically at Pasadena, it is unclear if home-sharing is assisting persons or families living in low-income neighborhoods or those far from tourist destinations. Visitor Perspective For visitors, short-rentals often represent a more affordable and flexible option. Many travelers indicate a preference for a residential environment and sole access to the amenities provided as part of the guest space (pool, spa, outdoor grill or patio, kitchen and eating areas, etc.), in lieu of a hotel or motel where these amenities are shared amongst guests. Additionally, many travelers enjoy being a part of a local neighborhood as opposed to a typical commercial district. Individuals relocating to new cities or areas often cite home-sharing as an opportunity to try out different neighborhoods or communities prior to making a rental or home ownership decision. And larger groups - extended families celebrating a reunion or holiday, bachelorette or bachelor party weekends, or even weekend rentals for the purpose of hosting small weddings or events - may seek out short-term rentals in order to have access to additional space or bedrooms, larger kitchen facilities, or expansive outdoor areas and amenities. In summary, the affordability and increased flexibility make short-rentals an attractive option. Economic Development For some cities, short-term rentals present a great opportunity to reap potential economic benefits, either directly through taxes on hosting or indirectly through increased tourist spending. By filling up spare bedrooms and ancillary spaces, hosts are maximizing the economic potential of their homes. Besides the direct money coming from the short-term rentals, visitors can have tremendous spin-off benefits to the local business community. Hosting itself can also have a positive economic impact as operators employ people to clean, maintain, and manage their units. Collection of Transient Occupancy Tax The collection of relevant transient occupancy taxes (TOT) is an important goal in regulating the short-term rental market. In Pasadena, it is estimated that the City would be eligible to receive a minimum of $90,000 annually from short-term rental TOT based on the observed and verifiable rental activity in June 2015 through May 2016 (Attachment G). That said, as the number of short-term rental listings in Pasadena has grown about four times in the last year, the historical TOT number is not likely to be reflective of the full magnitude of Pasadena s future TOT revenue potential from short-term rentals. Airbnb has argued that it is a platform that facilitates the rental of short-term rental units, not a TOT collector. However, they have begun to collect and remit TOT for rentals in Portland, San Francisco, Chicago, District of Columbia, and Malibu. While this increases tax compliance from hosts using this particular platform, Airbnb is only one of many short-term rental websites operating in the United States. Most listing companies leave remittance to the individual hosts who must then calculate their income and their taxable amount. For hosts on multiple platforms this can be complicated and time-consuming. When hosts fail to self-report their activity, it can be difficult for cities to audit or otherwise verify tax receipts. However, cities are increasingly requiring, as part of their regulatory ordinances, that hosting platforms disclose listing Economic Development and Technology Committee Page 3

4 information (name, address, length of stays, price, etc.), subject to privacy restrictions, to assist with the collection of TOT. Concerns with Short-Term Rentals Concerns regarding short-term rentals are common in many cities and generally fall into one of three categories: nuisance activity, impacts on existing housing stock, and consistency with residential use and character. Nuisance Activities Short-term rentals are sometimes the subject to nuisance complaints involving loud noise, parties, trash, fighting, inconsiderate guests, inadequate parking, excessive coming and going as well as the commercial use of residential properties for private events. Many have suggested that short-term rentals, where the host is not on-site during the entire length of stay, create situations where the host is difficult to contact, unwilling or unable to remedy problems, or may even be actively hostile to complaints. For neighbors, this can sometimes result in issues that could have been dealt with personally now resulting in a compliant to the City or Police Department. Impact on Housing Stock Many have expressed concern regarding the potential impact of short-term rentals on the housing stock in cities. To the extent rental units are removed from the long-term housing market and instead used solely for a short-term use, overall residential supply may be reduced. However, it is not guaranteed that removing a listing would result in the immediate expansion of the housing supply. Some hosts may only pursue short-tern rental opportunities seasonally; others in conjunction with holidays or activities were the demand for lodging would be high (sporting events, annual parades or festivals, conventions, etc.); other hosts may pursue hostduring times when the host anticipates travel or having limited or no need to access the unit. As previously described in this report, many hosts have used short-term rentals as a way to help afford their homes, recover from the loss of a job or health issue, and have meaningful, culturally enriching interactions with visitors from around the world. However, many owners have an incentive to convert housing units from long-term to short-term use because, in some neighborhoods, there is a substantial financial premium to be earned from short-term rentals. Technology has allowed for the easy pairing of hosts and guests, leading to a situation where long-term rents are under pressure as the regular rental market increasingly competes with the short-term market. Some new multifamily departments in cities have been renting brand new units as short-term rentals, which reduces the normal pressure to lower the asking prices to otherwise lease up a building to long-term tenants. Residential Use and Character Some neighbors of short-term rentals feel that these activities have resulted in the loss of stable residential character as their long-term neighbors are increasingly replaced by short-term guests. Even the most basic short-term rental usage has a commercial element to it. Comprehensive plans and zoning ordinances are intended to create micro-climates (singlefamily residential, multi-family residential, commercial, industrial, public facilities, etc.) in the community by establishing permitted land uses and parameters for development. Short-term rentals have the ability to short-circuit these protections; for example, residents may feel their Economic Development and Technology Committee Page 4

5 neighborhood character is compromised as the home next door evolves into a pseudo-hotel, as its demand as a short-term rental increases. And while supporters of short-term rentals argue that hosting platforms advertise their units by the maximum number of guests in an effort to protect guests from unwanted guests (e.g. bachelor party or private event), critics argue that some hosting platforms or listings advertise specific to these situations or guests as a way of maximizing profits, with the potential for nuisance issues and loss of neighborhood character being realized, quickly and abruptly, weekend after weekend. Potential Regulatory Strategies Many cities have adopted regulations on short-term rentals in the last few years. While approaches and outcomes have varied, there are several lessons learned from the experience in other cities. Some cities have chosen to ban the practice completely, declaring the activity incompatible with existing land use patterns and neighborhood character. Other cities have embraced the practice largely without restrictions. Most communities are opting for a hybrid approach. Below are some examples of how cities are tackling this issue. San Francisco San Francisco has probably spent more time and effort on the issue of short-term rentals than any other California community. The City has established an Office of Short-Term Rental Administration within the Planning Department staffed with approximately a half-dozen employees to enforce regulations and respond to complaints. Despite their efforts, the community remains dissatisfied with their local ordinance. The ordinance in San Francisco is similar to an ordinance currently being considered by the City of Los Angeles, but with several key differences. San Francisco s ordinance requires that hosts register, pay TOT, and cap short-term rentals at 90 days per year. However, San Francisco makes an exception to the 90-day cap for hosted rentals (host is present during the stay). There is no limit on hosted rentals. However, the Office of Short-Term Rental Administration has said it is virtually impossible to identify a hosted stay from a non-hosted stay, and therefore effectively enforce the 90-day cap. More recently, San Francisco approved legislation that places additional requirements on hosting platforms to verify, prior to posting online, that the listing is for a unit (or portion thereof) that is registered with the city. Multiple ballot initiatives have been defeated targeting components of the City s short-term rental program, most notably a ballot initiative from November 2015 that would have put a 75-night cap on all short-term rentals. It was estimated that Airbnb spent close to eight million dollars in an effort to defeat the initiative. One aspect of the ordinance that San Francisco staff closely monitor is that, if you are a tenant, you may not earn more than your monthly rent from your short-term rental fees charged to guests. This is tracked through the submittal of quarterly reporting by the host, and was once reported to be one of the most significant abuses of short-term rentals in San Francisco. Santa Monica In 2015, Santa Monica passed an ordinance prohibiting vacation rentals and home-sharing situations where the host is absent. However, if the primary resident is also present in the home (except during daytime and/or work hours) there is no limit on the number of days that homesharing may occur. The ordinance makes it illegal for hosting platforms to advertise an Economic Development and Technology Committee Page 5

6 unlicensed rental and requires that platforms disclose listing to the City, including names, addresses, length of stay, and amount paid. Sacramento In 2010, Sacramento approved two ordinances allowing limited short-term rentals. The ordinances require the city to notify all neighbors within 200 feet that a permit has been issued and sets a six-guest limit per rental. Each owner is required to keep a register of guests and to ensure all posting on hosting platforms are permitted residences. A short-term vacation rental may operate from a location that is not the operator s primary residence for a total of 90 days per calendar year. After the operator exceeds 90 days in a calendar year, a Conditional Use Permit applicant is required. Anaheim In July, the Anaheim City Council vote to prohibit short-term rentals and provided an 18-month window for existing short-term rental units to shut down. The Council also approved new restrictions on existing short-term rentals including new quiet times for the occupants, new fire safety codes, parking restrictions, a requirement that rental operates designate a local representative to respond to complaints and heftier penalties for violations. It is worth noting that many of the short-term rentals targeted by the changes in Anaheim would be defined in other cities as a vacation rental (owner has not established primary residency; unit is used exclusively for guests). An article in the Orange County Register on or around the time of the Council decision noted that, home sharing in which a homeowner rents out a room was lumped in with the ban against short-term rental of entire homes and condos. The Council is expected to consider home sharing as a separate item in August. Staff is considering a pilot program to give 50 home-sharing permits. Based on the information provided, this program would be similar to the regulatory approach taken in Santa Monica. Los Angeles Los Angeles is in the process of considering an ordinance, similar to San Francisco s. Shortterm rental hosts would be required to register with the City, establish residency (or landlord permission if the unit is a tenant-occupied), acknowledge compliance with the City s home-share regulations, including the proposed 120-day cap. In contrast to San Francisco, Los Angeles would not differentiate between hosted stays vs. non-hosted stays and instead set a higher cap of 120 days versus 90 days. This is consistent with an Airbnb issued report from September 2015 indicating that 86% of the entire home listings in Los Angeles are rented for less than 120 days per year. Any permit issued by the City would be good for two years. Hosts would be allowed to renew if they have been in compliance with the provisions of the ordinance in the two years prior, pay a renewal feed, document changes to their initial application, and provide records documenting the number of length of each rental during the past year. Like other cities, the proposed ordinance would require that platforms actively prevent, remove, and cancel listings they know to be illegal. Additionally, hosting platforms would be required to provide the City with short-term rental information (address, number of nights the unit was booked, amounts paid for stay) on a monthly basis. Economic Development and Technology Committee Page 6

7 Enforcement Many cities have noted difficulties enforcing against short-term rentals, as well as licensing short- term rentals where it has been legalized. There are several reasons why enforcing shortterm rental regulations is challenging number of short-term rental websites, listings that are constantly being added, modified, or removed, and limited access to information about the units themselves. Although cities are creating ordinances (with penalties attached) intended to force major hosting platforms to disclose listing information to a community or remove unpermitted listings, ultimately, the degree to which an organization is burdened by enforcement lies in the answer to this question will the community take a proactive approach or respond only to complaints. In the case of Santa Monica, staff and the Council introduced a proactive program, instead of relying on complaints, assuming there would be an initial spike in short-term rental cases for two or three years, with cases beginning to level off after. City of Pasadena Code Compliance staff indicated that a small number of complaints (one to two monthly) are received about short-term rental units, although nuisance complaints may be elevated coinciding with Rose Bowl events (but it is unclear if the nuisance complaints coincide with short-term units). Financial Impacts and Workload Impact The City of San Francisco s Short-Term Rental Administration (part of their Planning Department) includes six full-time equivalent (FTE), permanent positions who administer the City s short-term rental regulations. The City of Santa Monica, when considering their ordinance (home-share with requirement that owner(s) be present during length of stay; all else prohibited), indicated that their program would require the addition of 3.0 FTE permanent positions to administer and proactively enforce (see above) the provisions of the ordinance. Their staff indicated that cost recovery could occur through permit fees and/or business licensing, collection of TOT (estimated to be around $138,000 annually assuming 100 percent program compliance), and enforcement fines. An estimate on staffing needs would vary based on the degree of regulation included in an ordinance, and whether the ordinance would be administered proactively or complaint-based, but the cost recovery measures would be similar to those used in other cities. CONCLUSION Based on the information presented in this report, staff recommends development of an ordinance regulating short-term rental unit with a permit-based system. An ordinance to enact such a system and associated regulations could include parameters such as those outlined below: Establish a regulatory framework to legalize and regulate some short-term rentals where the owner is required to reside a certain number of months per year; Require hosts to register with the City and limit short-term rentals to a certain number of days per year; Prohibit any person from advertising a short-term rental that is not licensed; Require hosting platforms to disclose to the City on a regular basis the name of the host, the address of each listing, length of stay for each listing, and the price paid for each stay; Clarify the requirement on hosts and hosting platforms to collect and remit TOT; and Establish various tools and administrative fines to enforce illegal short-term rentals. Economic Development and Technology Committee Page 7

8 The City s efforts to address short-term rentals and home-sharing cannot be addressed in an ordinance alone. To be a successful policy, staff would additionally recommend the establishment of registration protocols and administrative guidelines, education campaigns intended to inform the public about short-term rental regulations, a proactive enforcement campaign, and monitoring and reporting to the Planning Commission and City Council about the status of short-term rentals in the community. ATTACHMENTS A. Global growth in short-term rentals B. Growth in short-term rental units in Pasadena C. Map of short-term rental units in Pasadena, June 2016 D. Snapshot of short-term rental unit characteristics in Pasadena, June 2016 E. Pasadena short-term rentals within ½ mile of Rose Bowl F. Pasadena short-term rentals within 1 mile of Rose Bowl G. Estimate of TOT potential from short-term rentals Economic Development and Technology Committee Page 8

9 ATTACHMENT A: GLOBAL GROWTH IN SHORT-TERM RENTAL UNITS Economic Development and Technology Committee Page 9

10 ATTACHMENT B: GROWTH IN SHORT-TERM RENTAL UNITS IN PASADENA Economic Development and Technology Committee Page 10

11 ATTACHMENT C: MAP OF SHORT-TERM RENTAL UNITS IN PASADENA, JUNE 2016 Economic Development and Technology Committee Page 11

12 ATTACHMENT D: SNAPSHOT OF SHORT-TERM RENTAL UNIT CHARACTERISTICS IN PASADENA, JUNE 2016 Economic Development and Technology Committee Page 12

13 ATTACHMENT E: PASADENA SHORT-TERM RENTALS WITHIN ½ MILE OF ROSE BOWL Economic Development and Technology Committee Page 13

14 ATTACHMENT F: PASADENA SHORT-TERM RENTALS WITHIN 1 MILE OF ROSE BOWL Economic Development and Technology Committee Page 14

15 ATTACHMENT G: ESTIMATE OF TOT POTENTIAL FROM SHORT-TERM RENTALS BY PASADENA COUNCIL DISTRICT AND IN AGGREGATE Economic Development and Technology Committee Page 15