Residential landowners seeking to rent out their properties on a short-term basis need to regularly review the laws, regulations, covenants, and other restrictions that may apply in their areas.
Short-term rentals, commonly run through organizations such as Airbnb, HomeAway, TripAdvisor, VRBO, and Stay Alfred, are heavily regulated by state and local laws. While they have been operating for the past ten years, no all-encompassing federal regulation of short term rentals currently exists. Meanwhile, regulations are developing piecemeal in hundreds of localities, even as this multi-million dollar industry grows and outstrips attempts to regulate it.
Underlying the desire for consistent regulatory formulation, industry observers point to benefits and drawbacks to short-term home-sharing.
Benefits: Increased income for individual homeowners, increased revenue for local businesses, increased tax revenue for state and local governments, and unique, cost effective lodging alternatives for travelers.
Drawbacks: undesirable changes to the character and quality of neighborhoods, commercialization of residential areas due to increased investor activity, noise pollution and other nuisances, and property damage.
Ongoing regulatory development ultimately seeks to strike a balance between much-needed revenue and protecting the integrity of local neighborhoods. Relevant cases have made it through the appeals process to three state supreme courts—Pennsylvania, Texas, and Wisconsin. While the details of each of these cases differed, the decisions were based on the court’s interpretation of an existing ordinance, covenant, or restriction and consideration of whether the subject language was ambiguous in its description or coverage of short-term home rentals.
While these decisions are instructive, they are, by definition, restricted to those jurisdictions. A handful of states have enacted preemptive laws to protect short-term rentals under limited circumstances. Such laws exist in Arizona, Florida, Idaho, Indiana, Tennessee, Wisconsin, and Nebraska.
Common elements of these laws include:
- A general prohibition against bans of short-term rentals.
- The pre-emption of existing and future local government laws that ban short-term rentals.
- Allowing local governmental authority to limit such rentals for purposes of public health and safety, use and enjoyment, and integrity of residential neighborhoods.
- Allowing local governments to tax or require permits for short-term rentals.
Considering the landscape, residential homeowners, lenders, potential investors, and property owner associations should understand the laws and local requirements where they are purchasing, lending, or investing. Local closing counsel, foreclosure counsel, and tax advisors are good partners in understanding the legal issues across jurisdictions.
Property owner associations need to draft clear, unambiguous covenants that also make room for amendments—and can be revisited on a regular basis to keep current with legal and technical developments.
Lenders should know that property owner associations can have broad, disruptive authority. While the Fannie Mae Uniform Security Instruments and other loan documents communicate a borrower’s duty to pay assessments and fines, a homeowner’s short-term rental of their residence where prohibited can result in the imposition of fines that, if left unpaid in some jurisdictions, can become first priority liens -ahead of a lender’s lien- against the property making it subject to foreclosure.
In addition, lenders should be aware that there are individuals seeking to purchase or refinance property with the intention of engaging in short-term rental activity. Taking steps to: ensure that the loan purpose would accurately reflect the intended use; ensure that purpose and use would be permissible under investor guidelines; and, on the servicing side, review policy and procedures for handling unpaid assessments and fines to protect the lender’s lien position are all good ways to address potential issues upfront and control costs to cure violations.
There is no doubt that the short-term home rental industry will blossom as consumers learn to appreciate and depend upon the perceived advantages these arrangements offer over traditional hotel and other accommodations. It is incumbent upon all parties to agree on how it may be administered to everyone’s advantage.
Read more insights on state and local efforts to regulate the short-term rental of residential property in Christina’s co-written article Factors Residential Homeowners and Real Estate Investors Should Consider When Leasing in Shared Economies, as featured in the September/October issue of American Bar Association Probate and Property Magazine.