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Frisco had originally planned to offer a “locals” only license classification for short term rentals. A new ruling in Louisiana put these plans on hold and could jeopardize many other communities short term rental laws. What was in the ruling and why is it so monumental for the industry? What does this ruling mean for short term rentals throughout Colorado?
A history of the New Orleans nightly rental case:
Until 2017, the city of New Orleans prohibited short-term residential rentals. On April 1, 2017, Ordinance 27204 became effective allowing residential property owners to apply for licenses to rent their property on a short-term basis. As a result of negative impacts on neighborhoods from the growing STR market, on August 8, 2019, the City enacted Ordinance 28157 that revised its licensing program by imposing new and restrictive requirements to qualify for STR licenses. One key provision of Ordinance 28157 restricts the issuance of STR licenses to owners who occupy the property as their primary residence, effectively limiting licenses only to New Orleans residents.
In November 2019, a group of residential property owners (plaintiffs) sued the City seeking a declaration that the new requirements were unconstitutional and asking the United States District Court for the Eastern District of Louisiana to issue a permanent injunction against their enforcement.
What was in the ruling in Louisiana and how does it impact Colorado ski town short term rentals?
There was an initial case that ruled in favor of the city of New Orleans, but on appeal the ruling was mixed on the two items.
There were two primary items decided in the case on appeal.
- “Taking of property rights” by the government: The first item is the court ruled that under state law the property owners did not have any property interests in the STR licenses or their renewal which means there is no “taking” by the government when short term rental laws are implemented. This has been a key argument of the short-term rental industry that the government was “taking” from them and therefore they should be compensated. This should finally put this argument to bed.
- Residency requirement unconstitutional: The court held that the residency requirement is unconstitutional. The Fifth Circuit found that the residency requirement violated the Commerce Clause and noted that local benefits could not justify discrimination against interstate commerce when there are alternative non-discriminatory methods to achieve legitimate government policy goals.
Does the Louisiana ruling set precedent for other Colorado cities nightly rental laws?
Just six days prior to the Fifth Circuit’s Hignell-Stark decision and dealing with some overlapping facts and law, the Third Circuit Court of Appeals, in the case of Nekrilov v. City of Jersey City ( (3d Cir. Aug. 16, 2022)), upheld Jersey City’s STR ordinance and showed significantly more deference to municipalities than was on display in the Fifth Circuit decision (see Legal Update, Third Circuit Dismisses Constitutional Challenges to Jersey City Short-Term Rental Restrictions). Following so closely on the heels of the Third Circuit’s Nekrilov decision, the Fifth Circuit’s Hignell-Stark opinion brings into stark relief the complex and often conflicting views concerning short-term rental laws and the constitutional standards applicable to them.
Long and short, we are just at the beginning of a lengthy process that ultimately will end up at the Supreme court to ultimately decide as there are conflicting rulings on the same questions regarding owner occupancy and STR permits and its impact on interstate commerce.
What will happen if the Louisiana ruling becomes the precedent by a Supreme court ruling?
- Cities will setup zones where nightly rentals are prohibited: We are already seeing this in areas like Steamboat where there are prohibited zones for new nightly rentals and there are zones closer to the mountain which are classified as tourist areas. Currently in these zones there are carve outs for primary residence owners that occupy the property and rent out up to x days per year. Depending on the ultimate ruling this practice of a special carve out for residents would not be possible and many cities would just make it so that nightly rentals are not allowed in these areas.
- Caps on nightly rentals: We are already seeing this play out in Breckenridge and other locations where there is a cap on nightly rentals. With this ruling if it becomes precedent, more cities will enact this along with outright bans in many locations
- Regulations that owner/manager must be present at time of rental: Although it might be hard to enforce, certain cities might require an onsite manager at time of rental. This was alluded to in the court case.
The ruling in Louisiana is not a major win for the short-term rental industry. The ruling clarified municipalities abilities to regulate the industry by squashing the argument that the government was “taking property”. This has been a constant defense against STR regulations. On the flip side, the ruling throws into question the ability for cities to require owner occupancy as a requirement of rental. This provision is common throughout Colorado and much of the country. Unfortunately, this is not a resounding win for the industry as there are now two different conflicting rulings on the same question.
The question regarding limitation of short term rentals to primary owners will ultimately be settled by the supreme court. Until this question is codified, look for cities to prohibit nightly rentals in certain zones, cap the number of nightly rentals, and put in requirements of an on-site property manager to address this prospective issue. Although the short-term rental industry is holding up this ruling as a knockout punch in favor of short term rental owners, the reality is far different as this ruling likely will not move the needle much to less regulation and likely will do just the opposite and lead to even more limitations.
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Written by Glen Weinberg, Owner Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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