Years of uncertainty over whether short-term vacation rentals are legal has now been replaced with uncertainty over the new rules created to regulate them.
The City Council voted Monday to limit rentals to primary residences, a decision likely to spur legal challenges and reduce city hotel-tax revenue.
Under the new rules, San Diego residents will have to show the city a current water bill, deed or lease agreement with their name on it in order to get a license to rent out their entire homes for up to six months a year. That means investors or out-of-towners with second homes wouldn’t be eligible to operate short-term vacation rentals.
But no one knows exactly how much of the market either group represents. It’s also unclear how the state Coastal Commission and courts might react to the rules, which could vastly reduce the number of rentals in the city.
There are also questions about whether the drastic reduction in vacation rentals eligible to get licenses could hamper the city’s budget and its ability to pay for enforcement – as well as whether the city can successfully enforce the rules even if cash is available.
In other words, city leaders have a lot to hash out before the city can implement the new rules.
Yet Mayor Kevin Faulconer has pledged to do that by July 2019.
Here’s a breakdown of how the regulations are expected to be enforced, their potential impacts and the roadblocks they could face.
Playing By the Rules
The rules approved Monday stick with the enforcement plans proposed by Faulconer’s team.
Hosts renting out a whole home will need to get a $949 annual license. Once they do, they can rent their home out for up to six months in a year. San Diegans will also be eligible to rent out duplexes and likely granny flats on their property – though the City Council must take a separate vote to formalize those rules.
Home-sharers who remain on site while they host visitors will be required to register with the city, though they will not need to get a license to operate.
All hosts will be required to pay hotel taxes, to post their contact information at their property and to pay nightly affordable housing impact fees. Home-sharers will pay $2.73 a night while those who rent out whole homes must pay $3.96 a night.
The city will set up a 24/7 complaint hotline and online portal, and maintain a database of licensed and registered vacation rentals that will be provided to police. The city also plans to assemble a group of city attorneys, code and police officers to enforce the rules and has proposed hiring 16 new employees to staff that enforcement team and monitor hotel-tax collections.
The Money Questions
Faulconer’s proposal counted on 3,686 hosts seeking annual $949 vacation rental licenses, money his team said would fund enforcement efforts.
That estimate was based on the current number of vacation rental operators who have registered to pay hotel taxes to the city.
But the City Council amended the proposal to make it more restrictive, leaving vacation-rental advocates to question whether the city can count on generating the $3.5 million needed to crack down on problem rentals.
The mayor’s team says the city’s conservative approach to estimating the number of hosts who might pay the fee may protect Faulconer’s regulatory plans.
Last year, San Francisco-based vacation rental data firm Host Compliance estimated that San Diego had 11,347 vacation rentals – far more than the city counted on seeking licenses.
That’s not to say the new rules won’t translate into a major budget hit for the city.
Last year, vacation rentals contributed $19 million in hotel taxes, accounting for nearly 9 percent of the city’s overall transient occupancy tax haul.
The new restrictive regulations could mean a major reduction in hotel taxes coming from vacation rentals, which could force budget cuts.
Development Services Director Elyse Lowe, who crafted the mayor’s proposal, said city officials are unsure how much the changes might affect the budget.
Legal Issues
Vacation rental advocates are already hinting at legal challenges to the new plan.
Share San Diego, a pro-vacation rental group supported by rental operators Airbnb and HomeAway, this week hired former City Attorney Jan Goldsmith to analyze the mayor’s regulatory pitch and the primary residence-only plan pushed by City Council President Pro Tem Barbara Bry.
Goldsmith didn’t directly threaten a lawsuit Monday but told the City Council that a decision to regulate different types of property owners differently could inspire equal protection challenges under the U.S. Constitution. He also argued the state Coastal Commission would likely view the rules unfavorably.
City Attorney Mara Elliott’s office has raised similar concerns but has also said that the City Council can proceed with regulations like those approved Monday if it provides justification for applying different rules to different groups.
Jonah Mechanic, a Share San Diego leader whose company manages hundreds of vacation rentals in the city, said his group is weighing its options.
“Share San Diego has every intention of protecting our owners’ property rights by any means necessary,” Mechanic said.
Mechanic said his group is also examining whether the City Council rules violate the Constitution’s takings clause, which mandates that the government can’t take private property without just compensation.
“The city is now taking away private property rights that it allowed for in the past,” Mechanic said.
The Coastal Impact
Before the new rules can be implemented in the coastal areas most impacted by vacation rentals, they will likely need to pass muster with the Coastal Commission.
The state agency, which regulates developments along the coast, has in recent years aggressively asserted the principle that tourists should have affordable options for stay in places on the coast.
It’s rejected vacation rental rules in other cities it views as too onerous.
In a letter sent to the city last week, a Coastal Commission official said the agency could likely support Faulconer’s original proposal, which was more permissive than the plan ultimately passed by the City Council and would have allowed hosts to rent out up to two properties.
Deborah Lee, the agency’s San Diego district manager, noted that Coastal Commission staff members were particularly supportive of Faulconer’s proposal not to curtail existing rentals in Mission Beach, given “the decades-long population” of vacation rentals there.
But the City Council decided Monday, at the urging of the area City Councilwoman Lorie Zapf, not to exempt Mission Beach from primary residence-only regulations.