Navigating the Legalities, Pros, and Cons of Short-Term Rentals

Growth of Short-Term Rental Industry.

Since 1995, the short-term rental industry has grown enormously with the launching of short-term rental companies such as Vrbo in 1995, Airbnb in 2008, and HomeToGo in 2014. Specifically, a 2022 National Business Institute article stated that by 2019, the U.S. short-term rental industry had grown to a $115 Billion annual industry. [1] Moreover, by 2020, the short-term rental industry, through which people listed their homes for short-term rental periods, which usually are for periods of less than thirty (30) days, exploded to the point where Airbnb reported a profit of $219 Million in the third quarter of 2020 and then the company had its initial public offering shortly after that. [2]

Despite the wide range of pros and cons asserted by proponents and opponents of short-term rentals, all recent evidence indicates that the short-term rental industry is here to stay permanently. In addition, in many places, including without limitation, in the State of New York and many cities, including most significantly, in New York City and also in a number of cities in the State of Florida and many other counties and municipalities throughout the United States, the applicable governing governmental agencies have been in the process of considering how to best respond to and regulate the short-term rental industry within their applicable jurisdictions. Therefore, even if a person vehemently opposes any sort of governmental control over short-term rentals and desires to challenge a specific short-term rental law, ban, regulation, statute, or ordinance’s legality under the U.S. Constitution (as described below), such individual must carefully navigate the applicable layers of state, county and local laws, bans, statutes, and ordinances where an applicable short-term rental property is located.

Pros of Short-Term Rentals.

Since its inception, there have been proponents and opponents of the policies underlying the legality of short-term rentals. On the pro side of short-term rentals are those opposed to any governmental ban and argue that any type of governmental ban is inappropriate, violates property rights, and may prevent the use of one’s private real estate property as one wishes. In addition, proponents of short-term rentals state that the portion of the rent received by a renter on the renter’s private rental property can be used to pay off mortgage debt on the applicable rental property. [3] Moreover, a portion of the rent received can be used by the owner of the rental property to pay for home improvements and maintenance to the rental property, which benefits not just the attractiveness and value of the rental property but that of the entire neighborhood where the rental property is located. Also, proponents of short-term leasing argue that governmental bans and other actions would make it less attractive for people to invest and re-develop in areas that need such investment and development. [4] Finally, such proponents argue that the rents paid under such short-term leases can be taxed by state and local governmental authorities to benefit the public’s good and welfare.

Cons of Short-Term Rentals.

In contrast, opponents of short-term rentals argue that the flow of transient vacationers and short-term guests staying in short-term rental properties will jeopardize the quietness of the neighborhood through increased crime, violations of noise ordinances by visitors, and declining maintenance of the properties, etc. However, a proponent of short-term rentals would counter such an argument by saying that in a typical residential area, neither the neighbors nor the town have any approval rights over to whom a rental property is rented. Moreover, such opponents argue that short-term rentals should not be allowed because they decrease property values due to transient persons staying at the applicable short-term rental property. Also, such opponents argue that each such short-term rental property further reduces the availability of affordable housing.

Constitutional Challenges Brought Against Short-Term Rentals.

In the past, opponents of bans on short-term rentals have argued that any governmental bans, rules, regulations, ordinances, laws, and statutes constitute an inverse taking under the 5th and 14th Amendments to the U.S. Constitution. This opposition is because precluding short-term rentals constitutes the taking of a private property right without utilizing the condemnation process; and, therefore, without the payment of just compensation to the property owner of the short-term rental property.

There have been a number of courts throughout the country that have reviewed restrictions on short-term rentals and evaluated whether such restrictions are unconstitutional. States, cities, counties, and municipalities have attempted to regulate short-term rentals in several different manners. Specifically, the types of regulations, rules, statutes, and ordinances that states, counties, cities, and municipalities have passed concerning short-term rentals and the applicable short-term leases fall into four (4) categories: (i) full prohibitions of short-term rentals; (ii) quantitative restrictions (as to the number of people, rooms and number of permits issued); (iii) proximity restrictions (how far one short-term rental property can be located with respect to another short-term rental property) and (iv) operational restrictions and (v) licensing requirements to obtain a permit (i.e., regulations in Lake Placid, New York regulate off-street parking and septic systems).

New York.

The State of New York has had an ongoing battle with Airbnb since Airbnb’s inception in 2008. In 2013, the Attorney General of the State of New York, in connection with Airbnb, stated that under the New York Multiple Dwelling Law, multiple dwelling units can only be occupied by permanent occupants who reside in the unit thirty (30) or more days. [5] Also, the New York Multiple Dwelling Law bars un-hosted rentals of less than thirty (30) days; and, therefore, if the rental is less than thirty (30) days, the owner needs to be present the entire rental period. The New York Multiple Dwelling Law is enforced in New York City by the Mayor’s Office of Special Enforcement (the “OSE”). [6] The OSE can impose penalties for violations of the New York Multiple Dwelling Law starting at $2,500.00 per day. [7] New York City has also obtained court orders barring building owners from engaging in prohibited short-term rentals.

The types of laws that have been passed in the State of New York which have withstood U.S. Constitutional challenges involve: (a) a cap on the number of rental-property licenses; (b) a limit on the maximum overnight occupancy of short-term rental properties and/or limit on the number of bedrooms and (c) a limit on the time a short-term rental property can be rented per year.

In 2014, the New York Attorney General reported that seventy-two (72) percent of Airbnb listings used as private short-term rentals violated the New York Multiple Dwelling Law. [8] In the Matter of Wallace v. Town of Grand Island, the Fourth Department ruled that specific regulations adopted by the Town of Grand Island did not effect a regulatory taking of real property for which just compensation was owed. [9] The court found that the plaintiff, in this case, did not provide financial evidence of damages and that “the subject premises was not capable of producing a reasonable return on his (plaintiff’s) investment or that it was not adaptable to other suitable private use” (Memorandum and Order at page 3). Moreover, the court emphasized that the plaintiff could still sell the premises privately or rent on long-term basis. Id. Finally, the court stated that even if a taking, relief shall be a hearing on just compensation, not a challenge of law. Id.

Florida.

With respect to Florida, in 2018, The Goldwater Institute filed a lawsuit on behalf of Natalie Nichols, an individual, titled Natalie Nichols v. City of Miami Beach, Florida, et. al. (“Nichols”) . [10] In Nichols, Natalie Nichols owned two (2) rental properties which she had previously rented out on a short-term rental basis. [11] In the City of Miami Beach, Florida, short-term rentals are defined as less than six (6) months and one (1) day or prohibited in family homes and other multi-family homes and other multi-family residential buildings located in certain areas of the city. [12] In Nichols, at issue was a law in the City of Miami Beach, Florida that fined homeowners up to $20,000 for a first offense and up to $100,000 for a fifth and subsequent offense. The court found that the fines of $20,000 up to $100,000 conflicted with Florida State law which caps fines for code violations at $1,000 per day for the first infraction and $5,000 per day for repeat infractions; and, therefore, ruled against the City of Miami Beach’s short-term rental law. [13] In Nichols, the court balanced the homeowner’s rights to a peaceful, undisturbed life versus the rights of homeowners to gain monetary value from their rental property. [14]

In July 2019, the Third District Court of Appeals agreed with the lower court’s ruling in Nichols that the fines violating the City of Miami Beach’s law were improper. Notwithstanding such a ruling, the City of Miami Beach, Florida, continued to enforce the short-term rental law and the levying of fines. Finally, in 2019, the City of Miami Beach, Florida and Airbnb entered into an agreement under which the City of Miami Beach, Florida can enforce the short-term rental law and Airbnb agreed to include business tax receipt numbers on all Airbnb listings in the City of Miami Beach, Florida. As a result, Airbnb and Vrbo collect Miami-Dade County, Florida lodging taxes but do not collect the City of Miami Beach taxes which are required to be collected by the host.

Other Jurisdictions.

In addition to New York City, New York State, and a number of cities in Florida, other jurisdictions such as the Cities of Jersey City, Washington D.C., Boston, San Francisco, Los Angeles, Las Vegas, Chicago, and Honolulu all have imposed restrictions on short-term rentals.

Wrap-up.

Based on legal trends in the U.S. today, if a real estate property owner wishes to use such real property for short-term rentals, the owner should retain a real estate lawyer to guide them through the myriad of State and local laws, regulations, ordinances, rules, and statutes that have been enacted to permit or limit short-term rentals. Also, such retained lawyer can advise on the pertinent restrictions in the subject community and whether or not such restrictions are ripe for legal challenges based on the U.S. Constitution.

This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

Unless expressly provided, this alert does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.

1. NBI, Inc., Airbnb, VRBO and Short-Term Lease Agreements: What You Must Know!. 2022.
2. Id.
3. https://www.coastalbreezenews.com/news/city/short-term-rental-discussion-yields-no-resolution-or-plan/article_3842a1de-9509-11ec-a891-471a13c04e79.html
4. Id.
5. N.Y. Mult. Dwell. Law § 4 (McKinney)
6. https://www.1.NYC.gov
7. Id.
8. https://www.bloomberg.com/news/articles/2014-10-16/airbnb-new-york-rentals-are-72-percent-illegal-and-other-new-numbers
9. In The Matter of Glenn H. Wallace, Petitioner, Appellant v. Town of Grand Island, Town Board of Town of Grand Island and Zoning Board of Appeals of Town of Grand Island, Respondents, No. CA 19-00925, 2019 WL 7043147 (N.Y. App. Div. Dec. 18, 2019)
10. Natalie Nichols, Plaintiff v. City of Miami Beach, Florida, Defendant, No. 2018-21933 CA (22), 2019 WL 10371277 (Fla. Cir. Ct. Oct. 08, 2019)
11. https://www.natlawreview.com/article/florida-zoning-appeals-law-miami-beach-ban-short-term-rentals-ruled-illegal
12. Id.
13. Id.
14. Id.