July 10 2018 Council Item - Short Term Rentals In San Bruno

Article Source: City of San Bruno CA

DATE: July 10, 2018

TO: Honorable Mayor and Members of the City Council

FROM: Marc Zafferano, City Attorney

SUBJECT: Receive Report and Provide Direction to Staff Regarding Short Term Residential

Rentals

BACKGROUND:

Over the past several years, cities have experienced growth in the use of residential properties as short term rentals (STR5), generally defined as rentals of rooms or homes for less than 30 days, advertised on platforms such as Airbnb and HomeAway. Using these online platforms, "guests" can rent rooms or entire houses from "hosts" on a shod-term basis in neighborhoods throughout the City, with no clear mechanism for the City to proactively identify these properties, regulate their use, or collect applicable permit fees and taxes. While STRs can provide a source of income to property owners, they can also create neighborhood concerns. This report examines the City's current regulations, evaluates the alternatives, and requests direction from the City Council.

Current City Zoning and Permittina Requlations

The City's zoning ordinance, which was adopted in the 1980s, defines a "hotel" as containing "six or more guest rooms" and "necessary off-street parking" (12.80.260).A "boardinghouse" is a "dwelling other than a hotel where lodging and meals for three or more persons are provided for compensation" (12.80.085). A "roominghouse" is "a dwelling other than a hotel where lodging is provided or three or more persons for compensation" (3.04.220). A "family" is "one or more persons occupying a premises and living as a single housekeeping unit as distinguished from a hotel... rooming house or boarding house..." (12.80,220). A "housekeeping unit" is a "single living unit, consisting of a room or suite or combination of rooms, providing complete, independent living facilities for one or more persons, including permanent provisions for living, sleeping, eating, cooking, and sanitation" (12.80.265).

Hotels are not permitted in residential zoning districts. Boardinghouses and roominghouses are permitted in R-3 (medium density) and R-4 (high density) residential districts with a conditional use permit. Individuals could therefore rent up to five bedrooms in a R-3 or R-4 district with a use permit, or up to two bedrooms in a R-1 district, under the City's current zoning ordinances.

Renting rooms in one's home could be considered to be a "home occupation" and therefore subject to the City's home occupation ordinance, which requires a permit issued by the Planning Director (12.84.130). However, the home occupation ordinance was not primarily designed to identify and regulate room rentals. Moreover, the ordinance is difficult to proactively implement and enforce by code enforcement staff because doing so requires obtaining the consent of property owners or tenants to investigate activities occurring inside their homes.

Current City Tax Regulations

In contrast to zoning ordinances, tax ordinances are not regulatory, but have instead been adopted solely to collect revenue. There are two City tax ordinances that could be extended to STRs.

The City's business license tax ordinance requires that all businesses obtain a license to conduct business in the City. For businesses whose annual gross receipts are less than $75,000, the tax is $75, or a rate of .1%. This ordinance does not contain a mechanism to identify individuals who are renting rooms in their homes using online platforms, nor would it be expected to generate significant revenue from STRs.

The City's transient occupancy tax (TOT) ordinance requires "hotels and motels" with six or more guest rooms to collect a 12% tax from all individuals who rent rooms in those facilities for 30 consecutive days or less. This ordinance was not designed to collect revenue from individuals who rent rooms in their homes, nor does it currently require online platforms to identify these individuals or collect TOT from them.

Summary Information about STRs in San Bruno

The City uses Muni Services, a statewide consulting firm, to assist staff with identifying and collecting taxes and revenue owed to the City. In preparation for this report, staff engaged Muni Services to identify STRs in San Bruno on all online platforms. Of the approximately 14,000 dwelling units in the City, a preliminary review has identified about 50 unique STIR listings at the current time, comprising 79 total rooms for rent and 15 houses for rent, located throughout the City. The daily average room rental rate is about $102, and the daily average house rental rate is $262.

Since 2014, code enforcement staff has identified two complaints that were specifically associated with a STIR. The issues included more than two rooms being rented out, individuals coming and going late at night, and noise. Both matters have been closed.

DISCUSSION:

The widespread and persistent emergence of STRs presents several policy issues. Property owners and residents have gained the potential to increase their personal incomes by renting rooms in their homes using convenient and well-known online platforms. Alternatively, some property owners rent out their entire house as a STIR. On the other hand, STRs may potentially create increased disturbances and parking impacts in some residential neighborhoods and reduce housing stock for long term residential use, while making it difficult to collect business license tax and TOT due the City.

Court decisions have held that cities can legally regulate or even prohibit STRs as a land use matter, on the basis of preserving the single-family residential character of neighborhoods.

However, the equal protection clause of the U.S. constitution prohibits cities from treating a group of unrelated individuals living together differently from a more traditionally-defined group of related "family" members. Ordinances that solely regulate the behavior of STIR guests, as opposed to the behavior of other neighborhood residents, are difficult to defend. One case found no rational basis to distinguish between overcrowded homes that were owner-occupied, and overcrowded homes filled with tenants, as both created the same impacts that the City was attempting to mitigate. The court said: "In general, zoning ordinances are much less suspect when they focus on the use than when they command inquiry into who are the users."

Another important regulatory constraint is the Communications Decency Act (CDA), a 1996 federal law enacted to shield website operators from an obligation to screen user content. SIR online platforms have successfully argued in litigation involving San Francisco, Anaheim, and Santa Monica that the CDA prohibits cities from requiring them to screen and verify that their listings comply with city ordinances.

Some cities have attempted to require online STIR platforms to share their data about hosts and guests. Under a 1986 federal law, the Stored Communications Act (SCA), providers of remote computing services or electronic communications services "shall not knowingly divulge a record or other information pertaining to a subscriber or customer of such service.. .to any government entity" without a subpoena or other legal process. The SCA forces cities to engage in potentially costly and time-consuming ongoing identification of, and communications with individual property owners to verify and gain compliance with both regulatory and tax ordinances.

The City Council may consider a number of objectives when deciding whether, and how to regulate STRs. Those objectives could include City recovery of administrative and enforcement costs, revenue generation by the City, protection of neighborhood character (parking, noise), the ability of property owners to supplement their income, and avoiding the loss of long-term and/or affordable housing stock.

Keeping these objectives in mind, cities can regulate transitory lodgings by doing the following:

• Prohibiting them completely.
• Adopting one or more of the following regulations:

• Quantitative (cap on number; ratio compared to long-term residential properties; maximum percentage cap) citywide, by street, or by zone;
• Concentration (minimum distance, supported by planning studies);
• Operational (occupancy caps based on room count, square footage, lot size or off-street parking);
• Rental period (minimum rental period; maximum number of consecutive rental periods; minimum time period between consecutive rentals; maximum number of consecutive rental periods in a given timeframe; maximum number of total rental days per year);
• Owner occupancy (owner presence; owner's primary dwelling; contact information);
• Permitting (registration; use permit issued by staff or Planning Commission);
• Home occupation (compliance with existing ordinance, as modified to address specific issues).

A recent joint issue of the California Real Property Law Journal and the Public Law Journal provided the following advice about regulating SIRs:

"Transitory lodging regulations are notoriously difficult to enforce due to the difficulty of obtaining information and evidence to prove violations of the regulations. Vacation-rental websites usually hide addresses behind paywalls, so absent litigation, a city is often left with its own enforcement efforts to prove a violation. It can be difficult to track the comings and goings of guests to show that a minimum rental period or that a maximum number of rental periods was violated."

Cities have taken different approaches to striking the balance between regulation, permitting, and enforcement. These approaches are informed by planning studies of the various residential neighborhoods within each city where the SIRs are located. If the City Council desires to regulate STR5, staff will need to study the data provided by Muni Services, examine the approaches taken by a variety of cities, and return with recommended regulations tailored to San Bruno's unique circumstances.

Cities that have opted to allow and regulate STRs have also determined that they should collect TOT at their usual rate (San Bruno's is currently 12%) from either the property owners or the online platforms. Collecting TOT from property owners requires establishing a permitting system to initially identify the STRs and then monitor them for compliance. Some cities use an outside consultant to perform these tasks. Whether a consultant or staff performs these functions, cities can charge a permit fee to recover the costs of compliance and enforcement. Collecting TOT from the online platforms would require the City Council to amend the City's ordinance to impose a legal obligation on the online platforms to collect and remit the tax, However, as noted above, cities have very limited legal rights to obtain information about guests and hosts form the online platforms, and therefore no clear way to ensure that the online platforms are fully complying. Some cities have entered into a "Voluntary Collection Agreement" (VCA) with Airbnb, which requires Airbnb to remit "all TOT collected from guests" directly to the cities. These agreements allow cities to audit once every four years using "anonymized transaction data" in lieu of personally identifiable information, but the cities must waive any back taxes that might have been owed.

Neither alternative is ideal. Collecting directly from property owners imposes a substantial resource burden on staff, and requires cities to actively monitor property owner compliance and take enforcement action against those who do not comply. Entering into a VCA eliminates these resource burdens, but requires cities to cities to trust that the online platforms are fully reporting revenues, with limited audit rights to verify compliance. Examples abound from across the state of both approaches: for example, the County of San Mateo has recently chosen to collect directly from property owners and is still working on implementing that decision; San Luis Obispo uses a simplified 'Home Stay" permit issued by the city costing $836 to register STRs and track payment of TOT; Redwood City has chosen a VCA with Airbnb and will begin receiving TOT as of August 1, 2018. Currently, only Airbnb is offering cities a VCA; other online platforms are not. Virtually all of the San Bruno listings are listed on Airbnb, though many of those are also listed on alternative sites.

According to Muni Services, it is difficult to accurately forecast the potential TOT revenue that the City could realize from either alternative. Given the current set of listings, and assuming a relatively optimistic occupancy rate of 40% and a 100% collection rate, the City could receive about $210,000 per year.

In summary, staff requests direction regarding whether the City should prohibit or regulate STRs; if the latter, what types of regulations should be considered, and which approach the City Council favors for cost recovery and collection of TOT. Based on this direction, staff can obtain additional information, such as host compliance rates from other cities that have implemented similar approaches.

FISCAL IMPACT:

There is no fiscal impact at this time. If the City Council were to authorize some form of STIR regulation, staff will calculate estimated costs for enforcement and net revenues accordingly.

ALTERNATIVES:

1. Direct staff to return with additional specific information before providing direction

RECOMMENDATION:

Receive Report and Provide Direction to Staff Regarding Short Term Residential Rentals

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FULL Council Agenda Packet WITH Staff Reports can be viewed and downloaded from:

https://sanbruno.ca.gov/gov/elected_officials/city_council_minutes_n_agendas.htm

This document should be available late Friday before the Tuesday Council Meeting

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Robert Riechel

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