Short-Term Rentals Impact on HOAs
Short-term rentals (STRs) are also called vacation rentals. STRs are a big business, and several companies cater to this market and provide online rental services, such as Airbnb, VRBO (Vacation Rental By Owner), HomeAway, FlipKey, TurnKey, TripAdvisor, Booking.com, VacationRentals, 9Flats, HouseTrip, HotelTonight, One Fine Stay, Casamundo, and Homestay, to name a few. Homeowner associations face problems with transient renters, including security issues, rule enforcement challenges, higher maintenance costs, and increased administrative expenses due to the need for greater supervision. To meet the challenge, the Oak Shores Association restricted short-term rentals and imposed a fee on landlords to offset the costs they created. Homeowner/landlord Ken Watts challenged various rules adopted by the association, including:
- A minimum 7-day rental period
- Limits on the number of cars and boats renters could bring into the development
- A garbage collection fee
- Boat fees
- Transfer fees
- A $325 annual fee on landlords who rent their homes (for wear and tear on recreational facilities, roads, and parking lots)
After a lengthy trial, the association prevailed. Mr. Watts appealed and lost. The court's rulings are significant: (i) associations have the right to restrict short-term rentals, (ii) boards can impose a reasonable fee to offset expenses associated with renters, and (iii) courts should defer to boards on decisions related to the maintenance, control, and management of common areas. To read the court's decision, see Watts v. Oak Shores. (Also see Almanor Lakeside Villas v. Carson)
Right to Restrict STRs
30-Day Lease Term. A restriction that rentals cannot be less than 30 days is a limitation on usage, not a prohibition, and has been deemed reasonable by the courts. (Mission Shores v. Pheil) If associations want to restrict or prohibit short-term rentals, they can do so in their rules without amending their CC&Rs. Most associations already have provisions in their CC&Rs that give them the authority they need, such as prohibiting members from using their separate interests for hotel-like operations. Another common restriction prohibits owners from running a business in the development.
Lease Terms Greater Than 30 Days. Beginning January 1, 2021, governing documents that require lease terms greater than 30 days may be unenforceable. (Civ. Code § 4741(f)) Associations with longer lease terms will need to show they do not constitute an "unreasonable restriction" (Civ. Code § 4741(a)) or will need to amend their governing documents to conform to the 30-day standard by no later than December 31, 2021. Failure to amend nonconforming documents by that date could result in a $1,000 fine. (Civ. Code § 4741(f)&(g))
Running a Business. The federal government does not consider a vacation renter a hirer of real property generating residential ‘rents.” Instead, the income is deemed business income. The IRS distinguishes traditional rentals between landlord and tenant from vacation rentals between licensor and licensee. While all homeowners who rent are required to report rental income on Schedule E, “Supplemental Income,” Schedule E itself directs homeowners who provide “significant services to the renter, such as maid service” to Schedule C or C-EZ, “Profit or Loss From Business (Sole Proprietorship).” Most of these short-term rentals offer professional cleaning services, a fully stocked kitchen, complimentary cable and Wi-Fi, toiletries and paper goods, grilling equipment, information on local restaurants and attractions, and other amenities comparable to a hotel. “The occupant [of a vacation rental], in exchange for a fee, is permitted to use the property for a short duration. Whether the property is a large hotel or a three-bedroom, two-bath house is irrelevant. If the occupant pays money in exchange for the ability to stay and sleep for a short time, the occupant is a “transient,” and the property is a “hotel.” (Harrington, Vacation Rentals: Commercial Activity Butting Heads with CC&Rs (2015) 51 Cal. Western L.Rev. 187, 202)
Proof of Lease Term. Associations can require evidence that lease terms are at least 30 days or more. To demonstrate compliance with the restriction, the only relevant information is an executed agreement bearing the names of the parties, the date, the lease term, and signatures. The landlord can redact financial and personal information from the agreement before submitting it to the association.
Coastal Associations
There is a caveat for associations within the jurisdiction of California's Coastal Commission. Amending governing documents to restrict short-term rentals requires approval by the Coastal Commission. "The decision to ban or regulate short-term rentals must be made by the City and Coastal Commission, not a homeowner’s association." (Greenfield v. Mandalay Shores).
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