Managing the Dangers of Corporate-Owned Short Term Rentals to Communities

One of the risks of letting short-term rentals (STRs) operate without regulations or enforcement is that out-of-state landlords can run what is effectively a speculative commercial enterprise at the expense of the community as a whole. When an STR is owned by a limited liability company (LLC) or other corporate entity, many city planners and councilmembers perceive it as a big red flag that the property may not be owned by a local resident, or that the local owner does not reside on premises. When your list of local STR operators includes more corporate entities than people, there may be less personal attachment of those landlords to the neighborhood or greater community, and  a corresponding greater risk that the lives of your residents will be disrupted by their hosting.

The incidence of corporate ownership is not distributed evenly across the country. For the below discussion, a corporate entity is defined to be an LLC, a legal partnership (LP), a Corporation (INC or CORP), or a Trust.  “In the course of its research, Harmari has had the opportunity to measure this factor across the country. The chart below shows corporate ownership in a variety of jurisdictions, and demonstrates that, while many cities have fewer than 15% of their STRs owned by corporate entities, others have over one-third corporate entity ownership rates.

One goal of local STR ordinances is to protect the rights of individual homeowners supplementing income from their properties in a respectful, lawful manner, while also preventing anonymous, corporate-sheltered investors from enriching themselves by skirting the rules everyone else has to follow. City planners have an uphill battle to fight on this issue, because some ordinances that are meant to catch these operators are hard to enforce. Fortunately, some cities have worked out effective and more enforceable ways to track down outside speculators.

Some LLCs Really Are Community Members

If every LLC was an outside speculator, enforcing local ordinances would be much easier, but this is not always the case. Regular homeowners running their own legal STR business may set up an LLC, a Corporation or a Trust to protect their personal assets from liability and gain tax benefits. In fact, Airbnb recommends this for all the hosts on their platform. However, some experts suggest that for many homeowners, the cash flow from renting out a single property would not be enough to cover the cost of the LLC fees, and that having at least $1 million in a commercial liability insurance policy would be enough.

Environments That Discourage Non-Resident STR Owners

A good way to deter speculative and out of state LLC-owned STRs is to set up ordinances that make them more difficult to operate. An effective obstacle is to set up a primary residence requirement. Harmari has found that 34 out of the 100 most populous working/living cities in the US have specifically added language referring to Primary Residency (i.e. Hosted STRs) as the only legally sanctioned way to operate in their City. This automatically eliminates multi-property owners from the pool of STR operators. Although some operators will still find a way to cheat the system, this requirement at least discourages the operators from investing in the extra effort, and a clear violation of the rules makes it easier for the City to take legal action later.

One clear example of the effectiveness of a primary residence requirement is in the comparison between two similar cities: Salem, Massachusetts, and Pittsburgh, Pennsylvania. Both have tourism activity while also being places where residents live and work. The difference is that Pittsburgh doesn’t have a primary residency requirement, while Salem does.  As a result its corporate-ownership rate is nearly one-third higher than that of Salem.

Another strategy is to limit the number of properties an operator can own. As mentioned above, most single-home operators would not generate enough income to make the investment in LLC fees profitable. Seattle, for example, has a one-property limit with a grandfathering rule allowing up to two properties. The more properties an operator owns, however, and the more nights they can legally rent them out, the more affordable LLC licensing becomes in relation to income.

Another strategy is to restrict ownership or operation to a “natural person” in the ordinance.  This is exactly what has been written into the ordinance for Santa Monica, California and Boulder, Colorado, and New Orleans, Louisiana.

Some Cities attempt to prove ownership by requiring a “nights per year threshold” to prove primary residency. In practice, operators have found it easy to create excuses for why they are unable to reside at one location for the minimum number of nights. Some excuses include:

• “I live at my partner’s house for part of the year.”
• “I am a student and go home for the summer/sabbatical/a co-op work term.”
• “I have to travel for work.”

The burden of proof then quickly shifts back to the City to prove otherwise. This is a non-starter in terms of both cost of surveillance and an invasion of privacy of the resident.

A far better standard for proving residency is to require document-based proof, including voter registration, deeds, utility bills, tax returns or driver’s license listing the STR as the owner’s residence.

Recognizing that an enterprising STR operator can falsify such proof, Harmari can go a step further in verifying an owner’s actual primary residence.  In partnership with Linebarger Analytics & Information Services, LLC (LAIS), Harmari offers a data-driven research service that was originally developed to detect homeowners falsely claiming primary or principal residence to claim homestead exemptions and other property tax benefits. The program compares ownership records to a vast catalog of public and private data sources nationwide, to flag owners who are deceased claiming multiple “primary” residences, or living elsewhere while they rent their properties. Those flagged accounts are then hand-researched by a team of non-crowdsourced, specially trained agents, followed up by direct mail and phone inquiries to flesh out the truth. This makes it difficult to circumvent the rules, and shifts the burden of proof back to the host.

Two Examples of Enforcement

Austin, Texas: The City allows non-owner occupied STRs, but they are geographically capped according to each census tract of the city. Their streamlined short-term rentals page states that to run an owner-occupied STR, the ownership information “must match the deed as recorded with the Travis County Clerk’s office or Williamson County Clerk’s office.” The registration form further clarifies that the property must be listed on the deed as a homestead.  Much of the research behind Homestead Exemption Audits is similar to that of Primary Residence Verification, in that if documentation is found that a person lives elsewhere that would invalidate a homestead.

Denver, Colorado: The City’s STRAC (short term rental advisory committee) releases regular Licensing and Enforcement Data updates following their six meetings a year which show their enforcement process with great transparency. Slide six of their most recent release shows disciplinary action taken against non-compliant STRs. Their requirements for obtaining an STR license for leased properties include a possession of property certificate showing the landlord’s approval to use the property as a short-term rental. For homeowners, the requirements are a Colorado driver’s license or Colorado State ID showing the applicant’s name and address and two of the following: proof of valid motor vehicle registration, proof of voter registration, Federal or state tax returns or other financial documentation, or a utility bill showing the applicant’s address. Non-primary residences are ineligible.

The more time city planners and council members can devote to clarifying effective requirements and enforcing them, the more control they will have over covert commercial enterprises associated with LLC owned properties that may try to disrupt their communities.

Contact us to learn more about Primary Residence Verification, Ordinance/Bylaw Consulting, and Short Term Rental enforcement solutions.