Enforcement of vacation rental regulations would restore balance

The Honolulu City Council is set to take up the short term rentals (STRs) issue again tomorrow with new drafts of Bills 85 and 89. Whichever bill ends up being prefered, it is imperative that the council include strong enforcement mechanisms in any city ordinance it chooses to pass. This post covers what those regulations should look like, and why they’re so critical.

To provide adequate housing for our residents today and our keiki tomorrow, the City and County of Honolulu must have the capability to enforce regulations aimed at balancing the the dire need for long-term housing stock, the concerns of destination communities experiencing extreme increases in STRs, and the need for some residents to earn additional income hosting STRs.

While regulations already exist, the nature of the disruptive technology now used to facilitate the short-term rental of units has made enforcement of these regulations all but impossible for county authorities. In short, our enforcement system is out of date and incapable of regulating this new sector of the tourism industry. The result is an imbalance.

“More than 1 out of every 20 housing units statewide is now offered as a vacation rental. In some communities, as many as 4 out of every 10 housing units have been converted into STRs.”

Don’t STRs Help the Economy?

The short answer is no, at least not for most people. The primary argument employed by proponents of STR expansion—that vacation rentals have become a pillar of Hawai‘i’s economy, or, put more simply, that “visitors = jobs”—is dubious at best. Several high-quality studies call into question the economic benefits supposedly associated with the vacation rental industry.

The City and County of San Francisco’s Office of Economic Analysis concluded that for every housing unit that is converted from a long-term rental into a short-term rental, the City and County actually suffers a net negative economic impact—the economic cost of removing housing from the long-term market, estimated at $250,000–$300,000 per unit, outweighs “the total economic benefit” produced by short-term rental activity.

A recent study by the nonpartisan Economic Policy Institute (EPI) reached the same conclusion. According to EPI, not only are the tourism-related benefits of STR proliferation vastly overstated, but those who do benefit from vacation rentals—namely, property owners—are “disproportionately white and high-wealth households.”

The solution is an update to our county ordinances to give regulators the ability to enforce our laws and find the right balance. Bill 85 includes many of the enforcement mechanisms that we identified in our Fall 2018 report, Priced out of Paradise, which analyzed best practices from destination cities across North America and Europe that have been struggling with much the same situation as we have here in the islands.

Bill 89, as it currently stands, incorporates many of these same mechanisms, while allowing for a limited increase in Bed & Breakfast-style STRs only (owner-occupied, not whole-home). Whichever bill ends up being prefered, it is imperative that the following enforcement mechanisms are codified as ordinance.

Platform Liability

Under platform liability, enforcement teams hold STR platforms, such as Airbnb, HomeAway, VRBO, FlipKey, etc., accountable for facilitating and profiting from illegal transactions. The idea is that making these powerful companies financially liable for advertising unpermitted rentals and connecting them with customers will create a strong incentive for them to police their own platforms and purge them of illegal rentals. Without its platform, the illegal rental will have no profitable means to continue operating.

If the platforms are regulating themselves in order to avoid hefty fines, this greatly limits the need for inefficient and ineffective on-site investigations of individual hosts. Platform liability streamlines the regulatory process and allows for effective and efficient enforcement by agencies with limited resources.

Platform liability has already been instituted in several jurisdictions in California, with great success. In the eight months after the policy went into effect, the number of STR listings in San Francisco decreased by almost 70 percent, from approximately 10,000 STRs to 3,500, according to a brief for the City and County of San Francisco et al. for Amici Curiae Supporting Defendant-Appellee, Homeaway, Inc. v. City of Santa Monica, June 14, 2018.

(Appleseed confirmed this in a telephone interview with Omar Masry, Senior Analyst for the City & County of San Francisco Office of Short Term Rentals, conducted on June 28, 2018.)

The platform liability provision in both Bill 85 and Bill 89 is specifically tailored to comply with the most recent court rulings on the subject. Most importantly, a nearly identical provision was recently upheld by the Court of Appeals for the Ninth Circuit, whose precedent is binding on Hawai‘i courts. This provision must be included in any regulatory plan approved by the council if enforcement is to be made effective.

Platform Transparency

Platform transparency provisions require the platforms to share their data with the city’s enforcement team. Currently, hosting platforms effectively shield illegal activity from scrutiny by refusing to share data necessary for prosecution.

“Together, the platform regulations set out in the CD2s of both bills—platform liability and platform transparency—represent the cornerstone of an effective enforcement regime.”

The platform transparency provision in both Bill 85 and Bill 89 would require the platforms to provide the Honolulu Department of Planning and Permitting (DPP) with detailed information pertaining to listings within the City and County.

Like the platform liability provision, the transparency provision is specifically tailored to comply with the most recent court rulings on the subject. Crucially, the provision is distinguishable in key respects from the law that was recently struck down in New York. The provision should also be included in any regulatory plan approved by the council.

Together, the platform regulations set out in the CD2s of both bills—platform liability and platform transparency—represent the cornerstone of an effective enforcement regime.

Limited Permitting, Enforcement First

The current draft of Bill 89 that was approved by the Committee on Planning would not allow for additional Transient Vacation Unit (TVU) permits. The vast majority of STRs currently operating in Hawaiʻi are TVUs—whole-home rentals for which the “host” does not live on-property.

These operations run directly counter to the spirit of home sharing—they are, for all intents and purposes, illicit hotels. In terms of the affordable housing crisis, it is these whole-home rentals that are the real problem. Allowing whole-home rentals incentivizes out-of-state investors and corporations to snap up large segments of our housing stock for the sole purpose of turning enormous profits on the short-term rental market.

Prohibiting this practice (and providing county authorities with workable enforcement tools) would return thousands of much-needed units to the long-term rental market and help ensure that those short-term units that are permitted comply with the stated intention of home sharing.

The draft does provide for the issuance of new bed and breakfast (B&B) permits, but only in a number equal to “one half of one percent of the total number of dwelling units [per] development plan area.” This is a vast improvement over earlier versions of Bill 89, which contemplated double the number of permits—far too many based on the housing needs and quality-of-life concerns of our residents.

O‘ahu residents deserve a firm commitment on the number of units that will be permitted and a thoughtful explanation of the reasoning behind this number. The devil is in the details, and implementing a sound enforcement strategy while simultaneously legalizing the majority of previously unlawful STRs would be a hollow victory.

This development plan area cap on B&B permits should be preserved. Furthermore, new permits should be issued only after the City and County proves capable of enforcing the law using these new tools. During the initial enforcement period, enforcement efforts could focus on large-scale commercial operators, who are the primary drivers of short-term rental expansion.

Neighbor Empowerment

Oftentimes, affected neighbors constitute an enforcement agency’s greatest allies in the effort to halt illegal activity. Those who have seen their own quality of life decline because of a vacation rental takeover in their neighborhood are generally eager to help solve the problem.

As much as possible, neighbors should be involved in enforcement efforts. Public hotlines and participatory permitting, complaint, and adjudication processes are tried-and-true tools. By soliciting help from the community, officials ease their own enforcement burden and make sure that the concerns of residents are taken into account.

New drafts of Bill 85 and Bill 89 submitted by Councilmembers Menor and Manahan contain strong neighbor empowerment provisions, which should be included in any regulatory plan approved by the council. In addition, neighbors should have a meaningful opportunity to oppose the issuance of an STR permit, as suggested in the draft of Bill 89 submitted by Councilmember Elefante.

Funding

The new drafts of Bills 85 and 89 contain language affirming that fines and fees related to STRs will be used for future STR enforcement efforts. The creation of such a sustainable funding source is essential to the long-term viability of the City and County’s approach to STRs.

Ban on STRs in Inappropriate Housing Types

The preservation of housing units explicitly designated for low- or moderate-income people (i.e., income-restricted units and units subject to housing or rental assistance) are especially critical for our most vulnerable residents. Vacation rental operation should be flatly prohibited in these types of units, as well as units that have recently been the subject of an eviction—it is important to discourage landlords from evicting long-term tenants in order to convert their properties into short-term rentals. Bills 85 and 89 each contain this important protection.

Geographic Distribution

Bill 89 was further improved by a provision establishing STR quotas for each residential area. By requiring the diversification of permits on the neighborhood level, this provision would ensure that permits are distributed equitably, and that high concentrations of units do not plague particular communities. Good policy requires limits not only on the overall number of permitted units in a city, county, or district, but also limits on the number of permitted units in sub-areas.

Expanded Definition of “Advertising”

The DPP has indicated that its enforcement efforts would be significantly aided by a regulation prohibiting not only short-term rentals themselves, but also advertisements for those rentals. Accordingly, both Bill 85 and Bill 89 contain such a provision. The new drafts go a step further by explicitly prohibiting all forms of STR solicitation, including verbal and electronic communications. This expanded definition of “advertising” closes potential loopholes before they can be exploited, and it should be included in any regulatory plan approved by the Council.

Prohibition of Fake 30-day Leases

Community advocates have identified a troubling trend: hosting platforms and STR operators draw up leases pretending to rent housing units for 30 days or more, as is law, thereby evading short-term rental regulation. But, in follow-up communications with the lessees (virtually always tourists), these hosts make it clear that the actual period of occupancy will be less than 30 days.

If duplicated on a large scale, this tactic could seriously undermine enforcement efforts. The proposed drafts of Bills 85 and 89 submitted by Councilmembers Menor and Manahan contain a provision explicitly prohibiting these fake 30-day leases, which are used to circumvent the law.

What’s At Stake?

We are in the midst of a decades-long housing and homelessness crisis. We face a fundamental question: should Hawaiʻi be a home for its people? Or should it be a playground for wealthy investors and their beneficiaries?

If we believe that it should be a home for its people, then it is critical that the final product of this legislative process include these enforcement tools. A balance can be achieved, but the council must act to preserve vital housing stock and protect our communities, while allowing for some genuine home-sharing that gives homeowners an opportunity to afford to stay in Hawaiʻi.

The consequences of the decision facing the council may be dire: without limiting STRs and implementing effective enforcement measures, our keiki and many of our low- and moderate-income residents will continue to be priced out of available housing, winding up on the streets or forced to leave entirely.