Whether its people coming to Colorado for skiing, for its craft brewing (Denver’s No. 3 in the nation in a new survey of America’s top 20 craft spirits tourism destinations) or to enjoy the benefits of legal marijuana (Marijuana businesses have long proclaimed that cannabis is drawing visitors to Colorado), visitors are flocking to Colorado. The Colorado Tourism Office reported that 77.7 million visitors to the state in 2015 spent an all-time high of $19.1 billion, generating $1.13 billion in state and local taxes, an increase of almost 7 percent from 2014.
Where Did This Short Term Rental Phenomena Come From?
Today’s traveling experience and options have changed dramatically over the last five years. It was not long ago when most of us thought that low cost, no-frills airlines were quite the unseen disrupter to the travel industry. Although this change did disrupt the air travel industry, the only physical impact was seen at airports. However, the recent disruptions caused by the explosion of the new entrants into the Short-Term Rental (STRs) market is physically being felt right next door and causing problems with HOA.
As tourists to Colorado turn to STRs, this is presenting a significant challenge to those people who volunteer to serve on their HOA and the managers who provide day-to-day management on their behalf. These institutions were not designed with governing their association based on the issues connected with hotel-like lodging transactions in private residential communities. This type of transaction within the HOA community can present security and privacy concerns, as well as constitute violations of a community’s governing documents.
If you live in the Denver area or Colorado generally, you live in an area that is attractive to tourists. Has your HOA board taken up the issue of how it is going to handle the Short Term Rental phenomenon and what it might mean in the coming years. Sites like Airbnb, Vacation Rentals by Owner (VRBO), FlipKey, HomeAway, and Roomorama tout the fact that they are innovators in online vacation property rentals and market that their strengths lie in their community-based approaches.
All of these visitors need accommodations for their overnight stays. More and more are turning to using alternatives other than hotels, motels and such. The emerging alternative that many visitors are choosing to use are short term rentals (STRs) offered by private property owners. For those private property owners whose residence is a stand alone, depending on what governmental entity it is located, they are generally free to do what they want. Some local governments have adopted local ordinances governing STR rentals (Denver has a specific policy). However, for property owners in which the property is located in area with a Homeowners Association (HOA), such short term rentals may be prohibited or may be governed by a set of specific rules. If you live in a HOA governed community you need to learn how your governing board is dealing with this growing accommodation choice. You may want to consult an HOA attorney.
While private citizens in your HOA may be celebrating their newfound ability to monetize their real estate assets they already own, HOA boards need to quickly figure out whether or not their existing document restrictions on rentals are sufficient to govern the growing tide of owners utilizing short term rental services like Airbnb.
Trends In The STR Rental Market
A recent study by the American Hotel & Lodging Association tracked Airbnb data from October 2014 through September 2015 in 14 major metro areas. This study revealed that South Florida joined Los Angeles, New York, and San Francisco as the areas with the largest number of full-time Airbnb operators. In 2015, 87,000 people visited Miami with Airbnb and stayed an aver- age of 4.8 nights according to Airbnb spokesman, Christopher Nulty. The typical Airbnb host made $6,400 sharing their unit or home over 42 nights of the year.
For Colorado property owners, the findings of an additional study of the Phoenix yields information that may be insightful. A study commissioned by the American Hotel & Lodging Association and conducted by the Pennsylvania State University School of Hospitality Management shows that 85% of Airbnb operators in Phoenix rent properties for more than 30 days a year.
Moreover, as a property owner in a community governed by an HOA, the findings of a new study backed by a hotel industry group says many Airbnb listings are more like de facto hotels that can evade hospitality regulations, giving them an unfair advantage over traditional hotel and bed-and-breakfast operators.
The report, funded by the American Hotel and Lodging Association (AHLA) and conducted by the hotels division of CBRE, claims that 81 percent of Airbnb’s $4.6 billion in U.S. revenue comes from whole-unit rentals, where the owner is not present during the guest’s stay.
If you live in a condominium, cooperative, or planned development, your use of your property is governed by deed-like restrictions commonly called covenants, conditions and restrictions (CC&Rs) or bylaws. These may bar short-term rentals entirely, or subject them to restrictions. Unlike zoning laws or local ordinances, CC&Rs are enforced by the homeowners’ association or coop board, which may impose fines on violators and place liens on the property to collect them.
There are five categories of Airbnb hosts: full-time operators who rent out their units 360 days or more per year; multi-unit operators who rent out two or more units; variable operators who rent out multiple units 360 days or more per year, mega operators who rent out three or more units; and occasional operators who rent out their units randomly, usually in connection with a local event such as the Skiing World Championships, National Western Stock Show, Great American Beer Festival, Cherry Creek Arts Festival, etc.
What Existing HOA Policies May Apply to STRs?
If either you or your HOA governing board finds out that one of your property owners has listed their property on one of these STR sites, you need to figure out if the existing HOA law and governing policy prohibits or restricts such rentals. What are the typical restrictions that most HOA’s have that could restrict this type of rental activity. There are three general areas that usually address this type of issue. They are:
Restrictions on Guests and their Occupancy in a Unit – STR customers would usually be construed as guests/temporary occupants in a community, but the typical guest/occupancy restriction requires that guests and occupants be screened, which is not easy to do when you have a customer arriving on a Friday and leaving the following Monday.
Rental restrictions – Most HOA’s have very detailed policies and procedures regarding what constitutes leasing of properties. These include what the terms are for minimum and maximum length of the lease. In the case of a STR, the exchange of money for the use of a residence does not easily fit within the typical example of a lease agreement but is more akin to a hotel lodging transaction. Even more problematic is that the guest occupancy is usually so brief that the violation is moot before the association can attain a successful result in arbitration in the case of a condominium or cooperative or in court in the case of an HOA.
Nuisance restrictions – In this modern era of all kinds of motorized vehicles, satellite transmission and the urban farming phenomena of raising chickens, almost every HOA has provisions defining nuisance activity. These provisions may be fairly generic with little specificity when it comes to STRs.
Property owners in HOAs need to be concerned with how STR usage affects their quiet enjoyment of their property or increases the rate of insurance in the community overall. Again, the biggest issue with relying on the nuisance provision to limit or prohibit STR activity overall is that the lodgers have typically vacated the property before an enforcement action can be completed and, in many cases, even commenced. For HOA boards and managers, it is important to discuss this activity and decide on a course of action well before the Airbnb customers show up in your community.
What Options Do You and Your HOA Have Regardig STRs?
Gathering information at time of unit purchase – With the findings from recent studies that STR host operators often own and rent out more than one unit, one way for a HOA to start managing the trend is to update their purchase applications to inquire if the potential purchaser currently or has previously listed property on an Airbnb or similar site within the last 24 months. Associations may also want to prohibit multiple ownership of units in the community as once an operator successfully rents out one property it is much more convenient to rent out a second or third property inside the same community.
Address the issue of STR rentals – Of greatest importance, HOA’s need to immediately address whether their existing governing documents specifically address STR type transactions and to clarify that, unless specifically authorized in the governing documents, the listing of a unit or home on such sites constitutes a violation of the governing documents.
Require disclosure of STR renting by owners – At a minimum, if the HOA does not have rental/occupancy restrictions in its governing documents, a board could pass a rule requiring owners to advise of the presence of an Airbnb guest and that they provide an ID when entering the community. That type of rule would give the association an idea of who is coming into the community, and that knowledge can help trace damage and other type of problems.
Have rules applying fines to violations – Fining for rules and covenant infractions is an enforcement option but not always a terribly effective one, especially in condominiums and cooperatives where fines cannot become liens. Under Colorado law, your HOA is required to adopt policies, procedures and rules regarding enforcement of covenants and rules, including notice and hearing procedures and a schedule of fines. Your HOA cannot levy a fine for any violations of the covenants or its policies unless it provides for notice and an opportunity for a hearing is given.
This means you must be patient and allow for due process. You will want to insure that your HOA’s fines are significant enough to deter the unwanted action your HOA policy should prevent. If not, you will likely find that the owner renting their unit as a STR may simply determine the economic benefits of renting it outweigh the potential costs (fines) for violating the rules or even the blanket prohibition of renting a unit as a STR.
Some owners will not pay fines unless required to by court order. If an HOA is required to file a lawsuit to collect delinquent fines, there is additional delay as well as the HOA having to incur legal fees. Luckily for the HOA, most STR violations are easy to prove, since the STR listing or advertisement is persuasive evidence of a violation. Upon establishing that the violation occurred, the HOA should be entitled to an award of attorney’s fees and costs.
Use suspension of use rights as deterrent– Suspension of use rights can be a more effective tool in terms of regulating the behavior particularly as negative reviews from customers who have not been allowed to use the common areas can impact future returns.
Have your HOA use a STR monitoring service – There are companies like STR Monitor that will monitor the Web for a monthly fee and report to your community if it finds any of your properties listed on these sites. In the absence of such monitoring, the association and/or manager often does not become aware that a unit has been listed on Airbnb until the “guests” show up in the lobby with their suitcases.
Have your HOA contact the STR of a listing that is prohibited under your rules – If your HOA finds out that a unit is being listed on any of the STR sites and your HOA prohibits such rental, then the HOA manager should contact the STR and advise them that the unit being listed for rent is not eligible for this type of activity.
Make sure your HOA members know the governing policy and rules if allowed – Whether your HOA prohibits the renting of units through a STR provider or they are allowed under a specific set of rules, your HOA must communicate clearly and frequently with property owners. Some residential property owners may not have considered nor do they fully understand that offering their residences for short-term occupancy exposes them to certain tax liabilities as well as to other laws which pertain to life safety as well as the Americans with Disabilities Act (ADA).
How to Find Your Local Laws and Other Legal Restrictions on Short-Term Rentals
If you want to find out whether your local government has any regulations relating to STRs, the Airbnb website has a summary of the legal requirements of about 50 cities, with links for more information. If your city isn’t listed here, the first place to check is your local municipal or administrative code, which may be available online at your local government’s website. To find yours, check out State and Local Government on the Net or Municode. If you can’t find your local law online, you may have to read it at your local library or city hall. A call to your city’s zoning board or local housing authority could also prove fruitful. You might also check out the Short Term Rental Advocacy Center, created by Airbnb, HomeAway, Trip Advisor, and FlipKey, for information on restrictions on short-term rentals.
This information is provided for educational purposes only and cannot be taken as legal advice. Neither I, nor the other attorneys at Evans Case, LLP, nor any person or entity that I or any such firm represents, has agreed to enter into any agreement, or to incur any obligation, nor has any attorney/client relationship been created by e-mail, fax or other electronic means unless specifically and expressly so provided. No attorney/client relationship exists in the absence of an executed engagement letter or fee contract.