What we do right, and wrong, with short-term rentals ...Middle East

We lived, in the not-too-distant past, directly downhill from a short-term rental. Its first floor deck peered into our second floor kitchen.

Sometimes, frat boys from Arizona would arrive in the middle of the night and take a drunken whizz off the deck. Once, a gaggle of bachelorettes taped a poster of a naked woman (with targets on her privates) to the sliding glass door facing our girls’ bedrooms. “Animal House,” anyone?

The Orange County grand jury spent the past several months balancing horror stories like this with private property rights, impacts on low-income housing stock and the bed-tax issue — something hotels are legally required to add to room charges and remit to cities, but which short-term rental operators may not collect, or pass on, with quite the same care.

Enter now the grand jury’s new study — “Long-Term Solutions to Short-Term Rentals” — which asserts that neighborhood peace and short-term rentals are not necessarily mutually exclusive.

“STRs can be good neighbors,” the grand jury declared. “The burden of getting STR operators to function in a community-friendly way should be on the operator and government, not the neighborhood residents.”

Cities with a growing number of short-term rentals don’t always have higher complaint volumes, the grand jury found, and some cities use smarter strategies than others when it comes to managing complaints — and all cities can learn from them.

The fight against short-term rentals, after all, can be futile. When cities ban short-term rentals, defined as contracts of 30 days or less, it often leads to “a never-ending game of ‘whack-a-mole’ — as soon as one unpermitted STR is shut down, another opens,” the grand jury said.

Blame this “problem” on the county’s embarrassment of riches, from an idyllic 42-mile coastline to Disneyland and Knott’s Berry Farm to major league sports. Short-term rentals are legal in 15 O.C. cities — Anaheim, Buena Park, Dana Point, Fullerton, Huntington Beach, La Palma, Laguna Beach, Lake Forest, Mission Viejo, Newport Beach, Orange, Placentia, San Clemente, San Juan Capistrano and Seal Beach.

Newport Beach has the lion’s share (1,550), followed by Laguna Beach (300), Anaheim (277), San Clemente (225), Orange (125) and Dana Point (115).

Cities themselves may contribute to some of the friction, the grand jury found. Code enforcement errs on the side of leniency. Also, some cities rarely pursue fines for violations, or bother collecting taxes on unreported income.

How much unreported income is there? Hard to know. Cities often rely on the “honor system,” depending on owners to accurately report and pay bed taxes. There’s not always much in the way of official monitoring or audits.

With the Olympics coming to Southern California in 2028, short-term rentals will kick into an even higher gear and prices will skyrocket, the grand jury said. There’s lots of room for improvement before then.

Complaints

So the permit’s in hand, the listing is popular, the parties begin. There’s trash, noise and lots of cars. Neighbors complain, often through an online portal.

But little may happen.

“(N)eighbors face hurdles in complaint resolution,” the grand jury said. “This, along with laxity in enforcement, may explain why fewer than 10% of STRs record a complaint in a given year, a number that fails to reflect the frustration of STR neighbors.”

Tracking and confirming even valid complaints can be difficult. Nuisance reports often come late at night or early in the morning, when code enforcement officers aren’t on duty. “(C)omplaints do not receive a timely response and the problem is not resolved at the time of the actual nuisance, if ever,” the grand jury said.

Most ordinances require an emergency contact for the permit-holders, “but a review of hundreds of complaints between 2022 and 2024 shows that in a number of cases the contact does not respond either in the 30- or 60-minute required time frame,” it said. “Warnings and citations may take up to a week to issue…. The STR operator may appeal the citation…. This can take some time, during which the STR may continue to operate.”

But citations are rare. When the code enforcement officers do investigate, they often exhibit “a fair bit of leniency,” issuing only warnings, it found.

How to do better? Proactively inspect short-term rentals, confirm occupancy limits, ensure that safety equipment is on site and that no unpermitted construction has been done. Use technology to combine owner contact information with permit and business license numbers so it’s always close at hand.

Playing Monopoly

Cities often limit the number of short-term rental permits they’ll grant, which creates a quasi-monopoly, the grand jury said. There’s typically a rush of applications, but once permits are granted folks are loathe to give them up.

“At least three cities (Newport Beach, Dana Point, and Orange) have created waiting lists in response to having more applications than available permits,” the grand jury said. “However, STR operators rarely voluntarily relinquish their permits.”

This can result in what we’ll call “permit-squatting.” Let’s say a short-term rental is — gasp! — converted into a long-term rental. It’s no longer subject to bed taxes, and the owner no longer needs that short-term rental permit. But the city wouldn’t necessarily know about that. And months — or more! — might pass before the city gets hip and moves to rescind the permit (so the next person on the waiting list gets one).

Also, some cities allow permits to be transferred from one family member to another, or to a new owner after a sale. Both skip the line entirely.

How to do better? “A system where permits expire after a certain time would afford those on the waiting list an opportunity to be placed ahead of renewals, thus creating a more equitable process,” the grand jury said. “One city, Dana Point, has set a limit on investor-owned properties, allowing more hosted STRs to have priority in getting permits.”

The city’s cut

Money, people, makes the world go round. And bed taxes on tourists, or “transit occupancy taxes” in official parlance, contribute to a city’s coffers. TOT’s range from 8% to 17% in O.C.

“In cities like Dana Point and Anaheim, TOT represents a substantial percentage of city revenue; however, nearly all of this comes from hotels,” the grand jury said. “Short-term rental TOT in Newport Beach represents 30% of total TOT collections, contributing 2% of city revenues.”

The haul could be better, perhaps, if collection was optimized.

“Newport Beach collects quarterly from agents who operate STRs and annually from STR homeowners, using paper-based forms,” the grand jury said. “This system does not allow for easy tracking … because multiple units at the same address (with separate permits) may be combined on the form. A digital submission by unique permit number, such as is used by the city of Orange, is easy and provides greater detail to the city.”

Orange also requires that monthly bed tax reporting include the number of days the rental was available, and how many days it was actually rented.

Anaheim uses “Voluntary Collection Agreements” with online booking agencies that enable monthly bed tax payments. It’s usually just a spreadsheet with totals, but at least one platform breaks down data (and dollars) by address.

“It is possible for an (online booking agency) to send more detailed data and for the city to integrate it into its information systems, but as yet no city appears to have negotiated … to implement this direct reporting,” the grand jury said. More detailed reporting would improve collection and flag unpermitted rentals. It would not, however, capture rentals booked directly with operators, which could be 30% to 60% of gross rental revenue.

Cities also don’t do real audits. “Put simply, these cities currently rely on the ‘honor system.’ Conducting business-level audits would allow cities to discover and collect additional funds,” the grand jury said

Low-income housing

Critics of short-term rentals have complained that they shrink the supply of affordable housing. The grand jury concluded that’s not, in fact, the case.

“(T)here is rarely a one-to-one relationship between STRs and long-term housing,” the grand jury said. “In many areas of the county, STRs are luxury or large-scale homes. It is extremely unlikely that such homes could or would be easily converted into affordable housing or demolished to create multiple affordable dwellings. Aside from the complications of such an endeavor, the likelihood that neighbors would acquiesce to these changes is negligible….”

Its analysis of inland cites suggested that if short-term rentals were converted to affordable housing, they’d contribute, at most, about 8% of the affordable units required (in the city of Orange, that’s 125 rentals and 1,671 low-income units required). It’s a much smaller percentage in other inland cities, it said.

Do it right

There are many ways cities can make short-term rentals work better, the grand jury said. Some ideas include creating easy-to-use complaint systems, requiring permit numbers in all advertising, and doing diligent code enforcement, with monthly reports of actual rental days and monthly electronic collection of bed taxes.

Cities have until late August to respond. Vacation rentals are part of O.C.’s history, the grand jury said, stretching back to Crystal Cove in the 1920s. It’s never too late to get it right.

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