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How Local Governments Can Approach State Preemption When Regulating Short-term Rentals

From a 30,000-foot view, the short-term rental (STR) market has established itself as a core part of the tourism industry. But if you zoom in, it becomes clear that the market is still highly unregulated. The regulation process may seem daunting, but without proper enforcement, communities could lose out on the benefits of the STR market.

“Effective regulation is one of the few things that you can do in government where actually enforcing the law ends up resulting in net incremental revenue for the community,” said Granicus’ general manager of compliance services, Ulrik Binzer.

But as it stands, there’s a tug-of-war happening between local and state governments when it comes to regulating the booming STR market—and some of this is related to state preemption.

The Problem with State Preemption for STRs
State preemption is a legal doctrine that gives states the power to override local governments when there’s a policy disagreement. While in many cases, the unique needs, challenges, and characteristics of a county, city, or community are paramount to policy decisions, a state policy often takes a one-size-fits-all approach to disparate communities—which could be detrimental.

In fact, Arizona—a preemption state—is currently blocking all local government activity relating to STRs. Policy makers like state representative John Kavanagh are working to undo the damage.

“Returning local control over short-term rentals is one of the only issues that has gathered bipartisan support in the Arizona legislature,” Kavanagh wrote recently.

A blanket regulation policy wrongly assumes that each city or town is identical to the next and ignores important community variables.

“Every community is different when it comes to what works and what doesn’t. What may work in one community could potentially be a complete disaster in another community,” said Binzer.

In theory, every community should be held to the same standard—as they are with, say, traffic lights. But in practice, regulating STRs means looking at the different variables and planning objectives of each community and taking them into consideration, such as housing costs, the general appetite for visitors, availability of traditional lodging, the value of tourism, the percent of existing STRs, and more. With state preemption, these critical elements are being overlooked.

You might call what happened in Sedona, Arizona, a cautionary tale. Arizona has some of the strictest state preemption legislation in the country when it comes to short-term rentals. Currently 30% of available rooms are STRs. About 70% of those STRs are owned by people who don’t live in the state. These factors affect community character and housing affordability.

For example, Sedona-Oak Creek School Superintendent Dennis Dearden and his family are renters, but not because they want to be: “Every time we put a bid on a house we would be outbid by an investor who wanted to turn that particular home into an Airbnb,” Dearden said in an interview with ABC 15 about the effect of STRs on the Sedona community.

Avoiding the One-Size-Fits-All Approach to Regulation
If your community is faced with an influx of STRs, don’t be afraid to fight the preemption policy approach. Some of the best practices involve making very narrow laws that can avoid preemption challenges. Here are a few tips to sidestep the one-size-fits-all roadblock:

  • If housing availability and the protection of affordable housing is the goal: Enact rules that allow only permanent, primary occupants of a property to rent out STRs. This will prevent investors from buying groups of properties and turning them into full-time STRs.
  • If preserving neighborhood character is the goal: Set quotas on how many STRs can operate in a given area.
  • If regulating STR parties is the goal: Install decibel meters that trigger unreasonably loud noises and alert the renter that the volume is too high.
  • If general regulation enforcement is the goal: Require operators to physically hand the renter their keys to the property, so they know exactly who their renters are and can discuss the local policies with them.

Approaching State Preemption at a Local Level
Whether we’re talking about public health issues or the booming STR market, state preemption can overlook the unique needs of a community and stifle innovation at a local level.

In the case of STRs, “the government needs to decide where to strike the balance between the property owners’ right to fair use of their property and the rights of surrounding property owners to set and maintain community standards,” Kavanaugh noted.

Historically driven by partisan or ideological motivations and special interests at a state-level, preemption is no longer prompted by practical constraints. These days, state preemption is doing more harm than good and it’s up to municipalities to change or prevent it.

Luckily, state preemption isn’t as cut and dry as one might expect—it’s all about finding the workaround. In some cases, that might mean making very narrow laws that sidestep the preemption (as mentioned above). Other times it’s more direct: the city can lobby state legislators to repeal or amend the law. Many cities in states like Michigan, Florida, and the aforementioned Arizona (and counties) are already working with their League of Cities representatives in this capacity.

In the quest to fight state preemption, technology designed to monitor and enforce STR compliance could be a critical asset. Software like Granicus Host Compliance can help municipalities find properties offered for rent, educate hosts on how to become compliant, and facilitate tax collection to help communities gain significant revenue. Trusted by more than 350 government customers, Host Compliance can help to save time, increase revenue recovery, and make the home-sharing economy work for everyone.

State preemption isn’t completely irreversible—and it’s definitely worth fighting against when the livelihood and well-being of a community is at risk.

For more information on STR regulation, state preemption, and access to specific case studies, check out the full webinar here.