Vacation rentals have been popular for many years. Whether it’s a condominium in the city center, a location on the beach, a luxury home by the lake, or a cabin in the woods, a desirable get-away property has always had a ready market of vacationers looking for hotel and motel alternatives. Has this market changed? Indeed, it has, inspired and spurred on by the internet, of course. 

Research and analysis by Lisa Harms Hartzler,
Sorling Northrup Attorneys

Some call it the “sharing economy.” Individuals offer rides in their personal cars. Crafters sell hand-made items to buyers all over the country. Residential property owners offer rooms in their homes for a night or a week. These small business opportunities are possible only through internet platforms like Uber, Etsy, Airbnb, and others like them. And they have turned their markets upside down.

In the short-term rental arena, Airbnb, HomeAway, VRBO, and Flipkey, to name a few of the most prominent internet sites, enable individual property owners to reach potential short-term renters anywhere. Thousands of owners have signed up to host renters a room, an apartment, a condominium, or a whole house in tourist-popular locations like Chicago. In more out of the way places, bicyclers cruising trails and cross-country drivers enjoy meeting locals and staying in a homey atmosphere. The short-term rental market has exploded nearly everywhere. Residential neighborhoods and apartment dwellers have not always welcomed this growth, while local governments have often struggled to respond.

Pros and cons of short-term rentals

There is no single definition of a Short-Term Rental (STR). It is generally considered to be a property rented for less than 30 consecutive days but is distinguished from multi-unit rentals like hotels and motels. An STR can be a room in a home while the owner is present, a house or apartment that is owner-occupied but the owner is away, or a dwelling that is not owner-occupied at all. The online STR market originated primarily to match owner-occupied homeowners with travelers looking for a low cost-room, but it has spread rapidly to include units that are rented exclusively on a short-term basis.

STR owners claim they benefit local economies by bringing in people who shop, dine at local restaurants, rent bicycles, take local tours, and visit local tourist attractions, especially in areas that do not have a big range of commercial hotels. STR owners may also improve the local economy through increased use of general contractors to improve their property, landscapers, and housecleaning services. They contribute to municipal revenues in some cases by paying local taxes, and they offer a unique alternative to travelers who might otherwise skip staying over. Part-time residents and absent owners contend that STRs are better for neighborhoods than letting a property sit empty for many months of a year. They also generate additional income, enabling some fixed-income owners to remain in their homes.

Opponents of STRs question whether STRs have any impact on local economies other than reducing demand for hotels and motels in the area, which in turn lowers local tax revenue. They claim that STRs also negatively affect long-term rental housing stocks by removing units that would otherwise be available for permanent residents. That reduction makes renting less affordable. The biggest complaint, however, seems to be that STRs degrade the positive characteristics of residential neighborhoods and apartment buildings. These complaints focus on non-owner-occupied dwellings operating more as commercial enterprises than homeowners who simply offer spare rooms for rent. Opponents cite incidents involving “party houses” that cause noise and disruptions, decreased safety with numerous strangers coming and going without any accountability to neighbors, and parking issues. In general, there is a perception that STRs are bad for residential areas.

Community responses

Municipalities have responded to the growth of STRs and attendant complaints in a variety of ways. The best responses address STRs before residents’ complaints reach a crisis, when emotions are high and no time remains to examine problems thoroughly and craft a measured response. Over-reaction can lead to unnecessary or unworkable solutions.

Local governments clearly have authority to address STRs. The Illinois Municipal Code authorizes municipalities to develop comprehensive plans and enact zoning ordinances to protect public health, safety and welfare. Zoning ordinances limit what a landowner may do, but they also protect landowners from nuisances that disrupt their quiet enjoyment and depress land values. Many municipalities in Illinois have already addressed STRs through zoning codes or by enacting specific ordinances. Home rule units may license STR owners, but non-home rule units will need to proceed more cautiously in trying to regulate landowners outside of zoning efforts.

What can be regulated

Regulations can be comprehensive or simple. The City of Chicago’s STR ordinance runs 48 pages, requiring licensing, reporting, fees, and taxes. Other cities ask for simple registration. If your community has no regulations, is looking into enacting some, or has regulations that are unworkable and need revision, the first thing to do is marshal the facts. How many units are being advertised in the community? Where are they? What kind are they—single family, apartments, high-end, economy? How are they used—seasonally, year-round, or only for specific occasions, like a popular hot-rod festival? Exactly what problems have been reported? Finally, what enforcement resources is the local government able to provide? It’s no use imposing regulations if nobody is available to enforce them.

Armed with the facts, a local government can then define its goals.  These might include:

• To preserve the character of a neighborhood.
• To minimize any reduction in long-term rental availability.
• To prevent nuisance behavior.
• To ensure building safety.

With these goal in mind, drafters can construct a definition of an STR. While it is usually limited to 30 days or less, some communities shorten that to seven consecutive days or less. Some restrict how many days per year in total an STR may be rented out. Some limit STRs to owner-occupied homes. There are many variables that need to be responsive to the actual situation or problems a community is facing.

If actual problems exist that need to be addressed, regulations can help achieve stated goals in a number of ways. Local governments can help preserve a residential neighborhood’s character by restricting the location of STRs, setting quotas, or imposing density limits in zones or districts. They can strengthen long-term rental availability by granting STR permits only to permanent residents in owner-occupied dwellings and excluding non-owner-occupied rentals. On the other hand, in most communities, STRs are a very small percentage of the entire rental market. There may be no need to restrict use so severely.

Municipalities concerned about nuisances can enforce existing nuisance ordinances. They can attempt to deter problem properties by requiring registration of STRs and obtaining the name of a local resident who can respond to problems immediately. Landlords may be asked to inform short-term tenants as to behavior expectations and parking options. Inspections are the only sure way to enforce building safety, but only if the municipality has the resources to conduct inspections regularly, uniformly, and fairly.

Some local governments may conclude that the best way to regulate is to issue permits. Although requiring permits can promote compliance and provide owner, location, and renter information, they also require administrative resources. Staffing needs to be adequate to handle permit application review, issuance, updates and renewals, and to investigate failures to register. Any fees need to be reasonably associated with the cost of regulation, while fines need to be high enough to discourage violations. Taxes will be difficult to collect, although some larger municipalities have succeeded in getting internet platforms to collect and remit taxes.

Local regulation may also focus on other issues, including off-street parking requirements, garbage collection, insurance coverage (regular homeowners insurance may be invalid for STRs), location of fire extinguishers, fire exits, pull fire alarms, guest registration information, signage (allowed or prohibited), noise limits, fair housing laws and ADA requirements, and the list goes on. What a local government should strive for is a balance between achieving stated goals and the needs and expectations of property owners. Regulations need to be reasonable to be effective.

State regulation

State senators and representatives have introduced legislation regarding STRs. A House bill introduced in 2016 provided that local governments could not regulate short-term residential property in a manner more restrictive than the Bed & Breakfast Act or impose more taxes than those on hotels. A Senate bill introduced in 2017 effectively restrained a local unit of government (including home rule) from prohibiting STRs, based on their classification, use, or occupancy, but authorized regulations to protect public health, safety, sanitation, traffic control, solid or hazardous waste control, pollution control, and other specified circumstances. Both bills are apparently dead for the moment and unlikely to be resurrected in the near future.

Conclusion

So, how is your community coping with STRs? Are you familiar with the regulations, if any, in your area? Although the percentage of STRs within the overall rental market may be small the number of property buyers looking for property that can be used occasionally, regularly, or exclusively as an STR will vary considerably by community. Awareness of the various local requirements and prohibitions, if any, could prove helpful. The “sharing economy” is here—good or bad, ready or not.