The following was originally published in my April 3, 2021 Newsletter in the "Additional Thoughts" section
Items C-4 and C-5 on this week’s agenda would amend a recent City ordinance regulating short-term-rentals (STR) such as AirBnB.
C-4 (21-0539) An Ordinance to Amend Sections 7:651 and 7:654 of Chapter 97 (Short-Term Rentals) of Title VII of the Code of the City of Ann Arbor
C-5 (21-0537) An Ordinance to Amend Table 5.15-1, Table 5.15-2, Sections 5.33, 5.37.2.P and 5.37.2.S, of Chapter 55 (Unified Development Code) of Title V of the Code of the City of Ann Arbor (Short Term Rentals) (CPC Recommendation: Approval - 8 Yeas and 1 Nay)
As approved in September 2020, that ordinance outlines a system of licensing for all STR uses, including “principal residence” properties where, for example, homeowners rent their whole house or part of their house for football weekends. Those owner-occupied STR's are permitted in all residential areas. The ordinance prohibited "non-principal residence" (i.e. investment property) STR’s in residentially zoned areas; those STR’s would only be permitted in “mixed-use” zoning districts.
This week’s proposed amendments (C-4 and C-5) will identify short-term-rental as a new category of permitted use within our code. Notably, they include special reference to “legal non-conforming use,” protecting the investments of people who can provide evidence that they operated non-principal residence STR’s in residential neighborhoods prior to March 1, 2021: investment STR businesses already established in residential neighborhoods will continue operation as a “legal non-conforming use” for as long as any owner of that property maintains the use.
This month, Mayor Taylor told the Ann Arbor Observer that the STR ordinance approved in September 2020 was a “mess” in need of fixing up. In defense of City staff expertise and community interest: I strongly disagree with this assessment. The current ordinance was recommended by the City staff that would be tasked with enforcement, drafted by City attorneys, and approved after months of community debate and discussion. I would argue that proposed amendments are a much bigger “mess.” If Council approves the amendments in C-5, we enrich a small number of investors and the City loses an unknown number of housing units that should function as long-term rentals or owner-occupied residences. This policy directly conflicts with every housing goal and related public interest professed by a majority of Council.
BY THE NUMBERS
Last month, the City sent thousands of postcards to residential landlords in town, asking them to self-identify as STR businesses before March 31. The City has already received notice that 120 STR businesses exist in residential neighborhoods but there could be many more. Staff has no deadline beyond which they will stop applying this special status to new properties (“determination can happen at any time”). The City has no idea how many total properties might eventually qualify for this special status.
The special status is significant: a “legal non-conforming use” may continue indefinitely. It attaches to the property (not the owner). So long as the use continues, it is a permitted use even if it is sold or transferred to someone else. In December 2020, a majority of Council argued that exceptions and special status were a matter of “fairness” so that current STR investors would not be forced out of the business and suffer financial loss. This week, we consider giving those investors a serious windfall: the proposed amendments give a relatively small number of current investors (and every future owner of the property) a huge competitive advantage. A limited number of STR investment properties will be even more profitable as ongoing businesses with reduced competition. The “legal non-conforming use” also enriches any STR investor who chooses to sell: the special status and unique profit opportunity makes the property more valuable to buyers.
In discussing this topic, City Planning Commission contemplated one specific scenario: a “bad actor” STR investor who manages to lose their City license to operate an STR (e.g. a property that has become a public nuisance). One commissioner asked: if a license is revoked on a property that qualifies as a legal non-conforming use, is that status preserved for the benefit of a future owner who wants to run an STR? The answer to that question: yes, if the property is transferred to someone else who can license the STR use within one year. In other words, identifying problem properties and revoking licenses won’t reduce the number of STR investment properties. Instead, it will simply incentivize the transfer of those properties to someone else (e.g. a family member, a business partner) because any future owner can maintain that exceptional status, for significant profit.
The marketable value of these STR businesses and the durability of this “legal non-conforming use” (beyond sale and even after a license is revoked) means that the numbers will not dwindle by “attrition.” The likelihood of these business properties (note: an unknown number of properties, greater than 120) ever going “off line” and returning to our housing supply as a traditional long-term rental or owner-occupied residence is slim to none.
The proposed amendments presume that the short-term-rental businesses in residential areas were legal before Council passed an ordinance regulating them. A few of my colleagues (including the Mayor) have suggested that recent court decisions might invalidate our ordinance. Owners of STR businesses threaten to sue the City and those investors cite one case in particular - Reaume v. Spring Lake - as decisive proof that the Ann Arbor ordinance is invalid. To make sense of this issue, it’s important to understand the timeline of events:
Mar 18, 2019
Council approved a resolution asking for analysis of potential STR regulation
May 21, 2019
Michigan Court of Appeals affirms the right of Spring Lake Township, Michigan to prohibit short-term rentals in residential areas (Reaume v. Spring Lake).
Oct 6-10-12, 2019
Consultants held three public meetings at Ann Arbor library locations to discuss STR regulation.
Jan 6, 2020
City staff recommended regulation based on type: principal residence/owner-occupied and investment properties/businesses. Staff advised that a dedicated short-term-rental investment property is a commercial business and does not belong in residential districts: a short-term tenant is not a “resident.” Based on this advice, Council directed staff to craft an ordinance that would license all STR’s and restrict the location of investment STR’s.
Jun 5, 2020
The Michigan Supreme Court concludes that short term rental was not a permitted use of a single-family dwelling, partially affirming and partially vacating the ruling of Reaume v. Spring Lake based on the phrasing of definitions in the local Spring Lake ordinance and zoning code.
Aug 6, 2020
Consideration of the STR ordinance was postponed to give legal staff time to assess whether STR investment properties were a “legal nonconforming use” in residential areas.
Sep 8, 2020
Council approved an STR ordinance drafted by City attorneys (in collaboration with staff) that would prohibit non-owner-occupied STR’s in residential neighborhoods of the City. Enforcement was delayed to March 1, 2021 in order to give investors time to transition out of the business.
Note that our City attorneys were well aware of (and advised Council about) Reaume v. Spring Lake before approval of the September ordinance. Because that case rests on local code definitions - definitions in Spring Lake township code that are very different from definitions found in local Ann Arbor code - there is room to argue how that precedent may or may not apply.
For example, Ann Arbor code meaningfully describes the purpose and intent of residential zoning to provide an environment explicitly for residents, not visitors. Our local UDC 5.11.2(A) describes residential districts as an environment of “dwellings, along with other related facilities that serve the residents in the district such as schools, recreational facilities, Parks, and Religious Assembly.”
This description from our local code is very close to my own reasoning for why non-owner occupied STRs do not belong in residential areas: the most profitable locations for STR investment happen to be the very same places where year-round residents can most benefit from convenient access to amenities in our community. Residential neighborhoods nearest downtown and nearest the Stadium present huge profit opportunities for STR investment because they are wonderfully convenient for tourists. However, those locations offer a higher community value when occupied by long-term renters or owners who can take advantage of that convenience day-to-day: adults walking to jobs downtown or classes on campus and children walking to elementary schools or parks.
TAKING A STAND
Progressive local advocates point out how full-time, dedicated STRs impact housing affordability: the profitability of short-term-rental investments deplete housing supply and drive up housing costs for residents. Legal precedents like Reaume v Spring Lake exist precisely because communities enact public policies and defend them. City attorneys crafted the original STR ordinance well after that case and fully aware of its potential implications. A majority of Council at that time recognized the importance of implementing the policy. Former Council Member Zachary Ackerman explained:
When we say short-term rentals account for only 0.2% of housing units, we’re talking about well over 100 units of housing today. That’s 300 bedrooms that are no longer available to community members.
The threat of a lawsuit should not deter us from enacting policy in the best interest of the community. Everything about the STR issue - availability of housing units for residents, market pressures that drive up housing prices, potential nuisance in quiet neighborhoods - should matter to us enough to take a stand. I hope that a majority of my colleagues will choose to take a stand this week.