Let’s Legalize Short-Term Rentals

Call them whatever you want; Airbnb, Vacation Rentals by Owner, HomeAway. You’ve probably heard about them in the news. Maybe you even stayed in one and wrote about it for a streets.mn post! Whatever you might call them, I’m talking about the ability to rent out anything from a spare couch to a whole unit or home on to strangers for one to 30 days, with the host either present or absent. I’m of the opinion that we should make them fully legal in Minneapolis and St. Paul. Let me convince you!

Boston_Vacation_Rental

An alley-facing two-unit vacation rental in Boston my wife and I stayed in. Owner lived on the left, rented the right out while his daughter was in school.

Current Legality

If we’re being technical, someone could legally rent out their unit (or a bedroom inside it) as a short-term rental under state and city laws. The State of Minnesota defines a Bed and Breakfast as:

Owner occupied establishments which offer lodging and breakfast, without a limitation on the number of rooms offered. If breakfast is offered to more than 10 persons, a commercial kitchen is required.

While this doesn’t cover whole units run nearly full-time as a short-term rental, it covers many use cases. Of course, to operate one of these, you’d need:

  • A hotel/motel license (renewed annually)
  • Inspections every 24 months
  • A facility that meets all establishment requirements (fire, safety, sanitation, etc)

At a glance, a single home or unit that meets the building code shouldn’t have a hard time meeting these requirements. The annual license fee assuming one guest lodging unit is $10 plus a $35 flat fee. Nothing too onerous. You’ll have to pay all state and local hospitality taxes, which is sort of unclear how that’s done with services like Airbnb (at least, in locations where they they don’t have streamlined occupancy tax collection & payment figured out). Finally, the state requires lodging establishments to follow all local zoning regulations before they’ll issue a license, which brings us to…

Local zoning! I’ll focus on Minneapolis here, as I suspect St. Paul (and many suburbs) are pretty similar. Again, technically, short-term rentals are legal in some parts of the city. Like the state, a “bed and breakfast” is the closest definition for VRBO-style units:

Bed and breakfast facility is an establishment where shortterm lodging is provided for compensation which may include breakfast meal service to guests only. Such facility is subject to additional requirements in the codes referred to in section 297A.50.

As with the state, you need a license (which will set you back $155 a year), and to meet certain building and maintenance requirements, plus inspectors may come in at any time.

When I say we should legalize short-term rentals, I’m mostly referring to zoning. Here’s which zoning districts bed and breakfasts are allowed in Minneapolis:

VRBO-Zoning-02

Basically, anything R3 and above allow them. As I’ve noted before, most of the city is zoned R2 and lower. Even at R3 and up, one can only open a BnB with a Conditional Use Permit, which requires a fairly intensive application process to simply rent out a spare bed, room, or unit. By comparison, someone can open an in-home daycare center or place of worship by right in any zone–uses that are more likely to bring traffic and noise nuisance issues.

Benefits of Allowing Short-Term Rentals

As a neutral observer–I’ve never worked for any firms in the short-term rental business–the biggest benefits to making these legal with fewer regulatory hurdles are flexibility and building local, independent business culture.

Tiny kitchen in a 250 square foot London VRBO.

Tiny kitchen in a 250 square foot London VRBO.

Flexibility

When I say flexibility, I mean for potential renters as well as property listers. On the demand side, I can say from experience that VRBO has offered properties in locations at prices I simply wouldn’t have found in the typical hotel market. Not always, of course. For example, in 2013 my wife and I took a trip to London and Paris. We found a small apartment in central London, about a mile walk from Big Ben (even closer to Piccadilly Circus and Seven Dials) for a price we simply could not find on the hotel market. We got the benefit of a kitchen to help lower our trip’s food bill, with the tradeoff being a less well-appointed living space and bathroom.

In 2014, myself and nine friends rented out two separate ADU units in Boulder, CO for a wedding weekend. The multi-room nature of each structure allowed the married couples some privacy while the single dudes could share a bed, all for less than if we had rented three hotel rooms (and again, they were in a far better location). Anecdata aside, standard hotels have price floors given the regulations they need to meet with the resulting construction and operation costs per unit. Short-term rentals can (though not always) meet a lower market tier.

Flexibility extends beyond the leisure or business traveler, as well. Many people move between cities and require short-term housing while they settle into their job and look for an apartment or home. While there are short-term availability apartments, they may not suit the needs of many relocators. We used to have a range of housing options for people of all incomes and tenancy requirements. As the City Journal says:

Single men had a strong order of preference among these various alternatives: They preferred lodging and boarding houses to cages, cages to dormitories, dormitories to flops, and flops to the city’s shelters. Men could act on these preferences by moving as their incomes increased.

In today’s New York, however, many of these housing choices are no longer available. City regulations designed to eliminate these classes of housing have left the very poor only the choice between a shelter or the street.

For property owners, the ability to rent out a spare room to help make the mortgage (or rent), one of Airbnb’s big marketing messages, is only one piece of the flexibility argument. Imagine someone building an ADU in their backyard for their mother-in-law, but it’s still a few years until she may need it. Maybe you’re the type who has family visit throughout the year for extended stays and want a nice finished space for them, but it would go unused the remaining 75% of days. Maybe you personally are gone half the year. Making it possible for people to choose how often they want to rent out space in their home should be on the table as an income generator in our cities. I’m not naive, somewhere between 95 and 99% of people don’t want a stranger sleeping on their couch or basement bedroom. That’s fine, but some do, and they represent…

Local Business

NY_Airbnb_comm_hostsOne of the primary arguments against Airbnb and other hosting sites is that commercial landlords make up a sizable chunk of units and revenue in a given market. A New York Attorney General report found that 6% of Airbnb rentals were commercial users with 3+ unique units, but they made up over one third of NYC Airbnb revenue and reservations (see right).

This Buzzfeed analysis of Airbnb data found hosts with at least three entire-home listings accounted for 18% of all NYC Airbnb revenue.

Since this runs contrary to Airbnb’s selling point of benefitting Regular Joes with a spare room, it must be bad, right? Let me put that into context. The United States hotel industry is made up of several large players, a good number of medium hotel companies, and a relatively short “long tail” of firms. This chart shows the market share top three hotel chains in the US:

US_Hotel_Market_Share

That’s 36% of revenues to the top 3 chains. There are other chains with similar number of rooms not listed here. Yes, the majority of hotels are actually owned as franchises rather than managed directly by the hotel firm itself (this IHG fact sheet shows about 88% are franchised). But a typical franchise hotel owner usually owns multiple properties in their given region. So if you’re an urban liberal who supports local business, which is worse: a 200 unit hotel franchise owned by an individual with likely multiple similar properties, or an Airbnb unit owned by a commercial landlord with 6 other similar units in your city? Which policy is more likely to have a vast network of individuals offering unique experiences to tourists in our charming neighborhoods?

Addressing Concerns

I believe there’s a healthy middle ground to allow but regulate this activity. I can guarantee almost none of the ~500 Minneapolis units listed on Airbnb have proper licenses from the city and state. They’re probably also not paying the required taxes. We need to streamline the processes necessary to get them up to snuff.

At the same time, there are maybe some regulations targeted at health and safety that fit a large hotel model that maybe don’t apply to a single room or unit. It might not make sense to require all of them.

In exchange for a simpler zoning, licensing, and tax collection processes, we should consider requiring commercial insurance, strictly enforce nuisance complaints, and raise the penalty for operating illegal short-term rentals. We should also consider some protections for hosts to prevent horror stories like this.

Finally, to the folks complaining that short-term rentals like Airbnb raise housing prices by pulling otherwise rentable units off the market…welcome to the party. Supply and demand do indeed exist, and you can’t pick and choose when to invoke them (i.e. argue against the notion that new supply helps affordability). I agree there are potential instances where a low-rent unit could be turned into a higher-margin VRBO by evicting residents. We need a broader policy on tenant’s rights in the Twin Cities. But even in the red-hot NYC market, that study found that “the average rent increase in this timeframe [2005-07 to 2011-13] was 9.76% for the top 20 zip codes for Airbnb usage, compared to 9.30% for the entire city.” That’s a pretty small difference, one that’s probably also explained by other factors.

In any case, short-term rentals offer up a more locally-sourced option for leisure, and even business, travelers while providing a potential source of income to folks much lower on the income ladder than typical hotel owners. I think they should be legal. What do you think?


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20 Responses to Let’s Legalize Short-Term Rentals

  1. Steve January 20, 2016 at 11:25 am #

    Making the zoning approval of 1 or 2 unit B&Bs easier is a good idea and legalizing the units makes them better neighbors. These should be allowed in R2B areas of the City; conditional use permits for this type of use is overkill. It would be better to require rental licenses and get the units inspected when they are licensed. Perhaps this could be tried on a trial basis in those neighborhoods that support the idea as a way to overcome resistance to a city-wide rule change.

  2. Wayne January 20, 2016 at 11:50 am #

    How about we just rezone everything that’s currently R2 as R3? Then you get the B&Bs and we get increased density by right everywhere. Win-win!

    • Steve January 20, 2016 at 2:15 pm #

      Wayne,
      R3 is going to be fought in primarily singe family areas because it would permit PUDs, Apartment buildings over 5 units, residential facilities and shelters with up to 16 residents, and parking lots for apartment buildings. Lisa Bender’s accessory unit ordinance got us to a third unit on these lots without changing the zoning, which increased density without changing the nature of the neighborhoods.

      • Wayne January 20, 2016 at 3:32 pm #

        At some point Minneapolis needs to decide if it wants to be a city or a pseudo-suburban second-tier ‘city’ forever. There’s plenty of demand for people to live here, lots of good jobs and the housing is surprisingly affordable still. But that last point is going to change because the demand probably won’t go away unless the jobs do, but the supply won’t keep up with demand at this pace. We still have one of the lowest rental vacancy rates in the country because there is simply not enough housing. Restrictive zoning does nothing but raise prices for everyone, which single family home owners *love* but it’s detrimental to everyone else. Do we want to emulate the worst tendancies of San Fransisco until housing is unaffordable to all but the elite? Or do we want to allow natural increases in density to meet demand so we can grow like every city used to before stupid restrictive zoning made it illegal?

        Also “changing the nature” of the neighborhood is code for either “I’ve got mine so screw you” or “I’m afraid of people who aren’t like me.” Neither attitude should be condoned, and they most definitely shouldn’t be codified in law. Take a look at places like the wedge where you’ve got the ‘in-between’ transition from houses to apartment buildings. Then look next to it at loring park or stevens square where most of the houses were replaced with denser buildings. It’s a natural process we artificially stopped with stupid zoning laws and it’s been screwing up housing costs ever since.

        • Stuart January 21, 2016 at 8:38 am #

          He didn’t say that upzoning would be a bad thing, just that it would be virtually impossible because of politics. There are easier ways of addressing the legality of VRBOs, which was the point of this article.

          • Wayne January 21, 2016 at 8:55 am #

            Politically easier, sure. But why not go all the way? R3 should be the lower threshold for density in the city, not an unattainable level of density for most parts of town. Although I have personal qualms about things like AirBnB and Uber, I know they have a lot of support and are likely to be able to get certain things changed like this. I know it’s a long shot, but why not try to couple up to that wagon for a density increase along the way?

  3. Paul Strebe January 20, 2016 at 6:52 pm #

    Great piece. In looking at the 1940 census, I was interested to see that the three bedroom house across from me in South Minneapolis had been a rooming house with four young men from rural areas who’d moved to the city to work in factories. Imagine something like that today? A way to get your job-less son out of the house where he’d get his meals cooked and his laundry done.

    • ae_umn January 21, 2016 at 9:39 am #

      You’re talking about a freshman college dorm, right? 😉

    • Bill Lindeke
      Bill Lindeke January 21, 2016 at 10:21 pm #

      Actually that is kinda of the story about when I moved back to Saint Paul, living in a “college house” though none of us were in college. 5 young people all saving a lot of money in small rooms was perfect for where I was socially and economically at the time. It’s too bad it’s technically illegal, because it shouldn’t be, and as you point out, is historically how the city operated. (Though the 40s were particularly bad with a housing crunch. See also: https://en.wikipedia.org/wiki/The_More_the_Merrier )

      • Paul Strebe January 22, 2016 at 11:55 am #

        What we really need is an R0 that forbids drinking and music after 10 pm, and no overnight guests or parking on the street. Also, no kids walking on lawns.

  4. mplsjaromir January 21, 2016 at 8:52 am #

    As long as taxes are paid and they meet minimum code, I have no problem with VRBOs. But AirBnB’s business model is that these place are competitive only when they break numerous local laws. Otherwise almost everyone is better off in a hotel.

    • Wayne January 21, 2016 at 9:00 am #

      This is exactly my issue with AirBnB and Uber and all the other so-called ‘disruptive’ business models. They’re disruptive because they’re illegal and competing unfairly by flouting local laws. In some cases they strong arm local governments into changing laws to accomodate them, but I strongly dislike their ‘do what we want and beg forgiveness later’ approach, especially when they’re pushing a race to the bottom for wages. With AirBnB it’s basically undermining an established industry that hasn’t really done anything wrong and also screwing up the housing market with people gobbling up properties to turn into short-term rentals instead of regular housing (which we need more of here, not less).

      • Paul Strebe January 21, 2016 at 9:53 pm #

        I have to disagree that “almost everyone is better off in a hotel.”

        First, I really see AirBnB filling a market niche that’s being ignored by the hotel chains — especially in the city. When visiting my daughter for the first time in St. Louis last year, the option was to stay in a big expensive hotel pretty far from campus, or do an AirBnB for a third the cost a couple blocks from campus.

        The truth is, how often do you really need (or want to pay for) the amenities of a typical hotel? The model seems built around a lifestyle of sitting in front of a TV or pool and paying $29.95/day for wifi or $14.95 for a club sandwich instead of being out exploring the town. Give me a decent bed, hot shower and free wifi and I’m good. Throw in some tips from a local host, and it’s a done deal.

        • Wayne January 22, 2016 at 9:42 am #

          The hotel industry has actually been pretty adaptive to the new reality of how people use hotels, though. They’ve created all sorts of different options like ones with kitchens or bare-bones ones that aren’t disgusting like the roadside ‘motels.’ I’m not going to defend some of their practices like blocking customers’ wifi to force them to use their own paid option (which I’m pretty sure was ruled illegal at some point recently anyway), but my point is that it’s not an industry with the same level of issues as the taxi/livery industry.

          That said the solution to any heavily-regulated industry that is misbehaving is to change the way you regulate it, not to allow illegal competition that flouts every last law and regulation you already in place with some garbage excuse.

          • Paul Strebe January 22, 2016 at 11:48 am #

            I don’t think anyone on the page has argued for not changing regulations eventually, but given the power of the hotel industry, I don’t see any choice for AirBnB and their customers to continue their practices until it forces the industry’s hand. It’s what finally helped accommodate Uber in many cities.

            And I can’t imagine Marriott or Hilton will start building single, dispersed short term options in a place like St. Paul, where you pretty much have to stay downtown or on 494 and rent a car if you want to visit your child at one of the small colleges. It’s a model built around car dependency and (somewhat ironically) density that works fine for business travel when others are footing the bill, but falls short for most everything else.

          • Justin January 22, 2016 at 11:57 am #

            I personally mostly use AirBnB and VRBO mostly when in non-urban areas. Cabins and beach houses and such in outdoor-tourism/recreation areas, rather than staying in a resort (which has a bunch of things I don’t need and sometimes lacks the things I want) or a hotel (often right in a town or by the freeway).

            I have mixed feelings about it in urban areas. A lot of good urban hotel options are starting to spring up and I’d like to keep that going.

            • Paul Strebe January 22, 2016 at 1:41 pm #

              Yeah, I’ve heard of some smaller boutique hotels springing up in some cities, but they’re not targeted to the budget-conscious. And (to continue with my scenario), I don’t see St. Paul neighborhoods allowing them any time soon (as in… never?)

              So if I have a kid at St. Kates who I want to visit, I see on Google Maps that hotels in downtown St. Paul range from $105 to $164. Plus, if I’m flying in, I’ll probably have to rent a car. Alternatively, Air BnB shows rentals within walking distance of campus ranging from $44 to $85. Add on $15-$20 in special taxes, and this is still an affordable option that many would choose.

    • Alex Cecchini
      Alex Cecchini January 21, 2016 at 9:28 am #

      I’m not 100% sure that’s the case. The few times I’ve stayed in one of these, the saving were either 1) substantial enough that tossing in taxes (if I wasn’t already paying them) would still have been cheaper than a hotel, and/or 2) the amenities offered are either better or simply different than a hotel. Having a kitchen to use is valuable if I’m staying more than a couple nights, even moreso once I have >1 kid. In Boulder, it was great to go shopping at the grocery store with a bunch of adults to get meals we could all cook together.

      I think we should consider having a sliding scale of what “code” is for a short-term rental. I’m not an expert on state requirements for small hotels or BnBs, so I’m not making specific recommendations. I’m thinking sanitation requirements (chemicals, etc) might be different for a house rental or bedroom than a hotel. Maybe a 2 unit or lower rental doesn’t need a hotel license, just a rental one. Spitballing here.

  5. Serafina Scheel
    Serafina January 23, 2016 at 3:30 am #

    There’s a huge market that is not well served by hotels and motels, which naturally gravitate to these kinds of rental properties. Particularly when the homeowner is on site, with a small number of units, I think a rental license is sufficient protection, particularly since a rental license is not even required to rent out a room in one’s house. In my neighborhood near the U, I know a half dozen neighbors who rent to visitors who are staying a week to several months.

    It is not necessarily price that Airbnb and other hosted properties hold as a competitive advantage, but the type and location of the properties. With a family, I far prefer being able to cook, do laundry, and have a sitting area and more than one room when I travel. Apartments and houses much better fit our needs than hotels, for roughly the same price or a bit more than a standard room. For business travel, hotels often offer better location and necessary 24 hour services.

    Most people who host on these sites do have insurance, pay income tax, etc. There’s even a whole new crop of insurers out there with policies specific to this kind of rental activity. Many property owners have been doing this for years before Airbnb and the like, and simply use these services as an additional source of referrals. But the sheer numbers of people currently trying it out for a time or two, and the number of property management companies using the online services has exploded.

    Some of the online sites allow hosts to add their local entertainment and sales taxes on a separate line, Airbnb calculates and adds them in specific jurisdictions where it must. I’d like to see that done consistently across the board.