Carrots and sticks: Vacation rentals, and the creation affordable, workforce housing

December 6, 2022

By Paris Achen
More communities across the country are finding creative ways to increase affordable and workforce housing stock through vacation rentals.
“As rent and mortgage rates continue to rise, policymakers are really trying to find any way to alleviate the housing shortage,” stated Noah Stewart, Expedia Group’s head of advocacy. “Short-term rentals have been repeatedly proven to have very little effect on rents, mortgages and the overall availability housing stock. However, local officials continue targeting them as wider housing issues continue growing.”
Stewart stated that the shortage of affordable housing for the workforce has been particularly acute in popular beach towns and ski resorts, where the demand is much greater than the supply.
It is not uncommon for businesses to have limited hours or even close on their regular operating days.
Caps and STR bans have their drawbacks
Communities have tried to force vacation rentals into long-term rentals by imposing bans on STRs and caps. However, such restrictions are not always successful in achieving their intended goal of creating more long-term housing or affordable long-term housing. Additionally, caps and bans can lead to lost jobs and unrealized tax revenue.
South Lake Tahoe voters approved in 2018 a phase-out plan for vacation rental permits that were not located in the city’s touristic heart. The city had revoked approximately 1,400 STR permits by 2021.
Colin Frolich, CEO at Landing Locals, a platform that connects second-home owners with local workers in need of housing, said, “It doesn’t mean those 1,400 houses become what you want them too be.” “A lot of them were sold to other owners who were happy to leave the house empty or rent it out monthly. They didn’t rent the homes to locals.
STRs: A affordable housing solution?
More jurisdictions are looking for affordable housing solutions. Among them are STR specific taxes that generate revenue for housing projects, and programs that encourage property owners to rent out their second homes or vacation rentals to local workers.
STR tax revenue streams in Colorado
Voters approved lodging and STR-specific tax referenda in a dozen Colorado cities and counties in November. Approval of HB 22-1117 led to a flurry tax levies that all took effect on Jan. 1. The new state law allows lodging tax revenue from the state to be used for affordable housing and child care as well as other workforce development.
In Colorado, Summit County voters approved Measure 1A in November. This measure imposes a 2% lodging excise tax on all county residents to generate $5.4million for workforce housing, child care, and tourism promotion.
Summit County’s Dillon also passed an STR-specific tax, 5%, on top of the 2% countywide exise tax, to support workforce housing. Dillon voters also approved to increase the town’s debt to finance workforce housing.
Toby Babich, president of Summit Alliance of Vacation Rental Managers (SAVRM), stated that workforce housing has been a problem in our destination for years. This was exacerbated by the rise in real estate prices post-pandemic which resulted primarily in higher purchase prices, higher rents, as well as fewer affordable and viable housing options. “Like all tourism service industries, the vacation rental industry has been affected and has been driving discussions and solutions to this community problem.”
SAVRM supported the 2% rise in lodging tax to help fund housing development.
Babich stated, “We are eager for more units to be built very soon.”
California and other states have also found ways of using transient occupancy taxes for affordable housing projects.
For homeowners, lease-to-locals incentives
Summit County’s 2% lodging tax for child care and workforce housing is just one part of their strategy to address the shortage of affordable housing.
The new trend of Lease To Locals programs is also being developed in the mountain county and the nearby town of Breckenridge. Landing Locals administers the Lease to Locals program. This program offers monetary incentives to homeowners to rent out their vacation homes or second homes to local workers.
Since October 2021, 74 vacation rentals units in Breckenridge have been converted into long-term housing units. According to Landing Locals statistics, those units housed 144 workers as well as 18 children.
Property owners have the option of converting to a 12-month or six-month lease. Incentives paid to the owner may be as high as $22,000 depending on the length of their lease and the size and condition of the unit.
Property owners can rent their unit out for six- or twelve-month leases and agree to cap rent according to the unit’s size in exchange for financial incentives. A one-bedroom unit rents at $1,500 per month, while a four-bedroom home rents at $4,000 per monthly.
Tenants must work in Summit County for a local employer for at least 30 hours per semaine.
In October 2020, the first Lease to Locals program was launched in Truckee, California. Since then, the program has expanded to include South Lake Tahoe, North Lake Tahoe, and Summit County in Colorado as well as the Wood River Valley in Idaho.
The Lease to Locals program in South Lake Tahoe, where STRs are largely prohibited, aims to recruit homeowners who have second homes that are vacant for the majority of the year. In Summit County, however, the program targets short-term rentals that are underperforming.
Frolich stated that property managers have been surprisingly supportive and have even recommended properties that are struggling in the STR marketplace.
He said, “If you rent a house on the lake for $1,000 per night and it’s full 60% of your time, there’s no way that you’re going convert to long-term rentals.” We’re better off converting people with empty second homes, extra bedrooms, or short-term rentals that aren’t performing well. These rentals might be better suited for long-term rentals, as they’re not in an attractive location for tourists.
Landing Locals, which is a small startup, was unable to keep up with demand for the program. Frolich stated that 60 jurisdictions have applied for funding to start programs. However, Landing Locals does not have the staff to manage all of them. The company plans to expand into five new markets by 2023.
There are 60 jurisdictions that have Landing Locals. However, there are many cities that don’t have enough money to hire them but want to start a smaller version of the program.
Colin Frolich stated that “In Sedona Arizona, that’s exactly how it happened.” “They said, “We don’t have enough cash to pay you guys to manage it, but we do possess our own internal capacity.” We gave them the playbook and they started their own program.
Rent to Locals is a program in Sedona that was launched in August 2022.
According to the city’s housing department housing affordability and availability are limited due to the city’s proximity to national forests. This limits the possibility of expansion and creates a shortage of housing options. Sedona’s average house price is just below $1 million. About 15% of the housing stock are short-term rentals.
Shannon Boone, the city’s housing director, did not respond to questions regarding how many homeowners had joined the program as of press time.
Sara First, Sarazona property management in Sedona, and board member of Arizonans for Responsible Tourism said that she doesn’t know any property owners who participated in the program.
First, First stated that property owners can make three times more from a short-term rental than a longer-term rental. “Only people who are considering taking their property off of the market would be interested in it.”
First, the Rent to Locals program was a workforce housing measure that has gained support in the elite community. She said that constituents have repeatedly opposed the city’s attempts to build apartment complexes. Sedona’s housing code prohibits the construction of accessory dwelling units despite the large number of houses in the area.
She said that there was plenty of space for low-income housing options but too much bureaucracy. “Every time the city proposes an innovative solution, the locals reject it.”
Lease to Locals’ two-year-old operation in Truckee has shown that such programs can provide long-lasting, win-win solutions for both property owners and local workers if applied strategically.
100 units in Truckee joined the program in October 2020, providing housing for 181 workers, and 41 children. According to Landing Locals, Truckee has stopped offering financial incentives for long-term lease renewals. However, more than half the homeowners have chosen to continue to rent long-term without additional subsidy.
Babich, a vacation rental property owner, supports the program as “a singular strategy among many to provide more viable and affordable housing options to local residents.”
He said, “This approach, which offers incentives rather than punitive measures is a positive community-minded approach for solving community problems.” While taxes, fees, and restrictions do not result in more housing options for locals this program has had a positive impact immediately.
Frolich stated that while it is understandable to have regulations that restrict certain types, that stick-only approach will not work well for you. You need to use both the carrot and the stick. Owners should be given the chance to choose to change their behavior. You can offer a carrot of $18,000 to owners. This can be very meaningful and has been proven to be a great way to get inventory back for exactly what you want.

Feature photo by Daniel Abadia on Unsplash

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