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

By Paris Achen

More communities across the nation are coming up with creative solutions that leverage vacation rentals to boost affordable and workforce housing stocks.

“As rent and mortgage prices continue to skyrocket, policymakers are really looking for anything they can do to alleviate the housing crisis,” said Noah Stewart, head of advocacy at Expedia Group. “While short-term rentals have been repeatedly shown to have a very minimal effect on rents, mortgages, and the overall availability of housing stock, local officials continue to target them as broader housing issues continue to grow.”

The shortage of affordable workforce housing “has been especially acute in popular ski towns and beach destinations, where the demand for affordable workforce housing has really greatly outpaced the introduction of new housing supply,” Stewart said.

As a result, it is common to see businesses with limited hours and even closures on regular operating days.

Drawbacks of STR bans and caps

Bans and caps on STRs have been one way that communities have tried to force vacation rentals to convert to long-term rentals. But such restrictions don’t always achieve their intended aim of producing more long-term housing, let alone affordable long-term housing. Plus, bans and caps come with an economic toll in terms of lost jobs and unrealized tax revenue.

In South Lake Tahoe, for example, voters in 2018 approved a phase-out of vacation rental permits outside of the city’s touristic core. By 2021, an estimated 1,400 STR permits had been revoked in the city.

“It doesn’t mean those 1,400 homes become what you want them to become,” said Colin Frolich, CEO of Landing Locals, a housing platform that connects owners of second homes with local workers who need housing. “What happened was a lot of them were sold to another owner who was OK with just leaving the house empty or just renting it monthly instead of nightly. But they didn’t necessarily rent the homes to locals.”

STRs, an affordable housing solution?

Now, more jurisdictions are trying different solutions to develop more affordable housing. Among them are STR-specific taxes that yield revenue for housing projects and programs that incentivize property owners to long-term rent their vacation rentals or second homes to local workers.

STR tax revenue streams in Colorado

In November, voters approved lodging and STR-specific tax referendums in a dozen cities and counties around Colorado. The flurry of tax levies, which all take effect Jan. 1, stemmed from approval of HB 22-1117. The new state law allows lodging tax revenue to be used for affordable housing, child care, and other workforce development.

Specifically, in Summit County, Colorado, voters approved Measure 1A in November to levy a countywide STR lodging excise tax of 2% to generate $5.4 million for workforce housing development, child care, hiking trails, and tourism promotion.

Additionally, the town of Dillon, in Summit County, passed an STR-specific tax of 5% – on top of the 2% countywide excise tax – to support workforce housing. Dillon voters also agreed to increase the town’s debt to fund workforce housing.

“Workforce housing has always been a challenge in our destination, exacerbated by the spike in real estate price post-pandemic, which resulted in higher purchase prices, higher rents, and fewer affordable and viable housing options for our community members,” said Toby Babich, president of the Summit Alliance of Vacation Rental Managers (SAVRM). “Like every tourism servicing industry, the vacation rental community has been impacted and has been consistently driving discussions and solutions to mitigate this community issue.”

SAVRM supported the 2% increase in lodging tax to fund housing development.

“We are eager to see more units being built very soon,” Babich said.

Other states like California have also found ways to use transient occupancy taxes to fund affordable housing projects.

Lease-to-locals incentives for homeowners

Summit County’s 2% lodging excise tax for workforce housing and child care is only one part of their approach to addressing the shortage of affordable housing.

The mountain county and the town of Breckenridge within it are also an incubator for the relatively new trend of Lease to Locals programs. The Lease to Locals program, administered by Landing Locals, provides monetary incentives for homeowners to long-term rent their vacation rentals or second homes to local workers.

Since the program started in October 2021, 74 vacation rental units in Breckenridge and unincorporated Summit County have been converted to long-term housing units. Those units have housed 144 workers and 18 children, according to statistics from Landing Locals.

Property owners can choose a six-month or 12-month conversion, and financial incentives paid to the owner can be up to $22,000, depending on the length of the lease and the size of the unit.

In exchange for the financial incentive, property owners rent out their unit for a six- or 12-month lease and agree to cap rent based on the unit’s size. The monthly rent for a one-bedroom unit is capped at $1,500, while the rent for a four-bedroom home would be limited to $4,000 per month.

The only criterion for tenants is they are required to work locally for an employer serving customers in Summit County for at least 30 hours per week.

The first Lease to Locals program started in the tourist mountain town of Truckee, California, in October 2020. The program has since expanded to include South Lake Tahoe and North Lake Tahoe in California, Summit County in Colorado, and the Wood River Valley in Idaho.

In South Lake Tahoe where STRs are largely banned, the Lease to Locals program attempts to recruit homeowners with second homes that are standing empty for the majority of the year, whereas in Summit County, the program targets underperforming short-term rentals.

Property managers have been surprisingly supportive of the program and have even recommended properties that have been struggling in the STR market, Frolich said.

“If you have a $1,000-a-night house on the lake and it’s full 60% of the time, there’s no way you’re going to convert to long-term renting,” he said. “We’re better served to convert people with empty second homes, extra rooms, underperforming short-term rentals that might be better served as long-term rentals because they’re poorly decorated or in a tough location for tourists.”

Landing Locals, a small startup, hasn’t been able to keep up with the demand for the program. So far, 60 jurisdictions with funding ready have applied to start programs, but Landing Locals doesn’t have the staff capacity to administer all of them, Frolich said. The company plans to expand to just five new markets in 2023.

In addition to those 60 jurisdictions, there are cities that don’t have enough funding to hire Landing Locals but want to start their own smaller iteration of the program.

“In Sedona, Arizona, that’s exactly what happened,” Colin Frolich said. “They said, ‘We don’t have enough money to pay you guys to run it, but we do have our own internal capacity. And we gave them the playbook, and they’ve gone forth and started their own program.”

Sedona’s program, called Rent to Locals, started in August 2022.

According to the city’s housing department, housing affordability and availability are limited because the city is surrounded by national forests, limiting the possibility for expansion, and there is a lack of diverse housing options. The average house price in Sedona is just under $1 million, and about 15% of the housing stock is short-term rentals.

At press time, the city’s housing manager, Shannon Boone, had not responded to questions about how many homeowners have joined the program so far.

Sara First, owner of Sarazona property management in Sedona and board member of Arizonans for Responsible Tourism, said she doesn’t know of any property owners who have participated in the program.

“Property owners can earn three times as much as a short-term rental than a long-term rental,” First said. “Only people who are already considering taking their property off the market would consider it.”

First said the Rent to Locals program was one of the few workforce housing measures that have gained support in the elite community. Constituents repeatedly oppose the city’s attempt to construct apartment complexes, and Sedona’s housing code outlaws the construction of accessory dwelling units despite large house lots around the city, she said.

“There is space for creative low-income housing options, but there is so much red tape,” she said. “Every time the city proposes a creative solution, the locals vote it down.”

Data from Truckee, where Lease to Locals has been operating for two years, shows that such programs can create long-lasting win-win solutions for property owners and local workers when applied strategically.

Since October 2020, 100 units in Truckee have joined the program, providing housing for 181 workers and 41 children. The city of Truckee stopped providing financial incentives to renew long-term leases, yet despite that, more than half of the homeowners have decided to continue to long-term rent without the additional subsidy, according to Landing Locals.

Babich, who is a vacation rental property manager, supports the program “as a singular strategy among many to introduce more viable and affordable housing options for local community members.”

“This approach, which offers incentives versus punitive measures, is a positive community-minded approach to solve community issues,” he said. “Taxes, fees, and restrictions are not resulting in more housing options for locals, but this program has had an immediate positive impact.”

“Thoughtful regulations to restrict certain types of housing stock makes sense, but that stick-only approach is one that’s not going to serve you well,” Frolich said. “You need to use the carrot and the stick. You need to provide owners the opportunity to opt in to something that you want their behavior to change. If you dangle a carrot, $18,000, in front of them, that can be really meaningful and actually has proven to be a really meaningful way to get back inventory for exactly what we want.”

 

Feature photo courtesy Daniel Abadia on Unsplash