A trend that started just over a decade ago, and which has not let up since, is the desire for people to monetize their assets. Airbnb began its business in 2008. Uber popped up in 2009. Today, homeowners can use Neighbor to rent out their extra parking spaces to RV owners. Do you think this type of sharing of services will go away? Probably not. And community associations are clearly being impacted by at least one of these services: The short-term rental (“STR”).
These days many homeowners are allowing their homes to be rented out as STRs through online vacation rental sites such as Airbnb, VRBO, and HomeAway. And for various reasons discussed below, many boards are approaching us with the hopes that we can assist them in banning STRs.
Before you move forward on a short-term rental ban, however, you should consider: (i) the pros, cons, and alternatives to a ban on STRs, (ii) whether you have the authority to restrict STRs based on your current governing documents and, if not, (iii) how to go about getting an amendment approved.
- Some Pros and Cons of Short-Term Rental Bans
What are some of the pros of banning short-term rentals?
Boards frequently identify the following as the direct negative impact of STRs: the revolving door of guests, the constant violation of rules and regulations, the noise, the parties, the lack of parking, and the increased property damage. By eliminating STRs, theoretically, the association will eliminate all the foregoing problems.
As far as indirect impact, some boards are concerned with how STRs impact FHA financing. Allowing Units to be rented for less than 30 days (if that is how your association defines “short-term”) makes an association ineligible for FHA-backed loans. Also, many boards argue an overall reduction in property values if STRs are present.
What are some of the cons of banning short-term rentals?
Probably the most obvious one is that they eliminate the ability of homeowners to have a simple way to supplement income. The platforms for short-term rentals are relatively easy to navigate and provide a quick way to rent your home.
Also, while many argue that the existence of short-term rentals reduces market value in general, the opposite may be true. Depending on your type of project, the availability of STRs for sale may actually increase the marketability of the units. Short-term rentals are, after all, a booming business.
Are there alternatives to a complete ban on short-term rentals?
Yes, and the board should consider them. Perhaps a cap on the number of Units that can be rented out on a short-term basis would be more easily approved and accepted by the owners than a complete ban.
Or, instead of approaching the problems of STRs with a ban, some associations approach them (and rental restrictions in general) from an enforcement perspective. If the problem with STRS are unruly, noisy tenants who violate the rules and damage the property, then the Board could impose stricter consequences on owners who continually fail to control their tenants. The association could, for example, establish a fine structure with hefty fines that escalate as the number of violations increase. Or, the association could incorporate a “three strikes and you’re out” system, where the first strike is a hefty fine, the second strike is a hefty fine and suspension of the right to rent on an STR basis, and the third strike is the revocation of short-term rental rights altogether.
Some associations are embracing short-term rentals and looking at this from an economic perspective. Rather than banning STRs, the associations are amending the declaration to include a fee that the owner must pay for each rental. The fee might cover damage caused by the numerous guests, or the cost of enforcement in general, or potential administrative expenses.
The point is that boards need to approach any proposed STR amendment from all angles. Only after thoughtful evaluation can the board make an informed decision on whether a complete ban on STRs is appropriate for the community and will garner the most support, or a different approach is warranted and better suited for the membership.
2. The Authority to Restrict Short-Term Rentals
We can ban STRs by rule, yes? No.
Boards often approach us with proposals to adopt rules banning, or otherwise limiting, STRs. That is the first mistake. A board cannot adopt a rule banning short-term rentals. Any restrictions on the use and occupancy of the Units need to be included in the declaration itself. See C.R.S. 38-33.3-205 of the Colorado Common Interest Ownership Act (“CCIOA”). A Board may clarify a rule or complement it, but any new restriction on the use of the unit must be contained in the declaration itself.
For example, if your declaration contains a restriction that states “short-term rentals are prohibited,” you could adopt a rule defining the term “short-term rental” as, for example, less than 30 days. In that case, you are merely clarifying what is already stated in the declaration vs. adding a new restriction, which would require an amendment to the declaration.
Ideally, however, you would want to have an actual timeframe stated in the declaration itself rather than in a rule. If you put the timeframe in the rule, then you are responsible for ensuring that the owner had actual notice of that rule. Plus, future boards might want to re-define the timeframe and overturn the prior rule. Also, courts scrutinize rules heavily if challenged.
If the timeframe is included in the declaration, on the other hand, future boards cannot overturn it unilaterally, owners are deemed to have constructive notice of the restriction (they are deemed to have received notice of the amendment once it is properly recorded), and the restriction is presumed valid and enforceable (assuming it is not contrary to Colorado law or enforced in an arbitrary or capricious manner).
The Declaration already prohibits “Commercial Use” and only allows “Single-Family Units,” so that means STRs are automatically banned, right? Wrong.
The second mistake boards often make is the assumption that the language in the existing declaration already bans short-term rentals or rentals in general. Current restrictions against “commercial use” of units or that require only “single-family units” are used as support for an automatic ban on STRs. This is approach is flawed.
First, renting a unit is not considered “commercial use” of the unit. In Houston v. Wilson Mesa Ranch Homeowners Association, Inc., the Colorado Court of Appeals held that short-term rentals did not violate a covenant prohibiting commercial use of a unit. The Court ruled that short-term rental of the home did not make the use “commercial” because the unit was being used for residential purposes. The renters were using it for ordinary living purposes such as eating, sleeping, relaxing, etc.
And, while the Court acknowledged the ambiguity of the phrase “residential purpose” when applying it to a short-term rental situation (i.e., ambiguous as to whether it required intent for the renter to be present for more than a transient stay and ambiguous as to whether one should be focusing the inquiry on the owner’s use of the property vs. the renter’s use), ultimately the Court concluded that, because ambiguities in covenants are to be construed in favor of the free use of property, short-term rentals were not inconsistent with residential use.
Second, requiring only “single-family units” in a community does not ban the use of such units for rental purposes. In Double D. Manor, Inc. v. Evergreen Meadows Homeowners’ Association, Double D was a nonprofit corporation that provided a group home for developmentally disabled children. The declaration provided that “all sites shall be for residential use only, with only one single-family dwelling permitted on any site. The Association argued that “single-family dwelling” restricted use to single families only. The Colorado Supreme Court disagreed, holding that “single-family dwelling” described the type of structure permitted, not the use of the unit.
The Association also argued that the home was being used for commercial and not residential use, as Double D had employees/staff living onsite, wages were being paid and there were other costs to maintain the group home business. The Court acknowledged the commercial aspect in that there was a receipt of funds to run the home; however, the use of the structure was still as a home for developmentally disabled children.
The City restricts Short-Term Rentals, so we can just enforce the City regulations, ok? Not ok.
Boards often believe that because the City restricts short-term rentals, and because the homes in the association are subject to City regulations, then the Association can enforce the City regulations. This is incorrect. An association only has the right to enforce its own restrictions, rules, and regulations. It has no jurisdiction to enforce the City or other governmental entity’s regulations.
So, if the City requires an owner to register their short-term rentals, or obtain a license, or provide a registered agent to respond timely to potential complaints, or if the City allows for the suspension of short-term licenses, all the foregoing is for the City to administer and enforce, not the Association.
3. Amending the Declaration to Ban Short-Term Rentals
If you do not have existing authority to ban short-term rentals, what is the next step? You must amend the Declaration.
Do we need Owners to approve a Short-Term Rental ban? Yes.
CCIOA, at CRS 38-33.3-217(1), provides that a declaration may only be amended by the affirmative vote or agreement of owners of units to which more than 50% of the votes are allocated, or any larger percentage stated in the declaration not to exceed 67%. That is the range. If your declaration provides an amendment provision that requires something outside of that range (e.g., requires 75% owner approval or 50% owner approval), then your amendment provision is contrary to Colorado law.
Note that CCIOA provides exceptions to the above range for certain types of amendments. One such exception allows the declaration to contain an owner approval requirement that is higher than 67% for amendments that would “change the uses to which any unit is restricted.” See CRS 38-33.3-217(4.5). Arguably, this would include taking a formerly permitted use, such as the ability to lease one’s unit on a short-term basis, and banning such use through an amendment.
Other provisions exempt owner approval requirements altogether, again depending on the type of amendment. If you are unclear of the owner approval requirement for a proposed STR ban, or any other type of amendment to the declaration, you should consult the association’s attorney.
Also, keep in mind that some declarations require first mortgagee (i.e., lender) approval in addition to Owner approval. Some declarations contain separate mortgagee approval requirements for “material” amendments, such as those that affect the right of owners to lease their units. Others, simply require first mortgagee approval for all proposed amendments. Unfortunately, some declarations even require unanimous mortgagee approval for amendments.
Thankfully CCIOA provides a process, at CRS 38-33.3-217(1)(b), under which an association may obtain first mortgagee approval by satisfying a few procedural requirements. Briefly, the association must identify the first mortgagees, send them the proposed amendment by certified mail with a request for approval, have notice of the amendment published at least twice in the county newspaper at least one week apart, and wait for 60 days to see if any mortgagees respond with an objection. The overwhelming majority do not. This is where apathy works in your favor, as a mortgagee who fails to respond in 60 days is deemed to have approved the amendment. And no, you cannot use this same “non-response in 60 days method” with owner approval.
How should the amendment be worded?
Now that you know the requirement for amending the declaration, how should you draft your short-term rental ban? Wording is important, and you should leave no room for ambiguity. When drafting the amendment consider the following:
- Include a clear definition of short-term rental. What is the timeframe for “short-term?” Less than 30 days? Less than 6 months?
- Include clear examples of traditional short-term vacation rental sites such as Airbnb, VRBO, HomeAway, etc.
- Prohibit not just the rental, but the advertisement of a unit for short-term purposes.
- Clearly define whether the short-term rental ban applies if the homeowner resides in the Unit. Can the homeowner rent a room on a short-term basis if the homeowner is living there as well? Will the concerns for short-term rentals be adequately addressed if the homeowner is present?
- If applicable, provide for exceptions.
And do not try doing this on your own. Make sure you consult your attorney in drafting the amendment or reviewing your draft.
What are some best practices in obtaining Owner approval?
Amending the Declaration to include a short-term ban, or for any purpose for that matter, is difficult simply because of the required owner approval. If a board is going to engage in the time, process, and cost of amending the declaration, it should evaluate the likelihood of success from the very beginning, and attempt to remove any barriers to that success.
Consider the number of Units already being rented. If your declaration requires 67% homeowner approval, and 40% are currently renting out their units as STRs, do you think the 40% will approve the amendment? Likely not. And with the foregoing percentages, if you are unable to get their approval, the amendment will fail. You need to consider how to convince the investor owners to approve the amendment. Perhaps you could exempt them from the ban altogether, and allow them to continue to rent on a short-term basis until they sell the Unit?
Also, discuss the community’s political climate in general. Is there sufficient support within the community to amend the Declaration in general, and to ban short-term rentals specifically? If not, what would it take to achieve such support? Would education about the rental/short-term use of units help or hurt your efforts to amend? Consider conducting a survey to test the pulse of the community. You do not want to waste your time and money pursuing a short-term rental ban if you discover that most owners would reject it.
Education, communication, and transparency are key to successfully obtaining approval for any proposed amendment. Educate the homeowners on the benefits of the amendment and be ready for questions. You should have already evaluated the pros and cons of banning short-term rentals, so you should be able to speak about them readily. You should be able to clearly and openly explain the intent of the proposed amendment, the goals you seek to accomplish by its passage, and the alternatives you have considered. You should be able to articulate the wording and meaning of the proposed STR restriction, and any exceptions to, or exclusions from, the same. And you should already know the requirements of amending the Declaration to add the restriction.
Presenting a thoughtful and clear campaign on the proposed short-term rental ban shows that the board made an informed and prudent decision in pursuing such amendment, and in expanding association funds to get it approved.
Finally, on a practical note, make sure you make it easy for homeowners to cast their vote. Most associations use the mail ballot process when conducting an amendment vote, which is set forth in the Colorado Revised Nonprofit Corporation Act, at C.R.S. §7-127-109. Under this process, the Association delivers to all owners: (i) the amendment, (ii) a cover letter explaining the amendment and including the information necessary to comply with statutory requirements, and (iii) a ballot upon which they can vote yes or no on the amendment.
Unfortunately, if there is no easy way to return the ballot, many owners will simply discard the mailer and ballot. It would be better to include a self-addressed stamped envelope for return. Also, you should include numerous options for return of the ballot, including but not limited to returning it by mail (using the SASE), email, fax, hand-delivery to the manager or board members, or dropping it off in a secure location, such as a ballot box installed in the clubhouse.
Plus, many boards fail to follow-up on the amendment process once it gets started. If you are using the mail ballot process discussed above, then you only have 60 days from the date you receive your first signed ballot to obtain all the necessary ballots for approval. Time passes very quickly. About a month into the process, the board should review how many ballots have been collected to date, then use the remaining month to go door-to-door, make calls, send emails, and otherwise attempt to solicit responses from the remaining community.
Adopting a short-term rental ban involves a lot of evaluation on the front end, careful thought and creativity during the drafting process, and diligence in getting the amendment passed. If you are interested in adopting a short-term rental ban or discussing the process and all that it entails, please contact any of the Altitude attorneys at 303-432-9999 or [email protected].