Solution Journalism spring 2023: Regulating short-term rentals in New Orleans

STR operators protest outside of New Orleans City Hall. Via AP News.

THE ISSUE: STRs IN NEW ORLEANS

The City of New Orleans Comprehensive Zoning Ordinance defines a short-term rental as “the use and enjoyment of a Dwelling Unit or any part thereof, by guests for a period of less than thirty consecutive days, in exchange for money, commodities, fruits, services, or other performances.” In other words, it’s a residence rental that only occurs for 30 days or less. In the 2010s and early 2020s, short-term rentals (STRs) have skyrocketed in popularity with the rise of platforms such as Airbnb and VRBO: there are 6.6 million active Airbnb listings worldwide, and 1.4 billion Airbnb stays have occurred since the company’s founding in 2007.

Although some people rent out a single room in their home on Airbnb as a way to make supplemental income, this is not the typical image of an STR host in New Orleans. 18% of STR hosts operate about half of the licensed STRs in the city. The top ten Airbnb operators in New Orleans controlled around 568 licensed listings altogether as of March 2018. This was about 13% of the 4,291 licensed Airbnbs in the city. At least five of these top ten operators were companies based out of state. It is difficult to nail down exactly how many units each company manages because they acquire multiple STR licenses under the names of different employees to avoid detection from the New Orleans government. Nonetheless, the money made from operating these STRs goes out of state, not to the New Orleans economy.

In 2019, the city tried to implement a law that required the owners of STRs to show that they had a homestead exemption, proving that they lived on the property. In August of 2022, the U.S. Fifth Circuit Court of Appeals struck this down, saying it violated the Constitution. The Commerce Clause of Article I of the Constitution gives Congress the authority “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” The Supreme Court has repeatedly interpreted the Commerce Clause to also prohibit states from passing laws that “unduly restrict interstate commerce,” a legal principle known as the Dormant Commerce Clause. According to the Fifth Circuit Court, New Orleans’ requirement that an STR operator live on the rented property hindered interstate commerce, because it prevented out-of-state hosts from operating STRs in the city.

Additionally, these multi-listing operators hurt the hotel business, which employs many residents in the city. Estimates put the hotel industry’s yearly loss due to STRs at around $450 million nationwide. Hurting the hotel industry does not just result in lower profit margins for the hotel executives—it hurts the locals employed by hotels as well. STRs don’t have bell boys, valets, receptionists, kitchen staff, or concierges. When it comes to cleaning, STR operators usually either clean the units themselves or contract a cleaning service, which lacks the reliability and employee benefits of being on a hotel’s payroll.

Another issue with operators of multiple listings is that they essentially run “scattered-site hotels,” but with none of the zoning regulations in place for actual hotels. This is an especially prominent issue in New Orleans because of its reputation as a party city. Zoning laws prevent hotels with rowdy tourists from popping up in residential neighborhoods, but these laws are more difficult to enforce for STRs because their operations are less overt. Often, these tourists come to the city to party, so they believe they can be as loud and obnoxious as they want in their STR. Darryl Durham, a resident of the historically Black Tremé district, explained to the Guardian how the neighborhood fills up with “drunk, mostly white college-aged kids” in Airbnbs on the weekends and becomes a “ghost town” Monday through Wednesday when they leave. These tourists have created “loud parties, overflowing garbage cans, and countless other issues” for neighbors.

Even though operators with multiple listings can generate income that rivals that of a hotel, they often don’t pay occupancy taxes. Within Orleans Parish, hotels must pay a tax equal to 13% of the fee charged to guests to stay in a room. STR operators are supposed to pay a similar 6.75%, plus a 5% sales tax, but because there are so many of them, and the city’s enforcement team consists of just seven people, it is difficult to ensure that STR operators are actually paying these taxes. In turn, New Orleans misses out on this tax revenue.

Neighbors also complain about how STRs hurt the general community. Many neighborhoods are filled with STRs, which often have no permanent residents. Because of the city’s restrictions on STRs in the French Quarter and Airbnb’s continued promotion as a less touristy alternative to hotels, the most heavily impacted neighborhoods in New Orleans are working-class Black neighborhoods. Central City, Tremé, the Seventh Ward, and Leonidas have the highest concentrations of STRs outside of the CBD. In line with Durham’s experience, neighbors constantly have a revolving door of new people staying for just a few days, instead of actual families and locals that are essential for building a sense of community.

Map of licensed STRs within New Orleans. Via nola.gov.

Rent costs have increased in the New Orleans neighborhoods with the highest concentration of STRs. In Mid-City, rent for a 2-bedroom unit increased by 28% from 2009 to 2015. In the Seventh Ward, a 2-bedroom is 30% more. In the Bywater, a three-bedroom unit costs 72% more to rent than it did before STRs took over. Although some of this can be attributed to the city recovering from Hurricane Katrina, studies have shown that STRs increase rent costs in cities across the country.

Short-term rentals are often more profitable than long-term leases for landlords. For example, as of March 2023, the average rent for a one-bedroom unit in the Bywater is $1,300. This averages out to about $42 a night. On the other hand, a one-bedroom Airbnb in the Bywater goes for around $200-$250 a night, not including whatever cleaning fees the operator charges, which they can pocket if they clean the unit themselves. Even if the Airbnb is only booked for one week out of every month, the landlord still makes more than they would from a long-term lease. Basic supply and demand economics tells us that if the supply of long-term rentals decreases, but the demand remains the same, the price will increase.

STR-induced rent hikes disproportionally affect Black neighborhoods in New Orleans. Airbnb markets itself as an opportunity to experience a more genuine side of the city, and the New Orleans Marketing Tourism Corporation encourages visitors to stay in these historic Black neighborhoods to experience the city’s cultural traditions. These neighborhoods, which include Marigny, Tremé, and the 7^th Ward, are also located near the French Quarter and CBD, making them popular with tourists who do not want to pay for a hotel in the Quarter or an STR in the CBD. Although they promote a genuine experience to tourists, STRs in these neighborhoods are pushing out the residents who keep the cultures and traditions of their neighborhoods alive.

Following the Fifth Circuit Court’s 2022 decision, a moratorium was in place on issuing new STR licenses in the city, but the debate over how to actually resolve the issue only intensified. On March 23, 2023, the city council decided on new regulations for STRs. Beginning in July of 2023, the city will only allow one STR license per square block. Which property gets the license will be decided by a lottery. There will also be a three-strike rule for quality-of-life violations such as complaints of noise or excessive drunkenness from guests. Up to two additional property owners can apply for an STR license per square block, but their neighbors must agree. Additionally, the operator must prove that they live onsite, and they must be a “natural person” instead of a business.

Although the new legislation doesn’t require proof of a homestead exemption, it still requires that the operator live on the property. If challenged in court, this will likely be considered a violation of the Dormant Commerce Clause. Furthermore, the new requirement that the operator be a “natural person” instead of a business may violate the Supreme Court’s 2010 Citizens United decision. This ruling declared that corporations have a First Amendment right to free speech just as citizens do, and limiting their spending on political campaigns is a violation of this right. It is not as clear-cut as the connection to the Dormant Commerce Clause, but attorneys may argue that the city’s unequal treatment of individuals and corporate entities violates the Citizens United decision.

Even if the new regulations survive legal challenges, they will be of no use if the city cannot enforce them. 

THE SOLUTION: NASHVILLE AND HOST COMPLIANCE

Nashville distinguishes between two types of STRs. Owner-occupied properties are properties where the owner lives full time. They might rent out part of their home while they live there, or rent out the entire home while they’re out of town. A non-owner-occupied property is a property that the owner uses solely for STR purposes. Although non-owner-occupied properties are permitted, they must have someone within 25 miles of the property that is available to help with any maintenance or other problems.

The legality of STRs in Nashville depends on their zoning district. There are a few no short-term rental districts, but aside from these, owner-occupied STRs are allowed anywhere in the city. Non-owner-occupied STRs are only allowed in non-residential areas.

Nashville has butted heads with the Tennessee state government over STR regulations. In May of 2018, the state legislature enacted Tennessee Code Section 13-7-602, which limits municipal governments’ ability to regulate STRs. The Legacy Clause states that “a any ordinance, resolution, regulation, rule, or other requirement of any type that prohibits, effectively prohibits, or otherwise regulates the use of property as a short-term rental unit does not apply to property that was being used as a short-term rental unit prior to the enactment of the ordinance, resolution, regulation, rule, or other requirement by the local governing body.” In other words, STRs in Tennessee are governed by the laws that were in place when they began operating, not by the current laws. This makes it very difficult for the city of Nashville to implement effective legislation to regulate STRs.

Tennessee’s legislation states that if an STR property is sold, it is no longer grandfathered in, and must comply to any new laws set by the municipal government. Nashville STR operators have found a way to get around this by creating an LLC and registering their properties in that name. Then, when they want to sell the property, they sell the LLC instead of the property, so the property is still owned by the same corporation and still does not need to comply with new regulations.

Because the state government has made it so hard for Nashville to implement new laws surrounding STRs, the city must focus on enforcing existing laws as strictly as possible. They have done this by teaming up with a technology company called Host Compliance.

Host Compliance uses AI to cross-check STR websites, such as Airbnb.com, with city records of STR licenses. The technology analyzes the photos of the properties on their listings and compares them to property records and assessor photos to find the addresses. The software develops lists of properties, both legal and illegal, with identifying information that makes it easy for city enforcement officers to organize and view them. Host Compliance sends unlicensed properties a violation notice along with a $50 daily fine. If the operator refuses to comply with the notice, enforcement officers from the city follow up.

In order to follow up on illegal STRs, Nashville increased their yearly STR license application fee from $50 to $313 to pay for two new inspectors, doubling their staff. This increased fee helped to discourage some would-be STR operators from filing an application.

Before implementing the Host Compliance system, enforcing STR regulations in Nashville was like “bringing a gun to a knife fight,” according to Host Compliance founder Ulrik Blinzer. Enforcement officials had to manually monitor sites at odd hours to catch illegal listings. They also had to catch operators in the act, which took a lot of time for each property. Now, the software filters through thousands of listings for the officers, who can prioritize manually targeting STRs that have racked up a significant number of complaints or violations while the software takes care of low-level offenders.

The Host Compliance technology, in conjunction with the increased staff, has been incredibly effective in Nashville. In two years, they found around 2,500 STR operators who were violating the law. They also increased the city’s annual STR tax revenue by 50%.

IMPLEMENTING THE SOLUTION IN NEW ORLEANS

Nashville and New Orleans have a lot in common. Both southern cities attract tourists for their music, history, and party culture. In 2022, tourists spent $8.8 billion in Nashville and in 2021, $6.7 billion despite damage caused by Hurricane Ida. Nashville, like New Orleans, also faces the burden of restrictive legislation from a higher jurisdiction. While the Fifth Circuit Court of Appeals has curbed New Orleans’ attempts to restrict STRs, the Tennessee state government has done the same to Nashville. When it comes to solving the STR problem, Nashville is a good case study to implement in New Orleans because they are more focused on enforcement than legislation.

New Orleans has made some progress when it comes to regulating STRs with the recent March 2023 rulings, but now they have to enforce these policies. There are over 2,300 residences in New Orleans with STR licenses, however, estimates have found that there are up to three times as many STRs operating without licenses from the city.

Implementing a technology-based system such as Host Compliance that works around the city government’s red tape would improve the efficiency of STR restriction enforcement. The technology does not require hosts to provide any additional information, such as the address of their property. Instead, it uses AI to analyze the image of the property and find the address on its own. The technology uses publicly available information.

As of November 2021, New Orleans had just five STR code enforcement officers and two administrators on its payroll. They will likely need to hire more staff to follow up on Host Compliance violations. To pay for this, they could follow in Nashville’s footsteps and increase the application fee for an STR license. Over time, however, the new system will more than pay for itself. Host Compliance will generate increased tax revenue by weeding out STR operators that haven’t paid the proper taxes. Host Compliance would also relieve much of the burden on enforcement officials’ shoulders, allowing them to focus on cases that need special attention.

Aside from enforcement technology, permitting non-owner occupied STRs to operate but requiring that they have a contact within 25 miles of the property would help somewhat to curb out-of-state owners. A stricter limit, such as 10 miles, would ensure that the owner either lives in the city or at the very least employs someone within the city as the point of contact for the property. New Orleans is smaller than Nashville in area—349.8 square miles compared to Nashville’s 526 square miles, so a smaller range would make sense.

Distinguishing between non-owner-occupied residences and owner-occupied residences, and allocating zones where each is allowed, would also help ensure that the limited number of STR licenses prioritize local operators. The city might run into trouble with the Dormant Commerce Clause, but not necessarily, because this would still allow out-of-state hosts to operate. It also distinguishes between live-in operators and non-live-in operators, as opposed to in-state and out-of-state operators. STRs are banned in the French Quarter and the Garden District (although many operate illegally), so the city already has some precedent in the zoning of STRs.

The March 2023 regulations will restrict the number of legal STRs significantly. Without adequate enforcement, hosts will simply operate their STRs under the table. This is currently very easy to do because the city barely enforces STR laws. If more STRs switch from licensed to unlicensed operations, the city will lose out on even more tax revenue.

The City of New Orleans has demonstrated that their current STR regulation enforcement is inadequate, and the new laws will only push more operators underground and make any sort of regulation even more difficult to enforce with the city’s current system. Implementing a Host Compliance technology and reforming their enforcement operations would increase the city’s tax revenue and crack down on STRs that hurt the community and economy. Most importantly, however, it would set a new example of efficiency and collaboration for the city government as a whole.