COMMENTARY: Short-term rentals - A regulatory wind blowing from the West

By Robert Pollack
BridgeTower Media Newswires

The issue of short-term rentals is a particularly hot-button issue across Michigan right now, with many different parties having an interest in how the state regulates the issue.

Single-family homeowners may have an interest in renting out a room to offset their mortgage payment. Investors may have an interest in purchasing cash-generating properties for passive income. Homeowner’s associations and condo associations may have an interest in managing how the homes or condos in their communities are used. And finally, cities may have an interest in how to best regulate short-term rentals for the benefit of operators while maintaining the character of their residential neighborhoods.

Several cases in the past few years in Michigan have highlighted the fact that short-term rental law still varies from local jurisdiction to local jurisdiction, with some courts varying as to the exact nature of the use, but one case in particular highlights the crux of the issue well.

In Reaume v. Township of Spring Lake, the Court of Appeals first ruled that operating a short-term rental is a commercial use of property and not a residential one and was thus prohibited in a residential zoning district. The ruling was then appealed to the Michigan Supreme Court, where the Supreme Court upheld the effect of the ruling, that the use was prohibited, but on a different basis: The court ruled that the short-term rental use of property fell within the township’s definition of a “motel,” not a “dwelling.” Because “motels” were not a permitted use in the residential zoning district, and the plaintiff’s property was zoned residential, the high court affirmed the appellate court ruling and concluded that short-term rentals were not allowed in the district.

One of the other main issues in the Court of Appeals case that the Michigan Supreme Court addressed was whether the definition of a “single-family dwelling” could apply to a family that was staying in a short-term rental on a temporary basis. The Court of Appeals ruled that a “family” for the purposes of single-family zoning did not apply to “individuals whose relationship is of a transitory or seasonal nature” and excluded transient or temporary rental occupation in that zoning on those grounds.

The Supreme Court of Michigan, however, vacated that narrow question, affirming that a “family” for the purposes of single-family dwellings, although not being of a transitory nature with respect to each other, still could be transitory as it relates to their occupancy. This theoretically could lay the groundwork for allowing short-term rentals in residential single-family zoning districts if there are no other provisions of the city’s zoning ordinance that deal with temporary occupancy, like a “motel,” in which the use would more readily fit.

Other subsequent cases have sidestepped this issue of whether short-term rentals are allowed in single-family residential districts by ruling on other grounds. For example, in Pigeon v. Ashkay Island, LLC, the court found that a short-term rental property was not permitted in a residential district because it met the definition of a “tourist home,” which is not permitted in the district.

Confusion regarding how to define and regulate short-term rentals may be partly why the Michigan Legislature has been working on passing statewide bills recently that would bring some conformity to the issue. House Bill 4722 and Senate Bill 446, bills with identical language, would allow short-term rentals across the state as a permitted residential use in all residential zones without the need for a special use or conditional use permit.

Under these bills, municipalities would still be allowed to regulate some of the effects of short-term rentals, such as traffic, noise and advertising, and would be able to enforce ordinances for the protection of public health and safety, as long as it did not have the effect of prohibiting short-term rentals.

The City of Sedona, Arizona, has been the epicenter of the debate over short-term rentals in Arizona. Sedona had previously made news in Arizona by being one early city to entirely ban short-term rentals. But in 2016, the Arizona Legislature passed Senate Bill 1350, preventing local governments from banning short-term rentals and allowing them across the state, much like HB 4722 and SB 446 in Michigan. This Arizona law has been modified slightly to allow cities to impose some zoning restrictions and regulate health and safety, but as of now, the law has remained relatively similar over the past five years, and efforts to do away with it have been rebuffed.

Arizona has seen a boon in short-term rentals as a result. For example, in 2014, Phoenix had 867 properties for rent on Airbnb, which is now at 3,707 active rentals, according to AirDNA.co. Arizona has seen the most drastic effects of the law particularly in Sedona, where seemingly whole neighborhoods were bought up and turned into lucrative Airbnb rentals charging hundreds per night, some bought up by capital investors from out of state. Although this has created a terrific investment opportunity in the city, it also has created a sharp downturn in affordable housing — the average home is now over $800,000 in Sedona and less than 2% of Sedona residents were born and raised in the city. Some are attributing the problem to the 2016 law.

It is hard to say how much of the issue is caused by short-term rentals as opposed to other intervening variables driving demand to places like Sedona, such as more people working remotely from scenic places during the pandemic, people moving out of cities in general, and people moving from California. Whether a one-size-fits-all approach across the state or a more localized approach is more appropriate remains to be seen in Michigan, but one thing is certain: Michigan municipalities, HOA/condo associations, investors and homeowners will likely need effective legal guidance to navigate the thorny legal issues involved with short-term rentals that are sure to arise in the future.
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Robert Pollack, a real estate, business, and municipal law attorney with Fausone Bohn LLP in Northville, is licensed to practice law in Michigan and Arizona.