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Tuesday, May 21, 2024

City required to refund more than $500K in short-term rental fees

The City of Wilmington will amend its short-term rental policy, following a court ruling declaring its registration requirement illegal. (Port City Daily/Alexandria Sands)

WILMINGTON — Wilmington homeowners have been renting out their properties for years and have paid the city roughly half-a-million dollars in registration fees. After an April court ruling deemed that practice illegal, the city must repay them, plus interest. 

Council will vote Tuesday on appropriating $511,484 for reimbursement.

READ MORE: Wilmington will appeal ruling that struck down its short-term rental ordinance

ALSO: ‘Void and unenforceable’: Superior Court judge strikes down Wilmington’s STR ordinance

CATCH UP: National law firm takes on Wilmington over short-term rental ordinance

The city’s short-term rental ordinance has been a topic of contention since issues surrounding the unregulated practice were brought to the attention of local officials more than seven years ago. Proponents of rentals have cited benefits include additional income for locals, as well as lodging options for tourists. Those against it have said rentals ruin the character of a neighborhood (specifically historic downtown), attract parties and large gatherings, and present safety issues.

The city did not have regulations in place prior to 2018 and some have long requested measures to keep rentals out of residential areas. The only requirement in the city’s code was ensuring visitors renting out private residences stay a minimum of seven days.

As Airbnbs and VRBOs became more prevalent, the city reviewed 16 other cities’ regulations and made a push to change its land development code.

Council approved a 2019 short-term rental ordinance that required homeowners using their properties as vacation rentals to register with the city. It also put in place certain restrictions: 400-feet separation between rentals, a cap on the number of rentals allowed within residential areas (2% of all units), a parking requirement, as well as additional rules involving parties and noise.

The guidelines allowed short-term rentals (albeit with a few provisions) in all zoning, except the manufactured homes district. 

“The ordinance intend[ed] to preserve the integrity of neighborhoods, limit disruptions to the primary purpose of neighborhoods, help ensure public safety and minimize the effects on housing affordability,” city spokesperson Jennifer Dandron wrote in an email. “The city sought to balance the negative effects against the benefits of a properly regulated short-term rental market and protect the community.”

Last month, the N.C. Court of Appeals — comprising a three-judge panel — ruled unanimously that provisions within the ordinance violated state law. 

Effective immediately, the city will no longer require property owners to register their homes as rentals. According to the 2019 amended N.C. Vacation Rentals Act, local governments are prohibited from requiring an owner or manager of rental property to obtain a permit.

Wilmington also will no longer enforce separation between rentals or a cap. The 2% capped estimate was based on the number of short-term rentals three years ago — 700 — out of all residentially zoned units.

As a result of the unanimous ruling, the city would have a tough time appealing the decision to the Supreme Court. City staff has decided not to continue litigation.

Nearly $450,000 in registration fees have been collected since the program’s inception, and participants incurred $10,189 in third-party processing fees (for the use of debit or credit cards). Per the general statute, 6% of accrued interest, or $57,867, is being accumulated to the refundable amount.

Assistant city attorney Shawn Evans told council at Monday’s agenda briefing the city is aiming to send out all checks by June 30.

How we got here

Following years of public debate regarding the best way to manage short-term rentals, city council adopted new regulations for both homestays and whole-house rentals in February 2019.

They were set to go into effect March 1, 2019, but the amended N.C. Vacation Rentals Act called into question whether a registration requirement was allowed by the city.

Back then, city officials did not feel the law applied to them. Their stance was the statute referred to building inspections, whereas requiring rental property registration involved zoning.

To maintain its separation requirement and 2% cap, the city implemented a lottery system for those wishing to register a rental property. 

David and Peggy Schroeder applied for the permit after renovating a house for $75,000, specifically to use as a rental, only to lose out in the lottery. A neighbor in close proximity received one instead. 

The couple first tried to appeal to the Wilmington Board of Adjustment — the only board able to overturn a council decision — but was denied.

National law firm Institute for Justice picked up their case and argued the city’s actions were unconstitutional. The Superior Court ruled against the Schroeder’s case for unconstitutionality, but it also deemed the city’s regulations “void and unenforceable.” 

Days later, Judge Richard Kent Harrell granted a stay on the order. Both the City of Wilmington and the Schroeders appealed the Superior Court’s decision.

The ruling prompted Carolina Beach leadership to table its discussion on regulating short-term rentals. Currently, there are no regulations on short-term rentals in Wrightsville Beach either.

The latest ruling overturns the city’s short-term rental regulations as invalid.

Had the city moved forward with plans to change the language in its ordinance from “registration” to “permit,” and also remove the 400-foot separation and 2% cap requirements as proposed in January 2021, it could have possibly avoided ongoing litigation.

City staff will now review its short-term rental guidance in its entirety and recommend changes. The planning commission will vote on revisions at a June 1 meeting; thereafter, the amendment would go to council for a vote at the July 19 meeting.

Split-decision on entire ordinance

Even though the Superior Court initially declared the city’s ordinance invalid in its entirety in September 2020, the recent appeals decision upholds some of the current rules, including:

  • There must be an offsite or off-street parking space for each bedroom being used in a short-term capacity 
  • Rental property owners must still obtain $500,000 in liability insurance
  • There is a three-bedroom maximum only applicable in homestays where the homeowner lives on site
  • No ground floor rentals are allowed in the central business district
  • A local manager must be available within 25 miles of the property, for contact with guests (and that person’s contact information must be posted within the unit)
  • Nuisance rules prohibiting parties and events are upheld
  • Trash carts must be brought to and from the street on collection days

As of Monday, the city updated its website to reflect the changes: 

“The City of Wilmington will no longer require registration for short term rentals or enforce the cap and separation requirements in the City’s short term lodging ordinance due to a recent court decision. All other provisions of the ordinance remain in effect.”

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