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Arizona protected Airbnb with 2016 law, but cities & activists hope to regain regulating power

For Bill Hunter, it all started in 2019 when the party buses started showing up in the Paradise Valley cul de sac where he lives and dropping people off at a neighboring house. 

“There were people all over the front yard and I was definitely uncomfortable,” Hunter said. “I was thinking ‘what the hell is going on?’” 

Just down the street, a house had recently begun operating as an Airbnb and had listed itself as being available to 35-plus guests. The next house over was listed as being open to 25-plus guests, Hunter said. 

In another part of the Valley, Susan Edwards was starting to experience something similar. 

Just north of Phoenix College, Edwards was awoken on the morning of Super Bowl LIII to a knock on her front door. A man in his mid-20s who seemed “out of it” asked her for an address that didn’t exist, peering into her house.

Edwards would eventually direct the man to a house that was across the street, which recently began being rented out as an Airbnb. Not long after that, a group of men began playing beer pong in the driveway and one man started urinating in the side garden. They wouldn’t be the last rowdy guests Edwards would see visit the property. 

The problem is one that has been reported widely across the Valley and the country: Houses in quiet neighborhoods being rented out as “party houses” by companies like Airbnb and Vrbo. The outcry has prompted the companies to make efforts to stop the disruptions in recent years. 

But Arizona residents like Hunter and Edwards say the problem still persists. And with state law tilted firmly in favor of Airbnb and other short-term rental platforms, cities and towns looking to stop the negative effects are increasingly finding their hands tied. 

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Edwards and Hunter are also concerned about the ongoing battles that have been going on in the halls of the Legislature for the past six years. But there’s also hope that a deal can be reached this year on short-term rentals, or STRs.

“I think there is value to a cease fire once we reach an agreement,” Sen. J.D. Mesnard, R-Chandler, who is currently working on legislation that adds additional enforcement mechanisms for STRs, told the Arizona Mirror. “I think there is more willingness to be flexible then.”

But finding a compromise will be tough, as the two sides have opposing demands on issues like accountability and local control. And the issues at stake go beyond disruptions to neighborhoods: The exploding STR market has led out-of-state investors to flock to Arizona and scoop up housing, exacerbating the state’s affordable housing crisis.

A quick history of STR legislation 

In 2016, the Arizona legislature created a law that prohibits municipalities from enacting regulations on STRs except in specific circumstances. It was touted by Gov. Doug Ducey and other lawmakers at the time as boosting the short-term rental market, though Ducey has said since that lawmakers should “revisit” the regulations after a string of complaints from cities and towns that find themselves with no way to go after bad actors.  

The bill was model legislation from the American Legislative Exchange Council, an organization that connects corporations with state legislators — almost exclusively Republicans — so they can craft pro-business legislation. In many instances, the result is legislation that is simultaneously pushed in statehouses across the country. That was the case with the 2016 STR regulation law, which shares almost identical language with bills being pushed in other areas, such as San Francisco, that year. 

The STR company Vrbo is a member of the trade association NetChoice, whose president sits on ALEC’s Private Enterprise Advisory Council.  

ALEC has a strong presence in Arizona, with many GOP members of both the House and Senate Republican caucus having ties to the group. (A recent ruling by the Arizona Supreme Court also found that 26 lawmakers who attended an ALEC conference may have also violated the state’s open meeting law by attending and discussing policy.)  

Since the ALEC legislation became law in 2016, other legislation aimed at STRs has stalled. 

This session, two bills both aimed at revisiting and repealing the 2016 law died after not being heard by a legislative committee. Similar attempts to rein in bad actors in the STR space have also met similar fates over the past few years.

Arizona is one of only six states that have enacted local bans on short-term rental regulations. The other states are Florida, Idaho, Indiana, Tennessee and Wisconsin.

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“They never did any impact study before that thing passed,” Edwards, the Phoenix resident, said about the 2016 law. 

But those impacts can be measured in different ways.

Towns vs lawmakers vs. Silicon Valley vs communities 

The Town of Paradise Valley was recently found to be in violation of that 2016 law after it passed a local ordinance aimed at regulating STRs.

The ordinance was challenged by a Republican state legislator using what’s known as an SB1487 complaint, named after a different 2016 law that permits any legislator to ask the attorney general to review an action by any municipality or county if they believe that action violates state law. 

If the AG’s investigation concludes that the local ordinance violates state law, the municipality must then forfeit all of the income tax money the state shares with cities and towns. Then the municipality is faced with a choice: repeal or amend the ordinance to comply with state law or take the fight to the Arizona Supreme Court, after which there is no appeal.

Critics of Paradise Valley’s ordinance say that the measure is too onerous on STR owners and that it goes beyond what municipalities are allowed to do under current state law. That law says municipalities are prohibited from taking any action that “materially increases the regulatory burden on a business unless there is a threat to the health, safety and welfare of the public that has not been addressed by legislation or industry regulation within the proposed regulated field.” 

The ordinance requires property owners to be on site for certain events, meet their guests within one hour of them arriving at the property, do a background check on every guest, provide the owner’s name and contact information to the town, install a landline telephone, prove that the guest has acknowledged the rules and regulations set by the town, clean the air filters every three months and more. 

The challenge came from state Sen. Warren Petersen, who himself operated a million dollar luxury Airbnb in Gilbert. Petersen told the Mirror that he now operates the home as a “traditional” rental and attempts to find the listing on Airbnb and Vrbo come up empty. 

“The cities and towns have been shivering and quivering in fear as these problems have gotten worse and worse,” Edwards said of the 1487 challenge. Other cities have similarly tried to pass ordinances aimed at regulating STRs and faced similar challenges. 

Sedona passed an ordinance to make STRs have a business license in the city but an SB1487 investigation found the ordinance violated the same state law. Sedona has seen a surge in STRs and a loss in affordable housing since the passage of the 2016 law, and more than 40% of the city’s workforce now lives outside Sedona’s borders. 

In Paradise Valley, the investigation found that the majority of the ordinance was lawful. But the more onerous provisions — the ones aimed specifically at cracking down on party houses — were deemed illegal.

“This is a helpful decision to our town and other municipalities so they know what the rules are valid so they can consider implementing rules also,” Paradise Valley councilmember Julie Pace said about the AG’s investigation. “I view this as a good decision from the AG’s office as it clarifies the murky world of how to regulate STR and party house abuses.”

Since Edwards and Hunter began having issues with STRs in their neighborhoods, they joined with other communities to find ways to address the issues of bad actors and other STR-related issues. 

Edwards is the Chair of the Arizona Neighborhood Alliance, which has been focused on trying to track and find solutions to how STRs are impacting communities in the state. Sedona is one of the major communities that is a partner with ANA. 

To community advocates, local control is the solution to their STR woes. But lawmakers, lobbyists for STR companies and real estate companies have different solutions. 

Mesnard, who said he has been hearing complaints about STRs being disruptive “for a number of years,” attempted to pass legislation last session that would have given back some local control to cities and towns. That bill died, he said, because his Democratic colleagues felt it didn’t go far enough while his fellow Republicans felt they shouldn’t be doing anything on the issue,

This year’s version has gotten traction, however, His Senate Bill 1168 is awaiting consideration by the full House of Representatives. The bill would allow a city, town or county to require an STR to maintain liability insurance and allows the Arizona Department of Revenue to suspend a transaction privilege tax license for any STR that accumulates three state or local fines. 

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Paradise Valley’s ordinance required STR’s to maintain liability insurance, and it was a provision the AG concluded it had authority to do. 

This year he said he is hoping to get the bill through with “everyone at the table,” but that means approaching the issue in a way that won’t satisfy groups like the Arizona League of Cities and Towns and the ANA. 

Zoning and TPT

Two big issues that have been hitting negotiations is the issue of zoning and licensing of STRs. Municipalities want zoning control because it would allow them to better control over things such as occupancy limits at STRs and could allow them to restrict specific types of uses, giving them the ability to possibly come down harder bad actors. 

But that ability was taken away from municipalities in 2016. Mesnard and the STR operators are not keen on giving that power back out of fear that municipalities will use it to zone them into unfavorable areas or out of existence entirely. 

“I wanted a targeted approach, I was not willing to turn over total zoning control over to the cities,” Mesnard said of the bill, saying that his focus is on the party houses and that he was concerned about handing that power over to cities and towns. “I think that in many cases that they’ll just zone them out of existence…I don’t want to see [STRs] zoned out of existence.”

Zoning has become a new battleground for Airbnb, with some cities and towns in other states zoning them into specific areas, effectively banning them. 

“I think the reasons for not allowing for zoning is political and there is that fear from the industry that we would relegate them to the areas of the city that people would not want to go to,” Roxanna Pitones, Senior Legislative Associate for the Arizona League of Cities and Towns said to the Mirror. “Zoning is by nature a local matter and it does make sense that it should remain at the local level because communities are so different.”

Mesnard said he felt that allowing zoning would be a step too far for the bill, and said many of the problems facing neighborhoods would be better handled by local homeowners associations, not municipal governments. Ducey similarly brushed aside neighbor complaints shortly after the 2016 law went into effect and said HOAs are capable of doing the job. And if people don’t live in an HOA, Ducey responded that “people should follow the law all over the state.” 

But the law, in regards to how Airbnbs are operating, is also somewhat murky — and it appears that many may not be entirely abiding by it, according to an analysis by ANA that was verified by the Mirror

Arizona law dictates that operators of an online lodging cannot operate without a transaction privilege tax license in the state and that TPT license must be listed and posted with each advertisement “for each lodging accommodation.” 

The Arizona Department of Revenue reports around 2,000 STRs in the state have TPT licenses, but groups like AirDNA, a STR market research company, report around 50,000 STRs in Arizona. 

ADOR spokeswoman Rebecca Wilder said some discrepancy in the numbers is to be expected, as one person can have a TPT license that applies to multiple properties. 

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“When a business applies for a TPT license, it can specify multiple locations under that single license to apply the right county and city tax rates to monthly gross receipts derived from each location,” Wilder said. “As a result, counts of licenses would not necessarily reflect the number of locations represented.” 

Prior to removing his listings from Airbnb and Vrbo, Petersen did not list a TPT license number on his property. When reached for comment Petersen said his listing was “in compliance” as Airbnb and Vrbo pay the TPT and hold the license and “collect and remit all TPT taxes.” He didn’t answer follow-up questions about whether he had a TPT license, as the law requires.

Airbnb said in a statement that it collects and remits taxes and is committed to working with ADOR “to develop an effective TPT registration and enforcement mechanism.”

There are a growing number of institutional investors swooping in on the STR game in Arizona, like the Parsons Real Estate Fund, which recently spent $9 million on luxury properties in metro Phoenix. Luxury apartments are also being bought up and rented out much in the same way houses have been. 

Sonder, a competitor of Airbnb that focuses on the luxury market, has been investing in Phoenix and raised $225 million during its last round of funding. 

“Out-of-state investors are basically pulling up a milking stool to Arizona,” Hunter said, adding that when he and Edwards examined the STRs that came into their neighborhoods, the owners were from states like Nevada, New Mexico and Alaska, often using outside firms to oversee the properties. 

It’s those investors that have municipalities worried as cities continue to see their housing markets diminish and discussions on capping the number of STRs heat up Mesnard’s bill. 

“You look at the books in other states and only a handful of states have state laws on this,” Pitones, the municipal lobbyist, said. “We are really navigating untreaded waters on trying to regulate this on the state level.”

Mesnard is “cautiously optimistic” that they’ll reach an agreement this time, despite reservations from municipalities and local advocates. 

“I’m an incrementalist — the more you stack on the plate, the harder it is to lift,” Mesnard said. “It’s never going to be one and done.” 

Mesnard’s bill passed out of the House Commerce committee unanimously and is still waiting to be heard on the House floor.

This report was first published by the Arizona Mirror.


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