In May 1989, the City Council adopted Ordinance 89-17 prohibiting the “transient commercial use of residential property for remuneration in the R–1 District.” The Ordinance defines “remuneration” as “compensation, money, rent, or other bargained for consideration given in return for occupancy, possession or use of real property.” The purpose of Ordinance 89-17 is to protect the character and quality of life in the City’s R-1 District. In June 1989, a lawsuit was filed against the City (Ewing v. City of Carmel-by-the-Sea) seeking declaratory and injunctive relief, as well as an award of damages for violation of the plaintiff’s civil rights. In October 1990, a trial court entered judgment in favor of the City, finding the Ordinance to be valid and enforceable. This decision was upheld by the California Court of Appeal, Sixth Appellate District.
While Ordinance 89-17 and the City’s Municipal Code prohibit transient rentals in the R-1 District, there is no prohibition on this use in the Multi-Family (R-4) and Commercial (CC, SC, RC) Districts. Over the last year it has come to the attention of the general public that the prohibition on transient rentals only applies to the R-1 District, and as such, the City has received a number of inquiries and applications to establish transient rentals in the downtown. Since February 2018, the Community Planning and Building Department has issued 16 permits, authorizing a total of 23 transient rental units (see Attachment 2). In response to transient rental permit activity, staff has drafted an information hand-out for the public (see Attachment 3). Transient rental units are subject to the Transient Occupancy Tax (TOT) rate of 10% of the rent charged by the operator.
STAFF ANALYSIS:
Transient Rental Issues: One potential issue with permitting transient rentals in the Multi-Family and Commercial Districts is that it can potentially impact available housing supply, as landlords may find it more profitable to rent their units on a transient rather than long-term basis. According to the California Department of Housing and Community Development, the state needs an additional 1.8 million housing units by 2025 in order to keep pace with population growth. In this vein, the State Legislature has recently passed a number of bills intended to streamline creation of new housing. In staff’s opinion, permitting transient rentals undermines local and state needs for additional housing units. The City contains approximately 3,000 single-family residences and 650 multi-family units. The multi-family units in the downtown provide the best opportunity for affordable/workforce housing.
Transient rentals may also potentially impact the City’s hotel industry. While there are certain distinctions between a hotel and a transient rental, both are very similar in their core function of providing nightly lodging to visitors. It is too early in the permitting process to determine if the 23 approved units are currently impacting occupancy rates, but as the number of transient rentals increase, staff anticipates that the occupancy rates of hotels could be impacted. Permitting transient rentals is also inconsistent with the City’s numerical cap placed on hotel units, which is set at 948 units under Ordinance 84-14. For example, a developer could potentially build a multi-unit apartment building, in which the individual units could be rented on a transient basis, essentially functioning as a multi-unit hotel.
Current Tools: The City currently has several tools that can be utilized to minimize the impact of transient rentals. For example, any project with a density of 23 or more dwelling units per acre requires a conditional use permit. Because projects at these densities require a conditional use permit, the City can issue the permit with a condition that the units not be used on a transient basis. While this tool can ensure that new project provide long-term rentals, it does not address conversion of existing apartments to transient rentals.
In addition to regulating transient rentals through the use permit process, they are also regulated through the building permit process. In September 2018, the City Council adopted amendments to Title 15 of the Municipal Code, which mandates that conversion of more than 1 apartment to a transient rental unit will require a change in Building Code Occupancy Classification from R-2 (long-term apartment) to R-1 (transient hotel/motel). The R-1 Occupancy Classification (not to be confused with R-1 Zoning) hold transient rentals to the same building code standards as a hotel and could require that the building be sprinkled and fitted with accessibility improvements as a result of the occupancy reclassification.
Policy Options: Staff is seeking feedback from the City Council as whether staff should prepare an ordinance that would prohibit or limit transient rentals in the Multi-Family and Commercial Districts. Such an ordinance would need to include sufficient findings as to why the regulations are necessary to ensure that goals related to public welfare are achieved. Furthermore, the ordinance should be crafted in a way that it does not diminish or undermine Ordinance 89-17, which protects the R-1 District from transient rentals. Of important note is that in recent years the California Coastal Commission has publicly supported transient rentals, and in certain cases, disallowed cities from banning such uses in the coastal zone. The California Coastal Commission may contest such an ordinance in Carmel.
As an alternative to adopting an ordinance in the near future, staff could continue to monitor and record data on the number of permits issued and report back to the City Council on a periodic basis. The 23 units converted this past year represent approximately 3.5% of the City’s multi-family housing stock. The City Council could consider drafting an ordinance or resolution to address the potential issue, if the number of transient units increase substantially over the next year.