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. In recent months there has been a proliferation of transient rental permits issued, with 34 transient rental units approved since January 2018 (see Attachment 2).  In response to transient rental permit activity, staff has drafted an information hand-out for the public (see Attachment 1). 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 eliminates available long-term housing supply. 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. Research shows that within City limits apartments and condominiums rents for less than half the rate of a single-family residence (see Attachment 3). The elimination of these housing units conflicts with the following General Plan – Housing Element goals, programs and policies:

Goal G3-1: Preserve the existing housing stock.

Goal G3-2: Preserve existing residential units and encourage the development of new multi-family housing in the Commercial and R-4 Districts.

Program 3-2.1.b: Preserve and Increase Second Floor Residential Uses. To prevent the loss of existing residential units in mixed-use buildings, the City will continue to prohibit the conversion of existing second-floor residential floor space to commercial use.

Policy P3-3.1: Ensure adequate sites are available to meet the City’s projected housing growth needs.

Policy P3-5.3: Preserve and expand affordable and rental housing opportunities to enable local employees such as teachers, police, fire fighters and other City personnel to live in the community where they work.

Permitting transient rentals in place of long-term housing may also be in conflict with a State mandate to increase housing supply. According to the State Department of Housing and Community Development (HCD), California needs an additional 1.8 million housing units by 2025 in order to keep pace with population growth. In recent years, the State Legislature has passed a number of bills intended to promote the creation of new housing units. For example, in 2017 the State Legislature adopted the California Housing Package, which included 15 associated housing bills. According to the State HCD website, “the Housing Package offers an injection of new regulatory and financial resources, and, with it, an opportunity to increase supply and innovate delivery throughout the State. California has a very low supply of new homes compared to need. The State averaged less than 80,000 new homes annually over the last 10 years—less than half of the projected need.”  In addition to the Housing Package, a number of other housing bills were also recently adopted and went into effect in January 2019.

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.

As an alternative to adopting an ordinance, 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 34 units converted this past year represent approximately 5.2% 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.