Over the past several months the City Council has been considering regulating transient rentals in the downtown, which includes the Multi-Family (R-4) and Commercial (CC, SC, RC) Zoning Districts. The City contains approximately 3,000 single-family residences and 650 multi-family units in the downtown. Within City limits, apartments and condominiums rents for less than half the rate of a single-family residence (see Attachment 1), and as such, these units provide the best opportunity for relatively affordable and workforce housing.

One potential issue with permitting transient rentals in the downtown is that it eliminates available long-term housing supply, which does not comply with several of the City’s General Plan policies intended to promote housing opportunities, as well as State mandates pertaining to affordable housing supply.

The City Council last considered this matter at the July 2, 2019 meeting, and continued this item for further discussion.  The Council provided the following feedback and recommendations:

• The City should restrict transient rentals in the downtown to some extent.

• The City should explore ways to promote rental housing and/or affordable housing opportunities by allowing a limited number of transient rentals as an incentive.

• Staff should provide additional analysis on potential transient occupancy tax (TOT) revenue.  Of the number of units approved, how many are in operation and are reporting TOT revenue to the City?

• The permitted transient rentals should be allowed to continued to operate as legal non-conforming units, provided the units are continually in operation.  The use should run with the land and have no sunset date.

The following section includes a response and analysis to the recommendations made by the Council at the July meeting.

Restricting Transient Rentals: Since January 2018, the City has received applications for a total for 47 transient rental units downtown, 38 of which were approved. A total of 9 units were denied, 4 of which because the property contains a use permit prohibiting such use, 5 of which because the units have not been constructed yet.

In staff’s opinion, the City should regulate and restrict transient rentals in the downtown to some extent, primarily for the purpose of preserving existing housing stock and promoting new housing opportunities. The City currently has several tools used to regulate transient rentals.  Any project with a density of 23 or more dwelling units per acre requires a conditional use permit (CUP).  As an example, 6 or more units on an 8,000 square-foot lot would require a CUP. Because of the CUP requirement, the permit can be issued with a condition that prohibits transient rental use. While this tool can help ensure that new projects provide long-term rentals, it precludes the City from imposing this condition on low density housing (<22 dwelling units/acre), and does not always address conversion of existing apartments to transient rentals.

Transient rentals 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.

Transient Rentals to Promote Rental or Affordable Housing: At the July 2019 City Counil meeting, staff suggested the transient rentals could be allowed, with restrictions, for the purpose of promoting and incentivizing new housing projects.  Under this scenario, the City could require that only a certain number or percentage of units on a property, or in a multi-family building, be devoted to transient rental use. For example, the City could potentially allow 25% of the units in a building to be used as transient rentals. While transient rentals do reduce available housing supply, permitting a limited number could potentially help subsidize and incentivize new housing projects. A multi-family housing project that includes some number of transient rental units, may make the project more financially viable. In addition to the construction of new multi-family housing, the City could establish a program requiring that a certain number of apartments in an existing building be converted to affordable housing in exchange for allowing conversion of other units into transient rentals.

At the April 2019 City Council meeting, staff presented data indicating that the average rental rate of an apartment in downtown Carmel is $2,374 per month, which equates to $79 per night.  Staff has also researched the average nightly rate for transient rentals in the downtown, which is approximately $518 per night. When comparing these two rates, transient rentals on average can potentially net 650% more (annually) than a long-term rental.  With that said, transient rentals are typically not booked every night.  Working with the assumption that transient rentals are only booked 40% of the time, and that there are additional costs associated with a transient rental such as cleaning and management, staff estimates that transient rentals could still net between 200-230% more than a long-term rental. This data clearly indicates that transient rentals are more profitable than long-term rentals, with potential to yield a greater return on investment for the developer. 

The City has few means of incentivizing the production of housing, in particular, affordable housing.  One of the primary incentives is the City’s density bonus program, which essentially allows more units than what would typically be allowed, if the project includes some affordable housing units.  Densities between 33-44 dwelling units per acre are permitted if the applicant provides affordable housing in accordance with State Density Bonus Law.  Densities of 45-88 dwelling units per acre are permitted if all the units are composed of affordable housing.  The City Council should consider whether allowing a certain number of transient rentals per site should be offered as an incentive to rental and/or affordable housing.

Analysis of Transient Occupancy Tax (TOT):  The City Council requested additional information on transient rental permits, including how many are in operation, how many are under construction, and how many are reporting TOT revenue. The data on these units is identified in the table below. In summary, the City has approved a total of 29 permits authorizing 38 transient rental units, with 9 units currently under construction.  In May and June of 2019, the City has received TOT revenue from 9 units (6 permits) totaling $17,366. During these months a total of 21 units reported zero revenue and reports were not submitted for 8 units. Staff intends to follow up on this research by contacting the permit holders that are either not submitting TOT reports or are reporting zero revenue, in order to determine why this is the case.  The City Council should take this data into consideration, when considering policy options and how it relates to transient rentals as a potential source of future revenue.

Legal Non-Conforming Permits: At the July 2019 City Council meeting, the Council indicated that the permitted transient rentals should be allowed to continue to operate as legal non-conforming units, provided the units are continually in operation.  Also, the use should run with the land and have no sunset date.  The Council’s recommendations are consistent with the City’s current regulations regarding non-conforming uses, as set forth in Municipal Code Chapter 17.36 (Nonconforming Uses and Buildings).  Under these regulations a nonconforming use may continue to operate in perpetuity, but is considered abandoned if replaced by a conforming use, discontinued for 6 consecutive months or if the building housing such use is demolished.  At previous meetings staff has requested that the Council consider whether the abandonment provisions should apply differently to transient rentals, however, the Council has indicated that the units should abide to the current regulations regarding abandonment. 

Previously considered is whether transient rental units should be classified as a legal non-conforming use or as a restricted use.  Legal non-conforming means that if the use is abandoned it cannot be re-established at the same location or elsewhere in the City.  If classified as a restricted use, this would mean that there would be a numerical cap on the total number allowed in the City. As a restricted use the permit could be transferred and if the unit is abandoned it could potentially be re-established at the site or elsewhere.  

POLICY QUESTIONS:

Staff is seeking feedback from the City Council on how to address transient rentals in the Multi-Family and Commercial Districts. The following are some questions that the City Council should ask, when considering how to best craft a policy:

1. Should the City restrict transient rentals in the downtown and to what extent?  If so, the following several questions apply.
   
   
2.  Should transient rentals be classified as legal non-conforming or a restricted use?
   
   
3. If classified as a restricted use, what should be the maximum allowed number imposed through a numerical cap?
   
   
4. Should the City allow a certain number of transient rental units per site or building as a means of promoting additional new rental units and/or affordable housing?  If so, what should the maximum number allowed per site or building be? Also, should the City still classify as a restricted use and impose a numerical cap on the total number allowed in the City?

RECOMMENDATION:  Staff recommends that the City Council take one of the following three actions:

1. Continue this item for further discussion with direction provided to staff.
2. Direct staff to prepare an ordinance and associated code amendments for adoption.
3. Direct staff to prepare draft code amendments to be scheduled for review purposes only, but not adoption.

The City Council has considered the issue of transient rentals at two previous meetings, including the meeting on March 5, 2019 and July 2, 2019.