Commentary

Property Ownership Fairness Act: Protecting Property Rights

Nearly a decade ago, the United States Supreme Court delivered one of the most controversial decisions in its history, Kelo v. City of New London, upholding a decision by state officials to seize private homes through eminent domain to make way for a massive redevelopment project to benefit powerful private developers. The ruling triggered outrage across the political spectrum. In response, Americans sought to safeguard their property rights through reforms at the state level. While some of these endeavors were successful, most were hampered by loopholes or ineffective tinkering with procedural details, thus leaving property rights as vulnerable as ever.

Arizona was different. In 2006, that state’s voters overwhelmingly approved the Private Property Rights Protection Act, one of the strongest protections for property rights in the nation. The Act is an excellent model for states that want to provide meaningful security for one of the most essential human rights: the right to ownership.

While in an eminent domain case, the government takes outright ownership of a person’s property, the government can also take away property through regulations that bar owners from using, selling, or building on their land. Such restrictions block people from pursuing the purpose for which they bought the property—thus taking away their property rights just as much as an eminent domain condemnation does—but because the government does not technically take the title to the land, judges often hold that owners are not entitled to any “just compensation” at all. Under this rule, people are often forbidden from using their property, but are then stuck with the purchase price, the taxes, the loan payments, the possible liability if someone is injured on the land—and such regulations often reduce the property’s value so much that the owner also cannot sell it.

Arizona’s Private Property Rights Protection Act is an excellent model for states that want to provide meaningful security for one of the most essential human rights: the right to ownership.

Consider just one of the many ways land-use regulations interfere with the rights of homeowners and stifle economic opportunity: restrictions on short-term rentals. The advent of the so-called Sharing Economy has opened new opportunities for property owners to make money and improve their local economies—and to benefit consumers with greater choice and lower prices. Airbnb and VRBO.com in particular have opened a new era for vacationers and others looking for places to spend the night. With expensive hotels no longer the only option, short-term rentals bring people to new destinations and encourage them to patronize the local economy and experience the local atmosphere. To get a sense of how important this revolution is, consider: Airbnb alone offers more rooms than major international hotel chains like Hilton and Marriott, and makes up about 8-17 percent of the short-term rental supply in New York City alone. In 2013, visitors to Coachella Valley, California, booked over a quarter million nights at short-term rental homes, pouring over $272 million into the local economy and creating 2,500 jobs.

Unfortunately, regulators have responded not by welcoming these innovations, but by trying to drive them out of business. Responding to the growing popularity of private rentals, powerful hotel companies and vocal neighbors have urged cities to ban property owners from offering room in their homes to travelers, despite the fact that these restrictions have no connection to government’s legitimate functions of protecting people’s health and safety. From New York to Santa Monica, places with bustling tourism economies are forbidding short-term rentals. Honolulu, which already prohibits rentals of fewer than 30 days, is considering raising fines for those who violate the ban to $10,000 per day. In 2008, Sedona, Arizona, even made renting residential property for fewer than 30 days a crime, punishable by up to six months in jail and a $2,500 fine. Astonishingly, that ordinance defined “rent” so broadly that it would apply to purchasing a time share, contracting for home improvements, and even hiring a babysitter.

Other cities are imposing burdensome regulations, though not complete bans. Rancho Mirage, California, requires at least one occupant be 30 years old, thus discriminating against legal adults who are younger. Nashville, Tennessee, limits the number of properties that may be “non-owner-occupied short-term rentals” to three percent, meaning that property owners like P.J. and Rachel Anderson—a young couple who are often on the road for P.J.’s job and who rent their home while they are away to supplement their income—and Lindsey Vaughn—who invested her children’s college fund in a property in hopes of drawing rental income—are simply out of luck.

These restrictions reveal a growing belief that an individual’s private property should be micromanaged by regulators who are often more interested in serving vocal special interests in the hotel industry than in respecting the rights of homeowners. Such efforts do not just hurt tourism, they also reduce property values, drive up the costs of travel and lodging, and put entrepreneurs out of business. And, unfortunately, most states do not protect unsuspecting property owners and entrepreneurs from these extreme regulations.

In 2012, Glenn Odegard bought a century-old home in historic Jerome, an old Arizona mining town known as “America’s Most Vertical City” because of its steep streets and its 5,200 foot elevation. Founded in 1876, Jerome was a copper boom town with a peak population of 15,000 in the 1920s, but when the mine closed in 1953, the population dwindled to about 450 today. The remaining residents sustained the town by transforming it into a tourist destination with ghost tours, art galleries, bed-and-breakfasts, restaurants, bars, and shops.

Glenn tried to contribute to that restoration by resuscitating a home that had been abandoned and left vacant for 60 years after a landslide filled it with rocks and mud. Intending to offer it as a vacation rental, Glenn lovingly restored the dilapidated house to its original historic condition. His successful efforts earned the home a feature in Arizona Highways Magazine and a spot on the Jerome Historic Home and Building Tour. Yet after they issued the relevant permits, Town officials changed their minds, and decreed that Glenn could no longer use the home as a vacation rental. Under the town’s newly announced ban, he and other homeowners face fines of $300 and up to 90 days in jail for each day they allow guests to stay in their homes for money. His “reward” for the investment of his time, money, and labor was to be declared an outlaw.

Sadly, state courts routinely uphold vacation rental bans, on the theory that “preserving the character and integrity of residential neighborhoods” and “securing affordable housing for permanent residents” (by forcibly keeping housing values down) are legitimate goals the government may pursue by restricting private property rights. Because owners can still rent their property long-term, and can live in the homes themselves, short-term vacation rental bans do not completely destroy the economic value of a home, meaning that under the laws of most states, owners are not entitled to any compensation, no matter how much the restriction costs them.

While it is understandable that neighbors don’t want loud renters next door or excessive traffic on their streets, those interests are adequately served by enforcing existing rules against noise and traffic congestion than by imposing new restrictions that only drive up the cost of living, hurt local businesses, and violate the rights of property owners.

To protect the rights of property owners nationwide, the Goldwater Institute has drafted a bill called the Property Ownership Fairness Act, modeled on the Arizona Property Rights Protection Act, to require state and local governments to compensate owners when their regulations reduce the value of property in ways not justified by public safety needs. The Act prohibits the abuse of eminent domain and the unfairness of regulatory takings, by providing that if government limits “the existing rights to use, divide, sell or possess private real property,” and that restriction reduces the property’s fair market value, government must pay to the owner just compensation. The Act does not require compensation, however, when a property restriction protects the general public against actual nuisances or threats to public safety. In other words, owners can be barred from engaging in pollution, maintaining dangerous conditions on their property, or using their land in ways that violate the rights of their neighbors, but cannot be prohibited from building or renovating homes or operating legitimate businesses—or forced to use their land in ways they don’t want to—unless the government pays owners for the rights that it has taken away.

Regulatory takings reform is an issue of fundamental fairness – the cost of community desires should not be imposed on property owners alone, but must be paid for by the community. The Property Ownership Fairness Act protects the fundamental human right of private property while respecting the need for rules that protect everyone.

Some have argued against compensating property owners for regulatory takings on the grounds that regulations almost always reduce the property values in some sense. Requiring compensation, it is said, would mean the government must pay to govern. But that argument overlooks the basic difference between regulations that prevent injuries to the public—for which the Act would not require compensation—and restrictions that go further, and force owners to give the public something of value, such as rules that force them to maintain their land as a wildlife refuge, or that forbid the renting of rooms in their homes in order to maintain a “small-town atmosphere.” These kinds of restrictions are not typical government functions. Instead, they essentially confiscate an owner’s rights in order to provide a public benefit, just like in an eminent domain case, when owners must give up land for the construction of a highway or a school. These kinds of regulations should come along with compensation, just as in eminent domain cases.

Others have argued that compensating people for regulatory takings is simply too expensive. One prominent leftist attorney, the late Douglas Kendall, admitted that requiring compensation “would essentially gut…efforts” to restrict the rights of property owners “because the funds necessary to compensate these landowners simply do not and will not ever exist.” But the fact that the government cannot afford to pay for what it takes is not a good reason for excusing it from its constitutional duty to justly compensate. Instead, it’s a good reason for government to show some restraint. When the costs of providing public goods—whether they be a wildlife habitat or a neighborhood without vacation rentals—fall on a single person or a small group, then the public should compensate the owners for their losses.

The Property Ownership Fairness Act strikes the right balance, respecting the need for regulations that protect the public—and even allowing government to do more, so long as it pays for what it takes from people. A decade after Arizona enacted its own version, we can inaugurate new era of nationwide protections for property rights, fairness, and the rule of law.

Christina Sandefur is Executive Vice President at the Goldwater Institute. Timothy Sandefur is Vice President for Litigation at the Goldwater Institute.