Economic ramifications of STR ruling in Highlands

Since Tuesday, Aug. 24, a committee calling itself Save Highlands has galvanized support from homeowners and businesses to fight the town’s recent decision to ban short-term rentals in Highlands’ R1 district effective Jan. 3, 2022.

The group has retained the Asheville, NC law firm of Allen, Stahl, and Kilborne, with attorney Derek Allen acting as lead counsel and are filing a lawsuit against the Town of Highlands challenging the town’s regulation of STR properties specifically in the R1 zone.

To pay for the endeavor, a GoFundMe account has been set up to raise funds to pay the retainer and legal fees of the law firm. The group is quickly nearing its goal of $200,000.

The decision to ban STRs in the R1 zone is based on the current verbiage in the town’s ordinance that outlines allowed uses.

Town Attorney Jay Coward said in his view the ordinance clearly disallows STRs in the zone, something he considers a commercial use. Whether an owner renting a home in the R1 district is a commercial use is up for debate across the state and is the reason Commissioner Donnie Calloway voted against the recent decision.

The ordinance reads: §6.1.C “Any use not specifically set forth in the use category is expressly prohibited.” §5.2.1 Residential District R-1 is a “low-density residential district for single-family dwellings” only.

According to Attorney Coward, since commercial uses aren’t allowed in R1, STRs which he considers commercial are prohibited. On the other hand, R2, a medium-density district, allows “tourist homes” with a special use permit. A tourist home “includes bed and breakfast homes or inns… where sleeping accommodations of not more than four (4) rooms are provided for occasional transient paying guests.” R3, a high-density district, does not allow overnight accommodations at all.

According to Coward, “It should be noted that tourist homes and bed and breakfasts, like hotels and motels, are overnight accommodations and are classified as “commercial uses” in §6.5, thus the requirement of a special use permit.”

Economic Impact

At the Aug. 24 meeting where commissioners agreed by consensus 4-1 to ban STRs in the R1 zone, there was no mention of the economic impact to Highlands or the numerous people who will be adversely affected – the Chamber of Commerce/Visitor Center, property managers, handy-people, cleaning people, those who will lose companies associated with STRs, businesses that will lose customers and year-round business, homeowners whose retirement plans rely on STR revenue, older owners whose only income is their rental income and the Town of Highlands, which stands to lose sales tax revenue.

The economic impact is what has spurred the campaign to counter the town’s recent decision.

“We relied on Highlands’ well known and long-standing position with regard to STRs, and with no notice, they blindsided homeowners, business owners, real estate agencies, cleaning crews, handymen and a host of others who will feel this effect,” said Jennifer Huff of Save Highlands.

Since the Chamber of Commerce/ Visitor Center relies heavily on the room tax money generated by all accommodations, including STRs, it stands to see a huge decrease in funding if STRs are banned forevermore in the R1 zone which makes up more than half of the town’s footprint.

See Highlands zoning map HERE.

Room tax proceeds from FY ‘20 -‘21 surpassed the total amount of room tax dollars for the previous FY ‘19-’20 which was already 14% higher than FY ’18-’19. The total occupancy tax proceeds for FY ‘19-’20 was $755,964.54. The total for FY ’20-‘21 was $1,324,740.16 – a 75% increase over FY ‘19-’20 and that was during Covid.

Without STRs in the R1 district, the town, too, stands to lose a hefty amount of sales tax revenue. In the last five years, annually the town has seen a steady increase in sales tax proceeds generated by retail sales as well as from traditional accommodations and STRs.

In FY ‘15-’16 sales tax revenue was $1,015,141; FY ‘16-’17 – $1,051,917; FY ‘17- ’18 – $1,092,139; FY ‘18-’19 – $1,165,486; FY ‘19-’20 – $1,193,149; and FY ‘20-’21 – $1,389,959.

Given the incredible increase in room tax proceeds enjoyed by the Chamber, an increase clearly due to STRs since the number of hotels in Highlands hasn’t increased, it follows that the increase in the town’s sales tax proceeds is from STRs and the money people staying in them are spending in town.

Once a municipality gets used to getting a certain amount of sales tax proceeds, it’s not far-fetched to surmise it may look to other funding sources to make up the difference.

When asked about potentially raising taxes to offset a loss in sales tax due to banning STRs in R1, Town Manager Josh Ward said “We would just have to evaluate the numbers if a steep decline occurred.”

Meanwhile, Allen, Stahl & Kilbourne has emailed the following Public Records Request, to Town Manager Josh Ward and Mayor Pat Taylor.

Copies have also been mailed by Certified Letter. “For purposes of these requests, please produce the following documents:

1. All meeting minutes from Board of Commissioner meetings held in 2020 and 2021.
2. The closed session meeting minutes held on August 24, 2021, pursuant to N.C. Gen. Stat. § 143-318.10(e). 2
3. All meeting minutes from Planning Board meetings held in 2020-2021.
4. All meeting minutes from Land Use Committee meetings held in 2020-2021
5. All meeting minutes from the Zoning Board meetings held in 2020-2021
6. All completed short term rental registration forms submitted over the last five years.
7. The current Zoning Ordinance of the Town of Highlands (“the Zoning Ordinance”).
8. Previous versions of the Zoning Ordinance.
9. Records showing any time the Town has enforced or attempted to enforce the Zoning Ordinance for renting property in alleged violation of the Zoning Ordinance.
10. Communications to and from the Town’s zoning administrator regarding short and long rentals in the Town.
11. Records showing the amount of occupancy taxes the Town has received each year over the last 10 years.
12. For the last 24 months, all communications – whether by email, text message or other means – between the Town (including its employees, Mayor, Commissioners, Planning Board members, and/or attorney(s)) and the following persons and entities regarding short- or long-term rentals in the Town: “a. The UNC School of Government; b. Dog Mountain HOA.; c. Little Bear Pen HOA.; d. Any other Home or Property Owners Association.; e. A hotel or motel as defined in Section 508 of the Zoning Ordinance.; f. An owner of property in the R1, R2, or R3 zoning district.; g. Any person or entity that rents or manages the short- and long-term rental of real property in the Town.; h. A member of the media; i. Any other person or entity.
13. All non-privileged communications within and between the Town and its employees, Mayor, Commissioners, Planning Board members, and/or attorney(s).
14. All communications between Commissioner John Dotson and anyone else regarding the sale or potential sale of the hotel commonly known as Mitchell’s Lodge located at 264 Dillard Road, Highlands, NC 28741.
15. All records showing the amount of money – such as real estate agent commission – Commissioner John Dotson or his company would, will, or has received for the sale of the property referenced in the previous request.
16. All communications between Commissioner John Dotson and potential purchasers of property in the R1, R2, and the R3 zoning districts regarding short- or long-term rentals during his tenure as Commissioner.”

Mayor Taylor said in his opinion all residential zones should be reviewed concerning STRs.

STR issue has been festering

The short-term rental issue has snowballed since late August when the Town Board backed Town Attorney Jay Coward’s interpretation of the R1 zone definition and voted via consensus 4-1 to disallow STRs in that district effective Jan. 3, 2022.

Those who lobbied against STRs in the R1 district applauded the commissioners’ decision; those who make a living or supplement their living through the rental of STRs – homeowners and vacation rental agencies – are up in arms and ready to fight. 

Jennifer Huff sent out an email last week, to all Chamber members, asking for donations to help fund the ensuing legal battle.

“I’m part of a small committee spearheading the effort to raise money to fund the legal representation we will need to fight back against the Mayor and Town Council who worked very quickly to ban our short-term rentals, effective January 3, 2022.

The committee is made up of Debi Bradshaw Martin, Caroline Ragsdale, Will Pichard, Becky Blakeney, Chris Rideout, David Bee, Julia Weller, Chris Weller, Kristy Jones-Favalli and myself.

“The legal team we’ve amassed is impressive, but in order to fight for the rights of ALL residential short-term rental owners, it will take a lot of funding. For the time being, only those located in R-1 are affected, but R-2 and R-3 zones are sure to follow.

“The plaintiff owners of Short-Term Rental properties located in Zone R1 in Highlands, NC are filing a lawsuit against the Town of Highlands, NC challenging the Town’s regulation of Short-Term Rental properties. The Plaintiffs have retained the Asheville, NC law firm of Allen, Stahl, and Kilborne, with attorney Derek Allen acting as lead counsel. The GoFundMe account will be used to pay the retainer and legal fees of the law firm incurred in the prosecution of the litigation.” she wrote. 

A resident in the R1 zone, Knight Martorell responded quickly to Huff’s email. 

“I am in complete support of the town’s recent ruling. VRBOs destroy neighborhoods and any sense of community. Perhaps YOU should live next door to after-wedding parties every weekend until 2 a.m. Picking up garbage on Monday morning after they left with so many pizzas boxes that the bear proof-can can’t close. Neighbors I have had for decades are moving out, and each house becoming a hotel. You need to seriously reconsider your direction, and priorities,” he wrote. 

“And, since when does the Chamber of Commerce put as its mission to not uphold the quality of life, and community in Highlands? This is not a business issue. Residents are outraged at what we now have to endure. The Chamber is running a risky game with this GoFundMe and undoubtedly will alienate many members such as myself.

“For 18 years, I worked with HDR, (an international architecture and community design based in Omaha) in community design throughout the U.S., and you might want to do some research into the affect that short-term rentals have on neighborhoods. VRBOs are banned in many municipalities for this very reason. Have you done research into community restructuring, and the profile of this topic nationwide? 

“In addition to the two issues I mentioned, Highlands residential streets are typically 20 feet wide or less, and many homes were built with two-car parking spaces, or only one. How many times have you driven home, but not be able to get to your house because the streets are blocked with cars parked in and on the streets? That happens a few times a week for me. Highlands does not have the infrastructure to support this. 

“I am astounded by this GoFundMe, and disappointed that the Chamber of Commerce so eagerly is unwilling to go to the extremes without regard for the other side of the coin,” he said. 

Huff said she simply associated businesses and the chamber, in name only and in no way was the Chamber endorsing the Gofundme page. She said she should have said “Dear Business Owners.”

Interestingly, though the Chamber of Commerce and Visitor Center exist at its current capacity largely from Occupancy Tax proceeds, Chamber Board Person John Woods and Chamber Board President Kaye McHan were quick to say the Chamber remains neutral in this matter.

“On behalf of the Board of Directors and Staff of The Highlands Chamber of Commerce, we want to go on record and state two items: the email that went out last night at 10:21 p.m. with a link to a Go Fund Account was NOT sent out by nor endorsed by the Chamber of Commerce. This list was obtained from resources other than the Board of Directors or any staff’s knowledge. And, at this time the Highlands Chamber of Commerce is going to remain neutral on this situation.

“The mission of the Highlands Chamber of Commerce is supporting the members/businesses in Highlands and quality of life for our residents,” wrote Woods. 

The issue comes down to the connotation of “commercial.” For those against STRs “commercial” means paying occupancy tax and sales tax however that is not explicit in Highlands Unified Development Code regarding any of the residential districts – R1, R2, or R3.

5.2.1 R-1 Residential District definition reads: The R-1 Residential District is exclusively a low-density residential district for single-family dwellings with customary accessory outbuildings, together with such other related uses which are of a residential character or contribute to the residential character of the district.

For many, those in favor of STRs in particular, the use of a house as a house, to sleep, bath and eat in, is a residential use. 

In fact, that issue has been pursued in more than one court with the outcome the allowance of STRs in residential zones.

At the Town Board continued meeting last Tuesday, Commissioner Donnie Calloway said he wasn’t comfortable disallowing STRs in the residential districts because there were just too many questions surrounding the term “commercial.”

Though Commissioner Marc Hehn joined the other four commissioners in the vote to disallow STRs in R1, during the meeting he alluded to information he had received the previous day about the issue, though he didn’t make it public or divulge what it was until asked by email Wednesday.

“We cannot continue to selectively enforce the town zoning which has been the case. All town zoning ordinances should be enforced,” he said explaining why he voted to accept the R1 verbiage as written even though there is nothing in it referring to STRs.

“There was a way to research this a little more, give everyone a chance to speak, have an expert in NC Land Use Law give an opinion and enforce the town zoning uniformly,” he said in an email. “I heard Attorney Jay Coward’s opinion last week and accepted it. Then, I received and read Rebecca’s opinion on Monday and shared it with Jay.”

Rebecca Badgett, with the NC School of Government was in communication with Hehn and offered her opinion which he didn’t make public during the meeting but shared via email the next day.

“It is not uncommon for STRs to be treated the same as other residential dwelling units. In the town’s case, dwelling units are allowed in the R1 district, and therefore STRs would be allowed, too,” began Badgett.

“A dwelling unit is: A single residential unit consisting of one (1) or more rooms designed, occupied, or intended for occupancy as separate living quarters, with cooking, sleeping, and bathroom facilities provided within the dwelling unit for the exclusive use of a single-family maintaining a household.

“This definition may apply to STRs. In short, just because a dwelling unit is rented on a short-term basis does not mean that its use has changed to a commercial use or that the use fits under the tourist home definition,” she said.

She offered one appellate court case in NC that ruled STRs are a residential use, despite the fact that a property is advertised as a STR and a financial benefit is received. Russell v. Donaldson, read page 9 HERE. 

“The courts held that a covenant prohibiting commercial usage of property did not prohibit the rental of the property on a short- term basis for residential purposes. ‘Neither [the] financial benefit nor the advertisement of the property or the remittance of a lodging tax transforms the nature of the use of the property from residential to commercial,’” stated the courts.

“You can always amend the code to regulate STRs in a distinct land use. If you do nothing, I think you have a fair argument that STRs are allowed anywhere other residential dwelling units are allowed, including R1,” said Badgett.

Like Commissioner Amy Patterson said at the continued meeting last Tuesday, the town can always amend its ordinance but for now felt the town should uphold what is written as interpreted by Attorney Coward and Hehn concurred.

Realtor Pat Allen stated in her “Investing at 4,118 Ft.” column in the Aug. 26 edition of Highlands Newspaper and again on Facebook, “the discussions now on restricting short-term rentals in town may turn into an ugly thing with protestors if it’s not handled correctly. We simply don’t have enough hotel rooms to accommodate visitors and that’s a bad thing that needs to be changed to a good thing. Anyone staying in a rental should abide by the same noise restrictions and safety issues that we locals do. The police are to be called and fines are to be issued in the same way they are to full-timers.” 

On Facebook she said there needs to be control and more regulations put in place.

“In a community with an HOA, the board sets the rules for rentals, short-term or long-term. In neighborhoods where homeowners are strongly against rentals, they should try and form one. 

“I live in a neighborhood that allows a minimum of seven days with people here to typically enjoy the town and events,” she said. 

A citizen who lives in a neighborhood just over the town limits said they have taken care of the issue of STRs through regulations.

“About two years ago, we started to see some neighbors either age out, or move for other reasons. Some of those sales went to buyers who were more interested in renting to short-term tenants than being full-time or part-time residents. 

“A couple of them are full-fledged businesses where the owner, by law can only stay 14 days or less per year in their own house. There is nothing wrong with either one of those situations on an individual basis. However, if an entire community flips into a rental mill, while it may be profitable, it loses its sense of community. And with that goes a personal sense of responsibility. 

“Owners and long-term renters tend to have a greater desire to be good neighbors. I would say the majority of short-term or weekend renters are often great folks as well. However, short-term renters also tend to be the ones that create disturbances which can ruin a weekend. Without a staff or anybody to manage them, things can get wild.

“To that end, the neighborhood amended its Declaration of Restrictions as follows,” he said.

“No trade or Business of any kind is permitted on a lot within the Subdivision. A Business activity shall be considered “related” to a residential use and thus permitted under this Section only if conducted by a person or persons residing in a Dwelling on the lot and only if the business activity (i) complies with applicable zoning requirements; (ii) is not apparent or detectable from outside the Dwelling; (iii) does not involve regular visitation to the Dwelling or the lot by clients, customers, suppliers, agents, other business invitees or by employees who do not reside in the Dwelling; and (iv) is consistent with the residential character of the Subdivision and does not constitute a nuisance or a hazardous, noxious or offensive use or threaten the security and safety of others.

“A Dwelling may be leased for a Vacation Rental and the leasing of the Dwelling will not be considered a Business if (i) the lease is for the entire Dwelling; (ii) the term of any lease is for at least four (4) consecutive days between January 1 through April 30, and at least seven (7) consecutive days between May 1 through December 31 of a calendar year.

“All leases of a Dwelling must be in writing and shall disclose that the tenant and all occupants of the Dwelling are bound by and obligated to comply with the Restated Declaration, and any duly adopted Amendments, and the Bylaws,” he said.

During the Town Board meeting, the economic impact of disallowing STRs in R1 was not considered.

“There was no mention about the numerous people who will be adversely affected by this hasty decision,” wrote Huff.

“It is about the people who will lose jobs. It is about property managers who will lose companies. It is about businesses who will lose customers and year-round business, as means to survive. It is about those who spent their savings, it is about the owners whose retirement plans counted on this revenue, it is also about the older owners whose only income is their rental income. Think of our guests, friends and families who love Highlands just as much as we do and would be disappointed to learn of this. Finally, the foreclosures, decline in property values and tax revenue that will go away will be devastating.

“We relied on Highlands’ well known and long-standing position with regard to STRs, and with no notice, commissioners blindsided homeowners, business owners, real estate agencies, cleaning crews, handymen and a host of others who will feel this effect,” she said.

So far there has been no mention of amending ordinances, but Mayor Pat Taylor said the staff, and board members will continue to be in communication with the town attorney and other experts about how to review and more forward in addressing the issues related to short term rentals.

Pictured at the top of the article is an aerial view of Highlands from Harris Lake.

By Kim Lewicki, Highlands Newspaper