Two years after city council approved restrictions for Airbnb-style rentals, a provincial tribunal has finally cleared the way for Toronto to enforce limits on landlords using their houses and apartments to accommodate tourists rather than residents.
But until the 30-day appeal period for Monday’s decision ends, it’s not certain that the new rules will necessarily go ahead, said Thorben Wieditz, of Fairbnb, a pro-regulation coalition that had standing at the Local Planning Appeal Tribunal (LPAT) that heard landlords’ arguments against the city’s short-term rental bylaw.
Landlords, who have invested heavily in profiting by renting out their properties on the short-term market, were carefully considering their options in the wake of this past Monday’s tribunal decision.
Jason Cherniak, a lawyer who represented seven multi-unit landlords at the LPAT, said his clients are disappointed the tribunal upheld the city’s plan to prohibit short-term rentals in units that are not the landlords’ principal residence. Their appeal will be based on legal errors in the decision, said Cherniak on Twitter.
Alexis Leino, the East York landlord whose legal fees were covered by Airbnb, says the decision to disallow short-term rentals in basement suites is “unfair.” He wants to use his apartment for rentals sometimes but also maintain the flexibility to host friends and family there too. He and other landlords told the tribunal that, because they live on-site, they are available to closely supervise their guests and ensure that parking, noise and garbage aren’t a problem for the neighbours.
The tribunal heard the suggestion from landlords that the inclusion of secondary suites in the city bylaw was politically motivated because that restriction wasn’t among city staff’s initially recommended policy but added following a discussion at council.
But senior city planner Caroline Samuel testified — and LPAT chair Scott Tousaw agreed — that it was the right decision to include secondary suites because provincial policy encourages them to increase the supply of available rentals in an environment where the vacancy rate hovers around 1 per cent.
How the decision plays out remains unclear in many respects. What we do know is companies are already bidding to aid enforcement of Toronto’s new rules; how other cities have used software-based monitoring and tip lines to roll out regulations; the avenues and likely arguments for landlords to appeal; and the expected impact on the condo market.
Here’s a breakdown of what we do and don’t know about how Toronto’s short-term rental rules will move ahead:
When will the regulations take effect?
The city says it will know more in December about when it will be ready to start licensing short-term rental operators and then monitoring their compliance. Council approved the zoning bylaw in December 2017. At the time the rules were supposed to take effect six months later, in June 2018.
But it is already evaluating two requests for proposals from suppliers: one to audit compliance to its short-term rental and ride-hailing rules; one to perform “data discovery services.”
The latter service, which involves monitoring every short-term rental in the city on an ongoing basis and setting up a complaints response system, could be up and running in as little as a month, said Ulrik Binzer, the founder and CEO of Host Compliance in Seattle.
His company provides the service to about 300 North American cities including Vancouver and Victoria, Los Angeles, Boston, Seattle and Minneapolis.
It uses a combination of artificial intelligence and a staff of about 250 analysts to monitor and enforce short-term rental rules. (Its bid on the Toronto contract involves a partnership with another company that would monitor compliance of Uber and Lyft.)
The cost of the software-based monitoring is about $500,000 but Binzer did not say what Host Compliance bid on the Toronto contract.
How does a city make sure landlords follow the rules?
Binzer says his company takes a screen shot of every single short-term rental in the city and time stamps it so the city has evidence of who is advertising. That is the foundation for a giant database. Short-term rental sites such as Airbnb and Expedia are scanned on an ongoing basis to add new rentals to the database. It then determines the addresses of each online ad to make sure they are in compliance with the bylaw.
The addresses are cross-referenced with permit holders. The landlord of a listing that doesn’t have a permit gets a letter on city letterhead ordering them to comply with the bylaw. It includes a screenshot of their online posting so they can’t deny they’re running a rental.
“If someone got a letter and the call to action was to get a permit or stop advertising, we’ll check to see if they did one of those things. We can even issue an administrative citation,” said Binzer.
In Los Angeles, they issue a fine.
Host Compliance also runs 24-7 call centres in 100 cities. It’s a local number residents can use to complain of rule-breaking landlords. The hotline can look up the landlord about the concern.
Complainants are asked to provide photos, videos and audio recordings to share with the city to substantiate their allegations.
“In real time, the hotline can look up the party so they can call the person,” he said.
The city’s search for a data company is encouraging, Wieditz said.
“If the city has tools in place people will come forward to make sure these places get shut down in these condo buildings and residential neighbourhoods,” he said.
What are the landlords’ avenues of appeal?
The landlords, who went to the tribunal to appeal the city’s bylaw, can ask it to review the decision or they can ask a Divisional Court to give it leave to appeal. Cherniak expects his clients — seven commercial short-term rental operators — will go to court.
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He said there is room to appeal for the grandparenting of landlords who have been running their rentals in the absence of the bylaw. Whether short-term rentals, a term that will be limited to 27 nights under the new bylaw, were permitted previously in Toronto, has been something of a grey area. The city argued they weren’t a permitted use but, in the absence of a bylaw, it also didn’t actively prohibit their operation.
Appeals are likely to be based on the idea that some short-term rental operators, currently renting properties that aren’t their principal residence — something that isn’t allowed under the new bylaw — were actually operating within the law prior to the new bylaw.
Those landlords could have a case for a legal nonconforming use, say lawyers, at the tribunal.
Cherniak said the idea needs to be tested in court. Once a landlord is charged with violating the bylaw, they could use it as a defence.
But then there’s the problem, he said, that “the city’s licensing rules do not allow you to register for a licence unless it’s your principal residence.
“That means even people who are grandparented wouldn’t be able to get a licence and operate legally. If I have a legal nonconforming use and the city doesn’t allow me to be licensed, can the city then charge me with not having a licence or am I allowed to continue operating without a licence?”
Cherniak said the city should allow for legal nonconforming short-term rentals to be registered so that those landlords can be licensed.
Lawyer Eric Gillespie, who represented Fairbnb at the tribunal, said that might be a viable argument even though the city argues that short-term rentals were never legal.
“In our legal system if the law changes for the land use but the person is already doing it, it seems rather unfair to leave the person with no ability to continue,” he said.
Applications for legal nonconforming use are generally made to the city’s committee of adjustment on an individual basis. It takes some time and money to do it and not all applications succeed, Gillespie said.
“The evidence of the city at the hearing was that a number of these properties do not appear to be legally operating. They would not be able to apply for legal nonconforming status,” he said.
Of an estimated 70,000 to 100,000 secondary suites in Toronto — most of them basement apartments — the city only has records of 2,138 that are considered legal — that is they comply with building and fire codes.
Will restrictions on short-term rentals discourage investors from buying condos as rentals?
It’s not clear how many investors buy condos to rent them on short-term platforms such as Airbnb. But Urbanation will be closely monitoring presale activity in the coming quarter to see if there is a change in investor sentiment, said Shaun Hildebrand, president of the market research firm.
Condos that are reaching completion now are making money on the long-term rental market but those units were pre-sold at much lower prices. Substantial rent increases in recent years have helped those condos to have a positive cash flow for landlords, he said.
But investors in projects slated for completion around 2023 will need to see long-term rents rise by about 60 per cent to about $4,000 a month to cover the owners’ carrying costs.
That’s not likely to happen even though the strongest growth in the rental market is in tenants with incomes of more than $100,000 a year, Hildebrand said.
“So, investors are either overly optimistic on rents, not too concerned with positive cash flow as long as the unit continues to appreciate, willing to put down a larger down payment to make the unit cash flow, or are intending to flip the unit or rent it out in the short-term market,” he said.
But despite not being able to rent on short-term platforms such as Airbnb, the recent elimination of rent controls on new units will encourage investors to keep them on the long-term market because they can make up any initial losses in time.
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