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Arizona Legislature Passes Measure to Restore Some Power to Cities

Arizona Legislature Passes Measure to Restore Some Power to Cities

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By Paris Achen

After years of fighting an Arizona state law that prevented cities from regulating short-term rentals differently than long-term rentals, cities have received the authority to set up STR licensing or permitting programs and to suspend or revoke the licenses of STRs with chronic violations.

The new regulating powers were approved in Senate Bill 1168 in a last-minute flurry one day before the statutory end of Arizona’s legislative session on June 25. Gov. Doug Ducey signed the bill on July 6, and the new law will take effect on Sept. 24.

SB 1168 is the fruit of several years of negotiations between STR advocates, city government administrators, and state lawmakers.

“SB 1168 was a compromise on both sides that essentially will give the cities the ability to penalize and eliminate the bad actors, or the one percent, as we call them,” said Linda Curry, president of Arizonans for Responsible Tourism, an advocacy group that fights for fair STR regulations.

“Nuisance issues in neighborhoods are not helpful to neighbors or the STR industry. Fair regulation to curb those issues is something we can all agree on.”

Arizona’s preemption law

At the same time, SB 1168 protects STR owners’ property rights by leaving intact Arizona’s preemption law, which prohibits cities from banning or limiting the number of short-term rentals in their jurisdictions.

Arizona’s preemption law came out of Senate Bill 1350 in 2016. The law prohibited cities from banning or capping the number of short-term rentals in the community. It also essentially prevented cities from regulating short-term rentals differently from long-term rentals.

The Arizona League of Cities strongly objected to the law because cities believed that without licensing and permitting programs, they had little recourse options to correct problems at short-term rentals in their community like nuisance and party houses.

During subsequent legislative sessions, the cities’ allies in the Legislature filed dozens of bills seeking to either repeal or weaken the law, but none reached the governor’s desk for a signature.

Local STR ordinances test the preemption law

In the meantime, some towns, eager to regulate short-term rentals on their own terms, have tested the state law. Paradise Valley in early 2022 passed an ordinance that town officials said was intended to curtail short-term rentals that repeatedly host loud parties.

However, some of the requirements reached beyond what was allowed by Arizona law. The ordinance, for example, required operators to conduct a background check on every guest and submit reservation information to the city within 24 hours of booking.

On March 30, Arizona Attorney General Mark Brnovich’s office issued an opinion stating that parts of Paradise Valley’s ordinance violated the state preemption law. Specifically, a ban on “social gatherings” at short-term rentals violated the law. Additionally, certain registration requirements and purposes were in violation. The attorney general’s office also found that Paradise Valley could not require a STR owner to meet in person with guests and verbally describe all rules and regulations before occupancy. The town also did not have the authority to levy fines on online lodging marketplaces.

The attorney general’s office investigated the ordinance under a 2016 law that allows state lawmakers to initiate a review when they believe a local government has violated state law. If the attorney general finds a violation, the local government risks losing its share of state income tax revenue if the violation is not corrected. For Paradise Valley, that would equate to approximately $1.6 million, according to the Arizona Mirror.

Increasing penalties for repeat offenders

In 2019, the Legislature passed House Bill 2672 which gave cities some authority to fine STR operators for verified violations of local or state laws.

The bill was designed to target STR party houses and increased the penalty for each repeat offense within a 12-month period with a maximum penalty set at 50% of a vacation rental’s gross monthly revenue.

Senate Bill 1168 adds to that authority.

“There already were laws in place to get rid of bad actors (in the STR space), but Senate Bill 1168 really helps cities go after the bad actors,” said John Hildebrand, an AZRT board member, president of the Scottsdale Short-Term Rental Alliance, and owner of vacation rental property management firm Hilde Homes. “It also helps to protect neighbors who have had issues with bad hosts.”

The law allows cities to require a regulatory permit or license with a fee not to exceed the cost to issue the permit or license, or $250, whichever is less, but the permit or license must be issued or denied within seven business days.

Penalties for violations are capped at $500, or up to an amount equal to one night’s rent, for the first verified violation; $1,000 or up to two nights’ rent for the second violation, and $3,500 or three nights’ rent for the third and subsequent violation within a 12-month period.

A three-strike rule within the bill allows cities to suspend or revoke a license or permit for up to a year if an STR operator has three verified health and safety violations within a 12-month period. Cities can suspend or revoke a license of an STR operator after only one violation if the violation involves a felony, death, or housing a sex offender.

STRs also can be required to maintain liability insurance of at least $500,000 or offer each rental through an online lodging marketplace that provides equal or greater coverage.

Operators also can be required to provide contact information and permit/license numbers to all single-family residential properties adjacent to and diagonally opposite a short-term rental.

Operators also could be required to provide an emergency contact who is responsible for responding to complaints or emergencies in person if required by public safety personnel.

What’s next?

Several cities with lively STR markets like Scottsdale, Phoenix, and Sedona are likely to act quickly to pass new ordinances under their new powers in SB 1168. However, their ordinances are expected to be relatively uniform with each other, thanks to the level of detail on the limits in the law.

“Ideally, this doesn’t have an impact on the good actors in the marketplace,” said Ashley Hodgini, a regional government affairs manager at Expedia Group. “It is designed to arm local jurisdictions with the ability to address bad behavior, and regulate the industry in such a way that protects property rights and preserves preemption, but also give cities a little bit more comfort that they can have recourse if issues develop, or concerns arise from neighbors.”

Photo courtesy Levi Meir Clancy

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