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Volume 8, Issue 24  |  March 24, 2023Subscribe

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Council moves forward with broadening timeshare definition to include fractional homeownership

By SARA HALL

City Council this week unanimously approved broadening the definition of timeshares to include fractional homeownership.

Councilmembers voted 7-0 on Tuesday (March 14) to move forward with city staff’s “preferred recommendation” to change the definition as described in city code. Staff noted that, as a timeshare use, fractional homeownership would effectively be prohibited in all residential zoning districts.

The issue has been studied and discussed for more than a year, most recently at the February 23 Planning Commission meeting, when an ad hoc committee made some basic recommendations on regulations, but declined to suggest specifics on several points.

While commissioners didn’t give the direct recommendation that council take action to broaden the definition of timeshares to include fractional ownership, several emphasized that the opportunity exists and that it was under the purview of the council to make that decision, not the commission. Most of the commissioners generally agreed that this business model is set up like a timeshare but framed as fractional ownership and that it seems to commercialize residential neighborhoods, but they stopped short of including it in the official recommendation and instead stressed that the City Council has the ability and authority to make that determination. Several also encouraged residents to share their comments with the council.

When the matter came before the council this week, city staff proposed the “preferred recommendation” to broaden the definition of timeshare to include fractional homeownership, which councilmembers ultimately agreed with, along with an overwhelming majority of public comments and letters. 

Staff also provided the council with an “alternative recommendation” to create a separate regulatory process for fractional homeownership, including certain components regarding location restrictions, a maximum cap, public noticing for transparency, enforcement and practical regulations. 

The “preferred recommendation” has language that aligns with what pretty much everyone is asking for right now, said Mayor Pro Tem Will O’Neill. 

“We’ve gone through the process enough to see what this is (and) what this isn’t, and (we can) start moving forward with the language that we’ve got in place,” O’Neill said. 

They aren’t the only jurisdiction grappling with how to get their arms around this, noted Councilmember Lauren Kleiman. 

They know they cannot, nor would they want to, preclude owner occupants from purchasing property in an LLC or prevent property owners from hiring a company to manage their properties, she noted. 

“What we can look at is the use of the property and whether it’s consistent with the neighboring uses, as intended by our general plan and our zoning code. This is obviously a very transient use that has potential for impacts that can be differentiated from the typical residential use in our neighborhoods,” Kleiman said. “I’m not confident that the law will be on our side in the interpretation of land use here, but what I am clear about from the many, many, many emails that we received and from all of you here tonight, is the community’s desire to disallow this type of use to the extent that we’re able.”

 “Absent the willingness of these operators to cease acquisition of these properties while the court in the Pacaso versus the Saint Helena case continues to examine whether the city exceeded its zoning authority and taking action to treat fractional ownership as consistent with a timeshare, we’re left with, I think, really no choice but to respond to the community’s will to address this,” she added. 

The way that we do that is by adding language to the city’s existing ordinance that specifically addresses this type of fractional homeownership, Kleiman said.

As it stands today, allowing fractional homeownership as it’s being used today is an improper use of land planning, said Councilmember Joe Stapleton. 

“It creates a camouflage for timeshares in areas that are not zoned or currently do not permit it,” Stapleton said. “If it acts like a timeshare, we should probably regulate like a timeshare.” 

When he bought his house in Newport Heights 36 years ago, Councilmember Brad Avery didn’t think he’d have to worry about his neighborhood. 

“It just never occurred to me that R1 would be threatened,” Avery said, noting that they’re dealing with a lot of pressure regarding housing from the state. “But the sacrosanct one to me is R1.”

It’s about building families, relationships and community, he said. 

“To me, a deal’s a deal,” Avery said. “And R1, when you buy your home, it’s inconceivable to me that you would end up having a rehab home next door to you, which has happened to many people in our city. Or, in this case, a timeshare – or whatever you want to call it – it’s just that the [turnover] cycles are too much for being shoved into an R1 neighborhood as far as I’m concerned.”

Council moves forward with broadening timeshare Peninsula Point

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Photo by Kevin Pellon (Instagram @socalsnapz)

City Council agreed to broaden the definition of timeshares to include fractional homeownership in the city

The city has done their fair share of letting people experience Newport Beach by providing short term rentals, Avery added.

At the February meeting, Planning Commissioners agreed to recommend to the council that a permit be created to regulate this type of use through the municipal code under business licenses (similar to how the city regulates short-term lodging). They also suggested several other general recommendations for the proposed regulations, including a local 24-hour contact person, that the property conform with current parking requirements and noise restriction standards, a good neighbor policy is posted at the property, subletting and guest use is prohibited, that a cap is set for permits (they didn’t propose a number, although 500 or less was mentioned during other comments), and to consider prohibiting them in R1 zones.

Fractional homeownership is when multiple owners purchase a property and split the allowed time at the property through a formal arrangement. It’s not a new concept – it’s fairly common with real estate among a group of friends or family members – but it’s gaining popularity online through agreements between strangers and managed by third-party companies. 

Properties are often purchased under a limited liability corporation and shares of the real estate are typically 1/8 ownership or greater. An online calendar usually helps organize the various co-owners’ use of the property, typically limited to no more than 30 days at a time.

An operating agreement is used to manage the property and usage plan. Owners share property costs, including maintenance, management, HOA, cleaning, tax, utilities, insurance and reserve fund costs.

When the city first started receiving complaints, City Council held a study session on Nov. 16, 2021. At the time, there were four known homes. 

City staff retained the services of Sagecrest Planning + Environmental to study jurisdictions with known fractional ownership properties and prepare a report, which council reviewed during a study session on September 13. At that time, there were 11 known homes in Newport Beach.

The report found that of the 22 jurisdictions surveyed, 13 classify these properties as a form of timeshare, seven cities do not regulate, and four cities revised the definition of a timeshare to strengthen their regulations and better regulate these types of uses. 

The report also found that four cities (that do consider them timeshares) have issued cease and desist letters, three cities are actively working on code updates now to regulate them more as timeshares, one city (Beverly Hills) adopted a moratorium to study the issues and one city (St. Helena) is in active litigation with Pacaso.

Councilmembers directed staff to return with proposed action items.

At the Sept. 27, 2022, council meeting, although there was some support for it, council decided not to pursue a moratorium due to the difficulties with the legal findings that a moratorium have been needed, Murillo explained.

Ultimately, council kicked the issue down to the Planning Commission to develop code amendments to better regulate fractional homeownership to protect the character of residential neighborhoods.

After more than two hours of discussion during an October 6 Planning Commission meeting, commissioners agreed to form an ad hoc committee to further study creating an ordinance related to regulating fractional homeownership. Staff shared a presentation regarding the growing trend of fractions homeownership, how other jurisdictions are addressing the use, current codes and possible options. 

The ad hoc committee met seven times and received input from residents and Pacaso officials. They considered a number of topics, including the regulatory process, location restrictions, development standards, operational standards and grandfathering provisions. 

This week, councilmembers recognized the process and the community’s involvement leading up to the meeting. 

The residents in the audience were speaking volumes with their presence, said Mayor Noah Blom. 

“We [council] all see you,” he said. “We understand the frustration you all feel.”

They appreciate the community coming out in force and voicing their opinion on the matter so the council knows where they stand on the matter, agreed Councilmember Robyn Grant.

“There’s an old adage that says ‘I know it when I see it,’” Grant commented, and in this instance, given the number of meetings and public comments on the issue, they understand exactly what the community is interested in seeing happen, policy-wise. 

It’s been well communicated, she added. 

During public comment on the item, a large majority of speakers opposed fractional homeownership in the city, although there were a few in support.

Purvi Doshi, senior public affairs manager for Pacaso, U.S. West, said co-ownership is part of Newport Beach’s past, present and future. It’s not a group home, short-term lodging, or a timeshare, she argued. It’s a valuable protected property right, no different than any other form of property ownership, Doshi said. 

At the September council meeting, there was agreement that a solution that respected property rights, acknowledged the city’s history as a vacation destination, and protected neighborhoods was in the best interest of the city, Doshi said. They’ve since met with city staff and the ad hoc committee on several occasions, and even presented their own draft ordinance as a starting point.

“At the last Planning Commission meeting, we heard many viewpoints. What we did not hear was a consensus or a preferred approach, thus we are very surprised to see in the staff report for this item a so-called ‘preferred approach’ to reclassify co-ownership as a timeshare. I suspect other homeowners within the city that hold their property in an LLC, trust, or other form of ownership that allows multiple owners would be surprised to hear that the city is reclassifying their ownership interest as a timeshare,” Doshi said. “It is not the government’s place to decide who can or cannot own a home. Nor is it appropriate to treat some homeowners differently than others. People have the right to own a home and enjoy that home.” 

They have a desire to work with the city to develop common sense regulations, she concluded. 

Also speaking in support of use were three fractional homeowners who commented during the meeting (a married couple that flew down from the Bay Area and one person who lives in the Los Angeles area).

Cathy Coste, a 1/8 owner of a home on Balboa Island who flew down from the Bay Area to speak at the meeting, said she and her husband have been visiting Newport Beach through rental homes or short-term lodging for the past 25 years. They tried to get a group of people to go in and start their own LLC, but because of certain circumstances they couldn’t do it. So, when they saw the Pacaso house for sale they pursued it, she said. Pacaso owns nothing, Coste emphasized, they brokered the deal and serve as a house management company. 

It’s not a timeshare or a transient use, her husband Randy Coste agreed, they own it.

They have spent hundreds of thousands of dollars, he said. It’s not a small investment, he added, it’s a commitment to the neighborhood. The money they spend creates a sense of ownership and pride in the home, Randy Coste noted. They also participate in community events, like hanging banners during Fourth of July.

They live here six weeks out of the year, he said, they’re not just coming to throw a party one weekend.

Six Pacaso employees also read letters on behalf of other homeowners. 

Most of the reasons for support were similar: Fractional homeownership allows families to afford a second home. Many noted that they wanted to be part of the community and loved their neighborhoods in Newport Beach, several named off local restaurants or shops that they frequent while in town.

Another speaker said she only commented after hearing the statements read from Pacaso employees, which underscored her point: They understand why they want to live in Newport Beach, but they don’t want temporary neighbors.

They know and care about their full-time neighbors, but they don’t know any of the fractional homeowners, agreed many other residents who spoke. The fact that they’ve never even met the fractional homeowners, despite some living just across the street, is indicative of the point they’re trying to make, several noted. 

They don’t see a “fractional” member of local groups or a “fractional” child in local schools, noted one speaker. The timeshare regulations are meant to preserve the nature of the communities, which are treasures that should be protected, she added. 

Overall, more than two dozen residents spoke in opposition to fractional homeownership.

Several agreed that fractional homeownership provides a unique opportunity to people, but they operate no differently than timeshares or vacation rentals.

“If it smells like a duck, acts like a duck, and looks like a duck: It’s a duck,” said Corona del Mar resident Debbie Stevens. “So whether we’re talking short-term lodging, timeshares, or fractional, they all act the same and have the same impacts.” 

It’s a quality-of-life issue that impacts the beach and coastal areas the most, she added.

A few speakers also urged the council not to forget about the residents in R2 zones. They also want to preserve their neighborhood environment, said Newport Island resident Gary Cruz.

“It’s not the zone, it’s the people that live in the zone,” Cruz said. “It’s not the number behind, it’s the R. It’s a residential.” 

President of Central Newport Beach Community Association Maureen Cotton echoed a previous suggestion of banning advertising of fractional homes for sale in Newport Beach, similar to what other cities have implemented. 

Other public comments included: Creating a mechanism to enforce the ordinance, concerns about the high turnover rate, opining that the use essentially turns established homes into hotels but without paying transient occupancy tax, the need to protect residential neighborhoods and suggesting implementing a moratorium on new fractional homeownerships.

Following the council’s direction to staff, the next step is a public hearing with the Planning Commission to review a draft ordinance. 

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Sara Hall covers City Hall and is a regular contributor to Stu News Newport.

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