Commission recommends fractional homeownership regulations, asks council to decide on specifics

By SARA HALL

A Planning Commission ad hoc committee on fractional ownership made some basic recommendations last week, but declined to suggest specifics on several points.

The staff report on the item also lacked details of what was to be presented, something that a number of public speakers criticized. The document simply states the date and time of the meeting, item name and number and that “staff will give a presentation to the commission.” Staff reports usually provide information on the issue, background and summary of any recommendation(s).

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. 

“This is a new trend that makes it very easy to invest in vacation property,” said Principal Planner Jaime Murillo.

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.

At the February 23 meeting, 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) and that permits be required for both the property and the property manager. Staff emphasized that it’s important that the city clarify that these permits would only be applicable to co-owned properties that are managed and facilitated by a third party, so that they don’t unintentionally capture other properties that are held in common ownership by family members or friends.

They also suggested that a management plan be submitted to the city. The plan needs to identify a local, 24-hour contact person that is available to address any issues that arise. They should be located within 25 miles and respond within 30 minutes of any calls.

Other recommendations included 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, a grandfathering provision be created and confirm that the owners acknowledge the rules. 

There were also some comments about suspending the permit after a certain number of complaints and exploring the idea of prohibiting advertising the use as a real estate selling point. 

Click on photo for a larger image

Photo by Kevin Pellon (Instagram @socalsnapz)

The Planning Commission discussed potential regulations for fractional homeownership in the city

After some discussion, commissioners also asked for transparency for neighbors through the permit process and directed staff to define fractional homeownership (but didn’t specify whether they should or shouldn’t fall under the description for a timeshare). Without making a specific recommendation, commissioners also asked council to consider a cap on permits (but didn’t propose a number, although 500 or less was mentioned during other comments) and to consider prohibiting them in R1 zones as a topic of discussion for the council. 

When asked by city staff for feedback on a potential cap for permits, commissioners were hesitant to share a specific number. 

“I think there’s no right answer. We’re going to get tarred and feathered no matter what,” said Commission Chair Curtis Ellmore. 

That’s a hard question to answer, agreed Commissioner Lee Lowrey. There are some legal clarifications needed before they decide, he noted.

Ellmore said he struggles with making a recommendation on that issue because, as planning commissioners, they deal with land use and oversight. They aren’t the best body to make that decision, he added.

The point that council is the deciding body on the issues was echoed by several commissioners. Some urged the public to share their comments with city council, particularly whether or not it should be described as a timeshare. 

Vice Chair Mark Rosene emphasized that the opportunity still exists for residents to reach out to council.

“This is very difficult and I still think the opportunity exists to broaden the definition of timeshares to include fractional ownership underneath it and that is not the purview of this body,” Rosene said. “So it needs to be clear that you have an opportunity, should you desire, to reach out to your council people who can make that ultimate decision.”

This is an opportunity for City Council to look at revising the way that timeshares are defined to see if it could capture what these fractional home ownerships are, agreed Commissioner Sarah Klaustermeier.

“It would be my preference to make a recommendation to not permit this use and to legally find a way to make that happen,” she said. “To me, this sounds like a timeshare framed differently in the form of fractional ownership. The way that the business model is set up, to me, feels like the commercialization of our residential neighborhoods where there is a profit that is taken from selling these fractional ownerships. I think they do operate like short-term rentals and we’ve capped the number of short-term rentals that we allow in the city.”

The ad hoc committee and city staff was directed to find a way to regulate the use, Rosene clarified. 

“I think that what this is an attempt to do is come up with practical regulation to provide visibility to what’s happening in the neighborhoods,” Rosene said. “I think, from a practical perspective and a regulatory perspective, that this does that, but this doesn’t mean it’s the only option. The option still exists to broaden the definition of timeshare, and your city council has that ability.” 

That’s not in the scope of their authority, Lowrey agreed. They were tasked with coming up with some potential guidelines, and then the city council can ultimately decide what direction they’d like to take. 

“There will be other avenues and with a body that has the jurisdiction” in terms of being able to put teeth in the regulations, Lowrey said. 

There are also a lot of different legal challenges, Lowrey added, noting a few other cities currently facing litigation. There are a lot of potential issues that could come down the pike, he said, and they’re trying to determine where to start.

The item will likely be on the March 14 City Council agenda.

The proposal isn’t perfect, but they were looking for feedback from commissioners to refine it, said Community Development Director Seimone Jurjis.

“This is a very difficult subject,” he said.

The devil is in the details, Jurjis said. They haven’t drafted an ordinance yet, these are essentially concept ideas, he noted. 

“This can still be fleshed out,” Jurjis said, and that will incorporate input from the council.

Newport Beach officials have discussed the issue several times over the past few years. It was first brought to the city’s attention by concerned neighbors. 

“The city has received a number of complaints and there’s a lot of resident concerns regarding this new form of ownership,” Murillo said.

The main concern is that they function more like short-term lodging where these residents come in for a week or two weeks at a time and they have non-resident behavior, Murillo explained, they act like they’re on vacation, which sometimes includes additional noise disturbances and parking problems.

The other concerns they’ve heard is that this is leading to the commercialization of residential neighborhoods and it could impact housing affordability in the city by reducing the overall housing stock and making it easier to purchase vacation homes and second homes, Murillo noted. 

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. Councilmembers directed staff to study what other cities are doing and report back.

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 the 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 fractional 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. 

As mentioned during various previous discussions on the issue, resident concerns are similar to the issues relate to short-term lodging, which the city has managed to regulate, including implementing a cap on the number of STL permits allowed in Newport Beach.

At last week’s meeting, public speakers said there are flaws in the recommendations, questioned how the regulations would be enforced, and raised concerns about the commercialization of residential neighborhoods. 

Max Johnson, a resident of Balboa Peninsula Point, one of the areas in the city most impacted by fractional homeownership, highlighted a point on which most speakers agreed: This use should be classified as a timeshare.

“These are timeshares and timeshares are currently not allowed in the city of Newport,” Johnson said. 

 Other cities have placed a moratorium or banned them outright with no legal repercussions, he noted, and the fact that Newport Beach hasn’t is “ludicrous.” At the very least, they need to pause before allowing anymore in the city until they can decide on what to do moving forward, he suggested. Nobody wants these in their neighborhood, he said.

“The fact that we’re letting Pacaso and these other companies come in and take away the quality of life in our neighborhoods is ridiculous,” Johnson said. “We’re involved in our communities and we care to know our neighbors, but Pacaso homes and other businesses such as these timeshares, do not care.” 

Also during public comment, Purvi Doshi, senior public affairs manager for Pacaso, U.S. West, thanked the commission and staff for allowing the company to work collaboratively with the city on the issue. Pacaso aims to “enrich lives by making second homes possible and enjoyable for more people,” she said. 

They took the concerns raised at previous meetings seriously, Doshi said, and she hoped the draft regulations address those issues. After working together on solutions, she thinks the recommendations presented offer a “really balanced solution and reasonable regulations.”

In regards to the cap, they propose 500 citywide, which is about one-third of what is allowed for short-term rentals. 

Addressing a key comment echoed by most of the public speakers, Doshi said fractional homeownership is different than how it’s being portrayed. 

“Pacaso is absolutely not the same as a timeshare. Our owners own and control a single home, in contrast to a timeshare where purchasers acquire contractual rights to use a commercial property and its various amenities. They typically operate on a point system and allow purchasers to spend time in different resorts in their network, (whereas) our owners must use the house that they own,” Doshi said. 

“In practice, timeshare purchasers have little to no control. If they are not pleased with the services provided, they can’t fire their resort operator, (whereas) they can decide to fire Pacaso as a home manager if they choose,” she added. 

The difference is also illustrated in price. The average timeshare purchase is about $20,000, in contrast a Pacaso co-owner spends, on average, $600,000 for their equity portion in the home.

~~~~~~~~

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