DRAFT – NOT FOR DISTRIBUTION NEW ORLEANS SHORT TERM RENTAL STUDY USING STRS TO SUPPORT AFFORDABLE HOUSING JULY 2019 TABLE OF CONTENTS OVERVIEW MARKET CONDITIONS BUSINESS MODELS FINANCIAL IMPLICATIONS POLICY EVALUATION RECOMMENDATIONS New Orleans Short Term Rental Study – Draft for Review 2 New Orleans engaged HR&A and Urban Focus to evaluate the feasibility and implications of using STR policies to support housing. Timeline of STR Regulations 2015 Short Term Rental Study conducted by City Planning Commission (CPC) Initial STR policies enacted City Council reconsiders STR policies, 2018 STR Study conducted by CPC 2015 2017 2018 HR&A Team engaged 2019 “For [commercial] short term rentals, using research that includes the forthcoming inclusionary zoning financial feasibility study, recommend provisions to create affordable housing.” – City Council Motion M-19-4 New Orleans Short Term Rental Study – Draft for Review 3 The HR&A Team undertook the following process to develop recommendations to tie affordable housing policies with STRs. Assess STR market conditions and business landscape Model and measure financial performance of STRs Evaluate benefits and limitations of proposed policies New Orleans Short Term Rental Study – Draft for Review 4 The City has proposed several taxes and fees as updates to its set of existing STR policies. Each affects the financial feasibility of STRs. Occupancy Taxes Permitting Fees Generate revenues for infrastructure investment Generate revenue for administration and enforcement of STR regulations* Occupancy Tax 8.75% 16.2% current proposed Commercial Permits** Owners $500 $5K current proposed Operators $0 current $1K Housing Requirements Generate revenue for affordable housing current proposed proposed $1/night impact fee additional fee and unit requirements *In addition to commercial permit fees, the City has also proposed additional residential permit and platform permit fees. **The proposed owner permit fees would be required for each unit, while the proposed operator permit fee would apply to each operator entity. New Orleans Short Term Rental Study – Draft for Review 5 Increasing other fees on STR units reduces the STR value that is available to support housing initiatives. Additional tax revenue for infrastructure Available to support affordable housing Value premium Value premium Additional tax revenue for infrastructure Additional permitting fees for enforcement Value premium Today's Conditions + Raise Taxes to 16.2% Baseline Scenario Proposed in Latest + New Permit Fees Legislation In this study, HR&A assumes a baseline scenario where the occupancy tax rate increases to 16.2% and the commercial STR permit fee remains at $500. Note: Ratios were calculated for the Central Business District and are meant to be illustrative. New Orleans Short Term Rental Study – Draft for Review 6 The City is currently considering STR legislation that would support affordable housing through two types of policies. Fee-based policies Unit-based policies Generate revenue used to support affordable housing (e.g. via NHIF) Require the creation of affordable units in exchange for STR permits Nightly Impact Fee $1 current $10 proposed Unit Conversion Fee, →STR -- current TBD proposed Land Use Conversion Fee, →Lodging -- current TBD proposed Unit Requirement -- current 1:1 above 25% cap proposed Tool to Support Inclusionary Zoning -- ALLOW current proposed New Orleans Short Term Rental Study – Draft for Review 7 The proposed affordable housing policies were evaluated against four criteria. 1 Level of public benefit produces and/or preserves housing affordability 2 Financial feasibility private actors can support public goals given market conditions 3 Alignment with dynamics of STR industry considers variation in business models, risk tolerance, etc. 4 Enforceability not onerous or impossible to enact New Orleans Short Term Rental Study – Draft for Review 8 These policies are intended to apply to different entities and serve different purposes. 1. Nightly Impact Fee Could Apply to 2. Unit Conversion Fee, →STR All commercial STR Units* 3. Unit Requirement 4. Land Use Conversion Fee, →Lodging Residential buildings converting to lodging land use 5. Tool to Support IZ New multifamily development *The nightly impact fee would also apply to residential zoning permits. New Orleans Short Term Rental Study – Draft for Review 9 Based on identified needs and financial feasibility findings, the HR&A Team recommends pursuing the following set of policies. 2. Unit Conversion Fee, →STR 1. Nightly Impact Fee Option 1: Recommend OR Option 2: $10 Nightly Impact Fee only $8 Nightly Impact Fee + $2,500 Unit Conversion Fee 3. Unit Requirement 4. Land Use Conversion Fee, →Lodging 5. Tool to Support IZ Do not enact due to implementation challenges $12,300/Unit Land Use Conversion Fee Add to incentive options Mandatory Mandatory Mandatory If STRs included, use to add additional affordable units OR pay fees Should Apply to All STRs Residential units converting to STR (future, not retrospective) Buildings converting from residential to lodging land use Developers pursuing new development When Imposed Per occupied night One-time charge at conversion One-time charge at change in land use One-time, at IZ incentive agreement Citywide Impact $6.2M ($8 comm, $5 resi) $6.7M ($10 comm, $5 resi) Dependent on level of conversion activity Dependent on level of conversion activity Dependent on level of development activity Mandatory or Optional 57 Units* (6:1 ratio between STR and affordable units) Financial feasibility of policies based on 16.2% tax on STR units and $500 commercial permit fee. Projected impact assumes full compliance. *Nightly impact fee may be applied to other STRs to not subject to the unit requirement. New Orleans Short Term Rental Study – Draft for Review 10 TABLE OF CONTENTS OVERVIEW MARKET CONDITIONS BUSINESS MODELS FINANCIAL IMPLICATIONS POLICY EVALUATION RECOMMENDATIONS New Orleans Short Term Rental Study – Draft for Review 11 Short-term vacation rentals are nothing new, but new business models and online platforms have led to their proliferation. Growth in STR Listings in New Orleans ~8,500 9,000 As of early 2019, there are now more than 8,500 distinct active listings on the major online STR platforms Airbnb and HomeAway. 8,000 7,000 6,000 5,000 4,000 ~3,200 3,000 2,000 1,000 0 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Note: Includes all listings on Airbnb and Homeaway platforms, which includes a small number of non-STR units. As of early 2019, around 3% of units on platform are self-identified as a lodging use (hotel, B&B, etc.). Source: HR&A Team analysis of data from Inside Airbnb and AirDNA New Orleans Short Term Rental Study – Draft for Review 12 3.5 percent of housing units in the City are offered as STRs, though this share varies dramatically by neighborhood. Whole-Unit STRs as a Share of Occupied Housing Units New Orleans vs. Peer Cities New Orleans Neighborhoods Central Business District 46% New Orleans 3.5% Marigny 16% Charleston, SC 3.5% Treme-Lafitte 14% Savannah, GA 3.4% Bywater 10% Nashville, TN 2.9% French Quarter (banned) 6.8% Austin, TX 2.1% Garden District (banned) 3.5% Los Angeles, LA 1.5% Citywide Average 3.5% New York City, NY 1.2% Note: Share is representative of non-hotel, whole-unit listings for all New Orleans data. Non-hotel whole-unit listings count was unavailable for other cities, for which a direct ratio between all whole-unit listings and occupied housing units is provided. This ratio is 5.5% in New Orleans. Source: HR&A Team analysis of data from AirDNA, The Data Center, and U.S. Census New Orleans Short Term Rental Study – Draft for Review 13 STRs are overwhelmingly concentrated in central neighborhoods of the city, such as the CBD, Treme, and Marigny. # of STRs (Non-Hotel) Share of STRs (Non-Hotel) Central Business District 891 14% Central City 427 7% Seventh Ward 435 7% Treme-Lafitte 361 6% Mid-City 351 6% Marigny 322 5% Lower Garden District 264 4% Bywater 214 3% Neighborhood 0 1 STRs per Acre 2 These top eight neighborhoods represent over 50% of STRs in the city. Source: HR&A Team analysis of AirDNA and U.S. Census data New Orleans Short Term Rental Study – Draft for Review 14 Within New Orleans, there are generally two categories of STR licenses, determined by zoning. Residential Zoning 2015 to present Currently proposed Temporary License Partial-Unit License Commercial Zoning Accessory License Large Residential License Small Residential License Commercial License Commercial License New Orleans Short Term Rental Study – Draft for Review 15 The analysis at hand focuses on regulation of commercial STRs, as defined by zoning status. Commercial New Orleans Short Term Rental Study – Draft for Review 16 TABLE OF CONTENTS OVERVIEW MARKET CONDITIONS BUSINESS MODELS FINANCIAL IMPLICATIONS POLICY EVALUATION RECOMMENDATIONS New Orleans Short Term Rental Study – Draft for Review 17 The financial value generated by STRs is realized by three parties. Building Owners Own the property and ultimately determine its usage, i.e. STR vs. different use STR Operators Oversee rental operations and maintenance, e.g. cleaning, furnishing, pricing Platforms Facilitate the transaction, including collection and disbursal of revenues and fees New Orleans Short Term Rental Study – Draft for Review 18 These parties vary in size and nature, and their roles can overlap. Building Owners Single-family homeowners STR Operators Platforms Multifamily property owners And many more… Self-Operators Proprietary Platforms Some property owners, typically smaller scale ones, will self-operate Most larger scale operators have their own platforms New Orleans Short Term Rental Study – Draft for Review 19 As the STR market in New Orleans matures, units are increasingly being run by larger operators. Share of Airbnb Units by Size of Operator 25% 655 2,944 42% 522 1,136 41% Apr-19 Feb-19 Dec-18 Oct-18 Aug-18 Jun-18 2 Apr-18 1 Feb-18 Dec-17 Number of listings per operator: Oct-17 Aug-17 Jun-17 Apr-17 Feb-17 Dec-16 Oct-16 Aug-16 Jun-16 Apr-16 Feb-16 2,882 Dec-15 Oct-15 Aug-15 1,437 Jun-15 55% 3+ (“Enterprise” operators) Note: Airbnb listings only Source: HR&A Team analysis of Inside Airbnb data New Orleans Short Term Rental Study – Draft for Review 20 There are at least three distinct STR business models, each of which represents a different relationship between the owner and operator. 1. Self-Operator: Building owner operates units on own. Typically a smaller-scale operation. 2. Management Fee Operator: Building owner pays a third-party manager a share of revenues to help operate STRs. Works at all scales. 3. Master Lease Operator: Operator leases units from a building owner, often for 3+ years. Only several larger operators do this. New Orleans Short Term Rental Study – Draft for Review 21 The key difference between these models is how value flows between the different parties. Within each model, STR revenues flow to different entities. Currently, these entities are the ones holdings the STR permit. 1. Self-Operator STR Revenue 2. Management Fee STR Revenue Operator 3. Master Lease Operator STR Revenue Owners and operators then take care of the related expenses and share in the earnings. The specific breakdown of responsibilities varies by contract. OwnerAll Expenses Operator Owner Operator Traditional Expenses Fee Operator STR Expenses STR Expenses Lease Owner Tradit. Expenses New Orleans Short Term Rental Study – Draft for Review 22 TABLE OF CONTENTS OVERVIEW MARKET CONDITIONS BUSINESS MODELS FINANCIAL IMPLICATIONS POLICY EVALUATION RECOMMENDATIONS New Orleans Short Term Rental Study – Draft for Review 23 To evaluate financial feasibility, HR&A first considered the size of the STR “value premium” over traditional rental units. Once this value is defined and measured, we can assess the financial feasibility of a variety of policies by using this value impact as a threshold. Net Income = Revenue - Expenses STR Value Premium Net Income for a Traditional Rental Unit Net Income for a ShortTerm Rental New Orleans Short Term Rental Study – Draft for Review 24 HR&A calculated the STR value premium based on value captured by both owners and operators. Owner Calculation: Owner Revenue – Owner Expenses – Net Income for Traditional Rental = Owner Value Premium Total Value Premium Operator Calculation (if operator is distinct from owner): Operator Revenue – Operator Expenses – Required Returns = Operator Value Premium New Orleans Short Term Rental Study – Draft for Review 25 Value premiums are highly variable across units, with two key factors influencing the value of STRs relative to traditional rentals. 1 2 Location: What is the relative appeal of the neighborhood, block, or building to long-term residents vs. visitors occupying STRs? Unit Bedrooms: What is the relative demand and “willingness to pay” for unit types (1BR, 2BR, 3BR, etc.) by long-term residents vs. visitors? New Orleans Short Term Rental Study – Draft for Review 26 Neighborhood-level premiums are determined by the strength of the residential market relative to the strength of the hospitality market. STR vs Traditional Rental Annual Gross Revenues, Various Neighborhoods $40 $35 +58% +91% $30 +180% Thousands $25 $20 $15 $10 Neighborhoods with lower long-term rents do not necessarily have low STR ADRs. $5 $0 CENTRAL BUSINESS DISTRICT LOWER GARDEN DISTRICT Traditional Rental Revenue SEVENTH WARD STR Revenue Sources: HR&A Team analysis of CoStar and AirDNA data New Orleans Short Term Rental Study – Draft for Review 27 Across all locations, STR premiums increase for larger units. Thousands STR vs Traditional Rental Annual Gross Revenues by Unit Size, CBD +65% $80 $70 $60 +32% $50 $40 $30 There is much more demand for large STR units than large longterm rental units, and STR operators calculate demand per bedroom rather than per unit. +31% $20 $10 $0 Studio/1BR 2BR Traditional Rental 3BR STR Sources: HR&A Team analysis of CoStar and AirDNA data New Orleans Short Term Rental Study – Draft for Review 28 TABLE OF CONTENTS OVERVIEW MARKET CONDITIONS BUSINESS MODELS FINANCIAL IMPLICATIONS POLICY EVALUATION RECOMMENDATIONS New Orleans Short Term Rental Study – Draft for Review 29 The proposed affordable housing policies were evaluated against four criteria. 1 Level of public benefit produces and/or preserves housing affordability 2 Financial feasibility private actors can support public goals given market conditions 3 Alignment with dynamics of STR industry considers variation in business models, risk tolerance, etc. 4 Enforceability not onerous or impossible to enact New Orleans Short Term Rental Study – Draft for Review 30 Based on identified needs and financial feasibility findings, the HR&A Team recommends pursuing the following set of policies. 2. Unit Conversion Fee, →STR 1. Nightly Impact Fee Option 1: Recommend OR Option 2: $10 Nightly Impact Fee only $8 Nightly Impact Fee + $2,500 Unit Conversion Fee 3. Unit Requirement 4. Land Use Conversion Fee, →Lodging 5. Tool to Support IZ Do not enact due to implementation challenges $12,300/Unit Land Use Conversion Fee Add to incentive options Mandatory Mandatory Mandatory If STRs included, use to add additional affordable units OR pay fees Should Apply to All STRs Residential units converting to STR (future, not retrospective) Buildings converting from residential to lodging land use Developers pursuing new development When Imposed Per occupied night One-time charge at conversion One-time charge at change in land use One-time, at IZ incentive agreement Citywide Impact $6.2M ($8 comm, $5 resi) $6.7M ($10 comm, $5 resi) Dependent on level of conversion activity Dependent on level of conversion activity Dependent on level of development activity Mandatory or Optional 57 Units* (6:1 ratio between STR and affordable units) Financial feasibility of policies based on 16.2% tax on STR units and $500 commercial permit fee. Projected impact assumes full compliance. *Nightly impact fee may be applied to other STRs to not subject to the unit requirement. New Orleans Short Term Rental Study – Draft for Review 31 Nightly Impact Fee Financial Considerations The Nightly Impact Fee could generate a significant amount of revenue and is generally financially feasible. Level of Public Benefit Fee Level Revenue Per Unit Financial Feasibility Citywide Revenue* Equivalent Affordable Units** Financially Feasible for Average STR? Commercial Nightly Impact Fee $1 $140 $255K 50 Yes $5 $700 $1.3M 260 Yes $8 $1,120 $2.0M 415 Yes $10 $1,400 $2.5M 520 Yes Residential Nightly Impact Fee Total $1 $125 $835K 170 $5 $625 $4.2M 860 N/A $6.7M 1,380 * Assuming compliance rate nearing 100% through platform cooperation. **Equivalent unit calculation based on annual subsidy cost provided to two-bedroom units affordable to households at 60% AMI New Orleans Short Term Rental Study – Draft for Review 32 Nightly Impact Fee Implementation Considerations The Nightly Impact Fee is a relatively straightforward policy: it is uniformly implementable, adjustable, and well-precedented. Alignment with Industry Dynamics Enforceability + Uniform impact: A nightly fee applies to all building and unit types, with impact proportional to performance (total fee tied to occupancy). ~ Unreliable collection mechanisms: Enforcement gaps exist, given currently inconsistent remittances. Path to enforcement is clear but unreliable: collaboration with the platforms is required. + Flexible: A fee is simple to modify and update. + Straightforward calculation + Well-precedented: Many existing examples exist, including in New Orleans. City Existing Nightly Impact Fee New Orleans $1 Nashville $2.50 Portland $4 Seattle $8 – 14 ~ Some market distortion: For owners and properties at the margins of profitability, the increase in fee may incentivize noncompliance (such as avoiding cooperative platforms) or exit from the market. + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 33 Unit Conversion Fee → STR Financial Considerations A fee for residential units converting to STR should be priced as an alternative to the nightly fee, which raises feasibility challenges. Level of Public Benefit Financial Feasibility + Discourages residential conversions: This fee disincentivizes situations where existing residential units are directly removed from the market for STR use. ! Infeasible at higher fee levels: A high fee would deter much of the market from complying due to a strong impact on profitability. Nightly Fee Equivalent* Conversion Fee Per Unit* Equivalent “STR : Affordable Unit” Ratio Financially Feasible? $1 $1,200 4:1 Yes $2 $2,500 2:1 Yes $5 $6,100 4:5 No $10 $12,300 2:5 No *Present value of a nightly impact fee at this level, over 10 years, assuming occupancy remains at present levels + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 34 Unit Conversion Fee → STR Implementation Considerations The unit conversion fee (→ STRs) is more challenging to price and impose than an impact fee, though it may be easier to enforce. Alignment with Industry Dynamics Enforceability + Flexible, with some challenges: Can be applied to most building and unit types. + Clear point of contact for collection: Fee can be tied to permitting process, requiring only a one-time collection. ! Market distortion: Financial impact of an upfront fee will harm smaller operators more ! Increases likelihood of noncompliance: than larger, well-resourced operators. The City Because fee is tied to permitting, only permitted will need to define which types of operators and units will pay (vs with nightly impact fee, all units situations this fee applies to. remit a tax if transaction occurs via certain platforms). + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 35 Nightly Impact Fee + Unit Conversion Fee → STR The City could consider combining a nightly impact fee with a unit conversion fee. Option 1: $10 nightly fee Option 2: $8 nightly fee + $2,500 conversion fee* + Annual Revenue Impact: $6.7M ~ Annual Revenue Impact: $6.2M + fees for conversions that year. ~ Additional Public Impacts: None significant. + Additional Public Impacts: Disincentivizes residential conversions. ~ Some market distortion: For owners and properties at the margins of profitability, the increase in fee may incentivize noncompliance (such as avoiding cooperative platforms) or exit from the market. ! Stronger market distortion: Financial impact of an upfront fee will harm smaller operators more than larger, well-resourced operators. The City will need to define which types of operators and situations this fee applies to. *Note that the unit conversion fee would be layered on top of the nightly fee: those who pay the former would still pay the latter. The unit conversion fee would apply to future conversions, not past ones. + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 36 Unit Requirement Financial Considerations The unit requirement’s public benefits are comparable to those of the nightly fee. Level of Public Benefit Financial Feasibility + Direct creation of affordable units: Generates on-site affordable units. ~ Uneven financial impacts: Easier for some owners or operators to meet this requirement than for others. ~ Feasibility varies neighborhood by neighborhood and building by building Feasible Ratio: 6:1 STRs unit affordable at 60% AMI Citywide Impact: 57 units Created within qualifying properties* + Positive ~ Neutral or weak ! Critical challenge *If applied to all commercially zoned whole-unit apartment STRs with 6+ units. This indicates 57 per year, not 57 “additional” per year. Citywide benefits may include additional fee revenue generated by commercial STRs that do not qualify for the unit requirement, if a nightly impact fee is layered.. New Orleans Short Term Rental Study – Draft for Review 37 Unit Requirement Implementation Considerations The unit requirement policy poses significant implementation challenges that undermine the policy’s actual impact. Alignment with Industry Dynamics Enforceability ~ Mismatch in timing: Length of STR permit and length of housing affordability differ. This issue can be solved, but it adds an additional layer of complexity. ! Technical difficulty in enforcement: The direct provision of affordable units will involve many layers of additional protocols, such as income verification, continued monitoring, etc. ! Inapplicability to all buildings: A unit requirement is only fitting for larger buildings (10+ units) with common ownership, and it has a highly uneven impact across neighborhoods. ! Strong distortion likely: Affordable unit requirements set at a ratio encourage owners and operators to “game” requirements (i.e. include five STRs in a property to avoid policy imposed at sixth STR). ! Mismatch in manager sophistication: Providing affordable units requires technical sophistication and familiarity with affordable housing, which some STR owners and operators may not have. + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 38 Building Conversion Fee → Lodging Financial Considerations A conversion fee for residential properties converting to a lodging land use can be priced to equal the “avoided” STR impact fees. Level of Public Benefit Financial Feasibility + Encourages desired behavior: Achieves public goal of disincentivizing removal of existing residential units from the market. + Revenue dependent on market activity: Total number of conversions will determine revenue generated by conversion fee. ~ Structured to prevent avoidance: Priced as a deterrent that is equal to long-term value of the nightly impact fee. Nightly Fee Equivalent* Building Conversion Fee Per Unit* $1 $1,230 $5 $6,100 $8 $9,800 $10 $12,270 *Present value of a nightly impact fee at this level, over 10 years, assuming occupancy remains at present levels + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 39 Building Conversion Fee → Lodging Implementation Considerations The building conversion fee does not apply to every STR and serves primarily to prevent the effective removal of residential properties. Alignment with Industry Dynamics Enforceability ~ Limited applicability: Applies only to buildings converting from residential to lodging land uses. ~ Aligned with future market conditions: Fee structured to equal the future impact fees that would otherwise be avoided by the land use conversion, reducing incentive to convert land use to avoid STR housing policies. + Clear point of contact for collection: Fee can be tied to permitting process, with one-time collection at change in land use designation. + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 40 IZ Incentive Financial Considerations Because IZ is applicable only to new development, STR incentives should be established as an alternative to the citywide STR policy. Level of Public Benefit ~ Impact dependent on market activity: Total units produced is dependent on new multifamily development occurring in locations subject to meeting IZ requirement. Financial Feasibility ~ Feasible under current market conditions: 6:1 STRs + Positive ~ Neutral or weak ! Critical challenge unit affordable at 60% AMI Developers should be presented with two options for providing affordable units beyond the base IZ requirement: Base IZ Policy + Affordable Requirement Incentives 5 - 10% of units at 60% AMI Density Bonus, Reduced Parking, PILOT, RTA STR Option 1: IZ STR Policy One affordable unit (60% AMI) per six STR permits STR Permits OR STR Option 2: Citywide STR Policy Meet citywide STR policy supporting housing New Orleans Short Term Rental Study – Draft for Review 41 IZ Incentive Implementation Considerations Using STRs as an IZ incentive is unprecedented nationally, but it would be possible to implement STRs as part of the City’s policy. Alignment with Industry Dynamics ~ Mismatch in timing: Length of STR permit and length of housing affordability differ. This issue can be solved, but it adds an additional layer of complexity. ~ Limited applicability: Applicable only to developers who are subject to meeting an IZ requirement. Enforceability + Clear point of contact: Enforcement can be aligned with enforcement of IZ policy. ~ Lack of clear underwriting standards: STRs are still an emerging use and may be difficult to consistently underwrite. + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 42 TABLE OF CONTENTS OVERVIEW MARKET CONDITIONS BUSINESS MODELS FINANCIAL IMPLICATIONS POLICY EVALUATION RECOMMENDATIONS New Orleans Short Term Rental Study – Draft for Review 43 Summary of Policy Evaluation 3. Unit Requirement 4. Land Use Conversion Fee, →Lodging Level of Public Benefit + $6.7M/yr ($10 commercial fee, $5 residential fee) OR + $6.2M/yr ($8 commercial fee, $5 residential fee) + $2,500 per residential conversion + Disincentivizes residential conversions + 57 units (plus some impact fee revenue if layered with the nightly impact fee) + Direct creation of units ~ Dependent on level of conversion activity + Disincentivizes conversions to lodging uses ~ Optional incentive; Impact depends on market activity Financial Feasibility + Feasible at all reviewed levels + Feasible at $2,500 ~ Feasible at 6:1 ratio ~ Uneven financial impacts ~ Structured to prevent avoidance: $12,300 fee per unit ~ Feasible at 6:1ratio Industry Alignment + + + + + Flexible ~ Applicable to only new conversions ! Uneven impact: smaller operators harder-hit ~ Mismatch in timing ! Inapplicable to all buildings ! Mismatch in manager sophistication ~ Limited applicability ~ Sized to align with foregone nightly fee revenue ~ Mismatch in timing ~ Limited applicability Enforceability ~ Unreliable collection mechanisms ~ Some market distortion + Clear point of contact for collection (permitting) ! Increases likelihood of non-compliance ! Technical difficulties ! Strong market distortion likely + Clear point of contact for collection + Clear point of contact for enforcement ~ Lack of clear underwriting standards 1. Nightly Impact Fee Uniform impact Flexible Straightforward to calc Well-precedented 2. Unit Conversion Fee, →STR Financial feasibility of policies based on 16.2% tax on STR units and $500 commercial permit fee. Projected impact assumes full compliance. 5. Tool to Support IZ + Positive ~ Neutral or weak ! Critical challenge New Orleans Short Term Rental Study – Draft for Review 44 Summary of Policy Recommendation 2. Unit Conversion Fee, →STR 1. Nightly Impact Fee Option 1: Recommend OR Option 2: $10 Nightly Impact Fee only $8 Nightly Impact Fee + $2,500 Unit Conversion Fee 3. Unit Requirement 4. Land Use Conversion Fee, →Lodging 5. Tool to Support IZ Do not enact due to implementation challenges $12,300/Unit Land Use Conversion Fee Add to incentive options Mandatory Mandatory Mandatory If STRs included, use to add additional affordable units OR pay fees Should Apply to All STRs Residential units converting to STR (future, not retrospective) Buildings converting from residential to lodging land use Developers pursuing new development When Imposed Per occupied night One-time charge at conversion One-time charge at change in land use One-time, at IZ incentive agreement Citywide Impact $6.2M ($8 comm, $5 resi) $6.7M ($10 comm, $5 resi) Dependent on level of conversion activity Dependent on level of conversion activity Dependent on level of development activity Mandatory or Optional 57 Units* (6:1 ratio between STR and affordable units) Financial feasibility of policies based on 16.2% tax on STR units and $500 commercial permit fee. Projected impact assumes full compliance. *Nightly impact fee may be applied to other STRs to not subject to the unit requirement. New Orleans Short Term Rental Study – Draft for Review 45 APPENDIX A. PRECEDENT STR HOUSING POLICIES B. STR BUSINESS MODELS C. FINANCIAL ANALYSIS METHODOLOGY New Orleans Short Term Rental Study – Draft for Review 46 A. Precedent STR Policies OVERVIEW To establish a baseline understanding of precedent for policies being considered by the City of New Orleans, the HR&A Team explored existing STR housing policies enacted in other parts of the country—reviewing relevant city- and state-level legislation, researching publicly available information on STR policies, and interviewing and corresponding with city staff in multiple cities including Nashville, Maui, Boston and San Francisco. This review is not a comprehensive assessment at every city’s STR policy. Rather, it is focused on cities whose policies include mechanisms to provide funding for affordable housing and homelessness programs. The HR&A Team also assessed peer cities in the hospitality market such as Nashville, Austin, Charleston and Savannah to identify what, if anything, they are doing to regulate STRs in support of housing. The impact of STRs on housing is an emerging challenge, and proposed or enacted solutions to address housing concerns vary. This study focuses specifically on commercial STRs, which are located in commercially-zoned areas of New Orleans and distinguished from residentially-zoned STRs. Distinguishing STRs by zoning type is not typical in other cities studied. The most common mechanism in use is a direct tax on revenue generated by STRs. In most cases, residential and commercial STRs are taxed or charged at the same rate. No active policies were found that tie STRs to inclusionary housing policies or affordable housing requirements. Definitions in New Orleans*: Short-Term Rental (STR): Rental of all or any portion thereof of a residential dwelling unit for dwelling, lodging or sleeping purposes to one party with duration of occupancy of less than thirty (30) consecutive days. Hotels, motels, bed and breakfasts, and other land uses explicitly defined and regulated in this ordinance separately from short term rentals are not considered to be short term rentals. Commercial Short-Term Rentals: An entire dwelling unit in a non-residential district that rents no more than five (5) guest bedrooms for overnight paid occupancy. *Per the 2018 New Orleans Short Term Rental Study New Orleans Short Term Rental Study – Draft for Review 47 A. Precedent STR Policies FEE-BASED POLICIES In many states, STRs—as well as hotels—pay both an occupancy tax and a sales tax as a share of gross revenue. Typically, these taxes are the burden of the STR operator, and are often collected and remitted by transactional platforms such as Airbnb, which voluntarily collect these taxes as part of each guest transaction. Not all platforms can or do provide this service, and the difficulty of fee remittances adds a layer of complexity to monitoring policy compliance. These taxes are typically imposed and collected by the state, but they can also be imposed at the city level depending on local policy. Nightly impact fees are actual dollar-value fees that are due each night a unit is occupied. These impact fees are often directed to a specific purpose, such as an affordable housing fund. Impact fees are typically legislated at the city level—state legislation is not required—and then collected by the city. The most common form of STR policies supporting housing are taxes or impact fees tied to STR occupancy. In addition to New Orleans, which has an existing $1 nightly impact fee in place that supports affordable housing, there are well-established precedents across the country for taxes and nightly fees dedicated to housing uses. Fees directed to housing uses range from a 0.5% tax in Boston to an $8-14 nightly fee in Seattle. While permit fees can sometimes act as a type of conversion fee, there is no precedent for conversion fees. A conversion fee is a fee imposed on units converting to a use that is believed to detract from a public goal, such as the preservation of residential land uses. Such a fee is applied to units converting from traditional residential uses to STR use, or to buildings converting from a residential land use (including STRs) to a lodging land use (such as hotel). There is currently no existing precedent for conversion fees for residential units becoming STR units. However, depending on permitting fee levels in place to operate STRs, permit fees function similarly to conversion fees. UNIT-BASED POLICIES There is no existing precedent for of a city or state permitting STRs in exchange for the development of affordable housing units. However, there are many examples of localities dedicating portions of their revenue tax or impact fee revenues to an affordable housing fund to support the provision of affordable units. The City of Boston noted that it is interested in exploring the option of tying inclusionary units to STRs or corporate apartments, but the City has not determined how to structure such a policy. More complex regulations lead to more operators working outside of the system. In New Orleans, many operators currently operate without STR permits or with expired permits. Others are seeking alternative means—such as permits for lodging uses—to avoid the uncertainty of STR regulations. New Orleans Short Term Rental Study – Draft for Review 48 A. Precedent STR Policies PRECEDENT STR POLICIES City Seattle, WA Portland, OR Nashville, TN New Orleans, LA Boston, MA Plymouth, MA Crested Butte, CO San Antonio, TX Cincinnati, OH Austin, TX Charleston, SC Los Angeles, CA San Francisco, CA Santa Monica, CA Taos, NM Savannah, GA Mashpee, MA San Diego, CA Impact Fee STR Tax Hotel Tax Tax Parity? Taxes or fees supporting housing issues $8-14 per nightly stay 17.10% 17.10% Yes $8 – 14 nightly impact fee $4 per nightly stay 13.50% 13.50% Yes 6% STR tax plus $4 nightly impact fee $2.50 per nightly stay 14.50% 14.50% Yes -- $1 per nightly stay 15.20% 15.20% Yes (pending) $1 nightly impact fee 2.75% 12.20% 12.20% Yes 0.50% STR tax 3.00% 11.70% 11.70% Yes 1.05% STR tax -- 18.40% 18.40% Yes 5.00% STR tax -- 16.75% 16.75% Yes -- -- 16.75% 16.75% Yes 6.00% STR tax -- 15.00% 15.00% Yes -- -- 14.00% 9.00% No -- -- 14.00% 14.00% Yes -- -- 14.00% 14.00% Yes -- -- 14.00% 14.00% Yes -- -- 13.50% 13.50% Yes $100 registration fee -- 13.00% 13.00% Yes -- -- 11.70% 11.70% Yes 4.28% STR tax -- 10.50% 10.50% Yes -- Source: Urban Focus research of policies by jurisdiction New Orleans Short Term Rental Study – Draft for Review 49 APPENDIX A. PRECEDENT STR HOUSING POLICIES B. STR BUSINESS MODELS C. FINANCIAL ANALYSIS METHODOLOGY New Orleans Short Term Rental Study – Draft for Review 50 B. STR Business Models THREE KEY ENTITIES 1. Property Owner – The property owner is the entity whose share of ownership of the real estate asset is 51 percent or higher. The owner’s focus is to identify uses that will make the real estate asset financially viable, and to choose the “highest and best use” for the real estate asset. Owners of STRs range widely in their size and nature. They can be owners of entire buildings and building portfolios, or they could be individual homeowners. In some cases, multiple parties will have shared ownership of an STR property, operating the unit as a joint venture. 2. Operator – The operator is the entity that oversees all operations related to running an STR unit, including managing bookings, cleaning, and coordinating with guests. There is significant variation in operator size. Larger operators may oversee hundreds of units, while others may coordinate only a handful of units. There are multiple large-scale operators working in New Orleans: Sonder, StayAlfred, Domio, Hosteeva and StayLoom are some of the major players. There are also smaller, locally based operators who work in the New Orleans market and the region. These smaller operators typically manage handful of smaller commercial properties for one or various clients. 3. Platforms – Platforms advertise and sometimes facilitate payments for STRs. Currently, the largest of such platforms are Airbnb and HomeAway (now VRBO, part of Expedia Group). There are many major and emerging platforms, and operators may use more than one to advertise their units. Platforms are usually third-party entities, though larger operators such as Sonder and StayAlfred have their own proprietary booking platforms. Online platforms have come to play an important role in policymaking, as they can significantly affect compliance with key regulatory processes, such as compliance with permitting and payment of taxes and fees. Fees and taxes are often, but not always, collected through the platforms. Airbnb, HomeAway and Sonder’s platforms all offer to collect these taxes and fees, but smaller platforms do not typically have this functionality. Regulatory Implications: Currently, either the owner or the operator may be the STR permit holder, depending on the business model. For instance, if a developer master leases a section of a building to an STR operator, the STR operator is responsible for the permit application and for the relevant STR taxes. From a regulatory monitoring perspective, tracking has thus far focused on the permit holder, though this will change as the permitting practices in New Orleans evolve to distinguish between each of the players above. Operators often post on multiple platforms and use online tools to track all sites. For the jurisdiction, this practice makes it difficult to confirm how many bookings there are in total, or how much total revenue should be generated through fees. The operator must manage and maintain records to track all fees and taxes required. This accounting can be a significant operating expense. Some cities have elected to prohibit the platforms from collecting taxes and fees in order to manage this process through the operator or permit holder. New Orleans Short Term Rental Study – Draft for Review 51 B. STR Business Models THREE KEY STR BUSINESS MODELS Depending on factors such as size, risk appetite, access to financial resources and investor capital, and more, STR owners may adopt one of three basic business models that are currently present in the market. 1. Self-Operator: An owner may choose to self-operate, typically if they have relatively few units or otherwise have the interest, ability, and resources to do so. They may still contract others to do the cleaning and other tasks, but they oversee the coordination of these activities. 2. Management Fee Operator: An owner may choose to hire an operator for a fee, typically a share of gross revenue. This share of revenue is typically 5 to 10 percent for smaller local operators, and up to 25 to 30 percent for the largest and most sophisticated operators, whose high fees are due to an ability to optimize and maximize revenue. The choice between self-operating and hiring a management fee operator is fluid, and it depends on both profitability and convenience. As developers of both hotels and multifamily buildings begin to understand the management of STRs, many can be expected to form operating companies of their own to increase profitability. 3. Master Lease Operator: An owner may choose to master lease STR units to an operator for several years. In these cases, the owner’s revenue stream is tied to a lease negotiated with the operator, rather than being tied to the amount of revenue generated by STR bookings. However, the lease rent that the operator is willing to pay is roughly based on the expected STR revenue, and it may be at or above multifamily market rents, depending on factors such as the neighborhood or the condition of the property. There is no single standard master lease contract—each agreement is a negotiation, and agreements differ widely between operators and even between units in a single operator’s portfolio. These leases also include terms around maintenance and management costs, based on the expected level of overall unit wear-and-tear and based on the owner’s willingness to pay for this maintenance. The leases more closely resemble a typical commercial office lease than a standard residential lease. MOVING BEYOND STRs Some STR owners and operators are opting to move entirely away from STRs, to become purveyors of traditional hospitality products. In New Orleans, several operators are increasingly operating under hotel licenses due to the lack of certainty in the STR permitting process. In several identified cases, these STR operators have identified properties in areas zoned to allow hotels and are self-developing properties as hotels instead of STRs. New Orleans Short Term Rental Study – Draft for Review 52 B. STR Business Models EXAMPLE PROJECTS Example of a self-operated project: A local developer owns and operates twelve STR units in four properties in the Uptown and Garden District areas of New Orleans. The developer is a joint owner in the properties, and is a sole owner of a company that operates the units as STRs. The owner was an early adopter of STRs, after determining that these residential units located in commercial corridors turned over regularly and did not achieve sustainable rents due to noise levels. The owner manages these units with a small team of two office staff and six full-time cleaners. The operating costs associated with managing the units as STRs are higher than the cost of managing them as traditional rentals, as the owner must pay for utilities, turning/cleaning costs, booking and management costs. However, the net rental revenue is about 10 to 15 percent higher than if these same units had been long-term rentals. Example of a master-lease operated project: A historic mixed-use, mixed-income multifamily building includes a mix of permanently affordable residential units, affordable commercial spaces, market-rate residential units, and STRs. The development also included several larger penthouses, which had difficulty leasing up due to a lack of market demand for units of that size and price level. The developer was approached by an operator to master lease the penthouse units for five years. The master lease rents were only slightly above the projected market rents used in the developer’s pro forma, and included some additional fees for wear and tear by the STR guests. Example of a hotel model: One developer has restored a 200-key hotel property, and under the hotel license, the developer is operating an additional 111 extended stay units through a long-term master lease with an STR operator. These units were originally, for a short period of time, contemplated to be one- and two-bedroom long-term market rate apartments, but the owner quickly determined that the market could not support them. The extended stay units have a separate entrance and are managed by the STR operator, but the hotel’s services are available for additional charges. The master lease is paid upfront each month to the property owner, and the terms include housekeeping, bellman service, and access to room service. The building was designed with separate amenities, but the lines between the extended stay guests and the hotel guests continue to blur. The master lease operator advertises the extended stay units as they would any STR unit. The hotel rooms are also advertised on the same platforms typically used to list STRs. New Orleans Short Term Rental Study – Draft for Review APPENDIX A. PRECEDENT STR HOUSING POLICIES B. STR BUSINESS MODELS C. FINANCIAL ANALYSIS New Orleans Short Term Rental Study – Draft for Review 54 C. Financial Analysis APPROACH Purpose In order to determine the financial implications of housing policies on the STR market, and to draw conclusions about the impact such a policy may have on the feasibility of operating STRs, the HR&A team evaluated the financial value associated with STR units and tested the financial feasibility of operating STRs in New Orleans under a number of scenarios. HR&A’s analysis is focused on STRs operating in commercially-zoned locations in New Orleans. This appendix describes the methodologies, assumptions, and results of this analysis. Methodology Establishing the value premium: For commercial STR operators and property owners, the decision to operate short term rentals is dictated by the ability to generate greater income through STRs relative to a traditional long-term rental. To understand how additional value generated by an STR may be applied to support housing initiatives, HR&A first defined the value premium of STRs relative to more traditional long-term rental units. Then, with an understanding of that value, HR&A assessed the value premium relative to the impact associated with housing policies being considered by the City. The value premium of STRs includes value flowing to both property owners and STR operators. Once this value is defined and measured, the HR&A Team can assess the financial feasibility of a variety of policies by using this value impact as a threshold. Net Income = Revenue - Expenses STR Value Premium Net Income for a Traditional Rental Unit Net Income for a Short-Term Rental New Orleans Short Term Rental Study – Draft for Review 55 C. Financial Analysis APPROACH Methodology (continued) Geography: The financial analysis was designed to assess the STR value premium in neighborhoods across the City where commercial STRs are most active, which provides detail on how the value premium varies in different locations. Value is impacted by both residential and hospitality market conditions in each location HR&A selected the eight most active neighborhoods for commercial STR permits, which together make up more than 75% of commercial STR’s operating in New Orleans and are representative of the overall market. Neighborhoods such as Tremé, although active STR markets, are comprised primarily of residentially-zoned properties, and therefore not included in this analysis. Neighborhoods included in HR&A’s analysis include: ▪ CBD ▪ Lower Garden District ▪ Central City ▪ Marigny ▪ Seventh Ward ▪ St. Claude ▪ Mid-City ▪ Bywater Business Models: There are at least three distinct STR business models in place in New Orleans, each of which represents a different relationship between the owner and operator. For each neighborhood, HR&A assessed the value premium under each business model: ▪ Self-Operator: Building owner operates and manages units on their own. Typically a smaller-scale operation. ▪ Management Fee Operator: Building owner pays a third-party manager a share of revenues to help operate STRs. Works at all scales. ▪ Master Lease Operator: Building owner leases units to an operator, often for 3+ years. Only several larger operators do this. This structure allows for comparison of the STR premium for all business models across the most active neighborhoods in New Orleans. New Orleans Short Term Rental Study – Draft for Review 56 C. Financial Analysis APPROACH Understanding Results Results are presented as a value premium, which is the comparison between the net income (revenues minus expenses) generated annually for a short-term rental unit and a traditional long-term rental. For example, if current net income for a tradition rental unit in a neighborhood is $12,000 per year, and net revenue for that same unit as a short-term rental unit is $14,000 per year, there is a $2,000 value premium for STRs on that unit. The flow of a value premium to property owners and operators is dependent on the business model in place on a unit, and STRs must remain feasible for both parties in order to maintain overall feasibility. Applying results to policies under consideration For fee-based policies such as a nightly impact fee, HR&A calculated whether the fee applied could be supported by the identified STR value premium. Fees were deemed feasible when the average annual premium across the market could support the projected cost. ▪ Nightly Impact Fee – A nightly impact fee impacts all units operating as STRs and is applied on a recurring basis for each night an STR unit is occupied. The HR&A Team projected fees associated with a nightly fee using average occupancy for STRs in New Orleans. A $10 nightly impact fee would generate an average of $1,400 per year per unit based on the average STR occupancy of 140 nights. ▪ Conversion – Residential to STR: A residential to STR conversion impacts residential units receiving STR permits for the first time and is applied on a onetime basis at initial issuance of an STR permit. For the purposes of this analysis, residential to STR conversion fees are deemed feasible when the fee can be absorbed by the value premium over the initial year of operation of the STR. Due to long-term market uncertainty and STR permitting length of one year, periods longer than one year were not considered for feasibility. ▪ Conversion – Residential to lodging land use: A residential to lodging land use fee is applicable to buildings converting to a lodging land use. Because units in these buildings would no longer require an STR permit, the conversion fee is structured to equal the long-term value of STR housing fees, which the HR&A team defined as the present value of a nightly impact fee over 10 years. The fee would to be applied on a one-time basis as part of the approval in land use change. New Orleans Short Term Rental Study – Draft for Review 57 C. Financial Analysis APPROACH Applying results to policies under consideration (continued) For unit-based policies, which require public benefit in the form of housing units, HR&A evaluated the value premium relative to the cost of providing housing units. Results are presented as a ratio of the number of STR units required to support an affordable unit (two-bedroom unit a 60% of Area Median Income). ▪ Unit Requirement: Unit requirements impact all properties in which the size and structure of ownership allows for this type of policy. Due to complications in implementing this type of policy on properties with few units or properties with divided ownership, the HR&A Team assumes applicability of this policy only on buildings with enough units to support the affordability ratio, and with unified ownership (i.e. non-condo properties). ▪ Inclusionary Zoning (IZ) tool: Using STR permits as an incentive within the City’s IZ policy provides a means for developers of new buildings already subject to an IZ requirement to meet an STR requirement through the IZ policy. Calculation of the ratio of STR units relative to supportable affordable units follows the same structure as the unit requirement analysis. Applying custom STR unit requirements at a project- or neighborhood-level is challenging for two reasons: 1 2 Lack of established underwriting process for STRs from lenders: Unlike other incentives available to support housing (PILOT, RTA, density bonus, parking reductions), there is not an established approach for underwriting STRs as part of the cash flow of a property. Short term rentals are an emerging market type. As such, lenders and others active in property markets noted that there is not yet an institutionalize process for underwriting and accounting for the value an STR unit may provide to a property. As a result, it is difficult to impose requirements based on underwriting at the project level, as is often done for other incentives used to support housing initiatives As STRs become more established and institutionalized, underwriting practices should become more common and allow for project-specific considerations. Variable alignment between hospitality and residential markets: The ratio of affordable units that can be supported by an STR at any given property is based on the value premium associated with STRs, which is dependent on market conditions and pricing for both hospitality uses (STRs) and residential uses (traditional rentals). Because these markets do not necessarily move in sync with one another, establishing tiered requirements tied to residential-based boundaries such as those recommended as part of New Orleans inclusionary housing policy is not possible. To account for these challenges, HR&A’s analysis assesses the ratio at which an affordable unit requirement could be supported across the most active neighborhoods for commercial permits in the city, including the Central Business District, Central City, Seventh Ward, Mid-City, Lower Garden District, Marigny, St. Claude, and Bywater. New Orleans Short Term Rental Study – Draft for Review 58 C. Financial Analysis APPROACH Summary of policies evaluated Nightly Impact Fee Current Proposed by Legislation & Evaluated by HR&A $1/night fee deposited in Neighborhood Housing Investment Fund (NHIF) • • Conversion Fee, → STR Current Proposed by Legislation Evaluated by HR&A None distinct from permit fee Apply some form of conversion fee Fee for units converting from residential to STR use Unit Requirement Current Proposed by Legislation Evaluated by HR&A None 1:1 ratio above a 25% cap Feasible X:1 ratio, no cap Conversion Fee, → Hotel Current Proposed by Legislation Evaluated by HR&A None Apply some form of conversion fee Conversion fee for properties converting from residential land use to lodging land use (hotel, timeshare, etc.) IZ Incentive $5/night for residential (not part of analysis) $10/night for commercial Current Proposed by Legislation Evaluated by HR&A Not an IZ incentive Allow as an incentive alongside other incentives identified in the IZ policy, including tax abatements, density bonuses, etc. Provide STRs with fees waived as an optional incentive New Orleans Short Term Rental Study – Draft for Review 59 C. Financial Analysis INPUTS AND ASSUMPTIONS Market conditions CBD Marigny Lower Garden District Traditional Long-Term $2,065 $2,115 $1,569 Monthly Rent 13% 9% 8% Vacancy $256 $335 $342 Average Daily Rate ($) Short Term 47 44 42 Annual Bookings 4.0 4.2 4.3 Avg. Length of Stay (Days) Rental Note: HR&A analysis further breaks out STR ADR, occupancy and length of stay by operator type. Traditional Residential Mid-City Central City Seventh Ward St. Claude Bywater $1,288 $1,109 $1,153 $1,232 $1,769 12% $218 40 4.2 16% $249 45 4.1 13% $314 43 3.7 13% $217 42 4.4 11% $256 42 4.3 Traditional residential assumptions ▪ Rental pricing and vacancy is based on market data from CoStar and Zillow for the full stock of multifamily housing in each neighborhood. The current rate of vacancy varies by neighborhood, ranging from 8% in the Lower Garden District to 16% in Central City. Short term rental assumptions ▪ Short term rental information (average daily rate, annual bookings, and average length of stay) for each neighborhood is based on market data from AirDNA analyzed by HR&A. AirDNA data is provided at the property level. HR&A’s analysis includes only active, whole-unit, non-hotel properties in commercial areas in operation for more than one year. Listings for which an operator, reservation count, or ADR were not provided were removed from the calculations. New Orleans Short Term Rental Study – Draft for Review 60 C. Financial Analysis INPUTS AND ASSUMPTIONS Operations, fees, and valuation – STRs Operations, fees, and valuation – Traditional resi. units Operating Expense Ratio (less taxes) Real Estate Taxes (based on 10% of assessed value) Cap Rate 18% 15% 5% Traditional residential assumptions ▪ HR&A assumes operating expenses equal to 18% of rental income, a standard market assumption for residential uses. Tax rates applied are based on the residential tax rate in New Orleans and applied on the assessed value, which is equal to 10% of market value. Short term rental assumptions ▪ HR&A assumes operating expenses for STRs based on frequency of rental (turns) and operator type, informed by information gathered through interviews of STR owners and operators. Occupancy tax of 16.2% reflects a proposed increase in infrastructure taxes on STRs, while permitting fees reflect current costs imposed on STR operators. For determining profit requirements, HR&A relied primarily on interviews with active STR owners and operators. Operating Costs Cleaning Fee (per bedroom, per rental) Utilities (per bedroom, per month) Fixtures. Furniture & Equipment (per bedroom) Self-Operator Management Fee Operator Master Lease Operator Fixtures, Furniture & Equip Useful Life (years) Management Fee (Management Operator only) $30 $40 $4,000 $5,000 $8,000 10 25% Taxes and Fees STR Occupancy Tax Commercial Permit Fee* Nightly Impact Fee Real Estate Tax Rate (based on 10% of assessed value) 16.2% $500 $1** 15% Other Cap Rate Return Requirement 8.5% 12% *Only a single permit fee is assumed, per existing regulations. **Base case assumes existing $1 nightly impact fee. New Orleans Short Term Rental Study – Draft for Review 61 C. Financial Analysis FINDINGS Value premium The average value premium across the City is approximately $4,300, though value premiums vary widely by neighborhood. This variety is a factor of the difference between achievable rents within the neighborhood’s traditional long-term rental market and achievable nightly rates within the neighborhood’s short-term rental market. For example, STRs in the Central Business District have high average daily rates ($256/night*), but long-term rents there are are relatively high, leading to a lower overall premium to operating an STR. Based on our calculations, STRs in neighborhoods like Central City and Seventh Ward can attract higher premiums because traditional rental rates are much lower there than in the CBD, while their proximity to tourist attractions allows them to have comparable or even higher STR rates ($249 and $315, respectively). A neighborhood like Mid-City has lower traditional rental rates as well as slightly lower STR rates ($218), which leads to a low overall premium. Neighborhood Weighted Average Value Premium Share of Existing Commercial Permits CENTRAL BUSINESS DISTRICT $1,980 28% 20% 65% 16% CENTRAL CITY $7,290 10% 60% 40% 0% SEVENTH WARD $7,910 8% 70% 30% 0% $800 8% 62% 34% 4% LOWER GARDEN DISTRICT $8,800 8% 58% 39% 4% MARIGNY $6,290 7% 56% 42% 2% ST. CLAUDE $1,870 4% 83% 13% 4% BYWATER $1,610 4% 84% 15% 1% Total / Average $4,360 77% MID-CITY Estimated Share of STR Units* Operated By: Self-Operators Management Fee Operators Master Lease Operators *Whole-unit, non-hotel STRs in operation for over a year New Orleans Short Term Rental Study – Draft for Review 62 C. Financial Analysis FINDINGS Fee-based policies Nightly impact fees of $10 per night are supportable for the average STR unit in the market. Fee-based policies are ultimately tied to the average number of occupied nights per whole-unit, non-hotel STR in operation for more than a year (thus “stabilized”). The nightly fee was calculated by multiplying this number by varying levels of nightly fees. The two conversion fees were calculated by taking the present value (discounted by 3 percent) of ten years of nightly impact fees for a unit, assuming a constant stabilized occupancy rate. Unit Conversion Fee Nightly Impact Fee Fee Level Annual Revenue Per Unit Annual Citywide Revenue* Equivalent Affordable Units** Financially Feasible for Average STR? Commercial Nightly Impact Fee $1 $140 $255K 50 Yes Equiv. Fee Level Fee Per Unit Financially Feasible for Average STR? $1 $1,200 Yes $2 $2,500 Yes $5 $6,100 No $10 $12,300 No $5 $700 $1.3M 260 Yes $8 $1,120 $2.0M 415 Yes Building Conversion Fee $10 $1,400 $2.5M 520 Yes Equiv. Fee Level Fee Per Unit Financially Feasible for Average STR? $1 $1,200 N/A Residential Nightly Impact Fee $1 $125 $835K 170 $5 $6,100 N/A $5 $625 $4.2M 860 $8 $9,800 N/A Total N/A $6.7M 1,380 $10 $12,300 N/A New Orleans Short Term Rental Study – Draft for Review 63 C. Financial Analysis FINDINGS Unit-based policies The most-feasible threshold of STR units required to provide an affordable unit is a 6:1 ratio. Applying an STR value premium for the lowest neighborhood premium ($800) ensures feasibility of a citywide policy across New Orleans and addresses some implementation challenges associated with a unit requirement policy. While a lower ratio (closer to 1:1) could be feasible in some neighborhoods, the high variability in STR premiums leads to a high variability in the feasibility of using STRs to provide affordable units, not only by neighborhood, but also by property. This leads to difficulties with implementing either of the two proposed unit-based policies. Under a 6:1 ratio requirement on applicable properties, 57 affordable housing units would be created through a unit requirement policy, assuming 100% compliance from qualifying units that currently have a commercial permit.*** Stacked STR value premiums* Annual subsidy per affordable unit** $800 1,820 913 340 . 57 Total Commercial STRs Commercial STRs in Rental Apartments Commercial STRs in buildings with 6+ permits Affordable units created $800 $800 $800 $4,860 $800 $800 ~6 : 1 STRs unit at 60% AMI Filtered for units selfreported as apartments (unified ownership in multi-unit property) x 37%, the share of existing commercial permits with density of 6+ permits in property ÷ 6, the ratio of STR units needed to support an affordable unit *STR value premium based on lowest premium in assessed neighborhoods in order to determine feasible policy across all of New Orleans **Annual subsidy cost is based on a two-bedroom unit provided at 60% AMI ***Projection of impact assumes application across all units, with no cap before requirement is applied. New Orleans Short Term Rental Study – Draft for Review 64 C. FINANCIAL ANALYSIS FINDINGS Share of units impacted Any fee or tax imposed on STRs will have some effect on STR operations and profitability, especially for units at the margin of profitability or units operated by entities with lower risk tolerance. The HR&A Team assessed unit performance on an individual property basis to understand the share of units whose operating feasibility will be impacted by recommended policies. The City’s proposed increase of STR taxes will impact the financial feasibility of 11% of STR units. The City is considering a proposal to increase current STR taxes from 8.75% to 16.2%. The HR&A Team’s baseline analysis assumes this increase in the tax rate to take into account how this tax will impact feasibility from current market conditions, and in conjunction with any housing requirements. The HR&A Team’s recommended policy of a $10 nightly fee will impact the profitability of an additional 8% of STR units. Imposing a fee equal to a $10 nightly fee (either through a $10 nightly fee or an $8 nightly fee and $2,500 conversion fee), will further impact feasibility of a share of STR units. HR&A estimates that a $10 fee will impact the ability of 8% of units to remain financially feasible under their current operating structure. Together, new proposed occupancy taxes and housing fees will impact the financial feasibility of approximately one fifth of commercial STR units. Policies Scenario Change in Number of Financially Feasible STR Units (%) Change in Average Value Premium Across the Market (%) Occupancy Taxes Increase from 8.75% to 16.2% (incl. $1 nightly impact fee) -11% -30% Nightly Fee Increase from $1 to $10 nightly impact fee -8% -14% Total Impact 16.2% occupancy tax and $10 nightly impact fee -19% -44% New Orleans Short Term Rental Study – Draft for Review 65 C. FINANCIAL ANALYSIS FINDINGS Share of units impacted (continued) For STRs whose feasibility is impacted by new fees, there are five possible responses to the enactment of the proposed policies, of which operators may choose a combination: ▪ Shift business model to adjust cost structure: Owners or operators may shift business models (e.g. switching from management fee to self-operation; or increasing the share of STR units) depending on what is optimal under the new regulations. ▪ Accept lower returns: Owners or operators may accept a lower rate or return, though this is often difficult if they are beholden to investor requirements. ▪ Pass fee on to consumer: To the extent that there is elasticity in market pricing, the owner or operator may raise STR prices and shift the burden of payment to the consumer. It is unclear the degree to which this can occur, some segments of tourist demand may be highly elastic and respond negatively to increases in price, therefore lowering occupancy and hurting overall revenues. However, to the extent that raising prices is possible, this is an attractive option to an owner or operator. ▪ Avoid compliance: If the reward of continuing to operate outweighs the costs and risks of operating “under the radar,” owners or operators may seek out opportunities to operate outside of the City’s established STR regulations. As the City considers new policies, it must also ensure mechanisms are in place to minimize non-compliance. ▪ Exit the market: If the owner or operator exhausts all other options for operations, they may be forced to cease operations due to an inability to be profitable. Based on current market impacts and proposed policies, HR&A expects only a small share of impacted units would exit the market. New Orleans Short Term Rental Study – Draft for Review 66