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National law firm takes on Wilmington over short-term rental ordinance

A national law firm is taking on City Hall over Wilmington’s short-term rental regulations. (Port City Daily photo / Michael Praats)

WILMINGTON — Wilmington’s contentious attempt to regulate short-term rentals is now being challenged by a national law firm that has taken up the argument that the city’s ordinance is illegal and unconstitutional.

As reported by WECT journalist Michael Praats earlier this week, the Institute for Justice, a self-styled Libertarian law firm, agreed on Wednesday to take up the case of a Wilmington family that purchased a residence in city limits for the purposes of renting it. When the couple purchased the property in 2018, short-term rentals (STRs) were being debated by the city but were still unregulated. The couple then put $75,000 in renovations into the house to make it rentable — only to be eventually denied an STR permit.

Related — Private property rights: Wilmington short-term rental owner appeals ‘unjust’ lottery system to no avail

Property owners David and Peg Schroeder took their case to the Board of Adjustment, the only city board that can overturn a council decision, but were denied — that left a civil suit in Superior Court as the only recourse.

Initial challenge

Wilmington City Council prevaricated on the issue for years before finally coming to an awkward compromise in early 2019. Council attempted to appease both property-rights advocates and STR detractors, in particular the influential Residents of Old Wilmington (which counted two councilmen as members).

The result, after hours of debate and a split council vote, was a system that limited STRs in residential zones based on a cap per area and a lottery system to decide between competing applications.

Several legal objections have been mounted against the system, including the fact that state law appears to prohibit Wilmington’s ordinance, which requires property owners to obtain a permit before renting property. While the law is fairly straightforward, the City of Wilmington contends that it pertains only to housing inspections and not zoning issues.

When the Schroeders made this argument at the Board of Adjustment, however, the Board ruled against them.

Taking the challenge to Superior Court

The Institute for Justice took up the Schroeders’ case because, according to attorney and constitutional fellow Adam Griffin, it aligns with IJ’s core concerns — illegal and unconstitutional government overreach and regulation.

The case is not a class-action suit, but IJ does believe it will set a clear precedent for others who find themselves in the Schroeders’ position, not just in Wilmington but in towns and cities across the state that have also attempted to regulate STRs in ways that may be illegal and unconstitutional.

Attorneys with IJ contends Wilmington’s actions in the Schroeder case are both illegal under state law and unconstitutional under both the North Carolina and U.S. Constitution. While the former is part of IJ’s argument, a more crucial part of their case is the city’s policy of ‘amortization,’ which gave those who lost out in the STR lottery the option to rent their property for one year.

“By capping the number of vacation rentals, Wilmington is effectively changing the rules in the middle of the game,” Institute for Justice Senior Attorney Robert Frommer said. “The city’s decision to regulate vacation rentals violates state law, and its use of a controversial tool called amortization to put a ticking time bomb on Peg and David’s rights violates the North Carolina constitution.”

In general, governments aren’t supposed to pick winners and losers in private industry — that’s the same principle that allowed IJ to force Carolina Beach to strike down a protectionist food truck ordinance. That law only allowed those truck operators who also had a brick-and-mortar within town limits to run their food trucks in Carolina Beach.

Related: National law firm files suit against Carolina Beach for restrictive food truck laws

In the case of Wilmington’s STR ordinance, IJ contends that the ‘raffle’ system is unconstitutional.

“Property rights cannot be simply raffled off for the benefit of one small class of people at the expense of everyone else,” Griffin said. “By establishing a two-percent cap and squeezing out all other property owners via a lottery, that is precisely what the city of Wilmington has done here. That violates the North Carolina Constitution.”

There’s also the specific objection to ‘amortization,’ which strikes many as flagrantly unconstitutional in a way that adds insult to injury.

Amortization

The objection to amortization is, in part, an appeal to the 5th Amendment requirement that the government fairly compensate people when their property is taken away by the government.

Typically, this is seen in eminent domain cases, where the state takes private property for the public benefit — for example an airport, a highway, or some other public project — but must first assess the property owner and compensate them.

In this situation, it’s not physical property being taken but the effective use of that property that’s being curtailed or taken away to protect the public for the purported risks of STRs. It’s worth noting that, while not part of the Schroeder case, the seriousness — or even existence — of those risks were hotly debated during the three-year process of crafting the city’s STR ordinance.

The problem comes with the issue of compensation — as IJ has pointed out, “[v]irtually every state in the country requires that a city compensate property owners if it takes their property or infringes on their property rights—including the right to rent property.”

In the Schroeder case, the city has not offered any compensation, nor has the city offered compensation to any other STR owner who lost out in the raffle.

What’s worse, IJ argues, the city is actually tasking the Schroeders to work in order to ‘pay themselves’ for their own lost property rights. Not only is the city not compensating them, but it’s not ‘passive income’ that the Schroeders can simply collect. They must continue to work — prepping the property for rental, cleaning and maintaining it, paying property taxes, advertising the rental, and so on — in order to earn that money.

Wilmington claims this ‘amortization’ lets them off the hook for the constitutional requirement to compensate citizens for lost property and property rights, according to IJ’s summation of the case. But according to Griffin, that’s not the same as compensation from the state. And, IJ further argues, even if it was considered compensation, one year would not be enough to recoup the Schroeders’ investment.

“[A]nyone who understands the economics of vacation rentals or home renovations knows that a year is nowhere near enough time for Peg and David to recoup their investment,” according to J. Justin Wilson, IJ’s senior director of communication wrote in a statement this week.

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