In 1999, Sonoma’s City Council enacted a ban on vacation rentals in residential neighborhoods. This was well before AirBnB began online rentals, and correctly anticipated the oncoming explosion of vacation rental activity in the North Bay.
Cities like Carmel, where vacation rentals had widely displaced residents, provided ample warning, and Sonoma wisely paid attention. Today a new threat has emerged: LLC time-shares, vacation homes masquerading under the guise of joint home ownership.
The City of St. Helena enacted a ban on time-shares long ago, recognizing that they comprise little more than a variation of hotel. A time-share allows entities to purchase a small interest in a property – a home or condo – and provides that entity with the right to occupy that property for a period of time proportionate to the size of their investment. Accordingly, a time-share condo might be subject to a score of “owners” who each have occupancy rights throughout the year.
A new start-up company called Pacaso is challenging St. Helena in court, claiming that its ban on time-shares is being illegally applied to Pacaso’s joint home ownership model, which uses an LLC approach. Under the LLC approach, buyers can purchase 1/8 shares in the LLC (or multiple 1/8 shares) and use the purchased property as a second home. If eight buyers each purchase a share, use of the home is then rotated among the eight. While unlike a vacation rental, which might have dozens of occupants during a year, the Pacaso system limits the number of occupants to eight owners, but the effect on a neighborhood is essentially the same, rotating occupants instead of stable neighbors. Shares in the LLC can be sold, or transferred.
Pacaso is now soliciting buyers for homes in Sonoma, and if the company’s approach in St. Helena is the same as it plans for Sonoma, it’s likely that LLC time-shares will be turning homes into pseudo-vacation rentals. At present, Sonoma does not have any restrictions on time-shares, a gap in its municipal code that, unless filled, will quickly be exploited. Moreover, Pacaso is well-funded, and if what’s happened in St. Helena is any indication, it’s likely that if Sonoma challenges the legality of Pacaso, a lawsuit will quickly follow.
A city’s municipal code is its suit of armor, laws designed to protect a city’s body from harm. Unlike armor, however, the municipal code is made of words, not metal, and the meaning of words can be challenged in court. It is for this reason that great care and forethought must be used when crafting a municipal code; if gaps in the code exist, they are quickly exploited, as air rushes into a vacuum. Pacaso believes it has found such a gap in St. Helena, and is aggressively rushing into it. Lacking a prohibition on time-shares, Sonoma displays far more than a gap, rather a gaping hole.
St. Helena’s legal position is that Pacaso’s LLCs are nothing more than time-shares, tantamount to vacation rentals in their effects on the stability of residential neighborhoods. Without question, if Pacaso succeeds in court, their model of joint second home ownership poses a direct threat to popular communities throughout the Bay Area, particularly the North Bay. Get ready Sonoma, the wolf is at the door.