New Orleans tried to limit short-term rentals by requiring license holders to live full-time in the lots they rent – but the court said that violates the Constitution.

NEW ORLEANS – A key provision of New Orleans’ short-term rental law that aimed to slow the industry’s spread into neighborhoods has been ruled unconstitutional by a federal appeals court, dealing a blow to housing advocates who fought to get the law passed three years ago and potentially reshaping the local short-term rental market.

A three-judge panel of the 5th Circuit Court of Appeals in New Orleans said Monday that the 2019 ordinance illegally discriminates against out-of-state property owners.

The law, like those in other cities, bans “whole-home” rentals in residential areas and requires license holders in those areas to prove they live full-time on the lots they list. But in the ruling, which could force a near-total rewrite of the city’s rules, Judge Jerry Smith of Houston wrote that restricting licenses to city residents violates the commerce clause of the U.S. Constitution by shutting others out of the market.

“The city doesn’t just make it more difficult for (out-of-state owners) to compete in the market for short-term rentals (STRs) in residential neighborhoods; it forbids them from participating altogether,” Smith, whom President Ronald Reagan nominated to the court, wrote in the unanimous decision. Joining Smith in the decision were judges Jacques Wiener Jr. of Shreveport, a President George H.W. Bush nominee, and Leslie Southwick of Jackson, Mississippi, nominated by President George W. Bush.

The ruling doesn’t automatically strike down the law, which imposes rules for short-term rentals in both residential and commercial areas and also bans them in the French Quarter and the Garden District. But it will let the short-term rental owners who sued the city in a 2019 federal lawsuit request that a U.S. District judge kill portions of the law, said attorney Dawn Wheelahan, who represents the plaintiffs.

That would potentially allow an increase in short-term rentals as out-of-state owners list their properties or purchase new ones to list.

“All that’s left for me to do is go to the district court and ask to enjoin the city’s ordinance, which I will do,” Wheelahan said. “(The city) will have to go back to the drawing board.”

The city did not respond to a request for comment.

Louisiana Fair Housing Action Center Executive Director Cashauna Hill called the ruling “disappointing,” adding that “our elected officials should keep in mind the consensus around New Orleans, that our neighborhoods and long-term residents need protection rather than policies that cater to wealthy tourists.”

“We hope that the city remains committed to enforcing solutions that prioritize the people who make our city special,” Hill said.

An uneasy compromise

New Orleans’ 2019 short-term rental law represented an uneasy compromise between residents fed up with the rapid growth of Airbnb, VRBO and other short-term rental listings in their neighborhoods and operators who argued in favor of the burgeoning industry.

Advocates of short-term rentals said they served as a way for residents to make extra money and help deal with skyrocketing housing costs. But fair-housing advocates said that short-term rentals were responsible for displacing long-term residents and were, in fact, a primary cause of the surging property prices in gentrifying neighborhoods close to the city’s tourism areas.

The ordinance passed by the City Council gave wide latitude to short-term rental operators in commercial areas such as the Central Business District and along retail corridors in the city. But it limited short-term rentals in residential areas to owner-occupied properties. It also created licensing and enforcement mechanisms, and put in place fees to support them.

In their 2019 suit, the plaintiffs challenged several aspects of the law, but the Fifth Circuit’s ruling against the residency requirement has the broadest implications.

U.S. District Court Judge Ivan Lemelle previously found the law violated the commerce clause, but Lemelle determined the city’s interest in keeping the housing market under control, reducing STR-related nuisances and protecting the character of residential neighborhoods created legal exceptions.

The appeals court disagreed, highlighting a series of policy alternatives that it said could achieve the city’s goals without discriminating against out-of-state owners.

For example, the city could limit the number of licenses per neighborhood to keep the housing market in tune with the local economy and to preserve neighborhood character, the appeals court said. To limit nuisances, the city could strengthen penalties and enforcement actions on disorderly guests and owners who commit other quality-of-life violations, according to the ruling authored by Smith.

Smith also suggested the city could raise taxes on STRs, which he said “would discourage younger – and rowdier – guests from renting them and provide additional funds that could also be used to mitigate nuisances.”

Complaints about lax enforcement of the law popped up almost as soon as it was passed, and data provided by a city contractor last year found that the number of illegal listings outnumbered legal ones in a city database by more than three to one.

Mayor LaToya Cantrell’s administration hired that contractor, Granicus, to automatically detect illegal listings on platforms like Airbnb. The administration also recently hired new inspectors to respond to complaints and ramp up code enforcement hearings.

District A Council member Joe Giarrusso said he had not seen the ruling, but acknowledged that the City Council will likely need to once again draft a new law.

“My personal view is if the 5th Circuit has ruled this way, and said that (the law) is not constitutional and has provided potential alternatives, then let’s look at the alternatives,” Giarrusso said.

© Copyright 2022, The Advocate / Capital City Press LLC, all rights reserved. Staff writer Jeff Adelson contributed to this report.

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