Short Term Rentals, or “STRs,” are an increasingly popular source of income for many homeowners and real estate investors. This is especially true in states like Colorado where, as of November 30, 2022, Vrbo lists 35,838 Colorado homes for short term rental on its website.[1] Other sources, such as a recent May 2022 study, suggest that nearly 50,000 homes in Colorado were listed as Short Term Rentals on websites such as Vrbo and Airbnb in 2021.[2] Although there is no question Short Term Rentals can be a lucrative business for many Colorado homeowners and investors, the rising popularity of Short Term Rentals has led to increased regulatory and legal red tape governing Short Term Rentals at not only the State level, but at the county and city levels as well. Operating a Short Term Rental also requires navigating numerous contracts and issues with renters, home owners associations (HOAs), property management companies, rental property listing companies, and others. Accordingly, homeowners and investors in Colorado looking to acquire, advertise, operate, or invest in, Short Term Rentals need to not only carefully consider numerous legal issues regarding Short Term Rental licenses, but also need to carefully prepare, review, and update various property-related contracts and agreements both internally and with renters and other third-party providers. A few of the larger considerations are discussed below:
Many Short Term Rental owners opt to hold their rental properties in a separate legal entity such as a limited liability company or “LLC.” Holding rental properties in an LLC helps afford the property owner with additional protection in the form of limited liability in the event a third-party, such as a guest, sues the owner for a loss or injury arising out of the third-party’s use of the property. LLCs also offer benefits to owners or investors who co-own a rental property with other individuals or parties. Although LLCs can be beneficial for many Short Term Rental owners, some cities and counties in Colorado prohibit or limit the practicality of placing a Short Term Rental in an LLC. For example, the city of Boulder requires that Short Term Rental licenses only be granted to natural persons, trusts, or nonprofits, not LLCs.[3] Likewise, numerous other localities, such as the city of Denver, require that only an individual’s primary residence serve as a Short Term Rental.[4] Because it is generally not advisable to place a primary residence in an LLC, short term rental owners in cities such as Denver may not be able to take advantage of the protections and benefits LLCs can provide property owners. Accordingly, whether an LLC is right for a prospective Short Term Rental property owner requires a careful analysis of both applicable local law and an analysis of the prospective owner’s, or owners’, own purposes, goals, and circumstance.
Nearly all counties and cities in Colorado require that Short Term Rental owners obtain a license to advertise and rent out their property. Application processes, requirements, and costs vary county to county and city to city and are regularly changing. As noted above, one of the larger considerations for prospective Short Term Rental owners is ensuring that the county or city in which the prospective short term rental is located allows non-primary residences to obtain a Short Term Rental license. Although some counties and cities such as Summit County and Vail allow STR Owners to obtain licenses for second homes or investment properties, other cities and counties such as Routt County and Denver County do not allow owners to obtain a STR license for any property that is not also their primary residence, which may force investors seeking to buy or invest in Short Term Rental properties to either forego Short Term Rentals altogether or obtain a separate license, such as a lodging facility license.[5]
Additionally, certain cities and counties require property owners to obtain an inspection or appoint a local representative as part of the license application process while others do not.[6] Cities and counties also differ in requirements for displaying or providing licenses and brochures to renters after the STR license is obtained.[7] Because failure to comply with license registration and maintenance requirements can result in a property owner being denied, or losing, a Short Term Rental license, property owners and investors should take care to ensure they comply with applicable local laws during the application process and also keep apprised of changes in local Short Term Rental codes and ordinances during the period they are license holders. Prospective Short Term Rental owners and investors should also take care to review any applicable HOA rules and regulations, or related property encumbrances and covenants, to ensure operating a Short Term Rental will not violate any agreed to covenants.
In addition to licensing requirements, Short Term Rental owners and investors should take care in preparing, reviewing, and maintain various property-related agreements. For example, Short Term Rental owners should consider using Short Term Rental Agreements with prospective renters. Short Term Rental Owners should also carefully review or prepare Property Management Agreements and Online Marketplace Agreements with companies such as Airbnb or Vrbo to ensure they understand each parties’ obligations and rights with respect to one another. Likewise, because Short Term Rental Owners are often required by statute to obtain and carry specific rental insurance policies, Short Term Rental Owners should not only carefully review any such policies, but should also carefully review any third-party provider contracts to understand whether there are additional insurance requirements and what each parties’ obligations are with respect to insurance. For Short Term Rentals held by LLCs or other entities, corporate formalities should be implemented and followed, including the use of detailed operating agreements, investor agreements, and related contracts.
Sources:
[1] Vrbo, Colorado vacation rentals, (last visited Nov. 30, 2022) https://www.vrbo.com/vacation-rentals/usa/colorado (stating that, for “Colorado vacation rentals,” “We found 35,838 vacation rentals.”).
[2] HR&A and Airbnb, Colorado Short Term Rental Impact Study, May 2022 (available at https://news.airbnb.com/wp-content/uploads/sites/4/2022/06/STR-Colorado-Impact-Study_Final_05.25.2022.pdf).
[3] See Boulder, Colorado Municipal Code Sec. 10-3-19(b).
[4] See Denver, Colorado Code of Ordinances Sec. 33-48(a)(2).
[5] See, e.g., Denver, Colorado Code of Ordinances Sec. 33-48(a)(2); Vail Town Code Chapter 4-14; Summit County STR Ordinance and Code Section 3821 ; Routt County Short Term Rentals (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjp7oSvitn7AhVMMDQIHQtoAlcQFnoECB4QAQ&url=https%3A%2F%2Fwww.co.routt.co.us%2FDocumentCenter%2FView%2F7734%2FHANDOUT-Short-Term-Rentals&usg=AOvVaw1KHBA8Vx5U8oaXF-VaPXzV).
[6] See, e.g., Vail Town Code Chapter 4-14-5, 4-14-3(B).
[7] See, e.g., Denver, Colorado Code of Ordinances Sec. 33-50.
