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Home My WebLink About12 - Code Amendments Related to Time Shares (PA2022-0202) - Correspondence (Pacaso)Received after Agenda Printed May 9, 2023 Item No. 12 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 525 UNIVERSITY AVENUE FIRM/AFFILIATE OFFICES PALO ALTO, CALIFORNIA 9430 I BOSTON CHICAGO TEL: (650) 470-4500 HOUSTON FAX: (650) 470-4570 LOS ANGE ES NEW YORK WWW.SKADDEN.COM WASHINGTON, D.C. DIRECT DIAL WILMINGTON 650-470-3 170 BEIJING DIRECT FAX BRUSSELS 650-798-6570 FRANKFURT EMAIL ADDRESS HONG KONG LANCE. ETCHEVERRYga SKADDEN.COM LONDON MUNICH PARIS May 9, 2023 O SASEOULLO SHANGHAI SINGAPORE TOKYO TORONTO Via Email Honorable Mayor Noah Blom & Council Members City of Newport 100 Civic Center Drive Newport Beach, CA 92660 citycouncil&newportbeachca. og_v Re: City of Newport Beach Proposed Ordinance Nos. 2023-4 and 2023-5 Dear Mayor Blom & City Council Members: We write, on behalf of Pacaso, in response to the City of Newport Beach's (the "City") recent efforts to regulate and prohibit home co -ownership through proposed Ordinance Nos. 2023-4 and 2023-5, which would amend Title 20 and Title 21 (Planning and Zoning) of the Newport Beach Municipal Code ("NBMC") Related to Time Shares (PA2022-0202) (collectively, the "Proposed Ordinance"). The Proposed Ordinance threatens property rights and interferes with Pacaso's homeowners' ownership of property in Newport Beach and their ability to use their homes consistent with the rights of all other homeowners within the City. The City's attempts to meddle with and restrict such rights, seemingly at the behest of a few vocal Newport Beach residents, is ill-advised and unlawful. We urge the City not to pass this unlawful and unconstitutional Proposed Ordinance. As set forth herein, the City's efforts to update NBMC Section 21.48.025 (Visitor Accommodations) so as to "modif[y] the definition of time share to clearly include fractional ownership units" is unlawful. Any attempt to regulate Pacaso and homeowners owning their residence through a co -homeownership model under this proposed amendment is flawed for several reasons —not the least of which is that such Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 2 regulation runs afoul of the law and infringes property rights. (Newport Beach City Council, Staff Report Ordinance Nos. 2023-4 and 2023-5: Code Amendments Related to Time Shares (PA2022-0202) 1 (May 9, 2023) (hereinafter the "May 2023 Report.") First, the Proposed Ordinance is unconstitutionally vague and ambiguous because it fails to provide individuals and entities a reasonable opportunity to know what conduct, speech, or uses are prohibited. Second, the Proposed Ordinance is overly broad because it extends to a substantial number of impermissible applications, including non-commercial and political speech, and has a chilling effect on free speech. Third, any application of the Proposed Ordinance against Pacaso would exceed the scope of the City's police power and the permissible scope of its zoning authority because the ordinance regulates property ownership and identity rather than use of land. Fourth, the Proposed Ordinance invades the privacy rights of Pacaso homeowners because it invades how homeowners can come together to own and use property together. Fifth, if the City were to enforce the Proposed Ordinance against Pacaso, the City would be selectively enforcing the ordinance against Pacaso, where other similarly situated homeowners are not being targeted by the City. Sixth, the Proposed Ordinance is inconsistent with Chapter 3 policies in the California Coastal Act and does not qualify as de minimis under the Coastal Act. Pacaso's mission is to enrich lives by democratizing the ownership of second homes. In Newport Beach, second home ownership has typically been possible only for very wealthy buyers. Pacaso lowers the barriers to the second home market by simplifying and streamlining the co -ownership process by reducing costs and making ownership possible at a more accessible price point. Pacaso organizes the ownership group, manages the legal process, and provides a management service to streamline the home ownership process for the co -owners. The concept of co -ownership through an LLC is not new, and in fact is used by many residents in the City; but Pacaso simplifies this process in a way that makes the experience accessible to people who have traditionally been restricted from this type of homeownership. As a result, Pacaso has made second home ownership available to a broader set of people, including those in traditionally diverse and underrepresented communities. Pacaso has also shifted demand away from the more limited supply of affordable homes by pooling the resources of second home buyers, which allows them to afford co - ownership of a home at a higher total price point. Pacaso homeowners are not transient; like all other homeowners, they have made a material investment in the property they call home and its surrounding community. 1. The Proposed Ordinance Is Unconstitutionally Vague And Ambiguous The Proposed Ordinance fails for being vague and ambiguous on its face and as applied to Pacaso (if it even applies in the first instance). "[I]t is a basic principle Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 3 of due process that an enactment is void for vagueness if its prohibitions are not clearly defined." Hunt v. City of Los Angeles, 638 F.3d 703, 712 (9th Cir. 2011) (citation omitted). "An ordinance may be void for vagueness" if it "fails to give a `person of ordinary intelligence a reasonable opportunity to know what is prohibited,"' among other things. Id. (citation omitted). Here, the Proposed Ordinance fails to provide individuals and entities — including Pacaso, homeowners, real estate agents, brokers, and persons of ordinary intelligence, among othersa reasonable opportunity to know what conduct, speech, or uses are prohibited, or any guidance as to how to determine whether their conduct, use of a home, or speech with regard to time share uses falls within the prohibited conduct. See id. The Proposed Ordinance provides: No time share use or time share unit shall be established or permitted in any zoning district except as authorized in the Code. Unless authorized by this Code, no person including, but not limited to, an owner of a time share unit, an agent, or a broker shall: 1. Develop or establish a timeshare use in the City; 2. Convert a property or unit in the City to a time share use or time share unit; 3. Advertise or cause to be printed, published, or disseminated in any way and through any medium, the availability for sale, in its entirety or a fraction thereof. (a) any property or unit in the City that is used for a time share use or as a time share unit; or (b) any entity where the ownership thereof, in whole or in part, entitles the owner thereof to use a property or unit in the City for a time share use; and/or 4. Manage a unit or property in the City that is being used for a time share use or as a time share unit. (May 2023 Report Ex. H, Proposed Code Text Changes (Redlined), at 3.) A "time share use" is defined as "the use of one or more time share accommodations or any part thereof, as a time share property." (Id. at 7.) A "time share property," means "one or more time share accommodations subject to the same time share instrument, together with any other property or rights to property Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 4 appurtenant to those time share accommodations." (Id. at 6.) A "time share instrument," in turn, means "one or more documents, by whatever name denominated, creating a time share plan or governing the operation of a time share plan, and includes the declaration dedicating time share accommodations to the time share plan." (Id.) In turn, a "time share plan" is defined as "any arrangement, plan, scheme, or similar device ... whereby a purchaser, in exchange for consideration, receives the right to exclusive use of real property, or any portion thereof, whether through the granting of ownership rights, possessory rights or otherwise, for a period of time less than a full year during any given year, on a recurring basis for more than one year, but not necessarily for consecutive years." (Id.) A time share plan "shall be deemed to exist whenever such recurring rights of exclusive use to the real property, or portion thereof, are created, regardless of whether such exclusive rights of use are a result of a grant of ownership rights, possessory rights, membership rights, rights pursuant to contract, or ownership of a fractional interest or share in the real property, or portion thereof, and regardless of whether they are coupled with ownership of a real property interest such as freehold interest or an estate for years in the property subject to the time share plan." (Id.) Taking these definitions together, the May 2023 Report states that a "`time share use' is defined as `any arrangement, plan, scheme, or similar device' that limits the owner to the right for `exclusive use of real property, or any portion thereof for `less than a full year during any given year, on a recurring basis for more than one year.' This means the use of any real property in which an owner has exclusive use of said property for less than the full year would be classified as a time share." (May 2023 Report at 3.) The Proposed Ordinance provides no guidance or criteria as to how its vague definitions apply in many circumstances, such as when co -owners, who are not Pacaso clients, make arrangements concerning when or how they can use a jointly owned property. As one example, the City fails to define what "pursuant to a plan" means. As a result, it is unclear whether the Proposed Ordinance applies to a family that purchased and co -owns a house among cousins and who use a Google calendar allotting times in which certain family members intend to use the house. Likewise, it is unclear whether the ordinance prohibits siblings who own a home who have allotted times in which they can each enjoy using the home. The Proposed Ordinance also potentially implicates friends who share a home but who stagger the periods of the year that they use and enjoy that home, and bought the property with such an intention. Likewise, the ordinance potentially prohibits domestic partners, or divorced or separated spouses, who wish to alternate usage of a jointly owned home at different times of year for whatever personal reasons —none of which is the concern of the City. Under the plain language of the ordinance, it appears that all of these scenarios would Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 5 be prohibited. But the City has urged that the Proposed Ordinance "does not inadvertently capture non -time share uses such as the purchase of an entire property between family and friends and/or the bequeathing of a property by a family member." Thus it is entirely unclear what is or is not prohibited. See Tucson Woman's Clinic v. Eden, 379 F.3d 531, 555 (9th Cir. 2004) (finding regulation unconstitutionally vague because it required patients be treated with "consideration," "respect," "dignity," and "individuality" —words that were subject to "widely variable" meanings, and therefore were "too vague and subjective for providers to know how they should behave in order to comply, as well as too vague to limit arbitrary enforcement"); Zubarau v. City of Palmdale, 192 Cal. App. 4th 289, 310 (2011) (holding city zoning ordinance permitting a 75-foot vertical antennae, but limiting the "active element" of antenna arrays to a height of 30 feet without defining the term "active element of the antenna array" or reconciling the differing 75-foot and 30-foot height limitations, to be unconstitutionally vague). The City acknowledged this ambiguity and resulting confusion. The May 2023 Report summarized the Planning Commission's recommendation, which specifically pointed out the need to "clarify" whether time share definitions excluded "shared vacation homes by family or friends": On April 20, 2023, the Planning Commission held a public hearing to discuss draft Zoning Code and LCP amendments. Seven people spoke (six in favor and one against). The Planning Commission recommended approving the amendments and suggested two additional changes for the City Council's consideration: 1) prohibit advertising time shares for sale, and 2) clarify time share definitions to exclude shared vacation homes by family or friends so that it is clear what is not intended. (May 2023 Report at 3 (emphasis added).) However, neither the May 2023 Report, nor the definitions in the Proposed Ordinance, clarify this issue. Instead, the May 2023 Report merely states that, despite the confusion around whether shared vacation homes with family or friends would be prohibited under the Proposed Ordinance, the City would not change the proposed definition of a time share plan to clarify this: With respect to an exception to the definition of time share plan, Staff is recommending that the definition remain as proposed because the definition treats everyone equally and avoids creating a loophole that could be used to avoid regulation. Specifically, the definition of time share plan set forth in the proposed ordinances requires several conditions be met to trigger regulation and does not inadvertently Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 6 capture non -time share uses such as the purchase of an entire property between family and friends and/or the bequeathing of a property by a family member. These conditions include: (i) the use of an accommodation; (ii) pursuant to a plan; (iii) whereby a purchaser, in exchange for consideration; and (iv) receives the right to exclusively use the accommodation for less than one year during a given year, on a recurring basis for more than one year.... (Id. at 4 (emphasis added).) But the proposed definition does just that. The definition of a "time share plan," sweeps in all co -ownership structures —no matter whether they are owned by strangers or family members, either via direct purchase or inheritance. It is thus entirely unclear how to interpret the Proposed Ordinance and proposed definition of a "time share plan" with regard to co -owners who have made arrangements or devised a plan to determine when or how each co-owner uses the property. Residents are left to guess how to comport their conduct to comply with the ordinance. On one hand, the City states that "the purchase of an entire family and friends" is necessarily a "non -time share use," but in direct odds with this statement, the City urges that that the definition "treats everyone equally." (Id. at 4.) The Proposed Ordinance is also unconstitutionally vague with respect to its purported prohibition on "person[s]" who "[a]dvertise or cause to be printed, published, or disseminated in any way and through any medium, the availability for sale, in its entirety or a fraction thereof: (a) any property or unit in the City that is used for a time share use or as a time share unit; or (b) any entity where the ownership thereof, in whole or in part, entitles the owner thereof to use a property or unit in the City for a time share use." (May 2023 Report Ex. H, Proposed Code Text Changes (Redlined), at 3.) The ordinance fails to clarify or define what constitutes "advertis[ing]," or whether this prohibition extends to someone reposting a time share listing on their social media page or merely sending a link of the listing via email to another friend. This prohibition potentially implicates brokers, agents, printing companies, and even individuals reposting listings on social media or via private email exchanges. Likewise, the ordinance fails to clarify, define, or set any bounds on who qualifies as "caus[ing] to be printed, published, or disseminated in any way and through any medium" the availability for sale of a time share. (Id.) The lack of clarity leaves citizens guessing as to what kind of speech is impermissible. For example, this phrase potentially extends to and implicates individuals merely conversing with a friend about a time share use or listing in the City, a printing company publishing an opinion piece about time share uses in the City, individuals reposting a time share Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 7 listing on Facebook, or an individual sending a link of a time share listing to another friend via private email, among potentially many others. The cloud of threatened criminal prosecution and massive fines for violations of the Proposed Ordinance makes this draconian ordinance even more troubling, since the vague ordinance may trap innocent and honest brokers, agents, printing companies, and ordinary citizens who merely repost, print or even discuss time share uses or listings in the City, by not providing fair warning. Because the ordinance is vague, ambiguous, and confusing, both on its face and as applied to Pacaso, and threatens ordinary, law-abiding citizens with enormous penalties for an ambiguous spectrum of conduct, it should not be passed. 2. The Proposed Ordinance is Unconstitutionally Overbroad The Proposed Ordinance violates the First Amendment because it is unconstitutionally overbroad on its face as it extends to a substantial number of impermissible applications. See Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557, 565 (1980). The ordinance provides that "no person including, but not limited to, an owner of a time share unit, an agent, or a broker shall ...": 3. Advertise or cause to be printed, published, or disseminated in any way and through any medium, the availability for sale, in its entirety or a fraction thereof. (a) any property or unit in the City that is used for a time share use or as a time share unit; or (b) any entity where the ownership thereof, in whole or in part, entitles the owner thereof to use a property or unit in the City for a time share use ... (May 2023 Report Ex. H, Proposed Code Text Changes (Redlined), at 3 (emphasis added).) "Any violation of these requirements is subject to the penalties," including fines, misdemeanors or imprisonment. See NBMC, § 1.04.010(C). By prohibiting a person from "disseminat[ing] in any way and through any medium" the use of a time share in the City, the ordinance broadly prohibits all speech on time share use in the City without exception —including non-commercial and political speech. The ordinance also applies to all "person[s]" who, without exception, disseminate information about a property being used as a time share use in the City or Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 8 an entity that is merely "entitle[d]" to use—i.e., potentially not even presently using — a property or unit for a time share use. This prohibits many different forms of protected speech —including an individual's forwarding of an online advertisement to another along with his or her commentary about Pacaso (to the extent it is the City's position that Pacaso is entitled to use a property as a time share use) —and also extends to any and every individual who "causes" or "disseminates" such speech. As another example, social communications among friends, co-workers, family members or spouses merely relaying news, gossip, or information about time share uses or listings in the City are prohibited under this ordinance. The ordinance also extends to Tweets or Facebook posts expressing an opinion about or providing information about a known time share use in the City. Indeed, a public comment or email to the City pointing out an improper time share use would be a literal violation of this ordinance. These are just a handful of examples of the overbroad nature of the ordinance and chilling effect the ordinance will have on free speech. This overbroad prohibition on protected speech (both commercial and non- commercial) regarding time share uses in Newport Beach renders the ordinance unconstitutionally overbroad and void on its face as it violates the First Amendment. 3. The Proposed Ordinance Exceeds The Scope Of Permissible Zoning Authority Cities may regulate land use by zoning under the police power of the state. Cal. Const., art. XI, § 7. However, this power is not unlimited. An ordinance must be "reasonable in object and not arbitrary in operation" to constitute a "justifiable exercise of police power." Roman Catholic Welfare Corp. v. City of Piedmont, 45 Cal. 2d 325, 326 (1955). A land use ordinance exceeds municipal authority under the police power where it has no substantial relation to the public health, safety, morals or general welfare. Id. Any attempt to apply the Proposed Ordinance to Pacaso is outside the scope of the City's authority to regulate permissible zoning subject matters. The Proposed Ordinance seeks to impermissibly regulate who the owners are, in contrast to the use of land as between residential and other purposes (which is permissible). The City has already acknowledged the limits on its power in this regard. As Community Development Director Seimone Jurjis conceded during the City's November 16, 2021 City Council Meeting, the City cannot regulate ownership: "From a city standpoint the only thing we can regulate is the use of the property. We can't regulate the ownership of the property. We don't regulate LLCs. We don't regulate the trusts, or Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 9 the S Corps, or tenants in common, or joint tenancy. We don't regulate that. The only thing we can regulate that is given to us as authority from the state is how do you use the property." (City of Newport Beach, Newport Beach City Council Meeting: November 16, 2021, YouTube, at 43:40-44:13 (Nov. 17, 2021) (emphasis added), https://youtu.be/nklQT25nAU ?tQ�2620.) Permissible zoning regulations must focus on the use of land. Zoning regulations that do not focus on the use of land, but rather target certain individuals, exceed the scope of permissible zoning regulations. The City may not adopt a zoning regulation based on the identity of a tenant or where a particular resident permanently resides. See Friends of Davis v. City of Davis, 83 Cal. App. 4th 1004, 1013 (2000). But the City's Proposed Ordinance does just that. Instead of focusing on the "use" of land, the Proposed Ordinance, by its terms, and the City, in their application against Pacaso and its homeowners —but not families or friends —regulates and targets individuals based on who the owners are, not how they use their property. As the City even concedes, whether the homeowners are "family and friends" is determinative of whether the use is a time share or non -time share use. (See May 2023 Report at 4 (stating that the Proposed Ordinance "does not inadvertently capture non -time share uses such as the purchase of an entire property between family and friends and/or the bequeathing of a property by a family member").) Thus, the application of the Proposed Ordinance and impact on property ownership improperly turns on the identities of owners, which is plainly impermissible. As a result, the Proposed Ordinance requires the City to peer within co -owned homes into the relationships and manner of use of such co -owners. The Proposed Ordinance regulates how people come together to own and enjoy property, requiring the City to assess and make determinations about intimately private engagements and arrangements, including those among friends, family members, co-workers, spouses, and separated or divorced spouses. The ordinance also invades, interferes with, and restricts individuals' ability to make intimate personal decisions about their living arrangements, including who they want to co-own property with, how they want to allocate the time spent within that home, and how they can use and share a home together. This is not within the City's power or scope to regulate. 4. The Proposed Ordinance Violates Homeowners' Right to Privacy The Proposed Ordinance, and its enforcement against Pacaso homeowners and other co -owners, violates their state constitutional rights of due process and equal protection by infringing upon their fundamental right of privacy under Article I, Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 10 Section 1, of the California Constitution. These privacy rights, which are enshrined in the California Constitution, are extraordinarily broad. There is a recognized autonomy privacy interest in choosing the persons with whom a person will reside, and in excluding others from one's private residence. See Tom v. City & County of San Francisco, 120 Cal. App. 4th 674 (2004). Pacaso homeowners have a privacy interest in coming together with co -owners to own and use a home together. Likewise, Pacaso homeowners have a privacy interest in choosing with whom to live, in excluding others from their home, and in their private living arrangements. Like all other homeowners, Pacaso homeowners have a reasonable expectation of privacy in their own home, including in their living arrangements, in how they can come together to own and enjoy property, in choosing with whom to live, and in excluding others from their home. The Proposed Ordinance violates these privacy rights. It regulates and invades how Pacaso homeowners can come together to own and enjoy property together, and restricts homeowners from being able to exclude others from their home. The ordinance intrudes into, interferes with, and restricts individuals' ability to make intimate personal decisions about their living arrangements, including who they want to co-own property with, how they want to allocate the time spent within that home, how they can share a home with others, and their ability to exclude others from the home. The Proposed Ordinance also regulates and invades intimate and private engagements and living arrangements, including assessing the identity of co -owners, relationships of co -owners, and manner of use of co -owners. The City even concedes that the identity of homeowners is relevant to the City's analysis as to whether the ordinance applies —stating that it "does not inadvertently capture non -time share uses such as the purchase of an entire property between family and friends and/or the bequeathing of a property by a family member." (May 2023 Report at 4 (emphasis added).) In doing so, the City impermissibly intrudes upon living arrangements. The City's intrusion on the Pacaso homeowners' privacy interest is not justified by any goals or interests underlying the Proposed Ordinance. For example, the City states that its amendment efforts were a "result of community concerns received regarding the commercialization of residential neighborhoods that fractional ownership uses create, including increases in traffic, parking, noise and trash" and their attempt to find the "best approach to address potential impacts." (May 2023 Report, at 2.) Similarly, the Proposed Ordinance states that fractionally owned homes "result[] in an increase in traffic and noise in residential neighborhoods, as well a [sic] Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 11 change to the fabric of the community due to the short-term nature of the stays," and that "public testimony included concerns about increases in traffic, noise, and trash." (May 2023 Report Ex. A, Ordinance No. 2023-4, at 2, 4.)1 However, prohibiting Pacaso does not further these goals. In fact, Pacaso homeowners —by virtue of the policies they adopt when becoming a Pacaso homeowner —cause less traffic, parking, noise or trash than other Newport Beach residents. For example, Pacaso co -owners agree not to have large events or parties; co -owners adhere to a 9:00 p.m. to 7:00 a.m. quiet hour policy; co -owners agree not to rent the home to third parties; and Pacaso encourages homeowners to avoid parking on the street unless absolutely necessary. In any event, Pacaso homes are subject to all of the same noise, nuisance and parking ordinances that currently apply to other single-family residences in Newport Beach. Finally, Pacaso is a purely residential co -homeownership structure that lacks any resemblance to such "commercial" uses or "short-term lodgings." Rather, Pacaso homeowners are strictly prohibited from any short-term rentals of their homes. Pacaso homeowners are true homeowners who make a significant financial investment in their home —and they are in it for the long haul. They are directly invested in the home and its surrounding neighborhood and community, and they own for their personal use and enjoyment, not for profit. Just like their neighbors, Pacaso homeowners make large financial investments in their homes and bring an owner mentality, not a "short-term" vacation mentality, to their use of the property. Council Member (and now sitting Mayor) Blom acknowledged this point and undercut the City's statements that Pacaso homeowners are "chang[ing] the fabric of the community" (May 2023 Report Ex. A, Ordinance No. 2023-4, at 2), when he rightly expressed: "I don't see four or eight owners of a single house really destroying our city. I feel like those people have actually put in $500,000 or a decent amount of money.... We would love it if it was a single-family owner for every house; that's the old way .... A lot of people that are maybe trying to create this life for themselves —maybe this is the best way to get to do it. I don't think they are here to destroy our community. I think they're here to enjoy it." (City of Newport Beach, Newport Beach City Council Meeting: November 16, 2021, YouTube, at 54:22-58 (Nov. 17, 2021), https://youtu.be/nk1QT25nAUQ?t=3260.) In any event, the City lacks all visibility and control into how much time any homeowner intends to spend in his or her home; so, preventing Pacaso and its co - Further, the Proposed Ordinance states that "fractionally owned homes are a time share and operate much like short-term lodgings," and "these homes operate as short-term lodging with residents expressing displeasure with the impacts that these homes were causing including an increase in the noise and traffic in the residential neighborhood." (Id. at 3, 4.) Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 12 owners from buying properties has no bearing on the likelihood that other prospective buyers are either buying the home as a second home, or anticipating the ability to use it for short-term lodging. Nor does the Proposed Ordinance further the purported goal of ameliorating concerns about "impacts on the City's housing supply and character of residential neighborhoods." (May 2023 Report Ex. E, Planning Commission Resolution No. PC2023-018, at 2; May 2023 Report Ex. A, Ordinance No. 2023-4, at 2.)2 Rather, Pacaso helps relieve competition for more affordable homes by giving second home buyers a better option. Instead of competing for a whole home valued at $525,000, for example, Pacaso offers up to eight second home buyers an option to be co -owners of a $4-5 million property for the same price. Just one Pacaso home can remove up to eight buyers from local competition. Further, second homes are notorious for sitting empty much of the year. In contrast, Pacaso-managed homes are fully utilized, which means that Pacaso homeowners engage in their community and support local businesses year-round. Finally, targeting Pacaso in order to address "frequent turnover of the properties' occupants and its commercial management" is a similarly specious rationale. (May 2023 Report Ex. A, Ordinance No. 2023-4, at 2.) The City lacks all visibility and control into how much time homeowners intend to spend in their homes, the frequency to which a homeowner invites over guests, how many overnight visitors the homeowner has, and how frequently they have people coming in and out of, or servicing, their home (including, e.g., landscapers, professional cleaners, etc.). Preventing Pacaso from buying properties does nothing to prevent other prospective buyers from buying the home as a second home and using it the same manner as the Pacaso homeowners. These major disconnects between the goals and findings underpinning the Proposed Ordinance and Pacaso's model and the behavior of its homeowners underscores that the ordinance is nothing more than a pretext to deny homeownership to new owners. Instead, it is plain that many other preexisting regulations, ordinances, and policies address the supposed "concerns" the City had with certain residential properties that underly the purpose and intent of the Proposed Ordinance. 2 The Proposed Ordinance further states that "the fractional ownership of single -unit residences as a second home further exacerbates the housing supply in Newport Beach making it harder to meet housing demand." (May 2023 Report Ex. A, Ordinance No. 2023-4, at 3.) Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 13 Because the City cannot show a narrowly tailored means to achieve its stated goals or purposes, the Proposed Ordinance should not pass. 5. The Proposed Ordinance Will Be Selectively And Arbitrarily Enforced In light of the City's largely homogenous community, the City's attempt to meddle in property co -ownership (especially among Pacaso's clientele) is deeply concerning. The City's enforcement agenda infringes on homeowners' constitutional and privacy rights to associate and cohabitate with persons of their choosing, effectuates an unnecessary barrier to entry for new homeownership opportunities, and directly stifles diverse individuals' access to owning real property in Newport Beach. By enforcing the Proposed Ordinance against Pacaso, the time share ban targets specific individuals who seek to co-own a property with individuals of their own choosing, and hampers their right to cohabitate. (a) The City's Enforcement Agenda Against Pacaso, But Not Other Co - Owned Residences, Is Suspect And Arbitrga The City's plan to enforce the Proposed Ordinance against Pacaso, without any similar measures taken against other co -owned residences (through LLCs, trusts, a tenancy in common, or otherwise), is selective and arbitrary enforcement with discriminatory, disparate impact implications. Several joint or partial ownership scenarios appear to fall under the City's broad definition of a "time share plan" under the Proposed Ordinance, but will nevertheless still be permitted to operate undisturbed. For example, as described above, a single-family residence co -owned by multiple family members through an LLC would purportedly fall under the City's Proposed Ordinance. Or, as another example, a residence co -owned by a husband and wife through an LLC would purportedly fall within the time share ban. Yet the City has expressly indicated that they will not be attempting enforcement against such entities or individuals who are similarly situated or functionally the same as Pacaso's homeowners. As the City's own council members pointed out, co -ownership of real property is common in Newport Beach and exists today in a variety of forms. As Community Development Director Seimone Jurjis noted during the City's November 16, 2021 City Council Meeting, co -ownership is "not a new concept" and people have long participated in fractional ownership of other real property such as larger buildings such as apartments or commercial properties. (City of Newport Beach, Newport Beach City Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 14 Council Meeting: November 16, 2021, YouTube, at 38:39-39:25 (Nov. 17, 2021), https://youtu.be/nkl QT25nAUQ?t=2319.) Mr. Jurjis noted that 56% of all single-family homes in Newport Beach are owned in an LLC or trust. (Id. at 41:19-41:28.) Further, Mr. Jurjis noted that the City only has access to the name of the LLC or trust —the City "[does not] know anything about who owns the LLC, what [is] the partnership structure of the LLC, who are the trustees." (Id. at 41:28-41:53.) Mayor Blom highlighted this issue during the November 16, 2021 City Council Meeting: The one thing that jumped out the most is that a lot of ownership in Newport Beach is held in LLCs and trusts, and there's a portion of residents here that have multiple homes within the City and some of those might be held in different entities, and if we start getting into the definition of not allowing fractional ownership[,] it frightens me because all of a sudden we're in an LLC and trust issue where that can be litigated in a way that might not be beneficial to a huge amount of our residents that are maybe giving ownership of that Balboa cottage to their four children, or something where maybe an operating agreement has the benefit of family in mind as well as the benefit of financial well-being. (City of Newport Beach, Newport Beach City Council Meeting: November 16, 2021, YouTube, at 51:31-52:40 (Nov. 17, 2021), https://youtu.be/nk1QT25nAUQ?t=3091.) He further stated: "I have a hard time denying when 56% of the ownership of Newport Beach is in an LLC or trust how we can legally justify getting rid of fractional ownership in any way, shape or form because it would eventually roll back to all of those kinds of arguments." (Id. at 55:40-55:57 (emphasis added).) As then -Mayor Pro Term Kevin Muldoon noted, each member in a Pacaso co -ownership arrangement is essentially "a more stringent partner than a family -owned trust or an LLC"—an attempt at a distinction that has no legal or substantive significance. (Id. at 1:10:15- 1:11:14.) Thus, the fact that the City plans to enforce the ordinance against Pacaso, where other similarly situated properties with similar ownership structures will Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 15 expressly not be targeted, is clear evidence that the City plans to selectively enforce the ordinance and that the City is deliberately and wrongly singling out Pacaso.3 6. The Proposed Ordinance Conflicts with Coastal Act Policies The Proposed Ordinance does not qualify as a de minimis Local Coastal Program ("LCP") amendment because it would fundamentally alter an allowable use of real property. An LCP amendment may be considered de minimis only under extremely narrow circumstances and must "not propose ... any change in the allowable use of property." Coastal Act, § 30514(d)(1)(B). Here, the City's Proposed Ordinance would treat co -ownership of residential units in the City as "time share uses" that are prohibited in all residential zones —including those in the Coastal Zone. Moreover, the Proposed Ordinance would apply a host of new regulations to any co -owned properties that are permitted. Because 56% of all single family homes in Newport Beach are owned as LLCs or in truststructures that allow multiple owners of a property —the City's Proposed Ordinance could alter the use of over half of the City's single family homes. Such sweeping and broad reaching regulation falls well outside of what the Coastal Act considers to be de minimis. More specifically, the NBMC currently defines "time share use" as a "right of occupancy ... that is not coupled with an estate in the real property." NBMC, § 21.70.020.V (emphasis added). Accordingly, homes with multiple owners, such as s Pacaso homes are not time shares; but, even for the sake of argument, if they were considered time shares, the Proposed Ordinance further fails for the independent reason that state law preempts the City from regulating time share programs locally. It is black letter law that "[i]f otherwise valid local legislation conflicts with state law, it is preempted by such law and is void." Sherwin-Williams Co. v. City of Los Angeles, 4 Cal. 4th 893, 897 (1993) (citation omitted). "A conflict exists if the local legislation `duplicates, contradicts, or enters an area fully occupied by general law, either expressly or by legislative implication."' Id. (citation omitted). "Local legislation is `duplicative' of general law when it is coextensive therewith." Id. "Similarly, local legislation is `contradictory' to general law when it is inimical thereto." Id. at 898. Under California's Vacation Ownership and Time-share Act of 2004 ("VOTA"), time share plans are not subject to local regulation: the regulation of time share plans and exchange programs is an "exclusive power and function of the state." Cal. Bus. & Prof. Code § 11280(a) (2018). And, while the law states that "[n]o provision of this chapter invalidates or modifies any provision of any zoning, subdivision, or building code or other real estate use law, ordinance, or regulation," id. § 11280(b), VOTA is clear that "[a] unit of local government may not regulate time share plans or exchange programs," id. § 11280(a), which is exactly what the City seeks to do through the Proposed Ordinance. Thus, the City's time share ordinance fits squarely within the scope of VOTA and "regulate[s] in the very field the state has reserved to itself." Id. The comprehensive nature of VOTA in regulating time shares and certain registration or advertising requirements for time share plans is so thorough and detailed as to manifest the legislature's intent to preclude local regulation of time shares and indicate that the issue is now exclusively a state concern. Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 16 in an LLC or trust, are not considered time shares because each owner holds an ownership interest in the home. The Proposed Ordinance, however, would broaden "time share uses" to include co -owned homes that are used separately by multiple owners "regardless of whether [the] rights of use are a result of a grant of ownership rights." (See May 2023 Report Ex. H, Proposed Code Text Changes (Redlined), at 6 (emphasis added).) Under this broadened definition, existing co -owned homes in the City's residential coastal zoning districts could be considered prohibited time shares — fundamentally changing the use of those properties. See NBMC, § 21.18 (not permitting time share uses in residential coastal zoning districts). Because the Proposed Ordinance would impose a novel restriction upon a previously "allowable use of property" in the Coastal Zone, the amendment cannot be considered de minimis. Coastal Act, § 30514(d)(1)(B). In addition, the Proposed Ordinance conflicts with several Coastal Act Chapter 3 policies and therefore neither qualifies as de minimis nor meets the findings required for an LCP amendment. See Coastal Act, §§ 30514(d)(1)(B), 30514(b), 30512(c). As an initial matter, no LCP amendment can be considered de minimis if it is not "consistent with the policies of Chapter 3" of the Coastal Act. Co -ownership opportunities advance a number of Chapter 3 policies such that a prohibition of this use would create inconsistencies with Chapter 3. For example, co -ownership augments the stock of overnight accommodations in the Coastal Zone for individuals who are not fortunate enough to live in coastal cities on a full time basis. By providing an additional option for accommodations and property ownership in the Coastal Zone, co -ownership homes increase coastal access overall. See id., § 30210; Cal. Coastal Commission, Staff Report for City of Malibu LCP Amendment No. LCP-4-MAL-20- 0083-2, (July 21, 2022), p. 2 (recognizing that increased supply in any one coastal accommodation type can "augment the stock of [all] overnight accommodations" and thereby enhance public access overall). Further, by providing homeownership opportunities for some individuals and families in the Coastal Zone, co -ownership units remove those same individuals and families from competing for properties in the vacation rental market, thereby increasing rental stock and lowering demand and costs for others. Accordingly, co - ownership facilitates increased coastal access and recreational opportunities for all visitors, including lower cost visitor serving uses. See Coastal Act, §§ 30210, 30213. Moreover, by providing ownership opportunities to multiple individuals and families in a single vacation property, co -ownership may help keep those seeking second homes in the Coastal Zone from purchasing lower -cost properties by themselves, thereby helping to maintain local housing stock for fulltime residents. Finally, co - homeownership increases property utilization and support for coastal businesses from multiple owners, unlike other second homes in the Coastal Zone that are more likely Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 17 to sit empty much of the time. Accordingly, co -ownership uses help support visitor and recreational uses in the Coastal Zone in furtherance of multiple Chapter 3 policies. See id., § 30213. For each of the reasons set forth above, the Proposed Ordinance's restrictions upon co -ownership, which if imposed may increase vacation rental demand and the acquisition of lower -cost homes in the Coastal Zone as second homes, and result in reduced support of visitor and recreational uses by fractional homeowners, are at odds with the Coastal Act's Chapter 3 policies. Accordingly, the Proposed Ordinance also fails to satisfy the Coastal Commission's finding requirements for an LCP amendment processed through the Commission's standard LCP amendment procedures. See Coastal Act, §§ 30514(b), 30512(c). Because the Proposed Ordinance cannot satisfy the Coastal Act's requirements for an LCP amendment —much less a de minimis amendment —the Proposed Ordinance should not be adopted. The City's Proposed Ordinance violates the rights of Pacaso and Pacaso's homeowners for all of the reasons described above. Pacaso's co -ownership model presents a means to diversify the City's housing market, demographics, and broader community in a positive and meaningful way, including by providing homeownership to those who have traditionally been excluded from the second home market. Pacaso has the potential to be an excellent partner of the City. Pacaso provides the City with the opportunity to foster inclusion and lift barriers to homeownership for people of diverse backgrounds. Pacaso's new homeowners are part and parcel of the underlying economic ecosystem. Unlike absentee second home owners, Pacaso owners occupy their home and support local businesses year-round, such as restaurants and retail shops. Additionally, not just homeowners in the City, Pacaso itself employs between 8-10 local businesses per property, including real estate agents, property managers, landscapers, pool cleaners, home cleaners, laundry services, handymen, local artists, and more. Mayor Blom & Newport Beach City Council Members May 9, 2023 Page 18 We are hopeful that the City will seize this opportunity to protect property rights and abandon its efforts to pass the Proposed Ordinance. Pacaso believes strongly in its mission to enrich lives by making second home ownership possible for more people and will pursue all necessary courses of action to defend the rights of the homeowners Pacaso serves. All rights are reserved. Sincerely, �4. k4., Lance A. Etcheverry Cc: Grace K. Leung, City Manager Aaron C. Harp, City Attorney