Short-term rental properties (STRPs) have become especially popular in Nashville in recent years through websites such as Airbnb and VRBO. In 2021 alone, Airbnb collected and remitted upwards of $92 million dollars to Tennessee, proving that short-term rentals are not only profitable for homeowners but also for the state. (WKRN) Despite this benefit, many Nashvillians are strongly opposed to the operation of short-term rentals, claiming that they are disturbing their neighborhoods and negatively affecting surrounding property values.
Metro Nashville and Tennessee legislature have taken actions over the last several years to regulate the use of STRs. Tennessee Code defines a short-term rental as a residential dwelling that is rented either wholly or partially for a fee for a period of less than thirty (30) days. (T.C.A. § 13-7-602). Most of the regulations regarding STRs are through the Metro Government of Nashville and Davidson County, TN Code of Ordinances (Metropolitan Code). It explains that those wishing to operate an STR and list it on any website must first obtain a permit from Metro Codes. Chapter 6.28.10 of the Code of Ordinances differentiates between the two types of STR permits: owner-occupied and non-owner occupied.
An owner-occupied property is one in which the owner resides at the property and rents out a room while they reside there or the whole property when they periodically go out of town. A non-owner-occupied property is one in which the owner does not live on the property and uses it only for rental purposes. This type of permit requires the personal contact information of the owner and of the person or business that resides within twenty-five (25) miles of the property that is responsible for addressing maintenance and other problems. Proof of insurance, proof of written notification to each adjacent property, a statement that the short-term rental would not violate homeowners associate agreements, and proof of payment of taxes. Zoning is also a factor in determining whether a property can obtain an STR permit. While owner-occupied STRs are allowed in all zoning districts that allow residential use except NS (no short-term rental) zoned districts, non-owner occupies STRs are only allowed in specific zones as described in Chapter 6.28.10(B)(1) of the Metropolitan Code.
Tennessee legislature passed the Short-Term Rental Unit Act effective in 2018 stating that the rules and regulations in effect at the time the property began being used as an STR is the law that governs the use until it is sold or transferred. This “grandfather clause” protects properties that were held out to the public as an STR and successfully obtained a permit to operate an STR from having to cease operation if the Metropolitan Code or zoning is updated while it is in use. Section b of the statute carves out an exception for the City of Brentwood stating that any ordinance, resolution, regulation, or other requirement enacted prior to January 1, 2014 that expressly limits the time a residential dwelling may be rented or prohibits the use of the property as an STR may apply to any property regardless of current use.
Because of this law, STR owners can keep obtaining permits to operate even after the updated regulations would have prevented them from obtaining a permit otherwise. Some Nashvillians have found a loophole through this statute by creating a limited liability company (LLC) and transferring the property into the LLC’s name. That way if the regulations affecting the property’s ability to be used as an STR change, the owner can simply sell the LLC and the owner of the property remains the same; therefore, the new owner of the LLC is protected by the grandfather clause and can continue to operate the STR according to the regulations in place at the time the initial permit was obtained. This does not work for owner-occupied STR’s because the Metropolitan Code specifies that the owner of an owner-occupied STR must be a natural person and not a corporation, limited liability company, partnership, joint venture, or trust. Because the grandfather clause only applies until the property is sold or transferred, this loophole would likely only be successful for non-owner occupied STRs if the property was transferred to an LLC while the property was still eligible for a permit. Furthermore, transferring the property to an LLC after the regulations would prohibit a new owner from obtaining a permit is not likely to be successful since transfers negate the grandfather clause according to the language in Metropolitan Code 6.28.10.
If Metro Council decides to act against the use of STRs, they could change zoning in many areas to NS and only allow the grandfathered STRs to operate. Legislation is needed to preempt these local regulations, which prompted the introduction of House Bill 645 in 2021. It was aimed at taking away local control of owner-occupied STRs and instead putting that power in the state to regulate. When the bill made it to the House Local Government Committee in April, it was amended to address the issue of passing permits to new owners. With concern from House committee members that the bill may revert to its original form on the House floor through “conforming”, the bill died when it ultimately failed to get adequate votes from the Committee.
Although some of the latest proposed legislation regarding STRs did not make it into law, other proposed legislation could emerge to address these controversial STRs in the future. For now, the Metropolitan Code is the best resource for determining whether a property is eligible for a permit and able to be used as an STR and contacting Metro Codes before purchasing a property for the sole use as an STR is advised. Because the laws and regulations surrounding STRs is always changing, obtaining the services of an experienced real estate attorney to investigate the current rules and regulations could tremendously help in the process to own and operate an STR in Nashville.
