Short-term rental business faces challenges

John Starks: People need to understand requirements when forming a startup.

Craig Hosmer: City's short-term rental requirements are actually easier to meet than they should be.

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At 27, Robert Iacob is nearly six years into a career he couldn’t have anticipated when growing up in the West Central neighborhood. In fact, Iacob attended Ozarks Technical Community College with the idea of being a nurse.

But then the short-term rental industry gained steam, and Iacob, who still lives in Springfield, grabbed hold. He opened his first short-term rental in 2018, and today he operates in 10 states with Sleepover Inc., the company he co-owns with a Los Angeles-based partner.

Iacob, who has addressed Springfield City Council twice about the challenges he has faced in trying to comply with STR regulations in the city, said Sleepover has about 250 rental units across the country. However, in Springfield, inventory is now under 30 units – roughly 80% fewer than the company had at its height. The reason, according to Iacob, is a city government that is starting to enforce its laws – something it hasn’t done up until this point.

Iacob said the city makes it hard to operate an enterprise-level business – that is, one that operates on a large scale with the ability to dominate its space – and this is not a problem he has experienced elsewhere.

“Other markets, I’m able to have a discussion, and they’re able to vote, and they do, and things move on,” he said.

Iacob received a letter from the city informing him that he was operating unlawfully and subsequently requested a hearing. The city sent out cease-and-desist letters to 98 properties in late March and followed up with 10-day failure-to-obtain letters. Those operators who did not respond to the second letter were ticketed through municipal court for operating without a business license and failure to pay taxes.

Iacob said half of the issue is the taxes the city began collecting from the city’s STR operators for the first time in July 2023. In his Aug. 13 hearing, he told city officials he cannot pay taxes because he does not have a business license, though city officials told him the taxes are due regardless of licensure.

The other half of the problem Iacob said his business faces is a limit the city’s code puts on Type 3 STRs – those located in zoning districts other than single-family or townhouse residential, typically in apartment buildings. City code stipulates that no more than two units are permitted on any premises.

At Sleepover’s height locally, Iacob said it operated 66 units just within Park East apartments in the heart of downtown. The company does not own the units but rather leases them to offer as STRs. Now, Iacob said, the company manages only five STRs among Park East properties, and these are located in the company’s Sky Eleven building.

“It’s disheartening; it’s discouraging,” he said. “I don’t want to go backwards because obviously there’s been money invested and people that have jobs.”

He said he employs 40 contractors across 10 states, including one full-time Springfield employee and a local housekeeping company with a large team.

The prospect of reaching compliance with the city is half daunting and half impossible, according to Iacob.

“The thing they suggested I do is fill out over 1,000 pieces of paper,” he said of the city.

The required records include a monthly form, which he called a coupon, for each individual unit. While he has not turned in the individual coupons, Iacob said he has turned over all financial records.

“They want me to go back for every month and every unit to fill out these coupons,” he said. “I don’t know how that benefits anybody in their team, in the administration, to have to go through all that. I gave them a spreadsheet.”

Even if Iacob fills out the paperwork, he said the city’s law banning more than two units per property – part of the 2019 STR requirements passed by the city – makes his business model impossible.

He noted that permission to operate an STR is a necessity for his business, which mostly offers rentals of 90 or 365 days for traveling professionals in fields like nursing. The longer-term rental units, which he calls mid-term rentals, are not limited by STR requirements.

“If there’s two 90-day stays and there’s a gap in between them, we have to pay rent, we have to pay utilities, internet – there are a lot of costs associated with our business,” he said. “In a perfect world all of these are mid-terms, but we still need that short-term rental flexibility.”

Fractious meeting
Iacob and his partner, Ata Rouhi, had a hearing before city officials on Aug. 13, Iacob in person and Rouhi by phone. Present were Director of Finance David Holtmann, city licensing officials and Assistant City Attorney Laura Vales.

Minutes from the hearing provided by the city of Springfield reflect a contentious meeting. They say the Sleepover co-owners were subpoenaed with a request for all required documentation to be turned in within 10 days. The minutes say tickets were issued for properties operating as STRs at 331 Park Central East and 235 N. Benton Ave., but Sleepover offers other properties that are also subject to enforcement. Iacob was invited to explain during the meeting why licenses and taxes had not been brought up to date for properties at 316 Park Central East and 1623 N. Jefferson Ave.

Iacob told the officials he believed all taxes were collected by the platforms the STRs were listed with, but Licensing Supervisor Quincy Coovert replied that the platforms told the city they will not collect and remit the 5% lodging tax.

Rouhi requested an extension to comply with the subpoena, but the request was denied.

The minutes say that Rouhi told the officials they did not understand business, while Iacob said the STR license was a “process of humiliation” that suggested the city does not want business owners to succeed. The minutes say he questioned the parameters of the subpoena.

“Quincy asked if Sleepover was operating STRs in Springfield now,” the minutes state. “[Neither] Ata nor Robert would respond.”

Iacob, who offered during his interview to show some of Sleepover’s STR units to Springfield Business Journal, told SBJ the STR space is new, and the laws around it are new as well. Meanwhile, being a pioneer in a new business space brings pressures and challenges, he said.

“There’s always a solution,” he said. “You’ve got to have people to work with you, though.”

Iacob said in other cities – he cited Cincinnati, Ohio, and Des Moines, Iowa, as examples – it is possible to work with local officials.

“I don’t feel guilty about any of this,” he said. “I don’t think I’ve done anything wrong. … Right now, there’s just not an enterprise-level solution for getting things taken care of.”

‘Follow the process’
John Starks, co-founder of STR management firm Nightly, based in Springfield, said he approves of Springfield’s efforts at enforcement of its STR policies. Nightly directly manages 40 STRs and assists in managing 90 others in the Springfield and Branson areas.

“We actually endorse what the city’s doing,” he said. “We’d like them to really crack down on the illegal STRs that are out there. All the properties we manage, we follow the process, and we encourage people to follow the process.”

Starks said any time someone starts a business, it’s important to do due diligence and understand the requirements.

He said guest messaging is 24/7, 365 days a year, including Christmas morning.

“You have to be responsive,” he said. “You need to make sure you understand what you’re signing up for and make sure you’re doing it legally.”

He noted once the city cracks down and sees how much tax revenue is not being captured, a property owner could end up with a lien against them.

“I’d rather sleep well at night,” he said.

Starks added that he’s not a fan of paperwork, calling himself a “more relational type of person.” But he said the city’s paperwork requirements did not seem unreasonable to him.

“It’s a subjective thing,” he said. “Any type of paperwork seems arduous to me, but if it’s really worth it, filling out paperwork shouldn’t be a big issue.”

‘We let it happen’
Councilmember Craig Hosmer is often critical of STRs in the city, but he said he has less of an issue with Type 3 properties of the sort Sleepover deals in. He said it’s mainly the hotel industry that takes issue with apartment buildings becoming ersatz hotels.

But neighbors, even in apartment buildings, may also take issue, he said.

“They don’t necessarily want a new person every day or every two days,” he said.

Council is looking at a bill to modify the rule prohibiting more than two units in a building and may instead base the permitted number on a percentage, he said

While STRs have their downsides, like the removal of housing stock from a city that is already facing a shortage, Hosmer said he is not opposed to STRs, and he doesn’t think they should be eliminated.

Hosmer said he doesn’t believe the city’s processes are cumbersome.

“I’ve never applied for a permit, so maybe there’s more red tape than I see, but I don’t think it’s that hard. In fact, I think it’s easier than it should be,” Hosmer said.

He said he doesn’t believe Iacob is making things up when he reports the difficulties he is facing.

“If he’s got 50 places, the paperwork’s going to be more than if he’s got one,” Hosmer said. “I don’t think we should make it easier because you’re doing 50 at one time. The process still has to be followed.”

He said Springfield probably has more illegally operating STRs than legal ones, and this is a source of frustration for him.

“We passed this back in 2019, and really until we started complaining about it, (city officials) were never enforcing it,” he said.

The problem is a lack of primary enforcement, according to Hosmer – and he said the issue is larger than STRs.

“As a city, if people don’t complain about stuff, we let it happen,” he said. “If people knew they were going to be held responsible for violating the law, they’d be more likely to follow the law.”

According to city officials, the city has licensed 75 Type 1 STRS – that is, those in which the owner resides on the premises. There are 227 Type 2 properties, located in residential neighborhoods with owners residing off the premises, and 49 Type 3, like the type Sleepover manages.

An additional 40 STRs are either in the application process, under further investigation or in the enforcement phase, officials say.