Losing the Property Rights Lottery

Donald and Irma Shirkey tried to play by the rules, but Pacific Grove, California, turned their property rights into a game of chance.

The couple purchased their brightly painted house on 5th Street, just a block from the ocean, in 1999. It was a second home for family and friends to use on visits. To cover the cost, the Shirkeys decided also to rent the house out as a vacation home. When Pacific Grove passed a new ordinance in 2010 requiring all short-term rental homes in the city to be licensed, they complied. When the city came back in 2017 and required a second license for the smaller guest quarters over the home's garage—which the Shirkeys sometimes rented separately from the main house—they went along with that, too.

Then in February, Pacific Grove passed another ordinance regarding short-term rentals. This time, the city instituted a density cap, declaring that no more than 15 percent of the homes on any given block could hold short-term rental permits.

The Shirkeys' guest house happened to be on a block with more permits than were allowed by the new ordinance. To solve that problem, the city set up a ping-pong-ball lottery machine and, on May 22, held a random drawing to determine which permit holders would be allowed to continue renting their homes.

The odds were not in the family's favor. While the permit for their small, upstairs guest quarters was selected in the lottery, the permit for the main house was not. The Shirkeys are now left with a second home that cannot be legally rented, and a small upstairs room that is not financially viable on its own.

"What the city did is insulting," says Christina Sandefur, a vice president at the Arizona-based Goldwater Institute, which is representing the Shirkeys and two other residents in a lawsuit against the city.

The suit argues that Pacific Grove violated the California state constitution's due process protections by using random chance to determine which licenses got revoked. "It was totally random," Sandefur says, "so owners who had racked up numerous complaints were allowed to keep their permits, while responsible homeowners were stripped of theirs."

The underlying problem, though, is the rental density ordinance itself. A 15 percent threshold is entirely arbitrary—does a street with 25 percent of homes rented constitute a greater threat to public health or safety? How about 40 percent?

Stripping otherwise law-abiding residents of the opportunity to rent their homes is bad enough, but raffling off property rights is shameful. With any luck, courts will also find it unconstitutional.