As Frisco officials continue to evaluate short-term rental options, a proposal to provide a short-term license category for residents has gained some traction. However, a recent decision in the U.S. Court of Appeals may prevent a locals-only rule.

“The only federal case law is very much against us,” Frisco Town Attorney Thad Renaud said.

The decision, issued Aug. 22 in the 5th Circuit of the U.S. Court of Appeals, ruled a New Orleans residency requirement to short-term rent was unconstitutional. Judges determined it violated the commerce clause in that it discriminated against out-of-state property owners, and thereby regulated interstate commerce which is the realm of the federal government.

Frisco Town Council is now planning to hear a new regulation from staff with a higher license cap and a without language creating a residency-restricted license type. The unique license type would have been issued alongside normal short-term rental licenses, but would not have counted towards the overall cap. Local renters also could have secured licenses even after the cap was reached.

The plaintiffs in the New Orleans case were a group of property owners whose short-term rental licenses were not renewed due to the city’s residency requirement. They also argued the city’s failure to renew their short-term rental licenses violated the takings clause because they had a property interest in the renewal of their licenses. The court dismissed the takings clause argument.

“This case cuts both ways, in some ways. It’s really very good for municipalities that are interested in regulating short-term rentals,” Renaud said.

By rejecting the takings clause argument, the court found there is no federally protected property interest in the license. Property owners can no longer argue denying a short-term rental license diminishes the value of their property.

The court recognized the city’s concerns, which were presented in a study conducted by the city.

The study indicated that short-term rentals in city neighborhoods had an impact on residents’ quality of life and a “loss of neighborhood character.” It also found “anecdotal evidence” that the booming rental market had led to an increase in housing costs.

Frisco Town Council members have repeatedly said their primary goal in curbing short-term rental licenses is to protect community character, and generating more workforce housing would only be an incidental consequence of its actions.

Upon learning about the court decision from Renaud, Frisco decided to table the first reading of its proposed short-term rental regulations which included language creating a new locals-only short-term rental license.

“I think we need to pull this ordinance and rethink,” Renaud said.

He added it will likely be years before this case is resolved and the laws regarding short-term rentals are hammered out and therefore cautioned against pursuing such short-term rental licenses.

Town council plans to create a new regulation in its place with a higher percentage cap of 25%, raised from 22%. The increase would make room for the 119 local renters who previously would have been exempted from the cap, Housing Program Manager Danelle Cook said.

The court decision could have a vast impact on the U.S. rental market, Renaud said at Tuesday’s council meeting. Cities like Denver and many across California have already instituted locals-only license types, and they could face challenges and litigation, he said.

“It’s pretty well reasoned,” Renaud said of the court’s decision. It recognized New Orleans’ concerns as legitimate but said it was unconstitutional nonetheless. New Orleans could only implement its exemption if the problems it sought to address — protecting community character, reducing housing costs, etc. — “could not be served by any other means,” Renaud said.

Council members still intend to pursue efforts to provide locals with some sort of solution. Included in those desires are hopes of creating some enforceable form of a “use it or lose it” policy, and creating more functional enforcement on unruly visitors in short-term rentals.

Councilor Rick Ihnken said he doesn’t like the idea of someone who isn’t using their license to have one when someone who needs it to live in this community can’t get it.

“It doesn’t seem right,” he said.

“I still think the intention is we want people in short-term rentals, we don’t want a speculative market on licenses,” Mayor Hunter Mortensen said.

Most councilors were in support of a 25% cap on short-term rentals, although councilor Andy Held offered one critique.

“I think what we will receive out of this is not necessarily what we’re looking for, which is, I would believe, more vacant homes. I think that is what we’re gonna get out of this,” Held said.