David and Peg Schroeder are lifelong residents of Wilmington, North Carolina. They raised their family in Wilmington and were small business owners in the city. After retiring to the mountains, the Schroeders bought a townhome in Wilmington as a place to stay when they visit family and to maintain their ties with the community. To afford the townhome, they planned also to offer it as a vacation rental when they were not living there. But now the city of Wilmington is trying to ruin their retirement plan by taking their right to rent away from them.
The Schroeders made substantial investments to renovate their townhome to make it suitable as a vacation rental—all based on the correct belief that it would be perfectly legal for them to do so. After several months and about $75,000 in renovation costs, the Schroeders had the property ready to rent. That is when the City changed the rules on them—passing a zoning ordinance that created a hard cap on how many properties were allowed to engage in vacation rentals. And under the cap, any property that fell within 400 feet of another vacation rental would be prohibited from operating as a vacation rental. Finally, to decide which property owners would retain their right to offer vacation rentals, the city devised a randomized lottery process. The result was an arbitrary, zero-sum process that pitted neighbor against neighbor in a raffle for property rights. And because the Schroeders’ neighbor drew a winning ticket, the Schroeders lost.
Using an oppressive and little-known process called “amortization,” Wilmington gave properties that did not win the lottery one year to continue operating. At the end of that time, people like the Schroeders would have to quit renting. That is because, as the theory of amortization goes, the Schroeders would be able to use that one-year period to recoup their investment in their property. And according to the city, this absolves the city of having to pay the Schroeders “just compensation” for their taking of the Schroeders’ property rights. In other words, Wilmington believes that it can take the Schroeders’ property and not pay for it because the Schroeders had time to cover their own losses.
But if the city wants to take the Schroeders’ property rights, it has to pay for them. What Wilmington cannot do is turn peoples’ property rights into lottery tickets and raffle them off. Nor can it create a small group of people allowed to exercise rental rights at the expense of everyone else. The North Carolina Constitution protects the Schroeders’ right to rent and it prohibits the city from granting exclusive privileges and creating rental monopolies that prohibit everyone else from renting. Now the Schroeders are fighting back, determined not to lose the property right they invested so much to acquire. That is why they have teamed up with the Institute for Justice to challenge Wilmington’s unconstitutional zoning and amortization scheme.
Response to Defendants' Motion for Summary Judgment and Incorporated Memo of Law
The Schroeders are model members of the Wilmington community who bought a townhome to stay connected to their family and friends.
David and Peg Schroeder are 30-year members of the Wilmington, North Carolina community. They raised their children in Wilmington, and their children raised their children in Wilmington. Before retiring, they were both small-business owners in town. David owned Schroeder Roofing, Inc. and Wilmington Hammerheads Professional Soccer Team. Peg owned Side Trips, LLC.
Upon retiring, the Schroeders moved to the mountains of North Carolina. But to remain connected to their friends and family, they bought a townhome in Wilmington’s Lion’s Gate community. Through a lifetime of hard work and investing their retirement in rental property, the Schroeders were fortunate to be able to buy a townhome at the beach. They cannot, however, afford to maintain it without renting it while they are away.
As a result, they made sure to buy in a location where they knew that vacation rentals for shorter periods of time were allowed. They consulted their realtor and a lawyer and determined that vacation rentals were allowed by the state, city and Lion’s Gate Home Owners Association. Moreover, they were aware of other property owners in the community that engaged in short-term rentals.
So, on June 6, 2018, the Schroeders purchased their townhome. They purchased the townhome outright, including the structure and property beneath it. They spent the next eight months and over $75,000 completely renovating the townhome to make it suitable for their own personal living and for vacation rentals. The Schroeders’ renovations included modifications made specifically to accommodate living and renting, like building a private owners’ closet and pantry.
They began renting in February, 2019, and pride themselves on maintaining their property in the best possible condition out of respect for their community and their neighbors. They do not allow pets; they rent only to mature adults (at least 25-years old); they limit rentals to four persons; they have obtained their neighbors’ consent; and they comply with all state laws, city ordinances, and HOA rules and guidelines.
When the Schroeders’ townhome was finally completed and their vacation rental business was up and running, they were prepared to enjoy a happy retirement and easy access to visiting their family. That is until the City of Wilmington decided to gamble away their right to actually earn something on their investment.
Wilmington raffles off the Schroeders’ hard-earned property rights, taking their right to rent and giving an exclusive privilege to their neighbor.
On March 1, 2019, the city of Wilmington implemented an ordinance regulating vacation rentals. The ordinance imposed cap-and-separation requirements. Specifically, only 2% of properties in Wilmington are allowed to engage in vacation rentals of fewer than 29 days and no property is permitted to engage in vacation rentals within 400 feet of another vacation-rental property.
To make matters worse, the city of Wilmington decided that all existing vacation-rental properties would be funneled into a lottery. In other words, everyone already engaged in vacation renting would have their existing constitutional rights turned into a raffle ticket. And if two properties within 400 feet of one another entered, only one property could draw a winning ticket. The city refused to grandfather in any pre-existing vacation-rental properties.
The Schroeders entered the lottery and lost their right to rent. Their neighbor was also engaged in vacation rentals and had the lower lottery number. Therefore, the Schroeders’ neighbor won a permit to rent with a 400-foot buffer against anyone else who wished to use their property for vacation rentals, including the Schroeders.
Without the right to rent their property on a short-term basis when they are not living in it, the Schroeders cannot afford to keep the townhome. Moreover, even if they could keep the townhome, they are forced to either give up the flexibility of visiting family and friends as they please or lose substantial rental income. The city is not just putting the Schroeders to an unfair choice; it is doing so by way of an unconstitutional exercise of authority.
The Schroeders are challenging the city’s attempt to change the rules to strip them of their property rights, the city’s granting of an exclusive privilege to rent to a few people at the expense of all property owners in violation of the North Carolina Constitution, and the city’s attempt to pass this ordinance in violation of state law.
Law of the Land
The North Carolina Constitution’s Law of the Land Clause protects the Schroeders’ right to use their townhome for vacation rentals. When the Schroeders spent tens of thousands of dollars to make their townhouse suitable for rental at a time when vacation rentals were perfectly legal, they acquired a property right in that use—a property right that the city cannot take away unless it compensates them.
It is unconstitutional for the City of Wilmington to now change the rules on the Schroeders in the middle of the game. The City’s attempt to raffle off the Schroeders’ property right through a lottery and amortization system is tantamount to using eminent domain without paying the property owner. At least when the government initiates a taking, it is required to compensate a property owner, not have the property owner compensate themselves. North Carolina’s Constitution does not allow the government to go back and divest people of their property rights without paying them. Because that is just what Wilmington is trying to do to the Schroeders, the City’s zoning and amortization scheme is unconstitutional.
Exclusive Privileges and Anti-Monopolies
North Carolina’s Constitution forbids the granting of exclusive or separate privileges and declares that “monopolies are contrary to the genius of a free state and shall not be allowed.” N.C. Const. Art I, §§ 32, 34. These clauses were designed to guarantee equal rights for all people and to prevent the government from creating privileged classes among North Carolinians.
Wilmington’s ordinance not only deprives the Schroeders of their right to rent; it gives their neighbors an exclusive privilege to do so: no one within 400 feet of them can have that privilege, too. North Carolina’s Constitution forbids these kinds of exclusive privileges, and for good reason. Just because someone lives close to someone else who is renting their property, that does not mean that one of those neighbors should lose her right to rent. One neighbor does not have veto power over another neighbor’s rights. That is why the City cannot funnel the benefits of the Schroeders investments in their property to their neighbors. Doing so grants an exclusive privilege at the expense of everyone else. That is the exact kind of government manipulation that the North Carolina Constitution forbids.
Moreover, by imposing a 400-foot buffer and capping the number of vacation rental properties at 2%, the City is creating a monopoly in violation of North Carolina’s Anti-Monopoly Clause. The only reason the Schroeders cannot engage in vacation rentals is because someone within 400 feet of them is renting and Wilmington’s ordinance protects that person’s monopoly. That is unconstitutional.
The government cannot take an individual’s property right from them while granting an exclusive privilege and protected monopoly in that right to their neighbor. But that is exactly what Wilmington is trying to do to the Schroeders. Thankfully the North Carolina Constitution prevents this injustice and protects the Schroeders’ right to rent.
The Litigation Team
IJ Attorney Ari Bargil and Constitutional Law Fellow Adam Griffin represent David and Peg Schroeder. Gray Smith of Mason & Mason, Attorneys at Law, serves as local counsel.
About the Institute for Justice
The Institute for Justice is the national law firm for liberty. IJ brings lawsuits nationwide challenging government abuses of property rights and is a leading opponent of retroactive takings through amortization. IJ represented a Dallas auto-mechanic, Hinga Mbogo, against amortization abuse in Texas.
 John V. Orth, Unconstitutional Emoluments: The Emoluments Clauses of the North Carolina Constitution, 97 N.C. L. Rev. 1727, 1737 (2019).
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