Tag Archives: regulatory control

The Power to Regulate is the Power to Destroy (as done with my inn)

 

I had no idea that the knock on my door was my doom. But it was. After a perfunctory hello, the state regulator told me that he was so glad my bed & breakfast – my inn – was currently not opened (we were doing renovations). He told me that if we had been opened he would have had to start fining me $5,000/day. In other words, we were closed for business.

The resulting disaster

The results of being so summarily (and un-expectantly) closed down were a disaster both financially and to my marriage.

We couldn’t go forward or backward with how the property operated. In an instant the regulator at our door had turned our property into a white elephant. The economic viability of the property was now gone under any scenario we had.

Going forward was a “no go”. Our plan had been to focus on short-term (under 30 day) stays similar to what a B&B does. Such short-term stays earn considerably more revenue than long-term stays and was the basis for our extensive capital improvements. But the regulator said we could not have short-term stays since our rooming house license only allowed long-term (over 30 days) stays. In fact, the regulator went on to say that if we ever had just one short-term stay he would fine us $5,000/day. And for good measure he said he would make unannounced visits to check on us going forward if we were to reopen.

But going backwards – back to strictly just taking long-term rooming house type stays – wasn’t really an option either. There wasn’t really a “back” to go to. The previous owner for years (well over a decade) had taken a goodly amount of short-term B&B type stays. (She had even gone so far as to advertise her place as a B&B at times.)  The price we had paid for the property had factored in the higher revenue stream from these short-term stays. But with these higher revenue short-term stays now “killed” (per the regulator at our door). The property could never be profitable (not at the price we had paid for it plus our capital improvements). We wouldn’t even be able to cover our costs.

Also not feasible was going way back to when the property was a private home (70+ years ago). The building’s configuration and 16 bedrooms made trying to convert the building back in to a private home not feasible.

So as my wife and I listened to the regulator at our door we could see our dream (of a first class inn) — a dream that we had poured our sweat & blood into as well as our money — start to disappear before our eyes. And going forward there was no recovery. Everything the regulator said stuck.

We had little choice. We cut our losses by selling the property at a fire sale price (for not much more than just the value of the land). As for the property’s ability to earn income from guest stays (or the enticing vision of the property being a luxury inn), we had to limit ourselves to just saying the property came with a rooming house license.

Our loss was enormous (at a level that amounts to the life savings for many people). We got back about 30 cents for every dollar we had invested in the place.

Another loss was our marriage. The financial loss from the inn — added to our other issues — was just too much for the marriage to bear.

“Stupid me” for getting into such a regulatory mess

Now you might well think I was pretty stupid to even allow myself to be in the position of being at risk to having a regulator tell me I had to close down, especially with such a large amount of capital at risk. And with hindsight, yeah, I was stupid. What the hell was I doing trying to use a “rooming house” license as if it were a “B&B” license?

But our “stupid” business plan is only stupid in hindsight. At the time, I had thought (wrongly) that we had satisfied the regulatory concerns. Here’s why I thought our plans were okay:

  1. My own reading of the regulations showed we were in compliance with the regulations. …  As best as I could understand the regulations, at least 15% of your stays had to be long-term and ergo the rest could be short-term.
  2. We had a letter from our state okaying our business plan. … The wording in the rooming house regulations was unclear and thus subject to interpretation. So I spoke with our state’s department that was in charge of enforcing these regulations. That department, the Department of Community Affairs (DCA), was most helpful. They agreed with my understanding on the mix of short-term and long-term stays (per item # 1 above). They had some other suggestions (such as to call ourselves an inn but not a B&B). And, the “nice” regulator was kind enough to put all this in a letter to us. I was delighted. Our business plan had a green light.
  3. Two other “rooming house” inns in town also took short-term stays. … In other words, we had precedent. Having our “rooming house” property also take short-term stays wasn’t a case of plowing new ground (regulatory wise or as accepted by the town). One of these other “rooming house” inns had even been the basis for our own business model (given how the other inn had some 80% of their guests be short-term stays). We had just wanted to do a more luxurious version of what this other inn was already doing.
  4. Our inn had already been accepting a good number of short-term stays for many years (as said earlier).

Hmmm … Doesn’t the above seem to cover regulatory concerns? I certainly thought so. I was wrong. Let me explain why.

The “green light” I thought I had in the letter from our state’s DCA department changed to all red with the different DCA regulator at our door. You’d think the official DCA letter we had in hand (from the earlier “nice” regulator) would cover the matter and put a cork in the mouth of the regulator at our door. It didn’t. Two reasons:

  • The regulator at our door simply dismissed the DCA letter. … The regulator didn’t care about the letter even though he was from the same DCA department. He interpreted the rooming house regulations quite differently and far more strictly. And apparently his interpretation carried more weight than the “nice” regulator we had dealt with (see next bullet).
  • The earlier DCA regulator reneged on his letter. … The “nice” DCA regulator who had okayed our business plan changed his mind. I’d presume he reneged on what he said with the “help” of someone else, presumably the regulator at our door. Legally (per the lawyer I later talked to) regulators can flip flop like that.

That’s pretty horrendous. But it gets worse.

What really blew my mind is that the regulator at our door had apparently come up with a just-for-us strictest possible interpretation of the rooming house regulations. For one, he dismissed as irrelevant that two other rooming houses in town also took short-term stays (per point # 3 above). Irrelevant? That defies logic.

Further, the regulator at our door dismissed the fact that the previous owner of our inn had also taken short-term stays (point # 4 above). As he said, just because the previous owner had also had been in violation of the regulations (in his view) didn’t make our own violation acceptable. That stance at least has logic.

BUT then why weren’t those earlier short-term stay regulatory violations “discovered” in the past for what was now our inn? Well, the easy (and obvious) answer is because the DCA had not used such a strict interpretation of the regulations in the past. It’s the same  reason (presumably) for why the other two “rooming house” inns in town had been allowed to take short-term stays for years.

The above facts pretty clearly say that the DCA regulator who came to our door was simply  on a mission to  close us down, to “get us” if you will. That’s also in alignment with the regulator’s demeanor. Per my opening remarks, from the moment I opened the door the regulator was hostile. He had no wish to discuss issues or even consider what we had to say. He was simply there to close us down (in so far as ever taking any short-term stays).

Wow! We were in deep trouble. Opening my door to the DCA regulator was like opening a one-way door to hell.

How the fire department began the regulatory destruction

The start of our regulatory destruction began with our local fire department. They sand bagged us as the new owners. When we protested, they got upset with us and (as best as I can determine) called a friend of theirs at the state DCA to “get us” (i.e. close us down).

I know. Most people love firemen. I had too before what happened with me and the  inn. I now have a deep distrust and antipathy for the town’s fire department. More precisely, my distrust is with the department’s administration and fire marshals who enforce the code (not with the fire fighters putting out fires).

What started things off was the fire department LIED to us that the property we bought met the fire codes. I’m totally serious. The fire department had let the previous owner (an elderly widow) be out of compliance with the fire codes. Yet the fire department had still given the property a certificate — the one hanging on the wall at the inn — that said the property met the fire safety codes.

My wife and I had relied on that (false) fire inspection certificate when we bought the place.

What then happened next still stuns me to this day. A few months after we had bought the place the fire department paid us a visit. They ended up giving us a 25 point write-up on fire code violations and improvements that had to be made. The improvements ranged from having to replace every internal door (some 40 doors) to enclosing the magnificent three story open staircase of our inn with sheetrock walls. All together, the costs would be well over $100,000.

When I asked the fire marshal why they were only now enforcing the codes (and had not done so on the previous owner) his only answer was “I don’t have a good answer.” That’s a word-for-word quote. I’d call the response pathetic but for the disaster his response meant for us.

At any rate, we contested the fire department’s actions. We protested so strongly that the end result was the state took over administering our fire code compliance. The state was far less stringent on what we had to do. For example, they didn’t think we needed to enclose the entire staircase in sheetrock. Note: It helps to understand that many parts of the fire code are subject to interpretation.

Well, the above series of events ticked off our fire department. I could see it in how terse their dealings with us became. Any doubts I had about this were removed when someone in town  later told me (on a second hand basis) that the fire department had been seriously upset with us, especially with how my highly assertive wife had dealt with them. It seems that the fire department had also felt miffed that we had somehow finagled a way to not have to dance to their tune (by having the state oversee our compliance with the fire code instead of them).

Hmmm … miffed. Sure, my (ex) wife can be overly assertive. (It’s even part of the “other issues” behind our divorce.) But screw that. For the fire department to have felt “miffed” about how we reacted to what they had so unfairly done to us is ridiculous. It’s like someone getting miffed at their rape victim for not just laying there and passively letting themselves be terribly violated.

And so I think our local fire department saw how they could get in the last word with us with a mix of punishment and revenge.  As said above, I think the fire department called up a buddy of theirs at the state DCA and asked them to “get us” (close us down).

Now I of course I can’t prove that the above is what happened. But the dots connect pretty well.  One of the larger “dots” came from the DCA regulator at our door when he made a slip of the tongue. The slip was when I asked him why he wasn’t enforcing the rooming house regulations in the same way on the other “rooming house” inns in town. His reply was that no one had called about these other inns (meaning someone had called about us).

Hmmm … “someone”. Now who might that someone be especially for the DCA to have responded to so strongly and with such severity on us? Again, my best guess is that “someone” was the local fire department. But it has to remain as just being a guess because the regulator at our door wouldn’t tell me who (or even what area) had called the DCA. (I asked). Nor did this information show up in an OPRA document request I made months later for the DCA, the fire department. and the town’s administration.

The inn reopens with the same business model

The new owners of my inn finished up our renovations and … get this … reopened with the same business model we had used (focusing on short-term stays). They operate with a rooming house license (just as we had done). They’ve even kept the same name for the inn. They’ve operated this way for some three years now.

In other words, the ONLY difference in “our” inn and the inn that reopened is the owners (and whether or not the owners  were liked or not  by the regulators). Here you have the same regulations (even some of  the same regulators) dealing with literally the same property and situation. Yet the regulators (apparently) have come up with totally opposite dictates for what the owners could do (and not do).

What other conclusion can any rational person reach? The regulators had unfairly (even maliciously) been out to get us and used their regulatory powers as a weapon.

Understand that the new owners have not been hiding how they operate. For example, they have a fully functional web site that lets people reserve their short-term stays (just as with a B&B or a hotel). The inn has received favorable press as a wonderful B&B/inn. Tripadvisor.com reviews give the inn five stars as a top notch B&B (as we had also earned).

I’m sure it helps that one of the new owners is a national celebrity. The regulators are probably a bit star struck. Also, I’m sure there’s just no way the regulators would impose a just-for-you overly strict interpretation of the regulations on the celebrity. The blow-back they’d receive wouldn’t be worth it. Who needs an angry call from the mayor or — who knows — perhaps even the state governor? As it is, the regulators have no ax to grind with the new owners (as they had with us).

The thing here is I only wish the new owners of my (formerly owned) inn success. Their buying my property at least let me move on. I’m even glad to see the inn be in the national media at times as a wonderful place to say. But it’s a bittersweet feeling.  I’m also reminded of the (unwarranted) destruction visited on me by the regulators.

But it’s not just a matter of the celebrity status  of one of the inn’s new owners insulating them from a regulatory nightmare. The other “rooming house” inn in town (the one that had served as our business model) continues to operate as it always has (focusing on short-term stays). (Note: the other “rooming house” inn in town — a cheaper somewhat rundown place that only took a modest number of short-term stays — closed down a couple of years ago due to its poor economics.)

Regulators are untouchable

You can’t fight regulators. In other words, they have all the power.

I went to a top lawyer with the intent of suing the DCA as well as the fire department. But the lawyer explained to me that the laws give extensive protection to regulatory agencies and their regulators. Unless a regulator is doing something egregious (like seeking a bribe) they (and their department) are protected from being sued.

Sure, I could still legally sue. But suing was a “no win” for me. I’d probably just add to my loss.  Even if I somehow won (not likely), I’d still lose given that my legal costs would likely be in the hundreds of thousands of dollars. Further, putting a dollar amount on how much the regulators had harmed me was problematic. The real estate market had tanked since I had bought the property (due to the Great Recession).

Circumstances help let the regulators “get away with it”

Not only could I not sue (per above) but I couldn’t even hold the regulators accountable.

Frankly, I think the town’s fire marshal who had lied about the inn’s fire certificate should have been fired.  Also, the head of the fire department should have suffered consequences for running such a loose ship. Similar consequences to the careers of the DCA regulators should have also happened, especially if the (presumed) underhanded collusion of the DCA and fire department to “get us” could be proven.

But the reality is there have been no career consequences to any of the regulators whatsoever.

I went up the chain of command for the regulators to protest what had happened but to no avail. It seems that “protect your own” triumphs rational thought.

For the local fire department I protested to the leadership in town. It got me no where. It helps to understand that the town’s  City Administrator was a former head of the fire department. I’d presume that he probably felt protective of his friends there. He gave empathy but took no action.

But I didn’t just speak to the City Administrator. Other people in charge of running the town (while also empathetic) took the view that the fire department was sacrosanct. After all, the fire department saved lives and thus had license to do whatever they felt was needed. The fact that the fire department had lied to us (over the fire inspection) and had probably helped destroy a small local business was seemingly lost on them all.

My protests to the DCA also got me no where. They closed ranks, stone walled me, and basically just didn’t care. All that my vigorous protests got me was a letter from a senior DCA official that basically just said tough luck and didn’t even bother to address my specific issues.

I felt like a rape victim trying to turn in their rapist only to have it fall on deaf ears.

I thought of trying to go public as a last resort way of holding the regulators accountable. I thought about going to the newspapers or state legislators for the sake of publicity and help.

But I didn’t go public. For one, I’m confident that I’d yet again just be greeted with indifference.  Other than me (and my ex wife) no one really cared. No one else’s ox was being gored.

But perhaps more important, going public would probably — at “best” — only result in hurting the innocent owners of the other “rooming house” inns in town (including the new owners of my inn). Even if I succeeded in making the regulators feel the heat from being in the public spotlight they’d probably respond with a regulatory crackdown on the other “rooming house” inns in town. They could throw up their hands in feigned horror that these other “rooming house” inns had managed to hoodwink them over the years as to how they were operating (in taking short-term stays). That would let the regulators claim that they were consistent in how they enforced regulations. They’d thus protect their jobs.

Now the above would of course be utter bullshit mind you on the regulators’ part given how openly the other “rooming house” inns in town have taken short-term stays for years.

But bullshit often wins.

So trying to go public just isn’t worth it (back then or now).  I win nothing. Again, at best I’d probably just “succeed” in hurting the other “rooming house” inns. As it is, I wish the new owners of my inn nothing but success. I’m glad they bought my place. It let me at least move on with my life.

But it’s all still so frustrating. By not taking the last resort of “going public” I’m in some ways helping the regulators get away Scott free with what they did to us.

Also frustrating — like adding salt to the wound — is how the local fire department is so often lauded in public for being such great protectors of the public. And those accolades go to some of the same people who through ineptitude (and probably also malicious revenge) helped to destroy my inn. Hmmm … Lauded? I think being fired is more appropriate.

Summary

The bigger point in telling my story here is as the title says. The power to regulate IS the power to destroy.

The personal story I’ve told here about my inn vividly illustrates this point. The regulators I dealt with vis-à-vis my inn had all the power. They used that power to destroy my inn with impunity and probably even malicious intent. And the regulators are essentially  untouchable, both legally and due to circumstances.

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