A controversial ordinance in Winona capping the number of rental houses could result in a slippery slope on city zoning powers, attorneys argued before the Minnesota Supreme Court on Thursday.

If Winona can regulate who uses a house — a homeowner vs. a tenant — it could potentially try to regulate all kinds of things about who lives in a neighborhood, argued an attorney representing homeowners challenging the law.

But an attorney for the city countered that if cities can’t regulate the commercial use of people renting out their houses in order to preserve a neighborhood, they could potentially be restricted from all sorts of other zoning, including where certain types of businesses are and aren’t allowed.

In a case being watched by local government leaders around the state, justices questioned attorneys about Winona’s law, which limits the number of rental properties to 30 percent per block in some lower-density neighborhoods.

Passed in 2005, the ordinance was meant to ease parking problems and protect the neighborhoods from decline. Three homeowners who were denied long-term rental licenses sued, arguing the rule infringes on their property rights.

A few other Minnesota cities have similar rules: Mankato, Northfield and West St. Paul set rental caps in varying percentages.

“There are tens of thousands of homeowners in Minnesota that are affected by laws such as these,” said Anthony Sanders, an Institute for Justice attorney representing the three Winona plaintiffs.

Zoning power

Most oral arguments Thursday centered on a municipality’s zoning power and what it means.

Minnesota cities have the power to regulate what physically happens on property, Sanders argued, not who is using it. Zoning is a powerful government tool, he added, but the state Legislature, in giving cities zoning power, set out to balance that power with people’s property rights.

George Hoff, an attorney representing the city, argued that the city’s ordinance is, in fact, aimed at property use. Homeowners who rent out their homes are turning them into businesses, he said.

“What we are doing is regulating a commercial use,” Hoff argued. “What’s happened in these traditional single family neighborhoods is that there’s been a choice made by that property owner to convert that home into a commercial venture.”

The city prevailed both in the district court and Court of Appeals.

Hoff argued in court papers that Winona officials studied the issue extensively before and after imposing the law.

One study showed that the concentration of rentals in Winona increased nuisance and police violations and decreased neighborhood quality.

Questioning Sanders, Justice Christopher Dietzen noted that cities have an interest in protecting property values and wondered if Sanders knew of evidence that property values were not depressed by the presence of rentals in Winona.

That wasn’t specifically studied, Sanders replied. But, he said, property values of those who were denied a rental license were depressed.

Elected officials have the power to find rational ways to deal with problems affecting citizens, Hoff has argued.

Justice David Lillehaug keyed in on that claim. If Winona had problems with renters, why adopt a policy that grandfathers in their landlords and prevents others from renting? he asked.

“Why is it rational to reward the very people that you’re having problems with?” he said.

Hoff responded that the city was faced with a problem and made a determination to, in the future, try to reel back in the amount of rentals.

Constitutional arguments

Plaintiffs in the case are also claiming that the ordinance violates constitutional due process and equal protection. One homeowner shouldn’t be treated differently than another one next door, who happened to get a rental license first, they have argued. Those arguments were only touched upon Thursday.

The city has argued in court filings that the ordinance doesn’t create classes of people who are treated differently because the licensing is addressed uniformly on a first-come, first-served basis.

The high court could take months before issuing a ruling in the case.

It could dismiss it altogether if it decides that it is moot because each of the three plaintiffs are no longer facing the rental dilemma: One man let his house go back to the bank, another homeowner sold the house, and the third eventually got a rental license after obtaining two temporary ones while trying to sell.

Sanders urged the court to issue a ruling, saying it is important to many Minnesota cities.

As in the case before the court, circumstances often change before a case winds its way through the long judicial process.

Lillehaug, though, suggested that plaintiffs could have used other legal methods, such as a temporary injunction, to get to the question faster.

New plaintiffs also could have been substituted for the original ones, he said. He pointed out that there’s not much litigation activity on the issue in general.

Sanders responded that its costly for plaintiffs to sue the government. The Institute for Justice is handling the Winona plaintiffs’ case for free.