Sarah Beall is considering letting her house in Winona go into foreclosure.

For 2½ years, her modest three-bedroom near the university has been sitting mostly empty and for sale, she said. After Beall moved out to live with her boyfriend, she wanted to rent it out like other homes on her block, but a city law designed to preserve neighborhood livability limits the number of rentals. Because 30 percent of the houses on her block already had rental certificates, the city wouldn’t give her one.

Beall is dreading her heating bills this winter without any rental income. Potential buyers aren’t biting, she believes, because they want the ability to rent it out, too.

“A lot of families don’t want to move in because of all the college rentals there,” she said.

Beall’s dilemma sits at the heart of a yearslong Winona dispute that is headed for the Minnesota Supreme Court on Thursday, after three other homeowners there sued the city. The court’s decision could have wide-reaching implications on a question facing cities and homeowners across the state: Can government limit house rentals in specific areas to preserve neighborhood livability?

Winona is not the only city to have such a rule. Mankato, Northfield and West St. Paul, for example, have set similar caps in varying percentages. St. Cloud is considering an ordinance, the plaintiffs’ attorney said.

Three Winona plaintiffs argue that the law treats homeowners unfairly and takes away their property rights. Though they lost their case in District Court and the Court of Appeals, they are appealing on grounds of constitutional due process, equal protection and other arguments.

The city is arguing that elected city officials have the power to find rational ways to deal with problems affecting citizens. The city has an interest in keeping the neighborhoods from declining, they say.

When houses don’t sell

The three plaintiffs in the Winona lawsuit are no longer facing the dilemma the law presents: 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 the house.

The court will have to decide whether the suit is still valid since the issue is over for all three.

The plaintiffs are seeking just $1 in damages, but more importantly they want a ruling in the favor of homeowners like them, their attorney said.

Plaintiff Holly Richard had lived in her Winona house for a couple of years while she worked at St. Mary’s University. She put it up for sale before she left for grad school in South Dakota in 2009.

In the midst of the recession, her house 10 blocks from Winona State University didn’t sell, so she tried to rent it. The city told her she couldn’t because 30 percent of the houses on her block already had rental permits.

Richard worked out what she called a “lease-to-own” agreement with a tenant, but the city told her that was illegal, too, she said, and started to fine her $125 a day.

The house then sat empty for a month or two while Richard appealed to the city, she said. Someone eventually told her she could apply for a temporary rental permit as long as she kept it listed for sale, she said. She got a full rental permit a couple of years later.

Richard, now living in South Dakota, is renting the house to a young married couple. If they decide to move out, she said, she’ll consider putting it up for sale again. “It makes it hard for people to find nice places to rent,” she said. “It discriminates against people who would rent. … I think it’s a really dangerous thing.”

Study spurs ordinance

Winona passed the ordinance in 2005 after several meetings and studies. The city planning commission found that 95 of 99 addresses with at least two police calls for noise or parties were rental properties, the appeals court noted in its decision earlier this year.

Richard and the other plaintiffs argue that the city’s zoning laws shouldn’t distinguish between who owns a property and who lives on a property.

Although cities can regulate rental houses to ensure their safety, homeowners who follow those rules ought to be able to rent just like their neighbors can, said their attorney, Anthony Sanders, of the Institute for Justice.

“What the government is doing is saying, ‘We think renters are worse people than owners,’ ” he said. “It really comes down to whether the city has the power to treat people differently, simply because they are renting a property out at a different time than their neighbor is renting their property out.”

But an attorney for the city argues that Winona’s law is aimed at property use: Homeowners who rent are turning their homes into businesses, said George Hoff, an Eden Prairie attorney representing Winona.

Hoff said Winona’s policy was carefully considered and reconsidered over the years: “This is not something that just came like a bolt out of the blue,” he said. “There’s been no claim here that this is not an honest effort by the city to try to deal with problems that they’ve encountered.”

A consulting firm found in 2012 that the concentration of rentals in Winona “increased levels of nuisance and police violations” and led to “a decreased neighborhood quality and livability,” the appeals court noted.

The ordinance doesn’t create classes of people that are treated differently, Hoff said, and therefore it doesn’t violate equal protection rights.

In its ruling siding with the city early this year, the appeals court found that Winona’s rule “establishes a neutral, numerical limit on the number of lots that are eligible to obtain certification as a rental property and applies uniformly throughout the affected districts on a first-come, first-served basis.”

Case watched

State Supreme Court jurists will consider a thick pile of arguments when the case comes before them on Thursday.

Several organizations and individuals have filed briefs supporting one side or the other, including the Minnesota Association of Realtors, the Minnesota Vacation Rental Association, the American Civil Liberties Union of Minnesota and the cities of Rochester, Mankato and St. Paul.

Hamline University law Prof. Marie Failinger said the case may be getting more attention than other property rights cases because the plaintiffs are more sympathetic than typical cases involving commercial landlords.

“I think a lot of people, with the economic downturn, can imagine themselves in this circumstance where they need to move and they can’t get out of their current house, and then what are they going to do with it?” Failinger said.

The League of Minnesota Cities, which also filed a brief, argued in court papers that, “If citizens are unhappy with their elected officials’ legislative decisions, their remedy is at the ballot box — not in the courts.”