A startup turns houses into companies. The neighbors fight back
In a sleepy cul-de-sac amid the bucolic vineyards and grassy hills of California’s Sonoma Valley, a four million dollar house has become the epicenter of a summer feud between angry neighbors and a new start-up financed by venture capital. homes across the country. The company is called Pacaso. He says it’s the fastest company in American history to achieve billion-dollar “unicorn” status – but its feuds in wine country, one of the first regions where it started its activities, foreshadow future trade problems.
Brad Day and his wife Holly Kulak first discovered Pacaso in May, after a romantic sunset dinner in their backyard. âAnd we just saw this drone, come up and fly over our backyard,â Brad said. “And we’re like, what is it?”
Pacaso denies having directed or paid a drone operator to film the neighborhood. But its website contains drone photos of the house in question, located at 1405 Old Winery Court. He says he bought the photos after the fact.
Nonetheless, after the drone incident, Brad and Holly became wary of what was going on in their neighborhood. About a week later, their neighbors told them that they were moving out and selling their house to a limited liability company, or “LLC.” But they were super vague about it.
Brad and Holly started talking to other residents in their dead end. One of them, Nancy Gardner, had learned from a friend in neighboring Napa Valley that a new company called Pacaso was buying homes in the area. The company was co-founded by a resident of Napa, and it converts homes into LLCs. Pacaso then sells the shares of these companies to several investors. Nancy Googled Pacaso and, of course, their dead end house was on her website. The company had named the house “Chardonnay” and was now selling investors the option of buying an eighth for $ 606,000.
Pacaso was founded in October 2020 by Austin Allison and Spencer Rascoff, two former executives of Zillow. The company is based in San Francisco, and like tech startups in the Silicon Valley region, its founders tell a great story about their business that isn’t just about making money. The company says the motivation for the business began when Austin and his wife, both based in Napa, purchased a second home in Lake Tahoe. The night after closing the house, Austin said in a promotional video, he and his wife sat around a fire “thinking how grateful we were to be second owners. And, from that point on, , I have always been inspired to make the dream of second home ownership possible for more people. “
To make secondary home ownership possible for more people – and, of course, make money – Pacaso uses a âfractional ownershipâ model. They buy a house, renovate it slightly, furnish it and then create an LLC for it. They then divide the ownership of that corporate house into eight fractions and sell those shares on their website.
If you buy a share in a house, you can stay there 44 nights per year, in increments of no more than 14 consecutive days per visit. You can also âgiftâ these stays to your friends or family. Pacaso offers an application to manage the logistics of booking stays. He ensures the management, maintenance and cleaning of the property. In return for all of this, he charges 12% of the purchase price of the house up front and a monthly fee in the future. If you buy a share in a house, you must hold it for a year. After that, you can sell it and enjoy any appreciation in the value of the home (or be responsible for any depreciation).
When Brad, Holly, and their neighbors discovered Pacaso’s business model, they were dismayed. They saw the venture capital-backed business invading their community and turning their neighbor’s house into a revolving carousel of vacationers. They imagined endless parties, noise and cars spilling out of their cul-de-sac. They were concerned that those staying at “Chardonnay” would drive too fast and ignore local concerns about forest fires and droughts. Most importantly, they feared that the Pacaso house would destroy their sense of community and turn their neighborhood into âDisneyland for adultsâ.
The county, Brad said, had designated its neighborhood as an “exclusion zone,” which prohibits Airbnb-style short-term rentals to preserve the “residential character” of communities. But Pacaso maintains that their clients are not short-term tenants. They are co-owners of an LLC. It also means that they don’t have to pay the usual taxes on short-term rentals. Likewise, in the nearby town of St. Helena, Pacaso was trying to get around a city ban on timeshares with the same argument. Day says he and his neighbors viewed Pacaso’s new business model as nothing more than “glorified timeshare” with a legal strategy to “sidestep regulations designed to keep communities intact.”
The cul-de-sac was triggered. They formed an organization called âSonomans Together Opposing Pacasoâ, which, not by chance, has the acronym STOP. They contacted the county supervisory board. They created an anti-Pacaso website and posted an online petition. They flooded the local newspaper with editorials and letters to the editor. They pressured local real estate agents not to work with Pacaso. âIt’s like we’re fighting a war by land, air and sea,â Brad says.
Protest signs adorn the neighborhood lawns, fences and cars. They say things like âStop Pacasoâ and âNot here, Pacaso! Brad’s favorite sign says, “The Pacaso house is the big one on the right without a soul.”
The signs, of course, make the prospect of buying a stake in the Pacaso house awkward, to say the least. Alfred Miller, however, bought a share of the “Chardonnay” before seeing it in person. Alfred is a Los Angeles-based risk management consultant. He believes in Pacaso’s business model. And he loves the wine and the climate of Sonoma. While researching “Chardonnay” online, he liked the modern architecture and the swimming pool, and he decided to buy an eighth of the share in the house. It wasn’t until a few weeks after making the purchase that he first visited Sonoma and witnessed the spectacle around his new investment.
âSo imagine me as the new owner moving up, and I come around the corner of Old Winery Court,â says Alfred. âThere is a professionally printed sign that says ‘No Pacaso’. Alfred then turned right onto Old Winery Courtâ and the more I drive around the neighborhood the more signs I see. Brad Day has three vehicles in front of his house and each vehicle has an anti-Pacaso sign on it. I park in the driveway, there are two signs on either side of the property. I mean, it wasn’t what I would call very welcoming. “
As was the case at Old Winery Court, controversy erupted in Napa after the company bought a home worth $ 1.13 million. That’s about 35% more than the median price of Napa homes. Pacaso insists that he only buys luxury and ultra-luxury homes, and therefore does not compete with local middle-class families in the housing market. But this house, located two blocks from a high school, didn’t quite fit their topics of discussion. Some Napans were pissed off. Pacaso says the house was trespassed and “illegally flagged”. Pacaso even claims they had to file a police report after a local wrote to them and said, “I’m going to burn down any house you buy in Napa.” This is not a joke.
The CEO of Pacaso, who lives in Napa, saw with his own eyes how angry the Napans were, and the company responded. In June, Pacaso agreed to sell the Napa home the traditional way, “to a whole home buyer,” rather than converting it into a corporation and selling it to multiple people. The company has also committed to strengthening its âOwner’s Code of Conductâ to include âdecibel limits on all home audio systemsâ; create a âlocal liaisonâ dedicated to helping neighbors; don’t buy homes in the area for less than $ 2 million; and, for every home sold in Napa and Sonoma counties, donate $ 20,000 to a local affordable housing nonprofit.
But as he tried to appease local communities with business reforms, Pacaso waged a legal battle with the city of St. Helena over whether his homes should be classified as timeshares. Pacaso strongly opposes this classification. One reason could be that timeshares have a bad reputation: although they are a popular way to go on vacation, their costs and associated fees tend to make them money losers rather than a worthwhile investment. .
However, potentially even more damaging to Pacaso’s ambitions: Timeshare is banned in many vacation communities across the country. Therefore, Pacaso has good reason to insist that this is not a timeshare.
âUnlike a timeshare model, the co-owners Pacaso serves collectively own real estate, not time,â says Ellen Haberle, director of community and government relations for Pacaso.
Saint Helena disagrees, stating that Pacaso homes are not allowed in their city due to a municipal ordinance against timeshare. “Just calling them condominium agreements doesn’t change that fact,” said city attorney Ethan Walsh. In response to the city’s ban, Pacaso sued the city in federal court. The trial is still pending.
Pacaso has announced plans to expand to North America and Europe. Considering the billion dollar company valuation, investors seem to believe that many people will be drawn to the company’s second home fractional ownership model. But local residents will likely continue to fight the unicorn rush in their towns.
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