ATTACKS ON SHORT-TERM RENTALS ARE INEVITABLE AND WILL PROFOUNDLY TRANSFORM THE RESORT PROPERTY MARKET

By: Mark Gibson

Legislating against short-term rentals has become akin to attacking sexual predators---there’s a one-way ratchet political policy cranking that never ends. And, why not? The absentee owners attacked by local governments don’t vote where they’ve been attacked (historically); they make easy targets. It’s a popular notion that the demon of soulless neighborhoods ought to be taxed out of existence…or at least…taxed until the problems of affordable housing are mitigated. If only it were that simple.

The Hansen State-Wide STR Taxation Bill

Colorado Sen. Chris Hansen is the principal sponsor of legislation (SB33, previously Bill 6 or Bill C) which anoints properties as commercial, rather than residential, if they are rented short-term more than three months a year. Hansen represents the Denver district between Capitol Hill and Washington Park to Crestmoor and Lowry, and believes his bill will close the loophole in short-term rental taxation. The tax will quadruple taxes on STRs (property taxes now at 6.9%) and raise over $78M a year, mainly funneled to public schools. On an average real estate transaction of $1.4 million, this tax proposal means the homeowner would be paying over $25,000 in property taxes annually – In addition to any mill levies---a $19,200 annual increase.

Tax advocates argue that this is about fairness and treating STRs more like hotels. However, the bill would require assessors to utilize ONLY a “market” based approach to determining an STR’s tax status, while stopping STRs from using alternative “income” or “cost” approaches --- as permitted for hotels---where taxes are based on profitability. With the Hansen/Polis tax proposal, STRs are taxed on the price they may be sold, and it doesn’t matter if the property is a money-loser. What’s fair for hotels is not, evidently, fair for STRs.

The fairness concept will not extend to local governments. At such extraordinary State tax rates, local government taxing ability will be castrated forever in the future. Western Slope local governments will surrender their taxing ability to the whims of the State Legislature…which is dominated by communities that prefer to kill tourism so that I-70 won’t be so crowded.

The Estes Valley Short-Term Rental Alliance estimates that owners in Estes Park, in reaction to these new taxes, will remove rentals from the marketplace and reduce local taxes by almost $2M annually for this resort town (population 6,000). So far, no one has added up the total tax loss we can expect in resort communities across the state.

Regarding losses, testimony from the online travel industry argues that the 90-day limitation will reduce rental property availability to the point that Colorado will lose $500M in tourism spending each year.

Another argument for the bill is that short-term rentals have dried up the long-term rental stock in destination resorts. In contrast, the 2022 Colorado Short-Term Rental Impact Study (conducted by HR&A) estimated that only 3 percent of the short-term rental housing stock matches the financial requirements to create long-term affordable rental properties. In the resort property management business, the only properties that will convert to affordable long-term rentals are those with trivial short-term rental income potential.

Grand County commissioners have argued that REITs are another demon behind STRs, and that they have no place in this community. Perhaps so, but a survey of some of the largest property management and cleaning firms guess-estimates that in Grand County there may be a total of merely eight huge stand-alone houses that rent as STRs and are owned by REITs. Moreover, if the Hansen/Polis taxes are sufficiently high, a flood of homes will hit the market, sinking values and opening doors for private equity firms like Blackstone to buy up huge tracts of resort properties. The anti-REIT bunch are playing Russian Roulette with tax policy.

Pete Seibert---a member of Vail Town Council and Colorado’s skiing royalty--- explained during a recent hearing, “If we lose anything over 89, 90 days of rentals in these condos, our off season is shot. (Property owners are) just going to rent during the ski season, and we no longer have an affordable housing problem, we have an affordability problem.” Chris Romer, head of the Vail Valley Partnership, explained “This really is a mountain tourism industry killer.” (Vail Daily, 12/11/23)

Somewhere between 50 and 75 percent of Colorado’s STR properties are owned by Front Range voters. Excluding Denver, almost all STRs are located in the five major ski resort counties. In an affluent community like Senate District 31, the impact this proposal will have on Chris Hansen’s constituents is clearly lost on him.

The final form of the Hansen bill can’t be predicted; neither can we suggest mitigation strategies. Given that Colorado’s Governor and his legislature have rarely seen a tax they don’t like, we predict a strong chance of passage. But even after passage, there will probably be a statewide TABOR vote required. {Urge all your friends in the Front Range to contact their state representatives to oppose the Hansen STR tax bill. Ask them to contact all their friends in Hansen’s district.}

Government Attacks in Destination Resort Communities

An inventory of all local government initiatives against STRs in Colorado is daunting, and would overwhelm this space. Realize that Aspen and Telluride, in particular, were at the forefront of STR regulation and zoning policies favoring affordable housing since the late ‘70’s. All other resort communities have been playing catch-up since then, and Summit County and the Town of Breckenridge have enacted a mosaic of regulations, taxes and fees at a dizzying pace over the past four years.

Grand County is years behind everyone else---in large part due to the historic property position and control that the City of Denver has had over Winter Park and Fraser, and local governments’ attitudes. Since Grand County governments have tended to copy the regulatory and taxation precedents created in Summit, it’s valuable to review what’s been going on there.

The Summit County commissioners in fall 2021 imposed a limit of 135 rental nights for owners of homes in neighborhood zones. A month later their regulations tightened further. In 2022 the commissioners imposed a moratorium on new short-term rental licenses and earlier this year adopted caps on licenses that are below the number of existing permits in several areas of the county. The latest regulations limit rentals to 35 bookings a year for nonresident owners in neighborhood zones. It goes on.

It’s gotten so bad that over 100 local residents and business owners put together a year-long fundraising effort that built a $1M legal fund for lawsuits filed in Federal District Court against Summit County and the Town of Breckenridge this past Fall. Almost all funds came from local families and businesses, and our business partners. These lawsuits represent the broadest, most comprehensive legal attack on unfair STR taxation and regulation that have ever been filed anywhere. The suits are being managed by an extraordinarily competent and well-heeled legal team. They are essentially ‘throwing the book’ at Summit County to see what sticks. Resolution of this litigation will take years. It is very difficult to predict what arguments will hold. (Those that believe all this is about government takings should look to greener legal pastures.)

These litigation filings should be considered required reading for STR owners, as they explain the regulatory and taxation roadmap that Grand County governments will likely mimic. (See https://newspack-coloradosun.s3.amazonaws.com/wp-content/uploads/2023/08/Summit-County-Resort-Homes-v-Summit-County-commissioners-STR-lawsuit.pdf Todd Ruelle, Summit County Resort Homes v. Summit County Board of Commissioners, Case No. 1:23-cv-02057-SBP Document 1 filed 08/14/23) (Also see The Knowledge Now, Colorado Municipal League, Short-Term Rentals, November 2016.)

Meanwhile, last June in Steamboat Springs, the city council passed a rule that could prove to be another model for vacation towns: A ban on new short-term rentals in most of the city and a ballot measure to tax bookings at 9% to fund affordable housing. Locals there have warned that the overlap of local restrictions, fees and taxes on short-term rentals along with the proposed increase in property taxes would force them to sell their properties.

From the New York City Office of Special Enforcement …

There are many factors that help keep New York neighborhoods vibrant, stable and livable. In neighborhoods where homes are being used for short-term rentals illegally, the comfort and safety of permanent residents and visitors alike is at risk. In these neighborhoods, the stock of available housing diminishes, and the distinctive character of the community changes.

Grand County Machinations

This past year Winter Park tripled its town taxes on STRs, going from 1% to 3%, on the premise that STRs should unilaterally provide another $1M plus in revenues to subsidize affordable housing. (Fundamental to this approach is the belief that housing shortages are caused primarily by income producing properties, but not empty trophy homes.) The town is considering raising “fees” on STRs further. Fees don’t require voter approval. So goes Winter Park, so goes Fraser

The Town of Granby saw similar deliberations this past Summer. They, too, decided that STRs should be taxed in order to raise $1M for affordable housing. Based on their assumption that about 400 STRs reside in the community, they passed a $728/bedroom/STR/year tax --- about 25% below the rate recommended by their economic consultants. But it was apparently lost on the town government that 77% of all STRs reside in Granby Ranch---which the town previously awarded immunity from any future impact fees or taxes. So, about 90 homeowners in Granby get to pay for the impacts of 400 STRS---so the tax proceeds will be functionally irrelevant. In politics, it is often better to look good than do good.

In early 2023, Grand County updated its STR regulations for the third time in as many years. Following consideration of a moratorium in 2020, the County commissioner passed new requirements, including: limiting any property in the county to accepting more than 16 renters in a single booking/location; STR renters cannot park on public thoroughfares; staff suggested increasing guest fees from $25 to $100/person/booking; mandatory fire inspections for all STRInnovative and proven policies on zoning, development requirements, planning overlays and (for example) lock-out construction tied to rental availability regs---- are all lost on our local governments. So is the taxation slippage created by tax cheats who rent sub rosa --- clearly a significant problem to those of us in this business. While the City of Denver has done more to preempt the evolution of affordable housing in the Fraser Valley than any other entity, local governments have never considered the obvious option to force the condemnation of Denver Water Board lands (vast in number and acreage throughout the valley) in order to affect housing policies. The many, many innovative solutions to resort housing dilemmas dwarfs the taxation revenues that may be extracted from STRs.

Take-Aways

It’s much easier to attack short-term rentals and look like you’re doing something, than fix failing development and zoning policies. (Why admit to policy blunders when you can attack STRs?) Like the Granby STR tax, like the Hansen tax bill, these proposals make it look like the policy-makers are doing something---but their proposals rarely have positive impact. State and local governments are shadow-boxing with housing policies….pantomime politics.

There is no end in sight for STR regulations and taxes. As the Breckenridge case demonstrates, the sooner a property owner makes a cogent STR investment, the sooner you will be a member of the STR club---before moratoriums and quotas shut the door on STR expansion. Buying a unique, quality property counts. The sooner an investor enters the market, the sooner they will travel up the STR learning curve to determine how to maximize operations and returns.

The days of simply listing your property on AIRBNB and watching the money come in are over. Understanding complex and continuously changing rental channels and supply/demand trends is fundamental to STR profitability; what works today won’t work tomorrow; it’s only getting harder, particularly as Google begins dominating this market.

It's important to note that a recent Laffer Associates study for the Colorado Lodging & Resort Alliance reports on a survey conducted among 2500 STR owners. This survey found that, in response to the commercial tax proposal, 54% of owners will reduce their rental periods to 90 days or less, and 13% of owners will sell their properties.

Certainly, the savvy realtor will be able to leverage these conditions for the prospective buyer, and/or demonstrate for a seller how their property’s uniqueness and position will win in the STR marketplace.

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