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Short-term rental owners in El Paso County may face huge (and expensive) changes 

Turbulence ahead for Airbnbs

click to enlarge A recent meeting of the Short Term Rental Alliance in Colorado Springs. Many think STRs are similar to long-term rentals. - COURTESY RYAN SPRADLIN
  • Courtesy Ryan Spradlin
  • A recent meeting of the Short Term Rental Alliance in Colorado Springs. Many think STRs are similar to long-term rentals.

In an explosive move with potentially devastating consequences for some, the El Paso County Assessor’s Office plans to tax short-term rentals, often referred to by the brand name Airbnb, as commercial properties.

The change opens a can of worms regarding how those properties are handled by city and county officials, insurance companies, and lenders. It also means hefty tax bills for local short-term rental (STR) owners. While the residential assessment rate is 7.15 percent of assessed value, the non-residential assessment rate stands at 29 percent, meaning property tax bills on STRs could quadruple.

The revelation comes after Colorado Springs City Councilor Wayne Williams asked County Assessor Steve Schleiker how short-term rentals are assessed, and Schleiker responded in a July 9 email obtained by the Independent.

Asked to comment, Schleiker tells the Indy via email: “Short term rentals and Airbnbs have been a topic of discussion over the past several years at the State Capital and throughout all 64 county assessor’s offices on the challenges of discovering and valuing these types of properties, and the voices from hotel/motel/and bed & breakfast properties throughout the State have been loud requesting fair and equal valuation and taxation.”

Schleiker’s move comes shortly after the Springs City Council passed an ordinance regulating STRs in late 2018, after years of planning, amending and public input. The extremely contentious law pitted STR owners against those who said the properties negatively impacted their quality of life in their neighborhoods. 

Council mostly sided with STR owners, creating an ordinance that was markedly friendly to the rentals compared with many other laws in Colorado cities, and cities across the nation. The law sets guidelines for running and licensing the properties, but allows them in any city zone, whether they are occupied by an owner or not (think whole-house rentals). Only homeowners associations are permitted to ban STRs. 

Importantly, Council’s regulations were based on their determination that STRs are residential properties. In other words, Council believed that an Airbnb was more like a long-term rental (say, a

n apartment) than a hotel or bed-and-breakfast.

The Assessor’s Office, which bases its determinations on state statute, plans to classify them as non-residential. But city spokesperson Jamie Fabos says via email that’s not really a problem.

“STRs are ‘residential’ for purposes of the City’s land use regulations,” she writes. “The Assessor may characterize the property differently for taxing purposes.” 

So far, Schleiker has made no changes to assessments, and says he won’t until 2021 or 2022. In the meantime, he plans to hold public meetings to help people understand the move, which he says is driven by the language in state statute that defines a nonresidential use as a lease lasting less than 30 days. Schleiker thinks several other Colorado communities have already switched their tax models, but most still tax STRs as residential properties. He plans to broach the subject at an upcoming meeting of the Colorado Assessors’ Association.

Schleiker says he’d like to see the state Legislature make a change that would allow both STRs and traditional bed-and-breakfasts to be taxed as residential properties. 

“We need to look at this differently, flip the page,” he says.

That’s because taxing single-family properties as short-term rental commercial properties could have major consequences. Those include:

• Homeowners could face major problems with their mortgages. Many lenders require “owner occupancy” and for the home to be used primarily as a “single-family home.” In the worst-case scenario, a commercial STR designation could lead a lender to “call the note,” meaning the full loan would be due immediately. There’s a chance that this could even impact a home that is a main residence. Consider, for instance, soldiers who list their homes as STRs while they’re deployed.

• Utilities bills could change. Once a home is converted to nonresidential use as a short-term rental, Colorado Springs Utilities or other utility providers in El Paso County could consider charging those properties commercial rates.

• Homeowners might need to buy different insurance. Most homeowners pay homeowner’s insurance. But if an STR is a commercial property, the insurance needed to protect it could change.

• More paperwork could be required, and it could mean a larger tax bill. Non-residential property owners must submit an annual Business Personal Property Tax (BPPT) declaration form that lists business equipment associated with the business. While the city and county no longer collect the BPPT, the assessor is still required to gather the information and value it for school districts, fire districts, the library district and the like. “The current State of Colorado BPPT Exemption is $7,700, which means any Business Personal Property that has an actual value of less than $7,700 is exempt from this tax,” he says. 

• Homeowners could be in trouble with their HOAs. Some STRs may be in violation of their homeowners association covenants and city and county zoning. Is it proper to operate a commercial short-term rental in a single-family residential neighborhood?

Schleiker also notes that his office’s task of running down all the properties being used as short-term rentals could be a nightmare. While the city licenses short-term rentals (or those that bother to apply), and could merely hand over the list to the Assessor’s Office for changes in taxation, the county has no such license, making the tracking of unincorporated STRs difficult. 

He also tells the Indy that property is assessed as it stands on January 1, not willy-nilly throughout the year as properties shift from one use to another. And since not all STR owners keep their properties listed all the time, the exact time that the property is listed could also have a big impact.

Additionally, Schleiker worries about being sued for charging STRs the commercial rate, since not all communities do that.

But to Williams, at least, the change in taxation makes sense. After all, it’s the same tax that other lodging establishments pay.

“Government shouldn’t be saying, ‘Your business doesn’t have to pay taxes, but your competitor does,” he says.

Local advocates on both sides of the issue are deeply interested in Schleiker’s move. Ryan Spradlin, founder of the Short Term Rental Alliance in Colorado Springs, and the owner of several local STRs, has been hearing from the Alliance’s 600 members.

But despite some of the dire predictions about the change, Spradlin says he isn’t worried. Added costs will simply be passed on to consumers, he says. And he doubts anyone who is up-to-date on their mortgage will see their lender bow out.

But that doesn’t mean he thinks it’s fair. Spradlin, like many STR owners, thinks the model should be considered the same as a long-term rental, like an apartment. 

“Every person who owns a house and rents it to another person for money is essentially in the same business we are,” he says, adding that landlords should have to pay the same tax.

What’s more, he says he was surprised that Schleiker didn’t notify him directly of the move, saying he’s worked hard to cooperate with governmental officials. Finally, he worries that a new tax will simply punish law-abiding STR owners who bothered to license their property, while encouraging more people not to operate above board. 

On the other side, Michael Applegate, who runs the smaller Neighborhood Preservation Alliance, which opposes STRs, says Schleiker’s move just makes sense, noting that STRs are already charged the same city tourism taxes that hotels are.

To Applegate, the most exciting news for the NPA isn’t the tax — it’s several other changes under consideration by City Council that could rein in STRs across the city.

In fact, since losing the battle on the STR ordinance, the NPA has been focused on winning the war, leaning on councilors to consider more stringent laws. He notes the city is looking for a contractor to get an accurate count of the STRs in the Springs, Council has given preliminary approval to an ordinance aimed at charging back taxes (and requiring payment of any other city bills) to STR owners that delay getting a city license or get caught without one, and Councilors are considering neighborhood-based caps on the numbers of STRs.

Councilor Jill Gaebler, one of the strongest early supporters of STRs, says she’s not necessarily opposed to such caps. And part of her reasoning is that more regulation is coming, like it or not, because Council has grown more interested in limits since last year. 

Applegate sees caps as an opportunity to preserve neighborhoods like the Old North End, Old Colorado City and Patty Jewett that have proven popular for STRs.

And he’s still pushing for other changes: a ban on non-owner occupied STRs, an overall cap on STRs in the city, a guest registry (so police can track STR users), better enforcement of a limit on unrelated people staying in the same home. 

Applegate says his most pressing concern is preserving affordable housing. While he acknowledges that STRs are a tiny percentage of city housing stock, he says their growth will limit choices for low-income residents. 

So what does Council think of all of this? Councilor David Geislinger says that, at a recent meeting, an STR opponent told councilors they “didn’t have their arms around” the issue. “And I said, ‘You’re right,’” Geislinger says. “We’re trying to get our arms around this.”

That might be tougher than one would imagine. A recent article in Wired magazine notes that a lot of cities are having issues with STRs, particularly when it comes to Airbnb.

“Airbnb is the undeniable giant of the field, and is reportedly preparing for an initial public offering,” Wired notes. “About 51 percent of all short-term rental listings in the U.S. are on Airbnb, according to an analysis by Binzer, of Host Compliance. VRBO controls 17 percent of listings and HomeAway 11 percent.”

Since STRs are tough for governments to track, let alone regulate and tax, Airbnb often negotiates agreements with local governments to collect and remit taxes. The Springs has such an agreement, as do hundreds of other communities. But those confidential contracts don’t provide governments with information about hosts that would allow for other regulatory action, such as enforcing zoning laws and licensing.

It’s known that at least some of the Airbnb contracts contain provisions forbidding the collection of back taxes. (Applegate wonders aloud if the Springs City Council will be in violation of its agreement should it approve an ordinance to collect such taxes.) 

Meanwhile, other cities have seen an explosion of STRs and have begun cracking down. In Denver, where non-owner occupied STRs are banned, a couple was charged with felonies for running illegal STRs in June. In July, a Denver attorney was hit with similar charges. (Spradlin ridicules these moves, saying they criminalize business owners rather than working with them.)

When it comes to the legality and regulation of STRs, courts have ruled for both sides. For the most part, of course, the business model is alive and well. But a recent court ruling may cast a foreboding shadow. 

An article in the Connecticut Law Review noted the Pennsylvania Supreme Court ruled homes used exclusively as STRs weren’t permittable.

“While the decision is extremely narrow and is not precedent-setting in other states, it portends the possibility that local governments and state courts nationwide could start to find that a short-term rental is inconsistent with zoning definitions of ‘family’ and ‘single housekeeping unit,’ thereby making such rentals illegal in most places. It is a remarkable ruling, worth understanding and watching for its impact,” the Review wrote.

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