By J. Adrian Stanley and Pam Zubeck, Colorado Springs Independent
The El Paso County Assessor’s Office announced plans last week 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 could also mean hefty tax bills for local short-term rental owners. While the residential assessment rate is 7.15 percent of assessed value, the nonresidential 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 Business Journal’s sister publication, the Colorado Springs Independent.
Asked to comment, Schleiker said via email: “Short term rentals and Airbnbs have been a topic of discussion over the past several years at the State Capitol 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 Colorado Springs City Council passed an ordinance regulating STRs in late 2018, after years of planning, amending and public input. The 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.
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, an apartment) than a hotel or bed-and-breakfast.
The assessor’s office, which bases its determinations on state statute, plans to classify them as nonresidential. But city spokesperson Jamie Fabos said via email that’s not really a problem.
“STRs are ‘residential’ for purposes of the City’s land use regulations,” she stated. “The Assessor may characterize the property differently for taxing purposes.”
No changes yet
So far, Schleiker has made no changes to assessments, and said he won’t until 2021 or 2022. In the meantime, he plans to hold public meetings to help people understand the move, which he said 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 said 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 said.
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 for 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. Nonresidential property owners must submit an annual Business Personal Property Tax 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 said.
• 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 legal 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, 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 STRs in unincorporated areas difficult.
Williams said the change in taxation makes sense as 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 said.
Winning the war
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 said he isn’t worried. Added costs will simply be passed on to consumers, he said. 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 said, adding that landlords should have to pay the same tax.
What’s more, he said 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, said 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 Colorado Springs.
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 STRs in the Springs; city council has given preliminary approval to an ordinance aimed at charging back taxes (and requiring payment of any other city bills) to STR owners who 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, said she’s not necessarily opposed to such caps. 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 said his most pressing concern is preserving affordable housing. While he acknowledges that STRs are a tiny percentage of city housing stock, he said their growth will limit choices for low-income residents.
So what does city council think of all of this? Councilor David Geislinger said 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 said. “We’re trying to get our arms around this.”
Editor’s note: A version of this article was originally published in the Colorado Springs Independent.