Bob Thompson
When does a short-term cabin rental, VRBO or Airbnb become classified as commercial property? How will that be defined and what are the implications for an area like Cook County, which has more than 650 short-term places to stay?
That’s been the $64 question for Cook County, which has seen a proliferation in the short-term rental market and has wrestled with how to classify them over the last few years.
On December 17, Cook County Assessor Bob Thompson came before the Cook County board of commissioners with an answer.
Thompson said if a property, which has multiple, uses, both as a seasonal cabin and a short-term rental, has 183 nights (or more) of rental in a calendar year, the property will be classified commercial.
Thompson wasn’t the only assessor in the state coming up with a definition on how to classify these properties. After reviewing the May 21, 2019 “Classifying short-term rental property” memorandum from the Minnesota Department of Revenue, the state’s assessors were forced to come up with a definition. Before making a decision Thompson held conversations with Minnesota Department of Revenue representatives as well as conducting a region-wide survey of county assessors. He and his staff then set criteria to establish grounds for determining if a property should be assessed as commercial.
A property’s primary use is commercial if either of the following criteria is met:
* Given the circumstances of ownership, the ONLY practical use of the property is presumed to be short-term rental, any non-commercial use being only incidental, and the property does not qualify as a bed-and-breakfast or seasonal resort classification.
The above criteria will accurately determine the appropriate classification for most properties, but special situations may arise that will require more in-depth analysis to determine the primary use of a property.
The above policy is established as a method to determine property classification that:
* Can be evenly and fairly applied,
* Leads to accurate classification of properties and
* Reflects an appropriate and efficient use of the department’s resources (staff time) to bring about the above results.
With an increase in vacation rental usage over the last several years along with growing concerns that have arisen, Cook County has begun exploring the need to regulate short-term rentals.
The intent of the county’s Vacation Rental Ordinance is to continue the allowed use of private vacation rental homes and cabins, but also mitigate possible adverse impacts of those operations. The draft ordinance establishes basic requirements for each rental operation.
During the commissioners’ public comment period, Dennis Rysdahl, majority owner in the AmericInn hotel in Tofte and owner of a company that manages and rents privately owned condos at Bluefin Bay, Bryce Campbell, Lutsen Resort owner and Jim Boyd, director of Cook County Chamber of Commerce, all spoke in opposition to the new classification for short-term rentals. Campbell said if the change goes into effect, he might scrap plans to add a $4 million Nordic spa to Lutsen Resort in 2020 and instead move it to Two Harbors. Campbell has just under 150 keys he said, that are turned for short-term rentals. He noted that he has to show 60 percent rental to acquire capital needed for future investments but under the new classification he would be stuck at the 183 limit and he would be under 50 percent annual occupancy. As a new owner in the area, he asked commissioners to consider what effect the higher tax would have on anyone in the industries’ ability not only to maintain what they now have, but also on someone who wanted to grow their businesses.
Rysdahl said setting a limit of 183 days on short-term rentals was an issue of fairness. He pointed out that the AmericInn in Tofte pays just under $58,000 annually in real estate taxes, about 5.5 percent of its gross income, while a typical one-bedroom condo at Bluefin that brings in $50,000 in rental income pays about 5.1 percent of its gross sales in taxes as a seasonal recreation property.
While the hotel is assessed at how much money it takes in as a business, said Rysdahl, a second home or cabin is assessed based on its estimated resale price.
He told commissioners that if the new classification goes into effect, the tax on a typical Bluefin condo would increase by almost 15 percent. Condo owners he said, would only want to rent in the busy, more profitable times of the year and then pull their condos from the rental market when the shoulder season or slower time comes along because they would be at their 183 day limit under the seasonal recreation classification. If they went over the limit, their taxes, on the model he used, would climb from $2,450 to $7,600.
This move away from having rooms to rent on the slower times of the year, said Rysdahl, defeats all of the efforts made to increase business during these quiet periods in the county.
“The whole fairness issue falls apart. They (condo versus hotel unit) don’t work as an investment in the same way,” Rysdahl said.
Jim Boyd went through a long litany of why the new classification wouldn’t be fair and would cost the county money in lost tax revenue. He asked commissioners to wait for the state to come up with a new tax bracket for short-term rentals.
County assessor speaks
Thompson told commissioners that the conversation about reclassifying short-term rentals has been ongoing in Cook County for five years or more. Statewide, he said, once the May 21 letter went out to Minnesota’s 87 counties, most of the county assessors were suggesting changes to their county ordinances for short-term rentals. He added, “all of the assessors in Region 4 are initiating changes” to their counties’ short-term rental classification.
“Cook County won’t be any more or less attractive, based on this,” he said.
Board chair Ginny Storlie asked what the time frame was for the ordinance to go into effect, and Thompson replied, January 2, 2020, with the assessment going on 2021 taxes.
Commissioner Heidi Doo-Kirk asked what happens when someone — say a snowbird — doesn’t even live in his or her house for 183 days of the year. Thompson replied that the county doesn’t look at someone’s declared homestead based on the amount of nights stayed there unless, “We find out that (the house) is for another use.”
Commissioner Dave Mills had a variety of questions concerning rentals at Bluefin Bay and other locations, and followed by inquiring what would happen if the county didn’t comply with the state’s memorandum. “What would be the consequences?” he asked.
“If we (the county) received a cease-and-desist letter, I would be filling out applications for other jobs,” said Thompson, who earlier had reminded the commissioners that he isn’t just an employee of the county, but of the state as well. He also added that any assessor who failed to comply with the state’s May 21 letter would be faced with some tough questions to answer.
Commissioner DooKirk told the board that this issue has been discussed since 2013, with talks about short-term rental classification being held “over, and over, and over,” at the state level and the county being told “we can’t change things just for Cook County.”
Of the 641 properties Cook County lists as shortterm rental, Thompson said “probably not 340” of them will be affected by the change to the ordinance.
Commissioner Bobby Deschampe told fellow commissioners he had spoken to the governor last week about this issue and “he’s open to talking about it.”
Meanwhile, Thompson advised the county board to draft a bill asking for any changes they see fit to the short-term rental ordinance and give that to Senator Tom Bakk (DFL), so he can submit it to the legislature. He also suggested sending down a commissioner to advocate for the changes, noting he could appear as well on the county’s behalf.
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