Could money from vacation rentals fund affordable housing? A lawsuit in northern Michigan has sparked that debate
Some in the local tourism industry are tossing around the idea that short-term rentals, such as those booked through Airbnb, collect room fees and use the money to pay for affordable housing.
For over a century, tourism has been a part of the Traverse City region’s economy and for most of that time it fit seamlessly into the business of the region.
At some point, someone coined the term “fudgies” to refer to the visitors who appeared in late spring and vanished in early fall, people who came to the area for a week or so and kept the fudge shops in business and then returned to somewhere else, to the relief of locals who wanted their town back. That term reflected a low-key, jovial hostility to visitors, even though locals knew, deep down, they were essential to the local economy.
But in recent years, tourism has accelerated and the region has become famous for a lot of things other than fudge. And that’s caused a strain on the local economy that cannot be expressed in a folksy neologism.
That economic strain includes a housing shortage. Now, some in the tourism industry are tossing around a new idea — that short-term rentals, such as those booked through Airbnb, collect room fees and use the money to pay for affordable housing.
In the last decade, it’s become harder and harder to find an affordable house in northwest lower Michigan, and employers have struggled to find enough staff because so many potential employees have moved away.
That’s in part because many tourists who traditionally stayed in hotels or motels increasingly stay in vacation rentals — properties that otherwise would have been local housing.
When visitors stay in lodging like a hotel or motel, they pay a 5-percent room tax that goes to a program promoting the region’s tourism industry, with the aim to bring even more people to the area. But if they book accommodations through Airbnb or another vacation rental operator, in many cases that tax doesn’t end up on their bill and they do not pay that 5-percent fee.
And that has raised a fraught question, on top of the debate over whether short-term rentals should be allowed in the first place – should vacation rentals also be required to collect 5-percent room fees and, if so, what should be done with that money?
That question is at the heart of a contentious dispute between Traverse City Tourism, the nonprofit, quasi-governmental agency that collects and spends the room fees from hotels in Grand Traverse, Leelanau, Benzie counties, and parts of Antrim County, and a vacation rental management company that has recently become vocal about the question of whether Traverse City needs more tourism or more housing.
The dispute led to a lawsuit between Traverse City Tourism and Golden Swan Management, one of several large vacation rental management companies in Traverse City. And that spawned a counter lawsuit, a lobbying battle over what state law should say about the debate, and a war of words.
WELCOME TO TRAVERSE CITY
Traverse City Tourism is headquartered at the corner of Union Street and Grandview Parkway in the heart of Traverse City, at the city’s visitor center. With its cache of hotel room fees, TCT is perhaps the number one promoter of the region. In 2019, it had revenue close to $7 million, mostly from the room fees, according to the most recent IRS filing available. They spend most of their money on TV, radio and web ads promoting the Traverse City region.
Back in 1985, when it was known as the Traverse City Area Convention and Visitors Bureau, TCT established an “assessment district” through a state law that allows convention and visitors bureaus to collect a percentage of room fees from hotels, in order to promote tourism.
That’s worked mostly without controversy for decades – hotel owners have had to pay a surcharge, a charge that’s been passed on to guests, and those fees have been used to promote tourism in their area, bringing in new business year after year.
But as more and more property owners turned rooms and cabins and houses into overnight rentals that were not part of the assessment districts and therefore not subject to room fees, agencies like TCT cried foul. Early arguments that vacation rentals should be banned because they take up local housing stock soon gave way to the idea that they should be subject to the same fee as hotels in order to level the playing field.
Many vacation rental operators are not subject to assessment districts because the law that created the program only applies to properties of 10 or more rooms.
And that’s what’s at issue in the lawsuit between TCT and Golden Swan: Does a management company that oversees more than 10 rooms, owned by other people in different places, have to pay the room fees?
TRAVERSE CITY TOURISM SUES
Traverse City Tourism filed a lawsuit against Golden Swan (Golden Swan) last March. The case is before Grand Traverse County 13th Circuit Court Judge Kevin Elsenheimer, who has not yet made a ruling on the question of whether the fee threshold is met by merely managing, and not owning, 10 rooms in different places.
Golden Swan filed a countersuit, claiming they’d been retaliated against for arguing TCT shouldn’t receive room fees if they were collected from short-term rentals, but the cases have since been merged and a trial is tentatively scheduled for March.
Golden Swan believes the money collected from short-term rentals in northwestern Lower Michigan would be significant — an estimated $6 million annually — while TCT says that’s high, and that the money from short-term rental assessments would only be a fraction of that amount.
And although neither side disputes that vacation rentals should be subject to the same “tax” as hotels in order to level the playing field, the question of what should happen with that money is at the heart of the dispute. Golden Swan says the funds from short-term rentals would be better used to pay for affordable housing and regional infrastructure.
“Katy (Bertodatto), our founder and my business partner, had been talking to Traverse City Tourism since 2018 about doing something other than spending money on tourism. … And as that idea gained traction, we were then sued by Traverse City Tourism,” said Mark Keely, managing partner of Golden Swan. “And so I think their lawsuit is retaliatory and that we're frankly being targeted because of our work in trying to get parity assessments for short term renting to go into housing and infrastructure rather than just going into Traverse City Tourism's coffers.”
Traverse City Tourism denies that the lawsuit is retaliatory, and says it’s best suited to collect the money and use it for its marketing campaign, or for whatever purpose its board determines most benefits the region. That might be housing, or it might be something else that promotes the region’s economy, said Whitney Waara, TCT’s chief operating officer.
Waara said their initial lawsuit was basically an attempt to recover outstanding debt from a company that manages more than 10 rental units, the threshold that TCT argues makes them subject to room assessments.
“We think of this as a simple collections case,” Waara said. “Golden Swan hit the threshold of 10 units. Of course, in the middle of COVID, we were very gracious with businesses as they were struggling, so we held off on pursuing, but did stay in communication and let them know that we think they've hit that threshold and that they are required to be participating. And, you know, once things had settled down, we felt it was the right time to continue to move forward with this collection. It’s not fair to the other businesses that are contributing.”
Golden Swan’s attorneys, Enrico Schaefer and Mark Clark, have argued that the company is not subject to the assessment district because they manage the properties but do not own them. They also argue that the properties are not in one location, which makes them exempt.
An exhibit included in the lawsuit quoted an email from Bertodatto to TCT. She wrote: “I will let you know when Golden Swan Management owns 10 or more properties, but as of this moment, we do not.”
The dispute could be settled in court, or it might end with a vote in Lansing.
BILLS AND LOBBYING EFFORTS
Golden Swan’s leaders maintain that not only has TCT sued them in retaliation, but they also lobbied for legislation to undermine their position. A bill that would eliminate the 10-room cap and earmark the assessments for convention and visitors bureaus was introduced by Rep. John Roth (R-Traverse City) but it appears to have stalled.
Attorneys for Golden Swan argued that TCT only did this because they were “obviously concerned regarding their tenuous legal position.”
Traverse City Tourism denies this and Waara said the legislation has been in the works for years. They — along with CVBs across the state — had come to realize that the 10-unit threshold was a problem because there are so many people who have just one or a couple of vacation rentals and Waara said it’s not fair that they don’t pay the assessment as well.
Waara said that some vacation rental management companies in the region have willingly signed on with Traverse City tourism and even some who have fewer than 10 rooms have volunteered to join because they see the benefits.
Keely, the managing partner at Golden Swan, acknowledged that TCT does a good job at marketing northern Michigan and his company benefits from that marketing, but he said he believes they do enough with the income they have now.
“I think the most important thing to consider is, we are not able to fully absorb the tourist dollars that are here,” he said.
Keely cited longtime restaurants in Traverse City, such as Amical, an upscale European bistro in the heart of the city’s downtown.
“For 25 years they've been in existence — and I might get this wrong by a year or two — they’ve been open for seven days a week, both lunch and dinner,” he said. “Now they're open five nights a week, even in the peak of the summer, because they cannot find staff.”
Keely, meanwhile, said Golden Swan is working with incoming state Sen. John Damoose (R-Harbor Springs) on a measure that would take a 5-percent assessment on short-term rental reservations statewide, and put the money toward long term housing.
He said he hopes the bill will be introduced in January, when the new legislature convenes.
A COMPLEX PROBLEM
Waara said she questions the viability of Golden Swan’s proposal, because, like with TCT’s tourism marketing regime, it requires a majority of hotel operators to opt in. She doesn’t think enough short-term rental owners will.
Waara also said more could be done with more money dedicated to attracting tourism and economic activity in the fall, winter and spring, projects that could grow the entire region’s economy. TCT has long wanted to create an indoor, year-round, sports venue, for example.
Waara said that the stuff needed to support the tourism industry’s workforce — housing, childcare, transportation, etc. — is the same stuff needed to support the region’s entire workforce, and that she doesn’t believe the hospitality industry should be singled out to pay.
“Those are also the same services that the hospital workers and educators and the mechanics and everybody else who works in our community need, and those are the general responsibility of our whole community to take care of,” Waara said. “They should not necessarily fall on the hospitality industry.”
Housing is a communitywide problem, and community leaders have various opinions on whether money from short-term rentals could be a fix.
Traverse City Mayor Richard Lewis said he understands the logic of money from vacation rentals going into affordable housing, because vacation rentals are a major cause of the affordable housing shortage, but he said he also sees value in what Traverse City Tourism brings to the community, because they work to develop tourism year-round rather than just in the summer.
“We don’t struggle for people coming here in the summer,” Lewis said. “[The problem is] the off season, like right now and moving forward until the spring.”
Also, Lewis noted, TCT already spends money on community projects other than marketing — like facility improvements at Centre Ice to keep the Detroit Red Wings’ popular preseason appearances, and TART Trails projects that have been important to the city.
Traverse City Mayor Pro Tem Amy Shamroe said Pure Michigan has been great at getting more people to visit the region, but she is more open to considering other uses for assessment fees if they are collected from short-term rentals.
Shamroe said some localities, like Traverse City, are impacted by tourists who stay at hotels or vacation rentals outside of the city limits, which don’t pay property taxes to the city. Maybe short-term rental fees could make up for that.
“I would say, as a leader in local government, that there’s a lot of everyday costs that get passed on to local communities,” Shamroe said. “I think there’s a lot of uses that need to be discussed.”