HB 4503 and SB 329: Recent Skirmishes Regarding Short-Term Rentals and Their Effect on Community Associations
Tourism is a major part of the Michigan economy and its significance continues to grow. From 2010 through 2014 tourism employment growth even outpaced overall state employment growth. Further, for each month between 2015 and 2017, Michigan’s visitor occupancy rate has increased over the prior year’s occupancy rate for every month, except for two. This growth has seen an increase in the significance of tourism for Michigan as a whole, and the increase in occupancy rates suggests that visitors may be looking to short-term lodging alternatives such as AirBNB. In fact, AirBNB rental fees in Michigan are estimated to have been approximately $25.2 million in 2016.
AirBNB presents a non-traditional model of short-term lodging often at odds with the existing relationships between hotels and municipalities. With the growth in tourism and the need for short-term lodging there have been several recent skirmishes between governmental bodies seeking to regulate short-term rentals, such as AirBNB, and those seeking to promote such use, such as realtors and realtor-backed interests. For example, the State of Michigan imposes a six (6%) percent use tax on rooms or lodging furnished by hotelkeepers, motel operators, and other persons furnishing accommodations available to the public on a the basis of a commercial and business enterprise for less than one month. Prior to July 1, 2017, AirBNB did not collect this use tax and the State did not receive any use tax revenue for AirBNB rentals unless the AirBNB hosts decided to pay it. Effective July 1, 2017, however, AirBNB began automatically collecting the 6% use tax and remitting it directly to the Michigan treasury. This concession arises out of an apparent effort by AirBNB to bring its business model in line with the expectations of state governments. Also, it appears to bring AirBNB in conformity with unpublished Michigan Court of Appeals decisions which concluded that short-term rentals constituted a commercial use of property in violation of deed restrictions requiring residential use only. See, e.g., Enchanted Forest Property Owners Ass’n v Schilling, unpublished court of appeals decision, Docket No 287614 (Mich Ct App Mar 11, 2010) (“Use of the property to provide temporary housing to transient guests is a commercial purpose, as that term is commonly understood.”).
Municipalities, however, have not yet received such assurances regarding the collection of use or tourism taxes since AirBNB’s agreement with the State of Michigan does not appear to include a commitment to pay any local or county fees. Further, recently proposed state legislation suggests that there may be pressure at the state level to limit a municipality’s ability to regulate short-term rentals such as AirBNB through its zoning authority. On April 25, 2017, two identical bills were introduced in the state House (House Bill No. 4503) and the Senate (Senate Bill No. 329) which both proposed to mandate that a municipality treat a short-term rental, such as an AirBNB rental, as a residential use and not a commercial use. In relevant part, both SB 329 and HB 4503 state that a short-term rental such as AirBNB would be “a permitted use in all residential zones” and that such use would “not be subject to a special use or conditional use permit or procedure different from those required for other dwellings in the same zone[,]” and that such use would “not be a commercial use of property.” This would prevent municipalities from precluding such use, and would invalidate prohibitions such as that adopted in Grand Haven. The Michigan Municipal League has come out in opposition to this proposed legislation on the basis that it improperly divests local municipalities of the ability to regulate the use of land within the locality.
Since AirBNB has committed to pay to the State of Michigan a 6% use tax intended to be imposed on the basis of a commercial or business enterprise, it seems to be inconsistent for the state to then also prohibit a local municipality or county from treating such use as a commercial use of property and to require that it be treated as a residential use. Further, there has been no progress on either HB 4503 or SB 329 since they were first introduced which could demonstrate a lack of support. Accordingly, it is possible that HB 4503 and SB 329 lack the support to advance in the legislative process.
Nonetheless, the two state-level actions discussed above demonstrate that a community association that wishes to limit the short-term rental of properties within its association should not exclusively rely on any governmental or statutory limitations on such use, nor should the association expect that Michigan law will always consider short-term rentals to be a “commercial use” of property. Governmental limitations on use at any level are subject to change, and an association that relies on restrictions which limit property use to residential use only to limit short-term rentals may find itself unable to enforce its restrictions as expected if Michigan law begins to define a short-term rental as residential use and not commercial use. Further, given the growth in the significance of tourism to the Michigan economy, any effort which can assist in boosting tourism will most likely attract the attention of Michigan’s elected officials. Accordingly, there may be growing support at the state-level to boost access to short-term rentals and limit a municipality’s ability to prevent such use.
Any association that seeks to limit short-term rentals should ensure that its restrictions are clear in what is permitted and what is not permitted. Restrictions that solely rely on a “residential use” only limitation, or which rely on municipal ordinances for enforcement are at a constant risk of losing the ability to preclude short-term rentals in their community. As demonstrated by the existence of HB 4503 and SB 329, there are interest groups which would prefer that homeowners and unit co-owners be permitted to engage in short-term rentals, as such use would broaden the market of investors interested in purchasing property in Michigan. In order to prevent such a decision from being made by outside interests, community residents and board directors should review their documents to ensure that any desired restriction on short-term rentals will be enforceable, even if the law changes.
Matthew W. Heron is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, land use, large contractual disputes, and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. He can be reached at (734) 261-2400 or email@example.com. You can also follow him on Twitter at @mwheron75.