Minneapolis cap on short-term rentals upsets operators and developers

Anthony Aguirre quit his corporate job to run his eight Minneapolis vacation rentals full-time. Now, as the city prepares to implement a new short-term rental (STR) ordinance that will limit investors to an STR other than the home they live in, it is forced to make a decision: sell or convert them into long-term housing. rentals.

“We ran the business the way the city wanted,” he said. “But it could destroy my business.”

The new rules, which were swiftly and unanimously approved by city council late last year, do not include a grandfather clause – a provision that would apply to Aguirre and other operators current. And critics of the ordinance, which will govern Airbnbs, VRBO and other vacation rentals, said the rules could stifle tourism and property development in the city by eliminating a relatively new source of rental income for developers.

In addition to strict licensing and reporting regulations, the new rule states that STRs cannot comprise more than 10% of units in buildings with more than 20 apartments. The cap has drawn the ire of large property owners and developers who have relied on STRs to fill empty apartments and fund new projects at a time of unusually high vacancy rates in the city.

Minneapolis council member Steve Fletcher said that as the STR industry has grown, so have complaints about STRs and concerns about the industry’s effect on housing affordability in the city.

“We had regularly received complaints about poorly managed properties,” Fletcher said. “And due to fears that the housing market will be distorted by this new practice, we have decided to act.”

As STRs become more common, cities from Bayport to Brainerd are implementing new regulations and some cities are banning STRs altogether. While the practice began as a way for people to share a couch or an extra bedroom with a budget-conscious traveler, the industry is now dominated by big companies like Airbnb and VRBO, which have built marketing platforms that allow individual “hosts” to advertise and manage their listings.

Big tech companies are also getting into the business by committing to long-term leases for large rental blocks – often entire floors – in large apartment buildings. This sector is now dominated by San Francisco-based Sonder, which has listings in nearly three dozen cities around the world. In Minneapolis, the website now includes 123 apartments with “reduced rates” from $66 to $136 a night.

It was Sonder’s commitment a few years ago to lease 94 units in a new 122-unit apartment building in Minneapolis’ Mill District that helped spark the city’s effort to revamp an STR ordinance less strict that had been quickly implemented before a dramatic expansion of STRs before the Super Bowl. Sonder reduced its engagement to a full floor of the building, placating some neighbors who worried about the high concentration of passing visitors.

As this practice increases, Fletcher said STR investors are competing with tenants and traditional landlords in a tight supply market, putting even more upward pressure on housing costs. “It has a significant impact on the market,” he said.

Alisa Mulhair, chief executive of Sonder Minneapolis, said the new rules will have a chilling effect on the city’s ability to accommodate the growing number of visitors who have needs a traditional hotel cannot meet.

“It’s important for cities to recognize that flexible housing and the need for furnished housing can vary in duration from days to months,” Mulhair said.

In a letter to the city council, she said the rules could have unintended consequences for future housing development in the city.

She said they could choke off a major source of tenants that real estate developers rely on at a time when many Minneapolis developers are struggling to find tenants.

In the letter, she said Sonder operates 220 units in nine Minneapolis buildings in areas where zoning rules already permit such uses, and that it is in the midst of “active negotiations for multiple opportunities that would accelerate development. ET would provide additional housing downtown.”

She noted that the company does not allow overnight stays, maintains a strict no-party policy, and that visitors to Minneapolis stay an average of 15 days with more than 60% of its bookings for more than 30. days.

At North Loop Green, a sprawling mixed-use development set to replace several surface parking lots in the North Loop neighborhood, the developer had already received municipal approval to include nearly 360 traditional rentals and nearly 100 STRs that would have separate halls and facilities for these guests.

In a letter to city council, Hines Project Development Manager Bob Pfefferle said that by increasing the number of rentals, the company was able to add public amenities, including green spaces, that would otherwise unaffordable.

He also wrote that the new rules would affect the overall viability of the project, imploring the city to include a grandfather clause that would cover this project and others.

Sharon Cohn, the developer of a nearby North Loop building, which opened last spring amid civil unrest and the COVID-19 pandemic and which also has a partnership with Sonder, wrote that without the commitment of Sounding “the project would be almost vacant.”

Kari Lundin, a Twin Cities real estate agent who specializes in working with small real estate investors, said the order comes at an especially perilous time for many small investors who are already struggling to cope with rising mortgage rates. vacancy and new tenant protections.

“People want to go out [of the city]”, she says. “I have a number [who] I don’t want to do business in Minneapolis anymore.”

She owns a duplex near the VA hospital that’s popular with patients and families and said the city’s action came quickly and without notice.

“I have reservations next summer,” she said. “So what do I tell them?”

Barb Johnson, an Airbnb ‘superhost’, said that while she supports regulations that will improve the safety of such rentals and limit disputes with neighbors, the rules are clearly aimed at larger operators, but will significantly affect disproportionately smaller ones at a time when many are struggling.

“The pandemic and other situations over the past year have driven many smaller players away because we don’t have the capital to withstand the past year,” she said.

Aguirre, who runs a small consulting firm STR, said he bought his first rental in 2012 – a triplex he lived in and initially operated as a long-term rental.

During the Super Bowl, he moved in with his parents and traveled so he could rent his place as an STR, but eventually converted the other two units to STRs, which bring in about 20-30% more revenue than rentals at long term, he told me. After quitting his full-time job nearly three years ago, he doesn’t know what’s next.

“We were hoping to have a long-term business in Minneapolis,” he said. “Now we’re just trying to stay afloat.”

Jim Buchta • 612-673-7376

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