Chuck Marohn  0:00  

Hey everybody this is Chuck Marohn, welcome back to the Strong Towns Podcast. I'm recording from probably the most unique location I've ever done one of these from.

Joe Minicozzi  0:19  

It's a courtyard.

Chuck Marohn  0:20  

Yeah, it's a courtyard. I've got my best friend Joe here with me. Joe Minicozzi.

Joe Minicozzi  0:25  

Technically, this is a square.

Chuck Marohn  0:27  

I think it is a square, yeah. We had lunch in Italy today, and then we decided to walk on over to the United Kingdom, where we just watched a band play six songs, not all from the UK, but from the Commonwealth, they said. You said In Excess is-

Joe Minicozzi  0:45  

In Excess is from Australia.

Chuck Marohn  0:47  

So if you haven't guessed, we are at Epcot Center. Okay, they played a tune from The Outfield.

Joe Minicozzi  0:54  

I didn't know The Outfield was British.

Chuck Marohn  0:55  

I didn't know The Outfield was British either. I loved The Outfield as a kid. When I was I like 25, 26 I was in this band. We were the host band for Moon Dance Jam, which is this huge rock festival in central Minnesota. Being the house band sounds more glamorous than it was. You basically kicked off the day, so you were the first band to play when all there were were like 500 drunks sleeping it off and a bunch of tents and stuff. Then you hung around and helped out the rest of the day. You switched out the bands, so they'd have a regional band and then a national band, two different stages, and we kicked off the regional stud. One of the early acts on the national stage was The Outfield. I was excited to see him, because I liked him growing up, and I kind of felt bad, because at that point there's like 2000 people there. There's nobody. In the evening when we would close out the day, because they had the national act and then we would play when everybody was leaving, there's 20,000 people there at the end of the day. It was huge. But when The Outfield was there, there was like 2000 I would estimate. Joe, I have never, live in person, heard a better singer than the guy for The Outfield. If you listen to his tunes, you'd think, okay, he takes it down when he's singing in concert. Not only did he not hold anything back, his vocals were effortless, just absolutely effortless. They're a three piece band, and they had just the fullest sound I've ever heard from a three piece. The Outfield just blew me away. So when these guys are playing The Outfield, I'm like, "Oh, that's cool."

Joe Minicozzi  2:46  

And the drummer was singing.

Chuck Marohn  2:48  

And the drummer was singing, which is also doubly impressive, yeah.

Joe Minicozzi  2:53  

So why are we here, Chuck? The audience wants to know what we're doing in Epcot, how we got here. It's not the music. Well, the music's here.

Chuck Marohn  3:03  

We're riding Guardians of the Galaxy.

Joe Minicozzi  3:05  

There's that.

Chuck Marohn  3:07  

No. Joe, you invited me to come speak with you and a mystery person who did not show. Let's just call him the big chicken.

Joe Minicozzi  3:19  

I want to own some of that because I didn't do a good job as an applicant on the conference. So for all the viewing audience, to get in to speak at a conference, particularly a conference that you're not kind of part of.

Chuck Marohn  3:35  

We asked to speak at this one.

Joe Minicozzi  3:35  

We asked. We crashed the assessors conference, and we're not assessors. To their credit, they allow outsiders into their conference to have a conversation. So we sort of crashed their party a little bit.

Chuck Marohn  3:50  

Joe submitted a session on Airbnbs, and they welcomed us in.

Joe Minicozzi  3:55  

Yeah, is an Airbnb a commercial operation, like a hotel, or is it a house? How do you value it?

Chuck Marohn  4:01  

For the two of us, I feel like this was an opportunity, obviously for us to get together and hang out, which we like to do, but it was also an opportunity to have a conversation with people who are directly shaping the tilting of the table around Airbnbs and short-term rentals. This is not like, sexy stuff, right? I rarely hear advocates talking about assessors.

Joe Minicozzi  4:33  

And tax assessment on Airbnb, no. But the thing is, I think to the listening public, it's like, get outside your comfort level. Don't just hang out with other planners talking about this stuff. Go find out how the world operates. You'll be pleasantly surprised that people want to have a conversation about it.

Chuck Marohn  4:50  

Okay, so do you want to walk through what we did? Because I feel like we should describe to people what we did and how what we pulled off. And then I think you should talk for quite a while about just the distortions.

Joe Minicozzi  5:04  

I run into this a lot with assessors, where they value Airbnbs as houses. They are architecturally a house, but they're used as a hotel. In my hometown of Asheville, North Carolina, it's a pretty big problem because we're a resort community. Not as bad as we've seen. We've seen worse at like Sun Valley, Idaho, where pretty much Ketchum, Idaho, is monolithically a hotel called a neighborhood. So you have this product that's happened in the marketplace, you've had this disruption in the marketplace, and there's cause and effects that happen there. It's always confused me, which is probably not the appropriate word but it's pretty close, that there's no uniform opinion inside the assessment world. So I was talking with one of the heads of research at the IAAO-

Chuck Marohn  5:57  

The International Association of Assessing Officers, yep.

Joe Minicozzi  6:02  

They've got a director of research. And I said, "Surely there should be an opinion." And he asked me to write a piece in their magazine which is called Fair and Equitable, which is great, but that's their magazine, and they take that seriously. So I thought, "Well, let's do one better. Let's do a debate." And I remembered one of your debates that you did a while ago when you were trying to harden your steel about the positions of Strong Towns. I think this was about your first book.

Chuck Marohn  6:35  

Yep, it was about my second book.

Joe Minicozzi  6:35  

The second book. You challenged all of us to expose the issues with your argument.

Chuck Marohn  6:38  

So at that one, I presented what turned into "Confessions of a Recovering Engineer." I presented the core things around that in a narrative form that I thought was compelling, and then we split into two teams, and I had a stack of Mountain Dew, and I said, "Whatever team rips my presentation the best in a way that adds to it, like makes it better. Don't just sit and say 'you're goofy looking.' Well, all right, fine, but that doesn't make my presentation better. Make it better. If you make a good point, I'll award you a Mountain Dew. And whatever side has the most Mountain Dews at the end, gets the whole stash." Everybody got a Mountain Dew. It was fun, right? Everybody had a good time, and I learned a ton, I got a lot out of it.

Joe Minicozzi  7:24  

So in this case, I reached out to some assessors. I tracked down some assessors that actually view them as commercial. But the hard part, the thing that is kind of different about this conference, is it's more high level, and a lot of assessors are busy. This season that we're in right now is policy adoption season, because a lot of people do their reassessments in January.

Chuck Marohn  7:52  

Everyone's getting ready to appeal their assessment.

Joe Minicozzi  7:55  

Yeah, it's like trying to hold a CPA conference in April. But it's a core group that comes here. They take it seriously. And I had a hard time getting here.

Chuck Marohn  8:07  

Here is Disney World, by the way. We were in the Dolphin resort, which, if you've ever been, it's like a big conference center, opulent hotel kind of thing.

Joe Minicozzi  8:18  

Yeah. So anyway, I did have one assessor from Monroe County Florida that had committed to taking the side that Airbnbs were houses. And then I just had a devil of a time finding an assessor that was coming here that would talk about them as hotel. In defense of that assessor from Monroe County, Florida, I just kind of lost track of him because I was too busy trying to track down other people. So he didn't show up today, because I don't think he realized that we got in as a panel. So you started the session, and our moderator was the assessor from Union County, Ohio. So she and I played Phil Donahue in the audience, running around with microphones, and you challenged the audience to a vote in an opinion.

Chuck Marohn  9:09  

Well. So if you've ever been to the National Gathering, or I used to do these at CNU, we would do these debates where we would have a before and after vote. So let's everybody vote on whatever the proposition is, and then we'll hear it out from everybody, and then we'll vote again at the end. That's what we did today. We set it up. The proposition was the standard for the IAAO, which is essentially their guidance to the world.

Joe Minicozzi  9:35  

So design guideline basically.

Chuck Marohn  9:36  

Yeah, that should consider Airbnbs, VRBO, short term rentals, as a hotel, basically as a commercial property. That was the proposition. And you got up.

Joe Minicozzi  9:51  

I made the case for Asheville, because we have 4300 of them. If you read the standard it says that, if it's single-family residential, you use the sales approach. So how did that house sell? If it's commercial, you do it based on its income and then the sales. So you want to know how much money it's making as a commercial product. The loophole is, an assessor could look at that table and go, "Well, it's a single-family house." However, it's not a single-family use. That's the challenge. Somebody individually chose to use it commercially, so they should be assessed as such. We're not saying don't do them. It's just they should be paying the fair share of taxes as a commercial product, because they have more commercial impact in the community.

Chuck Marohn  10:33  

Okay, let's walk through what we did, and then let's talk about the argument.  I'm broadly sympathetic to the argument you're making. There's some kids here running around screaming, so if you're getting that in the background, there's a little maze here.

Joe Minicozzi  10:45  

The kid's trapped in the maze. He's in the labyrinth.

Chuck Marohn  10:49  

Yeah. So we set this thing up where we took the vote.

Joe Minicozzi  10:56  

What was the vote going in? It was like 43% in favor of AirBNB as commercial.

Chuck Marohn  11:05  

Yeah. 57% I think was where we were at. Most people thought it should be a house. Going in, most of these assessors said this should be a house. It should be taxed as a house, and we should consider it a house. I decided to dress up as a magistrate. I had a gavel. I had a robe. I had a white wig with the big, long thing down the back.

Chuck Marohn  11:40  

And you were wearing shorts and sneakers.

Chuck Marohn  11:42  

I was wearing shorts and sneakers, but I don't know if everybody could see that from behind the podium. Now what we were really trying to do, this is a bunch of assessors. These guys make engineers look like wild maniacs. So very buttoned down. We weren't expecting a very loose room. So what we were trying to do is loosen up the place a little bit, get people talking, get them comfortable. Joe got up and gave his talk, about 10 minutes, mostly focusing on Asheville, making the opposite case of what people had voted for, basically that these should be considered commercial properties. Then we went around the room, and we asked people to talk on both sides, and we got some really fascinating arguments.

Joe Minicozzi  12:24  

People were a little cagey. There was a private sector assessor, a former municipal assessor, who works in the space, mostly in coastal towns. I actually showed one of her slides in the presentation. She's of the mindset that, for things that are like 11-bedroom houses with nine bathrooms, this is basically a hotel. It's nearly impossible to call that a house. So that's the low hanging fruit. Let's at least do those. But she also said, "Don't worry about the rest." But it did start the conversation. It was the icebreaker. You did have to continually ease the audience.

Chuck Marohn  13:08  

I did have to prod the audience quite a bit, but we did get some thoughtful remarks. Let's go through the core argument for why this should be commercial. Okay, I'm gonna say this. We're pals. You are very passionate about this because you feel a little bit, I think, personally offended or personally affected in your community in Asheville.

Joe Minicozzi  13:29  

I have staff, so I've got to pay salaries. I'm dealing with their reasonable requests for a fair wage of living, but I also know I can't charge a city $5 million to do analysis. I can't compete against other economics firms at that price. If I were to get hired by Topeka, Topeka is going to say "I'm not solving your housing problem, why should I?"

Chuck Marohn  13:30  

Yeah, "I'm not subsidizing Asheville's mess." So you you have this passion about it. I'm gonna maybe sound like I'm aggrandizing myself, but I feel like I have a more dispassionate view of this. So why don't you give the passionate view, and then I'm gonna try to unpack it a little bit.

Joe Minicozzi  14:17  

I think the point that really struck on the nose was that one assessor.

Chuck Marohn  14:22  

This is one of the comments we got, yeah.

Joe Minicozzi  14:26  

He said, "Houses sell for $600,000. AirBNBs sell at $800,000. So we split the difference and assess the housing market as $700,000. So the commercial property gets a benefit of a $100,000 haircut, and the homeowner takes on a penalty of $100,000."

Chuck Marohn  14:44  

Let's break this down so people listening can grasp, because numbers are hard. An assessor basically goes out and determines the value of your property. The assessor has a hard job. An appraiser basically gets their mark immediately. Like, they're dealing with a bank, they're dealing with a buyer. They can be like, "Well, this house is worth $400,000," and then the buyer is going to say, either "I won't pay that," or the seller's gonna say, "I won't sell that." There's a tighter feedback loop, maybe. The assessor is going out largely for property tax reasons. States that don't have property tax often still do assessments because you have school taxes and other things. So someone goes out and makes a determination on what your property's worth. The assessor is working with tools based on "What will this sell in the marketplace?" If it's a house, they're supposed to, in a sense, look at what a comparable property would sell for, and try to make a market determination on what that would be. I found they generally underestimate slightly, I would say to avoid controversy.

Joe Minicozzi  16:02  

Yeah, conflict. Also, there's a bias toward, there's an irrational buyer in the marketplace. They overpaid. Tighter housing markets. For anybody that's bought a house in a tight housing market, you know you've overpaid, but you want that house. So you're going to do what you can.

Chuck Marohn  16:20  

Well, you either overpay or you don't get it.

Joe Minicozzi  16:22  

Yeah. So what you find in Asheville's case, one of the numbers that I showed was that 40% of our home buyers are paying more than 50% of their income toward their housing needs. So they're over stretched, and they're going to cut corners somewhere. So maybe they don't go on vacation, maybe they don't go out to eat for 10 years.

Chuck Marohn  16:44  

Let's walk through this home buyer process as a way to back into the mayor. Again, kids, for random reasons, screaming next to us.

Joe Minicozzi  16:54  

They don't care about assessments. We can't move the kids out of here.

Chuck Marohn  16:58  

No. We are at Disney World, so you gotta expect some joyous children screaming. Hopped up on sugar. This is what I would do if I had kids this age. I'd send them in this labyrinth and have them run around like crazy. So I'm out buying a house, and I'm a person, I'm a family, I'm gonna buy this house. I go to the bank, and basically we're looking at my income. What am I making, and then what can I afford in a payment? Essentially, I'm going to buy the house, I'm going to get a mortgage, and I'm going to pay that mortgage year after year after year. I will either have a 15, 20 or most likely, because almost most mortgages today are 30 year mortgages. I will pay that for 30 years. In that period of time, the bank technically owns the house, and I'm making payments to them. When it gets done, they will give me the mortgage, and then I own the house. That is a model based on what my income is. Okay, walk us through now. You're buying this as an LLC specifically to put it on a short-term rental. What's the math of doing that? What are my comps? What are you looking at?

Joe Minicozzi  18:11  

Well, the example that I used was this house owned by Mountain Vista Alchemy LLC.

Chuck Marohn  18:17  

I love the alchemy part.

Joe Minicozzi  18:18  

It's great, isn't it? They have three LLCs in Asheville, three different Airbnbs named Alchemy, the reason being that it's a doctor out of New Smyrna Beach, Florida, who has this wacky face-wrap technology of making you look younger. That's not FDA approved, by the way. But people are gonna pay money for that. Good for you. So she and her husband dropped, I think was like $800,000 on this property, between the cost and the renovation. They're paying it off in 4.2 years based off 70% occupancy, which is reasonable in Asheville for Airbnb.

Chuck Marohn  19:03  

So back up, because you just you did numbers, and I want to simplify for people.

Joe Minicozzi  19:07  

Let me simplify the numbers.

Chuck Marohn  19:09  

Hang on a second. Don't use numbers. Someone's buying the house, and their calculation is not, "I'm going to get a 30 year mortgage. I'm going to pay this off in 30 years." Their calculation is, "Here's how much I can charge for rent of this short-term rental. Here's my occupancy rate. In other words, here's the percentage of time it's going to sit unoccupied. So I can come up with a cash flow and then I can pay off this thing in less than five years."

Joe Minicozzi  19:41  

Less than five years. So the other thing is, also, you get a tax break for the money that you put in.

Chuck Marohn  19:46  

Hang on, let's not go there yet.

Joe Minicozzi  19:50  

Too much?

Chuck Marohn  19:51  

Yeah, I think what we need to do here is set the hook. And then we'll get people crying, and then we'll kick them when they're down. This story gets worse. But if you're going to buy a house and you're saying, "Here's my income, I'm gonna get a 30 year mortgage. I'm gonna pay this off in 30 years," you're competing at someone who is going to look at that and say, "What can I get in rent and I can pay that back in five years."

Joe Minicozzi  20:15  

Yeah, I'll just make it simple. Are you making money in your house while you're living in it?

Chuck Marohn  20:19  

Right, no. You're paying for everything.

Joe Minicozzi  20:21  

You're paying for it. So you're paying a mortgage to the bank for the privilege of living in the house. You're essentially renting the house for 30 years. That rent payment is going to you getting that house, but it takes you 30 years to get there.

Chuck Marohn  20:33  

So if I buy it and I intend to rent it commercially, and I can basically pay off my initial investment in five years, what happens after five years?

Joe Minicozzi  20:43  

After five years, it's just straight income.

Chuck Marohn  20:43  

I'm just making bank.

Joe Minicozzi  20:44  

Yeah. So the example that I used. Over 30 years, that house has made $6 million of profit above owning the house. So you're going to get that asset and then plus $6 million. Now, are they going to hold it for 30 years and get there? I don't know. But that's the opportunity that they have that none of us have. There's more of an incentive for them to pay more to have that opportunity than what we have.

Chuck Marohn  21:08  

A lot of times, people will say, "There's just not a house affordable for me in my range." It's very hard to explain to people that they are competing against, literally, people who are valuing the whole system differently. You're buying X and they're buying Y, and it's the same thing, but it's actually two different products. One is a house to live in, and one is an investment property to cash flow. And you will, by necessity, value those very different.

Joe Minicozzi  21:42  

Yeah, I mean, how would you value your car versus going out and buying a taxi cab and charging people to get in it? So you can make money off that taxi cab. We can make money off our cars now with Uber.

Chuck Marohn  21:55  

Well, let's say there's a limited number of cars. If people will pay for taxis, and they need taxis, the taxi driver is going to outbid you if you're just driving to work and back.

Joe Minicozzi  22:06  

Or if you're in New York City, there's a limited amount of number of badges that go to taxi cabs, so they're highly competitive and very expensive because of the opportunity.

Chuck Marohn  22:17  

So in a sense, the marketplace is saying, "Hey, we can make money doing the short term rental thing. Therefore, we can bid higher for this."

Joe Minicozzi  22:26  

Well, I think the irony that you just hit is that the market sees the value. Why does the assessor not see that same value?

Chuck Marohn  22:33  

Let's switch to that, now. I feel like the one example that the guy gave today, he said, "If the house would sell for $600,000, but then the rental person pays $800,000, there's a $200,000 difference there between the two. Talk about what the assessor faces when they go out to look at this. Because they're looking at it and saying, what? "This is a house"?

Joe Minicozzi  23:01  

Well they don't know if that purchaser has gone out with the intention of Airbnb-ing it until it actually happens. Some places don't have permits. In the case of North Carolina, I can't require some sort of registration for if you start to use your house as Airbnb. My state has made it explicit that I can't make you register. However, I could create a zoning requirement where you need to have a use by-right with special requirements zoning application where you have to prove that you have an off street parking space, and that if you have more than three noise ordinance violations in a year, you lose your permit.

Chuck Marohn  23:40  

But the problem is that the assessor doesn't know. The assessor goes out and they're like, "I'm looking at a house. Last year, this house would have been worth $600,000. Now all of a sudden, someone paid $800,000 for it. Market must be going up." Even though it's a completely different buyer doing something completely different.

Joe Minicozzi  24:02  

Correct. But that's also my challenge. Here we are 10 years into this. I mean, they became public as a company 2016. They started in 2012, but just to be generous, say from 2012 to 2014, they didn't have their act together. When they went public, it became a national thing. How on God's green earth, do we not know where they are?

Chuck Marohn  24:21  

Right. The market's gotten more sophisticated, and ignorance of the of it is less of an excuse than it was.

Joe Minicozzi  24:30  

Can I talk about that one Assessor from Ogden? You're asking questions. You're prodding the audience. There were several folks that were just like, "We don't know where they are," "They'll eventually fail and go back to being a house, and what do we do then?" Finally, there was an assessor from Ogden, Utah, that said, "When a house converts from a house to a beauty salon on the corner of the block, we know that it's a beauty salon and we assess it commercially, even though it's a house. How is it that, in the center of the block, a house is used as a commercial enterprise called Airbnb and we somehow don't go after it the same way that we did the beauty salon? They're both houses."

Chuck Marohn  25:12  

Yeah, we somehow want to remain ignorant of that shift.

Joe Minicozzi  25:16  

Exactly, I think that was between the lines of what he was saying to his peers. "Your argument is basically confessing your either disinterest, ignorance or inertia."

Chuck Marohn  25:26  

Well, let me take this a step further. If you take the house and you convert it to a commercial use, let's say a coffee shop. Now, instead of being worth $600,000 as a house, you could pay $800,000 because you're selling coffee and you've got good revenue and good market and that building's worth more. This is hard from an assessment standpoint. If you have a commercial building in a neighborhood with good foot traffic and good sales and all that, it can be a junky building but it'll be worth a lot. If you have an immaculate build, like a mansion type thing, but it's out where there's no traffic and no people and no sales, that is essentially a worthless piece of commercial property. So if you've got this coffee shop, and it's worth $800,000 now, and the house next door is worth $600,000, what would what would the assessor do with that coffee shop?

Joe Minicozzi  25:26  

Well, first they're going to understand its income. What are the transactions that are happening there? One of the examples that was used was a you-store-it place. You-store-it places are dirt cheap buildings to build, and you don't value it based on it being a dirt cheap building.

Chuck Marohn  25:26  

You don't go out and say, "How much did this sheetrock cost to put in, and how much did this garage door cost?"

Chuck Marohn  25:26  

Yeah, it's basically a garage door and metal. 50 bucks a square foot. You don't value it as that. You value it for people are spending $200 a month to shove their stuff in a box.

Chuck Marohn  25:44  

Because that's what an investor would pay for it. They're gonna say, "What's the cash flow off of this? I need an 8% return." And they'll look at it and say, "All right, here's what it's worth."

Joe Minicozzi  25:44  

I think the overstory of all this is, this isn't to say, go out and bleed the commercial investor. It's just, pay your fair share. It's going to be a little bit of a bump more. You're in it because you're making money, and you're also creating more impact in the community than a regular homeowner is going to.

Chuck Marohn  25:44  

Now I've got the coffee shop, and it's $800,000 not $600,000 anymore, because now it's commercial and not residential.

Joe Minicozzi  25:44  

Because you're selling coffee at $4 a pop, and only cost you 80 cents to make the cup.

Chuck Marohn  26:47  

You've turned that house into a commercial, cash flowing business. Here's the question. What will the assessor then look at the house next door? Will they look at the house next door and say, "Well, you could convert that into a coffee shop or a florist or a pizza shop, so it's valued at $800,000," or will they look at it and say, "Nope, you're still a house, and a comparable house is going to be $600,000"?

Joe Minicozzi  28:05  

One of the arguments was exactly that. Like, "Hey, Joe, if we're going to say highest and best use, then we have to look at all houses as being Airbnbs." I can see that argument, but my response would be, "What's its use?" If it's being used as a house, it's a different animal than if it's being used as an Airbnb. It's that choice of use. Now, there are some states where they allow the assessors to assess based on use. I think it was the Arkansas assessor who said they assess based on use, based off of their policies. So actually, he went one better. He goes, "If it looks like a duck and quacks like a duck, it's a duck." That was his assertion.

Chuck Marohn  28:47  

Here's what I find insidious about this. If you go and open up the coffee shop, that won't impact me as a residence. I mean, it might ultimately, if the value of my neighborhood rises, and the neighborhood becomes a more valuable place and all homes go up and my home is one of those. But the assessor is not going to come out and say, "Wow, there's a $800,000 house-like structure here that's selling coffee, and there's a $600,000 home right here. I better bring that home up because it could sell coffee someday." It won't affect me.

Joe Minicozzi  29:29  

No, they wouldn't do in that case.

Chuck Marohn  29:30  

But if, instead of a coffee shop, they actually buy it and turn it into an Airbnb, the assessor's gonna look and say, "Well, that's a home, and all homes are now worth $800,000." So all of a sudden, my house is worth, from an assessment standpoint, way more.

Joe Minicozzi  29:49  

Correct. You're now driving my taxes up.

Chuck Marohn  29:52  

And that means the next house and the next house and the next house. But I'm not paying my house off in five years from the cash flow. I'm not doing any of that stuff. So in a sense -- and I think this was the thing that was kind of new to me today, that I hadn't thought through, and a little bit profound. The one guy said, "We don't know what to do." So what happens is, we take the $800,000 Airbnb and we value that at $700,000 and we take the $600,000 house, and we value that at $700,000 too. Just to make them even, we split the difference. So because it's considered residential, because it's house, the commercial property gets a tax break over what they should pay, and the residential property owner gets a tax increase beyond what they should pay. Besides, if you're buying that house to begin with, you have to stretch to get into it, because it's now being sold, in a sense, based on the assumption that you could commercially cash flow it. So you're paying higher taxes and a higher price. I feel like when people are saying, "We're getting squeezed and it's just not affordable," I don't think this is the entire conversation, but I think this is a snapshot of the kind of forces that are driving prices crazy.

Joe Minicozzi  31:14  

Well, the thing about it is, it's not that hard a concept to get your brain around. Most people listening to this have stayed in Airbnb, and we've paid somebody money to be there, like we know that that exists. We've stayed at a hotel before. It blows my mind that the hotel industry isn't more up in arms over this, because it's completely unfair from a competition standpoint. We're essentially playing checkers in the middle of a chess match. There's a different game being played in housing to have these arguments like, "Oh, it's not that big a deal." It's like to who? Are you even looking at the numbers on this? Or show me the math for why you think it's not a big deal, when you have 4000 of them in your marketplace.

Chuck Marohn  31:54  

What you and I were trying to do here was start a conversation. I told them, "Part of what we're here to do is get you to talk about this, because as housing people, as people who are working in cities, we see the huge impact this is having on people, on cities, on policy. You're right in the fulcrum of it, and you're not doing anything and no one understands the key role you're playing in enabling this."

Joe Minicozzi  32:25  

Okay, yes, but we were also both going in as professionals, to operate in this space, to learn more.

Chuck Marohn  32:32  

I really wanted to learn from them. The feedback that we heard against the resolution, people who said, "Nope, these should be considered homes."

Joe Minicozzi  32:47  

"What if there's football games going on, and I just do it 12 times a year?"

Chuck Marohn  32:51  

A lot of it came down to, in my mind, "Oh, this is really hard." I want you to talk about that "This is really hard." Because then I've got a meta question for you on "This is hard." What about these assessors?

Joe Minicozzi  33:05  

That's your damn job. I mean, my job is hard. Figuring out how to do tax econometric models of cities. Brain surgery is hard. Could you imagine a brain surgery going, "Oh my job is too hard."

Chuck Marohn  33:21  

"It's too hard to prevent infections."

Joe Minicozzi  33:23  

Yeah, it's like, that's your job. It's your job to assess things. This is going on in the marketplace. It is an actual investment vehicle. They're being sold as investment vehicles. Are you paying attention to sales? You should be, because you're an assessor. When they're being sold, you can see in the ads, people saying.

Chuck Marohn  33:38  

Are they being marketed that way, are they being sold that way, are they bought by an LLC who also owns five other ones in this market?

Joe Minicozzi  33:45  

You can open up their advertisements. I was showing podcasts of this guy in Asheville who's a realtor. Nothing stopped me from going on to his podcast and listening to him brag about closing $50 million in one year, and $55 million the next. Now, these houses that he sold to investors, to doctors in other states, this computer scientist in Ames, Iowa. The guy's got 18 Airbnbs, five of which are in Asheville. It is not hard to find this information. So why aren't you doing that?

Chuck Marohn  34:18  

Let me ask you the meta question. I feel like this goes back to a lot of the other work that you've done that we've talked about over the years, in terms of the tax equity stuff and all this. To me, in a rational system, the assessor's job is to, let's say, as accurately as possible reflect the value, while maybe erring a little bit. Because you're working for the government. The local government wants as big a tax base as they can, because they're literally taxing people.

Joe Minicozzi  34:52  

What's the metaphor that they always say? We want to pluck the feathers off the goose without making it squeal. They want to get as much taxes as possible without being too punitive on the taxpayer.

Chuck Marohn  35:05  

Let's go with that. Whether you, the listener, agree with that mindset or not, I've always felt like the incentive of the assessor is to basically get your tax assessment as high as they can without you coming back at them in a defensible way. I'm not saying their goal is to cheat people. I don't think it is. But their incentive really is to make it as close to the number as they can get. Why don't we see that happen/ Why wouldn't an assessor say "That's an Airbnb that should be taxed as a hotel." Why don't we set that value where it's supposed to be? Why don't we say it's commercial? Why, when we look at the $5 million property, do we assess it at two and a half million, but the $200,000 property we assess at $195,000? You've shown this again and again and again. I don't understand the incentives that assessors are sensitive to, because it doesn't seem like it aligns with either the public interest or the government's interest. I don't know whose interest it aligns with.

Joe Minicozzi  36:21  

Well, most assessors, at least in the south and the west, are from the county. If you have a county commission that isn't interested in having this discussion, the assessor is not incentivized to throw this at their feet, to go in and start stirring it up. If you have county commissioners that actually happen to own Airbnbs, are you really going to stick your nose out and say, "Hey, let's start having this conversation about taxation." To some extent, I wouldn't say it's a flaw, but maybe it's a bias. How many planners go out there and just start changing zoning codes without any back support?

Chuck Marohn  37:07  

Not ones that want jobs for very long.

Joe Minicozzi  37:09  

Yeah. So the system is designed to keep people from doing that.

Chuck Marohn  37:14  

So you think it's a status quo bias more than anything. I can't go to a place today without hearing about Airbnbs. I go give a talk on housing, and I can guarantee you that, if there's five questions from the audience, one of the five will be on short-term rentals and their impact on the market.

Joe Minicozzi  37:34  

One of the points I made is that it's high time to have this conversation, because it is becoming inexcusable to not have an opinion on this. One of the individuals even said as much, that if the IAAO wants to be taken credible is an institution, it should have an opinion about it. And they should, because they are the experts of understanding value and the reasons why value exists in the marketplace.

Chuck Marohn  38:00  

Yeah, they're the people we turn to and trust to do this. That was kind of what we were prompting them today to do. We were saying, "Hey, you can't be silent on this."

Joe Minicozzi  38:11  

Yeah.

Chuck Marohn  38:11  

I cut you off earlier when you started to talk about the depreciation thing. I feel like that is the thing where you're rolling on the ground in agony, because you realize that you're bidding against commercial property owners who are buying these things, cash flowing them out. They're looking at them as an investment, not as a home to live in. So you're already competing on unfair market. And they're getting a tax break that you're not getting through the property tax structure. And now let's kick the listener in the nuts.

Joe Minicozzi  38:44  

Oh, yeah, sorry. There's one example that I use. These people dropped $450,000 into the home improvement. 100% of that $450,000 is tax deductible. And under the Big Beautiful Bill, I can also start to depreciate, at an accelerated rate, the physical house that I bought. So I'm getting two tax breaks on it. Meanwhile, I'm making $300,000 a year in income on that property. So all that income, my tax deductions wipe out. So I'm getting free gravy with no taxation.

Chuck Marohn  39:07  

When you showed me this, my mind started rolling. Because I did not know this.

Joe Minicozzi  39:21  

Not only am I paying less taxes to the community that the building is in, I get to write off my income at the federal level with this vehicle that's making and printing its own cash. So that's the reality of the reason why it's a savvy and smart investment for people to do this, if you have the wealth to be able to drop that kind of money.

Chuck Marohn  39:44  

I tend to go to a lot of communities that are struggling, and I hear a lot of these people say, "We have these buildings that have absentee landlords and no one's taking care of them." I feel like what we have depreciation in this way -- which maybe I should define that too for people listening. Depreciation is basically like you can take that rate out of your income. So if you buy a half million dollar house, and you're allowed to depreciate it in one year. You can take half a million dollars of investment, that's your cost of doing business, and it offsets any revenue, any gain that you have. If it offsets all of it, you can roll it over to the next year. So all of a sudden, not only is this lucrative, but literally jack up the lucrativeness of it, and I think, create a weird incentive for people to buy properties, sit on them, even when they're starting to lose money, not turn them over, not change. You are locking up properties in commercial holdings in ways that I think are going to be long-term really distorting to the residential housing market. The thing is, I think a lot of these are probably being financed with residential mortgages. So you have the worst of all worlds. The federal government subsidizes the housing market for residential, giving you a loan that sits under the umbrella of government security, so lower interest rates, longer term, easier financing. And then you're jacking up, on the other side, all the deductions and all the tax breaks and everything. And then you're tilting the table so that they're going to pay less taxes than the normal residential property owner. And we wonder why nobody can afford a home. I know we get in the supply-demand argument, and I'm trying not to just pick fights with YIMBYs because I think, at the core, it's hard to argue that if we built more, it would help. But these things are not supply-demand things.

Joe Minicozzi  39:46  

Well, I show the numbers that Asheville is actually adding more supply into our marketplace, but more of them are being gobbled up by non-owner-occupied owners. So yeah, if that person is making a quarter million dollars a year in personal income, and their investment vehicle has garnered a 100% tax break on all of their personal income and made them $300,000 on top of that, I can flip that $300,000 into my next purchase in Asheville.

Chuck Marohn  39:46  

So all of a sudden, these things don't even have to cash flow for it to make great sense.

Joe Minicozzi  39:46  

They make great sense because they do cash flow in Asheville, because people keep on showing up to go hiking our mountains and eating our food. Which is great. We're a tourism town.

Chuck Marohn  41:27  

It just says, pay more for it and pay more for it and pay more for it. This is where I'm just really frustrated because it's a market being distorted in ways that are opaque and invisible to most people. You showed me an email today from a group of people who are basically out looking for wealthy investors, saying, "Hey, if you want to get into the real estate business, it's really lucrative. We can get you lots of tax write offs and decent cash flow. We'll help you do it." So all you have to do is be a person with money, and they can help you. Just like a stock broker would help you buy stocks, they can help you buy this kind of real estate and get all the tax breaks and the tax shelters and the benefits that come with it.

Joe Minicozzi  43:59  

"Don't hate the player, hate the game." We need to understand the game. I'm feeling like the viewer, the listener, is probably really depressed right now. There was a positive moment, right?

Chuck Marohn  44:14  

I think the coolest part was -- we're about to start the next show, so we better wind this up. So we asked them at the beginning, should this be a house or a commercial property? And by 14 percentage points, they said, "This should be a house." And at the end, that completely flipped.

Joe Minicozzi  44:34  

The majority was in favor of assessing them as commercial.

Chuck Marohn  44:40  

Which tells me that, if we have this conversation, if we talk about it, it becomes more obvious, and people are like, "Yeah, this is a problem, and we're ready to address it."

Joe Minicozzi  44:50  

Yeah, and the thing is, that was a one hour conversation. It was open. It was a very collegial, non threatening conversation. You can have conversations with people of opposing views, and some portion of that audience is willing to be informed, is willing to have an open mind, to reconsider their positions.

Chuck Marohn  45:13  

You hit them with 10 minutes of data, and then basically the rest of it was me and you trying to get them to talk, and it was them talking to each other. Like, "Here's what I think," and then someone get up and say, "Well, here's what I think, and it's different than what you think." Just that conversation moved the needle.

Joe Minicozzi  45:31  

You know what I think it was? I think it was just the overall guilt. Somebody in Arkansas going, "looks like a duck, quacks like a duck." Like, for Arkansas to figure it out?

Chuck Marohn  45:42  

Yeah. Well, I kind of made fun of him a little bit because when he talked, he did the "looks like a duck, quacks like a duck." Who am I to talk? I'm a Minnesotan, I've got a goofy accent too. But the Arkansas ones always made me chuckle. So he was funny.

Joe Minicozzi  46:01  

We should get them to come to the Gathering next year.

Chuck Marohn  46:04  

Maybe we should. I mean, it'll be in Fayetteville, so. No, I saw them educating each other, which was a ray of hope, like a little shining light.

Joe Minicozzi  46:17  

Well, I think, for the listening audience, yes, we're talking about a very specific thing, but I think that overarching lesson: Get outside your comfort zone. Get to a room full of people of differing opinions, have a conversation. Be willing to have that conversation. Take new information in, but also see what happens with that conversation. Talk with people.

Chuck Marohn  46:41  

Right. And I've long been a defender of Airbnbs. I look at my town and I'm like, sometimes these are really helpful for a person getting started, to be able to build that backyard cottage and lease it out and be able to put in that duplex, and if they can't get a tenant for a while, do a short term rental. I don't think we have to be Orwellian on this.

Joe Minicozzi  47:09  

We also don't have to bleed them. Like, it's gonna be $100 more a year.

Chuck Marohn  47:12  

You don't have to bleed them, right. But I do also recognize the distortion at work here. All right, here comes our band. So we got to say goodbye.

Joe Minicozzi  47:23  

We have outro music going for us to close this out.

Chuck Marohn  47:29  

I don't know how this will fit with our regular music, but hey everybody, thanks for listening. Joe and I are gonna go ride Guardians of the Galaxy and probably save the universe. I think that's what we're asked to do. Yep. So, take care and keep doing what you can to build a strong town. Thanks, Joe.

Joe Minicozzi  47:48  

Thank you.

Norm Van Eeden Petersman  47:51  

This episode was produced by Strong Towns, a nonprofit movement for building financially resilient communities. If what you heard today matters to you, deepen your connection by becoming a Strong Towns member at strongtowns.org/membership.