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To BnB - or Not?

By Kari Santos | Nov. 2, 2014
News

Law Office Management

Nov. 2, 2014

To BnB - or Not?

As San Francisco's Airbnb shakes up urban housing markets, cities move toward regulating short-term rentals.

The Sheldon Hotel near San Francisco's Union Square advertises itself as "affordable, safe and secure"; it shows up in listings of temporary housing for the homeless, and online reviews praise its cleanliness and the communal kitchen.

As a specimen of a dying breed - the single-room occupancy hotel - the modest Sheldon fills an important role in San Francisco's red-hot housing market. But its tenants, including some who've been there as long as 16 years, believe their landlord is trying to turn the Sheldon into tourist lodging, and they've sued Airbnb, a San Francisco

company that connects potential guests online with private lodging in cities around the world. Beyond merely providing information about places to stay, the Sheldon tenants allege, Airbnb is a partner with their landlord in illegally turning units in the building into short-term rentals - hotel rooms for tourists - filling the hallways with noisy and potentially dangerous strangers. (See Gamache v. Airbnb, Inc., No. CGC-14-541477 (San Francisco Super. Ct. filed Sept. 3, 2014.) Their lawyers hope the court will certify their lawsuit as the first class action against Airbnb.

Earlier this year San Francisco City Attorney Dennis Herrera sued two local property owners, alleging they violated California's Ellis Act (Cal. Gov't. Code §§ 7060-7060.7) by evicting tenants only to turn around and offer the vacated units for rent on Airbnb, HomeAway.com, and its sister company, VRBO.com (Vacation Rentals by Owner). Meanwhile in New York, Attorney General Eric T. Schneiderman released a report last month, based on data subpoenaed from Airbnb, concluding that 75 percent of the company's New York hosts appear to be breaking the law.

Around the globe, travelers and property owners by the thousands are using short-term rental websites like Airbnb. The idea of "home sharing" has zealous devotees: It's often hailed as the only thing standing between hosts and homelessness, as a way to empower the little guy in a corporate world, and as a path to better cultural understanding, one traveler at a time - all of which might actually be true. But home sharing is testing new ground in the courts, local governments, and housing markets. It tests zoning and landlord-tenant laws, as well as the patience of many neighbors, and it is helping to reshape the nation's most competitive housing markets.

The "sharing economy" accounts for a whole new sector of start-ups, including Lyft (similarly connecting drivers with riders) and TaskRabbit (connecting people who need a hand with vetted helpers for hire). These websites facilitate the transaction, take their cut of the fee, and assert in their terms of service that they are simply platforms to connect people and thus not liable for the services offered. But Airbnb seems to leave the abstract world of Web platforms behind by providing hosts with up to $1 million in damage insurance for "eligible properties" under certain conditions. Lyft provides its drivers with auto insurance, and TaskRabbit provides both property damage and bodily injury coverage for its users. With little more than an Internet connection needed to use Airbnb, property owners, landlords, and tenants can be sometime hoteliers. The result has legislators grappling with changes in public policy, would-be entrepreneurs frustrated, and attorneys trying to make sense of it all.

On October 7, San Francisco officials voted initial approval for legislation aimed at finding acceptable middle ground and imposing some rules onto the anarchy. (The law is expected to take effect in February 2015.) Meanwhile, most of the approximately 5,000 people in San Francisco offering a bed to travelers through Airbnb or another short-term rental site are breaking the law.

Because it's where Airbnb is headquartered, San Francisco is ground zero for the company's reputation: The platform is under pressure to balance the interests of hosts and guests with residents' concerns about neighborhood safety and the city's need to regulate its housing supply in a very tight and expensive market. (The median rent for a one-bedroom apartment was $3,120 as of June, according to Priceonomics.)

On the other hand, Airbnb appears to have had little impact on San Francisco's hotel industry, which maintains one of the highest occupancy rates in the country.

"It is a new phenomenon in the American landscape," says Myron Moskovitz, a landlord-tenant expert and appellate lawyer in San Francisco. "The courts would be delighted if states and cities pass legislation that addresses the problem rather than having to squeeze [these business models] into existing law."

Airbnb (the name shortened from the company's original URL, airbedandbreakfast.com) is the best known home-sharing operation on the Internet. The company, which according to the Wall Street Journal revealed a $475 million round of funding last summer, makes money by taking a percentage of each transaction, collecting fees from both the host and the guest. And it's wildly popular. In little more than six years, the start-up - founded in 2008 by computer engineer Nathan Blecharczyk and design school graduates Brian Chesky and Joe Gebbia - has grown to boast users in 34,000 cities around the globe. On any given night, more than 350,000 people worldwide are sleeping in Airbnb-hosted beds, according to David Owen, regional director of public policy for the company.

The Communications Decency Act provides much of the legal framework upon which Internet companies operate. (See 47 U.S.C. § 230.) In the past, legal issues have been primarily about defamation and privacy concerns, such as remarks in a Yelp.com consumer review. In general, Internet platforms are not liable for the content of what individual users post - Craigslist, Amazon, Google, and so forth included. But courts have found some limited exceptions, mostly in situations where the online company is shown to have been a producer of the content, according to Andrew Crocker of the Electronic Frontier Foundation.

The issues are grayer for a space-sharing platform such as Airbnb, which is neither landlord nor tenant.

San Francisco Board of Supervisors President David Chiu spent more than a year working with city agencies, Airbnb, the San Francisco Tenants Union, and other interested parties. His legislation regulates short-term private rentals, which previously had been prohibited. (See San Francisco Admin. Code, Ch. 41.) In April, Chiu said that his measure would "reinforce the existing prohibition against 'hotelization,' which refers to the conversion of residential housing into full-time de facto hotels."

Online space-sharing services crash directly into the city's long-established landlord-tenant regulations. Short-term rental operators such as bed-and-breakfast inns already must obtain a conditional use permit - which in turn requires a public hearing, notification to surrounding property owners, and collecting the city's 14 percent hotel tax, which was expected to produce more than $300 million during fiscal year 2013-14. On top of that, once a property is being used commercially, it falls under a different set of building code requirements.

Airbnb's website features a page called "Responsible Hosting," which tells potential hosts that "it's important for you to understand the laws in your city." Along with plenty of disclaimer language, there's a section with links to local regulations of more than 20 U.S. cities, including San Francisco.

"The Chiu legislation may reduce Airbnb's [liability] exposure," says San Francisco attorney Andrew Zacks, who represents property owners. "But to the extent Airbnb continues to profit from unlawful rentals of residentially zoned units, ... Airbnb is going to get dragged into the litigation arising from the private causes of action created by the new law and will be subject to injunctive relief of disgorgement of illegally received profits."

State and local laws protect tenants who stay longer than 30 days, and they set out requirements for when and how a landlord may evict them. California's Ellis Act does allow landlords to evict a tenant if the landlord is essentially getting out of the rental business. (Cal. Gov't Code §§ 7060-7060.7.) But turning a previously rented unit into a short-term rental violates the Ellis Act. In San Francisco, landlords must, among other things, compensate tenants they displace in amounts depending on various factors including the tenant's age, length of stay, disabilities, and children. And, of course, the city's stringent rent-control laws limit the amount by which rent can be increased, except for buildings constructed after June 1979. (See San Francisco Admin. Code, §§ 37.9, 37.9A.)

There is money to be made in short-term rentals, however. Big money. For instance, a studio apartment in San Francisco's Lower Haight neighborhood that rents for $1,900 a month, or about $63 a day, can bring in nearly three times that amount as a short-term rental, according to an August San Francisco Planning Department report. Likewise, a six-bedroom home in the Marina District that rents for about $11,000 a month can yield $39,000 through Home2sanfrancisco, which offers luxury real estate for interim use, according to the report and the company's website.

With that kind of incentive to tempt landlords, tenant advocates and city officials are primarily concerned that property owners are taking rental units off the market. The city's planning department estimates some 4,000 to 5,000 rental units in San Francisco have been turned into short-term rentals. Rents increase as the rental market is constrained, and real estate values soar, based on the higher earning potential per unit.

Interestingly, in this housing conflict tenants are cast as both victims and offenders, sometimes simultaneously.

"I don't blame the tech industry for the housing crisis," says Bay Area attorney Joseph Tobener, who represents the San Francisco Tenants Union and individual tenants. "I blame the speculators who are taking advantage of it."

The Tenants Union is suing some two dozen landlords for illegally renting apartments on Airbnb in buildings with four or more units and for other causes involving short-term rentals, Tobener says.

In April, San Francisco's Herrera brought a pair of lawsuits against two building owners over short-term rental use. In one, owners of a property in Pacific Heights allegedly removed longtime tenants and then illegally marketed the property as a tourist rental on vacation websites HomeAway.com and VRBO.com for as much as $595 per night, without a commercial permit. (See City & Cnty. of San Francisco v. Lee, No. CGC-14-538857 (San Francisco Super. Ct. filed Apr. 23, 2014).)

In the second, a landlord who evicted long-term tenants is accused of converting three apartments near Fisherman's Wharf into short-term vacation rentals, advertised on Airbnb and VRBO.com for up to $320 per night, and failing to collect hotel taxes from guests. (See People v. Yurovsky, No. CGC-14-538854 (San Francisco Super. Ct. filed Apr. 23, 2014).)

A typical scenario involves a tenant, hoping to offset the rent, offering a room or an entire flat for a short stay on a sharing platform such as Airbnb - at rates that exceed the prorated actual rent for what may well be a rent-controlled apartment.

"Any for-profit endeavor by a rent-controlled tenant is not good for public policy, nor is it fair," says attorney Zacks.

On the other hand, landlords may turn their less-profitable tenants' indiscretions to their advantage, the Tenants Union's Tobener says. Some even troll home-sharing websites looking for listings of their properties, which could justify evicting a low-paying tenant and then upping the rent.

Almost universally, home-sharing advocates say that the practice serves to help cover the high cost of living in San Francisco. The average household in San Francisco spends more than 40 percent of income toward rent, according to a recent analysis by the real estate website Zillow.com; the U.S. median household spends nearly 30 percent. Before voting in support of Chiu's law in early October, Supervisor Scott Weiner noted that he's heard from many constituents who "absolutely rely on income they derive from hosted rentals." Weiner, who chairs the Land Use and Economic Development Committee, also stated, "We don't want [residential] blocks turning into hotel districts."

Hosts and neighboring small-business owners add that the practice spreads the tourist wealth into neighborhoods that would not otherwise attract it.

Kepa Askenasy has owned her home in San Francisco's Potrero Hill neighborhood for two decades. An architect, she worked successfully as a sole proprietor and earned enough to afford a modest life in the city. But when the economy took a nosedive and an accident left her unable to work, with a pile of medical bills, Askenasy was in danger of losing her home. In 2010 she began looking for a way to maximize what she had: real estate.

"The thought of having strangers in my home and garden was never something I was interested in," Askenasy says. Nonetheless, she tentatively turned one room into a space suitable for a visitor and became a host through Airbnb.

Her first guest was a 19-year-old man from Berlin. It went well. Since then, more than 1,200 others have stayed in four separate rooms, each with a separate entrance. Many, Askenasy says, are the visiting parents or grandparents of nearby residents who don't have space for them. Some are travelers with business nearby in the burgeoning Mission Bay. During the summer months especially, more international tourists come and stay.

"I'm here all the time," Askenasy says. "I'm engaged with my guests and giving them a very local experience. They go off and do their thing during the day, but most of the time they're still eating breakfasts and dinners and spending money in the neighborhood."

In the United States, attorneys and regulators have had to shoehorn the new behavior of the sharing economy into existing laws, which are designed mostly to protect parties from one another. Strangers coming together to share property, cars, services, or food tends to give regulators a headache: It's not easy to accommodate public policy and legal rules to these person-to-person transactions.

"Regulations tend to kick in when people are making money on something and may not have safety in mind, or may profit by cutting corners," says Janelle Orsi, cofounder of the Sustainable Economies Law Center in Oakland and the author of Practicing Law in the Sharing Economy. "They're also designed to control a marketplace."

Taking bedrooms off the rental marketplace, for instance, alters the housing stock and affects its market value, Orsi notes. "[Property owners] should expect to pay taxes that allow cities to ... make it desirable for people to [live there]," Orsi says.

Cities around the globe are wrestling with how to regulate these online transactions. In August the National League of Cities announced a network focused entirely on ways to regulate the sharing economy. But forging new law is proving challenging.

That same month in San Francisco, Supervisor Chiu's legislation passed the city's Planning Commission, and then in September it was the subject of a seven-hour public hearing before the Board of Supervisors' Land Use and Economic Development Committee. Building owners and home-sharing advocates, including many Airbnb hosts, offered most of the comments; at the end, there was still no clear answer.

The version of Chiu's legislation that won preliminary approval from the board in early October legalizes and regulates much of what's already going on - people renting out their rooms and homes short term. And it makes San Francisco among the first cities to successfully pull off that legislative feat. In the European Union, Amsterdam and Hamburg have legalized home sharing for short-term rentals. In March, France passed a national law legalizing short-term home rentals; previously, permission from city governments was required. But San Francisco's law takes it a step further and requires hosts (limited to permanent residents) to register with the city before offering their space on a home-sharing platform such as Airbnb. (Portland, Oregon, has a similar ordinance.) Once the legislation takes effect, a property where no host is present during the stay could be rented for a maximum of 90 days per year. And all hosts would have to occupy their home the rest of the year. (VRBO cofounder Carl Shepherd objected to the law's residency requirements; because his company's listings are mostly vacation homes, the homeowners would not qualify.) Tenants living in rent-controlled apartments could only charge guests the equivalent of their unit's rent. Hosts must also carry liability insurance.

Explains Amy Chan, an aide to Chiu: "We know there are really bad actors who are taking properties off the [rental] market and putting residents' [housing] at risk." The legislation is intended to weed out renters who sublet their space nearly full time.

Under the legislation, hosts would have to pay San Francisco's 14 percent hotel tax. (In October, Airbnb began collecting the local tariff through its billing mechanism, similar to its practice in Portland, for example.)

San Francisco's citywide short-term rental property registry is a bigger point of contention for hosts, many of whom do not want their information made public. At the hearing, San Francisco Supervisor Jane Kim asked Airbnb's Owen whether the company might provide the city with a list of its local users.

Owen replied: "There is no other enforcement scheme that the city has in ... its planning ... codes that requires an Internet platform to disclose data about its users proactively, without a subpoena, to the city." The move, he argued, would be akin to asking a shopping website to disclose names of customers who buy plumbing supplies and might be illegally renovating a bathroom.

That's the same issue Airbnb is fighting in New York, where AG Schneiderman subpoenaed the company in May seeking information on people who use the home-sharing site to operate illegal hotels. Less than a week later, Belinda Johnson, Airbnb's general counsel, formally agreed to turn over anonymized information on some 16,000 listings in New York. But when the AG's office came back requesting specific information on 124 suspected violators (many of whom Airbnb says it had already banned), a group of users sued Airbnb to prevent the disclosure. (New Yorkers Making Ends Meet in the Sharing Economy v. Airbnb, Inc., 15852/2014 (New York Sup. Ct. filed Sept. 2, 2014).) Airbnb then announced it would not cooperate with Schneiderman's request. The AG's office, however, pushed forward with its investigation and formed a joint enforcement initiative with the City of New York to shut down illegal hotels in the five boroughs.

The California suit brought by tenants at the Sheldon Hotel alleges that sharing platforms such as Airbnb should be held accountable for the transactions they help to facilitate, which the plaintiffs contend are illegal in San Francisco. It also seeks broad injunctive relief on the ground that Airbnb violates the state's Unfair Competition Law (Cal. Bus. & Prof. Code § § 17200-17210) by advertising the Sheldon - within blocks of Union Square and the theater district - as "a tourist hotel and by unfairly renting residential rooms for tourist and short-term use."

Attorneys Tyson Redenbarger and Mark Hooshmand of the Hooshmand Law Group in San Francisco do business litigation and tenant law and represent the Sheldon plaintiffs. "Airbnb knows that some people believe this is illegal and has some of the law on its website," says Redenbarger. "They take a percentage of the rental. The percentage has a relationship to the property being rented."

Because Airbnb provides additional services - such as facilitating payment transactions, insuring hosts, and photographing the properties - the plaintiffs argue that the company has entered the short-term rental marketplace.

Airbnb did not respond to questions about the lawsuit. But its website does instruct hosts to know and follow all local laws, and it suggests notifying neighbors and landlords about Airbnb guests.

A 2012 appeal involving the website Roommates.com may have relevance. The Ninth Circuit ruled that although the Communications Decency Act made the Internet company immune from liability for comments posted by its users, it is subject to other laws. As the website's name suggests, it matched potential roommates: Participants selected their roommate preferences for a number of different characteristics, including race, gender, sexual orientation, and familial status. A Southern California housing council sued Roommates.com, alleging discrimination under the Federal Housing Act. But ultimately the Ninth Circuit found that the FHA didn't apply - not because the company is an Internet platform, but because the transaction was between two private parties.

"[A] business transaction between a landlord and a tenant," wrote Chief Judge Alex Kozinski, "is quite different from an arrangement between two people sharing the same living space." The court ruled that Congress had not intended the FHA to extend into people sharing living space in a home. (Fair Housing Council of San Fernando v. Roomates.com, LLC, 666 F.3d 1216, 1220 (9th Cir. 2012).)

Another key issue that remains unresolved in the home-sharing economy is that of insurance. Property owners in San Francisco may not be insured for short-term rentals, because typical policies exclude illegal activity. So, if a mishap occurred while a paying guest was present, the owner's policy might not apply.

Airbnb has a section on its website explaining the responsibilities of hosting and helping hosts understand how insurance works. And since 2012 it has provided its hosts up to $1 million in insurance against property damage.

"By and large, safety issues are thankfully incredibly rare," Airbnb's Owen said at the September hearing. "But accidents happen ... and we hear the message that this is a critical issue for regulators.

"I am confident that as ... this market increases, the insurance [industry] will respond," he continued. "We saw that with the ride-sharing companies."

People have begun to do business in the middle ground between commercial activities that are regulated and what they do in their personal lives that generally isn't regulated, notes Orsis of the Sustainable Economies Law Center. "The sharing economy has really unearthed a vast legal gray area," she says.

Consider, for instance, the area between the unregulated hosting of a personal guest, and the highly regulated operation of a commercial hotel; between the weekly dinner party at which ten neighbors pitch in for groceries, and the highly regulated commercial restaurant; or between the informal carpool that collects donations for gas, and the heavily regulated taxi industry.

"This is absolutely something that is brand new and should be interesting," says landlord-tenant expert Moskovitz. "It's resolvable. There is a way to accommodate the legitimate desires between residents and landlords and the city."

Lisa Davis is a freelance writer and author of The Sins of Brother Curtis: A Story of Betrayal, Conviction, and the Mormon Church. She teaches journalism at Santa Clara University.

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Kari Santos

Daily Journal Staff Writer

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