Cities cracking down on Airbnb and other home-sharing models are really just obstructing opportunities for people to serve the market demand and make some money.
May 13, 2019
By: Bobby Casey, Managing Director GWP
A little over four years ago, Ross Ulbricht was convicted of money laundering, computer hacking, conspiracy to traffic fraudulent identity documents, and conspiracy to traffic narcotics via the internet. He was sentenced to two consecutive life sentences plus forty years.
The one charge that has a victim tied to it is computer hacking, which is tantamount to breaking and entering. Otherwise, he just hid where his money came from, talked to someone about fraudulent identity documents, and talked to someone about bringing in narcotics.
He made a lot of money facilitating a virtual free market. Successful free markets are a direct threat to the U.S. government, precisely because they are successful without giving the government a cut.
They want the fees for the identity documents.
They want to traffic the drugs.
They want to see what’s on the computers.
They want to know where you got your money.
Silk Road was a famous example, but plenty of people try to find ways to hustle and get shut down. Last week I discussed the economic impact of state level licensure laws. The same impact can be seen on those who wish to help the indigent.
The government wants to have a monopoly on charitable works and welfare. So someone feeding the homeless gets shut down.
I see a lot of ads on Facebook about various business opportunities. Everything from real estate flipping, to making a living at blogging, to micro funding, to workshops on how to conduct workshops are all there.
I’m impressed with how many new niche jobs, gigs, and hacks people have come up with to start generating income!
One such business model takes Airbnb to the next level. The abridged version is you take out a bunch of leases and then sublet short stays through Airbnb. This especially makes sense in high demand markets like New York City.
Sounds like a great gig, right? Legitimate. Some risk, but great earning potential. Certainly, so long as the landlord is agreeable, there’s nothing wrong with it… right?
Stop right there. Did you ask the city what THEY think about it?
Here are five cities where Airbnb is unwelcome:
Los Angeles: Starting July 2019, you will only be allowed to host from a residence where you reside six months or more; and they may only host a maximum of 120 nights per year. They have to register the properties they use for hosting with the city as well.
New York City: Permanent residents may host 30 days or fewer per year. The hosts must be in the house, and they cannot host at more than one property at a time. The city requires Airbnb to submit a list of hosts and their addresses to their “Office of Special Enforcement” every month to track the activity.
Santa Monica: Like NYC, only permanent residents can host a maximum of 31 days per year, and must be present in the house when doing so. Hosts must register for a business license and assess the 14% occupancy tax on their rentals.
Las Vegas: Only permanent residents may host and must be present during the stay. They must obtain a business license which has to be renewed every six months as well as carry liability insurance of $500,000. Also:
- Short-term rentals can’t have more than three bedrooms (those with more have to pay a whopping $1,000 registration fee)
- No new Airbnb rental can be within 660 feet from any other existing listing
- The city limits overnight guests to 12 or fewer per home or apartment
- Hosts must register with tax authorities, collect taxes from guests, and remit them to the city and county
San Francisco: This battle has been raging for a while. Host must live in that property for 275 days or more per year, and be present when hosting. They cannot have multiple listings, nor can they host more than 90 days per year.
They must register with the city’s Treasurer and Tax Collector as a business entity as well as with the Office of Short-Term Rentals for a certificate valid for 2 years. Of course, San Francisco also requires the 14% occupancy tax be assessed on all stays.
The sad truth is, people support this kind of ridiculous legislation and vilify Airbnb for contributing to housing shortages. It’s entirely false, but politicians are absolutely winning in the narrative game.
Two major cases where people made millions off the Airbnb model are in San Francisco and New York City.
Darren and Valerie Lee turned 14 San Francisco apartment units into short term rental properties. They own and/or manage 17 apartment building in the city which collectively have more than 45 units between them.
This isn’t the model where they leased only to sublease on Airbnb. Instead this is their own properties!
They didn’t even bother with a trial, and instead just settled to pay the $2.25 million in penalties to the city of San Francisco.
While San Francisco maintains Airbnb is the culprit behind their housing shortage, I’ve yet to make the connection between the $2.5 million in fines and a solution to the housing crisis.
This is the most recent and notorious example of ILLEGAL HOSTING! (You should be scared of this because of my capital letters and the word “illegal”.)
Metropolitan Property Group (MPG) (“along with a number of associated entities and people“), operated 130 short-term rentals throughout the city.
“All in all, the city claims that MPG is responsible for almost 13,700 illegal short-term rental reservations, which generated a total of approximately $21 million in revenue from 2015 to 2018, and deceiving almost 76,000 guests who booked their accommodations through Airbnb.
“The city also claims that MPG and its operators went so far as to create 18 additional corporate entities for the purposes of skirting Airbnb’s rules and the city’s laws.”
Deceiving guests? Really? The guests paid for accommodation and got it. There was no deception. No one was ripped off by this, by the way.
What interests me is the “18 additional corporate entities”. This network of corporations are facing charges from the city of New York, no question about that. What will the final sentence or penalties look like?
The couple in San Francisco were personally hit with over $2 million in penalties. But what will the individuals involved in the New York case be hit with? Will their corporate structures prove to protect their individual wealth in this case?
If nothing else, this will prove to be a very strong defense for corporate structuring.
In the end, the limited supply and high real estate demand in markets like New York, San Francisco, Las Vegas, Los Angeles, and Santa Monica affect both the residential sector as well as the tourist industry.
The supply is finite, made so in large part by city and state ordinances and protocols. Short and long term industries are vying for the same real estate. The solution isn’t to vilify one or the other. The solution is simply MORE real estate.
Policies like rent control, long wait times for permits, and zoning laws make it virtually impossible to meet the real estate demands of a given market. Limited supply and exceedingly high demand is what drives prices up, but to put that squarely on the shoulders of short-term leasing is dishonest.
These heavy regulations on Airbnb and other homesharing business models are just cities looking for a scapegoat and a cut of the take.
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