The Ruckus over Airbnb: Local Governments Struggle to Control Short-Term Vacation Rentals

Airbnb is presently valued at $30 billion. Not bad for a couple of guys who couldn’t even make their house payment a decade earlier.[1]

Started in 2007, Airbnb was nothing special. A couple of broke San Francisco tenants wanted to subsidize their income by renting out three air mattresses on the floor of their apartment loft, plus breakfast. Turns out that there was a design conference that weekend, and hotel space was tight. These guys created a simple website, found their first three guests, and voila! Airbnb was born. First known as “Air Bed and Breakfast” (because guests stayed on air mattresses), the name was later changed to Airbnb when the company upgraded its image.[2]

It started with a simple concept. Find an event with a shortage of hotel space, and connect attendees with hosts. The company quickly found that there was enormous pent-up demand for affordable short short-term residential rentals. The concept of subletting entire vacation homes as short-term rentals was nothing new. VRBO had been coordinating vacation rentals since 1995.[3] But Airbnb seemed to be on to something different: finding hosts who wanted to rent out part of their own living spaces while they continued living there.

Fast forward to 2016. The Wall Street Journal reports that Airbnb has just completed its most recent round of investment funding at a whopping $850 million, with the company being valued, according to some, at $30 billion.[4]  Airbnb, originally founded in San Francisco, is now suing the city and county that gave birth to it.[5] Homeaway, ostensibly a formidable competitor, joins forces with Airbnb in suing San Francisco to enjoin the city from enforcing ordinances that threaten to squelch the very type of short-term rental business that has made Homeaway and Airbnb the vacation rental titans they have become.

What’s going on? And what went wrong?

The short answer is “Capitalism.” In high demand markets, landlords make more money from short-term rentals than from long ones. Plus, tenants can earn income by renting out part of their living spaces.

Unfortunately, the same factors that benefit landlords can sometimes harm tenants, neighborhoods or communities.[6] Municipalities that have considered the issue of short term rentals in residential areas have found three major negative impacts:

  1. Decreased Local Housing Stock. Apartments that might otherwise rent for two, three or four thousand dollars a month can command prices of $200 or more per night. As a result, landlords with vacant apartments sometimes opt to forego long-term tenants in favor of short short-term rentals. Some municipalities have expressed serious concerns about housing stock being converted to short-term rentals.
  2. Decreased Housing Stability. In some instances landlords have evicted long long-term tenants so that their units can be converted to short short-term rentals.
  3. Negative Neighborhood Impacts. Short Short-term rental tenants may lack the stability of long long-term tenants. And some neighbors find that short short-term rental properties become “party houses” with excessive noise and activity.

Responses worldwide have been varied. Some municipalities have adopted ordinances that welcome short short-term rentals with “open arms.” Others have levied big fines.[7] Some, like San Jose, have adopted ordinances that allow the municipality to collect taxes that would otherwise be lost.[8] Some have taken a “middle road” approach by capping the number of short short-term rental days per unit per year. In some of these cases, a landlord (or a tenant) can have an unlimited number of short short-term rental days if such rental is “clearly incidental to the occupancy of the dwelling unit” by a family.[9] The benefit of this approach is that it allows an owner or tenant to subsidize their income through short term rentals. It increases the available short short-term rental stock, but it does not cause displacement of long long-term occupants in favor of short short-term renters.

Between 1981 and 2014, San Francisco banned short short-term rentals for fear of losing important housing stock.[10] Since February of 2015, San Francisco has allowed residents to “rent out their residential units on a short-term basis if they register their units with the City, which assigns the unit a registration number and lists it on a City-run registry.”[11] However, only about 25% of San Francisco short short-term rentals complied with this registration requirement. [12]

On June 24, 2016 San Francisco adopted an ordinance which required “hosting platforms” (such as Airbnb) to ensure that every property listed was registered with San Francisco. Violators were subject to fines up to $1,000 per day plus criminal liability.
Airbnb thereafter filed suit in federal District Court and sought to enjoin San Francisco from enforcing the ordinance. Airbnb claimed that San Francisco seeks to hold Airbnb liable for the online content of persons who list properties for short short-term rental without registration. (The federal Communications Decency Act provides important immunities to online content providers for content uploaded by third persons).

In denying the motion of Airbnb for injunction, the District Court found that the ordinance doesn’t seek to hold Airbnb liable for content uploaded by landlords, but instead makes platform hosts (like Airbnb) liable for charging and collecting a fee in connection with booking reservations for unregistered postings.

The suit isn’t over. San Francisco looks like it may be in scoring position – for now. But it’s clear these issues won’t be going away anytime soon.


Robert Jacobs
Robert B. Jacobs
mediates real estate, business and construction disputes. He has practiced law in the Bay Area for 28 years. He holds an AV rating from Martindale-Hubbell.

[1] http://www.businessinsider.com/how-airbnb-was-founded-a-visual-history-2016-2/#it-started-with-an-email-joe-gebbia-sent-his-roommate-brian-chesky-an-idea-what-if-they-made-a-designers-bed-and-breakfast-complete-with-a-sleeping-mat-and-breakfast-it-was-a-way-to-make-a-few-bucks-almost-nine-years-later-that-idea-is-worth-25-billion-1; http://www.wsj.com/articles/airbnb-raises-850-million-at-30-billion-valuation-1474569670
[2] Id.
[3] http://tugbbs.com/forums/index.php?threads/vrbo-homeaway-announcement.35409/
[4] http://www.wsj.com/articles/airbnb-raises-850-million-at-30-billion-valuation-1474569670
[5] See Airbnb v. City and County of San Francisco, filed on June 27, 2016, United States District Court for the Northern District of California, case number 3:16-cv-03615
[6] http://money.cnn.com/2016/06/22/technology/airbnb-regulations
[7] https://www.theguardian.com/travel/2014/jul/08/airbnb-legal-troubles-what-are-the-issues
[8] See City of San Jose City Council Memorandum at http://sanjoseca.gov/DocumentCenter/View/37954
[9] See City of San Jose Ordinance 29523 http://www.sanjoseca.gov/DocumentCenter/View/38486
[10] See Order Re Preliminary Injunction, entered November 8, 2016, Case No. 3:16-cv-03615, supra
[11] See page 3 of the Complaint in Case No. 3:16-cv-03615, supra
[12] See Order Re Preliminary Injunction, supra at page 3

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