Blame eBay—they started it. Like it or not, we now live in the "sharing economy." Transactions that used to involve corporate “middlemen” have become peer-to-peer interactions powered by the Internet. Traditional retailers must compete with eBay. Taxi and limo companies must compete with Uber and Lyft. Banks and finance companies must compete with peer-to-peer lending and bank sites like Prosper.
Rental and multifamily housing has now jumped on the sharing bandwagon with both feet. The number of people choosing to rent out their living space for short-term stays via Airbnb, VRBO, and other online community marketplaces is exploding. So, too, are the regulations, lawsuits, risks, benefits, and opportunities that accompany this kind of new and sparsely regulated "Wild West” marketplace.
Developers, owners, managers, renters, homeowners, and even homeowner associations must navigate this new economic marketplace being developed.
The Regulatory Environment
Many cities and counties have moved aggressively to regulate, restrain, and tax short-term rental housing, typically defined as a rental of fewer than 30 consecutive days, according to Short-Term Rental Housing Restrictions, a white paper prepared by Robinson and Cole for the National Association of Realtors in 2011.
There are four principal reasons communities regulate short-term rentals:
1. To protect the neighborhood environment;
2. To collect transit occupancy tax revenue;
3. To provide a level playing field for traditional hotels; and
4. To provide for the safety of renters.
Ordinances that have been created to address these concerns run the gamut from outright bans to geographic restraints, as well as operational and occupational requirements, licensing, and taxation.
Horror Stories Prompt Government Action
Horror stories about online short-term rentals are as plentiful as ghost movies at Halloween. Here are a few that might keep property owners up at night.
A California condo owner rented out her unit to a verified Airbnb user for a 44-day stay and received payment for 30 days up front. She encountered issues with the Airbnb guest from the start of his stay but allowed him to remain in her unit for a 30-day period, during which time she remained off-site. Upon attempting to collect payment for the remaining 14 days of their agreement after the 30-day period ended, the condo owner was met with a troubling response from the Airbnb guest. He not only refused to pay; he also refused to vacate the premises. And under California law, once an occupant stays for more than 30 days in a rental unit, that person gains the rights of a tenant.
The condo owner hired a lawyer and turned to the press to bring attention to her predicament. But the resolution (in the form of a legal eviction) didn't occur until nearly two months after the Airbnb guest had been asked to leave the premises.
A holdover guest who gains tenants' rights has the potential to cause even thornier issues for apartment landlords, as their liability extends to every tenant in the building who could potentially be impacted by the actions of the occupant who refuses to leave. What if there's a water leak affecting the unit below and the guest-turned-tenant denies the property manager access to the apartment? This action would render the landlord unable to remedy the situation in a speedy manner.
The inability of the owner to remedy the situation quickly actually happened in another California case. In that instance, an Airbnb guest clogged the toilet in a condo unit, which caused it to overflow and the pipes to back up, resulting in a flood of water that extended all the way out into the hallway, the lobby, and a neighboring condo unit. The property managers were alerted of the situation by other tenants in the building and called in an emergency crew to clean up the water. However, the Airbnb guest didn't inform the condo owner of the severity of the incident, but merely alerted her of the clogged toilet. The owner didn't find out until more than a week later, after the Airbnb guest had left and new ones had arrived and departed as well.
Because other guests had stayed in the unit after the incident happened, the condo owner's claim that she filed with Airbnb under its $1 million host guarantee was denied. Meanwhile, the condo association had been billed $10,000 for the emergency clean-up that was needed as a result of the flooding incident. The situation resulted in the condo association prohibiting all owners in the building from arranging any future rentals of their units via Airbnb.
It's not surprising that communities across the country have reacted—and, in some cases, overreacted—in many different ways to the short-term tenancy market.
In California, many cities have moved to ban or severely restrict short-term rentals. This is especially true in upscale resort communities like Sausalito, Tiburon, Manhattan Beach, Santa Cruz, Napa County, Marin County, West Hollywood, Laguna Beach, and Indian Wells.
Other cities, such as Malibu, have chosen a more moderate path. Following a contentious process in which Malibu city officials threatened to subpoena Airbnb's financial records, short-term rentals were permitted, subject to the owners paying the city’s 12% transit occupancy tax. Airbnb has begun working with other cities throughout the country to collect similar taxes.
Competitor … or Partner?
The Airbnb market has reached all subsets of housing, from single-family homes to condominiums to apartments. In several recent cases, it's even extended to dormitory housing and student housing.
While, typically, the listing party has an ownership interest in the property being rented, that hasn't always been the case.
The multifamily rental market, including lessees of apartment units or single-family residences, are the hidden and silent majority of the short-term housing submarket. Whether as a result of a contractual prohibition on subleases or a desire not to advise an owner or manager that a tenant intends to allow short-term renters to reside in an apartment unit, tenants are not readily advertising their use of the Airbnb market.
For its part, Airbnb readily offers apartment rentals for hosts to rent out, legitimizing this market. The market thus provides an opportunity for a tenant to make the most of their tenancy, including through a short-term rental for a cost that exceeds the monthly rent.
In some limited cases, the market has included tenants renting blocks of units in order to provide short-term lease opportunities, making the rental market profitable indeed for private parties.
No more than two years ago, the multifamily market was heavily opposed to the use of sites such as Airbnb, due to the inherent risks created by having a unit essentially sublet without owner–operator approval. However, developers, owners, and managers have recently begun to recognize that their efforts to limit or outlaw the short-term rental market at their properties may be a losing battle. As with all good business decisions, when one can't beat the competition, the choice then becomes whether to join them instead.
Recently, referring to it as a transparency and control move, Equity Residential indicated that a potential revenue-sharing deal with Airbnb might be on the horizon. Such a transaction would provide for a cut of rentals from Airbnb in exchange for the use of unoccupied units. Reportedly, AvalonBay Communities and Camden Property Trust have discussed similar potential deals.
Such discussions, should they come to fruition, carry a host of considerations. For example, who would the short-term tenant be responsible to if there were a revenue-sharing agreement? Airbnb is the facilitator between a “host” and a “guest” and, thus, the apartment owner or manager would be the host. What occurs when a guest refuses to relocate and becomes a holdover tenant? Will the tenant sign a lease agreement? Will they be responsible for community guidelines?
What happens when a multifamily property becomes essentially a hotel? As indicated above, most cities are enacting taxes on short-term rentals. Considerations must be made to other long-term tenants and the effect that short-term rentals might have on those properties.
What's the wear-and-tear on an apartment unit from a maintenance and repair standpoint? How, and under what terms, are furnishings provided within a unit? Will the insurance normally provided by Airbnb extend to the units provided as part of a short-term rental through a multifamily host? What risks, if any, exist from having an invitee enter into a property without background checks, and what if they injure a long-term tenant or their property?
If you're a nationally based multifamily owner or manager, the regulatory patchwork applicable to short-term rentals may be particularly disconcerting. As some areas begin to ban short-term rentals, the individual owner/renter could fly under the radar for authorities. If national, regional, or state entities enter the short-term rental market, they must ensure the applicability and approval of any short-term rentals in the locations in which they may offer them.
Likewise, if you're a small owner or manager, you must consider individual properties that lack the leveraging power that nationally based companies might have.
While it seems apparent that the multifamily industry has struggled with the sub-Airbnb market, the decision to capitalize and legitimize the market is slowly coming to fruition. Such a decision, however, should only be made upon careful deliberation, weighing both the risks and benefits of doing so. From well-drafted contracts to well-deliberated regulatory analyses, a multifamily party can and should tread carefully—but can reap significant benefits.
Shared short-term rentals are with us to stay, and it's becoming clear that most jurisdictions will eventually opt for a strategy that will allow them to regulate and tax rather than a strategy that will permit them to impose restrictions and bans. As an executive in the multifamily industry, you must decide which strategy is best for you.
You can beat short-term renters by:
• Inserting strong provisions in your lease and or CC&Rs prohibiting short-term rentals. These should include provisions prohibiting tenants from short-term subleasing of rooms in their units, if possible.
• Vigorously monitoring Airbnb, VRBO, and other sharing websites, to detect noncompliance.
• Immediately noticing noncompliant tenants, threatening eviction. Some landlords have opted to pay noncompliant tenants to move, especially when apartments are rent controlled and the landlord wishes to avoid the expense and uncertainty of a trial.
• Remaining wary of block rentals by single individuals or companies, where it is clear they will not be resident occupied.
Or, you can join the short-term rental market by:
• Listing your vacant units on short-term rental websites;
• Making an agreement with your tenants to allow them to list their units, ensuring that they pay additional rental amounts should they do so;
• Reviewing state, county, and local short-term rental laws and ordinances and fully complying with all regulations;
• Keeping meticulous financial records of short-term rentals to comply with transit occupancy tax requirements;
• Carefully analyzing the liability and insurance issues that may arise from engaging in short-term rentals;
• Carefully drafting contracts to limit your liability; and
• Reviewing potential revenue-sharing opportunities with sites such as Airbnb.
No matter how you decide to deal with the new "sharing economy,” understand that it's an area in which laws and regulations that impact the rights of property owners are rapidly changing. Experienced legal representation is essential to navigating these uncharted waters.