Is Airbnb an Illegal Hotel? How New York Law Makes It So and What Can be Done

Monday, March 6th, 2017 at 5:00 pm, by Alec Smith

In October, New York Governor Andrew Cuomo signed a bill that imposes substantial fines for advertising home rentals in violation of New York City law. Currently New York City short-term rental laws make it illegal for homeowners living in multi-family dwellings to rent out their whole apartment for periods of less than 30 days. However, over the past few years during the rise of self-listing sites such as Airbnb, New York state and city authorities have avoided enforcing the law due to the legal grey area surrounding the question of who is liable for its violation. The most recent New York law makes clear that hosts who post illegal listings on sites such as Airbnb will be subject to fines of up to $7,500 per violation. Airbnb initially sued under the Communications Decency Act, a federal law that states websites cannot be held liable for the content published by their users, but has since dropped the lawsuit after the state clarified that only hosts would be subject to fines.

So what does this mean for the legal and economic landscape of New York City? Most obviously, it means that hosts, rather than the firms, will bear the legal and financial burdens of the law. Airbnb’s focus has mostly been on short-term rentals to tourists, vacationers, and travelers from tenants or property owners who either have spare rooms or are away. Thus, those New Yorkers who used sites like Airbnb to supplement their income while traveling for work or vacation will lose out on those opportunities in the future. Additionally, Airbnb will likely suffer, as New York City is the firm’s largest US market, providing over $1 billion in revenue last year. With fewer hosts to provide the short-term listings upon which their platform is largely based, Airbnb should expect to see those revenues decline in the coming years. Less obvious will be the law’s impact on hotel prices. Airbnb is much more akin to a hotel competitor than a long-term apartment or home rental agency. Over the past few years, hotels have decried Airbnb as unfair competition that has undercut their market and forced them to lower their room prices. Travelers and tourists, as well as property owners, should therefore expect to suffer under the recent New York law due to rebounding hotel prices likely to result once all short-term listings disappear from sites like Airbnb.

State officials argue that the law is focused on ridding New York of multi-property owners who were taking advantage of sites like Airbnb to generate income from their second or third properties by running “illegal hotels.” These multi-owners were effectively taking listings off the market, which was artificially raising property values and rents throughout the city and reducing the amount of affordable housing. However, these State officials misunderstand the business model of Airbnb. Airbnb’s focus has been on single listings of property owners who either have spare rooms, which the law won’t effect, or who are gone for some period of time and would like to earn income from their vacant property. It was never based on the creation of effectively illegal hotels run by multiple property owners. In fact, the firm has stated such and has even removed 3,000 “commercial” operators from its listings. Airbnb also promises to continue to crack down on hosts with multiple listings. Thus, New Yorkers should expect little, if any, impact on apartment availability or affordability from this most recent law.

In short the law will accomplish little of its stated goal since Airbnb has been effectively self-policing the issue already, but will instead harm both the residents of and visitors to New York. The question then is, is there a better means of policing Airbnb?

Alternatively, the New York state legislature might have proposed legislation that allows short-term rentals but subjects property owners that list on sites like Airbnb for fewer than 30 days to the same hospitality tax paid by hotels. Further, the legislation could have increased the tax-rate for “multi-listers,” or flat out banned multi-listing within New York City. In terms of fairness, hotels and property owners would be on an even regulatory playing field in such a scenario. But at the same time, the statue would strongly discourage or flatly prevent “illegal hotels” that unfairly compete with traditional hotels. In legal terms, New York property owners would not be faced with substantial liability for taking advantage of a financially beneficial service. In economic terms, New York residents and visitors under this proposed legislation would continue to enjoy the benefits of short-term listing sites like Airbnb.

Additionally, it is still likely that even with the hospitality tax New York property owners would be able to list at lower prices than standard hotels because they don’t face the same initial investment costs or costs of providing the many amenities hotels traditionally offer. Thus, residents would still be able to continue to fill their listings with visitors who would benefit from lower costs of stay than they would if only left with hotels to choose from. Moreover, the penalty or bar on multi-listing should cause a decline in illegal multi-listing and any remaining unlived-in properties should return to the market, which in turn should increase apartment availability and affordability for residents. Furthermore, Airbnb would benefit from continuing to have a large number of short-term listings on their site. Finally, even hotels would benefit from this legislation as the hospitality tax would raise the prices of Airbnb listings so the competitive pressure on them to lower their prices would decrease. And the legislation would prevent individuals from effectively operating as hotels. The competition hotels would face would be less direct. This proposed legislation would best balance the interests of all the parties involved rather than benefit the larger corporations that have the resources to lobby and litigate at the expense of the individuals who do not.