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Monday, June 6, 2016

DC Takes Aim at Airbnb, Hits Existing Rental Industry

Regulating the Sharing Economy Could Kill Traditional Small Businesses

Washington, DC’s new regulations on Airbnb and similar businesses could end up killing off old-fashioned bed-and-breakfasts.

The hotel industry and hotel worker unions have lobbied hard for the DC bill. 

Airbnb, the service that allows owners to rent out homes or rooms short term, has been a godsend for many travelers, enabling them to enjoy quality stays in cities where hotels are either too expensive or too seedy. Yet, using homes for short-term rentals does create some problems, which many local governments are seeking to address by regulating this new industry under existing laws that don’t really apply.

Small businesses will have to fundamentally restructure and sell off some properties if the law is passed.One problem is that while most people use Airbnb as it was originally intended — for short-term vacation stays — some renters use the properties for meetings or parties.

For example, one large and opulent property in DC became known as the “celebrity house hunter mansion” after it appeared on the television show Celebrity House Hunting. Its owner regularly rented it out for parties, spurring 14 police visits for excessive noise. The result was a 2015 lawsuit by the city against owner Doug Jefferies for the noise violations and for operating a hospitality business without the required city licenses. Washingtonian magazine reported that “police were dispatched to the house more than 100 times over a nearly one-year period beginning in April 2014.”

This case is an extreme example, but it’s part of a trend of jurisdictions around the country investigating Airbnb properties for breaking local zoning and land-use regulations that make no allowance for small-scale, short-term rentals.

The DC-based R Street Institute, which has graded cities by their friendliness to short-term rentals in its Roomscore index, notes that as short-term rentals have spread across the nation, hotels fearful of losing business to Airbnb “have responded with an at-times vigorous backlash” aided by regulators and lawmakers.

“Opponents have offered a raft of legislative and regulatory proposals to restrict short-term rentals in various ways, such as limiting where they can legally operate, imposing requirements for tax collection and remittance, and enforcing strict licensing regimes,” notes Roomscore. “In some cases, these rules have been added to limitations governing property rentals that already were on the books.”

Regulators may have good intentions, such as preserving peace and quiet in residential neighborhoods. But their attempts at law enforcement can play into the hands of special interests.

In DC, the backlash comes in the form of a bill introduced in the city council that threatens to wipe out much of the home rental business. It requires owners to

  • submit their properties to a full inspection to ensure compliance with fire, health, building, and zoning codes, and ensure that the property complies with Americans with Disabilities Act requirements;
  • send a notification letter to neighbors about their intent to rent out their property;
  • operate the license under their personal name and not through a corporate entity;
  • be present throughout the visitor’s stay; and
  • only advertise through a hosting platform like Airbnb if they have a business license.

Failure to follow these requirements will be a misdemeanor offense punishable by a fine of up to $500 and up to six months in prison. Clearly, this regulation will have a chilling effect on the emerging short-term rental market.

Few properties will be fully compliant, and notification to neighbors may result in pressure on property owners not to follow through with renting their homes. And the requirement that the homeowner be present rules out the chance to earn money while the owner is away on a vacation or business trip.

Worse, the requirements also hurt DC’s existing bed-and-breakfast industry. Many bed-and-breakfast entrepreneurs have either set up a corporate identity or use a management firm to oversee their properties, and many own several properties. These businesses will have to fundamentally restructure and probably sell off some properties if the law is passed.

Cui bono? Incumbent players who have carved out a niche for themselves under existing regulations and feel threatened by the creative disruption unleashed by innovation.

The requirement that the homeowner be present rules out the chance to earn money while the owner is away on a vacation or business trip.

The hotel industry and hotel worker unions have lobbied hard for the DC bill. They want to see short-term rentals regulated in exactly the same way as hotels. “It’s an illegal business model. This is just the same as an old rental business that operated on 3-by-5 cards out of a rental office,” the head of the local hotel workers union told the Washington Post. “This is not some magical high-tech thing that is creating some vast new market that didn’t exist.”

That statement is clearly untrue. Airbnb’s revenue was close to $1 billion last year, while the typical DC Airbnb host brings in just $5,100 a year from property rentals.

As in ridesharing and other aspects of the new economy, the anti-Airbnb backlash is an attempt to shove the square peg of a new market phenomenon into the round hole of regulations written for a different market.

When a similar effort went before San Francisco voters last year, they roundly rejected it. People who rent out property in DC, whether through Airbnb, HomeAway, or Craigslist, should make their voices heard above those of the special interests. At stake are consumer choice and entrepreneurial opportunity.

  • Iain Murray is the Competitive Enterprise Institute's vice president of strategy. For the past decade with the Institute, he has concentrated on financial regulation, employment and immigration regulation and free market environmentalism.

    Murray has published several acclaimed books, including Stealing You Blind: How Government Fatcats Are Getting Rich Off of You and The Really Inconvenient Truths: Seven Environmental Catastrophes Liberals Won’t Tell You About – Because They Helped Cause Them. His op-eds have appeared in The National Review, The Providence Journal and Fox News. He has appeared on Fox News, CNN Headline News, the BBC and Al-Jazeera, among other broadcast networks.

    In addition to his work at CEI, Murray is the visiting fellow at the Adam Smith Institute and board members of the Cherish Freedom Trust and American Friends of the Taxpayers Alliance and advisory board members of Global Britain and Young Britons Foundation.

    Prior to coming to CEI in 2003, Murray was the Director of Research for the Statistical Assessment Service and an Executive Officer in HM Department of Transport. He received his MBA from the University of London and his MA from the University of Oxford.