Airbnb Update: San Francisco Legalizes Airbnb

  • San Francisco legalizes Airbnb, imposes hotel tax on Airbnb's hosts.
  • Airbnb is facing legal challenges in other cities like New York and Barcelona
  • The company is likely to use this legislation as a model to negotiate with other jurisdictions.

Airbnblogo

Airbnb became legal in San Francisco, its home town, as the city’s Board of Supervisors passed a law to regulate peer to peer accommodation services like Airbnb. Airbnb, which was valued at $10 billion in the latest round of funding, welcomed the legislation.

In our recent post on Airbnb IPO valuation, we noted that Airbnb's business model faces major legal threats. The new law solves most of Airbnb’s legal problems in San Francisco and also increases the probability of other cities legalizing Airbnb and its ilk. This is a big boost for Airbnb as legality of its listings was the biggest threat faced by Airbnb. On the other hand, the new law will lead to increase in total expenditure by the guests and also make a sizable minority of listings illegal. While the immediate impact of legislation may lead to decline in total listings, in long run the number of listings on Airbnb may see a rise as the legislation clears the air around Airbnb’s legality issues.

The new law lifts the city’s ban on residential rentals of less than thirty days, a law intended to keep landlords from turning apartments into hotels and accentuating San Francisco’ already serious housing problem. Had the city not lifted the ban, most of the listings on Airbnb would have been illegal creating an existential threat for Airbnb, at least in San Francisco. Airbnb has run afoul with many cities’ local rental laws including New York and Barcelona. While city of Barcelona fined Airbnb more than $34,000, the New York attorney general has started an investigation into illegal listings on Airbnb.

There are around 5,000 Airbnb listings in San Francisco, around 10,000 in Barcelona and around 20,000 in New York. Together the three cities add up to around 35,000 listings, around 5%-6% of Airbnb’s total listings. These cities are huge tourist attraction and have potential to contribute a large chunk of Airbnb revenues.

Airbnb_listings

Source: Whimsley

The new legislation allows only permanent residents to host guests. The legislation also caps number of listings to one per host. The legislation allows non-hosted rentals for a period of 90 days during the year. There is no such restriction on hosted rentals.  

A study conducted by San Francisco Chronicle found that about a third of the 5000 total listings came from people who list more than one property. These listings would become illegal once the law come into force. The study also found that more than half the listings in San Francisco were full apartments of which a sizable number were rented throughout the year, which is not allowed by the new legislation. This will lead to significant decline in total listings in San Francisco. While legislation requires Airbnb to collect 14% hotel tax from next year, the company had already started collecting taxes from beginning of this month. The imposition of hotel tax may push up the total cost for the guests. The Board estimates that imposition of hotel tax on Airbnb listings will lead to an inflow of $11 million into city coffers every year. Considering that hotel tax is at 14%, the total rental accruing to hosts in San Francisco adds to $ 80 million. The revenues accruing to Airbnb from San Francisco totals to around $10 million.

On the positive side, harsher sections of the legislation including a demand that Airbnb pay back tax amounting to $25 million were not passed. The legislation also makes the hosts responsible for abiding by the law. The hosts are required to file a declaration stating that they have listed only one property and they do not rent out entire house or apartments for more than 90 days.

The legislation is a big victory for Airbnb. While the legislation may lead to decline in listings, it removes the existential threat previously faced by Airbnb. Airbnb is also working with other cities to pass legislations, which make Airbnb listings legal.

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