In late October, the Mayor’s Office of San Francisco announced Mayor Lee’s signing of the Short-Term Residential Rentals Ordinance (Ordinance).
The Ordinance regulates users in the sharing economy who rent out their homes to consumers. While drafting the Ordinance, the Board of Supervisors of the City and County of San Francisco found that San Francisco prohibited “hotelization,” the widespread conversion of residential housing to short-term rentals, because the conversions resulted in the loss of housing for permanent residents. The Ordinance carves out an exception to this rule, allowing residents that live in their primary homes in the city to rent them out on a short-term basis. Secondary or vacation homes that do not have permanent residents occupying them are not granted permission.
The Ordinance requires primary residents who want to rent out their homes to obtain permission from the Planning Department by demonstrating that they live in the unit for the majority of the year and carry liability insurance. The permission is good for two years as long as the resident pays transient occupancy taxes and abides by reporting requirements and all applicable laws.
San Francisco’s Office of the Treasurer & Tax Collector lists the following tax and related requirements that apply to all transient occupancy operators:
- Timely file monthly tax and assessment statements;
- Timely send a monthly payment of the transient occupancy taxes and assessments collected;
- Have an approved Transient Occupancy Tax Certificate of Authority issued by the Office of the Treasurer & Tax Collector; and
- Possess valid permits as issued by the San Francisco Police Department, Fire Department, Department of Public Health, and Department of Building Inspection.
The sharing economy
In the announcement, the Mayor’s Office explained that “the sharing economy, also known as collaborative consumption, uses technology and social media to promote the sharing and re-use of underutilized assets such as cars, bikes, tools, rooms, spaces, skills, and other goods. The growth of the sharing economy has been driven by the success of innovative companies and organizations like City CarShare, ZipCar, RelayRides, Airbnb, Getaround, Taskrabbit, Shareable, Vayable, and more, many headquartered in San Francisco and creating a growing number of local jobs and local economic benefits.”
In the short-term rental context, Airbnb, Inc. and HomeAway, Inc. are two major players. Though they operate under different models, both companies have established online marketplaces that enable those seeking short-term rentals to find such accommodations.
In cities like San Francisco and New York, short-term lodging rates can be very expensive. Even more problematic are housing costs that prevent people from living in an urban center. Indeed, as Mayor Lee noted in the announcement, “[n]ow, San Franciscans who just want to share their home with occasional visitors will have a clear set of rules and restrictions to earn extra money to make ends meet and enjoy a better quality of life in our city for themselves and their families.”
The backlash: HomeAway, Inc. sues the City of San Francisco
The HomeAway.com website (HomeAway) declares that it is the world’s number one source for vacation rentals with over one million listings within and outside the United States. The website serves as the online marketplace from which vacationers and others seeking accommodations can browse their options, read other users’ reviews, reserve, and pay for the rental.
Nearly immediately after Mayor Lee signed the Ordinance, HomeAway sued the City of San Francisco in federal court. HomeAway is asking the court to prevent San Francisco from enforcing the Ordinance, and to declare that it violates the Commerce Clause of the United States Constitution.
Revealing that Airbnb played a significant part in the drafting of the Ordinance and political donations to relevant city officials, HomeAway’s complaint alleges that the Ordinance discriminates against non-San Francisco based operators of short-term accommodations by requiring that people who rent out their homes, collect fees, and pay the associated taxes be permanent residents of San Francisco.
A Wall Street Journal blog observed that HomeAway has adopted a business model that centers on supporting the relationship between the provider and user of the rental service, and so does not collect fees or pay taxes itself. In addition, HomeAway is geared toward the rental of vacation and second homes, and not primary homes. Thus, the blog concludes, the Ordinance effectively locks HomeAway out of the San Francisco market because only those who are permanent residents of San Francisco are allowed to rent their properties.
HomeAway alleges that the end result of all of this is a facially discriminatory law which imposes substantial burdens on interstate commerce effectively reducing competition and harming the consumer.