Airbnb Under Pressure in New York

Controversy is nothing new to Airbnb. As I discussed before, the alternative hotel startup had to deal with a nasty incident in California. Now comes New York City with a lawsuit against the apartment rental hopeful, calling them “illegal hotels.”

No doubt this action was fueled by State Attorney General Eric Schneiderman’s report called Airbnb in the City. In that 40-page report, Schneiderman pointed out that last year, 4,600 units (primarily Brooklyn and Manhattan) were rented out through Airbnb for a period of at least three months with nearly 2,000 of them occupied this way for six months or more. According to State Senator Liz Krueger, nearly three-quarters of these Airbnb rentals are illegal.

So what’s the problem here? There are three issues. First, these units have not been charging the many New York taxes required for rental units. Of course, the renters haven’t been adding in these taxes because they are not allowed to serve as rental properties. Nevertheless, New York estimates that the past couple years has cost their city treasury more than $33 million.

The second issue is limited hotel rooms. New York, like many other major cities, is enjoying high occupancy rates – at quite high room charges – but there is limited additional supply in the pipeline. High demand is chasing limited supply. Sounds kind of like the airline industry, right?

The third issue is one that New York has talked about as long as I have been alive: How do you have ‘affordable’ housing in one of the most expensive cities in the country? The famed city desires to have these units occupied by residents, not short-term tenants. In addition, some units are rent controlled. Sometimes lease or purchase documents include provisions that they cannot be used for short-term rental. Nevertheless, apartment owners and tenants are doing just that. Hence, why Mayor de Blasio calls them illegal.

In New York’s test case, they were granted a preliminary injunction against two brothers who own a couple buildings in Manhattan. A subsequent release by the mayor’s office said the motivation behind the injunction came from “serious health and safety problems.” What’s not mentioned here is the quandary facing Mayor de Blasio. On the one hand, he wants to shut down these “illegal” operations. On the other hand, the thought of an additional $33 million to pump up the city coffers cannot be ignored.

Stay tuned, this will be interesting. Not only will New York City and Airbnb be working closely on this, virtually all cities where Airbnb operates will be monitoring the outcome closely.