The Airbnb Ordinance Isn’t Working

 

Less than 5 percent of Airbnb hosts have registered and are paying taxes, and many are undoubtedly illegal; here’s why.

My wife and I could be the postercouple for Airbnb. We mostly use Airbnb when we travel because we prefer a local feel to a hotel. After buying our house, we became hosts ourselves to meet people and help the family pocketbook. Renting a spare bedroom is not the expressway to the Louis Vuitton life, but it does cover a little under half our monthly mortgage and factored into our decision to become homeowners.

According to Airbnb’s surveys of its members, we are not atypical. Half of Airbnb hosts say the platform has helped them afford their home; in some cities like Los Angeles, up to one-quarter of hosts say Airbnb saved them from foreclosure or eviction. Airbnb can help hosts make ends meet but, for most hosts, it’s not a full-time job and generates only a few thousand dollars a year: again, according to Airbnb corporate, “the typical US host earns the equivalent of a 14-percent annual raise.” Because Airbnb is cheaper than a typical hotel, it is also a boon to visitors. Cheaper housing means many visitors stay longer and spend more on their Sacramento experience, which benefits the larger economy.

In the past few years, Airbnb usage has blossomed in Sacramento. Whereas in 2013 there were fewer than 50 Airbnb units, today there are several hundred. A Brookings Institution study found that the Sacramento metro region experienced one of the largest growths in room-sharing. And, according to a 2015 study by a hotel market analysis firms, Sacramento is one of the top ten U.S. markets for Airbnb revenue as a percent of hotel rooms revenue – meaning Airbnb is providing accommodations for a growing percentage of our city’s short-term visitors.

But not everything is unicorns and rainbows in the new home-sharing economy. There are convincing reports coming out of America’s tourist meccas – e.g. New York, San Francisco, and Los Angeles – that some landlords are evicting tenants and converting long-term rental housing into more profitable, short-term Airbnb rentals. In those cities, the net effect is an affordable housing double-whammy: fewer affordable rental units overall and higher rents for everyone else as supply decreases but demand remains the same. More later on how Airbnb impacts the Sacramento market, but suffice to say that the “hotelization” of long-term rental units should be a policy concern in a city that (dubiously) boasts the fastest growing rent market in the nation.

The Airbnb Ordinance

For much of 2015 the City of Sacramento wrestled with what to do with Airbnb. Existing Airbnb units were all illegal, city staff concluded, because they were effectively bed and breakfasts operating in residential areas without a conditional use permit. Some members of the public wanted an outright Airbnb ban. It could hurt the rental market and transient guests might make bad neighbors that hurt residential quality of life. On the flip side, Airbnb contributes to the local economy and is an important source of income for many residents.

In January 2016, the city council adopted an ordinance that admirably attempted to thread this needle. It legalized Airbnb but subjected homeowners to the same 12% tax imposed on hotels. At the same time, the council capped the maximum number of days an off-site homeowner can rent out their property on Airbnb to deter the conversion of long-term rentals.

In a little more detail, under the ordinance a homeowner:

• must register annually with the city;
• must post a copy of their permit inside the unit and include their permit number on all rental ads;
• must pay a 12% tax on the rent received;
• cannot rent to more than 6 persons at a time; and,
• cannot rent out their house for more than 90 days per year unless they also live there (in which case there is no maximum).

To address neighborhood nuisance concerns, the ordinance also provides notice to neighbors who live within 200 feet of an Airbnb unit, prohibits homeowners from hosting weddings and conferences, and creates a process for the city to revoke a permit if the unit becomes a source of noise complaints or otherwise falls out of compliance with the law.

Swing… and a Miss

So, with 2016 now for the history books, how is the ordinance doing? The answer is… not good.

I made a public records request with the city to find out how many Airbnb units had registered in 2016. As of December 31, 2016, about a year since the short-term rental ordinance was enacted by the city council, a grand total of 13 hosts have registered their units with the city. The applications of another 10 hosts were pending, which, assuming they get approved, will raise the total to 23 registered hosts.

Any way you slice it, that is a tiny fraction of the total population of Sacramento Airbnb hosts. In November 2015, then-City Manager John Shirey estimated there were 170 Airbnb hosts in Sacramento, which would still mean only about one of every ten hosts has registered. But Shirey’s denominator is almost certainly too low, probably even then and certainly now. If you search the Airbnb website for a room in Sacramento, it reports that there are presently “300+” units. AirDNA, by far the most comprehensive and most cited public resource on Airbnb listings, reports that there were 340 active hosts in Sacramento in the past 30 days.

To get the most accurate picture possible, I contacted AirDNA and they agreed to share their historical listings data for Sacramento with me. According to their data, in 2016 there were 496 hosts who, for at least one day in that year, listed 678 properties in Sacramento.

That means less than 5 percent of Airbnb hosts registered their units with the city. Yikes.

 Mo Listings, Mo Problems

The low number of registered listings is a big problem for just about everyone, except maybe Airbnb. For the city, it means hundreds of thousands of dollars in lost revenue. According to the city, those 23 registered (or registration pending) hosts generated $4,050 in registration fees and $17,500 in taxes for the city. If every host were registered, it would generate at least a few hundred thousand extra dollars in city revenue per year. AirDNA’s upper-end estimate of Airbnb host revenue for 2016 was just under $5 million, so a safe assumption is that the city is losing about $300,000 to $600,000 in taxes per year due to low registration.

For registered hosts (we few, we happy few), the low registration rate means our units are either less competitive or less profitable than they would be if compliance was higher. Airbnb’s platform creates a perfectly efficient market for rental units. If I raise my rates to pass along the city’s tax but the rest of the market does not (because they are not paying it!), the rational renter will skip my listing for a better-priced (and equivalently attractive) alternative. Effectively, to stay competitive and to comply with the law means I need to swallow the tax: consider it a 12% penalty for following the law. Perversely, from a policy standpoint, this means the city is strongly disincentivizing compliance.

Illegal hosts are at-risk, too, but they likely don’t know it. As I’ll touch on more below, most hosts are probably unaware they have to register their units – after all, they wouldn’t have to in 99% of cities in the United States. Yet, failing to register can subject them up to a ridiculous 6 month stint in county jail and a $25,000-per-day fine. Overcriminalization, thy name is the Airbnb ordinance.

No Effect on Long-Term Rentals… Yet

Finally, while not a problem in Sacramento yet, continued lax enforcement of the ordinance could in the long-term displace rental housing.

When measuring displacement, the big question is whether an Airbnb listing is a brand new addition to the rental market or whether it is the result of a long-term rental unit being converted to a short-term one. For example, if someone takes an empty spare bedroom and puts it on Airbnb, the long-term rental market is unaffected: no units were added or lost. However, if a landlord takes an apartment building with yearlong residents, evicts them, and converts it to a daily rental property on Airbnb, the number of long-term rentals have shrunk. If supply is significantly reduced, the ripple effect is that everyone’s rents go up.

There is no data on how an Airbnb unit was used prior to being listed. However, two factors can be used to estimate the number of “commercial units” commonly thought to contribute to displacement. First, is the Airbnb listing for a private room or shared room (like a living room) inside someone’s home, which are not usually part of the long-term rental market, or is the entire place being rented? Second, is the listing being rented out for more than 6 months out of the year? If the listing is being rented less than 6 months a year, the homeowner would probably make more renting it year-round to a long-term tenant. Assuming an economically rational homeowner, this suggests the listing is not available 365 days a year. For example, the listing may be a second home or even the homeowner’s primary residence which they only put on Airbnb while they are on vacation.

An analysis by the statistics blog FiveThirtyEight.com found that, outside your Los Angeleses and San Franciscos, “Airbnb’s impact is probably still small in most cities” because they have a miniscule number of commercial listings. That certainly seems to be the case in Sacramento. According to AirDNA’s data, there were only 39 “entire place” listings that were booked for more than 6 months in Sacramento in 2016. That is equivalent to 0.04% of the 88,353 long-term rental units in Sacramento – not enough to seriously affect the market.

But, that does not mean this cannot change. Since 2012, the number of Airbnb units has been doubling each year in Sacramento. Currently half of the active listings are entire place listings. And, according to AirDNA data, 111 entire place listings were rented out for more than 3 months in 2016, potentially in violation of the anti-displacement provisions of the city’s ordinance.

Sacramento Airbnb Listings

Source: AirDNA

Explaining the Registration Gap

So, why are so few people registered? There are a few issues here, but it mainly boils down to the fact that the city is treating Airbnb hosts like they are sophisticated business owners, which they most definitely are not. To legally run an Airbnb, a homeowner must first separately file for two permits: a business license tax application ($50) and a short term rental application permit ($125). Then, the homeowner must calculate a 12% transit occupancy tax (TOT) on all receipts and file a monthly accounting and payment to the city.

Most Airbnb hosts probably have no idea how to do this, because they have never done so before and no one has explained it to them. Again, most Airbnb hosts are renting rooms out as a side-gig. They have full-time jobs and have never run a small business. For most, I’d wager, it has never even occurred to them that they need to register their units. As far as I can remember, for example, Airbnbnever emailed me as a host to tell me that, in Sacramento, I needed to register with the city and pay taxes to use their platform.

And the city does not make it easy, either. If you search for “Airbnb” in the city’s website search bar, you get four results, none of which indicate that a registration and tax requirement have been adopted. Unless someone already knows the correct terms of art for running an Airbnb (e.g. “business operations tax account,” “short-term vacation rental”) I doubt they would successfully navigate the city’s labyrinthian website to find the webpage explaining the legal requirements.

Legally, ignorance of the law is no excuse. But, if we are trying to craft successful public policy, the ordinance needs to account for the background and capacity of the regulated community.

  ♪♪ “How do you solve a problem like… low short-term rental housing unit registration?” ♪♪

It’s time for Sacramento to re-examine its Airbnb ordinance, or at the least the implementation of that ordinance. The current approach is destined for failure, or a draconian city crackdown. Luckily, the city does not need to reinvent the wheel. Drawing inspiration from other cities, here are five changes the city could adopt to fine-tune its ordinance.

(1) Require Airbnb collect the hotel tax. The city cannot hope to attain a 100% registration rate if it places the onus of registration on the 500+ mostly mom-and-pop Airbnb hosts. Expecting hundreds of people to register their units and then send in monthly paper reports on their rental activity is not only unrealistic, it’s inefficient. There’s an obvious, better solution. Have Airbnb automatically collect the tax. Airbnb alone knows who all the Airbnb users are in the city. And Airbnb is already collecting a percentage surcharge (its fee) on every listing. Having Airbnb collect the tax would mean 100% coverage, less work for the city, and less work for hosts.

And this is not a novel solution. Airbnb already collects and remits local taxes in over a dozen cities and counties just in California. If it can be done for Palm Desert (pop. 50k), it can be done for Sacramento (pop. 480k).

(2) Eliminate the permit requirement for people who rent under 90 days. If Airbnb can be made to collect and remit the tax, there is no longer a reason for the city to require hosts to register. It’s a useless bureaucratic exercise that most hosts are bound to mess up, as they currently are. Arguably, it may make sense to require the 45% of hosts who rent more than 3 months a year to register, if only to have them certify that they live in the unit (and thus are not bound by the 90-day rental cap). This is what Philadelphia does, sparing more casual hosts from added paperwork.

But, as explained next, if Airbnb can be entrusted with self-policing even this might be unnecessary.

(3) Require Airbnb to remove entire place listings that are rented for more than 90 days in a calendar year. Airbnb hosts are required to indicate whether they are listing a private room on the site, or an entire place. By definition, a host is not present when an entire place is listed. Thus, Airbnb already has the data to know which hosts are violating the city’s 90 day cap. Airbnb has boasted that it has removed hundreds of listings in other cities that violate local laws; it should be asked to do the same here.

(4) Earmark the Airbnb tax towards making Sacramento more affordable for all residents. The tax on Airbnb units is pure, additional revenue for the city, most of which (9% of that 12%) goes straight into the general fund and can be spent for any purpose. Given fears that Airbnb may contribute to Sacramento’s growing unaffordability, directing those dollars towards mitigating that possibility makes sense. Airbnb tax money will always be just a drop in the bucket compared to the city’s nearly half-billion dollar general fund, but it could give a big boost to the city’s underfunded affordable housing trust fund or to help finance Mayor Steinberg’s goal of 2,000 permanent housing units for the homeless.

(5) Decriminalize Airbnb listing errors. Finally, the ordinance needs to be amended to remove the threat of jail time and ludicrous fines on hosts who violate the ordinance. A person who fails to pay a $125 rental unit registration fee should not be sharing a jail cell with someone who physically harmed another human being. America has a massive overcriminalization problem, with over a million people in jail or prison who pose no public safety risk – let’s not add to it. Although it’s probable that few illegal hosts will be heading to the clink anytime soon, allowing the city or prosecutors to use the threat of incarceration to coerce lopsided plea deals is itself an abuse of our judicial system.