AirBnB Comes to Town: The new fad in travel is to rent a room in a local's home. The neighbors and the hotel industry were not amused. Then the government got involved.

March 9, 2016


Jennifer Martin-Romme
Zenith News

If any generalizations can be made about AirBnb hosts (or at least the dozen I spoke with), they care about forming a relationship with the people who stay in their homes. One bakes cookies for a late-night arrival. Another leaves notes and treats to comfort the guest who’s in town for a funeral. Most recommend sights or activities not usually marketed to tourists. Some give personal tours of Duluth; others help foreign guests practice English.

Part dot-com wunderkind, part hippie Rainbow Family, AirBnb is a web app that connects short-term rental properties with travelers looking for lodging. (If you’re thinking, “Isn’t that what hotels are for?” we’re getting to that.)

But the AirBnb community—the people worldwide who stay with total strangers and open their homes to total strangers—don’t view themselves as a business. Every host I interviewed believes they are offering a unique experience, not available in the hospitality industry, of staying in a real home and making new friends. Many have at least one former guest with whom they’ve stayed in touch.

Nevertheless, there is money to be made. Listings on range from a couch to crash on for $20, to posh, 10-bedroom second homes renting for upwards of $500 a night. Tenants (or “guests,” as they’re called within the community) might share a kitchen, bathroom, and living space with their landlord (or “host”). Other hosts only rent out their home when they’re not in it, and yet other hosts might not live in the dwelling at all.

Larry Telega’s home, just west of Morgan Park, became unoccupied when he moved in with his girlfriend. Since 2014, he’s rented it, for a few days to a few weeks, to over 100 groups. “People who have stayed at my home say they’ll never go to a hotel again. They like the closeness and the price. It’s easily half the price of a hotel.”

Not to mention the average AirBnb price of $100 a night (usually shared among three to five people) is far more lucrative than the average Duluth rent of $900 a month. “I could have easily just rented my house out on a one-year lease, but that wouldn’t have paid as well.”

Duluth is one of many cities grappling with how to regulate the AirBnb phenomenon. Burnsville banned the practice entirely after a bill failed in the state legislature last year to prohibit all Minnesota cities from banning it.

In 2013, the Duluth Planning Department added a “Vacation Dwelling Unit” category to the Unified Development Chapter—the Bible of local zoning and the approved uses within each type of zone. For example, hotels and motels are only permitted in business districts, to shield the neighborhood from all the noise and the comings and goings. Bed-and-breakfasts can be permitted in an “R1”—the strictest residential zone, but B&Bs must have at least 6/10 of an acre of land to buffer it from the neighbors.

The new Vacation Dwelling Unit category was permitted in R1, but hosts were required to obtain an Interim Use Permit subject to approval by the Planning Commission and the City Council.

This turned out to be hopelessly out-of-touch with the actual AirBnb community, which started in 2008 when CEO Brian Chesky couldn’t afford the lease on his San Francisco apartment, so he began renting out air mattresses on his floor. This is usually a flagrant violation of most standard rental agreements that restrict subletting and limit the number of overnight occupants in accordance with fire and safety codes.

But Chesky didn’t get an eviction notice; he started a trend. AirBnb, Inc. is currently valued at $25.5 billion. The company claims to facilitate five million stays per night in 50,000 cities around the world.

Last June, the City Council imposed a one-year moratorium on new Vacation Dwelling Unit permits, leaving some hosts to carry on as usual, and others unable to operate legally—which is pretty much where things still stand.

Part of each Planning Commission meeting has been devoted to public discussion of a new set of regulations to address the reality that many AirBnb hosts are renting out a part of their own dwelling. These meetings are mostly attended by AirBnb hosts, and by their freaked-out neighbors—who are quite reasonably alarmed at the idea of living next door to whomever you might have crashing on your sofa—and by hoteliers, mostly proprietors of traditional bed-and-breakfasts, who don’t understand why their own establishments are so strictly regulated, while this burgeoning love-fest has been allowed to make tax-free bank with nary a thought of health and safety codes.

Larry Telega attends the Planning meetings and mostly agrees with the idea of regulating short-term rentals—he would even go so far as to deny licensure to owners who live too far away—but, “I suspect [the B&Bs] were trying to hold back our business. It’s speculation on my part, but at least one city councilor just doesn’t like vacation rentals.” Telega declined to name the city councilor.

“What if you met some people from out-of-town,” says Telega, “and they were looking for a place to stay? They seem interesting, so you say, ‘Hey, come stay at my place!’ When should the City get involved in that?”

Second District City Councilor Joel Sipress has a very simple answer: As soon as money starts changing hands. “Under the law, anyone engaged in short-term rental is engaged in sales activity and has to be paying taxes. They have to have inspections...Sure, it is a different product [than hotels], but under the law, it is commercial activity.”

According to Sipress, the number of Vacation Dwelling Unit permit applications ballooned in 2014, prompting the Council to pass the moratorium. “The process we had for vacation rental permits was insufficient for the growth of the industry. Everybody doing AirBnb was, technically, violating the law...To be blunt—we don’t have to allow vacation rentals in residential zones at all. In fact, the burden is on advocates of vacation rentals to make the case that they should be allowed in residential zones, since we don’t allow other commercial activities in residential zones [except for home offices and bed-and-breakfasts].”

David Wade has a summer home in Ely and rents out his Park Point home while he’s gone for the season. He initially obtained a long-term rental license, but soon discovered that short-term, face-to-face renting was more profitable and more fun. “[The guest] usually gets a kitchen. You figure if you’ve got a family, it’s pretty affordable. And it’s more personable.”

While Wade understands the need for regulation, he feels that the City has been unduly influenced by the hospitality industry—namely, the bed-and-breakfasts. “When [the City] came out with this new category, the B&Bs came out in force to stop it. There were people there [at a Planning meeting] from the B&Bs wearing signs that said, “No short-term rentals!” or “STR” in a circle with a line through it. I don’t think we’re stealing their business though. It’s a different market. People who want a hotel experience, they go someplace else.”

All the hosts I interviewed expressed support for regulation (some even had harsh words for those who are ignoring the moratorium and renting without a permit), but most also felt, to one degree or another, that the hospitality industry is just butthurt over what amounts to maybe losing a tiny fraction of their market share. Besides, even if hotels and B&Bs do lose business to AirBnb, capitalism rewards those who build a better mousetrap, right?

But Tim Allen, owner of AG Thomson House Bed and Breakfast and president of the Historic Inns of Duluth trade association, isn’t worried about mousetraps—he’s worried about firetraps. “I want to be very clear: We’re not trying to shut them down. What we’re trying to do is make them get a license, get inspected, and pay taxes. Everyone needs to follow the same rules and, for public safety, they need to be brought up to code.”

Allen emphatically denies that any B&B owners were wearing signs in protest of short-term rentals. “I was there and saw those signs, but I assure you none of them were B&B owners. They were concerned neighbors. It had nothing to do with us. I would not even support that because, technically, I am a short-term rental.”

Eve Graves moved when she got married, and now rents out her former home, catering to outdoor sports enthusiasts whose needs are often not met by traditional lodging—they need more space to clean their gear and they want a safer place than a motel room to leave expensive equipment. At first, her neighbors imagined a revolving door of party animals, who (unlike long-term tenants) wouldn’t even care about mowing the lawn or shoveling the sidewalk. “It’s scary for the neighbors, because it looks like you’re putting in a hotel, but you’re not.

“I reassured them that I screen everyone. I took away anything [that guests] could use outdoors [like lawn furniture]. And if I get one complaint, you’re out. I won’t rent to smokers. If you smoke at all, even off the property, I won’t rent to you. I won’t rent to partiers. If you’re just coming here to see Canal Park, I won’t rent to you...I’ve never had to kick anybody out. If you don’t rent to smokers, you don’t get those kinds of people.”

Graves is entirely within her rights to not rent to smokers, who are not a protected class. However, quite a few of the hosts I spoke with (and many more whose profiles I viewed online) will not rent to families with children and/or are not disability-accessible—both potential violations of the Fair Housing Act.

“That’s an interesting question. It would be a really good exam question,” says Myron Orfield, a law professor at the University of Minnesota with expertise in housing law, who formerly served in the state legislature.

Single-family dwellings and buildings intended to be occupied by up to four families are exempt from the Fair Housing Act, provided the owner lives on the premises. “They had to exempt these mom-and-pop businesses. That was part of the political compromise to get the Fair Housing Act passed in 1968.”

However, Orfield believes the Fair Housing Act does apply to non-owner-occupied short-term rentals—or, in Duluth parlance, Vacation Dwelling Units.
Landlords cannot claim exemption if:
•They own more than three single-family dwellings, including one or more of their own personal residences;
•If they use any type of real estate agent or broker (“I think this would include AirBnb”); or
•If they have “a lot” of rental transactions per year. The exact number of transactions isn’t specified, but the more rental transactions per year, the less likely it’s exempt.

The Fair Housing Act does not apply to hotels and motels. Those are covered by the Minnesota Human Rights Act as “public accommodation,” which prohibits discrimination on the basis of race, color, creed, religion, national origin, sex, disability, and sexual orientation—but not on familial status. So a child-free hotel would be perfectly legal (if perhaps ill-advised from a business standpoint).

Traditional bed-and-breakfasts fall into a slightly different category under state law, depending on the size of the operation and whether the owner lives in the residence (not just on the premises). A smaller B&B might be in the same category as a single-family dwelling, while a larger company might be treated as a hotel.

Most of the AirBnb hosts I spoke with treasure their ability to handpick their guests. Certainly none consider it discrimination, but rather among their strongest arguments that they are good neighbors, responsible hosts, and that relationship-building is at the heart of AirBnb. And yet, the arbitrary nature of their widely varied criteria for sniffing out undesirables—usually based on very limited communication—gives the sense that their attempts to discern good guests amount to little more than reading tea leaves.

Like many dot-coms, quality control relies on a user review system. If a host gets too many complaints, AirBnb can suspend their account. Too many negative reviews of a guest can curtail their chances of finding another host.
You can get a “verified” account by giving AirBnb your phone number, driver license, and a link to your Facebook page—but with no questions asked as to whether you have, say, homeowner’s insurance or a working fire alarm.

After the moratorium, those who’d already obtained a Vacation Dwelling Unit permit were grandfathered in, and the City began sending out cease-and-desist letters to anybody they caught renting without a permit, including any owner-occupied AirBnb—all of which were now illegal.

Tim Allen, Joel Sipress, and City Planning Director Keith Hamre all say the City is closely monitoring and cracking down on unpermitted short-term rentals. Allen is particularly optimistic that this effort is effective. “The City knows where every single one of these things are...Oh, they may think the City doesn’t know where they are, but I’m confident that the City knows.”

Based on my own observations, this is a fantasy. Either the City is not actively looking for scofflaws, or it has absolutely no idea where to find them. I made contact with seven unpermitted, active short-term local hosts within a matter of hours—and those are only the ones who admitted to me that they’re operating without a permit.

Most declined to be interviewed on-the-record, although one agreed to be quoted on condition of anonymity. She lives in one half of a duplex and rents out the other half to help pay the mortgage. For a while, she rented it out on yearly leases, but, like other hosts, she found that short-term rentals were more profitable, less damaging to the property, and far more enjoyable.

She says City officials have given her contradictory information as to whether her situation is legal. She undergoes fire and safety inspections (she provided the most recent as proof), and says she pays all applicable taxes. Yet she can’t get a Vacation Dwelling Unit permit because of the moratorium. “It’s unfortunate that a lot of us want to play by the rules, but the City is not allowing us to.

“If AirBnb isn’t your thing, you’re going to stay at a hotel no matter what. AirBnb people want an authentic experience of the city, and they’re not going to stay in a hotel no matter what. AirBnb is just opening the doors for more people to come to Duluth.”

If the City is trying at all to get a bead on this, they’re probably monitoring and its upmarket cousin, (for “Vacation Rental by Owner,” which is owned by HomeAway, Inc., founded in 2005 and now a publicly-traded company valued at nearly $3 billion).

Almost all my sources rent out their properties through more than one website and/or via offline transactions. In fact, is unpopular because the site blocks email addresses and telephone numbers in private messages (and don’t even think about spelling out the ol’ “two, one, eight,” because they’re onto that, too).

This policy is intended to prevent people from advertising on AirBnb, and then taking things offline for a private transaction in which AirBnb won’t get its three percent cut. The ability to communicate is collateral damage—some of my interview requests resembled charades.

In any case, no host I spoke with is entirely reliant on for business, and some don’t use it at all.

On March 1, the Planning Department rolled out its proposed new rules, which distinguish between “Vacation Dwelling Units,” which are not owner-occupied, and “Home Shares,” which are. Vacation Dwelling Units have more stringent barriers to entry, on the theory that you’re less likely to put the Manson Family in your spare room if you’re in the house too. Vacation Dwelling Units must obtain a Special-Use Permit, subject to approval by the Planning Commission and the City Council. A Home Share is only required to submit some information and pay a $200 application fee. Both will have to pass health, fire, and safety inspections, as well as pay lodging and sales taxes.

The new rules include a third category, “Accessory Vacation Dwelling Unit,” which has not yet been defined. It may include scenarios like renting out a detached garage, or maybe a treehouse (those abound on AirBnb). Mostly it seems like a catch-all way for the City to not get caught with its non-tech-savvy pants around its ankles again.

Under the proposed new rules, Vacation Dwelling Units will have a minimum required stay of two nights and a maximum of 29. Home Shares will have no minimum and a maximum of 30 nights. The maximum is because anything longer requires a standard rental license. The minimum is, as Sipress put it, “to preserve and protect the residential character of the neighborhoods.”

Neither restriction is popular among hosts, especially the two-night minimum. “We’re going to be paying the same tax as the hotels and motels, so why should we have that?” says David Wade.

“Somebody comes up for Grandma’s Marathon, they really only need one night,” says Larry Telega. “I asked Keith Hamre, and he said it would lead to more drinking and partying. I said, ‘Wouldn’t it be worse if they’re drinking and partying for five nights instead of two?’”

In general, most of the hosts I spoke with view the minimum and maximum as a means of insuring that hotels and motels continue to get plenty of one-night business, while precluding 90-day summer-long rentals that might be a niche market for Vacation Dwelling Units.

The Planning Department’s proposed rules will go to the Planning Commission on March 8 to decide whether to forward them on to the City Council. When and if the Council signs off, the moratorium will end.

Melissa Maki and Troy Rogers just bought their first home in the Endion neighborhood last summer. Expenses were more than they anticipated, but they have a large upstairs room they don’t use, so they rented it out on AirBnb. It wasn’t just about the money, though. Maki and Rogers used AirBnb themselves when traveling in Europe and they like the philosophy behind it.

For a few weeks, until the moratorium set in, they shared their kitchen and bathroom—and their lives—with 13 people who either “wouldn’t realistically have been able to come to Duluth because the hotels are too expensive,” or with what they call “conscious travelers,” whose goal is to stay in private homes and experience the city the way locals do. “One was doing a Great Lakes tour,” Rogers says, “and he wanted to stay only with local people everywhere he stopped.”

Now their upstairs room sits empty and money is getting tight again. They’re worried that once the City finally settles on a policy and lifts the moratorium, the licensing requirements will be more than they can afford. “This is not something we’re going into business with,” says Rogers, “and if you make the bar too high, then either people will go underground and do it illegally, or they won’t be able to do it at all.”

Maki and Rogers have attended the Planning meetings, but sometimes find the tone off-putting. “All the stakeholders are involved,” says Maki, “and it’s not always clear who’s referring to what. The comments have gotten very heated. People have brought up that our guests are ‘not the highest level of clientele.’ That really bothered me a lot, because we’ve had very good experiences and met wonderful people.”

One of Joel Sipress’ biggest concerns is the effect on the rental housing market. “We already have a shortage of rental housing...We don’t want vacation rentals to take a chunk of the housing stock. We’re getting signs of exponential growth in this industry. In other cities, vacation rentals have taken over entire city blocks.”

Planning Director Keith Hamre sees it differently. “What prompted [the moratorium] is we had a lot of [short-term renters] asking whether they were in compliance or whether they needed a rental license. We had no license for owner-occupied vacation rentals.

“It’s going to take some units out of the rental market. Is it going to take a lot? Right now, we have 29 of them. I think the perception is that there’s a lot of these, but it’s not a lot. Sixty isn’t even one hotel.

“This is a new product for consumers coming to Duluth. They aren’t staying in a hotel. They aren’t camping. We want to support this, but we also want to make sure that the units are safe.”

Both Sipress and Hamre make good points. Last October, the New York Times reported a glut of absentee landlords buying up properties in Nashville, New Orleans, and Austin, Texas, for the sole purpose of turning them into full-time AirBnbs. They weren’t quite buying up entire city blocks, but the ensuing 24/7 parties have degraded the surrounding property values, and the cities’ attempts at regulation have done little to quell the constant flow of Neighbors-from-Hell.

However, the available research tends to support Hamre’s more optimistic view. A 2015 review of the literature by the University of Chicago Law School found that 86 percent of short-term rentals are owner-occupied, which doesn’t take housing units out of the market.

Fifty-six percent of hosts said they need the extra income in order to pay their rent or mortgage, which the review notes is actually keeping far more people in their homes than it is taking units off the market.

San Francisco—AirBnb’s birthplace and one of its largest hubs in the world—saw a $56 million economic benefit directly attributable to AirBnb in 2014 alone. It allowed more people to visit the city who wouldn’t otherwise be able to afford to, and they spent their dollars—a whopping $43 million—throughout all neighborhoods of the city, not just around the hotel districts.

Airbnb hosts face strong headwinds from a well-funded coalition of landlords and hotel industry insiders, which plans to spend millions of dollars on a public campaign criticizing Airbnb. One large landlord went so far as to consider offering $500 bounties to employees who identify Airbnb hosts in the landlord’s buildings. Amply demonstrating the coalition’s deep political connections, it is spearheaded in New York City by a prominent political consultant who previously served as chief of staff to the New York attorney general, political strategist for the Hotel and Motel Trades Council, and chief strategist for the successful reelection campaign of New York’s governor.
As is typical, incumbent interests have sought to portray Airbnb and its ilk as “evading” established systems of regulation, though this is true only in the sense that the automobile “evaded” the horse tax and saddle regulations.
Because the threat of enforcement actions can have a chilling effect on start-ups and their users, state and local government officials should consider how their actions may affect burgeoning businesses. Officials should
encourage the sharing economy’s growth through collaborative efforts rather than seek to protect incumbent businesses. As Ned Ludd’s followers learned long ago, technological innovation is not easily halted.

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