The issue of short-term vacation rentals continues to roil California cities large and small, but a major compromise in San Francisco agreed to by Airbnb and HomeAway has ended for now the fighting in the city that has the

As of Jan. 16, all such rentals in San Francisco had to be registered with the city, with permits paid for and transient occupancy taxes regularly paid. Online rental platforms that didn’t sign the settlement will face criminal penalties as well as fines up to $1,000 day if they rent out homes, condos or apartments which didn’t comply with the standards accepted by Airbnb and HomeAway.

Hotels, timeshares, bed-and-breakfasts and homes rented for 30 days or more are not affected.

At least temporarily, the compromise has put a dent in Airbnb business in San Francisco, city officials told the Chronicle. Given that the city is rejecting more than a quarter of applications for various reasons, Airbnb might never have as many listings as its peak number in the unregulated era. Homeowners who only rent infrequently may consider the $250 registration fee too high and the bureaucratic hassles too many.

The compromise was finalized last year after a long court battle that began when the home-share companies sued in U.S. District Court over a restrictive city law that was eventually upheld.

Giant apartment chain loses suit over Airbnb rentals

Airbnb – which was founded in San Francisco in 2008 and remains headquartered there – faces further battles across California.

Recently, it won another federal court case, this time in Los Angeles. It involved a lawsuit filed by Aimco, one of America’s biggest landlords, which owns apartment buildings in 24 California communities from the Bay Area to San Diego, as well as throughout the U.S.

Aimco wanted Airbnb to take responsibility for making sure its tenants didn’t use Airbnb, which is a violation of Aimco’s standard lease. On Dec. 29, the U.S. District Court ruled for Airbnb.

Aimco, a Denver-based corporation, denounced the ruling as a violation of its privacy rights. But it has not yet made clear whether it will appeal the ruling.

Stalemate over rental regulations continues in Los Angeles

While Airbnb has secured a deal in San Francisco, officials in the two largest markets  – Los Angeles and San Diego – have been trying to come up with a consensus for years. Both cities have laws on the books that essentially forbid short-term rentals in most neighborhoods but have only rarely been enforced.

The Los Angeles City Council in October held a public hearing on a proposal to impose relatively strict limits on its 23,000 short-term rentals – in particular a requirement that only the home’s primary owner could list a home, not investors who have proliferated in recent years because of Airbnb and similar companies. But a council committee decided to continue looking at the issue after complaints the rules were either too strong or too weak. There was also criticism of a provision to ban renters of rent-controlled apartments from using platforms like Airbnb.

The San Diego City Council in December couldn’t find a fifth vote on the nine-member board for either a tough ordinance that Airbnb homeowners depicted as potentially devastating or a measure that would have added some limits and used ramped-up city enforcement to target “party houses” that disrupt beach neighborhoods. The city has an estimated 9,000 short-term rentals.

It’s such a widely used strategy that there’s a Nov. 8 statewide initiative (Proposition 54) which attempts to stop it. But while the state’s voters may quash this type of end-run around the hearing process in Sacramento, San Diego residents are watching something slightly different but equally controversial unfold Tuesday.

In her term as City Council president, Sherri Lightner has been unable to strictly limit short-term rental services like Airbnb and HomeAway, which have caused controversy in a number of beachfront San Diego neighborhoods. City officials and residents have been debating the issue for three years and a consensus is emerging to pass a set of rules that regulate STRs, but allow this emerging industry to continue to grow.

With only one month left in her term, Lightner scheduled a last-minute meeting this morning dealing solely with this issue. Instead of letting the compromise get vetted in the normal manner, she’s trying to quickly push through what the San Diego Union-Tribune calls a “simple definition change in the city municipal code.” But as the article’s headline points out, the modest re-wording is “sweeping” and would result in a “ban” on Airbnb and other similar services.

By reclassifying tourists and visitors as transients, the article explains, the new rule would forbid homeowners from renting out their properties for fewer than 30 days in single-family neighborhoods and require a seven-day minimum stay in multifamily zones. If five council members approve this change, then without much public debate, Lightner will have quickly achieved the goal she was unable to achieve in her years on council. That’s what’s reminiscent of the Capitol end-of-session process.

There are a variety of opinions about this new short-term rental industry, which uses web-based applications to connect tourists with homeowners who want to rent out empty rooms or their entire homes for vacation use. Officials in tourist cities across California have been fighting over the proper regulations for it. Because it’s such a new business model, aged municipal codes don’t clearly address STRs, which means they’ve largely been operating in gray areas.

Advocates for the industry say companies like Airbnb and HomeAway boost the tourist industry and help small business owners. They can also help homeowners, struggling to pay the bills in highly priced coastal real-estate markets, bring in income. It’s a property rights issue, according to some observers. Homeowners, they say, should be free to rent out their own properties, provided they follow some basic rules. And tourists enjoy this affordable alternative to the big hotel chains, which sometimes try to use their political clout to stamp out the competition.

Critics complain that these property owners in many cases (especially those who rent out their entire property) are essentially operating hotel businesses in residential neighborhoods and that those neighborhoods often are plagued by late-night partying and loud music. They say STRs harm the character of neighborhoods and reduce rental stock. As Lightner said at a community planning meeting recently, “Given that STR are a visitor accommodation, there clearly are areas where they are permitted and where they are not permitted. The Municipal Code already regulates that. Where STRs are permitted is determined by the zoning of your property. We are going to protect the sanctity of single-family neighborhoods where STRs are not allowed.”

According to published reports, Lightner said she isn’t trying to ban home-sharing (when people rent out a room or two while they are at home), but short-term rental advocates argue the change she is pushing could easily be interpreted by the city to do just that.

Defenders of these rental arrangements say their status is allowed and that critics are trying to ban them without proper legislative deliberation. Furthermore, they say the city should punish “externalities” – e.g., loud music or bad behavior – not largely ban a type of business. San Diego and other cities already deal with long-term renters and homeowners who misbehave on their properties. Proponents of STRs claim it’s wrong to single out property use, rather than, say, loud music or public drunkenness.

Some public-opinion surveys suggest that most San Diego voters want to regulate rather than shut down this innovative new business. The STR industry notes that California’s big coastal cities are on the cutting edge of technological innovation, which would make it out of character to shut down this business model in its infancy, rather than find creative solutions to legitimate problems.

Such bans can also simply drive short-term rentals underground. As long as San Diego neighborhoods are close to the ocean, there will be property owners who find a way to rent their homes to tourists for short stays, they add. Opponents say the answer to scofflaws is more enforcement and fines. If Lightner’s rule change goes into effect, property owners would face $2,500 fines for single infractions and with a maximum of $250,000 in fines per property.

Lightner’s Tuesday morning special council session may bring a new criticism to the process, with some observers arguing that such an important and contentious battle ought to be debated through the normal process, not fast-tracked in a way that short-circuits unfolding efforts to compromise. And they believe a hastily drafted effort to rewrite city code so dramatically is more reminiscent of the controversial dealings in Sacramento than the type of transparent government Lightner promoted throughout her City Hall career. Stay tuned for a contentious council meeting, one way or the other.

Steven Greenhut is Western region director for the R Street Institute. He is based in Sacramento. Write to him at sgreenhut@rstreet.org.

Enter San Francisco, where officials often don’t play by the normal economic rules. No metropolitan area is more closely identified with the burgeoning high-tech economy than the Bay Area. Yet in June, three of the city’s 11 supervisors proposed a 1.5-percent payroll tax that would be imposed specifically on technology companies that earn $1 million in gross receipts.

This “tech tax” was designed to raise money to battle the city’s homeless problem. But the economic rationale was epitomized in a statement by the bill’s author, Supervisor Eric Mar: “The rapid tech boom in our city and region threatens our city’s ability to thrive and prosper,” he said, in a Guardian report. “Five years after the boom, it’s time for San Francisco to ask the tech companies to pay their fair share.”

Earlier this month, the measure that would have placed the tax proposal on a citywide ballot was defeated in committee. Enough San Francisco legislators apparently understand an idea that goes back to Aesop’s day: Strangling a golden goose is a quick route to poverty. But this won’t be the last San Franciscans will hear about such a tax increase, nor is it the only example of increasing hostility by city officials and local activists to the tech industry.

“Corporate buses that Google and other tech companies (use) to ferry their workers from the city to Silicon Valley, 30 or 40 miles to the south, are being targeted by an increasingly assertive guerrilla campaign of disruption,” according to a 2014 Guardian article. Protesters have blocked buses. A window was busted on one of them. As the article put it, protesters complain that “the tech sector has pushed up housing prices in the city and made it all but unaffordable for anyone without a six-figure salary.” The Google buses make it easier for tech workers to live in beautiful San Francisco, rather than in the more mundane San Jose area.

Likewise, San Francisco supervisors recently passed a law that legalizes short-term rentals in the city, but imposes restrictions on them. Property owners can only rent out their entire house 90 days a year. It must be their primary residency. They must pay hotel taxes. They must follow the city’s rent-control laws. The most controversial element: Hosting sites, such as Airbnb and HomeAway, would be responsible for making sure hosts – i.e., the people who post their homes for rent on company sites – are registered with the city. Airbnb filed a lawsuit arguing the law violates the First Amendment and Communications Decency Act. The latter is a 1996 federal law that protects websites from being held accountable for what individuals post on them.

Advocates for the short-term rental law use a similar argument as those who defend the “tech tax” proposal. They blame these rentals for depleting the city’s housing stock and driving up the cost of apartments. “It is ultimately about corporate responsibility,” according to Supervisor David Campos, quoted in the San Francisco Chronicle. “About an industry that has made and continues to make tens of millions of dollars in this line of work taking responsibility for the negative impact that they are having on the housing stock.”

Once again, many San Francisco officials see thriving tech companies as a problem. They blame their success for driving up housings costs. Apparently, the best way to drive down housing costs is to drive businesses – and residents – out of the city. It’s the kind of zero-sum rationale that’s fashionable in San Francisco. Yes, demand drives up costs if – and it’s a big if – supply remains the same. Thanks to strict building restrictions and growth controls throughout the Bay Area, the supply of housing is largely capped.

Within the city of San Francisco, rent control is a staunch disincentive for property owners to rent out their apartments or to invest in the construction of new ones. In essence, a tenant can stay for many years in apartments at below-market rates. Rent increases are capped. Evictions are difficult, thanks to the city’s notoriously pro-tenant rent laws. Over the years, the city has only built a tiny portion of the units needed to keep up with the population growth. The permit process for building anything is costly and cumbersome. Even some state legislators from the Bay Area recognize the need to build more supply, but most proposals are modest or focus on building more subsidized units.

“(O)ver the long run, setting an artificially low price on a product (in this case, apartments) guarantees that the supply of that product will diminish,” explained Peter Byrne in a prescient 2000 San Francisco Weekly article. “Among other things, when people are unable to move – due to excessively high rents – they tend to stay in one place, that is, to hoard their apartments, effectively removing these units from the market.”

Property owners become afraid to rent out their apartments. It’s one thing to rent out an apartment for market-based rents. You can always raise the rent after the lease is up or give tenants notice and move into the building. But in San Francisco, such reasonable behaviors are restricted. As a result, “thousands of units are simply being kept off the market,” according to a 2014 report by KALW. “Some estimate up to 10,000 of these units exist. Many sit unrented because tenants are proving too risky an investment for some property owners.” Tenants can get free attorneys and even tie up legitimate evictions (for nonpayment) in a costly legal process.

By contrast, in the booming city of Tokyo, home prices have been steady for 20 years, according to a new article by Alex Tabarrok for the Foundation for Economic Education. That’s because the city “has a laissez-faire approach to land use.” In 2014, it issued more than 142,000 building permits – far more than the entire number of permits in all of California that year. Yes, even a densely populated city with virtually no vacant land can build its way out of its housing crunch. Keeping supply up also makes it easier to deal with the homeless issue.

The proposed “tech tax” is counterproductive for any number of reasons. “It’s solving a housing crisis by hurting an economy,” said Mark Pincus, founder of Zynga. As Forbes’ Travis Brown reported, “The same innovative individuals who would be paying this 1.5 percent payroll tax already pay 13.3 percent on their earned income (the highest rate in the nation).” San Francisco is a great city, but there are other great cities competing with it for these jobs.

The tax is dead for now, but the same illogical reasoning – and fundamental problem – is alive and well. Why, yes, it might be possible to at least marginally reduce housing prices by chasing jobs and taxpayers away. But is that a road the city wants to travel? Isn’t it far better to try something sensible and create new incentives to create rental properties?

Steven Greenhut is the Western region director for the R Street Institute. He is the founding editor of CalWatchdog. Write to him at sgreenhut@rstreet.org.