The Internet is enabling more and more Americans to leverage their biggest asset, their home, by renting rooms to travelers. So why are local governments trying to shut them down?

Early one Saturday morning last fall, Jonathan Hogan awoke to the sounds of banging on his front door followed by voices shouting, “Open up! Open up! We are the police!” Unaccustomed to trouble with the law, Hogan opened his door, and saw a group of five or six men in suits and uniforms standing on his Greenwich Village stoop.

“There was a policeman, three officials from the city, a fireman, and a couple of others that I didn’t recognize,” recalled Hogan. Despite their numbers, the authorities had not come to search for drugs or apprehend a fugitive. Instead, they were there because of an advertisement Hogan had posted on the Internet.

Hogan—who requested that we not use his real name—had recently fallen on hard times. He lost his job as an art vendor during the recession, and with five children, two of whom had recently gone off to college, and a hefty mortgage to pay, he had been left scrambling to make ends meet. The one asset he did possess was his house, which had several spare rooms and an apartment sitting unused in one of the most desirable neighborhoods to visit in Manhattan. At first, he rented them out to friends from Ireland who were passing through the city, but soon he converted them into rental apartments and began to post ads online to draw in lodgers from all over the world.

“I worked hard, gave my guests excellent service and value, and it was just starting to catch on,” Hogan said. His monthly finances were beginning to stabilize, his visitors were gaining access to a cheaper, cozier alternative to a hotel, and the city was drawing in additional tourists who might otherwise have been unable to afford to visit New York and support the local economy. Many of his guests enjoyed their stay enough to write positive reviews on Web sites like TripAdvisor, but with this enhanced reputation came another kind of attention, one that had brought the NYPD to his door.

For more than a year now, New York City has been enforcing a new state law that makes it illegal for homeowners like Hogan to rent out their house or apartment for less than a month. All across the city, police raids have shut down hundreds of similar informal bed-and-breakfast establishments, with nearly 1,900 different violations issued in under twelve months. Often, the fees associated with the citations stretch into tens of thousands of dollars. Hogan was threatened with a $25,000 fine—all for marketing the empty rooms in his house.

Short-term vacation rentals have existed for years with little attempt by local governments to stamp them out. But thanks to the Internet, an industry that was once small and underground has, in a few short years, exploded into a multibillion-dollar worldwide business. Airbnb, an Internet booking engine launched in 2008, connects more than a million renters and hosts in 192 countries. Homeowners, many of them left jobless by the economic downturn, have increasingly turned to the practice as a relatively secure, entrepreneurial way to leverage the value of their most significant asset.

But an opportunity for some can be seen as a threat by others. Short-term vacation rentals like Hogan’s cut into the bottom line of some powerful interests, and those interests are pressing local governments to put a stop to the practice. The dynamics that have led to the crackdown in New York are playing out nationally—and internationally—as governments struggle with how, or whether, to accommodate a burgeoning new vacation rental industry. While some regulation and taxation of this new market is inevitable and necessary, the danger is that we may strangle precisely the kind of small, entrepreneurial markets we should be fostering.

New York City has long been one of the world’s most enticing tourist destinations; more than fifty million visitors arrive annually in the Big Apple to stroll through Central Park and Times Square. But in recent years, the tourist landscape of the city has become a battleground between a powerful, entrenched hotel industry and a decentralized world of entrepreneurial homeowners doing business with short-term renters via the Internet. For much of the past decade, the entrepreneurs flew under the radar, making use of Web sites like Craigslist, sparking a boom in short rentals by tourists wanting to save a buck and have a more intimate vacation. However, with the onset of the recession and a decline in tourism across the board, hotels teamed up with hotel unions and began flexing their muscles and working their connections in city hall and Albany. They also found unlikely political allies among the city’s politically powerful tenant activists—there are more than a million rent-regulated apartments in New York City—who worried that legitimizing vacation rentals would encourage greedy landlords to get rid of their regulated tenants.

With the endorsement of the tenant activists, the hotel industry took its cause to city officials, who, in turn, lobbied Democrats in the state legislature. In 2010 New York passed a law requiring a minimum thirty-day stay for any rental in a residential building—in effect making shorter-term rentals, the bulk of the market, illegal. The law also required health and safety features, like sprinkler systems in each room, that the average homeowner usually doesn’t have and can’t afford. When the law went into effect last May, Mayor Michael Bloomberg’s administration began enforcing it with gusto.

The crackdown in New York is similar to ones happening in several major European cities. Paris, for instance, passed a law in 2005 banning the rental of any residential property for less than a year, and began enforcing that law in 2010. London is now engaging in a wave of enforcement in the run-up to the 2012 Summer Olympics.

Many American cities have long had laws on their books banning short-term rentals. In New Orleans, for instance, rentals must be for a minimum of thirty days—sixty days in the French Quarter. As with many rules in the Big Easy, this one has been neither scrupulously followed nor enforced. But as homeowners have begun to soak up some of the massive tourist demand that floods the city during Mardi Gras and Jazz Fest by offering lodging over the Internet, signs that the local government will soon stop ignoring the phenomenon have begun to appear. Under increasing pressure from hotels and neighborhood associations to crack down, the city has launched a series of law enforcement sweeps to target people renting out multiple units in violation of the law. (This has netted some surprising offenders, like Henry Coaxum, a close associate of Mayor Mitch Landrieu’s who had been renting out rooms in a spare home.) The city has yet to target the average Craigslist advertiser offering up a room in the Vieux Carre, but if pressure from the hotel industry were to continue, those types of rentals could be next to face scrutiny.

Laws against short-term rentals have also long existed in some of the tonier cities in Florida, such as Boca Raton and Del Ray Beach. But similar restrictions have recently spread to other cities in the state, thanks, ironically, to a new state law intended to help individual homeowners take advantage of the Internet-empowered vacation rental market. The law set a date after which municipalities could no longer pass ordinances against short-term rentals. Predictably, a number of cities hurriedly pushed through such ordinances in order to beat the deadline.

Crackdowns against vacation rentals are also happening in other cities across the United States, in part for fiscal reasons: municipalities need the money. Cities like Palm Desert, California, and resort communities in Colorado have recently required short-term rental owners to buy permits and pay taxes, as well as abide by parking, trash, noise, and other ordinances. But these restrictions don’t seem unreasonable. The permits aren’t prohibitively expensive (a few hundred dollars), the taxes aren’t unfair, and unruly guests can legitimately upset neighbors.

Indeed, in a rare instance of an industry asking for more regulation and taxes, a group representing New York’s besieged short-term rental owners is backing a proposed state law that would similarly define, regulate, certify, and tax legitimate vacation rental apartments. In return for legitimacy and freedom from harassment and fines, the group, the Short Term Rental and Hospitality Association (STRAHA), says its members would gladly pay the same occupancy tax that regular hotels pay.

“License us and provide a way for visitors from Europe, South America, and Asia to check legitimate establishments, so that overseas visitors won’t get scammed by criminals pretending to offer accommodations,” said a STRAHA representative. “The scam artists would be driven out and safe vacation apartment rentals would be allowed to prosper.”

The danger of any ordinance restricting commerce is that it will wind up protecting incumbent interests at the expense of new entrants into the market. So even the more reasonable-sounding laws bear watching. But if done right, these lighter rules could ensure that necessary taxes are paid, legitimate neighborhood concerns are respected, and average citizens are free to make use of an untapped, valuable asset: their own homes.

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