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Are Vacation Rentals an Endangered Species?

Say goodbye to vacation rentals in New York City and, possibly, San Francisco. Both cities are targeting the cost-effective hotel alternative: New York through an outright ban, and San Francisco though stepped-up enforcement of an existing law.

First, New York. On July 23, Governor David Paterson signed into law a ban on rentals lasting 30 days or less, effective May 2011. The law did not necessarily intend to punish vacation rental owners and managers per se, but ostensibly to constrain developers who illegally alter their apartments to draw in short-term tenants. The government claims this limits the amount of properties available to permanent residents. The ban does not apply to two-family or single-family homes.

Or, as New York Mayor Michael Bloomberg put it, “When housing designated for permanent occupancy is illegally converted into a hotel, unsafe conditions are created, the residential character of City neighborhoods is harmed and the supply of much-needed units of housing is depleted. The bill provides a clear definition of what constitutes transient and permanent occupancy, which will allow City agencies to issue summonses and initiate other enforcement actions against illegal hotels.”

Which would be fine were it not for the widespread collateral damage caused by the law. The ban prevents individuals from renting out their homes, and wipes out an economical option that is popular among many travelers. And all this comes as hotel rates in New York, already the priciest in the country, are on the rise.

In a letter to Governor Paterson, Steve Kaufer, CEO of our sister site TripAdvisor, laid out the potential consequences of the bill for NYC itself: “At a time when small businesses are struggling to overcome the challenges of a difficult economy and many states are increasingly eager for an influx of tourism, it is surprising to see any legislation that would limit tourism and curtail commerce. Vacation rental properties provide an economic contribution to their neighborhoods and should not be easily dismissed. A ban on rentals lasting less than 30 days could send many vacation rental owners into foreclosure. Who benefits if more people lose their homes and local economies are weakened?”

On the other coast, in San Francisco, the scenario is a bit different. Since 1981, the city has had a very similar law on the books (no rentals less than 30 days), but the ban has gone largely unenforced. But as The Bay Citizen reports, a recent boom in the vacation rental business has drawn the city’s attention and ire. “Obscure city ordinances dating back 30 years are supposed to prevent apartments from being used as short-term vacation rentals without pre-approval from the city,” writes Scott James. “But since 2004, only one unit has received that permission, according to the Department of Building Inspection, which regulates the practice.”

Basically, many of the hundreds of vacation properties available in San Francisco are likely illegal. What this means from a practical standpoint is difficult to say. But as in New York, city officials are concerned about permanent residences disappearing from an already overheated housing market.

The flip side, however, is that vacation rentals are very lucrative for the city. “Instead of enforcing the law and stopping the practice,” James writes, “the city has made money by taxing vacation rentals without checking first to see if they are legal.” Vacation rental income is taxable at the same 14 percent rate charged to hotels, and in total, hotel taxes bring in some $150 million per year. The city’s treasury department even scouts out vacation properties to make sure they are paying the 14 percent tax. But, according to James, it does not share its list of properties with the building department, which is responsible for investigating the properties’ legality.

Impact on Travelers

The reason vacation rentals are so popular these days is because they make a whole lot of economic sense. Nightly rates are often at or below average hotel rates, and vacation properties provide money-saving flexibility thanks to full kitchens, multiple bedrooms and bathrooms, and larger living spaces. For travelers, they are a necessary alternative to expensive hotels and eliminate the need to eat out for every meal. Intangible benefits such as increased privacy or the sense of living like a local are also a draw.

New York’s law, which eliminates these properties entirely, clearly goes too far. Talk about using a saw when you need a scalpel! And since this is New York City, one of the most popular tourist destinations in the world, the precedent is alarming. Cities concerned with the impact of vacation rentals on the local housing market must find a more nuanced approach that allows individuals to responsibly lend their homes to travelers.

Readers, what do you think? Is it fair for cities to wipe out vacation rentals? Are vacation rentals an essential part of the travel industry?

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