Features

Airbnb's Battle for New York


Airbnb's Battle for New York

Photograph by Getty Images

These days, when Ken Podziba answers his phone and it’s a stranger on the other line, he has a pretty good idea of what they’re calling about before they start talking. The owner of an eight-unit apartment building in Manhattan, Podziba is search-engine famous in New York for how he dealt with a tenant who sublet her apartment via Airbnb, and he frequently hears from other owners, landlords, and building supervisors who suspect they have a tenant doing the same. If something goes wrong—a party breaks out, somebody gets robbed, the cops show up, someone slips and falls—it’s not the tenant, or some sharing-economy guru in Silicon Valley, who’s going to be held responsible. It will be the owner’s problem. That’s why at the first hint of Airbnb usage, Podziba explains, “I tell them to do what I did: Get surveillance cameras. Hire a private investigator. And do the necessary steps to get them out.”

Podziba doesn’t fit the caricature of a ruthless New York landlord. By day, the former New York City sports commissioner runs Bike New York, a nonprofit that provides safety training and organizes citywide bike tours. He also manages the five-story, red-brick building he inherited from his father on Elizabeth Street, a short walk from Katz’s, the famous deli where Meg Ryan faked an orgasm in When Harry Met Sally. It’s in his capacity as a building owner that Podziba has found himself on a collision course with one of the world’s hottest startups.

In 2008 a pair of recent graduates from the Rhode Island School of Design, along with a former Microsoft (MSFT) engineer, launched Airbnb, a company that allows people to hop on its website, create a profile, and then rent out their spare bedrooms or entire homes. Since its inception (very first offering: a single air mattress on the floor of a San Francisco apartment), Airbnb has grown into a global hospitality brand with more than 600,000 listings in 34,000 cities and 190 countries. The company, which makes money by charging guests and hosts a percentage of each rental transaction, closed on a $450 million, late-stage round of investment in April that values it at $10 billion. The company’s investors include Y Combinator, Sequoia Capital, and Andreessen Horowitz (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz).

Airbnb is near the front of a pack of startups with dizzying valuations that facilitate the so-called sharing economy. Essentially, they make it easier for people to connect with other people to monetize their stuff, from their homes to their labor (TaskRabbit), vehicles (Lyft, Uber), and parking spaces (ParkPlease, Parking Panda). Airbnb has proven to be particularly popular in New York, which has emerged as the company’s largest market as well as its most turbulent.

“Airbnb is making money while letting people do whatever they want. It’s crazy”

Last summer, Podziba heard from his building’s superintendent that one of his tenants appeared to be frequently subletting her apartment. Every few nights a new set of occupants was seen coming and going from the third-floor unit. Podziba says he was concerned about safety. He didn’t want a bunch of people he hadn’t vetted constantly passing through the building. There was no doorman on-site to intervene if something should go wrong.

At first Podziba didn’t know what to do. He did some research and learned that legislators in Albany had passed a law in 2010 explicitly prohibiting residents in multiunit dwellings such as his from renting out their apartments for less than 30 days, unless they were present. So not only was his tenant apparently violating her lease, which prohibited commercial use of the apartment, she also appeared to be breaking the law. Podziba contacted the Mayor’s Office of Special Enforcement to register a complaint. To his surprise, the regulatory agency informed him that in New York, the hefty fines for short-term rental violations aren’t levied against guests or hosts. They’re levied against building owners.

After consulting with his lawyer, Podziba installed a surveillance camera to gather evidence, capturing the arrival and departure of all the luggage-toting visitors. He then hired a private investigator, who jumped on Airbnb and booked a stay in the tenant’s apartment. According to Podziba, his tenant—who was paying him $1,400 a month for the rent-controlled one-bedroom—was charging $220 to $260 a night to Airbnb guests. Podziba sent an e-mail to Airbnb, explaining how the renegade tenant was breaking various laws on his property and requesting that Airbnb remove her illegal listings. Airbnb e-mailed back a terse response: “As a platform, we do not arbitrate disputes between our users and third parties.”

After a long and expensive struggle, Podziba got rid of his Airbnb-loving tenant, but he continues to harbor a strong grudge against the company—which has created a system that directly affects his property and yet will not accept his feedback at any level. “Airbnb is making money while letting people do whatever they want,” says Podziba. “It’s crazy.”
 
 
In July 2013, having been brushed off by Airbnb, Podziba vented his frustration to the New York Post, which published a juicy story alleging the tenant had made $500,000 from her apartment over four years while living with her husband in a New Jersey suburb. And so the story became just another iteration of an emergent tabloid genre, Airbnb noir: apartment-sharing mishaps, disputes, and horror stories. As the city enters the summer’s high tourist season, the drama is heating up. Neighbors are morphing into informants, and tourists into contraband, as city officials conduct raids to root out stowaway Swedes and bootleg Bulgarians.

Airbnb founders (from left) Joe Gebbia, Brian Chesky, and Nathan BlecharczykPhotograph by Jake StangelAirbnb founders (from left) Joe Gebbia, Brian Chesky, and Nathan Blecharczyk

These stories get hyped by those rooting for Airbnb to take its place alongside Pets.com and Myspace in the pantheon of startup flameouts. But despite the occasional high-profile disaster, a great number of Airbnb users rate the service highly and would like to see the company solve its current problems in New York. (Airbnb has an overall 4.1 out of 5 rating in Apple’s (AAPL) App Store.)

Ryan Geist, a self-employed marketing consultant, uses Airbnb to sublet a one-bedroom apartment on Manhattan’s Lower East Side when he and his girlfriend are out of town. Geist says he loves Airbnb and has no sympathy for the hotel industry, which lately has been bemoaning the loss of business to DIY hoteliers such as Geist. “F-‍-‍- the hotels,” he says. Geist is more sensitive to the concerns of longtime New York residents. “It’s their home,” he says. “Now their neighbor is never here. Now it’s all these people with suitcases. But the rent is so high, what are we supposed to do? We choose to engage in this community of sharing.”

In February, Ashton Kutcher, the Hollywood actor and co-founder of venture capital fund A-Grade Investments, appeared on Jimmy Kimmel Live! to explain to millions of viewers why Airbnb and other peer-to-peer startups are running into problems in cities like New York. Kutcher, who is an investor in Airbnb and Uber, broke down the complex issues in simple terms. “It’s a Mafioso village mentality of ‘we’re not going to let the new guy come in,’ ” said Kutcher.

The company has been quietly digging into its venture capital war chest to finance an all-out public-relations, advertising, and lobbying campaign to overwhelm its opponents in New York. Airbnb hired Paul Weiss, a corporate law firm, to fight on the company’s behalf with New York Attorney General Eric Schneiderman, who is taking a hard look at Airbnb’s business practices. The company is paying $120,000 a year to Bolton-St. Johns, a lobbying firm, to advance its agenda in the statehouse in Albany, according to public records. And it hired Risa Heller Communications, a politically connected PR firm, to shape Airbnb’s message in the local press.

Airbnb Chief Executive Officer Brian Chesky recently told Yahoo!’s (YHOO) Katie Couric that these political skirmishes are “a huge risk for the company if we can’t manage it. But I’m incredibly confident that we can. I believe the best things for cities will prevail.”

In March, Airbnb paid $10,000 to sponsor “Brooklyn Night”—an annual reception, at which the Brooklyn Chamber of Commerce plies a roomful of lawmakers in Albany with Brooklyn delicacies. According to Kantar Media, Airbnb spent $176,000 on ad space in the New York local market in 2013, up from $8,000 a year earlier. In December the company ran its first major national ad campaign, featuring dozens of Airbnb properties rendered as wholesome little birdhouses. In June, Airbnb launched an ad campaign in New York featuring local Airbnb hosts testifying on behalf of the company. In the first TV spot, a mom named Carol cooks pancakes for her Airbnb guests.

“I’m sure you’ll see more advertising in the future,” says David Hantman, Airbnb’s head of global public policy. Until recently, Hantman, a former chief of staff to U.S. Senator Charles Schumer (D-N.Y.), was based in Washington. With the regulatory fight over Airbnb’s future materializing in New York, rather than on Capitol Hill, Hantman is relocating to Manhattan. “As people try and gin up opposition, there is obviously more of a robust public debate. We are going to engage in that debate.” The company’s efforts are getting an assist from the Peers Foundation, a nonprofit co-founded by an Airbnb employee, that aims to be something akin to the National Rifle Association for the sharing economy. According to the group’s baffling manifesto, “Together, we are economic powerhouses, not just of money-making but meaning-making. We respect the hustle of hard work and the humility of deep connection.” The group’s website features a petition, with 234,755 signatures, protesting New York’s “poorly written” law and calling for the state to “legalize sharing.”

New York City landlord PodzibaPhotograph by Ross Mantle for Bloomberg BusinessweekNew York City landlord Podziba

Hantman says Airbnb is currently focused on trying to amend the 2010 state law to allow New Yorkers to rent out their apartments for less than 30 days, without being present, if the home is their primary or secondary residence. “Our belief is that if you are renting out a home in which you actually live, there should not be a law against it,” he says.

Airbnb’s current peer-to-peer rental model already works well and generates little community friction in much of the country, where people live in detached or semi-detached houses. But critics point out that in New York City the majority of renters and owners live in multiunit buildings—and that those buildings, whether rentals, condominiums, or co-ops, by and large tend to prohibit commercial use of individual units. Thus even if Airbnb succeeds at amending the 2010 state law, a large number of Airbnb hosts in New York would still be breaking legally binding restrictions.

Hantman says he’s aware of the issue. “The first step is to change the law,” he says. “The second step is to work with landlords and co-op boards so they understand that this activity is beneficial. We know that landlords and buildings are split. Culture changes. We’re confident, over time, that more and more buildings will be accepting of this activity.”

There are two bills pending in Albany that if passed would amend the state law in favor of Airbnb’s interests. The bills face intense resistance, however, from a vocal and diverse coalition of New York constituents, including affordable housing groups and hotel labor unions.

While the legislative battle inches forward, Airbnb has taken to publicly shaming New York for being so hostile to its hosts. “The history of New York is one of the most welcoming histories of any city in the world,” says Hantman. “And yet, what we’ve experienced over the last couple of years, is that other key cities—Hamburg, Paris, Amsterdam—have all been moving faster in the direction of allowing people to do this. It confuses us, quite frankly.”
 
 
That confusion demonstrates a failing of peer-to-peer services: They’ve proven remarkably effective at creating trust and collaborative consumption between two parties. Yet they tend to exclude the concerns of third parties, no matter how much they may be directly impacted by the transaction. In the sharing economy, two is a party. Three is a syntax error.

Nick Grossman, of Union Square Ventures, who has studied peer-to-peer networks as a visiting scholar at Massachusetts Institute of Technology, credits Airbnb’s rapid growth in large part to its effective reputation management system. After every Airbnb stay, each guest is encouraged to fill out a review of the host, and vice versa. The reviews are attached to the user’s profile and accumulate over time, creating incentive for both parties to be on their best behavior. “Airbnb built a system that allows a profound amount of trust between strangers,” says Grossman. “It’s clearly working for the people who are directly participating.”

Not everyone, actually: Only the guest and host get to review each other. There’s no way for a neighbor or a co-op board to participate in the post-transactional reviews, nor is there any incentive for guests and hosts to be mindful of their needs. That’s proven to be a systemic shortcoming in New York, where almost every real estate transaction involves a vested third party. The only way for the building owners and managers to be heard is to voice their displeasure to elected officials, lawyers, social media, and tabloids.

In October, CEO Chesky announced that Airbnb would be rolling out a “24/7 Neighbor Hotline” in New York, where neighbors and landlords could provide feedback on Airbnb users. Eight months later the hotline is still not up and running. Hantman says the company remains committed to the idea, but there are ongoing logistical challenges with making the pilot program work.

Grossman believes that over time, peer-to-peer businesses may adapt to better incorporate feedback from affected third parties. “They’ve developed these amazing and inventive schemes for developing trust and safety among users,” he says. “Now the next step is to add another constituency. How do you extend the ring of trust and reward hosts not just for being good to their guests but also for being good to their neighbors—and how do you reward the neighbors for being welcoming of this new idea? It’s an interesting challenge.”

Sam Hamadeh, founder and CEO of PrivCo, an agency that analyzes privately held companies, points out that Airbnb doesn’t own any of its rental properties. That means the company must sustain loyal participation from its hosts, a group that is coming under increasing pressure from hostile third parties not just in New York, but in a growing number of other urban communities, including San Francisco, Paris, Barcelona, and Berlin.

“The problem is that there are so many regulatory, legal, liability, and safety issues involved,” says Hamadeh. “They are going to have to fight city by city. That’s very tough to do. It’s going to be a slog. Even if you win one city, you have to keep going.”
 
 
On a Wednesday evening in May, Hantman is standing in a Manhattan auditorium, doing a town hall meeting with a hundred or so agitated Airbnb hosts. The mood is reminiscent of an airport lounge a few hours into a long and maddening delay. “What’s going to happen to us?” shouts one man. Hantman waits for the din to subside. “We’re on the same side!” says Hantman. “We’re fighting for you.”

Earlier that day, Airbnb shared some unfortunate news with the sharing economy. After months of legal skirmishing with Attorney General Schneiderman, who has asserted that much of the activity facilitated by the site is illegal, the company agreed to turn over a large batch of potentially incriminating data about its New York users. It would do so under the condition that certain identifying details such as names and addresses would be redacted, at least initially. But in the months ahead, if Schneiderman requests more specific information, the company has agreed to provide it, potentially exposing thousands of apartment sharers to legal repercussions. “It’s important to remember that this is not our ideal outcome,” says Hantman. “This is not what we were hoping for.”

There’s a good chance, Hantman tells the roomful of worked-up New York hosts, that the state is only interested in cracking down on Airbnb’s most voluminous users—people brokering dozens of short-term rentals, often in multiple units in the same building. Hantman concedes, however, that he’s not entirely certain what will happen. “We’re not the attorney general,” he says. “I don’t know what he’s after.” (Schneiderman declined an interview request for this article.)

The Airbnb hosts look less than reassured. “Are you prepared to share any of the pain with us?” asks an anxious-looking young man named Josh. “When the attorney general gets our information, I’m sure he’s not just going to send us Christmas cards.”

The crowd applauds. Hantman nods. “We’ve been working so hard just to try and protect the hosts,” says Hantman. “I haven’t slept in a week.”
 
The Airbnb host responds, “I’m not sleeping much either.”

Gillette_190
Gillette is a staff writer for Bloomberg Businessweek in New York.
Kolhatkar_190
Kolhatkar is a features editor and national correspondent for Bloomberg Businessweek. Follow her on Twitter @Sheelahk.

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