The Pain and Gain of the Sharing Economy

When it comes to Airbnb, VRBO and other online community marketplaces in today’s sharing economy, the question for multifamily owners and operators seems to be whether they should beat ’em or join ’em.

The number of people choosing to rent out their living space for short-term stays has exploded and so have the horror stories surrounding this type of rental. One such nightmare is a holdover guest who gains resident rights, which happened to a condo owner in California. Such a situation could cause even thornier issues for apartment landlords, as their liability extends to every resident in the building who could potentially be impacted by the actions of this holdover guest.

Shared short-term rentals are with us to stay, however, and it is becoming clear that most jurisdictions will eventually opt for a strategy that will allow them to regulate and tax rather than a strategy that restricts and bans.

As for developers, owners and managers, the decision to capitalize and legitimize the market is slowly coming to fruition. Such a decision, however, should only proceed with careful deliberation. From well drafted contracts to comprehensive regulatory analysis, a multifamily party can and should tread carefully, but can reap significant benefits.

If you do decide to jump on the sharing bandwagon, there are some questions you need to consider (and then evaluate whether or not the language in your rental agreements addresses them in a satisfactory manner).

Such questions include: Will the insurance applicable from Airbnb extend to the units provided as part of a short term rental through a multifamily unit? What occurs also when a multifamily property becomes essentially a hotel? What occurs when a guest refuses to relocate and becomes a holdover resident? Will the resident sign a lease agreement? Will they be responsible for community guidelines? What risks exist, if any, from having an invitee enter into a property, without background checks, and what if they injure a long term resident or their property? How and under what terms are furnishings provided within a unit? Who would the short term resident be responsible to if you have a “revenue sharing agreement” with a site such as Airbnb?

A multifamily owner may decide to join the community sharing marketplace, either by listing their vacant units on short term rental websites and/or making an agreement with your residents to allow them to list their units in return for a share of the short-term rental income. Before making this decision, you should be sure to do the following:

1. Analyze the liability and insurance issues that may arise from engaging in short-term rentals.
2. Carefully draft contracts to limit your liability.
3. Review state, county and local short-term rental laws and ordinances and fully comply with all regulations.
4. Keep meticulous financial records of short-term rentals to comply with transit occupancy tax requirements.

But if you decide that short-term rentals are not for you, there are some measures you can take to protect your property… and yourself. You should:

1. Be wary of block rentals by single individuals or companies, where it is clear they will not be resident occupied.
2. Vigorously monitor VRBO, Airbnb and other sharing websites to detect noncompliance.
3. Identify and threaten noncompliant residents with eviction.
4. Insert strong provisions in your lease and or CC&R’s prohibiting short-term rentals. These should include provisions prohibiting residents from short term sub leasing of rooms in their units, if possible.

Whether you join ’em or beat ’em is up to you, just make sure you have the know-how (and legal counsel) to navigate this new and sparsely regulated “Wild West” marketplace.

Morgan Stewart is a partner with Manly, Stewart & Finaldi, an Irvine, Calif.-based law firm that specializes in real estate. He devotes his practice to advising national multi-family and commercial real estate clients on legal issues including construction litigation, insurance bad faith, general corporate formation issues, contract negotiation and development, and personal injury. As an emerging leader in the industry, Morgan’s reputation for detailed and thorough counsel has allowed his clients to focus on their core business, while avoiding costly and unnecessary legal action.