Emerging Trends in Municipal Law: Short Term Rentals – Capitalism; Socialism, or Piracy?

By Steve C. Silvey

 

As we know from what used to be taught in high school history class, the United States is unique in recognizing the existence of both individual rights and certain property rights. Those rights are supposed to be protected by the U.S. Constitution and by the states through the Fourteenth Amendment to the Constitution. What happens when business technology moves faster than socioeconomic, political, or legal regulation? Labeled by some commentators as the Airbnb phenomenon, the drama and answers are being discussed every week in board rooms, cities, and towns around the state and country.1

 

On the street, the scenario looks like this. A person owns a home in a quiet residential neighborhood. Just for ease of description, let’s call that fictional person Suzie. The neighborhood happens to be in a big city attractive to jobs, culture and tourists. Suzie worked hard to buy the house and works harder to keep and protect it. Occasionally Suzie collects the fruits of her labor by sitting and enjoying a quiet sunset on the porch or in her backyard. Suzie is invested in the property and the surrounding community in every sense, financially and emotionally. Although the individual stories may vary, the majority of other owners in the neighborhood are in similar situations.

 

Last year, the house next door changed hands due to a death in the family. The burden of ownership passed to a family member in another location. For ease of description, let’s call that person Bob. His situation is different from Suzie’s and the rest of the neighborhood. Bob cannot afford the house. To make ends meet, he rents the property two or three weekends every month. The twelve-person hot tub on Bob’s deck that overlooks Suzie’s manicured garden is an effective marketing tool for Bob. His internet posting uses pictures of Suzie’s property.

 

Unfortunately for Suzie and the rest of the neighbors, the rotating guests are disruptive, cavalier, and destructive. The local authorities are involved in conversations with Bob about possible non-conforming use. Also, in recent conversations, Suzie asserts that her right to quiet enjoyment is being trampled by Bob. On the other hand, Bob told both Suzie and the city that he can do what he wants with his property. He thinks it is his own rights and those of his transient guests that are being infringed upon.

 

The commotion is exposing a fundamental tension with direct conflict between individual rights, perceptions about property rights and whether government regulation can or should be involved in the discussion. There is also massive disruption due to the speed with which business technology operates and the relatively slower legal and political response. Is the tension from business innovation operating within an appropriate capitalist structure? Is the phenomenon a socioeconomic shift with the corresponding “taking” of some property right? Or is it a more typical legal problem of individuals overreaching, trying to pirate something they haven’t earned or aren’t otherwise entitled to, combined with lax or nonexistent enforcement of established rules by authorities?

 

If, as the saying goes, “all politics are local,” this article discusses the trend in the context of our local municipalities.2 Given that entire careers and books can and are devoted to the topic of property rights, in-depth coverage isn’t provided in that area. Background is provided to identify and narrow the discussion to rapidly changing, local, and municipal events. Answers are ultimately found in who is asking the question.

 

What is Airbnb and why should we care?

Before we look at how Airbnb describes the company and what others say, let’s try to take names or personalities out of the discussion and focus on the intellectual problem rather than the emotional. Deeper academic studies are now following the company with early interest seemingly centered on affordable housing. David Wachsmuth and Alexander Weisler from the School of Urban Planning at McGill University recently published a thoughtful analysis (called the Rent Gap Study).3

 

Alongside the ride sharing company Uber, Airbnb is one of the two leading lights of the so-called “sharing economy,” a contentious concept built on the peer-to-peer exchange of goods and services enabled by recent advances in information technology. The sharing economy has its free-market triumphalist advocates (e.g. Hopkins 2016), as well as liberal-
progressive defenders who view it as an opportunity for destabilizing market-oriented consumerism and individual ownership (e.g. Sundararajan 2016). An emerging line of radical critique, meanwhile, conceptualizes it as a new kind of deregulatory right-wing populism (Morozov 2016; Slee 2016). Airbnb is a short-term housing rental service whose platform connects travelers with hosts. 4

 

From this point, we’ll distinguish the company and use the terms short-term rentals (STR) and the sharing economy.

 

Data provided from the Airbnb website demonstrates that the company is already a juggernaut and market leader in a little over ten years.

 

From an Airbnb press release, Airbnb was [f]ounded in 2008, Airbnb exists to create a world where anyone can belong anywhere, providing healthy travel that is local, authentic, diverse, inclusive and sustainable. Airbnb uniquely leverages technology to economically empower millions of people around the world to unlock and monetize their spaces, passions and talents to become hospitality entrepreneurs. Airbnb’s accommodation marketplace provides access to 6+ million unique places to stay in 100,000+ cities and 191 countries and regions…Airbnb’s people-to-people platform benefits all its stakeholders, including hosts, guests, employees and the communities in which it operates. 5

 

Airbnb hosts more than 6 million listings. That is more room availability than the largest six hotel groups COMBINED.6 At close of calendar year 2018, the company collected over $1 billion in hotel-type taxes for states and municipalities.7 Year-to-date in 2019, it reports collections of total transient occupancy taxes at an astounding level of 68% of all bookings.8 Granted Airbnb doesn’t have any real competition and it is essentially a self-created category, but that is bad news for anyone thinking about trying to lasso the genre.

 

If this data isn’t sufficiently startling, then consider the March 7, 2019 press release. “Airbnb signs agreement to acquire HotelTonight. HotelTonight is a hotel-booking service focused on making last-minute trips easy and fun, offering guests seamless, on-demand booking for boutique and independent hotels...Today, more than 400,000 companies are using Airbnb to help manage their travel, and same day bookings are now growing 2x year over year.” 9 Now they’re buying into the commercial and business travel arena and cornering a market they created.

 

Speaking of creating markets, Professor Robert Shiller from Yale shared his personal experience as an entrepreneur in a New York Times article. He found, and said, that capitalism is our culture. The “spirit of capitalism” is an old concept, but critical. Commenting on our cultural foundations and with reference to a colleague’s book, Professor Shiller said:

 

To sustain [capitalism], laws and institutions are important, but the more fundamental role is played by the basic human spirit of independence and initiative... Professor Phelps discerns a troubling trend in many countries, however, even the United States. He is worried about corporatism, a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society, he says, people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while, he says, but, in the end, it will always be left behind. Only an entrepreneurial culture can lead. 10

 

In a few words about his experience, Professor Shiller synthesizes why we need to pay attention to STRs and the sharing economy. We should remain alert to intrusions, assuring that individual rights aren’t trampled by corporatist (more socialist) elements and our entrepreneurial culture remains in the lead.

 

Property Rights and Zoning

Another facet of the business and legal conflict is Bob’s scenario that was outlined earlier. Bob represents the classic, stereotypical American individual saying “Don’t tread on me.”11 Any government interference is too much. As James Madison wrote, “In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.”12

 

Although certain aspects of that stance are settled, the courts are still wrestling with where the lines are drawn when individual rights collide with property rights and government intervenes in some fashion. What is crystal clear is that the authorities can impose restrictions on both. It remains an everchanging question of how much restriction is legal.

 

Surprisingly, the first true zoning case didn’t reach the U.S. Supreme Court until the 20th century in Village of Euclid v. Ambler Realty.13 The Supreme Court relied heavily on an earlier Illinois case for the ultimate holding, Aurora v. Burns.14 The parameters of the restrictions described are still accurate.

 

‘The constantly increasing density of our urban populations, the multiplying forms of industry and the growing complexity of our civilization make it necessary for the State, either directly or through some public agency by its sanction, to limit individual activities to a greater extent than formerly. With the growth and development of the State, the police power necessarily develops, within reasonable bounds, to meet the changing conditions... The harmless may sometimes be brought within the regulation or prohibition in order to abate or destroy the harmful. The segregation of industries commercial pursuits and dwellings to particular districts in a city, when exercised reasonably, may bear a rational relation to the health, morals, safety and general welfare of the community. The establishment of such districts or zones may, among other things, prevent congestion of population, secure quiet residence districts, expedite local transportation, and facilitate the suppression of disorder, the extinguishment of fires and the enforcement of traffic and sanitary regulations.

...The exclusion of places of business from residential districts is not a declaration that such places are nuisances or that they are to be suppressed as such, but it is a part of the general plan by which the city’s territory is allotted to different uses in order to prevent, or at least to reduce, the congestion, disorder and dangers which often inhere in unregulated municipal development.’15

 

A succinct summary of the dynamic was described by Justice Oliver Wendell Holmes, Jr. in his book of the Common Law.

To accomplish the task, other tools are needed besides logic. It is something to show that the consistency of a system requires a particular result, but it is not all. The life of the law has not been logic, it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious, even the prejudices which judges share with their fellow-men, have had a good deal more to do than the syllogism in determining the rules by which men should be governed. The law …cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. In order to know what it is, we must know what it has been, and what it tends to become. We must alternately consult history and existing theories of legislation. But the most difficult labor will be to understand the combination of the two into new products at every stage. The substance of the law at any given time pretty nearly corresponds, so far as it goes, with what is then understood to be convenient; but its form and machinery, and the degree to which it is able to work out desired results, depend very much upon its past.16

 

Volumes are written about Justice Holmes’ thoughts on individual property rights and government interplay. Summarizing pages of commentary for our purposes here, Holmes viewed law “based on duties and not rights.”17 According to the analysis, “To ‘have’ property in the legal sense is not the ability to use it, but to ‘prevent other men ... from interfering with my use or abuse.’” 18 The term police power was an invention to cover certain acts of the legislature which are seen to be unconstitutional, but which are believed to be necessary. We see the result rationalized in balancing tests still used today as a sliding scale some thought weighted in favor of the government. “On the other side of the balance is private property. At some point, ‘the rights of property would prevail over the other public interest, and the police power would fail.’”19

 

Justice Holmes’ prediction that it is difficult labor trying to understand the combination of history, legislation, and new products remains accurate today. As to what is convenient now, we must recognize the form, machinery and role of
business innovation.

 

Quick refresher on the role of capitalism and innovation

The machinery of capitalism, business purpose, and innovation is directly opposed to the restrictive legal concept. If nature abhors a vacuum, the speed of business technology filling that vacuum in the form of the sharing economy is astounding and the law can’t compete. From the business view, conflicting legislation is illegal, but irrelevant. The sharing economy in the form of STRs already left thoughts of legislation in the dust.

 

On the one extreme is capitalism in a form espoused by Ayn Rand: “If men are to live together in a peaceful, productive, rational society and deal with one another to mutual benefit, they must accept the basic social principle without which no moral or civilized society is possible: the principle of individual rights….Man’s rights can be violated only by the use of physical force.”20 Under that scenario, deprivation of individual rights is tantamount to physical assault and robbery.

 

A more moderate view is found from Columbia University’s Center on Capitalism and Society: “Capitalism is a system of largely private ownership that is open to new ideas, new firms and new owners – in short, to new capital. Capitalism’s rationale to proponents and critics alike has long been recognized to be its dynamism, that is, its innovations and, more subtly, its selectiveness in the innovations it tries out.”21 Posing a similar question to that being discussed here, the Center asks “how does society respond to the social defects and deficiencies of capitalism without choking off capitalism’s potential dynamism?”22

 

Survey of Municipal Codes and Cases

At the federal level, we are beginning to see the sharing economy and the specific topic of STRs find their inevitable way to the courts. The 9th Circuit Court of Appeals struck down a constitutional challenge to Santa Monica’s STR restrictions in HomeAway.com v. City of Santa Monica.23 There the court allowed complete prohibition of unlicensed rentals for a period less than 30 days.

 

Closer to home, the 7th Circuit Court of Appeals recently addressed Chicago’s STR ordinance in Keep Chi. Livable v. City of Chi.24 Although the court declined to address the merits of the Chicago ordinance, finding a lack of standing for any plaintiff, it leaves the trial court ruling intact for the moment that STRs can be restricted in Chicago.

 

At the local level, municipalities are waking up to the STR discussion and responding in typical fashion. Is it a problem for us? If so, can we tax it? Do we have to enforce or protect something? A good example of an appropriate analysis was done by the City of Park Ridge in 2017, along with an Illinois survey and draft ordinance.25 Ultimately the City Council voted against STRs, largely following the Suzie scenario that single family residential meant exactly that. The business of short-term rental was inconsistent with their zoning overlay and thus prohibited. In 2017, the survey revealed that in addition to Park Ridge, twelve surrounding communities were in discussions about, already passed, or declined an ordinance.26

 

Conclusion

To the extent that predictions can be made, we are already seeing evidence of standard rules of legal conduct following business innovation, no matter how fast the technology moves. Citizens and their representatives should remain alert to intrusions, assuring that individual rights aren’t trampled by corporatist (more socialist) elements and our entrepreneurial culture remains in the lead. Suggested solutions for municipal authorities might include taking a balanced business approach. Be innovative. Implement policies reflective of the community. If the community is like Chicago or Evanston, control it and tax it for additional sources of revenue. If the community is like Park Ridge, then enforce and protect the social environment already in place.

 

If the sharing economy means sharing property or property rights that don’t belong to someone in the first instance, eventually the authorities will catch it and either tax it, restrict it, or prohibit it. According to Justice Holmes, the Constitution imposes a duty upon local representatives to prevent others from interfering with individual property rights – whether capitalist, socialist or pirate.


1. Recognizing attribution to the Airbnb company, its brands, trademarks and intellectual property where appropriate. Use here is only intended as commentary and opinion.

2. Quote attributed to former U.S. Senator from Massachusetts and Speaker of the House, Thomas Phillip “Tip” O’Neill Jr.

3. Airbnb and the Rent Gap: Gentrification Through the Sharing Economy, forthcoming in “Environment and Planning A: Economy and Space” David Wachsmuth and Alexander Weisler School of Urban Planning, McGill University, Montreal, Canada

4. Id at pg 4.

5. https://press.airbnb.com/about-us/

6. March 1, 2019. https://press.airbnb.com/airbnb-hosts-share-more-than-six-million-listings-around-the-world/

7. April 15, 2019, https://press.airbnb.com/airbnb-collects-over-1-billion-in-tourism-taxes-in-the-united-states/

8. Id.

9. https://press.airbnb.com/airbnb-signs-agreement-to-acquire-hoteltonight/

10. “Why Innovation is Still Capitalism’s Star”, The New York Times, Robert J. Shiller, August 17, 2013.

11. Col. Gadsen flag, “The Flag of the United States”, Hicks (1918), U.S. Government Printing Office, pg. 23.

12. “Property”, James Madison, National Gazette, March 29, 1792.

13. 272 U.S. 365, 47 S. Ct. 114, 71 L. Ed. 303, 54 A.L.R. 1016 (1926).

14. 319 Ill. 84 (1925).

15. Euclid, 272 U.S. at 392-393, quoting Aurora 319 Ill. at 93-95.

16. Oliver Wendell Holmes, The Common Law, pg. 1 (1881).

17. Legal Theory and Property Jurisprudence of Oliver Wendell Holmes, Jr., And Louis D. Brandeis: An Analysis of Pennsylvania Coal Company v. Mahon, 38 Creighton Law Review 2005, 1179-1202, pg. 1183.

18. Id.

19. Id. at page 1184.

20. Individual Rights | The Ayn Rand Institute https://ari.aynrand.org/issues/government-and-business/individual-rights, from “The Nature of Government”.

21. Columbia University, The Center on Capitalism and Society, https://capitalism.columbia.edu/
theory-capitalism

22. Id.

23. HomeAway.com v. City of Santa Monica, 918 F.3d 676 (9th Cir. 2019)

24. Keep Chi. Livable v. City of Chi., 913 F.3d 618 (7th Cir. 2019).

25. Agenda Cover Memo and attachments, Approve Zoning Amendments and a Registration Program for Short-Term Rentals, April 19, 2017 for April 24, 2017, Park Ridge, Illinois.

26. Arlington Heights, Des Plaines, Evanston, Glenview, Lincolnwood, Morton Grove, Mt. Prospect, Niles, Oak Park, Rosemont, Schaumburg, and Skokie. Evanston and Lincolnwood vacation rental ordinances and Oak Park reported a tax collection agreement in place with Airnbnb.

 

Steve C. Silvey is Of Counsel to the Patterson Law Firm, LLC. A graduate of DePaul University Law School and Certified Litigation Management Professional. Former co-founder and managing partner of a national firm, president of a software company, CEO of a professional development company, and chairman of a non-profit senior center.