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New York Is Standing Between Airbnb and an IPO

New York Is Standing Between Airbnb and an IPO

(Bloomberg Businessweek) -- Airbnb Inc. is used to mostly coming out on top. Despite fierce opposition from traditional hoteliers, the home-rental startup has negotiated regulations that have allowed it to operate in more than 500 cities, from San Francisco to Tokyo. Now the company, last privately valued at $31 billion, is gearing up to go public. But it’s hit a wall in New York City, where the rules are stricter and Airbnb’s often aggressive tactics appear to have backfired.

The city forbids short-term rentals of most entire apartments—exactly the arrangement of greatest value to Airbnb and the people, known as hosts, who use its platform to rent their homes. New York boosted its budget to hunt down these illegal listings to about $8 million this year, a tenfold increase in four years, according to documents from the city’s Office of Special Enforcement viewed by Bloomberg Businessweek. The city has subpoenaed Airbnb for the addresses of more than 17,000 hosts it says are operating illegal rentals. And talks between Airbnb’s chief negotiator and his principal adversary have been at a standstill for years.

New York Is Standing Between Airbnb and an IPO

Investors want Airbnb to sort things out with New York before it goes public in 2020, according to three people familiar with the discussions who spoke on condition of anonymity because the matter is private. The company is working hard to come to terms with the city, one of them says. Failure could cast doubt on Airbnb’s valuation and also lead other cities to tighten laws or otherwise push to renegotiate terms on which companies like Airbnb do business. Airbnb confirmed its intention to go public next year in a statement released after this story was published Thursday.

“The more legal Airbnb can be, the more confident investors will be in the IPO. New York is obviously a kind of bellwether market for them,” says Andrew Rasiej, chairman emeritus of New York Tech Alliance, a nonprofit industry advocacy group. “They are doing all they can to legalize.”

Airbnb is still pushing for changes that would open the market, but with its listing looming, it’s willing to compromise on regulation, such as agreeing to a ban in rent-controlled buildings. Airbnb’s global head of policy, Chris Lehane, says the company will outlive its opponents to eventually succeed in New York. “Who’s going to be around the longest?” he asks. “New York is a marathon and not a sprint. We will ultimately get across the finish line.” Lehane says New York is no longer as important to Airbnb’s bottom line, given that it represents only 1% of revenue.

Airbnb has been at odds with New York for almost its entire existence. A 2010 amendment to the city’s Multiple Dwelling Law prohibits entire apartments from being rented for fewer than 30 days without a tenant present, meaning legal short-term rentals are limited to one- and two-family homes or spare bedrooms. It’s one of the strictest regulations in the U.S., but that hasn’t stopped some 55,000 listings from proliferating across the city, generating about $70 million of the $5 billion global annual revenue expected this year, according to a person familiar with the situation. Many people who rent out units are probably unaware they’re doing so illegally.

In 2015, when the company hired Lehane, who’d worked in the White House Counsel’s Office under Bill Clinton and later became known in Washington as a master of hard-nosed opposition research, it signaled Airbnb’s desire to go on the offensive. Airbnb ran attack ads against New York politicians who pushed to further restrict the company. It organized protesters to swarm City Hall, where posters were handed out depicting its political opponents under a “Wanted” sign.

Lehane’s principal opponent isn’t a lawmaker but a powerful union head: Peter Ward, who runs the New York Hotel & Motel Trades Council. Ward has worked in the hotel union his entire life, starting out as a teenage dues collector and rising through the ranks. Opposition researchers working for Airbnb dug into Ward’s background, according to people familiar with the matter, and leaked documents to the New York Daily News about his four homes and $440,000 annual salary. Ward says the debate had been focused on policy until Airbnb made it personal. “They threatened elected officials and ran a massive media operation to crush the opposition,” he says. “You needed someone to approach this with velvet gloves, and instead they used an iron fist.”

Airbnb’s opponents also turned up the heat. Ward’s 40,000-member union has given hundreds of thousands of dollars to Mayor Bill de Blasio’s administration and endorsed him for president. (“Bellhop politics,” Lehane said last year in an interview on CNBC, arguing that members of the City Council were nothing more than bellhops for the big hotel corporations.) Ward helped form a coalition of hotel groups, local politicians, housing advocates, and tenant organizations to oppose Airbnb. The coalition ran anti-Airbnb ads and conducted sting operations to expose illegal short-term rentals to the media.

Lehane says the city used “threatening, bullying tactics.” Ward says Airbnb did the same: “They are bullies, and I have the scars to prove it.”

Airbnb’s path forward is simple, according to Ward. Airbnb must “live within the guidelines of the law” or leave town, he says. Similarly, the city is throwing extra resources at enforcing the law rather than considering relaxing it so New Yorkers can lawfully rent their homes for extra cash. “Approximately 95% of our enforcement is Airbnb,” says Christian Klossner, executive director of the city’s Office of Special Enforcement. “The key issue for us is they are taking housing away, creating dangerous conditions, and generating a nuisance in the community.”

Airbnb is taking steps to work with the city, including by providing data on its hosts to help track down illegal listings. It also donated more than $10 million to New York nonprofits last year. The company has been meeting with local advocacy groups, mobilizing hosts to lobby in the state capital, and contributing money to friendly politicians. It’s also boosted its head count in the city. Josh Meltzer, who handles public policy at Airbnb from New York, says he’s trying to find common ground with local officials. “We are absolutely willing to negotiate,” he says. “We are just looking for a fair-minded and rational person on the other side of the table.”

Paradoxically, a case brought by Airbnb against the city may provide a venue for a more fruitful conversation between both parties. On Sept. 27, Airbnb and New York’s lawyers will meet in Judge Paul Engelmayer’s office in the U.S. District Court in Manhattan to hash out the next step in Airbnb’s latest suit against the city. This one concerns a law that would force the company to regularly share more data about its hosts, likely making it easier for the city to spot and fine lawbreakers. The judge could force Airbnb to hand over names and addresses every month, allowing the city to fine those breaking the law and possibly wiping tens of thousands of Airbnb listings off the market. But such a move would at least legitimize its market in New York and soothe investors worried about greater upheaval.

Airbnb made mistakes in New York, underestimating the city’s affordable-housing crisis as well as Ward, says Bradley Tusk, a venture capitalist and former political strategist who’s advised startups including Uber Technologies Inc. (Tusk also ran the 2009 mayoral campaign of Michael Bloomberg, the owner of Bloomberg Businessweek’s parent company, Bloomberg LP.) “This issue festered and festered and has gotten to a point now that Airbnb has lost all political leverage,” he says. “Can you ring the bell in a city where you’re not legal? It would be pretty damn awkward.”

To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net, Molly SchuetzRebecca Penty

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