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Business

Airbnb hopes to levy hotel taxes for 700 cities

Airbnb already has agreements with 200 cities to levy overnight fees - or hotel taxes - from guests. It plans another 500 such agreements, covering 90 percent of its business volume, to shore up its business model.

Peer-to-peer homestay marketplace Airbnb, founded in August 2008, is now worth around $30 billion (28.2 billion euros). It has a fabulous business model: It acts as an intermediary between people looking for a place to overnight, and Airbnb 'hosts' - people with extra space in their homes or apartments willing to rent out space to short-term guests.

In addition, the company has recently begun expanding into peer-to-peer tour-guide services. The company charges guests a fee for each homestay or tour-guide experience, amounting to some 10 percent of the value of the booking.

In effect, Airbnb's homestay providers collectively serve as a sort of giant hotel. This has meant that the company's business model is a direct threat to the balance sheet of regular hotels. Hotels are governed by a variety of regulations and tax obligations; in contrast, during the early years, none of those constraints applied to Airbnb hosts.

Bildergalerie Millionäre | Brian Chesky (imago/ZUMA Press)

Airbnb Co-Founder and CEO Brian Chesky

That led hotel owners and operators to complain that Airbnb's homestay hosts presented unfair competition - and in some cities, hoteliers vigorously lobbied municipal or state governments to ban or restrict AirBnB from operating in their cities.

Airbnb's response has been savvy: in effect, the company agreed that it was operating what amounted to a giant hotel, and set about striking agreements with city after city to levy muncipal overnight taxes - hotel taxes - on guests. The goal was to mitigate Airbnb's exposure to 'regulatory risk' by cutting municipalities in on the financial gains associated with its peer-to-peer marketplace.

The company's existing tax agreements with 200 cities are just a start. On Monday, Airbnb CEO Brian Chesky, in an interview with the London-based "Financial Times" (FT) newspaper, said the company was looking to strike tax agreements with another 500 cities. Whilst the company operates in more than 50,000 municipalities in 190 countries, the 700 cities the company has on its radar for tax agreements would cover the great majority of its overnights.

"When you have a tax agreement, you have an explicit agreement, therefore there is not an existential risk," Chesky, one of three co-founders of the company, said in the FT interview.

Apartment buildings in Berlin (picture-alliance/dpa/M. Wolff)

Despite a lot of activity building new apartments like these in Berlin, there's a shortage of available living space in some Germany cities - Berlin, Munich, Frankfurt, and Hamburg, among others

Some big cities cracking down on peer-to-peer homestays

However, tax deals don't eliminate regulatory risk entirely. New York City recently pass a law imposing heavy fines on short-term apartment rentals. That's a problem for Airbnb - because the city is one of its top markets.

The new law isn't being fully enforced yet, and Airbnb is negotiating with the New York State government and trying to find an accommodation. The company has estimated that it could collect about $90 million a year in hotel taxes for the city if its homestays were fully legalized and accounted.

Earlier this year, Berlin's city government likewise banned landlords from renting out apartments to short-term visitors, with some exceptions permitted.

Berlin's new law, which was challenged by a lawsuit but upheld in court, was structured specifically to torpedo Airbnb's peer-to-peer homestay business model in a Berlin context. The penalty threatened by Berlin for breaking the law was an astonishing €100,000. The fines would hit the people renting out their homes, never the guests.

Angela Merkel's flat in Berlin via Airbnb (Airbnb)

In 2013, it was even possible to rent, through Airbnb, the Berlin apartment where German Chancellor Angela Merkel had previously lived for many years

Berlin's move was motivated not just by angry hoteliers, but also by the fact that apartments are in very short supply in the German capital, with net in-migration of tens of thousands of new residents each year. Long-term rentals in Berlin are covered by rent-control regulations, which - even though they are often ignored in practice - have to some degree limited the ability of landlords to boost long-term rents up to the sky-high levels seen in other major German cities like Munich or Frankfurt.

For Berliners willing to rent out rooms in their apartments, the profits to be had from Airbnb overnight rentals to tourists - many of whom were loud, party-hearty types, to the annoyance of neighbors - were therefore substantially higher than the profits to be had from longer-term rentals to Berlin residents. As a result, more and more apartments were being converted into makeshift mini-hotels.

 

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