HARI SREENIVASAN: So it's a two bedroom?

JENNIFER: Yeah, two bedrooms.

HARI SREENIVASAN: Three years ago, Jennifer and her husband began listing their two bedroom apartment on what was then an up-and-coming website Airbnb.

JENNIFER: My husband travels a lot for work. We also have family all over the country. And so when we knew we were going away, I would just make the apartment available. We have a space that sleeps six. So people almost always rented it. It just kept going well and we kept having all these good experiences

HARI SREENIVASAN: Airbnb connects hosts who want to share their homes with guests who are looking for a place to stay – short term, typically for a weekend or a vacation. Airbnb lists the property, connects the two parties, and collects a booking fee.

Jennifer – she did not want us to use her last name – charges up to $200 a night to rent her place when she and her family goes away, up to a week every month.

JENNIFER: I think it's great for the local communities, I can kind of, direct people to my favorite restaurants in the neighborhood. I'm able to help people come in here and really experience what the city has to offer, you know.

HARI SREENIVASAN: What sounds like a win-win situation for Jennifer and her guests is not so simple. What Jennifer is doing may be illegal in New York City, where city and state laws restrict short-term rentals.

The short-term home rental industry is booming. Platforms like Homeaway, Flipkey, VRBO are popular. And Airbnb has emerged as the giant in this space, especially in cities. Airbnb now lists over one million rooms available in 192 countries. And New York City, with more than 25,000 listings a night, is the platform's largest U.S. market.

New York is also where the debate over how to regulate short term home rentals like Airbnb is perhaps most contentious.
According to a report by New York Attorney General Eric Schneiderman last year, nearly three-quarters of Airbnb's listings between 2010 and 2014 were essentially ‘illegal hotels'– short term rentals that violate state and city laws against renting out an apartment for less than 30 days unless the occupants are also present.

Schneiderman found 94 percent of Airbnb hosts are like Jennifer and her husband. They have only one or possibly two listings.

VIJAY DANDAPANI: Those are rooms that would have gone to the hotel industry and should have gone to the hotel industry given what we've invested in the city and our buildings.

HARI SREENIVASAN: Vijay Dandapani chairs the New York City Hotel Association and is President of Apple Core Hotels, which owns five in Midtown Manhattan, including this ‘La Quinta'. He says competition from Airbnb has driven down his hotels' room rates.

VIJAY DANDAPANI: Rates have not gone back up to pre-financial crisis despite the fact that tourism has gone up. That's because, let's say you had 100 rooms, now you've suddenly got 140 rooms, 40 of those rooms being not hotels

HARI SREENIVASAN: Dandapani complains Airbnb and its hosts not only steal business, they also do not follow the same rules and regulations as hotels.

VIJAY DANDAPANI: We have a fire command system, security systems that give you protections from intruders, and so on. The moment you get into converting your house into a hotel, which is de facto what is being done nowadays, none of those protections are there.

HARI SREENIVASAN: Then, there's the issue of taxes. Airbnb collects a hotel occupancy tax on behalf of hosts in many cities but not New York.

Chip Conley, Airbnb's Head of Global Hospitality, says the company is looking at how to do that.

CHIP CONLEY: The annual taxes that we would be paying would be 65 million dollars if the state and city of NY would allow us to be a collector of taxes and a remitter of taxes. Currently they are not allowing us to do that.

HARI SREENIVASAN: City officials counter that allowing collection of taxes legitimizes activity that is largely unlawful.

CHIP CONLEY: So what's odd to us is that actually New York is actually sort of a laggard here relative to so many other communities across the US who have said, let's create sensible legislation and let's make sure we're actually collecting taxes as well.

HARI SREENIVASAN: New York Airbnb hosts Jordan and Joshua — who also prefer us not to use their last names — say they'd be willing to pay a hotel tax for renting out their two bedroom apartment. They already declare the income: about a $180 a night.

JORDAN: If Airbnb collected the tax right when it was booked; then we wouldn't have to worry about it.

HARI SREENIVASAN: The hotel industry is not the only group fighting Airbnb. So are residents of apartment buildings where neighbors' apartments are rented out to total strangers. New York State Senator Liz Krueger represents the east side of Manhattan.

SEN. LIZ KRUEGER: Constituents started coming to me and saying, "There's something strange going on in my building. The apartments seem to be being rented out on a nightly basis. There are groups of tourists wandering in and out with luggage, with keys to the buildings.

HARI SREENIVASAN: Krueger, who has often been dubbed Airbnb's Doubter-in-Chief, was the primary sponsor of the 2010 state law that effectively banned short-term apartment rentals in New York City.

SEN. LIZ KRUEGER: They encourage illegal activity. They don't have to, but they choose to do so as a business model.

HARI SREENIVASAN: And the short-term rental activity that troubles officials like Krueger and Attorney General Schneiderman most is what they call ‘commercial users' of Airbnb and similar websites.

SEN. LIZ KRUEGER: People becoming entrepreneurs and renting one to 100 apartments, claiming that they're their own homes, and turning them into ongoing illegal hotel arrangements.

HARI SREENIVASAN: In fact, the Attorney General's report found that while only 6 percent of Airbnb hosts advertise three or more listings, they account for more than a third of Airbnb's business in New York.

The report also found thousands of Airbnb listings were rented for three months or more of the year.

We found that New York Assemblywoman Linda Rosenthal went on what she terms an undercover sting operation this spring to find these commercial users.

ROSENTHAL: Do you live here? You don't live here, oh ok.

In one of the videos that she released to the press, Rosenthal is seen visiting a host who, she says, was renting seven apartments in a building, none of which he lived in.

HOST: "But in case anybody asks something, you don't know what's Airbnb is.

ROSENTHAL: "Oh, OK.

HOST: "That's why Airbnb always calls you guests."

HARI SREENIVASAN: Airbnb has taken steps to remove users who have a large number of listings.

CHIP CONLEY: We, like the Attorney General, support the idea of cracking down on illegal hotels and unscrupulous landlords. In spring we took down 2,000 listings, what we were calling bad actors who we just felt shouldn't be using the site

HARI SREENIVASAN:But State Senator Krueger argues Airbnb is enticing landlords like the one in the undercover video, to convert apartments into short-term rentals, which can be more profitable than renting them to long-term residents. And that, Krueger says, makes it harder for New Yorkers to find affordable housing in a city where the housing market is already tight.

SEN. LIZ KRUEGER: Airbnb has told me, "If you could just do one or two, it would be okay," and the answer is no, because if 10,000 people decide to rent out two apartments fulltime, that's 20,000 units off the market.

HARI SREENIVASAN: So we're sitting in an illegal hotel room, according to the State Senator.

JENNIFER: Yes, I have a difference of opinion with her, for sure. It's really hard for me to feel like my home is a hotel. I feel like someone who is welcoming a lot of people who become friends. I think the key is just making sure that it's people are, it's something that people are doing with their primary home. Financially, it really helps my family. Rents here have skyrocketed in the 10 years that we've been here.

HARI SREENIVASAN: Airbnb argues it helps residents stay in their homes by allowing them to earn supplemental income to pay their rent or mortgage.

JOSHUA: It affords me as an artist to be an artist. I use part of this income to survive on.

HARI SREENIVASAN: Joshua also says that the Airbnb system allows them to be very choosy about who they let stay in their home and when.

JOSHUA: It's up to us as hosts what we want to do. I say we deny 8 out of 10 people that ask us to stay here. And we get a lot of requests. a lot. So that's how I regulate it.The question that people ask is do we feel safe having people we don't know in our home and the answer is yes.

HARI SREENIVASAN: Arun Sundararajan is a business professor at New York University. He says cities like New York should partner with companies like Airbnb and residents to forge new ways of regulating the activity on those platforms.

HARI SREENIVASAN: Why is the AirBNB model so different than the model for lodging that we've had all the rules and regulations around so far?

ARUN SUNDARAJAN: The fundamental innovation is in tapping into underutilized capacity: repurposing what used to be residential real estate and sort of converting it into a new form of mixed-use real estate where for some of the time it is short-term accommodation, and for the rest of the time it's residential.

HARI SREENIVASAN: Cities across the country are grappling with these questions.

Like New York, Santa Monica banned short-term rental of entire homes when the host is not present and additionally imposes a 14-percent tax when a host rents out a room in his house.

Other cities have recently forged a middle ground.

San Francisco residents are permitted to rent out homes a maximum of 90 days a year.

In Philadelphia, the maximum is 180 days and hosts must pay an eight-and-a-half percent hotel tax to the city.

ARUN SUNDARARAJAN: I think that there's a growing recognition among cities that this kind of sharing economy activity can be good for a city.

HARI SREENIVASAN: But for now, New York City is cracking down. It has expanded the office tasked with investigating complaints of illegal hotels and is proposing higher fines for violators.