City Attorney Dennis Herrera at a City Hall press conference

Herrera pursues $5.5 million penalty from scofflaw owners over illegal Airbnb rentals

Brazen property owners defied the law, turned 14 homes into an illicit hotel chain in the midst of San Francisco’s housing crisis

SAN FRANCISCO (May 1, 2018) — City Attorney Dennis Herrera announced today he is seeking $5.5 million in penalties from two property owners, who, after being caught in 2014 illegally running a de facto hotel in one building, returned to flouting the law and unlawfully rented out 14 other apartments on Airbnb.

A motion filed today in San Francisco Superior Court seeks a $5.5 million penalty for Darren and Valerie Lee, a couple who earlier had evicted tenants using the Ellis Act from their property at 3073-3075 Clay Street and then unlawfully converted it into short-term rentals. Herrera sued the couple in April 2014 over that unauthorized conversion. The Lees settled in May 2015, agreeing to pay $276,000 and have a court-authorized injunction prohibiting them from maintaining any of their San Francisco properties as short-term rentals in violation of the law. The injunction covers at least 17 buildings with more than 45 units. However, a painstaking two-year investigation by the City Attorney’s Office has found that in just the first 11 months that the injunction was in place, the Lees violated it more than 5,000 times, booking more than $900,000 in short-term rentals and pocketing more than $700,000 in illicit revenue from 14 units. 

“This couple’s deceit, fraud and greed is breathtaking,” Herrera said. “While teachers, families and long-time residents are struggling to stay in their homes, the Lees were taking precious housing and turning it into an illegal hotel chain. Perhaps they thought they were going to get away with it. They were wrong. We will continue to protect our residents and our rent-controlled housing supply.”

“This couple broke the law, got caught, pledged to stop, and then turned around and did it again — only this time with an elaborate ruse to try to hide their tracks,” Herrera said. “It didn’t work. Let this send a message loud and clear to those looking to illegally profit off our city’s housing crisis: Don’t try it. We will catch you, and you will pay a steep price. We will make sure that it’s not worth it.”

Herrera is seeking a penalty of roughly six times the value of the illegal bookings — an appropriate penalty to deter future violations given the Lees’ intentional and calculated scheme to repeatedly violate the law.

San Francisco requires, among other things, that anyone renting a unit less than 30 days register with the City’s Office of Short-Term Rentals and be a permanent resident of that unit. If you own or rent a multi-unit building, you may only rent out one unit for short term rentals, and it must be the unit in which you reside. The rules are designed to prevent residential housing from being turned into de facto hotels.

“The filing today represents years of dogged and persistent investigation by the staff of the Office of Short-Term Rentals in close collaboration with the City Attorney’s Office,” Office of Short-Term Rentals Director Kevin Guy said. “The Lees are some of the most egregious, repeat violators of the City’s short-term rental laws. They have taken units off of the market that should be reserved for long-term San Francisco residents.  It is extremely gratifying to see them being brought to account for their actions.”

The Lees concocted an elaborate scheme where friends, family and associates — none of whom lived at the properties — posed as straw tenants or Airbnb hosts to illegally advertise and rent 14 residential units for short-term stays. The scheme included drawing up phony leases and even staging the apartments to look like they were being lived in — complete with dirty dishes and damp towels — before City investigators inspected them.

However, every apartment was staged in the same way. They had the same Costco food items scattered about, the same arrangement of dirty breakfast dishes in every kitchen sink, same personal products in each bathroom, same damp towels artfully draped over doors as though someone had recently showered, the same collection of shoes and clothes in closets, and the same houseplants in each apartment.

An exhaustive investigation found that although different Airbnb “host” accounts for the properties were created under different names, all but one was created from the same IP address, a unique numerical label that identifies each device using the Internet, showing that the rental accounts were almost entirely created from a single computer, smart phone or similar device.

Bank records also showed that between May 2015 and February 2016 Airbnb deposited short-term rents totaling more than $650,000 into various bank accounts controlled by the Lees. Then, after the Office of Short-Term Rentals issued multiple violation notices in February 2016 for illegal short-term rentals at multiple Lee-owned properties, Airbnb deposits started going into bank accounts newly opened by the Lees’ surrogates.  Airbnb deposited more than $53,000 in those surrogate accounts in March and April 2016, bank records show.  

None of the units in question were ever registered with the Office of Short-Term Rentals, making each short-term rental illegal and a violation of the injunction. The units covered under the enforcement motion are: 439 Broderick St., 1146 Fell St., 1148 Fell St., 1328 Fell St., 1522 Fell St., 1524 Fell St., 1117 Leavenworth St., 1119 Leavenworth St., 1925 Lyon St., 826 Masonic Ave., 20 Natick St., 833 San Jose Ave., 1362 Utah St. and 1364 Utah St. 

“This was a roll-up-your-sleeves investigation that required scouring reams of records, exhaustive legal practice, and plenty of shoe-leather detective work,” Herrera said. “I want to thank the Office of Short-Term Rentals for their invaluable assistance alongside the hardworking staff in my office.”  

The case is: City and County of San Francisco and People of the State of California v. Darren Lee et al., San Francisco Superior Court No. CGC-14-538857, filed April 23, 2014. More information can be found on the City Attorney’s website: www.sfcityattorney.org.

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