City Attorney: Faux leases, faux tenants hid couple’s $700,000 profit on illegal Airbnb hotels across 14 residential properties — $5.5M penalty sought.

San Francisco City Attorney Dennis Herrera today threw the book at pair of city landlords who, having already settled a suit charging they were operating more than a dozen illegal Airbnb hotels across the city, allegedly spent the last two years fabricating an elaborate scheme to continue cashing in hundreds of thousands of dollars running unlawful short-term rentals.

The motion filed today against married couple Darren and Valerie Lee lays out a number of extremely detailed charges, stemming from a two-year investigation by the City Attorney’s office. While the couple in 2016 agreed to pay the city $276,000 and approved a five-year injunction against operating illegal short-term rentals on their numerous city properties, today’s motion charges the Lees “never intended to comply with the injunction’s prohibitions on their highly profitable but illegal short-term rentals” and “engaged friends and family to act as surrogates — to create host accounts on Airbnb and to short-term rent the properties.”

The city claims the Lees violated their injunction more than 5,000 times in just its first 11 months while raking in upwards of $700,000 in “illicit profits” from running an Airbnb empire across 14 properties. More than $50,000 more purportedly trickled into accounts created by “friends, family members, and associates.”

The city’s years-long investigation of bank records, business records, the ownership of numerous LLCs and the actual whereabouts of the platoon of alleged phony tenants was every bit as complex and arcane as you’d think it would be. But there were moments when circumstances veered into the downright theatrical.

To wit: After this city’s Office of Short-Term Rentals in 2016 flagged a number of the Lees’ properties, Valerie Lee and her attorney led city officials on walkthroughs of eight of her units. Per today’s filing, “Each of the eight properties inspected had been staged to appear as if a tenant lived there, but it was obvious that it was a ruse. Every apartment had the same staging: 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 same houseplants in each apartment.”

Additionally, “Defendants also submitted six faux leases to create the appearance that certain apartments were rented to genuine tenants, then positing that the tenants were conducting unsanctioned illegal short-term rentals. However, the purported tenants were, in fact, Defendants’ friends, family, employees and/or associates merely posing as tenants.”

These faux tenants, described as “surrogates” by the city, were traced via DMV and other records to their actual residences — not at their San Francisco flats, but throughout the state: Lancaster, Richmond, Mountain View. Tellingly, all but one of their Airbnb host accounts was created using the same IP address.

The City Attorney states that subpoenas of Airbnb and various banks provided information conflicting the Lee’s claims they were unaware of the short-term rental activity and derived no income from it. The city alleges that more than $650,000 flowed from Airbnb to several  LLCs’ bank accounts, which were both created and controlled by the Lees.

“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,” summed up Herrera. “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.”

The Lees were, in 2005, sued by erstwhile tenant Gene Rymer and his family. Rymer, his daughter, grandchild and son-in-law were eventually pushed out of the Clay Street apartment, which Gene first rented in 1976, via the Ellis Act — which allows landlords to evict tenants from a structure that is being taken off the rental market.

And yet, in 2014, when Herrera sued the Lees for allegedly turning the rent-controlled flats at 3073-3075 Clay Street into $595-a-night vacation getaways, Darren Lee told the Chronicle, “I think they have the wrong information. I’ve got a tenant in there right now, a long-term tenant who’s paying me rent.”

So: The defense against charges his property was being used as an illegal hotel was that it was being rented out to tenants — after the Ellis Act had been evoked. Perhaps not surprisingly, Rymer and his family in 2015 received an $80,000 settlement.

The Lees are now accused by the city of some 2,271 nights of illegal Airbnb rentals across 14 city residential properties — 439 Broderick, 1146 Fell, 1148 Fell, 1328 Fell, 1522 Fell, 1524 Fell, 1117 Leavenworth, 1119 Leavenworth, 1925 Lyon, 826 Masonic, 20 Natick and three in or near the Mission: 833 San Jose, 1362 Utah, and 1364 Utah.

At a max of $6,000 per violation and more than 5,000 violations, the ceiling for this litigation exceeds $30 million. But the city instead requested the “more modest civil penalty” of $5.5 million, plus fees for “well over 400 attorney hours, 250 paralegal hours, and 80 investigator hours unraveling Defendants’ scheme and bringing this Motion to Enforce.”

Reached via e-mail, Darren and Valerie Lee’s attorney, John Brown, wrote “I cannot comment now; haven’t read the papers yet.”

Update, 4:15 p.m.: Brown e-mailed us the following sentences: “I have hardly begun to digest the long motion filed by the city, but I note as follows: The SF Office of Short-term Rentals already found that the Lees were not the responsible parties. The motion relies on many inaccurate facts. This is an improper second bite at the apple.”

This does not seem to be the view of the Office of Short-Term Rentals, however. From that office’s director, Kevin Guy: “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. 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.”

833 San Jose, another property purportedly illegally rented on Airbnb.