Russell Flynn

December 11, 2019 Comments Off on Vacancy Control, Not Rent Caps, is the Worry: Coldwell Banker Commercial’s Q&A with Flynn Investments’ Russell Flynn Views: 1851 Connect Classroom, National News

Vacancy Control, Not Rent Caps, is the Worry: Coldwell Banker Commercial’s Q&A with Flynn Investments’ Russell Flynn

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Multifamily rent control is at the top of the commercial real estate news, leading many to make dire predictions about how legislative caps will impact development or investment. Russell Flynn, founder and head of Flynn Investments, owns 4,000 multifamily units in and around the San Francisco Bay Area, and has been a multifamily investor in Northern California for decades. In 1979, former San Francisco mayor (and current U.S. senator) Dianne Feinstein appointed him to the city’s Rent Board. That same year, Flynn launched the Coalition for Better Housing, an industry group of large apartment owners advocating for property rights. Coldwell Banker Commercial’s Managing Director Dan Spiegel recently spoke with Flynn about recent rent control legislation, and how it might impact multifamily investment, development and growth.

Q. California recently signed Assembly Bill 1482 in early October 2019, putting rent increase caps on multifamily properties. Oregon also signed rent-control legislation earlier this year, and other municipalities and states are considering it. Should we be concerned?
A. I think efforts to control rents and maintain affordability are cyclical. We saw waves of rent control legislation during the 1980s and 1990s, then those were repealed. The theory is that, if rents on sitting tenants are capped, it means they won’t be gouged with sudden increases, thereby making housing more affordable. The recent legislation is leading to concerns that, if property owners and landlords can’t raise rents, it will scare off investors and developers. Investors and developers have worked within rent-control guidelines, and they are doing just fine. They know the rules. The actual issue that landlords, investors and property owners need to worry about is vacancy control legislation.

Q. What is vacancy control legislation, and why is it a potential challenge?
A. Under rent control legislation, rent increases are capped for sitting tenants. It means that, while owners and landlords CAN raise rents, they are capped as to how much. Vacancy control legislation kicks in when the tenant vacates the property. In a typical unit turnover situation, the landlord invests money to improve the empty unit, then charges a higher rent to the next tenant. But, when you introduce vacancy control into the mix, the landlord is capped as to how much he or she can charge that next tenant. This means that the landlord doesn’t have much incentive to improve the units between tenants; there is no profit motivation to do so. As a result, units fall apart and are more uncomfortable to live in. Berkeley and Santa Monica had vacancy control legislation until the state passed the Costa Hawkins Act in 1995, which prohibited vacancy control ordinances.

Q. What do you think is the takeaway from the legislation?
A. Many investors and owners operate under rent-control legislation, and are doing just fine. And in reality, you can’t buy a building and suddenly increase your rents to market rate anyway. Landlords prefer to keep rents from 5%-10% below market. Also, there is an inherent, safety factor built into rent control buildings, which saves us from our worst instincts to raise rents, refinance, then keep on buying; this leads to overleveraging, which is what got investors in trouble during the 2007-2009 downturn. Also, the California rent control act is pretty lenient, compared to laws in Oakland or Los Angeles, which are stricter. Rent control doesn’t mean you absolutely can’t raise rents with existing tenants, it just means the increase is capped. Investors need to be patient in rent-control environments, with the understanding that returns increase upon unit turnover and improvement.

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