jwarden
This explanation seems very implausible to me. By lowering
the rent by X%, and therefore reducing annual revenue by
X%, you admit the building is worth X% less. But by
leaving the building X% vacant, also reducing the annual
income stream by X%, you and the bank can somehow pretend
the building is worth what it would be if full? I doubt
owners and banks actually believe this. Is there some
policy that forces this?
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> zipy124
The policy is spelled out in the article? Banks have
strict regulations that mean they have to have a
certain amount of capital backing loans, and by
revaluing a building you lower the capital that backs
the loan, thus raising its risk, and thus leading you
to break the regulation around capital requirements.
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> makeitdouble
Here the bank cares less about annual income than
future income.Keeping it vacant only impact current
income, lowering rent impacts future forecasts.
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> > AnthonyMouse
> Keeping it vacant only impact current income,
lowering rent impacts future forecasts.Does it
though? Suppose you can't find a tenant right now
because the market is soft but is predicted to
improve in a few years. If you leave the unit
vacant, you lose money right now. If you rent it
out with e.g. a 3-year lease, you make more for
the next 3 years than you would with a vacancy,
and if the market price has increased by then you
can increase the rent on the unit and either get
it from the current occupant or the one you get to
replace them in the high demand market when the
higher rent causes the low-paying tenant to not
renew the lease.So taking a tenant now only
improves prospects (you fill a current vacancy)
with no negative impact on future returns. The
only thing it does is imply that current rents are
lower than before and future rents might be too,
but a vacancy implies that even more strongly.
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> > > bandrami
Humans are not Pareto efficient.If my wife and
I are at the airport, and the gate agent
offers me (and only me) an upgrade on the
flight, your logic says I should take it since
that's strictly better than both of us flying
economy.
|
> > > > AnthonyMouse
Business tenants know perfectly well that
when it comes time to renew a commercial
lease and local rents have increased, the
renewal rent is going to approximate the
current market price.The landlord doesn't
want you to to leave but only to the
extent that finding a new tenant costs
more than the discount against the current
market price they'd have to give you to
stay.
|
> > > > schlipity
You should take it and then switch seats
with your wife. Happy wife, happy life.
|
> postepowanieadm
How do you asses the value? You use the x last
transactions. No transactions, no data, the last value
remains.
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> > AnthonyMouse
"Last value" is pretty meaningless when it's stale
though.Suppose there is a building that was built
in 1970, last rented out in 1975 and then bought
by a company that has used it as their own offices
until now. The last transaction was in 1975,
what's the value if they apply for a mortgage
today? Surely they have some formula to use for
this based on e.g. other buildings in the
area.Moreover, "failure to find a tenant" is also
a type of transaction. It's the landlord acting as
the high bidder for the space, essentially the
involuntary edition of imputed rent, and implies
something negative about the financial prospects
of the building when it continues for a
significant period of time or large percentage of
units. Ignoring that it is either incompetence or
some kind of perverse incentive.
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> > > embedding-shape
> "Last value" is pretty meaningless when it's
stale though.For who and in what way though?
Every entity involved wants to keep the price
high, except the renter/new buyer, so with
that in mind, "Last Value" seems optimal for
achieving that.Maybe it's different in the US,
but in Spain there is a ton of properties that
sit completely empty and unused, even since
earlier than 2008, just because the owners
don't think the value is enough to sell yet,
and they wouldn't earn enough renting it out,
so everyone (except renters/new buyers) seems
to prefer it just sits empty for decades.
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> > > > AnthonyMouse
> For who and in what way though?For
anyone who wants an accurate
accounting.Suppose the building is
supposed to be worth $20M, has an existing
$10M mortgage and is actually only worth
$10M. The landlord comes to you and wants
to borrow another $5M against the
building. Pretty important to the lender
at this point that they're not overvaluing
it, right? Or the same if they go to a
different bank trying to refinance an
existing mortgage they're already
underwater on when using an accurate
accounting.
|
> > arcza
If a coffee shop is charging $25 for a latte and
sells none, we don't say everything's fine because
no sales data. The sales are $0 and it's not
fine.There is no escaping the powers of supply and
demand.
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> > lotsofpulp
"You" require a continuous analysis of cash flow
to continuously determine value, and proper
management. A simple, and common, requirement in
commercial lending called the debt service
coverage
ratio.https://www.investopedia.com/terms/d/dscr.as
pLower income for the building means lower
numerator, which means being unable to meet the
agreed upon DSCR, which means default. Whether or
not the lender acts on this default is a separate
matter, as they are usually loathe to get into the
property management business, but renegotiation of
terms and eventually foreclosure does happen.
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> alper
The whole goal is not to write off the value of the
property which you have to do if you rent it for less
money than initially planned. That's not that
difficult to understand is it?
|
> > NoboruWataya
I mean, it's highly unintuitive, which I would say
makes it difficult to understand. The main
weirdness is that lowering the rent would force a
revaluation whereas letting the building sit
vacant for an extended period of time apparently
would not. If this is truly driven by regulatory
capital requirements, then it seems like a gap in
the regulations.Also foreclosure generally isn't
the only option: the borrower could, for example,
agree to repay part of the loan early, or give
extra collateral, both of which would increase the
LTV (and this would be better for the bank).I'm
not saying the explanation is wrong, but I don't
blame people for finding it difficult to
understand. Other factors contributing to this are
probably borrower relationships/negotiating
strength and the high costs associated with
foreclosing.
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> AnthonyMouse
The argument the article makes is that the bank
doesn't want to admit the property is worth less than
the mortgage because then they would "have to"
foreclose.The question is, why would they actually do
that? The premise is that the landlord has to take out
a new mortgage every few years and then the bank won't
give them a new one if they're underwater. But that's
only true if it's a different bank.Let's take the same
example. Building was expected to be worth $20M,
landlord pays $4M down and takes a $16M interest-only
mortgage. The only thing the bank ever expected from
this was to collect interest on the $16M until it's
paid back, which could be never and that's fine as
long as they get to keep collecting interest.Then we
find out the building is maybe really only worth $14M.
But the landlord is still making the interest payments
on the $16M, and over time it will likely become worth
more than $16M again due to inflation if nothing else,
so why does the bank need to foreclose? The risk that
they could "lose $2M" is by that point a sunk cost.
It's the thing that happens if they do foreclose (or
fail to renew the loan). They'd be calling in the note
against an LLC that owns nothing but a building which
is now estimated to be worth less than the loan
principal. So the obvious thing would be to keep
renewing it as long as the landlord continues to make
the interest payments.This feels like some kind of
regulatory inefficiency or accounting scam where the
bank is listing the mortgage lien as an asset and
would have to take a write off if they valued it
accurately and therefore transfer their perverse
incentive to the landlord to prevent that from
happening.Notice however that doing that also hurts
the bank. The landlord is collecting $500k/year at
half occupancy, then paying the bank $640k and losing
$140k/year to try to avoid the total loss of their $4M
initial investment. Maybe they can do that for a year
or three but the longer it continues the higher the
probability that they run out of money. Whereas if
they were collecting the $700k/year from renting out
the entire building at lower rents then they could
keep paying the bank its $640k/year forever,
regardless of whether they're technically underwater.
And if the landlord runs out of money then the bank
has to take the $2M write off because they get a $14M
building instead of collecting interest on a $16M
loan. So the bank is really shooting itself in the
foot.
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> ReptileMan
Think of it that way - until you haven't climbed on
the scale, you haven't gained weight, even if your
pants are bursting at the seams.
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> > GJim
At some point, you don't need to stand on the
scales for it to be obvious you are a fat bastard.
Ditto, it's obvious to all that commercial
property has lost a huge amount of value.I suggest
that like the dotcom/2008/AI bubbles, people will
just keep dancing and making money until reality
catches up and the music stops.
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> senordevnyc
Agreed. From the article:Actual commercial real estate
professionals could give you many more reasons than I
canI am so tired of listening to people with little to
no experience with commercial real estate try and
explain the vacant storefront thing. Maybe this
explanation in the article is correct, but it raises
more questions than it answers, and it's unclear why
we should trust this person's explanation.
|
Schiendelman
I actually think there's a business to be had here.As
described, the landlord can't offer a traditional lease
for the actual value of the space.However, the landlord
could offer essentially day rentals without creating a
lease. There are systems for this already, such as
Peerspace and their ilk, which I've used for small events.
I believe these don't trigger the foreclosure clauses.I
think that a property management company managing deeply
underwater buildings could play in this, reducing their
cost structure by offering day rates. They've often
already got a solid NFC entry system. Most of what you
need is automated pricing, onboarding and offboarding, and
figuring out how you avoid needing physical
cleaning/setup/teardown overhead.
|
> zipy124
I can't comment on that specific structure, but pop-up
shops are one method that in the UK councils will
often help vacant buildings with for exactly this
reason, with the upside that they may convert into
permanent tenants.
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> > GJim
Yup....And the downside is loads of reasonably
successful decent small shops in the UK now have
to close after 12-24 months when the rents get
jacked-up from sensible to astronomical levels.
None of them become permeant tenants unless they
are a front for money laundering (hence the
explosion of nail bars and barbers on the UK high
street) or illegal goods (dodgy vape
shops).https://www.bbc.co.uk/news/articles/cqj1rkq
qrgroYour local press (if yours still exists) will
also be full of such stories.
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> > > Schiendelman
Anything over 30 days is likely not to be a
pop-up shop. There's no way to give a tenant
12+ months without triggering the foreclosure
clauses, AFAIK.
|
> > > > GJim
The UK is different old boy.
|
> > > > > Schiendelman
Of course it is! But I don't think
it's different in this way. Did you
have a specific data point about a
12-24 month rental getting kicked out
in order to prevent foreclosure?
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> > Schiendelman
Isn't that through council subsidy rather than
avoiding a foreclosure-trigger tenant agreement?
|
> > Schiendelman
Ha, cute, but no, very different. Wework is a
tenant, and does significant buildouts. This would
be "you can use the space for a few days or
weeks".I've seen companies provide some moveable
furniture in a space like this - some desks, some
extension cords - but it has to be up to the
temporary user to configure and put things away
when they're done.
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> > sam_lowry_
Gosh... someone finally explained the WeWork
business model that is more reasonable than "walk
barefoot and expect money to rain from the sky".
|
> grebc
I own a commercial property, I wouldn't want to have
day to day rentals.I don't enjoy dealing with property
management or the fees they charge.
|
> > Schiendelman
Tell me more - is your commercial property vacant?
I'm a landlord myself, and the calculus gets very
different when you have a long term vacancy.
|
> yellow_lead
well, isn't the rent estimated as the daily rate * 30
then?
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> > Schiendelman
By whom, for what purpose?
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flotzam
How come this obvious workaround isn't used much more
often:>> If the system allows you to pretend that the
vacancy is temporary, why doesn't it allow you to lower
rents on the pretense that lower rents are also
temporary?> This does happen sometimes: it's packaged as
"incentive offers," like 50% off the first 12 or 24 months
rent, or 6 months without rent, etc, that lower the
average rent over the life of the lease without lowering
the "list price." That's common in residential leases, and
I know it happens sometimes in commercial leases, but I
don't know how prevalent it is.
|
> roenxi
It is worth noting that the reason they are pretending
is almost certainly because of regulatory demands - if
it were just between the bank and the owner they'd
agree to do what is in both of their best interests -
rent the space out at market rates. If there is a
market-based 3rd party involved they will figure out
that the bank is playing games and start acting
whether or not the bank officially recognises the
losses. Surely only a regulator or other similar
heavily law-bound body would tolerate this sort of
sillyness.So as a blind guess, it probably depends on
how legal incentive offers are. The axis being
optimised here will be what the regulatory bodies can
tolerate before they start handing out fines and
punishments.
|
> > flotzam
Ah. That makes sense. Maybe the polite fiction
would clash too obviously with accounting
standards once the (de facto) lowered rent
payments roll in:
https://news.ycombinator.com/item?id=48567769Could
the situation be improved then if financial
regulators started treating both versions
("temporary" vacancy / "temporarily" lowered rent)
equally? Tolerate both or crack down on both.
|
joshka
Sounds like fraud with extra steps.
|
> Scaled
Yes, but seems unlikely to be prosecuted... The
government directly benefits from higher tax
valuation.
|
pif
Say what you want, but a law that lets you pretend that
the value of a building is based on what you ask, rather
than what you can actually obtain, is a stupid law.
|
grebc
It's very clear there is no commercial property investors
here, nor commercial borrowers.
|
> dazc
Care to enlighten us?
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WCSTombs
(2025).> The obvious thing cities could try is to put more
pressure on building operators to fill their spaces, but
the building operators are already under a ton of pressure
- they're losing a bunch of money! So, cities could do
something like put a vacant storefront tax and... make
them lose even more money? If that "worked," the mechanism
would be to force a lot of commercial property to default,
which could put a lot of new space on the market at lower
prices, which should lower the commercial rent. But it
would also hurt the banks a lot, which has a history of
leading to bad consequences and subsequent bailouts.I
agree that this is the obvious remedy. I don't know if
it's exactly the right answer, but it's the natural place
to start the conversation, and I think it's at least in
the ballpark of the right solution. It's the city (and
bigger) government's job to create policies that
incentivize the right behaviors for the benefit of the
community. There clearly has been an oversight here, if
extremely valuable commercial properties are literally
just sitting unused for no good reason. In my opinion we'd
all be better off if the market did correct itself, at
least getting us all on the same page about what these
properties are actually worth, rather than the current
situation.The city stepping in also helps put the fuckup
back in the right place, in the hands of the property
owners and lenders who seem to have made these bad bets,
rather than externalized to the residents and business
owners of the city, who haven't done anything wrong. The
article suggests that this leads to "bad consequences" and
even bank bailouts, but I'm pretty unconvinced that the
problem is widespread enough that the federal government
would literally need to start bailing out banks. From what
I've seen, it's really bad in a few specific metro areas
and not so much in others.
|
themafia
It could be 2 to 4 years to build the space. You can also
structure the loan so the interest is amortized over a
longer period than the loan which simply requires a
balloon payment or refinancing of the interest balance at
term which can offset some of the costs presented in this
article.It also does look like San Francisco has a vacant
storefront tax although the penalties are fairly
light.https://abc7news.com/post/remember-vacant-storefront
-tax-san...
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jojobas
There is also the practice of "deferred interest paid in
kind", where vacancy is considered temporary, and the bank
agrees that the interest for the term of vacancy will be
paid at loan maturity. Not sure how/if it applies to
multi-tenant buildings, but plenty of them aren't
multi-tenant.
|
bsder
The "problem" is that we let people claim the "rent" is X
for certain people and "Y" for other people--both at the
same time. Just stop that.The "solution" is that you
should have to pay tax on what you claim the rent is after
a small grace period (Less than 24 months certainly.
Probably less than 12 or at least prorated starting before
that.).If your financial agreement requires and claims
that the rent is $5000, no problem! Then the tax authority
should expect to receive the tax revenue they would expect
if someone was actually paying $5,000 in rent to you. If
you want to leave the space vacant even after paying the
tax on the revenue--have a blast.That would short circuit
all the financialization shenanigans.
|
> Anon4Now
If the property is devalued, the property taxes lower
accordingly. Portland, Oregon has been facing this
problem recently. The devaluations caused the tax
revenues for the city to drop, which in turn has
caused budget issues.For example, "Big Pink" is an
office tower in downtown Portland. It's last sale was
for about $370 million. Out of desperation in a
saturated market, the owners sold it last year for
about $45 million. No one - the owners, the city, or
the citizens - wants to have the vicious downturn of
values, and there is no easy solution. Adding a
vacancy tax just exacerbates the problem.
|
> > Ekaros
As citizen I might prefer downturn of values. At
least in medium term. Yes there is lot less tax
income. But on other hand lowering values would
mean lower rents which would mean lower overheads
and potentially cheaper prices or more business
being viable.
|
> > > Anon4Now
I'm with you there, but as far as I can tell,
it hasn't impacted residential prices.
|
> > nairboon
Adding taxes in a downturn obviously adds
additional friction. One might ask, what happened
to the tax revenue of that $370M transaction,
where is it now when the city needs it.
|
> > > Anon4Now
It's gone. So are many services that the city
provided.
|
spwa4
TLDR: lowering the rent would create a direct problem for
banks to convince investors the building is worth more.
And since they've already given the money of the investor
away (usually to construct the building in the first
place), effectively the bank would have to pay back the
difference if they did this.So it's a choice between
honesty and profit towards investors ...Oh and obviously
the "solution" is waiting for inflation to change the
price of the rent effectively. So the real fix is for
government to take the initiative and start paying people
(by now, a lot) more.
|
BrenBarn
Here is the problem:> Half empty, the building is only
generating $500k per year in net income instead of $1M.>
Let's imagine the owner lowers the rent by 30% to fill the
building.> Now, reality has proven the operator can only
make $700k per year.No. When the building sat half empty,
reality had already proven that it could not generate what
they thought it could.This is the insane fallacy driving
this whole thing, and no amount of explanations about
commercial mortgages will prove anything other than that a
larger number of people than we thought are participating
in the same delusion. If you cannot rent the space for
what you thought it could rent for, your building is
already worth less than you thought, and it is sheer folly
to think that you can alter that fact by pretending you
are waiting for higher rent later.> So, cities could do
something like put a vacant storefront tax and... make
them lose even more money? If that "worked," the mechanism
would be to force a lot of commercial property to default,
which could put a lot of new space on the market at lower
prices, which should lower the commercial rent. But it
would also hurt the banks a lot, which has a history of
leading to bad consequences and subsequent bailouts.There
is another problem. What we need is to dig deeper into
that theory and push harder and harder for solutions where
all the financial loss gets pushed onto the people at the
top who have a lot of money. If the banks are making money
off this kind of nonsense then they should fail.> I'll
give this some more thought, but if any actual commercial
real estate professionals have ideas I'd love to hear from
you in the comments!No! Commercial real estate
professionals are mostly just more people buying into
these same fallacies! What we need is more people outside
that self-deluding system saying "this is nuts, I'm taking
$100 million from you" and resetting the entire system.
|
> alper
> a larger number of people than we thought are
participating in the same delusionCongratulations, you
have just described high finance.
|
weli
It all comes back to fractional reserve banking. It is the
root of all evil in our financial system. If Rothbard
could only see the current state of affairs...
|
> VulgarExigency
Rothbard would probably lament that we have not yet
turned children into "financial products" as
well.https://mises.org/mises-daily/children-and-rights
|
> pjc50
This is a crank opinion that is somehow everywhere.
The building is real, it's not fractional.
|
> > weli
The bank lended more money than it has in reserves
allowing for speculation and extra inflation of
perceived value of an asset
|
> Ekaros
You do not even need fractional banking for this. Same
thing could happen without it. Someone lends money and
is unable to pay it back. Both sides pretend that
things will eventually go well. As at least on paper
they have not lost anything until prices are realised.
|
> > weli
Without fractional banking the bank needs to be
way more cautious when appraising an asset and be
more conservative with the future gains
estimation. Decreasing speculation and inflation
of value.
|