Lowering the rent to fill their building reduces the value of that building, which means when they sell it, they will recognize a loss that is likely larger than many years of operating loss from the empty building.
Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property. Then when those buildings come up for refinance, either the borrower will have to come up with more funds so that the loan to value max isn't exceeded or the borrower will default and the bank will lose the income stream and be holding another property where their investment is more than the value.
Borrowers usually don't want to come up with more funds on a property where they're underwater and banks don't want to foreclose on property where the bank will be underwater, so it's in the bank's interest to let things be vacant and keep the valuations based on the previous rent, rather than lowering the rent and facing the music. You'll also see promos like first several months free, rather than reducing the rent, so you can report it's rented at whatever the headline rate is, even if the tenant is effectively paying much less; of course, the tenant will be looking for somewhere else to rent come renewal.
This is far from the only case in banking where taking some action on an asset that would otherwise be reasonable won't be done, because it would trigger a mark to market on too many other assets. Ex: you can't sell realize a loss to sell treasury bonds to satisfy cash flow needs, because you'll have to mark to market all the similar bonds, and then you won't meet your reserve needs.
> Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property
> it's in the bank's interest to let things be vacant and keep the valuations based on the previous rent, rather than lowering the rent and facing the music.
This just seems like everyone involved is playing make-believe about the actual value of their property. A tax on vacant land that increases exponentially year after year might help to correct this behavior, because at some point, it costs less to realize the loss than it does to pay the ever-increasing vacant land tax.
That's precisely what's going on.
It's a common theme among wealthy individuals/organizations to treat property as having value X for some purposes and Y for others - e.g., like pretending stock holdings are worth X for the sake of taxation while being able to secure loans by representing the stock valuation as Y.
That is a tad dismissive. Instead of not wanting to see empty storefronts, consider residents who would like to start a local business, but can not because the rent on commercial properties is prohibitively expensive. Then remember that there are residents who would like more jobs in the area.
By the way, I am very supportive of lower property values. I've just mostly given up on this issue, since from my conversations with random people all around the world, most people don't really want that to happen. Like, they want the property values to go down, but they don't want THEIR property to go down.
Well, the government at the very least. From the article:
> Banks are highly regulated, so they can’t just loan whatever they want. The government insists that banks keep high margins of safety in their portfolio, and commercial loans are risky, so the terms they can offer are designed to limit risk. […] Second, the bank must keep a strict loan-to-value (LTV) ratio — so they won’t lend more than 80% of the value of the building (and often less than that).
The government says banks can’t loan more than 80% of the value of the building because it’s too risky. But what banks have done is instead maintained an inflated value of the property so they can loan out a higher percentage, which has led to the country being full of empty, overvalued property. Ie, a high risk of collapse—which is just what the regulation was intending to prevent. Lying about the value of an object to get around regulations is often considered fraud.
And beyond that: people’s assets are mostly residential real estate, not commercial real estate. So I don’t know that people will get that worked up about commercial real estate devaluing.
This must just indicate that the model used to value the building is wrong, right?
I'd think insofar the value of the building is tied to the rental price, that value should naturally be a function of the revenue that the building can be expected to generate, which in turn is be a function not only of the chosen rent price but the likelihood of someone renting at that price. Why would a building that offers its units at $N per unit but can only fill half of them at that price be worth more than the same building filling all of its units at $N/2 per unit?
I suppose there's some wiggle room to account for the relative uncertainty in those two cases. But fundamentally the rental price is a choice whereas the value of the building is (or ought to be) based on a combination of the qualities of the property itself and what the market is willing to bear.
I thought it was a really elegant solution, and has made me wonder if a similar program could be used for vacant Commercial Real Estate in the cast of a national vacancy tax, land value tax, or similar value-lowering event.
1: https://en.wikipedia.org/wiki/Bank_Term_Funding_Program#Prog...
The specific buildings I was thinking about have paid more in taxes alone than their asking price.
Doesn't this only indicate that the algorithm is shite? They can give first 1000 months free but rent is $1T, also we need 1st and last.
I suppose the model sucks because the community is highly benefited by a low profit cozy coffee shop or book store, which might not be able to afford the property tax rate needed to discourage the "keep it vacant" strategy.
Maybe I changed my mind, and "vacant and/or not being used for its zoning purpose" needs a separate, additional fee.
I think the only viable businesses left in the neighborhood are a sub shop and a liquor store. Even the gas station is pretty low traffic.
There's a lovely little coffee shop within a couple of miles away, close to the city center. It has nice events in the evening, such as trivia nights, contest nights, etc. Plenty of parking. But do I really want to go to where almost everybody is on their phone when I can stay at home and pet my cats? I think that's one of the major competitors' stores have, especially small, targeted-audience stores. Home is much more comfortable and rewarding than going out, especially if you have a cat or a dog.
But empty buildings aren't a bad idea under all circumstances. Eg, It might be prudent to have empty living space in a tourist or student area to deal with annual surges in demand. Or maybe someone has a warehouse full of facemasks because they think the price will 10x in the next pandemic. We'd have the same crowd complaining about empty buildings saying they were just doing it to hide the fact that the building is empty when in fact that is a pretty reasonable strategy that would be socially beneficial.
No, the leverage isn't the problem. The article is very explicit about this: the bank makes a $16M loan at interest of $640K / year, and the building operator is so good for that loan that he pays it off indefinitely out of his personal funds. The operator doesn't want to be foreclosed on, because that leaves him worse off (assuming the market eventually picks back up), and the bank doesn't want to foreclose, because that leaves it much worse off (whether the market picks back up or not).
The reason for the pretense is that lowering the rent legally requires the bank to foreclose despite foreclosure being terrible for the bank.
why a bank would hold a completely vacant building for 15 years.
By leasing for cheaper they effectively capitulate and sell at a loss which will hammer their funding ability. It's land speculation similar to tech speculation. Inflate valuations, get a longer runway from lenders, etc.
At some point it has to come back to reality, but as the saying goes: "The market (land owners) can remain irrational longer than you (businesses) can remain solvent."
I had the exact same question before I fully read the article.
This is answered in the article in the "Extend and Pretend" section.
> "And so long as the operator can afford to keep losing $140k per year on the building… they can!"
> [...]
> "The only sticking point here is that the building operator is still losing $140k per year. But remember that, if he gives up, he loses the $4 million he’s already put into the building. Even if he ended up paying $140k per year for 10 years before things turned around, losing $1.4 million is still better than losing $4 million."
Extending the article's example to a scenario where the building was vacant for 15 years, it means the operator was willing to lose $140K per year. In the 15 year scenario, the operator lost $2.1 million ($140K * 15 years) which is still better than losing the $4 million if the operator walked away from the investment.
> Anything that makes owning an empty building a bad investment in all circumstances.
In the final section "This Sucks, What Could We Do About It?", it mentions how adding a vacant store font tax would end up creating more foreclosures. This is the side effect of the financialization of real estate.
Usually, if you have a problem and you know why, you'd consider doing something about the cause of the problem.
I think we need Vacancy taxes that go up based on the percentage of time vacant over different spans of time. Anything that makes owning an empty building a bad investment in all circumstances. This needs to apply to all units in a multitenant building.