> 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.
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.