I have often wondered why, when stores close, landlords leave the spaces empty for years at a time instead of lowering rents. The answer, apparently, is banks often won't let them:
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@evacide But that still leaves it an open question... if landlords arent making the most of their property by leaving it empty, then why would banks want to avoid the chance of profit as well.
> if landlords arent making the most of their property by leaving it empty, then why would banks want to avoid the chance of profit as well.
The banks' problem is that as long as the landlord maintains the fiction that the property can be leased out at $50/foot, the banks can carry the loan on the books at full value even if the property has sat unleased for years, so long as the landlord continues to make payments on time. But the moment the landlord leases it at a more realistic price (say $25/foot), that creates a mark to market event where the bank has to reduce the book value of the loan, and revalueing loans lower tends to interfere with one's annual bonus. So you see banks have a powerful incentive to maintain the fiction that it will lease at $50/foot *someday*, even though a property pulling in at least *some* income is arguably the more valuable loan. 1/2
Add to that the possibility that it's a balloon loan with no regular payments save one big one years down the line, the bankers would rather kick the can down the road every year instead of messing up their books and bonuses. The problem of a possible missed balloon payment years in the future is likely somebody else's problem.
So the problem is partially a bank regulatory problem: the banks are permitted to misprice their commercial loan portfolio. Of course, should they be forced to price accurately, there would be a series of bank runs and bank insolvencies that would make First Republic, Sterling, and Silicon Valley Bank look like a walk in the park.
I dunno, as a business man I've never once expiernced any of this.. Never even heard of a bank being able to dictate how i rent my own property or at what price.
@freemo @artemesia @evacide Are your properties cross-collateralized against each other? It may be regional too, but it probably mainly affects large portfolios that are tied up in each other.
I'm told this is also the reason why in some areas they will do things like "sign a three year lease and we'll give you 12 months free", then when the lease is up the tenant moves to another store under the same arrangement. Just giving you 1/3rd off makes the bank nervous.
No my loans were each with different and seperate companies which I was a owner (and each company had different owners though i was a main one in all of them).
My personal portfolio has always been pretty small as im not a landlord, I use those properties when I have them. I am just well aware of the terms ont hema nd what I can do.
It was my friends whom I asked that tend to have large portfolios and act directly as landlords in some cases.
@freemo @fwaggle @artemesia @evacide
Ask your friends why they have empty retail spaces.
There was also a lot of wiggle words used, such as:
- "...the financing may have been contingent on maintaining a certain level of rent"
- "If your financing assumed $50 a square foot, and you go in and lease the space for $25 a square foot, you're probably going to have to send the lease to the lender to approve,"
My reading of the article is that if the landlords make their payments, then no one cares. If a landlord is renewing their mortgage, then they will have to show their tennants and rates. One lower renter will drive down the rents of everyone else, so it will be a red flag. Thus neither the landlord nor the bank are incentivised to do this.
My reading of the article is that it os not the active interference of banks that is the problem, but a series of incentives that come together to lead to this crappy outcome (aka a systemic issue).