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
That still leaves an open question for me if taken at face value..
why would they punish a bank agent by refusing them their bonus for taking an action that ultimately hurts the bank. Banks are money driven, so seems really silly they would punish their own agents for doing something that causes them to make money off it.
Also this is not something I've ever heard of or expiernced, when i buy a property (and thus become a landlord) I've never heard of a bank being able to tell me what price im allowed to lease it at.
If the bank employee takes an action that forces the bank to book a loss this year, on a loan where the book loss could have been postponed 10 or 15 years, the bank's management and colleagues' reaction is going to be: "you assole". Add to that banks being highly leveraged (they carry only 2-7% reserves, depending on their line of business and quality of their portfolio), just one loan going declarably bad can trigger a lot of regulatory scrutiny and possible close examination of their remaining loans carried at book value. (see prior comment about bank runs)
> If the bank employee takes an action that forces the bank to book a loss this year, on a loan where the book loss could have been postponed 10 or 15 years,
But this is my point, when I buy a property and am the landlord this never happens, the bank employee does even get a say... I bought the property, its my property, and I can charge what I want for it. Thats what is so confusing to me. In my many years in business I've never witnessed the bank that gave me the loan to buy a property is going to dictate what i price i have to lease my proeprty at, they dont even have the legal right to dictate that if they wanted to.
Maybe your talking about some other country with a messed up law other than the USA? "Maybe this is the norm int he UK or something and I dont know it?
I have read the article, and thats exactly why im confused. I have owned tons of business properties and never once seen or heard of such a tactic.. which leads me to think the article is compelte BS, thats kinda my point.
Maybe its not, id be really curious to hear anyone who expiernced this... but i asked several of my business colleagues and they to have never heard of such a thing.
No it isnt, but as a business man who has bought many a property,a nd with many high end investors who have bought entire skyrises among the people I asked the fact that none of these people have ever seen anything remotely like this is very telling. At a minimum it clearly isnt as normal as the article suggests and therefore not an explanation for the phenomenon in most cases.
@freemo @artemesia @evacide stumbled upon this thread, first off I understand your experience doesn’t reflect the situation being described in the article, but you have to realize for any outside observer this is a logical fallacy. You’re placing a burden of proof based on your lack of personal experience to validate what the article proposes, and you’ve provided no evidence except anecdote. So please be aware that it comes off as contrarian.
1/?
@freemo @artemesia @evacide I’ll operate in good faith and assume that you are genuinely curious. Your personal experience I assume goes into small business loans and residential real estate. I presume your experience does not go into either multi story office spaces or multi unit retail spaces. Most are corporately managed, and due to the significantly greater property values of shopping malls and office spaces are also not owned by small investor groups. 2/?
@freemo @artemesia @evacide it requires significant capital to build and mortgage these properties, which is why they are also corporately owned, investors usually buying into the company but not the properties specifically. The mortgages on these commercial and office properties are on a completely different scale than small business. These are the mortgages which are classified as commercial mortgages, a classification made by the lending institution 3/?
@freemo @artemesia @evacide loans for commercial mortgages, similar to residential mortgages, are often then repackaged into Commerical Mortgage Backed Securities, much in the same way that retail investments were repackaged and sold. The finer details are not known to me, but one difference is that the consequences of foreclosure and therefore market risk is on another scale. 4/?
@freemo @artemesia @evacide if we look back at the 2008 financial crisis, we can see a glimpse of what happens when a chain of defaults, foreclosures and the subsequent devaluation of residential properties leads to a chain of events that result in massive devaluation of the property, followed by the massive devaluation of the mortgage backed securities, and subsequently any and all investment devices peripherally related or composed of said RBS’s 5/?
@freemo @artemesia @evacide the potential for a similar crash in CMBS values is there, however obviously the property values differ, and the terms between borrower and loaner are therefore more highly scrutinized, or liabilities are managed through mechanisms, such as lease rate control. There is (probably) less predatory subprime lending, but banks need to still have marketable features in order to incentivize investors to purchase a CBMS. 6/?
@freemo @artemesia @evacide I’m going to go ahead and disqualify myself as any sort of authority here, I’m not a finance person. I’m working off me diving down this rabbit hole and wasting part of my life in order to understand this particular banking structure. Anyways, so the surface level assumption that lease rate control in order to maintain property valuations does seem like it should warrant skepticism, but it doesn’t invalidate the claims alone 7/?
@freemo @artemesia @evacide if youre still reading… the valuation and rating of CMBS does follow both the concrete valuation of the property, as well as the stability and risk of the loan based on the long term income of the commercial property. Both the borrower (landlord) and bank prefer “anchoring tenants” that increase the retail appeal of the property as well as ensure long term income and tenet reinvestment. 8/?
I am reading, but you wont get a response from me on the rest or any more detail for like 2 days. Lets late and I have a trip tomorrow. ButI did read everything, just no time to engage further sorry. But thanks for your respond=ses
@freemo @artemesia @evacide not a problem, this is more of a summary of my rabbit holing trying to answer the question you posed, because although I don’t agree with how it was posed, I think it does warrant addressing.
Fair, if you remind me in a few days ill be happy to come back and engage more fully.
@freemo @artemesia @evacide highly rated tenants are preferred (https://en.m.wikipedia.org/wiki/Credit_tenant_lease), and if anything lowering the rent rate can have the secondary effect of attracting potential tenants with lower credit ratings. The overall valuation of the CMBS mostly relies on property value, and a mix of income volume and stability (https://pages.stern.nyu.edu/~igiddy/ABS/CMBS_Evaluation.pdf). Of note from this example of a CMBS evaluation are a few points. 9/?
@freemo @artemesia @evacide Pg 22 “Groujd Rent” & “Contractual Rent Steps”. If anything this seems to suggest that rather than lowering rent, CMBS ratings favour potential future increases. Although it does not explicitly dictate what the bank can tell the borrower to do, it certainly incentivizes everyone from both lowering rents as well as taking on tenants with low credit ratings. 10/?
@freemo @artemesia @evacide Pg 28, obviously there is a mathematical preference that is established by how the rating is calculated by the balance between vacancy rate, tenant credit rating and income. Pg 35 vacancy concessions. Pg 41 gross potential revenue. From a casual perusing of an example CMBS evaluation scheme, there is no explicit mechanism of rent rate controls however there are multiple ways of incentivizing valuation and credit rating. 11/?
@freemo @artemesia @evacide if we return to the initial premise of the article of banks “not letting” landlords lower rent, it looks like an assignment of agency and anthromorphization of the relationship between borrower and lender. The banks can dictate the terms of the loan based on the risk and valuation of the property, which for the purposes of CMBS occur usually at 12 month intervals. 12/?
@freemo @artemesia @evacide the paper here https://emoszkowski.github.io/ericamoszkowski.com/Moszkowski_JMP.pdf is a topical but academic analysis of what I’ve described, unfortunately I cannot vouch for the validity, although it seems plausible. If I have to summarize, I disagree with the presentation of the vacancy phenomenon the same way that I disagree with the rebuttal. But the premise seems to be as valid as the need to rigorously question the premise. 13/?
> stumbled upon this thread, first off I understand your experience doesn’t reflect the situation being described in the article,
Of course not, which is why I didnt limit it to my personal experiences. As I stated I asked several people who would be experts in this field and none of them heard of such a thing.. That is the telling part, my own personal experiences only prompted me to doubt the article, more so due to its complete lack of citations or evidence to back itself up.
> but you have to realize for any outside observer this is a logical fallacy
Which logical fallacy is that? As far as I know consulting with multiple experts, when there is a complete lack of evidence present would not be a logical fallacy. Closest one I can think of would be if I stated my expertise superscedes evidence. But when no evidence is provided I cant think of any possible fallacy you could refer to that would apply to seeking expert advice from multiple third parties.
> You’re placing a burden of proof based on your lack of personal experience to validate what the article proposes, and you’ve provided no evidence except anecdote.
Other way around. The OP/Article make an assertion with no evidence requiring the reader to have the burdon of proof and seek to prove what the article claims. Since the article provides no evidence and it has the true burden of proof it is automatically invalidated regardless of if I provide evidence or not. The fact that I took the time to check with experts anyway satisfies my own requirements for evidence, but is rather irrelevant to if it provs it for anyone else since the burden of proof was never mind=e and never satisfied.
> So please be aware that it comes off as contrarian.
You are welcome to think that... just as this introduction leaves me concerned that you may be unduely antagonistic and biased going in.
@freemo @done @artemesia @evacide TLDR the whole world banking system is Wile. E. Coyote standing in space, having run off a cliff. If a critical mass of people look down, it all crashes. A vast amount of effort is being put into keeping people from looking down.
Office space and retail space are all worth far less post COVID and post work at home. If it was all marked to market then a lot of banks and funds would be kaput.
@freemo @evacide I am talking about the content of the Business Insider article, which is clearly referencing instances of US banks in US cities refusing to permit lease rates below what's in the loan covenant. You may wish to (re)read the article.