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.
