Comment by mistercheph
6 months ago
This doesn't make sense to me, why is lowering rent by 30% any more "proof" that the building is not worth what's stated on the bill than having a 30% vacancy rate at the expected value? Aren't both subject to the same "market conditions" argument?
It's all about contract/loan assumptions.
If the space is vacant, and the last known rent was $X, the assumption is that borrower is bad at advertising space, but a successor would be able to get it rented again at that rate.
OTOH, if the space is rented at 0.7 times $X, the tenants may have a long term lease that fixes that price for a significant time and even a savvy successor would have a hard time raising rents, so the valuation needs to be calculated based on current rent.
This seems like an assumption that over time would come to bite the banks that overexpose themselves to lending in this manner.
Wouldn't banks want to accurately assess these valuations so these types of "bad loans in actuality, good loans on paper" don't become a large portion of their balance sheet?
Maybe not all at once, but over time it seems like banks would want more accuracy on this.
In a normal world yes. But banks are incentivized to mark up the value of these properties, so they continue to do that.
I think the argument is that the building was able to generate such income stream, in this case the stream comes from the owner. The owner is betting the investment will pay-off at some point, so is taking temporary loses (you could say that the owner is paying the rent for the vacant places).
I believe the argument is not about value itself, but about gaming certain ways to estimate value. For example a certain bank might have a policy that value is a certain multiple of rent.
Agreed. I’ve always been skeptical of this argument, because it assumes the counterparty to these valuation models is consistently an idiot.
I've always assumed the counterparty is a computer. You have say 100 Billion of 401k moneys to invest. How are you going to invest it into real estate with a expense ratio of 0.05 and also check all of the properties in the portfolio?
Counter party is either stupid, careless, on it or forced. I think often there is intermediaries involved. Say real estate investment fund. For which on paper in short term numbers looking good is enough. And in past environment as long as there was enough money coming in the ponzi could continue to run.
And other parties further can be say pension funds, which on paper are forced to search for anything that make their goals look good enough. Thus not doing enough due diligence.
Everything is fine until it is not. And this has been seen time after time.