Comment by sjducb
2 days ago
Loan to Value (LTV) is a percentage that tells you how safe a loan is. You divide the amount of the loan by the value of the building. So if I buy a building for 10 million with a 6 million loan and 4 million of my own money then I have an LTV of 60%.
This means if I go bankrupt then the bank can sell the building and get its money back.
If the value of the building halves because the rent halved then I have a 6 million loan on a 5 million building. My LTV is 120%. The bank cannot get its money back by selling the building.
No bank is going to give me a loan on a property with an LTV of 120% so I’m stuck with my current bank. My current bank then increases my interest rate because I am now a very high risk customer who can’t leave. This is very expensive for me.
One way out of this situation is to get my LTV back to 60% which means I need to reduce the loan to 3 million by finding 3 million to pay off part of the loan.
Another way out is to sell the building for 5 million then pay the bank one million, exiting the deal with a loss of 1 million.
None of these are good for me. I’ll do anything to keep the value of the building high by charging high rents even if no one can actually pay the rents and the building sits empty.
Long term I might be able to exit by getting permission to convert it to flats.
Don't forget that long term the current downturn is likely to end and so I will again be able to get the rent in a few years if I can just hold on for these bad years.
... which sort of assumes that the global downturn and the local downturn are completely unrelated.
Like, if a rent hike pushes out the tenant who has been there the longest, who has the most consistent revenue stream, in other words is the surest bet, then that, all by its lonesome, should be a pretty clear risk indicator to the bank.
Sounds like a solution would be to average rent prices over some period of time to account for rental market fluctuations.
Solution for who? Everyone with power in this situation wants to keep the building valuations artificially inflated.
If local people want shops on their high street then the only real solution is incredibly agressive fines for vacant commercial spaces.
The commercial market is functionally frozen and illiquid. Owners can’t come down without declaring bankruptcy, bankruptcy is bad for lenders because they can’t move the property for the loan amount so you essentially have a mass delusion because accepting reality would bankrupt much of the existing players and start a crisis
So how long can you collect $0 of rent on your $5000 building before the bank realizes?