Comment by makeitdouble
14 hours ago
Here the bank cares less about annual income than future income.
Keeping it vacant only impact current income, lowering rent impacts future forecasts.
14 hours ago
Here the bank cares less about annual income than future income.
Keeping it vacant only impact current income, lowering rent impacts future forecasts.
> Keeping it vacant only impact current income, lowering rent impacts future forecasts.
Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years. If you leave the unit vacant, you lose money right now. If you rent it out with e.g. a 3-year lease, you make more for the next 3 years than you would with a vacancy, and if the market price has increased by then you can increase the rent on the unit and either get it from the current occupant or the one you get to replace them in the high demand market when the higher rent causes the low-paying tenant to not renew the lease.
So taking a tenant now only improves prospects (you fill a current vacancy) with no negative impact on future returns. The only thing it does is imply that current rents are lower than before and future rents might be too, but a vacancy implies that even more strongly.
it's because the expected future income is based on what current tenants are paying, extrapolated to the number of units in the building, ignoring vacancies. I get what you are saying, it should be based on total rental income from the building - full stop - but that isn't how it is done, and this is the result.
Simply stated, if you rent a new unit for 25% lower, then the value of the building just dropped 25%. If you don't rent to a new tenant, your value must be the same, that's what the existing tenants are paying (not that I agree with this, it's just how it works right now).
It's similar to how people holding low liquidity assets will claim they are "worth" whatever the last person who paid for this assert, even if the real value of it is dropped, the "book value" is still sky high.
> but that isn't how it is done, and this is the result.
And the result is dumb, which is the point. The bank should stop doing that if they don't want to cause problems for themselves.
Review again how this works. The landlord put in $4M and the bank $16M on what was supposed to be a $20M building. They can't find enough tenants, which means in real life it's only worth $14M and the incumbent system is for everybody to pretend that isn't the case when it really is.
As a result, the landlord is collecting $500k in net rent instead of the $700k they could get by lowering rents and getting more tenants, while paying the bank $640k/year in interest. The landlord does this because if the value of the building eventually recovers then they don't lose their initial $4M investment, whereas if they hand over the keys to the bank it's definitely gone. And even if that money was gone, they'd still want to keep operating the building if they were at least turning any annual profit instead of making continuous losses.
This is bad for the landlord (they lose $140k/year instead of making $60k/year) and it's even worse for the bank, because now if the landlord runs out of cash or concludes the value of the building isn't going to recover, the bank has to eat a $2M loss by foreclosing instead of continuing to collect $640k in interest every year, which they could have done indefinitely if the landlord was allowed to keep renewing the loan while making more money by lowering rents and increasing occupancy.
Worse, this is happening at scale. If landlords could lower rents without getting foreclosed on then banks would keep getting their interest payments until inflation catches up to the nominal amount of the mortgage. But if the landlords are required to keep taking a loss, they eventually start to give up -- the article implies that they don't want to give up until the annual loss eats the original $4M, but it really happens as soon as they think the value of the building isn't going to recover. But that's only a problem for the bank if they default on the mortgage, which they do if keeping it makes them lose $140k/year but not if it's still earning them $60k/year. And that's especially a problem for the banks if it happens not just at all but all at once.
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Why do banks calculate it that way? Do they all do it that way, is it legally compelled? It seems obviously incorrect.
If you let a family member move in for free that doesn't make the value of the building go to $0. That valuation strategy is too simplistic.
A three year lease locks in the lower revenue. If the market recovers tomorrow you can have the full price for nearly as long.
But I'm not convinced the risk-reward calculation fully explains it. You can see plenty of places where they know full well it's not going to rent at the price they're asking. I think there are other factors, including not letting your other high-lease tenants think that they're now occupying a low-rent establishment.
Your jewelry store would rather not suddenly be next to a cheapo nail salon. And if you've got a third property to lease, the high-fashion brand looking at it will see the nail salon and move on.
Humans are not Pareto efficient.
If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
This happened on the flight to my honeymoon, and my wife took the upgrade.
You should take it and then switch seats with your wife. Happy wife, happy life.
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Business tenants know perfectly well that when it comes time to renew a commercial lease and local rents have increased, the renewal rent is going to approximate the current market price.
The landlord doesn't want you to to leave but only to the extent that finding a new tenant costs more than the discount against the current market price they'd have to give you to stay.
> If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
This has happened many times to me - the answer is to take it and give the upgrade to your traveling companion if you are the one who flies a lot.
> Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years.
You'd need perfect information to make a contractual decision on that, and it still has lasting effects.
For instance imagine renting your floors to Pornhub for these 3 years on the cheap because the market it low. Assuming you made the right calculation and demand recovers 3 years later, you'll have to first kick out the company (= months spent restoring it), then try to convince the insurance company that eyes at your building that they should pay a hiked price to move into Pornhub's previous floors.
And that's assuming you haven't completely blown it where the market actually recovers within 6 months for reasons nobody anticipated.
How you think about it is different to how the multiple different players think about it.
If you’re levered up to the eyeballs you don’t want your bank reviewing your file.
But that just means the bank is creating deliberately delusional forecasts.
I can build a building that charges a billion dollars a month rent, and sits completely empty. A forecast suggestion I'll be making hundreds of billions with no renters is clearly silly.
You’re paying the loan, go for it son.
I commented about the logic of the bank's forecasting. Your response doesn't make sense in that context.