Comment by advisedwang

The key analysis is how does the system manage the risk that a building's equilibrium rent goes down or turns out to be lower than assumed when writing the loan.

The system described in the article is basically that the risk is not explicitly planned for, and just washes out that it is managed by a vacancy and building owners eating the cost of the vacancy.

Any solution needs to provide a new answer for how that risk is managed, preferably one that doesn't result in foreclosures. Some possibility:

* The bank takes on the risk, by loans having a provision for writing down value if rents have to drop. This is tricky, because if the operator decides when rents need to be revised down, they have no incentive to protect the bank's position. If the bank decides, then they have no incentive to ever accept a rent drop, they'd rather force the operator to eat the vacancy. You'd need some trigger like duration of vacancies.

* The operator takes on the risk but with a mechanism for lowering the rent. I can't really figure out a way this would work without requiring the operator to have capital on hand though.

* The risk is insured. If rents need to drop then insurance pays the write-down in property value. I'm not sure any insurance company would be able to take this business though, as it is highly correlated between customers. A downturn would just wipe-out the insurer.