7 ms·

The whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficul

by alper 3mo ago

The whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficult to understand is it?

NoboruWataya 3mo ago
I mean, it's highly unintuitive, which I would say makes it difficult to understand. The main weirdness is that lowering the rent would force a revaluation whereas letting the building sit vacant for an extended period of time apparently would not. If this is truly driven by regulatory capital requirements, then it seems like a gap in the regulations. Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank). I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.
- grebc 3mo ago
  Banks care that you pay their loan first and foremost, how you do that as the borrower is up to you. They care about the regulatory requirements in so far as you either meet it, or you don’t at the time of writing a loan. And maybe you get a yearly review. Also people are looking at this in a very isolated view. Just because a building is vacant doesn’t mean the owner has no other option than just lower the rent. Typically owners of commercial property own multiple properties and various other types of assets. Vacancy rates are also built into calculations.
  - bombcar 3mo ago
    That's the missing link on these - the owner is making payments either way - the bank is getting their money. They don't want to disrupt the flow or trigger contract clauses, so they cover the missing cashflow from elsewhere.
    - mlsu 3mo ago
      They are extending loans though. In a normal market, requesting an extension when the bank knows you're underwater should set off some risk alarm bells and trigger a denial. The "normal person" intuition about how loans work is correct here: if I try to refi my house when it's underwater and I've lost my income, the bank denies the refi. That incentivizes me to do what it takes to make the bank whole, or, make the appropriate decision to leave my house and let someone else who can afford it take over payments. When everyone, the regulator, the operator, and the bank, are whistling a tune, when the whole sector is fucked, everyone has a big problem. How big? About as big as hundreds of buildings in the downtown of every major city sitting half-empty! That's a pretty big problem. Maybe not as large as 08 but definitely structural. We're all paying indirectly for this office space to sit empty, instead of being able to use it.
      - grebc 3mo ago
        You don’t have knowledge into the borrowers capacity to pay based on a single vacancy.
        mlsu 3mo ago
        I have the capacity to pay someone to dig a hole and fill it in. Would that be a wise use of my resources? We're talking about the whole sector here, not one borrower. Huge swathes of commercial real estate are sitting empty, that's a big ongoing problem for everyone whether the loans are being serviced or not.
        grebc 3mo ago
        Dig and fill away dear fellow, that's what this site does best. The whole sector doesn't have a vacancy problem. And it's not a problem for the banks nor the owners if they're servicing their loans. Sure they're not making money but that's not your or anyone else's problem either.
        bombcar 3mo ago
        Have you heard the story of Boeing and the "cost-plus" contracts? Digging a hole and filling it in can be quite profitable!
- alper 3mo ago
  > lowering the rent would force a revaluation Commercial leases are often for say 5+5 years, so once you lock it in, you know for sure what the property revenue is going to be for the next so many years. Your uncertainty equation has collapsed. I think the main insight here is that commercial real estate is an entirely different animal than the residences that you may be used to. You can apply this same reasoning to the "back to the office" pushes done on behalf of the institutional investors who have exposure to large commercial properties in inner cities. That too is a financial house of cards built on assumptions and vibes.
doctorpangloss 3mo ago
Nobody said commercial real estate was risk free free money in some abstract financial product, other than the doofus who wrote this long "note." The hard fact is these are real buildings in real places that aren't really fungible at all. So it seems kind of ridiculous that CRE investors should be insulated from every possible externality. Obviously the right thing to do is to tax vacant properties, and then we shall see how many stay vacant and how many foreclosures there are (hint: owners suddenly find capital and are able to pay the tax or rent things out and nothing ever gets foreclosed in every one of these scenarios where it actually happens).
- grebc 3mo ago
  What you’re proposing is a brand new tax just because you don’t like people who play by the rules as written. Well done. Way to encourage people to not do things.
  - scraptor 3mo ago
    The specific proposal is not great but changing the rules is in fact the correct solution of the current rules lead to systematically bad outcomes.
    - grebc 3mo ago
      How is it systematically bad? Is there a banking crisis?
      - doctorpangloss 3mo ago
        i think you are on the first step of the journey to seeing that neither math nor maximizing $ is the solution to all problems. it's not even the solution to most problems.
      - BrenBarn 3mo ago
        Have you heard of this thing called people being happy. . .

by alper 3mo ago

The whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficult to understand is it?

NoboruWataya 3mo ago

I mean, it's highly unintuitive, which I would say makes it difficult to understand. The main weirdness is that lowering the rent would force a revaluation whereas letting the building sit vacant for an extended period of time apparently would not. If this is truly driven by regulatory capital requirements, then it seems like a gap in the regulations. Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank). I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.

grebc 3mo ago
Banks care that you pay their loan first and foremost, how you do that as the borrower is up to you. They care about the regulatory requirements in so far as you either meet it, or you don’t at the time of writing a loan. And maybe you get a yearly review. Also people are looking at this in a very isolated view. Just because a building is vacant doesn’t mean the owner has no other option than just lower the rent. Typically owners of commercial property own multiple properties and various other types of assets. Vacancy rates are also built into calculations.
- bombcar 3mo ago
  That's the missing link on these - the owner is making payments either way - the bank is getting their money. They don't want to disrupt the flow or trigger contract clauses, so they cover the missing cashflow from elsewhere.
  - mlsu 3mo ago
    They are extending loans though. In a normal market, requesting an extension when the bank knows you're underwater should set off some risk alarm bells and trigger a denial. The "normal person" intuition about how loans work is correct here: if I try to refi my house when it's underwater and I've lost my income, the bank denies the refi. That incentivizes me to do what it takes to make the bank whole, or, make the appropriate decision to leave my house and let someone else who can afford it take over payments. When everyone, the regulator, the operator, and the bank, are whistling a tune, when the whole sector is fucked, everyone has a big problem. How big? About as big as hundreds of buildings in the downtown of every major city sitting half-empty! That's a pretty big problem. Maybe not as large as 08 but definitely structural. We're all paying indirectly for this office space to sit empty, instead of being able to use it.
    - grebc 3mo ago
      You don’t have knowledge into the borrowers capacity to pay based on a single vacancy.
      - mlsu 3mo ago
        I have the capacity to pay someone to dig a hole and fill it in. Would that be a wise use of my resources? We're talking about the whole sector here, not one borrower. Huge swathes of commercial real estate are sitting empty, that's a big ongoing problem for everyone whether the loans are being serviced or not.
        grebc 3mo ago
        Dig and fill away dear fellow, that's what this site does best. The whole sector doesn't have a vacancy problem. And it's not a problem for the banks nor the owners if they're servicing their loans. Sure they're not making money but that's not your or anyone else's problem either.
        bombcar 3mo ago
        Have you heard the story of Boeing and the "cost-plus" contracts? Digging a hole and filling it in can be quite profitable!
alper 3mo ago
> lowering the rent would force a revaluation Commercial leases are often for say 5+5 years, so once you lock it in, you know for sure what the property revenue is going to be for the next so many years. Your uncertainty equation has collapsed. I think the main insight here is that commercial real estate is an entirely different animal than the residences that you may be used to. You can apply this same reasoning to the "back to the office" pushes done on behalf of the institutional investors who have exposure to large commercial properties in inner cities. That too is a financial house of cards built on assumptions and vibes.

doctorpangloss 3mo ago

Nobody said commercial real estate was risk free free money in some abstract financial product, other than the doofus who wrote this long "note." The hard fact is these are real buildings in real places that aren't really fungible at all. So it seems kind of ridiculous that CRE investors should be insulated from every possible externality. Obviously the right thing to do is to tax vacant properties, and then we shall see how many stay vacant and how many foreclosures there are (hint: owners suddenly find capital and are able to pay the tax or rent things out and nothing ever gets foreclosed in every one of these scenarios where it actually happens).

grebc 3mo ago
What you’re proposing is a brand new tax just because you don’t like people who play by the rules as written. Well done. Way to encourage people to not do things.
- scraptor 3mo ago
  The specific proposal is not great but changing the rules is in fact the correct solution of the current rules lead to systematically bad outcomes.
  - grebc 3mo ago
    How is it systematically bad? Is there a banking crisis?
    - doctorpangloss 3mo ago
      i think you are on the first step of the journey to seeing that neither math nor maximizing $ is the solution to all problems. it's not even the solution to most problems.
    - BrenBarn 3mo ago
      Have you heard of this thing called people being happy. . .