6 ms·

I find this question hard to think about. Who exactly should be pricing in the risk of something like this happening? On both sides there are agents who have ta

by papeda 7y ago

I find this question hard to think about. Who exactly should be pricing in the risk of something like this happening? On both sides there are agents who have taken on risk. Some of the agents paying rent overextended themselves even before the crisis. Some of the agents renting space did the same. So who should take the hit? Nobody (i.e., the government)? Even that solution seems wrong -- do we really want to incentivize agents that leverage their property holdings to the hilt? My naive reaction is that the agents renting space are somehow "more able" to absorb the costs. Maybe it's because I think banks seem to be doing ok, and in my head banks are the people who lend things to people and charge fees, whereas my friendly neighborhood restaurant seems to be scrabbling harder to make ends meet. Or maybe it's because I think people who own resources are just always doing better than the people who rent them. But that's not a very convincing argument.

FartyMcFarter 7y ago
Both should be pricing in the risk. If I buy a house as an individual I'm taking some of the risk, but so is the bank that lends me money. We each have different risks (I can lose the house, the bank can lose the money if they can't make it back by selling it), which is fine.
- kfrzcode 7y ago
  Honest question, how does one factor in risk for a catastrophic decline in cash flow? I'd suggest having a war chest which could cover six months expenses. I'm not a business owner though... I imagine it's probably harder to do than it is for an individual.
  - toomuchtodo 7y ago
    6-12 months of cash reserves, whether you’re an individual or business. The yield drag is offset by avoiding insolvency.
    - papeda 7y ago
      Is this reasonable to expect from a business where 6 months of cash reserves are not legally required? Can't the restaurant that saves 1 month of reserves instead of 6 months charge lower prices and still turn a profit, thus outcompeting the prudent save-for-6-months restaurant?
      - Eldt 7y ago
        Yeah, and then they get ruined by a pandemic or an assortment of other situations...
        londons_explore 7y ago
        But 'ruin' simply involves claiming bankruptcy, then selling assets to someone else who will continue operations with 1 month reserves. Overall, cost of business is lower.
        rebuilder 7y ago
        They do. And? Most businesses do not plan for this kind of disaster. Once in a blue moon, the ones that do are better off for it, but they have to survive decades of poor competitiveness to see that benefit.
  - maccard 7y ago
    if your war chest covers 6 months, then at what point do you start chasing the income? do you wait until 6 months are up, or do you begin the process 2-3 months in, in the hope of resolving the situation before you run out of cash?
  - Zenst 7y ago
    Business interruption insurance is one way, though as with all insurance, the wording is very important to make sure it covers your needs.
matz1 7y ago
The mistake is the landlord didn't take payment upfront, 6 month / 1 year.
- williamdclt 7y ago
  What fraction of renters (companies or individuals) can afford 6months of rent?...
  - matz1 7y ago
    Of course there is pros and cons in every situation, but if you want to ensure getting paid, you want to be paid upfront.
- eropple 7y ago
  That's sure a reasonable and thoughtful idea in industrialized countries where most workers live close to hand-to-mouth.
  - matz1 7y ago
    Then the landlord bear the risk of non payment.
- AmVess 7y ago
  Do you make your mortgage or rent payments 6 months to a year in advance? If not, why do you expect landlords to do the same?
  - matz1 7y ago
    >Do you make your mortgage or rent payments 6 months to a year in advance Depends on the situation, yes. >If not, why do you expect landlords to do the same? If the landlord want to reduce the risk of non payment, then they better be asking upfront. Of course it could create another risk. Everything has a trade off, so pick your poison.
tomp 7y ago
It's an unprecedented catastrophe, and even if we will weather it, someone (well, many someones) will suffer (we'll all suffer, but some more than others). Besides solving the crisis (to which most of us cannot meaningfully contribute) the main priority is preserving the rest of the society so that we can go on with as little harm as possible when the immediate crisis (virus) is over. In this specific situation, it's obviously better to prioritize borrowers/renters over landlords, because the former are actually productive. Restaurant fails => no food; landlord goes bankrupt => house remains, it's just gonna be owned by someone else. What complicates matters, obviously, is second-order effects; first of all, if some / many landlords are leveraged, them defaulting might impact banks, which is definitely something we don't want; if I were the government, however, I'd be saving banks directly in this situation, not landlords. The other consequence is a crash of the housing market, which IMO isn't that much of a big deal, but it's been politically untenable for a while because too much of ordinary people's wealth is tied in housing. It might be a good opportunity for a reset, though.
- jandrewrogers 7y ago
  One of the largest second-order effects of transferring all risk to landlords is that rents will go up because risk has a real financial cost that must be covered by cashflow. That will remain true no matter who ends up owning the property.
  - jjoonathan 7y ago
    The risk has a cost, yes, but it's far from clear that tenants will be the ones who end up paying it. Not all businesses get to pass all costs to the customer. Sometimes customers win and the business has to live with reduced profitability. I'm sure that landlords will play the "tenants pay" angle in the media, but the more vigorously they play it the more I will suspect it isn't true.
  - maxsilver 7y ago
    > One of the largest second-order effects of transferring all risk to landlords is that rents will go up The opposite is likely. If we finally require landlords to actually take on the risks they already consented to previously, many of them will give up and sell out -- freeing property up to be used productively by real people, and lowering rents. In effect, if we stop bailing out landlords, landlording will become a slightly-less-lucrative industry, which will slightly reduce cost-of-living across the entire market.
Blackthorn 7y ago
I generally don't feel bad about the rich person in this equation taking the hit. 99% of the time that's the landlord.
maxsilver 7y ago
I don't see how this is even in question. The landlord should always be taking on the risk, that's literally their only job -- they provide nothing of value, besides that one thing. (They often don't even maintain the property or upkeep, in the US that's usually entirely on the tenants, through a third-party management service priced into the rent). If landlords aren't willing to take the risk of tenant defaults on, then landlording should just be universally-illegal, and let the government directly cut rent-like mortgages and property-management-like upkeep for those properties. If the general public is going to keep bailing out wealthy deadbeat landlords every decade, we better at least get to keep the property.
- jariel 7y ago
  This is upside down. It is absolutely not a landlord's job to assume the business risks of their tenants. Definitely not. If the restaurants declare bankruptcy, yes, then there is limited ability for them to get their rent, but otherwise, the restaurants 'owe'. It may be a good idea for renters to renegotiate and for smart landlords to take heed. But in general - contracts need to be obligated. It doesn't matter that you view the 'landlord' as 'doing nothing'. Also, in most cases, remember that land has been commoditized, it's not like the 'King' owns everything - the land was purchased for some amount, has a value, it's being 'managed' like any other asset, and if there's competition in this industry (there is a lot), the surpluses are going to be thin, just as thin as any other industry. While there are existential issues about the 'productivity' of real estate, they don't really matter at the most local level, because the most local 'landowner' is just playing in a competitive layer of business like anyone else. So for now - it's best to honor contracts, re-negotiate, and follow the laws. The government may want to intervene in a 'really really smart way' but I don't see how this is perfectly possible.
ummonk 7y ago
The way to be economically successful in modern America is to leverage yourself to the hilt to get massive returns during good times (while cautious savers miss out on getting such massive gains), and then turn around and ask for a bailout if things go south and the heavy leverage and lack of rainy day savings pushes you underwater.
- londons_explore 7y ago
  The way to be economically successful is to extract those large profits from your company in the good times, then claim bankruptcy in the bad times. All your assets get sold off cheap, and you can use those extracted profits to form a new company to buy up the assets and continue business.
jariel 7y ago
Does it matter that much who is 'more able' to absorb costs? The original question of who takes the rent etc. is more likely relevant. It's hard to know who is profiting more, but it's a side question. Normally - the restaurants would declare bankruptcy, the landlords would follow suit, and due to the pervasive nature of this pandemic ... so would the banks who can't absorb that much loss. The dominos would come down and take the entire economy with it. BUT 'Real Estate' is not a productive game! This is one of the weirdest things about our economy - so much is based on rent-extraction, not productive investment. This is why the central bank can take all the 'worthless investments' off of the bank's balance sheets and give them cash at face value and 'poof' the economy can move on. 2008 was not an implosion of productive assets - it's was a major accounting realignment ... which caused productive parts of the economy to suffer as a result of calamity. But at its core, just a big rebalancing of the balancesheet. Put another way - what if all real-estate were socialized: it's all free, you just have use it, and everyone is 'allocated' some kind of limit or whatever by whatever rules. Those rules may not be perfectly fair but it could be done. Then nobody has to pay rent. Then, when restaurants 'pause' operations, they don't go out of business. Because we are not an agrarian society wherein any specific bit of land is really about its industrial value ... this could actually work. We do it in a fancy way today by having people speculate with huge mortgages, only to sell them later. I'm only making a rhetorical point here, but if we are going to 'socialize the risky parts of the real-estate economy via central banks' because they need to be unfairly bailed out every 10 years, then there is no 'free market' in such things anyhow. The 'unfair socialization' is happening at the central bank. In Canada, the average home price increased last year more than the average annual wage (before taxes!). This is insane and untenable. It means the real #1 driver of inequality is simply homeownership: the more you can leverage, the more you are leveraging over others. A $200K income becomes a means to buy a $2M home that increases in value as much as your income. While the flat owners and renters are left with no capital gains there. This aspect of our economy might essentially be the most truly fragile because.
ruth9 7y ago
When I bought my condo I was required by the bank and the condo association to have a small rainy day fund to cover monthly maintenance for a few months in case I lost my job. It's only been a few weeks of businesses being closed and people out of work. I wouldn't mind if the government steps in and offers 10 year loans to landlords at CONSIDERABLE interest rates or in exchange for SIZEABLE shares of property.

by papeda 7y ago

FartyMcFarter 7y ago

Both should be pricing in the risk. If I buy a house as an individual I'm taking some of the risk, but so is the bank that lends me money. We each have different risks (I can lose the house, the bank can lose the money if they can't make it back by selling it), which is fine.

kfrzcode 7y ago
Honest question, how does one factor in risk for a catastrophic decline in cash flow? I'd suggest having a war chest which could cover six months expenses. I'm not a business owner though... I imagine it's probably harder to do than it is for an individual.
- toomuchtodo 7y ago
  6-12 months of cash reserves, whether you’re an individual or business. The yield drag is offset by avoiding insolvency.
  - papeda 7y ago
    Is this reasonable to expect from a business where 6 months of cash reserves are not legally required? Can't the restaurant that saves 1 month of reserves instead of 6 months charge lower prices and still turn a profit, thus outcompeting the prudent save-for-6-months restaurant?
    - Eldt 7y ago
      Yeah, and then they get ruined by a pandemic or an assortment of other situations...
      - londons_explore 7y ago
        But 'ruin' simply involves claiming bankruptcy, then selling assets to someone else who will continue operations with 1 month reserves. Overall, cost of business is lower.
      - rebuilder 7y ago
        They do. And? Most businesses do not plan for this kind of disaster. Once in a blue moon, the ones that do are better off for it, but they have to survive decades of poor competitiveness to see that benefit.
- maccard 7y ago
  if your war chest covers 6 months, then at what point do you start chasing the income? do you wait until 6 months are up, or do you begin the process 2-3 months in, in the hope of resolving the situation before you run out of cash?
- Zenst 7y ago
  Business interruption insurance is one way, though as with all insurance, the wording is very important to make sure it covers your needs.

matz1 7y ago

The mistake is the landlord didn't take payment upfront, 6 month / 1 year.

williamdclt 7y ago
What fraction of renters (companies or individuals) can afford 6months of rent?...
- matz1 7y ago
  Of course there is pros and cons in every situation, but if you want to ensure getting paid, you want to be paid upfront.
eropple 7y ago
That's sure a reasonable and thoughtful idea in industrialized countries where most workers live close to hand-to-mouth.
- matz1 7y ago
  Then the landlord bear the risk of non payment.
AmVess 7y ago
Do you make your mortgage or rent payments 6 months to a year in advance? If not, why do you expect landlords to do the same?
- matz1 7y ago
  >Do you make your mortgage or rent payments 6 months to a year in advance Depends on the situation, yes. >If not, why do you expect landlords to do the same? If the landlord want to reduce the risk of non payment, then they better be asking upfront. Of course it could create another risk. Everything has a trade off, so pick your poison.

tomp 7y ago

It's an unprecedented catastrophe, and even if we will weather it, someone (well, many someones) will suffer (we'll all suffer, but some more than others). Besides solving the crisis (to which most of us cannot meaningfully contribute) the main priority is preserving the rest of the society so that we can go on with as little harm as possible when the immediate crisis (virus) is over. In this specific situation, it's obviously better to prioritize borrowers/renters over landlords, because the former are actually productive. Restaurant fails => no food; landlord goes bankrupt => house remains, it's just gonna be owned by someone else. What complicates matters, obviously, is second-order effects; first of all, if some / many landlords are leveraged, them defaulting might impact banks, which is definitely something we don't want; if I were the government, however, I'd be saving banks directly in this situation, not landlords. The other consequence is a crash of the housing market, which IMO isn't that much of a big deal, but it's been politically untenable for a while because too much of ordinary people's wealth is tied in housing. It might be a good opportunity for a reset, though.

jandrewrogers 7y ago
One of the largest second-order effects of transferring all risk to landlords is that rents will go up because risk has a real financial cost that must be covered by cashflow. That will remain true no matter who ends up owning the property.
- jjoonathan 7y ago
  The risk has a cost, yes, but it's far from clear that tenants will be the ones who end up paying it. Not all businesses get to pass all costs to the customer. Sometimes customers win and the business has to live with reduced profitability. I'm sure that landlords will play the "tenants pay" angle in the media, but the more vigorously they play it the more I will suspect it isn't true.
- maxsilver 7y ago
  > One of the largest second-order effects of transferring all risk to landlords is that rents will go up The opposite is likely. If we finally require landlords to actually take on the risks they already consented to previously, many of them will give up and sell out -- freeing property up to be used productively by real people, and lowering rents. In effect, if we stop bailing out landlords, landlording will become a slightly-less-lucrative industry, which will slightly reduce cost-of-living across the entire market.

Blackthorn 7y ago

I generally don't feel bad about the rich person in this equation taking the hit. 99% of the time that's the landlord.

maxsilver 7y ago

I don't see how this is even in question. The landlord should always be taking on the risk, that's literally their only job -- they provide nothing of value, besides that one thing. (They often don't even maintain the property or upkeep, in the US that's usually entirely on the tenants, through a third-party management service priced into the rent). If landlords aren't willing to take the risk of tenant defaults on, then landlording should just be universally-illegal, and let the government directly cut rent-like mortgages and property-management-like upkeep for those properties. If the general public is going to keep bailing out wealthy deadbeat landlords every decade, we better at least get to keep the property.

jariel 7y ago
This is upside down. It is absolutely not a landlord's job to assume the business risks of their tenants. Definitely not. If the restaurants declare bankruptcy, yes, then there is limited ability for them to get their rent, but otherwise, the restaurants 'owe'. It may be a good idea for renters to renegotiate and for smart landlords to take heed. But in general - contracts need to be obligated. It doesn't matter that you view the 'landlord' as 'doing nothing'. Also, in most cases, remember that land has been commoditized, it's not like the 'King' owns everything - the land was purchased for some amount, has a value, it's being 'managed' like any other asset, and if there's competition in this industry (there is a lot), the surpluses are going to be thin, just as thin as any other industry. While there are existential issues about the 'productivity' of real estate, they don't really matter at the most local level, because the most local 'landowner' is just playing in a competitive layer of business like anyone else. So for now - it's best to honor contracts, re-negotiate, and follow the laws. The government may want to intervene in a 'really really smart way' but I don't see how this is perfectly possible.

ummonk 7y ago

The way to be economically successful in modern America is to leverage yourself to the hilt to get massive returns during good times (while cautious savers miss out on getting such massive gains), and then turn around and ask for a bailout if things go south and the heavy leverage and lack of rainy day savings pushes you underwater.

londons_explore 7y ago
The way to be economically successful is to extract those large profits from your company in the good times, then claim bankruptcy in the bad times. All your assets get sold off cheap, and you can use those extracted profits to form a new company to buy up the assets and continue business.

jariel 7y ago

Does it matter that much who is 'more able' to absorb costs? The original question of who takes the rent etc. is more likely relevant. It's hard to know who is profiting more, but it's a side question. Normally - the restaurants would declare bankruptcy, the landlords would follow suit, and due to the pervasive nature of this pandemic ... so would the banks who can't absorb that much loss. The dominos would come down and take the entire economy with it. BUT 'Real Estate' is not a productive game! This is one of the weirdest things about our economy - so much is based on rent-extraction, not productive investment. This is why the central bank can take all the 'worthless investments' off of the bank's balance sheets and give them cash at face value and 'poof' the economy can move on. 2008 was not an implosion of productive assets - it's was a major accounting realignment ... which caused productive parts of the economy to suffer as a result of calamity. But at its core, just a big rebalancing of the balancesheet. Put another way - what if all real-estate were socialized: it's all free, you just have use it, and everyone is 'allocated' some kind of limit or whatever by whatever rules. Those rules may not be perfectly fair but it could be done. Then nobody has to pay rent. Then, when restaurants 'pause' operations, they don't go out of business. Because we are not an agrarian society wherein any specific bit of land is really about its industrial value ... this could actually work. We do it in a fancy way today by having people speculate with huge mortgages, only to sell them later. I'm only making a rhetorical point here, but if we are going to 'socialize the risky parts of the real-estate economy via central banks' because they need to be unfairly bailed out every 10 years, then there is no 'free market' in such things anyhow. The 'unfair socialization' is happening at the central bank. In Canada, the average home price increased last year more than the average annual wage (before taxes!). This is insane and untenable. It means the real #1 driver of inequality is simply homeownership: the more you can leverage, the more you are leveraging over others. A $200K income becomes a means to buy a $2M home that increases in value as much as your income. While the flat owners and renters are left with no capital gains there. This aspect of our economy might essentially be the most truly fragile because.

ruth9 7y ago

When I bought my condo I was required by the bank and the condo association to have a small rainy day fund to cover monthly maintenance for a few months in case I lost my job. It's only been a few weeks of businesses being closed and people out of work. I wouldn't mind if the government steps in and offers 10 year loans to landlords at CONSIDERABLE interest rates or in exchange for SIZEABLE shares of property.