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I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes." By definition, the income from renting a property i

I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes." By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%. This is sort of the same myth as the "I shouldn't take more money because it will bump my tax bracket" (which makes no sense since tax brackets are marginal)[1]. However, it is true that landlords will often have properties empty with rates at what seems to be higher than the market-clearing price. The only explanation for this I've heard that makes sense is that rents/tenants are bimodal: the average is misleading. There's one group of tenants (cafes, indie hardware stores, hobby shops, etc) can afford one rent, while Starbucks, Citibank, and Panera can afford a second, much higher rent. Which tenant you get is a lottery, so as a landlord it may be short-term beneficial to set the rent at the higher mode and "wait out" a high quality tenant. And yes, long term this can be a collective detriment. [1] Except for things like the EITC, and this was a strong criticism of it.

deleted 5y ago
[deleted]
xhrpost 5y ago
> By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%. I think the issue is more with capital appreciation. Yes, month to month you're still losing nominal dollars for not having a tenant, even with lower taxes. However, that land/building are likely still seeing appreciation, even in markets that aren't "hot". Some friends of mine recently bought a building to open a restaurant. I'm pretty sure it had been vacant for more than half its lifetime, yet trying to negotiate with the owner was a nightmare. They simply didn't want to budge and were apparently very content with saying 'No' to offers and letting it sit there for well over half a decade empty.
- awillen 5y ago
  It still appreciates if it's rented out, so that doesn't change anything. When it's rented, you get appreciation plus income, and when it's not rented, you get appreciation only.
  - kflzufkrbzi 5y ago
    If appreciation is 99% and rent is 1% does it change anything?
    - djrogers 5y ago
      That’s a bit of a straw man, as that degree of market imbalance would completely end renting.
      - nend 5y ago
        Isn't that what this thread is about though? The complete end of renting in this downtown strip. The buildings are sitting empty and not renting.
        alisonkisk 5y ago
        Why are they appreciating so much if there's no rent to collect? Are storefronts NFTs?
        pstuart 5y ago
        Lots of money out there looking for home, so to speak.
        IG_Semmelweiss 5y ago
        There are hordes of SBA dollars floating around, looking for a home. Havent you seen the fed's balance sheet?
        ethanbond 5y ago
        Because land is finite. Land within an established city even more so. Not only is there rent to collect should they want to, but it’s almost a guarantee that there will be rent to collect indefinitely into the future.
    - 55555 5y ago
- franciscop 5y ago
  The thing I learned recently that happens in Spain is that if you have a property sitting empty, the government will calculate a "virtual rent" so to speak and charge you based on that (normally lower than actual market rate, but not much). If you rent it out, you get taxed based on what you actually make and not on this potential rent. Real estate taxes are apart/independent. This makes people really want to rent out places, and you see a much higher occupancy than in other countries (you still have squatters, which is a big issue, pushing in the opposite direction so it's still not perfect).
  - 6510 5y ago
    It should be much more harsh. If you own a building where a store should be but aren't using it as such you should be made to pay an insane tax for lowering the value of the entire shopping area.
    - 6510 5y ago
      I live in a block with around 6000 people and no stores. That what should be the mall was held hostage for decades by a supermarket chain who have a store 10 km from here. They didn't want their competitors to have it. Eventually the entire thing was changed into a giant day care.
  - infogulch 5y ago
    Oh that's a great idea. Especially if the owner is insisting at only renting at a ridiculous price per area -- ok, fine, set your rates at whatever you like even if nobody is remotely willing to pay that, but you'll pay taxes at that rate so best not inflate it too much, hm?
  - hanniabu 5y ago
    Sounds like a good opportunity for a business to get paid to rent out your place for a profit that's a fraction of the virtual rent. The owner saves money ahead can kick you out when they find a good client
    - 5y ago
- ransom1538 5y ago
  "I think the issue is more with capital appreciation." From the commercial landlords I have talked with SF, the lease term length is the main contributor to vacant retail spaces. When a retail shop moves in the lease term can be 5-7 years. Retail shops invest up to 50-100k fixing up the space - they need the guarantee they can rent the place for a lengthy time. Thus, the landlord needs to be sure the retail tenant has the capital and credit to last. So, landlords will hold out - rather than risk a bad tenant for 7 years. And quite frankly, there just aren't enough business models that work in retail spaces. If you have a brand new tenant with a 7 year long lease - this could also wreck your chances of a sale if the new owner wants the space cleared out. Also! Commercial tenants have the protection of LLC (or c-corps, etc) - so if their "Grape vape LLC" doesn't work out - they can just walk - and as a landlord you can't go after them personally.
  - Aeolun 5y ago
    How is this a problem? As far as I can see the landlord takes on zero risk there. In the best case scenario the landlord gets a 7 years of steady rent. In the worst case, they get a few months and the store goes out of business (breaking the lease). I see no reason why you couldn’t repeat that ad infinitum?
    - fredophile 5y ago
      Some commercial real estate deals will expect the landlord to contribute some amount for tenant improvements. So if you get a bad tenant you might be out that money. In addition, before they go out of business they probably stop paying rent. So if the business fails in the first year that could easily be a net loss to the landlord compared to waiting for a better tenant.
    - IG_Semmelweiss 5y ago
      Transaction costs. Everytime a lease is signed there are transaction costs and they are not immaterial.
pxeboot 5y ago
I can only speak to residential, but when I worked in the industry, it was extremely rare for rents to go down because many existing tenants would see the new rate and demand a discount or leave. It was perceived as cheaper to have a few vacant units at $2000 a month instead of renting them for less and lowering the rate for anybody renewing their lease.
- awillen 5y ago
  This is definitely true in large apartment buildings, where units are very comparable and leases are identical. Not so much in commercial where lease terms may vary widely, and even units in the same building may be meaningfully different in value based on how they're currently configured and who's looking to rent (e.g. if you want to rent a space to start a restaurant, and it was previously set up as a restaurant, you've got a lot of infrastructure there already, so it's more valuable to you as a tenant than it would be to someone who wants to use it as a hardware store).
- BeFlatXIII 5y ago
  I now have the mental image of a tenant moving one unit over to start “new” and get the discount lease rate. Thanks for brightening my day.
  - TeMPOraL 5y ago
    That's how you deal with mobile phone operators :). Threaten them to leave if they won't give you a better offer, and if they don't, then just leave... and come back some time later, to get the much better "new customer" treatment.
    - BeFlatXIII 5y ago
      Works for cable internet, too, if there’s more than one provider in your neighborhood.
  - m-ee 5y ago
    A friend of mine did this during the pandemic. Asked for a rent reduction and the landlord refused but offered them an identical unit in the building at the lower price.
conjecTech 5y ago
There may be other factors besides what they nominally "want". Depending on their source of financing, landlords changing the rent on these spaces can be both logistically difficult and may cause a huge negative cashflow shock because of the way it effects capital requirements on commercial loans. Louis Rossmann covers it in a video (https://www.youtube.com/watch?v=NdfmMB1E_qk https://www.youtube.com/watch?v=NdfmMB1E_qk) based on this reddit comment (https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g4ai27m/?context=3 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...).
smsm42 5y ago
Small point on [1] - it's not only EITC, there are a number of benefits that are income-dependant where a small income increase could make you ineligible for a ton of benefits. Effective marginal tax rates for people right around poverty line is crazy high for their income - because each additional dollar earned turns into lost benefits. https://fee.org/articles/the-welfare-trap-labyrinth-of-programs-punishes-work/ https://fee.org/articles/the-welfare-trap-labyrinth-of-progr... The tax rates still aren't 100% there but even something like 50% may seriously discourage people.
- namibj 5y ago
  Just to add: a receiver of "Hartz IV" long-term unemployment in Germany can earn an income of 100 EUR/month tax-free, with an 80% marginal tax rate for the next iirc ~700 EUR, due to unemployment benefits going down accordingly (think as if that tax was automatically deducted from your benefits).
busterarm 5y ago
I worked doing data entry in my teen years for a tax certiorari law firm in NYC and I can tell you that one of the favorite tricks of multiple-building owners is to have a mostly vacant building (or several) as a tax sink. Most of the time they would put their family in the units at no charge and write off the whole building to offset their others. This is especially true of buildings they were holding for sale to property developers.
- novok 5y ago
  Wouldnt they make more money overall renting it although? There is only so many free units you can give your family and friends.
  - brendoelfrendo 5y ago
    They're probably just holding onto the building to sell it to someone else. The next buyer, in turn, is only buying it to sell it for even more. Tenants may even be considered a liability. They don't want to manage a property, they want to hold an asset as an investment.
    - somnic 5y ago
      This only makes sense if tenants are a liability, because you get property value increase + rental income. As long as renting doesn't decrease the property value by more than the net rental income there's gotta be something else going on. And if you don't want to manage a property, property management companies exist for that exact reason.
  - busterarm 5y ago
    Tenants ask for things that family might not necessarily. Also you can leave most of the building in poor shape while keeping up the units you're letting family stay in.
s0rce 5y ago
I'm sure you'd make more money after takes renting it out but you have more costs associated with having a tenant (and risks). If you can just sit on a vacant property get some tax rebates and watch it appreciate you don't need to do anything. Your tenant won't break stuff, you don't need to find new ones, its just appreciating slowly and requires less hands on management.
burlesona 5y ago
There is actually a phenomenon colloquially called "extend and pretend," where it's better for commercial properties to sit vacant or half-vacant than lower the rent. The reason is, the building is financed based on it's calculated property value, and commercial property value is simply a multiple of the listed rent. Whether or not you're collecting the rent is immaterial -- after all it's perfectly normal to buy a vacant lot and built a building on it, or to buy an old warehouse etc. and refurbish it, etc., such that the bank has to make the lending decision based on projected rent rather than actual rent. So this is what they do. The problem is only when the projections are proven false, such as when you lower the rent to fill the space. If you do that, the bank must now lower the value of the building, which can easily make the building worth less than the loan. Further complicating things, commercial properties are usually on short-term financing, for example a 5-year "revolving" loan where the developer pays interest only for 5-years and then is expected to pay off the loan all at once (unlikely) or refinance (99% of the time). So, suppose the building has a $8M loan based on a theoretical $10M valuation. The developer is making the payments, whether from the partial rent, or his personal bank account, even though the building is vacant. The loan is now due to be refinanced. If the developer says, "I'll get a tenant in here any day now," the banker can nod and say "I believe you," and refinance the building. The developer keeps paying the payments and doesn't have to go bankrupt. The banker doesn't have to foreclose and write off the loan as a loss. Conversely, if the developer had cut the rent in half to get the building full, the banker now has to lower the building's value from $10M to $5M, and therefore the maximum loan is reduced to $4M. But the developer owes $8M to the bank, and doesn't have the money to pay it off. Not even the $4M to cover the difference and refinance the rest. In this scenario, the developer goes bankrupt and the bank has to foreclose on the property. Thus both parties choose "extend and pretend" as the rational action, even though it's not good for the developer and terrible for the surrounding community. From my friends in the real estate business, my understanding is that a shocking percentage of commercial real estate is currently operating in this "extend and pretend mode," which ironically just reinforces the pattern, since all the players involved know that if the banks started forcing the issue they would likely kick off a chain reaction of bankruptcies, write-offs, and a destabilized real estate market that would lead to huge losses for most or all of them. So instead, "this is fine."
- 5y ago
ChrisMarshallNY 5y ago
If you say the rent is $100/sqft, then the tax break is for $100/sqft of unrealized rent. If you rent at a reasonable (for the area) rent (say, $15/sqft), then you get the money, true, but it may not beat the tax break. Accounting is weird. I learned this, back in the late 1980s. I was wandering around Ann Arbor, and marveled at all the "FOR RENT" signs. The person giving me the tour explained why they were there. I am no expert, and don't know much about tax whatnots and real estate, but that was the story they told me, and they stuck by it.
- ericd 5y ago
  Wait, you’re saying they can write off rent that they should’ve gotten but didn’t because of vacancy? Not an accountant, but I don’t think that’s the case?
  - deleted 5y ago
    [deleted]
- maddyboo 5y ago
  What’s stopping them from “asking” $500/sqft? $1000? At what point is it fraud?
  - ChrisMarshallNY 5y ago
    I do not know the details, but my experience with accounting regulations, is that there's likely to be a lot of heavy-duty checks and balances. I doubt it would be anywhere near as simple as I stated. Remember that I am not an expert in this field.
vincentsaulys 5y ago
What about inheritors? They inherit the property. To them, it is too much effort to try and rent out versus write off the loss on their taxes. (all personal experience of course and idk how much this affects anything at large)
musingsole 5y ago
> I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes." Good for you. My inlaws live near several. They suck.
JeremyNT 5y ago
I don't know the guy, but one property owner here is sitting on a lot of property he bought ages ago that he doesn't even bother to rent out. I think the reason is that the repairs any tenant would demand would be costly, and he paid next to nothing for the buildings. So, in his calculation, he makes enough from appreciation (assuming an eventual sale) that he has no need to rent it. Once you have enough capital, you no longer need to optimize at this level. He may be leaving money on the table, but he's wealthy enough that it doesn't matter. He can afford to be lazy and still turn a profit, while letting the community bear the negative consequences of his vacant eyesores until he inevitably sells them for dozens of times what he paid. Speculation is the real value in real estate. If you don't need money from renters to make your loan payments, why even bother with them?
- ericd 5y ago
  Is this in CA? This is one of the major problems that prop 13 causes, property taxes don’t rise commensurate with the value, so many are content to leave buildings vacant, given that holding costs are so low if the owner bought long ago.
- Aeolun 5y ago
  > If you don't need money from renters to make your loan payments, why even bother with them? That sounds like a good summary of the whole problem.
MrStonedOne 5y ago
its because they are likely tied up in CMBSs with terms that state that the value of the building is based on the value its renting units out at, and if they lower the rent they have to recollateralize the loan (pay an additional down payment, to cover the lost 'value' of the property), but they can just apply missed rent from empty units to the end of the mortgage and take a tax write off. https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g49g4c5/?context=2 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...
- code_biologist 5y ago
  This. I work in the industry and this is the reason.
  - yourapostasy 5y ago
    What is the rationale for granting the tax write off? I'd love to be able to take my peak monthly income, claim "missed income" off that peak of my current monthly income, and take a tax write off my personal taxes.

deleted 5y ago

[deleted]

xhrpost 5y ago

> By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%. I think the issue is more with capital appreciation. Yes, month to month you're still losing nominal dollars for not having a tenant, even with lower taxes. However, that land/building are likely still seeing appreciation, even in markets that aren't "hot". Some friends of mine recently bought a building to open a restaurant. I'm pretty sure it had been vacant for more than half its lifetime, yet trying to negotiate with the owner was a nightmare. They simply didn't want to budge and were apparently very content with saying 'No' to offers and letting it sit there for well over half a decade empty.

awillen 5y ago
It still appreciates if it's rented out, so that doesn't change anything. When it's rented, you get appreciation plus income, and when it's not rented, you get appreciation only.
- kflzufkrbzi 5y ago
  If appreciation is 99% and rent is 1% does it change anything?
  - djrogers 5y ago
    That’s a bit of a straw man, as that degree of market imbalance would completely end renting.
    - nend 5y ago
      Isn't that what this thread is about though? The complete end of renting in this downtown strip. The buildings are sitting empty and not renting.
      - alisonkisk 5y ago
        Why are they appreciating so much if there's no rent to collect? Are storefronts NFTs?
        pstuart 5y ago
        Lots of money out there looking for home, so to speak.
        IG_Semmelweiss 5y ago
        There are hordes of SBA dollars floating around, looking for a home. Havent you seen the fed's balance sheet?
        ethanbond 5y ago
        Because land is finite. Land within an established city even more so. Not only is there rent to collect should they want to, but it’s almost a guarantee that there will be rent to collect indefinitely into the future.
  - 55555 5y ago
franciscop 5y ago
The thing I learned recently that happens in Spain is that if you have a property sitting empty, the government will calculate a "virtual rent" so to speak and charge you based on that (normally lower than actual market rate, but not much). If you rent it out, you get taxed based on what you actually make and not on this potential rent. Real estate taxes are apart/independent. This makes people really want to rent out places, and you see a much higher occupancy than in other countries (you still have squatters, which is a big issue, pushing in the opposite direction so it's still not perfect).
- 6510 5y ago
  It should be much more harsh. If you own a building where a store should be but aren't using it as such you should be made to pay an insane tax for lowering the value of the entire shopping area.
  - 6510 5y ago
    I live in a block with around 6000 people and no stores. That what should be the mall was held hostage for decades by a supermarket chain who have a store 10 km from here. They didn't want their competitors to have it. Eventually the entire thing was changed into a giant day care.
- infogulch 5y ago
  Oh that's a great idea. Especially if the owner is insisting at only renting at a ridiculous price per area -- ok, fine, set your rates at whatever you like even if nobody is remotely willing to pay that, but you'll pay taxes at that rate so best not inflate it too much, hm?
- hanniabu 5y ago
  Sounds like a good opportunity for a business to get paid to rent out your place for a profit that's a fraction of the virtual rent. The owner saves money ahead can kick you out when they find a good client
  - 5y ago
ransom1538 5y ago
"I think the issue is more with capital appreciation." From the commercial landlords I have talked with SF, the lease term length is the main contributor to vacant retail spaces. When a retail shop moves in the lease term can be 5-7 years. Retail shops invest up to 50-100k fixing up the space - they need the guarantee they can rent the place for a lengthy time. Thus, the landlord needs to be sure the retail tenant has the capital and credit to last. So, landlords will hold out - rather than risk a bad tenant for 7 years. And quite frankly, there just aren't enough business models that work in retail spaces. If you have a brand new tenant with a 7 year long lease - this could also wreck your chances of a sale if the new owner wants the space cleared out. Also! Commercial tenants have the protection of LLC (or c-corps, etc) - so if their "Grape vape LLC" doesn't work out - they can just walk - and as a landlord you can't go after them personally.
- Aeolun 5y ago
  How is this a problem? As far as I can see the landlord takes on zero risk there. In the best case scenario the landlord gets a 7 years of steady rent. In the worst case, they get a few months and the store goes out of business (breaking the lease). I see no reason why you couldn’t repeat that ad infinitum?
  - fredophile 5y ago
    Some commercial real estate deals will expect the landlord to contribute some amount for tenant improvements. So if you get a bad tenant you might be out that money. In addition, before they go out of business they probably stop paying rent. So if the business fails in the first year that could easily be a net loss to the landlord compared to waiting for a better tenant.
  - IG_Semmelweiss 5y ago
    Transaction costs. Everytime a lease is signed there are transaction costs and they are not immaterial.

pxeboot 5y ago

I can only speak to residential, but when I worked in the industry, it was extremely rare for rents to go down because many existing tenants would see the new rate and demand a discount or leave. It was perceived as cheaper to have a few vacant units at $2000 a month instead of renting them for less and lowering the rate for anybody renewing their lease.

awillen 5y ago
This is definitely true in large apartment buildings, where units are very comparable and leases are identical. Not so much in commercial where lease terms may vary widely, and even units in the same building may be meaningfully different in value based on how they're currently configured and who's looking to rent (e.g. if you want to rent a space to start a restaurant, and it was previously set up as a restaurant, you've got a lot of infrastructure there already, so it's more valuable to you as a tenant than it would be to someone who wants to use it as a hardware store).
BeFlatXIII 5y ago
I now have the mental image of a tenant moving one unit over to start “new” and get the discount lease rate. Thanks for brightening my day.
- TeMPOraL 5y ago
  That's how you deal with mobile phone operators :). Threaten them to leave if they won't give you a better offer, and if they don't, then just leave... and come back some time later, to get the much better "new customer" treatment.
  - BeFlatXIII 5y ago
    Works for cable internet, too, if there’s more than one provider in your neighborhood.
- m-ee 5y ago
  A friend of mine did this during the pandemic. Asked for a rent reduction and the landlord refused but offered them an identical unit in the building at the lower price.

conjecTech 5y ago

There may be other factors besides what they nominally "want". Depending on their source of financing, landlords changing the rent on these spaces can be both logistically difficult and may cause a huge negative cashflow shock because of the way it effects capital requirements on commercial loans. Louis Rossmann covers it in a video (https://www.youtube.com/watch?v=NdfmMB1E_qk https://www.youtube.com/watch?v=NdfmMB1E_qk) based on this reddit comment (https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g4ai27m/?context=3 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...).

smsm42 5y ago

Small point on [1] - it's not only EITC, there are a number of benefits that are income-dependant where a small income increase could make you ineligible for a ton of benefits. Effective marginal tax rates for people right around poverty line is crazy high for their income - because each additional dollar earned turns into lost benefits. https://fee.org/articles/the-welfare-trap-labyrinth-of-programs-punishes-work/ https://fee.org/articles/the-welfare-trap-labyrinth-of-progr... The tax rates still aren't 100% there but even something like 50% may seriously discourage people.

namibj 5y ago
Just to add: a receiver of "Hartz IV" long-term unemployment in Germany can earn an income of 100 EUR/month tax-free, with an 80% marginal tax rate for the next iirc ~700 EUR, due to unemployment benefits going down accordingly (think as if that tax was automatically deducted from your benefits).

busterarm 5y ago

I worked doing data entry in my teen years for a tax certiorari law firm in NYC and I can tell you that one of the favorite tricks of multiple-building owners is to have a mostly vacant building (or several) as a tax sink. Most of the time they would put their family in the units at no charge and write off the whole building to offset their others. This is especially true of buildings they were holding for sale to property developers.

novok 5y ago
Wouldnt they make more money overall renting it although? There is only so many free units you can give your family and friends.
- brendoelfrendo 5y ago
  They're probably just holding onto the building to sell it to someone else. The next buyer, in turn, is only buying it to sell it for even more. Tenants may even be considered a liability. They don't want to manage a property, they want to hold an asset as an investment.
  - somnic 5y ago
    This only makes sense if tenants are a liability, because you get property value increase + rental income. As long as renting doesn't decrease the property value by more than the net rental income there's gotta be something else going on. And if you don't want to manage a property, property management companies exist for that exact reason.
- busterarm 5y ago
  Tenants ask for things that family might not necessarily. Also you can leave most of the building in poor shape while keeping up the units you're letting family stay in.

s0rce 5y ago

I'm sure you'd make more money after takes renting it out but you have more costs associated with having a tenant (and risks). If you can just sit on a vacant property get some tax rebates and watch it appreciate you don't need to do anything. Your tenant won't break stuff, you don't need to find new ones, its just appreciating slowly and requires less hands on management.

burlesona 5y ago

There is actually a phenomenon colloquially called "extend and pretend," where it's better for commercial properties to sit vacant or half-vacant than lower the rent. The reason is, the building is financed based on it's calculated property value, and commercial property value is simply a multiple of the listed rent. Whether or not you're collecting the rent is immaterial -- after all it's perfectly normal to buy a vacant lot and built a building on it, or to buy an old warehouse etc. and refurbish it, etc., such that the bank has to make the lending decision based on projected rent rather than actual rent. So this is what they do. The problem is only when the projections are proven false, such as when you lower the rent to fill the space. If you do that, the bank must now lower the value of the building, which can easily make the building worth less than the loan. Further complicating things, commercial properties are usually on short-term financing, for example a 5-year "revolving" loan where the developer pays interest only for 5-years and then is expected to pay off the loan all at once (unlikely) or refinance (99% of the time). So, suppose the building has a $8M loan based on a theoretical $10M valuation. The developer is making the payments, whether from the partial rent, or his personal bank account, even though the building is vacant. The loan is now due to be refinanced. If the developer says, "I'll get a tenant in here any day now," the banker can nod and say "I believe you," and refinance the building. The developer keeps paying the payments and doesn't have to go bankrupt. The banker doesn't have to foreclose and write off the loan as a loss. Conversely, if the developer had cut the rent in half to get the building full, the banker now has to lower the building's value from $10M to $5M, and therefore the maximum loan is reduced to $4M. But the developer owes $8M to the bank, and doesn't have the money to pay it off. Not even the $4M to cover the difference and refinance the rest. In this scenario, the developer goes bankrupt and the bank has to foreclose on the property. Thus both parties choose "extend and pretend" as the rational action, even though it's not good for the developer and terrible for the surrounding community. From my friends in the real estate business, my understanding is that a shocking percentage of commercial real estate is currently operating in this "extend and pretend mode," which ironically just reinforces the pattern, since all the players involved know that if the banks started forcing the issue they would likely kick off a chain reaction of bankruptcies, write-offs, and a destabilized real estate market that would lead to huge losses for most or all of them. So instead, "this is fine."

5y ago

ChrisMarshallNY 5y ago

If you say the rent is $100/sqft, then the tax break is for $100/sqft of unrealized rent. If you rent at a reasonable (for the area) rent (say, $15/sqft), then you get the money, true, but it may not beat the tax break. Accounting is weird. I learned this, back in the late 1980s. I was wandering around Ann Arbor, and marveled at all the "FOR RENT" signs. The person giving me the tour explained why they were there. I am no expert, and don't know much about tax whatnots and real estate, but that was the story they told me, and they stuck by it.

ericd 5y ago
Wait, you’re saying they can write off rent that they should’ve gotten but didn’t because of vacancy? Not an accountant, but I don’t think that’s the case?
- deleted 5y ago
  [deleted]
maddyboo 5y ago
What’s stopping them from “asking” $500/sqft? $1000? At what point is it fraud?
- ChrisMarshallNY 5y ago
  I do not know the details, but my experience with accounting regulations, is that there's likely to be a lot of heavy-duty checks and balances. I doubt it would be anywhere near as simple as I stated. Remember that I am not an expert in this field.

vincentsaulys 5y ago

What about inheritors? They inherit the property. To them, it is too much effort to try and rent out versus write off the loss on their taxes. (all personal experience of course and idk how much this affects anything at large)

musingsole 5y ago

> I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes." Good for you. My inlaws live near several. They suck.

JeremyNT 5y ago

I don't know the guy, but one property owner here is sitting on a lot of property he bought ages ago that he doesn't even bother to rent out. I think the reason is that the repairs any tenant would demand would be costly, and he paid next to nothing for the buildings. So, in his calculation, he makes enough from appreciation (assuming an eventual sale) that he has no need to rent it. Once you have enough capital, you no longer need to optimize at this level. He may be leaving money on the table, but he's wealthy enough that it doesn't matter. He can afford to be lazy and still turn a profit, while letting the community bear the negative consequences of his vacant eyesores until he inevitably sells them for dozens of times what he paid. Speculation is the real value in real estate. If you don't need money from renters to make your loan payments, why even bother with them?

ericd 5y ago
Is this in CA? This is one of the major problems that prop 13 causes, property taxes don’t rise commensurate with the value, so many are content to leave buildings vacant, given that holding costs are so low if the owner bought long ago.
Aeolun 5y ago
> If you don't need money from renters to make your loan payments, why even bother with them? That sounds like a good summary of the whole problem.

MrStonedOne 5y ago

its because they are likely tied up in CMBSs with terms that state that the value of the building is based on the value its renting units out at, and if they lower the rent they have to recollateralize the loan (pay an additional down payment, to cover the lost 'value' of the property), but they can just apply missed rent from empty units to the end of the mortgage and take a tax write off. https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g49g4c5/?context=2 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...

code_biologist 5y ago
This. I work in the industry and this is the reason.
- yourapostasy 5y ago
  What is the rationale for granting the tax write off? I'd love to be able to take my peak monthly income, claim "missed income" off that peak of my current monthly income, and take a tax write off my personal taxes.