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I’ve heard from non-authorities sources that loans for the comercial properties have covenants that would severely financially punish the landlord for lowering

I’ve heard from non-authorities sources that loans for the comercial properties have covenants that would severely financially punish the landlord for lowering the rent. Enough of these restrictions in a single location would have a monopolistic effect on pricing paid for by landlords who now have to carry these loans without tenants. Usually it’s expensive to distort a market enough to maintain monopoly pricing but not if you can get someone else that is optimistic, naive, or desperate to pay for it.

onlyrealcuzzo 4y ago
IIUC, this is an expansionary accounting trick. Your revenue in commercial real estate is imaginary. If your building is vacant 100% of the time for the year, your revenue is 12 months x your desired rent. Then you have an expense of 12 months vacancy. You can get loans based on your revenue. Additionally, it's the reason you see concessions of 1-2 months free all the time - but landlords will never reduce the rent. concessions are expenses. Revenue is 100% of their desired rent.
- cjbgkagh 4y ago
  Would that be a covenant on revenue vs a covenant on rental price? Wouldn’t that amount to the same thing. I’m not in that industry nor have I paid particular attention to it, just going by a rumor I head from a friend. Perhaps instead of a covenant it could be more implicitly enforced by suggesting if there is a revenue drop they’ll revalue the property and force the landlord to make up the difference which could be financially ruinous for some.
- 8note 4y ago
  Claiming revenue that you never actually had sounds fraudulent? Can't they extend the trick, so that they have one unit that rents at $100B that always has the vacancy expense of $100B? Then they can set the other rents as they like with little impact to their revenue
VHRanger 4y ago
Having rented commercial properties, the way around this is to agree to the lease rent, but then negotiate a bunch of rent vacations, financed renovations, etc. which even out to having a much lower lease. The commercial landlord financial infrastructure is broken, but gameable. Also, a land value tax would fix this (and many other real estate market distortions)

onlyrealcuzzo 4y ago

IIUC, this is an expansionary accounting trick. Your revenue in commercial real estate is imaginary. If your building is vacant 100% of the time for the year, your revenue is 12 months x your desired rent. Then you have an expense of 12 months vacancy. You can get loans based on your revenue. Additionally, it's the reason you see concessions of 1-2 months free all the time - but landlords will never reduce the rent. concessions are expenses. Revenue is 100% of their desired rent.

cjbgkagh 4y ago
Would that be a covenant on revenue vs a covenant on rental price? Wouldn’t that amount to the same thing. I’m not in that industry nor have I paid particular attention to it, just going by a rumor I head from a friend. Perhaps instead of a covenant it could be more implicitly enforced by suggesting if there is a revenue drop they’ll revalue the property and force the landlord to make up the difference which could be financially ruinous for some.
8note 4y ago
Claiming revenue that you never actually had sounds fraudulent? Can't they extend the trick, so that they have one unit that rents at $100B that always has the vacancy expense of $100B? Then they can set the other rents as they like with little impact to their revenue

VHRanger 4y ago

Having rented commercial properties, the way around this is to agree to the lease rent, but then negotiate a bunch of rent vacations, financed renovations, etc. which even out to having a much lower lease. The commercial landlord financial infrastructure is broken, but gameable. Also, a land value tax would fix this (and many other real estate market distortions)