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Risk. Someone has got to take the risk of owning the property. Don't take it as some kind of moral imperative, I don't mean it that way. It's not inherently go

Risk. Someone has got to take the risk of owning the property. Don't take it as some kind of moral imperative, I don't mean it that way. It's not inherently good or bad. But simply put if a thing has value, people need to decide how to structure access to it. You can't get around having some entity that has the thing on its balance sheet, and that entity decides how to finance the maintenance of the thing. Do you pay in cash? Do you get a mortgage? Do you rent it to mom and pop, or some large corporation? What do you allow in the contracts? These kinds of decisions have an effect on what the thing will be worth, and in the end there's a risk taker who gets rewarded or punished for doing it well or doing it badly. You can roll the risk into some larger conglomerate that does other things like building the stuff in the first place, or a financial entity that has some financing advantage, or some entirely other thing that might make sense. But in the end, the risk is there somewhere in some entity and needs to be dealt with.

nordsieck 4y ago
> But simply put if a thing has value, people need to decide how to structure access to it. You can't get around having some entity that has the thing on its balance sheet, and that entity decides how to finance the maintenance of the thing. I mean, you can. The property system isn't the only way to structure access to rival goods; it's just the best way[1]. Of course, without an owner, the property is immediately subject to the tragedy of the commons which is almost always worse than even the worst landlords. --- 1. For most things. Some stuff is... weird. I don't know a lot about water rights, but I've heard that's one of the least good areas of property law. And some things (ocean dwelling fish for example) can't really be property in a meaningful way.
- lordnacho 4y ago
  Absolutely, I'm just saying this is what the rental company does in the modern economy. We have this world where we assign ownership to everything and let the owners decide what to do. Of course it could be different.
- tivert 4y ago
  > Of course, without an owner, the property is immediately subject to the tragedy of the commons which is almost always worse than even the worst landlords. IIRC, the "tragedy of the commons" is basically a fiction, at least when it comes to things like the example literal plot of common grazing land. People aren't the stupid, pathologically self-centered and antisocial agents simple economics often assumes they are. If they're in a community, they work out systems to prevent overgrazing. IMHO, "tragedy of the commons" only really happens when no community can form and no community coordination can happen. https://en.wikipedia.org/wiki/Tragedy_of_the_commons#Criticism https://en.wikipedia.org/wiki/Tragedy_of_the_commons#Critici...
  - mc32 4y ago
    Fishing with overfishing and depletion of fish stock is an example of tragedy of the commons. Also it’s seen in BLM grazing lands when mismanaged by the BLM. It’s not a fiction.
    - tivert 4y ago
      > Fishing with overfishing and depletion of fish stock is an example of tragedy of the commons. Also it’s seen in BLM grazing lands when mismanaged by the BLM. It’s not a fiction. I don't disagree, but I think the "tragedy of the commons" is overstated to imply that commons are always a failure (ultimately as propaganda for private-property-is-the-only-solution). I think, if you have a stable community using the resource that can take responsibility for it, it will manage it to avoid the tragedy. If no community can form (e.g. fishing in international waters) or one is prevented from forming (e.g. by some authority like the BLM asserting responsibility but failing to take it), that's when you'll get the tragedy. A "building without an owner" is a case where I definitely could see a tragedy of the commons being avoided, so long as it has relatively stable set of tenants. It'd basically turn into a co-op.
rwmj 4y ago
Isn't the bank taking the risk here? The story we're commenting on is about how commercial landlords have defaulted, passing the risk along to the bank.
- lordnacho 4y ago
  There's several levels of risk, and having separate entities is what allows us to segment it. First, let's think of it like a layer cake. We can call them tranches as well. The company that owns the buildings borrows money from the bank. They want to pay the loans back by managing the buildings in such a way that income from rents outweigh the interest on their mortgages, plus the admin costs of staff and other little stuff. The loans (and salaries) have to be paid from the incomes before anything else. The thing is though, the bottom layer, equity, takes anything beyond the obligations. So if you owe the bank 1M and the staff 500K, but the renters are paying you 10M, you get to keep the whole 8.5M profit. If the renters only pay you 1.5M, you get no profit but the bank and the staff are happy. If you can't pay the bank, the bank will repossess the properties. Basically, the bank's loan is converted to equity. This also means the bank can lose money on the deal, because it's possible that even selling the building leaves them in the negative, for instance if it somehow becomes worth a lot less. So actually both the owner of the building and the bank are taking related risks. The bank is taking a credit risk: they mainly only care that you can pay the loans back and that the collateral has reasonable value. The owner is taking an equity risk: they want to balloon the profits above the interest/admin expenses so they can get those dividends.
  - candiodari 4y ago
    > If you can't pay the bank, the bank will repossess the properties. Basically, the bank's loan is converted to equity. This also means the bank can lose money on the deal, because it's possible that even selling the building leaves them in the negative, for instance if it somehow becomes worth a lot less. This is absurd. For the bank, because the bank is virtually guaranteed to lose money. The only reason "owners" can't pay the bank is that the lease prices have dropped (usually by a lot). If the lease prices have dropped, the value of the property has dropped, and if it can't be refinanced the value of the property has dropped below the capital owed. So the bank gets the property, but only if that doesn't solve the problem of the money owed. In other words, this is a useless guarantee. Furthermore, the owners will never pay back the loan. Rather they'll buy more properties. So this is like a lot of business loans: an effectively eternal ("interest-only") loan. Any bet that the market will never go down has a zero chance of being correct. And of course, as demonstrated yet again this will happen to a lot of properties at the same time, magnifying the losses. Why are banks allowed to make that bet? For society, because the owners of the building don't contribute anything. They don't contribute capital, which is what defines ownership in capitalism. They don't contribute admin work (that's outsourced). The only thing they have is clout with the banks, sometimes city hall, built up trust, or "goodwill". In other words, they are in their position because of corruption. Also for society because no owner will risk his personal wealth on something like a building. It will be packaged as a limited liability company. So when it goes bankrupt, the owner at most loses an income stream that was probably going 99% to interest payments anyway.
thebooktocome 4y ago
I’d agree with you but for the part where—at least in America—any substantial loss one of these landlords might take is bailed out or subsidized by some level of government, i.e., by the taxpayer. For example, a local mall is teetering on the edge of bankruptcy, but not to fear: the township is in talks to purchase it at market value so as to not create an eyesore. Utter insanity.
- lordnacho 4y ago
  Yes it's actually important that whoever has risk in a project has a say in it. What we've seen recently is a parody of the free market.

nordsieck 4y ago

> But simply put if a thing has value, people need to decide how to structure access to it. You can't get around having some entity that has the thing on its balance sheet, and that entity decides how to finance the maintenance of the thing. I mean, you can. The property system isn't the only way to structure access to rival goods; it's just the best way[1]. Of course, without an owner, the property is immediately subject to the tragedy of the commons which is almost always worse than even the worst landlords. --- 1. For most things. Some stuff is... weird. I don't know a lot about water rights, but I've heard that's one of the least good areas of property law. And some things (ocean dwelling fish for example) can't really be property in a meaningful way.

lordnacho 4y ago
Absolutely, I'm just saying this is what the rental company does in the modern economy. We have this world where we assign ownership to everything and let the owners decide what to do. Of course it could be different.
tivert 4y ago
> Of course, without an owner, the property is immediately subject to the tragedy of the commons which is almost always worse than even the worst landlords. IIRC, the "tragedy of the commons" is basically a fiction, at least when it comes to things like the example literal plot of common grazing land. People aren't the stupid, pathologically self-centered and antisocial agents simple economics often assumes they are. If they're in a community, they work out systems to prevent overgrazing. IMHO, "tragedy of the commons" only really happens when no community can form and no community coordination can happen. https://en.wikipedia.org/wiki/Tragedy_of_the_commons#Criticism https://en.wikipedia.org/wiki/Tragedy_of_the_commons#Critici...
- mc32 4y ago
  Fishing with overfishing and depletion of fish stock is an example of tragedy of the commons. Also it’s seen in BLM grazing lands when mismanaged by the BLM. It’s not a fiction.
  - tivert 4y ago
    > Fishing with overfishing and depletion of fish stock is an example of tragedy of the commons. Also it’s seen in BLM grazing lands when mismanaged by the BLM. It’s not a fiction. I don't disagree, but I think the "tragedy of the commons" is overstated to imply that commons are always a failure (ultimately as propaganda for private-property-is-the-only-solution). I think, if you have a stable community using the resource that can take responsibility for it, it will manage it to avoid the tragedy. If no community can form (e.g. fishing in international waters) or one is prevented from forming (e.g. by some authority like the BLM asserting responsibility but failing to take it), that's when you'll get the tragedy. A "building without an owner" is a case where I definitely could see a tragedy of the commons being avoided, so long as it has relatively stable set of tenants. It'd basically turn into a co-op.

rwmj 4y ago

Isn't the bank taking the risk here? The story we're commenting on is about how commercial landlords have defaulted, passing the risk along to the bank.

lordnacho 4y ago
There's several levels of risk, and having separate entities is what allows us to segment it. First, let's think of it like a layer cake. We can call them tranches as well. The company that owns the buildings borrows money from the bank. They want to pay the loans back by managing the buildings in such a way that income from rents outweigh the interest on their mortgages, plus the admin costs of staff and other little stuff. The loans (and salaries) have to be paid from the incomes before anything else. The thing is though, the bottom layer, equity, takes anything beyond the obligations. So if you owe the bank 1M and the staff 500K, but the renters are paying you 10M, you get to keep the whole 8.5M profit. If the renters only pay you 1.5M, you get no profit but the bank and the staff are happy. If you can't pay the bank, the bank will repossess the properties. Basically, the bank's loan is converted to equity. This also means the bank can lose money on the deal, because it's possible that even selling the building leaves them in the negative, for instance if it somehow becomes worth a lot less. So actually both the owner of the building and the bank are taking related risks. The bank is taking a credit risk: they mainly only care that you can pay the loans back and that the collateral has reasonable value. The owner is taking an equity risk: they want to balloon the profits above the interest/admin expenses so they can get those dividends.
- candiodari 4y ago
  > If you can't pay the bank, the bank will repossess the properties. Basically, the bank's loan is converted to equity. This also means the bank can lose money on the deal, because it's possible that even selling the building leaves them in the negative, for instance if it somehow becomes worth a lot less. This is absurd. For the bank, because the bank is virtually guaranteed to lose money. The only reason "owners" can't pay the bank is that the lease prices have dropped (usually by a lot). If the lease prices have dropped, the value of the property has dropped, and if it can't be refinanced the value of the property has dropped below the capital owed. So the bank gets the property, but only if that doesn't solve the problem of the money owed. In other words, this is a useless guarantee. Furthermore, the owners will never pay back the loan. Rather they'll buy more properties. So this is like a lot of business loans: an effectively eternal ("interest-only") loan. Any bet that the market will never go down has a zero chance of being correct. And of course, as demonstrated yet again this will happen to a lot of properties at the same time, magnifying the losses. Why are banks allowed to make that bet? For society, because the owners of the building don't contribute anything. They don't contribute capital, which is what defines ownership in capitalism. They don't contribute admin work (that's outsourced). The only thing they have is clout with the banks, sometimes city hall, built up trust, or "goodwill". In other words, they are in their position because of corruption. Also for society because no owner will risk his personal wealth on something like a building. It will be packaged as a limited liability company. So when it goes bankrupt, the owner at most loses an income stream that was probably going 99% to interest payments anyway.

thebooktocome 4y ago

I’d agree with you but for the part where—at least in America—any substantial loss one of these landlords might take is bailed out or subsidized by some level of government, i.e., by the taxpayer. For example, a local mall is teetering on the edge of bankruptcy, but not to fear: the township is in talks to purchase it at market value so as to not create an eyesore. Utter insanity.

lordnacho 4y ago
Yes it's actually important that whoever has risk in a project has a say in it. What we've seen recently is a parody of the free market.