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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 tran

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.

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.