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TL;DR -- The banks demand a certain level of rent and the landlord has no leverage over the bank. It would be interesting if this sort of covenant was made ill

TL;DR -- The banks demand a certain level of rent and the landlord has no leverage over the bank. It would be interesting if this sort of covenant was made illegal/unenforceable. The downside to such a move is that it would make banks more cautious about lending on commercial properties, the upside is that landlords would likely optimize for cash flow and that would reduce vacancies. From a public policy perspective I could see it as a jobs creator since these storefronts hire people and create jobs.

splitstud 3y ago
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kjkjadksj 3y ago
It seems like the market should favor a riskier bank who finances builds without such rent obligations. Are there barriers to this in the market perhaps, legal or otherwise, from preventing this theoretical free market approach from solving the inefficiency?
fallingknife 3y ago
This won't make any difference to the number of retail jobs. People will buy the same amount of stuff and the retail industry will stay the same size. Would just be moving retail from one location to another.
- ChuckMcM 3y ago
  That is a counter intuitive take, care to expand? Clearly it absolutely will "increase" the number of retail jobs in the neighborhood where the storefront is by virtue of a vacant space has zero jobs available and a leased space has non-zero number of jobs available. In the SF Bay Area that would also increase sales tax revenue for the city where the storefront was if they were selling taxable goods. Another subtlety is that "storefront" sounds like "retail" but it really is just a place to do business, it could be a mini-mart, a clothing boutique, or some other goods for sale location, but it could also be a service business like a restaurant, a salon, or pet grooming Etc.
- BobaFloutist 3y ago
  You forget that more retail locations mean more people with jobs, that can then also buy stuff.
gspencley 3y ago
What I don't understand is how it benefits the bank for the owner / borrower to leave a commercial property vacant, thus collecting NO rent, which could impact the borrower's ability to repay the loan even more. Possibly resulting in a default. I guess the bank has the property as collateral. But liquidating the property is also expensive and risky. Generally if you want people to borrow money from you, you want those loans paid back with interest. It can't help business to have customers constantly defaulting and leaving you with physical assets and costly legal and liquidation proceedings. The other thing the article mentioned was "credit tenants": big chains that will take out long leases and continue to rent even if they close the location and it appears vacant. But while clearly the banks would love these tenants, there wasn't a connection made in the article between "borrower is about to default because they can't find a tenant" and "credit tenant swoops in to save the borrower and bank." The only thing credit tenants seem to add to the story is that they are yet another reason there are so many vacant retail locations. A big chain opens a store, and then closes it because the under-performing location costs less to run out the lease than it does to keep it operating. I'm clearly missing something.
- GolfPopper 3y ago
  My takeaway (and perhaps I have it wrong too) is that: 1) The bank doesn't have a mortgage on the commercial property, that's the owner/landlord. 2) The bank can tell the owner, "You can't lease this place for less than $100 per square foot". 3) The benefits to the bank from having "this place goes for $100 per square foot" on their books (or, conversely, the negative consequences of not having that one their books) are strong enough to keep the bank locking that rate in place, even if doing so increases the chances of the landlord going bust. 4) Worst self-percieved case for the bank is: "We own a commercial property worth a lot on paper, because on paper it's worth $100 per square foot, which makes it easy to find another buyer."
  - entropicdrifter 3y ago
    Kinda smells to me like the banks are trying to engage in price-fixing to keep the commercial real estate market from plummeting too far in value too fast
Gibbon1 3y ago
Perhaps banks doing less business issuing mortgages for existing real estate would be good thing. For memory, I read that in the UK the banks issue 17 times more loans for existing real estate than for improvements and new construction. If that's true a lot of what banks are doing is generating fees from churn.
shmerl 3y ago
I don't get what's the point for the bank to demand some level if they are getting nothing in result? I.e. isn't less than what they want still better than nothing?
- thereisnospork 3y ago
  It's about the book value, with both micro and macro incentives. E.g. A 20pct rent cut might mean a 100million property portfolio has to be marked down to 80 million dollars for a 20 million dollar loss. That means: a: lost bonuses for the bankers - self-explanatory. b: potential balance sheet issues. That loss could mean the bank is now overleveraged and regulatorily required to liquidare assets. It could also drive a bank into insolvency if there are poor risk management practices (think Silicon Valley Bank having to mark down bonds due to interest rates.) Losing even a few hundred thousand a month in rent isn't that big of a deal in comparison.
  - ChuckMcM 3y ago
    Agree with this. One of the more interesting things about following the NY AG trial against Trump is to get a peak into how banks "value" things and what they consider "good" or "not good". The overall value of a property is a function of its median rent, so it seems like if the landlord has no tenants but is asking for a high rent, that makes the property more valuable (algorithmically) than one with lower rents. That struck me as pretty wild but it is also clear why it is hard to get people convicted of misrepresenting values because pretty much there is a lot of "because I say so" in the rules.

splitstud 3y ago

[dead]

kjkjadksj 3y ago

It seems like the market should favor a riskier bank who finances builds without such rent obligations. Are there barriers to this in the market perhaps, legal or otherwise, from preventing this theoretical free market approach from solving the inefficiency?

fallingknife 3y ago

This won't make any difference to the number of retail jobs. People will buy the same amount of stuff and the retail industry will stay the same size. Would just be moving retail from one location to another.

ChuckMcM 3y ago
That is a counter intuitive take, care to expand? Clearly it absolutely will "increase" the number of retail jobs in the neighborhood where the storefront is by virtue of a vacant space has zero jobs available and a leased space has non-zero number of jobs available. In the SF Bay Area that would also increase sales tax revenue for the city where the storefront was if they were selling taxable goods. Another subtlety is that "storefront" sounds like "retail" but it really is just a place to do business, it could be a mini-mart, a clothing boutique, or some other goods for sale location, but it could also be a service business like a restaurant, a salon, or pet grooming Etc.
BobaFloutist 3y ago
You forget that more retail locations mean more people with jobs, that can then also buy stuff.

gspencley 3y ago

What I don't understand is how it benefits the bank for the owner / borrower to leave a commercial property vacant, thus collecting NO rent, which could impact the borrower's ability to repay the loan even more. Possibly resulting in a default. I guess the bank has the property as collateral. But liquidating the property is also expensive and risky. Generally if you want people to borrow money from you, you want those loans paid back with interest. It can't help business to have customers constantly defaulting and leaving you with physical assets and costly legal and liquidation proceedings. The other thing the article mentioned was "credit tenants": big chains that will take out long leases and continue to rent even if they close the location and it appears vacant. But while clearly the banks would love these tenants, there wasn't a connection made in the article between "borrower is about to default because they can't find a tenant" and "credit tenant swoops in to save the borrower and bank." The only thing credit tenants seem to add to the story is that they are yet another reason there are so many vacant retail locations. A big chain opens a store, and then closes it because the under-performing location costs less to run out the lease than it does to keep it operating. I'm clearly missing something.

GolfPopper 3y ago
My takeaway (and perhaps I have it wrong too) is that: 1) The bank doesn't have a mortgage on the commercial property, that's the owner/landlord. 2) The bank can tell the owner, "You can't lease this place for less than $100 per square foot". 3) The benefits to the bank from having "this place goes for $100 per square foot" on their books (or, conversely, the negative consequences of not having that one their books) are strong enough to keep the bank locking that rate in place, even if doing so increases the chances of the landlord going bust. 4) Worst self-percieved case for the bank is: "We own a commercial property worth a lot on paper, because on paper it's worth $100 per square foot, which makes it easy to find another buyer."
- entropicdrifter 3y ago
  Kinda smells to me like the banks are trying to engage in price-fixing to keep the commercial real estate market from plummeting too far in value too fast

Gibbon1 3y ago

Perhaps banks doing less business issuing mortgages for existing real estate would be good thing. For memory, I read that in the UK the banks issue 17 times more loans for existing real estate than for improvements and new construction. If that's true a lot of what banks are doing is generating fees from churn.

shmerl 3y ago

I don't get what's the point for the bank to demand some level if they are getting nothing in result? I.e. isn't less than what they want still better than nothing?

thereisnospork 3y ago
It's about the book value, with both micro and macro incentives. E.g. A 20pct rent cut might mean a 100million property portfolio has to be marked down to 80 million dollars for a 20 million dollar loss. That means: a: lost bonuses for the bankers - self-explanatory. b: potential balance sheet issues. That loss could mean the bank is now overleveraged and regulatorily required to liquidare assets. It could also drive a bank into insolvency if there are poor risk management practices (think Silicon Valley Bank having to mark down bonds due to interest rates.) Losing even a few hundred thousand a month in rent isn't that big of a deal in comparison.
- ChuckMcM 3y ago
  Agree with this. One of the more interesting things about following the NY AG trial against Trump is to get a peak into how banks "value" things and what they consider "good" or "not good". The overall value of a property is a function of its median rent, so it seems like if the landlord has no tenants but is asking for a high rent, that makes the property more valuable (algorithmically) than one with lower rents. That struck me as pretty wild but it is also clear why it is hard to get people convicted of misrepresenting values because pretty much there is a lot of "because I say so" in the rules.