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I know some landlords that refuse to lower rent since they don't want to lower the book value of the property. I.e. they rather have someplace empty than rent

I know some landlords that refuse to lower rent since they don't want to lower the book value of the property. I.e. they rather have someplace empty than rent it out at the still quite high market rate. There has to be some don't ask don't tell policy going with the banks for that to work?

bobthepanda 3y ago
Commercial loans are made on the basis of the rent, so lowering it may put a loan in default
- piva00 3y ago
  There should be some occupancy rate baked into the analysis as well, no? It doesn't make sense if it's mostly/purely on the basis of the rent, a property with 10 units that has one tenant on a sky high rent but otherwise is completely unoccupied is much worse off than a 10 units property with 10 tenants paying 20% of the sky high rent.
  - bruce511 3y ago
    Worse off cash-flow wise, but better off balance-sheet wise. Now you and I, we're all about the cash flow. But there are serious accounting complications when the balance sheet changes. Plus it's not a good look to reassess asset values up and down all the time (it's a red flag to the tax man) so its better off trying to get a long-term view, not a short term one. But to answer your question, no occupancy is not generally a factor when considering a buildings value. It's too volatile to be a useful input against a long-term asset.
    - piva00 3y ago
      Got it, it makes sense but at the same time (as with most accounting) it... Doesn't? A property can take a loan based on their balance sheet asset value which is based on the rent price, if those rents are too expensive for the market and keep the building mostly unoccupied it means that the asset value is inflated, since it cannot achieve its supposedly sheet value as the rent is not attractive and won't generate cash flow, if/when the building as an asset is sold the buyer will want to have it to generate cash flow and that requires renting out as much as possible for the higher amount possible, so at some point the whole charade just implodes? Wrapping my head around financial tricks is quite hard sometimes, some of it just feels like smoke-and-mirrors way too detached from reality. Is it because it's mostly purely quantitative rather than qualitative in the 2020s?
      - bruce511 3y ago
        Think of it this way, on the one hand the building changes in value a bit every month. Sometimes it's up, sometimes it's down. And sure, there might be a bank-loan against the building. But buildings are not revalued all the time. They typically revalue when they change hands. You might have it revalued (up) if you want to get a bigger loan, but it's not like the bank is running around revaluing buildings in case they went down. (It's not good for them to acknowledge it's underwater either.) Both parties are optimizing for the _long game_. If the market is in a short-term slump (think < 5 years) then it pays the bank to wait for a recovery, and it pays the company to hang on. Yes, if done at scale, across an industry, then the wheels can come off in a big way (as happened in 2008) but for short term fluctuations there's a polite understanding that it's in everyone's interest to carry on through the downswing into the next upswing.
- deleted 3y ago
  [deleted]
PeterisP 3y ago
It's a short term workaround, as it has no impact on real value and they have to pay the bank anyway without that income stream; so if someone feels their operation will go insolvent, that's a way to postpone it at the cost of some extra losses, but not prevent it.
LarsAlereon 3y ago
I like the idea of punitively high taxes for unoccupied properties to try to encourage landlords to rent at market rates.
- bluecalm 3y ago
  Land value tax is enough imo. Wasting land potential and speculation is heavily disincentivized by it. Penalties for not renting would be gamed in no time.

bobthepanda 3y ago

Commercial loans are made on the basis of the rent, so lowering it may put a loan in default

piva00 3y ago
There should be some occupancy rate baked into the analysis as well, no? It doesn't make sense if it's mostly/purely on the basis of the rent, a property with 10 units that has one tenant on a sky high rent but otherwise is completely unoccupied is much worse off than a 10 units property with 10 tenants paying 20% of the sky high rent.
- bruce511 3y ago
  Worse off cash-flow wise, but better off balance-sheet wise. Now you and I, we're all about the cash flow. But there are serious accounting complications when the balance sheet changes. Plus it's not a good look to reassess asset values up and down all the time (it's a red flag to the tax man) so its better off trying to get a long-term view, not a short term one. But to answer your question, no occupancy is not generally a factor when considering a buildings value. It's too volatile to be a useful input against a long-term asset.
  - piva00 3y ago
    Got it, it makes sense but at the same time (as with most accounting) it... Doesn't? A property can take a loan based on their balance sheet asset value which is based on the rent price, if those rents are too expensive for the market and keep the building mostly unoccupied it means that the asset value is inflated, since it cannot achieve its supposedly sheet value as the rent is not attractive and won't generate cash flow, if/when the building as an asset is sold the buyer will want to have it to generate cash flow and that requires renting out as much as possible for the higher amount possible, so at some point the whole charade just implodes? Wrapping my head around financial tricks is quite hard sometimes, some of it just feels like smoke-and-mirrors way too detached from reality. Is it because it's mostly purely quantitative rather than qualitative in the 2020s?
    - bruce511 3y ago
      Think of it this way, on the one hand the building changes in value a bit every month. Sometimes it's up, sometimes it's down. And sure, there might be a bank-loan against the building. But buildings are not revalued all the time. They typically revalue when they change hands. You might have it revalued (up) if you want to get a bigger loan, but it's not like the bank is running around revaluing buildings in case they went down. (It's not good for them to acknowledge it's underwater either.) Both parties are optimizing for the _long game_. If the market is in a short-term slump (think < 5 years) then it pays the bank to wait for a recovery, and it pays the company to hang on. Yes, if done at scale, across an industry, then the wheels can come off in a big way (as happened in 2008) but for short term fluctuations there's a polite understanding that it's in everyone's interest to carry on through the downswing into the next upswing.
deleted 3y ago
[deleted]

PeterisP 3y ago

It's a short term workaround, as it has no impact on real value and they have to pay the bank anyway without that income stream; so if someone feels their operation will go insolvent, that's a way to postpone it at the cost of some extra losses, but not prevent it.

LarsAlereon 3y ago

I like the idea of punitively high taxes for unoccupied properties to try to encourage landlords to rent at market rates.

bluecalm 3y ago
Land value tax is enough imo. Wasting land potential and speculation is heavily disincentivized by it. Penalties for not renting would be gamed in no time.