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Why do commercial spaces sit vacant?
- polalavik 10mo agoWe need land value tax bad [1] In Los Angeles I’ve watched business after business close because their rent was increased by their commercial landlord only for the property to sit vacant in some cases (no exaggeration) for over 5 years! Thats absurd. Also as a business owner who would like some space to work out of your only options are endless swaths of vacant industrial buildings that are tens of thousands in rent a month. I don’t quite get how anyone runs a brick and mortar or has space to do anything profitable. [1] https://en.wikipedia.org/wiki/Land_value_tax https://en.wikipedia.org/wiki/Land_value_tax
- zem 10mo agosame thing happens in SF, often to businesses that have been a valued part of the local neighbourhood for years. it's infuriating.
- anigbrowl 10mo agoYep, this has wiped out my favorite deli, local cinemas, and bookstores in the east bay. Basically non-capital-intensive businesses seem to pay the price for the market signal falsification engaged in by landlords and banks. But nobody wants to bite the bullet and risk setting off a repeat of the 2008 financial crisis, so we've ended up with some kind of hypernormalization-style fake economy which is being 'run' by a former reality TV star and a bunch of TV personalities and political entrepreneurs.
- dec0dedab0de 10mo agoDon't underestimate how many businesses are supplementing their income with dirty money.
- harmmonica 10mo agoI’d support a land value tax myself so don’t take this following comment as criticism, but you don’t even need a land value tax in the case of LA. You do need to repeal Prop 13 for investment properties. I wager most of those years-vacant properties have a generous Prop 13 assessment and so the owner can just sit on it because their carrying cost is closer to zero than what it would be in any other tax regime. Then all of us folks around them continue to make the adjacent area nicer and they just ride off into the sunset while the absurd delta between their taxable value and market value increases. Prop 13 is like the anti land value tax. Makes places like Texas look downright progressive.
- spankalee 10mo agoWe need to repeal Prop 13 completely. The fact that my neighbors pay 1/10th the property tax that I do, despite being younger and less at risk of being forced out of their home due to going fixed income or some financial crisis, is absurd.
- ricksunny 10mo agoI'm a former (i.e. not irrelevant to the question) Californian who also thinks Prop 13 should be repealed, and am probably supportive of LVT; Can you walk through the scenario that younger neighbors pay a tech of the property tax you do? Are they legacies and benefiting from some sort of inherited trust or something?
- shaftway 10mo agoNot OP, but it's probably about inheritance rules. If you inherit a property then you inherit its tax basis. In fact, if I remember correctly, you inherit the tax basis, but the capital gains basis resets. You effectively inherit a property that has a low property tax, but face zero capital gains if you turn around and sell it. All of this is subject to limits and rules and stuff. I think prop 19 made it so that you have to use it for your primary residence for the first year. And I think there's a cap on the difference between property value and tax basis of ~$1m.
- coliveira 10mo agoSome businesses survive because they already own the property or have long time leases.
- kcplate 10mo agoSometimes the last lessee is still on the hook for the remainder of the lease due to landlord improvements for the tenant. Had a friend lease a retail storefront, his business failed, but he still was coughing up rent to the landlord until the space was leased again. He was a sole proprietor and had to personally guarantee the lease. It was in his best interests to pay it rather than take the hit to his credit by defaulting on the lease. My guess is a already wealthy landlord would probably be motivated to ride out the remainder of an existing lease and write off any unpaid amount as a loss before lowering the price to attract another business into the space.
- PaulHoule 10mo agoThe article points that adding any more costs just costs the operator money and won't change their behavior unless the costs are so high that the bank is forced to foreclose. Maybe on some that level that is a good thing and clears the market but in the current situation the banks just won't make loans unless this happens. It makes me think of the "poker game" model of nuclear power plant construction where the vendor is quoting a price lower than they know it will cost because otherwise they wouldn't make the sale. If commercial buildings were properly priced at the outset, banks would be financing fewer of them.
- estearum 10mo ago> The article points that adding any more costs just costs the operator money and won't change their behavior unless the costs are so high that the bank is forced to foreclose. That is assuming operators are roughly zero-IQ automatons who can't factor future costs into present decisions?
- marcosdumay 10mo agoYes, the idea of a land value tax is to make it high enough to for banks to foreclose. The entire thing is about making sure land is used on the most socially benefiting way possible.
- dragonwriter 10mo ago> The entire thing is about making sure land is used on the most socially benefiting way possible. The idea of land value tax is to make the government effectively the universal landowner and everyone else renters, and renters paying a high enough rent that it is economically infeasible to use land for any but the most financially remunerative purpose. Having it optimizing for social utility rather than maximizing negative externalities requires a finely optimized system of Pigovian taxes and subsidies, otherwise you are nailing the accelerator to the floor on the divergence between market incentives and social utility.
- epistasis 10mo ago
- spwa4 10mo agoHow does land value tax change the scenario in the article? It plays out exactly the same way with and without land value tax.
- spankalee 10mo agoLand value tax mainly helps with severely under-utilized properties like parking lots. Right now a parking lot is taxed far, far lower than a lot with a building, so the owner can keep it for parking when it would be better utilized as residential, commercial, or office space. If it didn't pencil out to just site on empty land, we'd get better development.
- spwa4 10mo agoSo it does not help with commercial property? How does that work? I don't understand the reasoning. Because this is of course not true unless it lowers the value of that land to below zero. And if it lowers the value of that land even just to zero, it'll just be undeveloped entirely ...
- ImPostingOnHN 10mo ago> So it does not help with commercial property? The opposite: It does help with commercial property > if it lowers the value of that land even just to zero, it'll just be undeveloped entirely It's not that the value of the land is zero, but rather the price can drop to zero. The price is a factor of both the land value and the taxes on the land. For example, suppose you buy land for $50, and you wish to 10x your investment, and won't resell for less than $500 (which nobody will pay). Suppose further that the land value tax is $0/mo. You can sit on the land doing nothing, ruining the community, and it won't cost you much. Now suppose the land value tax is raised/added to the tune of $1/mo. You would need to find some use for the land that raises more than $1/mo, or else you're losing money every month. Costing money every month means the land is now worth less, let's say $25. But what if you don't want to use the land, because you're a speculator, not a business owner? Well, you can choose to either keep losing money monthly, or sell the land for $25. Economically speaking, you might choose to sell the land if you would otherwise keep it empty for >25 months. If you choose to sell the land, whether for $25 or $0, then I could buy it and run a business from there, and as long as the business makes more than $1, I stand a chance to profit. Thus, I win, and also the community wins, because the storefront that the original speculator kept empty gets filled with something useful. In fact, in this scenario, everybody wins except the real estate speculator who was ruining the community by keeping storefronts empty, and that person deserves to lose and be punished. With any luck, the speculator realizes that what they're doing is both bad and unprofitable, and either finds a useful way to contribute to the community, or fucks off forever. Either way, the community wins!
- atoav 10mo agoAnd I don't even think it is controversial. People who squat on needed resources without using them are a drain on society, thus society should try to create an incentive structure for using spaces. A tax can be part of this.
- scifi 10mo agoTrue. What I don’t get, is how is vacancy a good move for the landlord? Wouldn’t it make more sense to have a tenant during that time?
- bobthepanda 10mo agoCommercial loans are not like residential mortgages and often the loan is based on a minimum rent. If you go below that then you are in default.
- deleted 10mo ago[deleted]
- triceratops 10mo agoHow do they make mortgage payments without rent?
- bobthepanda 10mo ago* own a portfolio of real estate, so losses in one area can be offset * own a mixed use building, so an empty ground floor retail space can be offset by multiple floors of apartments also, if the rise in equity outpaces the losses in rents it can still be net positive
- duskwuff 10mo agoI don't like just saying "read the article", but this is precisely what the article explains. In short: the rental rates are a condition of the property owner's loan.
- danjl 10mo agoWhat about incentivizing switching the building from commercial to residential? Given that commercial brick and mortar are generally on a downward trend, and the need for housing continues to increase, it would seem better to switch the property zoning in the long run. Since I'm clueless about the financial details of commercial real estate, I'm sure this proposal is full of holes, but, as a rule, I prefer incentives rather than penalties to motivate change.
- seanmcdirmid 10mo agoIs it because of Prop 13 that commercial property owners aren't paying adequate property taxes that would act to encourage use?
- bell-cot 10mo agoOne "Simple Fix" for cities, albeit with limited scope: Force your Planning Commission, Zoning Board, etc. to keep track of the vacancy rates for commercial space. Then use their powers to strongly discourage the construction of yet more vacant commercial space. And/or renovation of such space to other uses. EDIT: - Please do not assume some trivial straw-man implementation of this idea. That includes City organization being hopelessly corrupt or incompetent.
- antognini 10mo agoHow would this help? If the existing operators refuse to lower rents and leave their spaces vacant then under this scheme no one else can build new spaces which rent at lower rates. You would just be stuck with vacant properties at above-market rates.
- estearum 10mo agoNo, Just Tax Land (TM)
- kevin_thibedeau 10mo agoJust charge a fine for poorly maintained space that degrades the community. They do this for homeowners.
- warkdarrior 10mo agoThis policy would backfire greatly. For one, if I want to keep a competitor from expanding into my town, I'll just lease some commercial space and keep it vacant. That way they cannot build in my town.
- bluGill 10mo agoThat is a bad answer because it invites too much power to those commissions/boards. They already have a lot of power which they abuse (in places) to not allow things they don't like that would be good for the community.
- dec0dedab0de 10mo agoInteresting, but It doesn't answer why a bank would hold a completely vacant building for 15 years. I think we need Vacancy taxes that go up based on the percentage of time vacant over different spans of time. Anything that makes owning an empty building a bad investment in all circumstances. This needs to apply to all units in a multitenant building.
- coliveira 10mo agoThis doesn't happen because the owners of commercial property are very rich people. Adding these rules would essentially devalue commercial property all over the US, and we know how congress would never allow this to happen.
- deleted 10mo ago[deleted]
- roenxi 10mo ago> Anything that makes owning an empty building a bad investment in all circumstances But empty buildings aren't a bad idea under all circumstances. Eg, It might be prudent to have empty living space in a tourist or student area to deal with annual surges in demand. Or maybe someone has a warehouse full of facemasks because they think the price will 10x in the next pandemic. We'd have the same crowd complaining about empty buildings saying they were just doing it to hide the fact that the building is empty when in fact that is a pretty reasonable strategy that would be socially beneficial.
- anigbrowl 10mo agoThat would be true in a normal economy where supply and demand dominated. See an empty storefront/building, hustle up a few bucks and turn it into an art studio or entertainment space or whatever. But if you start using a building you have to pay rent, and if you pay rent that goes on the books, and if it goes on the books then the mortgage on the property gets reevaluated and the then the merry-go-round comes to a screeching halt, because most commercial property is mortgaged up to the eyeballs.
- LgWoodenBadger 10mo agoPricing something based on what you project to make over 20 years seems like an insane way to go about it. Nobody can predict that far in the future. It's a no-lose scenario for banks though, which is why it's done that way I guess.
- antognini 10mo agoThis article probably omitted it for simplicity, but you would discount the income stream over time. Projected income at the 20 year mark is valued much less than income next year. That helps to account for the uncertainty.
- crazygringo 10mo agoEverything is priced that way, basically. In the world of finance, everything is priced according to the future income it can generate -- not just real estate, but stocks, bonds, etc. There's nothing insane about it. To the contrary, it's the only rational way of doing things. You're right that nobody can predict correctly that far in the future, but ultimately you have to choose whether you think a business decision will be profitable or not, so you have to predict anyways or else you could never do anything. People build lots of models to try to predict better. And market prices reflect a middle point between the pessimists and the optimists. Also, it's not no-lose for banks. If the owner walks and the property is re-sold for less than it was originally bought for minus the down payment, the bank very much loses. That's a major point of the article, why the bank would prefer the space to continue vacant for a few years than take that loss.
- mcphage 10mo ago> Everything is priced that way, basically. In the world of finance, everything is priced according to the future income it can generate -- not just real estate, but stocks, bonds, etc. There's nothing insane about it. To the contrary, it's the only rational way of doing things. The only rational way of doing things is to turn every part of our economy into a bubble? Well, that at least explains why it’s all collapsing.
- deleted 10mo ago[deleted]
- soared 10mo agoIn the current world isn’t the “downtown parking lot” situation more common? Where the value of the asset is increasing so quickly year over year, that locking in a contract right now for x years mean forfeiting the increases of future years - meaning the value of your asset is more when vacant than when rented/built on? IE why sell my parking lot this year for $5M when I’m 2 years it will be worth $7M, so I’m better off waiting and taking no income for the next two years as opposed to taking $5M and investing it.
- thaumasiotes 10mo agoAll you need is 20% annual returns and you're better off with the investment. ;D
- strongpigeon 10mo agoA problem is that the externalities of leaving a space vacant are not priced in. Having a bunch of storefront vacant in an area makes it much less appealing and devalues all the other properties surrounding it. It does seem like a vacant storefront tax, which is briefly mentioned at the end of the article, could address this, if partially. This whole extend and pretend deal seems like it's simply accumulating risk hoping this will pass, while risking an even bigger, potentially systemic crash. Though I honestly don't know that much about the commercial finance world.
- Ferret7446 10mo agoThat would just devalue the surrounding property even more. This is why "we should just do X" is almost always a bad idea.
- immibis 10mo agoBy "devalue" you mean "lower the price of" which... seems fine? Useful assets being cheaper is a good thing.
- HeyLaughingBoy 10mo agoAs long as you're not the owner of said asset.
- yesfitz 10mo agoDoes your house stop being a house if the price goes down? Does your car drive worse if no one will buy it? I'm not saying it doesn't suck to overpay for something, but you can't expect too much pity when you lose money speculating.
- ImPostingOnHN 10mo agoyes, this entire discussion is about a policy which might be good for communities but not necessarily for real estate speculators who keep storefronts in those communities empty
- mistercheph 10mo agoThis doesn't make sense to me, why is lowering rent by 30% any more "proof" that the building is not worth what's stated on the bill than having a 30% vacancy rate at the expected value? Aren't both subject to the same "market conditions" argument?
- senordevnyc 10mo agoAgreed. I’ve always been skeptical of this argument, because it assumes the counterparty to these valuation models is consistently an idiot.
- Ekaros 10mo agoCounter party is either stupid, careless, on it or forced. I think often there is intermediaries involved. Say real estate investment fund. For which on paper in short term numbers looking good is enough. And in past environment as long as there was enough money coming in the ponzi could continue to run. And other parties further can be say pension funds, which on paper are forced to search for anything that make their goals look good enough. Thus not doing enough due diligence. Everything is fine until it is not. And this has been seen time after time.
- lesuorac 10mo agoI've always assumed the counterparty is a computer. You have say 100 Billion of 401k moneys to invest. How are you going to invest it into real estate with a expense ratio of 0.05 and also check all of the properties in the portfolio?
- coliveira 10mo agoIn a normal world yes. But banks are incentivized to mark up the value of these properties, so they continue to do that.
- immibis 10mo agoI believe the argument is not about value itself, but about gaming certain ways to estimate value. For example a certain bank might have a policy that value is a certain multiple of rent.
- bix6 10mo ago> a building is not a building but a financial product. Are we cooked chat?
- Analemma_ 10mo agoYour house and the 30-year fixed-rate mortgage on it is a financial product too, and a fairly complex and risky one at that. This fact is just well-hidden from you by nested layers of government subsidies. There is basically no way for real estate to not be a complex financial product, because almost no one can pay cash-up-front for it. If it wasn't financialized, nobody could ever afford to own anything and we'd all be feudal serfs renting from a couple landlords.
- deleted 10mo ago[deleted]
- jeffbee 10mo agoUnmentioned in this article is the spread of small business pretend as a lifestyle, where someone signs a lease for the space, pays the rent, and never opens it or only after years of futzing around. They can do this because they have some other source of income, and it is just another aspect of wealth inequality that pretenders can outbid sincere small business operators. In my neighborhood we had a prominent corner store that was apparently vacant but actually had been leased by a restaurant that then spent 7 years intermittently remodeling the interior. Of course all the local NIMBYs spent the entire 7 years shouting about developers, but it wasn't their fault really.
- tigranbs 10mo agoLiving in SoCal, I almost always prefer to order online. Most local businesses are losing to their e-commerce competitors; no wonder commercial spaces are empty. I have a side business of a small e-commerce shop. I would consider having physical space just for the sake of luxury, but now I would rather spend that monthly rent on marketing online rather than paying for physical space. IMHO, that's what is happening. Bank problems or anything else are secondary; if it were profitable to be at the physical location for the businesses, other factors would vanish.
- milkytron 10mo agoThe article applies to all kinds of loans for property though. Apartment complexes could also be 50% vacant and still "worth" their original value if the asking rents remain high. Office buildings that got cleared out after covid, same thing. Brick and mortar retail are the same. The article is more of a criticism of how asset values are calculated and loans are managed to avoid foreclosure. Which results in financially valid buildings/loans that are underutilized because the other option is creating economic equilibrium at the cost of lenders and debt holders.
- roughly 10mo agoSo the problem here is the banks wrote their loans stupidly and both the bank and the property owner's willing and able to burn money to keep those chickens from coming home to roost, which has an enormous social cost on small business owners, citizens, and other businesses in the area, but the article concludes we can't really do anything about it because it might make the banks sad and cause the renegotiation of a bunch of those shitty contracts. Since when did "taking a loss" get written out of the definition of "investing"?
- jrjeksjd8d 10mo agoTFA seems to claim that the benefits of "nice buildings" outweigh the externalities of desolate, character-less street levels in cities. It doesn't seem very on brand for Strong Towns. This phenomenon is going on in the downtown of my city - decreased foot traffic leads to tenants leaving, and the cycle continues. It's a miserable place to live or work that basically becomes a ghost town at 5pm. They're trying to do some office-to-residential conversions, but they're not very desirable because the entire neighborhood feels hollow and abandoned. Instead of delaying these defaults and accumulating systemic risk until there's a massive correction, someone should be enforcing accounting that marks to market the actual rental value. That would force banks to be honest about the real level of risk on their balance sheets.
- Jblx2 10mo agoIf you can pretend that 50% occupancy @ $500k per year total rent is a temporary market slump, why can't you also pretend that 100% occupancy at $700k in rent is also a temporary market slump?
- mekdoonggi 10mo agoEmpty unit? The right tenant is coming any day now. Rented unit? Can't be rented to imaginary rich/stupid people.
- mcphage 10mo ago> Rented unit? Can't be rented to imaginary rich/stupid people. No, but you can raise the rents. Best case scenario, they pay the higher price. Worse case scenario they leave—which leaves you exactly where you were before, with some extra money in your pocket.
- nullocator 10mo agoThis also confused me, especially since we know that over time rents would be raised so maybe in a few years you do hit the target of a million?
- arjie 10mo agoOkay, the problem is ultimately that banks are constrained in the Loan-To-Value ratio they can have, but the value is something they can arbitrarily determine. They're incentivised to make the loan, and the person buying the property is also incentivised to do this, so they use the lever they have: they make up the value such that the loan can be made. Perhaps if we split off commercial lending arms, allowed them unbounded LTVs, and then allowed them to fail we would get better performance? It does seem like a pretty complicated problem. We want banks to be reliable, we don't have a pricing mechanism because the market is illiquid, and we have incentives to keep the Potemkin story alive.
- mekdoonggi 10mo agoStartup Idea: My company will lease your space for whatever price you want. Then we sub-lease your building at the market rate. We charge the different between the market rate for your building and what you want to charge + a small fee. That way your property retains it's "original" value, but actually gets rented out. Everyone (especially us) wins!
- slater 10mo agoSounds great! I'll charge you $100 per sqft, and you can sublease it at the current market rate, which is $5 per sq ft.
- mekdoonggi 10mo agoPerfect. That'll be $96 + tip.
- johnecheck 10mo agoThat's unbelievably stupid. But then again, so is not renting out the space at the market rate so you can pretend it's worth more than it really is. So... good luck, I guess?
- anigbrowl 10mo agothat's the joke.gif
- aEJ04Izw5HYm 10mo agoThe world needs Someone with enormous chutzpah to try this.
- lordnacho 10mo agoIt always bothered me that certain things are not marked to market. It's pretty much the point of financializing the economy, that you can then get a current value for things, instead of being able to pretend everything is fine. The problem is that if you don't update values continuously, you are surprised when you finally are forced to. Some stock on the public market that isn't doing well goes from 100 to 90, 80, 70... etc, and people thinking about the stock have to make decisions accordingly. A private loan against that business can sit at 100 until the company decides it can't pay, and suddenly the loan is worth 20.
- antognini 10mo agoMark-to-market can create liquidity crises when coupled with capitalization requirements, though. This can happen in, e.g., bond markets. Say a bank is sitting on a pile of very safe bonds. If the interest rate suddenly increases, the mark-to-market value of the bonds goes way down. The bank would still expect to get the full value of all the bonds at maturity. But if the bank has to mark-to-market, the current value may be low enough that capitalization requirements force the bank to sell all the bonds in a fire sale. So even though the bank in theory could have held onto the assets and gotten exactly what it had expected from the start, it instead ends up taking a big loss.
- thaumasiotes 10mo agoI think that's almost what happened to Silicon Valley Bank, except that they weren't required to recapitalize, but all of their customers read their financial disclosures, assumed a mark-to-market loss was an actual loss, and withdrew their money, running the bank.
- jayd16 10mo agoWhy can you bullshit about an empty building but not a temporarily low rent building? Why doesn't this just lead to "Month-to-month and Pretend"?
- anigbrowl 10mo agoBecause rent on the books is dollars and cents. If you (a landlord) pretend to rent a building to me at $1m/year but give me a $500k 'rebate' that's arguably a fraud on the bank and/or tax fraud. Doing it month-to-month might be a workaround but any commercial operation will want to write off the rent against tax, which makes it official again. You could probably make this work by donating office space to nonprofit organizations while maintaining high nominal rent (and maybe this already happens) but it's not as practical for storefronts etc.
- jayd16 10mo agoThis still doesn't quite explain why vacant is excusable but under priced isn't also excusable. Said another way why isn't a vacant space treated as renting it for $0? I can see why you wouldn't want to lock in a long-term low rate but why isn't a short-term rate as excusable as a vacancy?
- anigbrowl 10mo agoBecause once it's on the books, the bank has a fiduciary duty (to its shareholders) to take note of it - effectively marking the value of the building to a multiple of market rents - and if the rent indicates that the building is worth much less than it was financed for the bank has to reduce its exposure by law. While the income is $0, the landlord can say they're actively seeking tenants, and the bank can pretend to believe this and exercise its right of forbearance. Lower actual rent payments break the illusion of how much the property is worth, and both the landlord and the bank have to put that unpleasant reality on the books. Real world example: the fanciest mall in downtown San Francisco was valued at $1.2 billion a few years back. Great location, great building design, a nice place to shop for many years. Things started to go bad after COVID, and after 2 years of no rent the banks pulled the plug and foreclosed. They ended up buying the deed for $133 million. This would be a great deal, except that they'd loaned $566 million. So they are not the proud owners of an empty mall, which is only worth about 25% of the money they initially invested, and they have to tell their shareholders that they lost $433 million. Now that the cat is out of the bag they could start renting out retail units at affordable prices, but a bank does not want to be a landlord/property manager. https://www.sfgate.com/local/article/2-buyers-scoop-former-san-francisco-westfield-21169647.php https://www.sfgate.com/local/article/2-buyers-scoop-former-s...
- yesfitz 10mo agoSomething that's not addressed is how this situation plays out for 5-over-1 development[1] that's becoming the norm (or other mixed-use buildings). Basically, the buildings cashflow solely on the residential, but the commercial space is/was valued optimistically (especially leading up to the 2020 pandemic). So a building's owner isn't in a financial bind, and if they were to lower rent on the commercial space, even if they didn't lose the building, it would be much harder to refinance the next time their loan matured. (Commercial loans are frequently "balloon" loans that have payments like they're amortizing over 30 years, but they mature before then, meaning the borrower either has to pay the remaining amount of the loan, or refinance.) Possible Solution: I've been thinking about a cumulative vacancy tax that increases every year a space is vacant (and decreases for every year it's occupied). So a building owner or loan underwriter could project when a vacancy would become more costly than lowering rent. You could charge the tax on the assessed value of the vacant space. Increase it by 100 basis points for every year that a space is vacant. Decrease it by 200 basis points for every year that it's rented. 1: https://en.wikipedia.org/wiki/5-over-1 https://en.wikipedia.org/wiki/5-over-1
- stared 10mo ago> Intuition fails because normal people think of a building as a building, when in the majority of cases, a building is not a building but a financial product. Behavior that makes no sense for a building can make perfect sense for a financial product. And it is precisely why a lot of people hate capitalism. Adam Smith himself would would disapprove: "As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce."
- AnimalMuppet 10mo agoI've seen in here a couple people saying that Land Tax is the answer. But... Let's say I have a building that's sitting vacant. Under the current system, I pay property tax, which is based on the land plus the improvements (the building). So it costs me to hold the building vacant. If we switch to a land tax, then that would be taxed on the value of the land only (though presumably at a higher rate). But if moving to a land tax is revenue neutral, then the tax on vacant land would be higher than it was before, and the tax on improved land would be lower. The net effect of a land tax, then, would be to lower the tax on this unoccupied building. How is that supposed to fix the situation?
- jerlam 10mo agoYour scenario seems to imply that for your empty building (and for every other empty building), there is an identical plot of land that is vacant, that will pay the same land value tax. Your tax would go up in the following situations. Maybe there is very little, or no vacant land. Maybe every other land plot has a 30-story mixed use office tower/apartment building that is currently paying many multiples of your property tax. The discussion about land value taxes often involve dense areas where these situations are more likely.
- IAmGraydon 10mo agoMy day job is a Director level role at a large commercial real estate firm. Our primary segments are brokerage, management, and development management. I've been doing this for 11 years. >The story starts with a building operator and a bank deciding what a building is worth. To figure this out, the operator is going to make a financial model that projects the income that a building will generate. We're going by existing leases at the property, and take into account their expirations and rent escalations. Mostly, we're looking at current income. If a building is valued at $20M because of a $1,000,000 NOI at a 5% cap, that's because it literally has $1,000,000 of yearly income NOW and some seriously high grade tenants to justify that cap. Also, if there are no tenants in the building, we value it by things like construction value. If we're talking about new developments, we usually pre-lease and borrow based on the signed leases. >You may wonder how the cap rate is determined. The simple answer is the owner and the bank negotiate and agree on a number. This is disingenuous. We don't pull a cap rate out of thin air. We go by market caps on comparable properties and also factor in the credit of the existing tenants and their lease terms. There is a tiny bit of back and forth on the cap if the buyer and the bank disagree but this a matter of tenths of a percent. All of that said, I have never known a property owner who refused to lower rents in a game of chicken with the bank and most would certainly rather fill a space with someone than keep rents elevated. If a space is empty, it's generating zero income, your NOI is therefore lower, and the building value has already decreased. The bank isn't pretending it's worth more than it is because you're advertising a certain rate. They're just giving you more time to lease the space so it doesn't have to go into receivership, which is a loss for everyone. Beyond that, most leases are signed at or below asking rent unless the area is extremely high demand. They may not be advertising a rate drop, but anyone in this business knows that asking rents are a point to be negotiated during the leasing process.
- solatic 10mo ago> If [a vacant storefront tax] “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts. Sounds like the right trade-off to me. Let the banks get hurt for the pain that's coming to them for making a loan on an asset that declined in value, let's see if it actually causes bank bankruptcy, then let's consider bailouts. Because letting balance sheets express a lie about financial health is preferable somehow? Letting pressure continue to build until commercial property owners can't cover interest payments is preferable? Ideally, commercial development would be done by publicly-owned companies. Instead of renting, sell the storefront for a pittance to a mom-and-pop owner operator, conditioned on occupancy and using it for primary income. If occupancy is forfeited, then sell it to a new mom-and-pop. Selling instead of renting means there are no rent increases. You go back to having local stores that have been open for 40+ years that have a real relationship with the surrounding community. You make it possible for young chefs to get a restaurant space to prove their mettle without needing to cozy up to some wealthy financier who then sucks away most of the income. You make it possible for young people to start new independent businesses without a mortgage on their future, which helps them invest further in their surrounding community. Being able to buy cheap storefront space is what made the American Dream possible for so many immigrants to America and built the largest middle class in the world.