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AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent

AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent it out for 1500/mo it effectively cuts the value of that building in half. Just an accounting issue for someone who owns it out right, but devastating for someone with a loan. I think this is why you’re seeing landlords offering multiple free months of rent nowadays. It allows them to adjust to actual market pricing annualized, while being able to call the “free” months an expense

marcus_holmes 5mo ago
We had this experience with a local town centre where the high street basically died. Retailers priced out by high rents, which was fine when the economy was good and people were spending, but as soon as it took a dip there was nowhere to go and they had to shut up shop. And this mechanism was why; almost all the real estate was owned by funds and leveraged. Property values based on a multiplier of rent. They could weather a long spell of zero rental income because that effectively cost them nothing, but if the rent went down then the value went down and they had to come up with the difference.
- salynchnew 5mo ago
  That seems like a rather inefficient use of resources. How long will a fund typically keep that on the books before they have to offload the asset or declare bankruptcy? At a certain point, that smells like a scam with a real estate business attached to it.
  - mschuster91 5mo ago
    > That seems like a rather inefficient use of resources. Inefficient for society? Yes. But for the capital providers aka investment (and let's be clear: retirement) funds and banks? Definitely not. The fundamental problem at the root of all of it is how the US does pensions. In contrast to most European countries that operate in a redistribution system, aka the current workers pay the pensions of the current pensioners in exchange for "IOU tokens", the US has everyone responsible for themselves... which leads to a constant influx of cash into all kinds of asset markets, no matter the market conditions. And that is bad, for multiple reasons. - it ties general economic downturns to people's pensions. That in turn factually prevents politics from doing what is right (e.g. restrict climate gas emissions), because a lot of companies make a lot of money by abusing the environment and cracking down on that would lead to them losing value. - it creates a lot of perverse incentives. When you got almost 50 trillion dollars in total retirement funds [1] with hundreds of billions of dollars in new savings each year... that money has to go somewhere where it is backed by a physical asset or a consumption in the end. A lot of that money ends up in government bonds, which "allows" the US to cut taxes for the ultra-rich without limitations and balloon the national debt without consequences because guess what, the US can "always" borrow money. It's just as bad as Japan, only less openly exposed. What does not end up in bonds ends up primarily on the real estate market, driving the nonsense we're discussing here, and what remains goes into crap like Yo [2]. - it disincentivizes the forces of the free market from holding bad actors accountable. Under "normal" conditions, the AI bubble or Tesla would simply have run out of cash years ago because no one would give them more money, but when the scam is so large it ends up in the S&P 500, cash will flow in automatically from all the dumb money that is going into ETFs and other pension investment vehicles. Once you are in, you stay in. - To make it worse, people are increasingly going from "moderate" managed funds to the extremes: either purely tracking funds that have virtually no fees deducting profits (and, in exchange, do not exercise voting rights) or into high-yield "activist investor" funds that love to do exploitative shit like forcing companies to redistribute their liquidity reserves as dividends (robbing the company of resilience against economic downturns) or engage in LBOs, buy-and-break-apart schemes and the likes. These almost always offload the consequences of making money for investors onto society at large... like, for example, malls falling apart because anchor stores fell victim to the vultures. Toys'R'Us is one particularly nasty example. > At a certain point, that smells like a scam with a real estate business attached to it. The entire pension based economy in the US is the true scam - in the end, it's all IOUs just like our "pension points" in Europe. If there is no economy around due to demographic collapse or whatever, the IOUs become just as worthless. Normally I wouldn't even care, but unfortunately, the US pension market is so large that a lot of dollars flow out elsewhere, including our healthcare system, and I'm sick and tired of American vultures buying up everything in Europe Just Because They Can. [1] https://www.ici.org/statistical-report/ret_25_q4 https://www.ici.org/statistical-report/ret_25_q4 [2] https://en.wikipedia.org/wiki/Yo_(app) https://en.wikipedia.org/wiki/Yo_(app)
    - CPLX 5mo ago
      This is broadly accurate, but it can be a little easier to point the finger at the actual culprits, which is Wall Street. The problem is the financialization of everything, and the insistence on ensuring high rates of return above all other goals. Which is highly related to the dynamics that you mentioned here, so we're agreeing. But other countries don't do this because the government stops them. In this country, the financial sector is more powerful and can override democracy through a couple of obvious means that we've all seen. The result is effectively the plundering of a previously strong economy for the benefit of a couple of people. Ask yourself why General Motors is taking the many billions of dollars in cash that they generate from their business operations and literally sending it directly to Wall Street bankers through the form of stock buybacks rather than investing in the next generation of electric cars. It's an obvious mistake, and eventually the bill will come, but maybe not in the lifetimes of the people who profit from it. Certainly not before they have a chance to buy another summer home. China doesn't do this. They keep savings rates high and returns low, which means the money goes into building factories and infrastructure and lots of other things that ultimately make the country much, much wealthier.
      - Terr_ 5mo ago
        > Ask yourself why General Motors is taking the many billions of dollars in cash that they generate from their business operations and literally sending it directly to Wall Street bankers through the form of stock buybacks rather than investing in the next generation of electric cars. Hmm, putting aside others issues (e.g. stock-manipulation to make quarterly numbers) stock-buybacks might be viewed similar to repaying a loan and reclaiming the stock that was put up as collateral... Although I suppose if the loan is zero-interest, why would one want to do that? Even if somehow all spending options are terrible today (but might improve tomorrow) one could just sit on the cash.
        CPLX 5mo ago
        All spending options are not terrible today. That's the point. Without reinvestment, the companies will fall behind and die. The decisions by major companies to prioritize stock buybacks over capital investment in the next generation of products and innovation is the absolute core of why the financialization of everything threatens to destroy us as an industrial economy and, by extension, our prosperity and way of life.
  - ThrustVectoring 5mo ago
    Commercial real estate lending typically has a clause that allows pausing of payments during a vacancy and letting the interest accrue into the balance of the loan - effectively, the banks are giving the property owners a free option to try and get the vacancy cleared without affecting long-term incomes and asset prices.
    - BrenBarn 5mo ago
      That still sounds like a scam.
      - ceejayoz 5mo ago
        Yeah, it's a big high-stakes game of musical chairs.
        Projectiboga 5mo ago
        More like a game of Hot Potato.
        MichaelZuo 5mo ago
        Ironically, this is one of the strongest proofs that American society is very un-capitalistic. Shareholders, who would have received the dividends from rent payments otherwise, simply go pound sand when this happens. Even though there should be plenty of shareholders willing to accept lower asset values in exchange for continued, reduced, dividend payouts.
        pstuart 4mo ago
        America has a long history of privatizing profits and socializing costs. Market economies are clearly preferable over demand economies (like, no question about it), but Late Stage Capitalism is bad for everybody except the oligarchs. John Steinbeck once said that socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires. With AI and Robotics looming over us, we would be very well served to re-examine our economic systems while we still have a chance.
  - gizajob 5mo ago
    I think that about nails it for most commercial real estate.
  - deleted 4mo ago
    [deleted]
- deleted 5mo ago
  [deleted]
LPisGood 5mo ago
I’m not sure if the explanation in the second part holds water. Wouldn’t the reduction in property value be the same as the ammortized free rent?
- Arainach 5mo ago
  No, because the mortgage companies' valuation is based on rent and does not consider any incentives.
  - deleted 5mo ago
    [deleted]
  - BrenBarn 5mo ago
    Right. . . but isn't that just obviously stupid? If I say the rent is $3k a month but you get all 12 months free, why would anyone be fooled by that? Why would you base it on some hypothetical rent rather than the amount of actual money that the property takes in?
    - bluGill 5mo ago
      The bank knows but they maintain the fiction that they don't because their books collapse too if they count those. Banks make money from loans. Don't forget this is typically a short term things. When the economy improves the building will be rented again. So they need the books to look good today to get through.
      - bombcar 5mo ago
        And commercial loans are NOT like your home mortgage. One you got your home loan, the bank no longer cares (or even can care) about the value of the house, only if you’re not actively destroying the property and maintaining insurance and paying on time. Commercial loans are often shorter duration and roll over and highly tied to the valuation of the property or properties, and often have clauses allowing them to call the loan if valuation dips too much (think: margin call).
coldtea 5mo ago
>AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent it out for 1500/mo it effectively cuts the value of that building in half. Well, if the town is dying, the "value of that building" is effectively cut in half, or worse, anyway. Asking a lot for rent is not gonna magically make the building worth more - it will just keep it unrented.
- tardedmeme 5mo ago
  It's not just accounting, it means enough things that they're incentivized to manipulate it upwards. It impacts the loans they can get and the interest they pay, enough that it may be worth it to forego some actual income to keep the fake numbers up.
  - bombcar 5mo ago
    And they’re often owned by funds that are measured in the billions. A parking lot in New York covers for a bunch of empty middle America storefronts, as long as the valuation works out on paper.
    - zoomablemind 5mo ago
      It seems that approach is a way to generate losses without actually losing the titles. These losses are needed to offset incomes elsewhere thus not paying taxes on profits. Investment fund's commodity is value - the rest are just tools to optimize the value.
      - SoftTalker 5mo ago
        In aggregate, the owners of these properties are investing to earn a return. Losses only lead to "not paying taxes on profits" if there are no profits. The overall portfolio has to be earning a risk-appropriate return or investors will go elsewhere.
      - dh2022 4mo ago
pif 5mo ago
> devastating for someone with a loan Sorry, I can't understand why. Could you please expand a bit? I don't get how decreasing the value of the building makes the loan more difficult to repay.
- sokka_h2otribe 5mo ago
  The backing of the loan is in part based on the value of the asset, so you need to add collateral to accommodate a reduction in the asset value. Basically you have to pay a lot more if the building value goes down
- sjducb 5mo ago
  Loan to Value (LTV) is a percentage that tells you how safe a loan is. You divide the amount of the loan by the value of the building. So if I buy a building for 10 million with a 6 million loan and 4 million of my own money then I have an LTV of 60%. This means if I go bankrupt then the bank can sell the building and get its money back. If the value of the building halves because the rent halved then I have a 6 million loan on a 5 million building. My LTV is 120%. The bank cannot get its money back by selling the building. No bank is going to give me a loan on a property with an LTV of 120% so I’m stuck with my current bank. My current bank then increases my interest rate because I am now a very high risk customer who can’t leave. This is very expensive for me. One way out of this situation is to get my LTV back to 60% which means I need to reduce the loan to 3 million by finding 3 million to pay off part of the loan. Another way out is to sell the building for 5 million then pay the bank one million, exiting the deal with a loss of 1 million. None of these are good for me. I’ll do anything to keep the value of the building high by charging high rents even if no one can actually pay the rents and the building sits empty. Long term I might be able to exit by getting permission to convert it to flats.
  - bluGill 5mo ago
    Don't forget that long term the current downturn is likely to end and so I will again be able to get the rent in a few years if I can just hold on for these bad years.
BrenBarn 5mo ago
I hear people say this a lot but it doesn't make any sense. Why would the value be based on some imaginary rent rather than the actual amount of money taken in? It seems stupid for anyone to say that asking, say, $2500 rent with three free months (giving $27k for the year) is better than just asking $2000 with no free months (giving $24k for the year). If this is really what is going in then the system deserves to crash.
- bluGill 5mo ago
  Even in the best of times you will have empty places so they have to ignore unrented places since there is no formula that can tell the state of the economy from just current rent. Real estate is always local so even in the worst economies there is always some place booming
- james_marks 5mo ago
  [dead]
- bombcar 5mo ago
  It’s just how commercial real estate is valued. It’s very formulaic based on the local multiplier of rents. It even applies down to single-family homes but those have competing buyers (families) - but in pure commercial you are the multiple of rents and basically nothing else (save in the strange case of someone wanting that particular property). The key is home loans for normal families can’t be called - commercial loans can.
- IAmBroom 5mo ago
  Your suggested alternative generates a need for massive accounting by the banks, tracking each loan's aggregate monthly rental income. A simpler rule that mostly covers today's problems, and adds very little overhead after the loan is signed, is often considered good enough.
  - nothercastle 5mo ago
    It’s probably a bad rule in retrospect but to reprice now would be devastating

marcus_holmes 5mo ago

We had this experience with a local town centre where the high street basically died. Retailers priced out by high rents, which was fine when the economy was good and people were spending, but as soon as it took a dip there was nowhere to go and they had to shut up shop. And this mechanism was why; almost all the real estate was owned by funds and leveraged. Property values based on a multiplier of rent. They could weather a long spell of zero rental income because that effectively cost them nothing, but if the rent went down then the value went down and they had to come up with the difference.

salynchnew 5mo ago
That seems like a rather inefficient use of resources. How long will a fund typically keep that on the books before they have to offload the asset or declare bankruptcy? At a certain point, that smells like a scam with a real estate business attached to it.
- mschuster91 5mo ago
  > That seems like a rather inefficient use of resources. Inefficient for society? Yes. But for the capital providers aka investment (and let's be clear: retirement) funds and banks? Definitely not. The fundamental problem at the root of all of it is how the US does pensions. In contrast to most European countries that operate in a redistribution system, aka the current workers pay the pensions of the current pensioners in exchange for "IOU tokens", the US has everyone responsible for themselves... which leads to a constant influx of cash into all kinds of asset markets, no matter the market conditions. And that is bad, for multiple reasons. - it ties general economic downturns to people's pensions. That in turn factually prevents politics from doing what is right (e.g. restrict climate gas emissions), because a lot of companies make a lot of money by abusing the environment and cracking down on that would lead to them losing value. - it creates a lot of perverse incentives. When you got almost 50 trillion dollars in total retirement funds [1] with hundreds of billions of dollars in new savings each year... that money has to go somewhere where it is backed by a physical asset or a consumption in the end. A lot of that money ends up in government bonds, which "allows" the US to cut taxes for the ultra-rich without limitations and balloon the national debt without consequences because guess what, the US can "always" borrow money. It's just as bad as Japan, only less openly exposed. What does not end up in bonds ends up primarily on the real estate market, driving the nonsense we're discussing here, and what remains goes into crap like Yo [2]. - it disincentivizes the forces of the free market from holding bad actors accountable. Under "normal" conditions, the AI bubble or Tesla would simply have run out of cash years ago because no one would give them more money, but when the scam is so large it ends up in the S&P 500, cash will flow in automatically from all the dumb money that is going into ETFs and other pension investment vehicles. Once you are in, you stay in. - To make it worse, people are increasingly going from "moderate" managed funds to the extremes: either purely tracking funds that have virtually no fees deducting profits (and, in exchange, do not exercise voting rights) or into high-yield "activist investor" funds that love to do exploitative shit like forcing companies to redistribute their liquidity reserves as dividends (robbing the company of resilience against economic downturns) or engage in LBOs, buy-and-break-apart schemes and the likes. These almost always offload the consequences of making money for investors onto society at large... like, for example, malls falling apart because anchor stores fell victim to the vultures. Toys'R'Us is one particularly nasty example. > At a certain point, that smells like a scam with a real estate business attached to it. The entire pension based economy in the US is the true scam - in the end, it's all IOUs just like our "pension points" in Europe. If there is no economy around due to demographic collapse or whatever, the IOUs become just as worthless. Normally I wouldn't even care, but unfortunately, the US pension market is so large that a lot of dollars flow out elsewhere, including our healthcare system, and I'm sick and tired of American vultures buying up everything in Europe Just Because They Can. [1] https://www.ici.org/statistical-report/ret_25_q4 https://www.ici.org/statistical-report/ret_25_q4 [2] https://en.wikipedia.org/wiki/Yo_(app) https://en.wikipedia.org/wiki/Yo_(app)
  - CPLX 5mo ago
    This is broadly accurate, but it can be a little easier to point the finger at the actual culprits, which is Wall Street. The problem is the financialization of everything, and the insistence on ensuring high rates of return above all other goals. Which is highly related to the dynamics that you mentioned here, so we're agreeing. But other countries don't do this because the government stops them. In this country, the financial sector is more powerful and can override democracy through a couple of obvious means that we've all seen. The result is effectively the plundering of a previously strong economy for the benefit of a couple of people. Ask yourself why General Motors is taking the many billions of dollars in cash that they generate from their business operations and literally sending it directly to Wall Street bankers through the form of stock buybacks rather than investing in the next generation of electric cars. It's an obvious mistake, and eventually the bill will come, but maybe not in the lifetimes of the people who profit from it. Certainly not before they have a chance to buy another summer home. China doesn't do this. They keep savings rates high and returns low, which means the money goes into building factories and infrastructure and lots of other things that ultimately make the country much, much wealthier.
    - Terr_ 5mo ago
      > Ask yourself why General Motors is taking the many billions of dollars in cash that they generate from their business operations and literally sending it directly to Wall Street bankers through the form of stock buybacks rather than investing in the next generation of electric cars. Hmm, putting aside others issues (e.g. stock-manipulation to make quarterly numbers) stock-buybacks might be viewed similar to repaying a loan and reclaiming the stock that was put up as collateral... Although I suppose if the loan is zero-interest, why would one want to do that? Even if somehow all spending options are terrible today (but might improve tomorrow) one could just sit on the cash.
      - CPLX 5mo ago
        All spending options are not terrible today. That's the point. Without reinvestment, the companies will fall behind and die. The decisions by major companies to prioritize stock buybacks over capital investment in the next generation of products and innovation is the absolute core of why the financialization of everything threatens to destroy us as an industrial economy and, by extension, our prosperity and way of life.
- ThrustVectoring 5mo ago
  Commercial real estate lending typically has a clause that allows pausing of payments during a vacancy and letting the interest accrue into the balance of the loan - effectively, the banks are giving the property owners a free option to try and get the vacancy cleared without affecting long-term incomes and asset prices.
  - BrenBarn 5mo ago
    That still sounds like a scam.
    - ceejayoz 5mo ago
      Yeah, it's a big high-stakes game of musical chairs.
      - Projectiboga 5mo ago
        More like a game of Hot Potato.
      - MichaelZuo 5mo ago
        Ironically, this is one of the strongest proofs that American society is very un-capitalistic. Shareholders, who would have received the dividends from rent payments otherwise, simply go pound sand when this happens. Even though there should be plenty of shareholders willing to accept lower asset values in exchange for continued, reduced, dividend payouts.
        pstuart 4mo ago
        America has a long history of privatizing profits and socializing costs. Market economies are clearly preferable over demand economies (like, no question about it), but Late Stage Capitalism is bad for everybody except the oligarchs. John Steinbeck once said that socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires. With AI and Robotics looming over us, we would be very well served to re-examine our economic systems while we still have a chance.
- gizajob 5mo ago
  I think that about nails it for most commercial real estate.
- deleted 4mo ago
  [deleted]
deleted 5mo ago
[deleted]

LPisGood 5mo ago

I’m not sure if the explanation in the second part holds water. Wouldn’t the reduction in property value be the same as the ammortized free rent?

Arainach 5mo ago
No, because the mortgage companies' valuation is based on rent and does not consider any incentives.
- deleted 5mo ago
  [deleted]
- BrenBarn 5mo ago
  Right. . . but isn't that just obviously stupid? If I say the rent is $3k a month but you get all 12 months free, why would anyone be fooled by that? Why would you base it on some hypothetical rent rather than the amount of actual money that the property takes in?
  - bluGill 5mo ago
    The bank knows but they maintain the fiction that they don't because their books collapse too if they count those. Banks make money from loans. Don't forget this is typically a short term things. When the economy improves the building will be rented again. So they need the books to look good today to get through.
    - bombcar 5mo ago
      And commercial loans are NOT like your home mortgage. One you got your home loan, the bank no longer cares (or even can care) about the value of the house, only if you’re not actively destroying the property and maintaining insurance and paying on time. Commercial loans are often shorter duration and roll over and highly tied to the valuation of the property or properties, and often have clauses allowing them to call the loan if valuation dips too much (think: margin call).

coldtea 5mo ago

>AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent it out for 1500/mo it effectively cuts the value of that building in half. Well, if the town is dying, the "value of that building" is effectively cut in half, or worse, anyway. Asking a lot for rent is not gonna magically make the building worth more - it will just keep it unrented.

tardedmeme 5mo ago
It's not just accounting, it means enough things that they're incentivized to manipulate it upwards. It impacts the loans they can get and the interest they pay, enough that it may be worth it to forego some actual income to keep the fake numbers up.
- bombcar 5mo ago
  And they’re often owned by funds that are measured in the billions. A parking lot in New York covers for a bunch of empty middle America storefronts, as long as the valuation works out on paper.
  - zoomablemind 5mo ago
    It seems that approach is a way to generate losses without actually losing the titles. These losses are needed to offset incomes elsewhere thus not paying taxes on profits. Investment fund's commodity is value - the rest are just tools to optimize the value.
    - SoftTalker 5mo ago
      In aggregate, the owners of these properties are investing to earn a return. Losses only lead to "not paying taxes on profits" if there are no profits. The overall portfolio has to be earning a risk-appropriate return or investors will go elsewhere.
    - dh2022 4mo ago

pif 5mo ago

> devastating for someone with a loan Sorry, I can't understand why. Could you please expand a bit? I don't get how decreasing the value of the building makes the loan more difficult to repay.

sokka_h2otribe 5mo ago
The backing of the loan is in part based on the value of the asset, so you need to add collateral to accommodate a reduction in the asset value. Basically you have to pay a lot more if the building value goes down
sjducb 5mo ago
Loan to Value (LTV) is a percentage that tells you how safe a loan is. You divide the amount of the loan by the value of the building. So if I buy a building for 10 million with a 6 million loan and 4 million of my own money then I have an LTV of 60%. This means if I go bankrupt then the bank can sell the building and get its money back. If the value of the building halves because the rent halved then I have a 6 million loan on a 5 million building. My LTV is 120%. The bank cannot get its money back by selling the building. No bank is going to give me a loan on a property with an LTV of 120% so I’m stuck with my current bank. My current bank then increases my interest rate because I am now a very high risk customer who can’t leave. This is very expensive for me. One way out of this situation is to get my LTV back to 60% which means I need to reduce the loan to 3 million by finding 3 million to pay off part of the loan. Another way out is to sell the building for 5 million then pay the bank one million, exiting the deal with a loss of 1 million. None of these are good for me. I’ll do anything to keep the value of the building high by charging high rents even if no one can actually pay the rents and the building sits empty. Long term I might be able to exit by getting permission to convert it to flats.
- bluGill 5mo ago
  Don't forget that long term the current downturn is likely to end and so I will again be able to get the rent in a few years if I can just hold on for these bad years.

BrenBarn 5mo ago

I hear people say this a lot but it doesn't make any sense. Why would the value be based on some imaginary rent rather than the actual amount of money taken in? It seems stupid for anyone to say that asking, say, $2500 rent with three free months (giving $27k for the year) is better than just asking $2000 with no free months (giving $24k for the year). If this is really what is going in then the system deserves to crash.

bluGill 5mo ago
Even in the best of times you will have empty places so they have to ignore unrented places since there is no formula that can tell the state of the economy from just current rent. Real estate is always local so even in the worst economies there is always some place booming
james_marks 5mo ago
[dead]
bombcar 5mo ago
It’s just how commercial real estate is valued. It’s very formulaic based on the local multiplier of rents. It even applies down to single-family homes but those have competing buyers (families) - but in pure commercial you are the multiple of rents and basically nothing else (save in the strange case of someone wanting that particular property). The key is home loans for normal families can’t be called - commercial loans can.
IAmBroom 5mo ago
Your suggested alternative generates a need for massive accounting by the banks, tracking each loan's aggregate monthly rental income. A simpler rule that mostly covers today's problems, and adds very little overhead after the loan is signed, is often considered good enough.
- nothercastle 5mo ago
  It’s probably a bad rule in retrospect but to reprice now would be devastating