5 ms·

The theme of the article is in part how Real State can royally screw over business... A sad, really sad thing happened in Rio de Janeiro, in Brazil. The city

by speeder 12y ago

The theme of the article is in part how Real State can royally screw over business... A sad, really sad thing happened in Rio de Janeiro, in Brazil. The city center, had multiple very old business, a particular square, that had been a hotspot in imperial times when Rio was the Imperial Capital, had many business opened at those times, and that were still open... Business that survived many depressions, crisis, regime changes, world wars... Then because of the recent real state price boom (example: in São Paulo prices on average rose 300% in 4 years), they all got outpriced in their rent... There was 250 year old shops that were still only a single location, and still renting their original location, but landowners just bumped the rent prices up by like 100% in a single year, and kicked out all those multi-hundred year shops out. The end result looked like a sort of historic defacing, lots of shops that were there since the monarchy times, that had lots of history (for example a library where famous writers, poets and musicians used to hang out for about 200 years) were just shut down without mercy. Some people even tried to ask the government to help... But it didn't work.

sokoloff 12y ago
It's unfortunate for those business who were unable to afford (or decided not to pay) the new rent, but IMO it would be a greater tragedy for property rights if the owners of the buildings were exposed to all the downsides of a market where rents might fall but unable to participate in the upside if rental demand and rents turned to the upside. "Heads I lose; tails nothing changes" isn't a stable economic system either.
- WalterBright 12y ago
  In the US, buildings can be designated as historic landmarks and so cannot be altered in a way that would destroy that. Often it's the building owner himself getting it so designated, in exchange he gets tax breaks. It's not perfect, but it's a workable system.
  - ics 12y ago
    Landmarks are extremely contentious and doesn't always prevent the shady actions suggested in the original article. One example from recent memory: http://www.ibtimes.com/save-rizzoli-bookstore-effort-heats-57th-street-building-defaced-critics-say-nyc-landmarks-1567229 http://www.ibtimes.com/save-rizzoli-bookstore-effort-heats-5... http://gothamist.com/2014/04/04/everybody_has_been_bought_off_-_bre.php http://gothamist.com/2014/04/04/everybody_has_been_bought_of... > Sources say Vornado Realty Trust (NYSE:VNO), which co-owns the three properties at the center of the dispute, deployed contractors to deface the exterior of the buildings in a premeditated effort to derail the landmark-evaluation process. “Preemptive demolition,” as the tactic is known, is not an uncommon strategy for property owners, which have been known to purposely disfigure a building’s distinctive features after catching wind of an effort to designate a property for landmark protection. Once the building is defaced there is no going back in the eyes of the LPC (rumours of the LPC being bought off is another matter, but even proof of such actions would not reverse this point). Generally though it is indeed a "workable system".
    - WalterBright 12y ago
      If the owner was willing to go that far, then there's a bit of an injustice going on in the form of "taking property without just compensation". Since making something a landmark is a public benefit, it would be fair for the government to compensate the landowner for the lost value a landmark designation would exact.
      - brewdad 12y ago
        They do get compensated in the form of large property tax breaks.
        arjunnarayan 12y ago
        Well, obviously the tax breaks aren't enough since the owner is willing to deface it to avoid the situation. Partial compensation is not really a defense. This is still a regulatory taking.
- emodendroket 12y ago
  Landlords driving out tenants who have a contract doesn't sound like a blow for property rights to me.
  - sokoloff 12y ago
    My read of the typical situation is that the rent increases are made within the bounds/scope of the contract (the lease) and yet tenants still complain. When a lease expires and the rent goes up at the renewal? Tenants complain. When a tenant is month-to-month and the rent goes up with 30-days notice? Tenants complain. I didn't read anything in the original article, nor in the GP comment to yours about Rio to suggest that the rent increases were contravening an existing contract.
    - zhte415 12y ago
      Tenant: The rent is too high Landlord: The rent hasn't been changed for a long time --- Tenant: With other costs going up, I can't afford to pay more for rent. Landlord: With other costs going up, I need more rental income. --- Tenant: The place needs painting. Landlord: He has given that place heavy wear and tear. --- Tenant: I know people who pay less for a comparable place. Landlord: I know people who pay more for a comparable place. --- Tenant: Small businesses like me can't afford to pay high rents. Landlord: Small businesses like him tend to manage money badly and have risky businesses. --- Tenant: The rent ought to be low because the neighborhood is rundown. Landlord: We landlords should raise rents in order to improve the quality of the neighborhood. --- Tenant: I am a desirable tenant with up and coming customers. Landlord: The music drives me crazy, and neighbours complain. --- Tenant: I always pay the rent whenever she asks for it. Landlord: He never pays the rent until I ask for it. --- My point is, both sides complain.
      - ufo 12y ago
        > Landlord: With other costs going up, I need more rental income. Rent in Rio de Janeiro have grown widely above inflation for many years. Its one of the most expensive cities in the world in terms of rent.
- yourapostasy 12y ago
  It isn't quite that simple. Real estate is one of the most widely-available assets that can be as levered as it is allowed in so many nations. This leads to perverse incentives. A property owner with a paid-up property can lever up, kick out tenants, post an out-sized rental rate, and use the credit to cover costs and missing income until a new tenant willing to pay the rental rate steps forward. Usually they step forward with the simple progression of time and inflation catching up to the new rental rate, or it's a business more heavily capitalized and banking on serving much more flush clientele (interesting discussions around the bifurcation of the economy and just how many businesses can thrive crowding into that wealthier end). This puts lots of incentive to keep inflating real estate valuations until the credit spigot is turned off. Meanwhile, the hands on the credit spigot gets paid by the velocity of credit granted, so they get lots of incentive to keep granting credit on inflated valuations. This circle turns until it doesn't, usually with some form of falling demand exposing who wasn't wearing swimsuits as the tide goes out. Contrast this with the asymmetric credit access available to most small businesses. They could have a longer tenure and track record than the present owners of the real estate, but still be considered a great risk because (rightfully) the credit granter will assess growth prospects to practically nil. So faced with a 200+ year old business that can definitely pay back $100K in five years, or a new property owner of the underlying real estate that might, maybe, possibly pay back $2M in 10 years if the right valuations can be signed off, which deal looks better come bonus time? This isn't a nefarious plot or the yield of some evil; it is simple human nature played out on the canvas of time and incentive structures. There are some interesting issues to ponder here with how agency, compensation and influence are structured in the valuations process, and how that ties in with the overall cycle. As well as many other factors that don't show up on an initial cursory take of the industry. But suffice to say...it isn't quite that simple. As for what can one individual do about it, that's a fascinating and long discussion in itself.
  - sokoloff 12y ago
    I think your comment is very good and agree with virtually everything you say. That said, I think the difference in access to credit is driven in large part by the collateralization and very little to do with the growth prospects (IMO). The real estate loan is collateralized by a building and land which can be foreclosed upon in the case of default, dramatically lowering the worst-case outcome for the lender. That land and building might not be worth the face value on the loan (especially if there was a bubble pop type of event), but it's going to be worth something, probably something north of 60% of the loan's face value, which was probably capped at 75% of the apparent market value of the property for a commercial cash-out loan. In the case of a small business, especially an opex-heavy, capex-light business like a restaurant, what's the lender going to get in bankruptcy? The rights to the name of a recently failed restaurant and the picked-over remains of whatever equipment wasn't stolen or fire-sold during the last day of operation? The lender's downside asymptotically approaches 100% of the loan's face value. If my downside as a lender is 40% in one case and secured by a hard asset and 100% in another case secured by nothing, it's no surprise that people are lined up to make the first loan relative to the second. (There's also a strong, secondary market for performing and non-performing mortgage loans that has a far weaker parallel in the small business lending arena, but that secondary market's existence is largely a consequence of the collateralization. Yes, it also suffers from or contributes to the velocity point you make.)
- bsder 12y ago
  Um, the landlord chooses to take on a contract. Nobody forces them to. The fact that a landlord gambled that real estate prices would be stable or downsloping and signed a long term contract is not the fault of the other party. "Heads I win; tails you lose" isn't a stable economic system either.
  - sokoloff 12y ago
    I think we're talking about something different. As I understand it, both sides honored the terms of the original contract. Once that contract expired and it came time to negotiate a new one, the market rent was much higher and the tenant chose not to renew at the newly offered rate. No one has to have breached the original contract for this outrage (misplaced, IMO) at landlords to surface.
    - bsder 12y ago
      No, reread the article. The contract was still in force and the landlord was trying to force the restaurant to cave in buying the contract out. > Finally, after months of struggles and eventually litigation, the owner, who was also recovering from two hip surgeries, caved. The hotel bought out the remainder of his lease.
      - sokoloff 12y ago
        > No, reread the article. My bad (and thanks for the bluntness; really! have 2 upvotes...). I originally read that section too quickly and internalized it as "oh, they had a 15 year lease that the landlord had previously tried to buy them out early and now that 15 years is up, they can renegotiate." You're absolutely right that the article strongly suggests otherwise and that my reading comprehension was poor.
        girvo 12y ago
        In fairness, when I initially read the first few paragraphs of the article, I got the same impression you did. It wasn't until I read further that I saw it wasn't the case.
- rmc 12y ago
  You're right, property rights have gone too far and should be limited and curtailed.

by speeder 12y ago

sokoloff 12y ago

It's unfortunate for those business who were unable to afford (or decided not to pay) the new rent, but IMO it would be a greater tragedy for property rights if the owners of the buildings were exposed to all the downsides of a market where rents might fall but unable to participate in the upside if rental demand and rents turned to the upside. "Heads I lose; tails nothing changes" isn't a stable economic system either.

WalterBright 12y ago
In the US, buildings can be designated as historic landmarks and so cannot be altered in a way that would destroy that. Often it's the building owner himself getting it so designated, in exchange he gets tax breaks. It's not perfect, but it's a workable system.
- ics 12y ago
  Landmarks are extremely contentious and doesn't always prevent the shady actions suggested in the original article. One example from recent memory: http://www.ibtimes.com/save-rizzoli-bookstore-effort-heats-57th-street-building-defaced-critics-say-nyc-landmarks-1567229 http://www.ibtimes.com/save-rizzoli-bookstore-effort-heats-5... http://gothamist.com/2014/04/04/everybody_has_been_bought_off_-_bre.php http://gothamist.com/2014/04/04/everybody_has_been_bought_of... > Sources say Vornado Realty Trust (NYSE:VNO), which co-owns the three properties at the center of the dispute, deployed contractors to deface the exterior of the buildings in a premeditated effort to derail the landmark-evaluation process. “Preemptive demolition,” as the tactic is known, is not an uncommon strategy for property owners, which have been known to purposely disfigure a building’s distinctive features after catching wind of an effort to designate a property for landmark protection. Once the building is defaced there is no going back in the eyes of the LPC (rumours of the LPC being bought off is another matter, but even proof of such actions would not reverse this point). Generally though it is indeed a "workable system".
  - WalterBright 12y ago
    If the owner was willing to go that far, then there's a bit of an injustice going on in the form of "taking property without just compensation". Since making something a landmark is a public benefit, it would be fair for the government to compensate the landowner for the lost value a landmark designation would exact.
    - brewdad 12y ago
      They do get compensated in the form of large property tax breaks.
      - arjunnarayan 12y ago
        Well, obviously the tax breaks aren't enough since the owner is willing to deface it to avoid the situation. Partial compensation is not really a defense. This is still a regulatory taking.
emodendroket 12y ago
Landlords driving out tenants who have a contract doesn't sound like a blow for property rights to me.
- sokoloff 12y ago
  My read of the typical situation is that the rent increases are made within the bounds/scope of the contract (the lease) and yet tenants still complain. When a lease expires and the rent goes up at the renewal? Tenants complain. When a tenant is month-to-month and the rent goes up with 30-days notice? Tenants complain. I didn't read anything in the original article, nor in the GP comment to yours about Rio to suggest that the rent increases were contravening an existing contract.
  - zhte415 12y ago
    Tenant: The rent is too high Landlord: The rent hasn't been changed for a long time --- Tenant: With other costs going up, I can't afford to pay more for rent. Landlord: With other costs going up, I need more rental income. --- Tenant: The place needs painting. Landlord: He has given that place heavy wear and tear. --- Tenant: I know people who pay less for a comparable place. Landlord: I know people who pay more for a comparable place. --- Tenant: Small businesses like me can't afford to pay high rents. Landlord: Small businesses like him tend to manage money badly and have risky businesses. --- Tenant: The rent ought to be low because the neighborhood is rundown. Landlord: We landlords should raise rents in order to improve the quality of the neighborhood. --- Tenant: I am a desirable tenant with up and coming customers. Landlord: The music drives me crazy, and neighbours complain. --- Tenant: I always pay the rent whenever she asks for it. Landlord: He never pays the rent until I ask for it. --- My point is, both sides complain.
    - ufo 12y ago
      > Landlord: With other costs going up, I need more rental income. Rent in Rio de Janeiro have grown widely above inflation for many years. Its one of the most expensive cities in the world in terms of rent.
yourapostasy 12y ago
It isn't quite that simple. Real estate is one of the most widely-available assets that can be as levered as it is allowed in so many nations. This leads to perverse incentives. A property owner with a paid-up property can lever up, kick out tenants, post an out-sized rental rate, and use the credit to cover costs and missing income until a new tenant willing to pay the rental rate steps forward. Usually they step forward with the simple progression of time and inflation catching up to the new rental rate, or it's a business more heavily capitalized and banking on serving much more flush clientele (interesting discussions around the bifurcation of the economy and just how many businesses can thrive crowding into that wealthier end). This puts lots of incentive to keep inflating real estate valuations until the credit spigot is turned off. Meanwhile, the hands on the credit spigot gets paid by the velocity of credit granted, so they get lots of incentive to keep granting credit on inflated valuations. This circle turns until it doesn't, usually with some form of falling demand exposing who wasn't wearing swimsuits as the tide goes out. Contrast this with the asymmetric credit access available to most small businesses. They could have a longer tenure and track record than the present owners of the real estate, but still be considered a great risk because (rightfully) the credit granter will assess growth prospects to practically nil. So faced with a 200+ year old business that can definitely pay back $100K in five years, or a new property owner of the underlying real estate that might, maybe, possibly pay back $2M in 10 years if the right valuations can be signed off, which deal looks better come bonus time? This isn't a nefarious plot or the yield of some evil; it is simple human nature played out on the canvas of time and incentive structures. There are some interesting issues to ponder here with how agency, compensation and influence are structured in the valuations process, and how that ties in with the overall cycle. As well as many other factors that don't show up on an initial cursory take of the industry. But suffice to say...it isn't quite that simple. As for what can one individual do about it, that's a fascinating and long discussion in itself.
- sokoloff 12y ago
  I think your comment is very good and agree with virtually everything you say. That said, I think the difference in access to credit is driven in large part by the collateralization and very little to do with the growth prospects (IMO). The real estate loan is collateralized by a building and land which can be foreclosed upon in the case of default, dramatically lowering the worst-case outcome for the lender. That land and building might not be worth the face value on the loan (especially if there was a bubble pop type of event), but it's going to be worth something, probably something north of 60% of the loan's face value, which was probably capped at 75% of the apparent market value of the property for a commercial cash-out loan. In the case of a small business, especially an opex-heavy, capex-light business like a restaurant, what's the lender going to get in bankruptcy? The rights to the name of a recently failed restaurant and the picked-over remains of whatever equipment wasn't stolen or fire-sold during the last day of operation? The lender's downside asymptotically approaches 100% of the loan's face value. If my downside as a lender is 40% in one case and secured by a hard asset and 100% in another case secured by nothing, it's no surprise that people are lined up to make the first loan relative to the second. (There's also a strong, secondary market for performing and non-performing mortgage loans that has a far weaker parallel in the small business lending arena, but that secondary market's existence is largely a consequence of the collateralization. Yes, it also suffers from or contributes to the velocity point you make.)
bsder 12y ago
Um, the landlord chooses to take on a contract. Nobody forces them to. The fact that a landlord gambled that real estate prices would be stable or downsloping and signed a long term contract is not the fault of the other party. "Heads I win; tails you lose" isn't a stable economic system either.
- sokoloff 12y ago
  I think we're talking about something different. As I understand it, both sides honored the terms of the original contract. Once that contract expired and it came time to negotiate a new one, the market rent was much higher and the tenant chose not to renew at the newly offered rate. No one has to have breached the original contract for this outrage (misplaced, IMO) at landlords to surface.
  - bsder 12y ago
    No, reread the article. The contract was still in force and the landlord was trying to force the restaurant to cave in buying the contract out. > Finally, after months of struggles and eventually litigation, the owner, who was also recovering from two hip surgeries, caved. The hotel bought out the remainder of his lease.
    - sokoloff 12y ago
      > No, reread the article. My bad (and thanks for the bluntness; really! have 2 upvotes...). I originally read that section too quickly and internalized it as "oh, they had a 15 year lease that the landlord had previously tried to buy them out early and now that 15 years is up, they can renegotiate." You're absolutely right that the article strongly suggests otherwise and that my reading comprehension was poor.
      - girvo 12y ago
        In fairness, when I initially read the first few paragraphs of the article, I got the same impression you did. It wasn't until I read further that I saw it wasn't the case.
rmc 12y ago
You're right, property rights have gone too far and should be limited and curtailed.