I've read elsewhere that while this seems logical, it often isn't possible for commercial landlords as their loan terms are tied to a given rental price.
* All loans are priced based on the paper rental price, among other things. Pretty much no one buys commercial property with cash, so if the rent is lower the next purchaser won't be able to get as big of a loan, and the original landowner will be underwater.
* Posted rents are sticky, in that they are the basis of the negotiation for the next round of rents, and especially so for commercial real estate where leases are multiple years long and landlords often throw in renovation for leasees. Banks would prefer a space be empty rather than lower rent and then you have to negotiate from a lower base, and getting another tenant would mean having to rip out everything you put in for the current tenant at your own cost.
You see similar issues in multifamily where landlords would rather offer you "X free weeks" instead of lowering the actual rent by an equivalent amount.
Having rented commercial properties, the way around this is to agree to the lease rent, but then negotiate a bunch of rent vacations, financed renovations, etc. which even out to having a much lower lease.
The commercial landlord financial infrastructure is broken, but gameable.
Also, a land value tax would fix this (and many other real estate market distortions)
Forget rent control, the way commercial real estate works, many banks give loans based on certain minimum rents being paid, if the landlord lowers the rent the bank can call the entire loan to be paid immediately.
Many commercial property mortgages already contain clauses allowing the borrower to defer payments if they don't have a tenant. For those that don't, well they should have negotiated better terms before taking out the loan.
Here is a fun factor. A property's value is largely driven by how much rent it can bring in and its loan is based on that value. If rent goes down enough it could effect the value and ultimately the loan which is premised on its value. Nobody wants to be the bank with a 5M loan on a 4M property. In fact normally they don't want to loan more than 70% of the value of the property.
My understanding is that this results from the terms of commercial loans. If they were to sign a lease at a lower rate, they'd have to lower the appraised value of the real estate, which would blow up the loan.
But offering "concessions" like free months of rent, or having apparently any rate of vacancy doesn't affect the loan.
Owners are not able to cut rent as most commercial financing have covenants which require a minimum lease rate/sq foot. If they cut rent, they could be in technical default and lose the building.
Commercial financing has onerous terms which should be stricken by the government/courts.
Don't know if it's true, but I've been told that loan renewals for commercial properties use the most recently rented unit as an anchoring point, so if you lower rents too much, you end up under-water in your loan.
> The hypothesis speculates that, if a building's assessed value is lowered, it could trigger conditions in loan contracts that penalize the landlord or investor.
This is the issue exactly. A commercial mortgage lender will insist on a certain maximum Loan-to-Value ratio. The value of the property is directly related to the long-term income that it generates (i.e., the net present value of all future cash flows). If the amounts of cash flows go down, then the value of the property goes down and the loan-to-value ratio goes up. In a commercial loan, the lender can often call the loan due at certain times during the term of the loan for any reason. One big reason to do so is if the loan-to-value ratio goes up beyond the level that the lender was comfortable with. Refinancing in such a circumstance could be very expensive. Thus, it may make more sense for an owner to keep a property vacant and lose money temporarily than to take on a tenant at a lower rent and possibly cause the lender to call the loan.
TL;DR -- The banks demand a certain level of rent and the landlord has no leverage over the bank.
It would be interesting if this sort of covenant was made illegal/unenforceable. The downside to such a move is that it would make banks more cautious about lending on commercial properties, the upside is that landlords would likely optimize for cash flow and that would reduce vacancies. From a public policy perspective I could see it as a jobs creator since these storefronts hire people and create jobs.
From what I've read, in the case of commercial lets there's a good reason for this.
The companies that manage these properties acquire/refinance loans based on the value of their assets and the value of their assets is mostly determined by the rent they ask for, much less the rent they are actually getting. This leads to commercial landlords refusing to budge on a ridiculous price that was determined in different market conditions and as a result will opt to leave it vacant.
Taking the lower price would adversely affect their access to financing and could put them under water (they already were) on their loans.
Why these agreement/loans don't take this problem into account to prevent this situation is a total mystery though.
Can’t find the source, but the long of it is that the value of commercial property is a function of the rent that you can get.
If you are ‘looking’ for a renter at a given rate, then the value isn’t reassessed.
If you lower your rate and rent it at a reduced rate, then the value gets reassessed. If it gets reassessed too low, now your loan gets margin called and you need to pay cash to keep your loan to value within a set range. If you don’t have that money, then it’s in your interest to keep looking at unrealistic rents.
There is also commonly a provision to tack missed payments on to the end of the loan + interest so the financiers aren’t that quick to foreclose. Finally, any changes to the agreement require a % of financiers to agree which gets difficult when the financiers get more numerous.
From what I've heard, certain real estate enterprises including a substantial portion of commercial real estate can get financing on their nominal asking rent, whether or not they actually have tenants paying that rent.
I'd imagine these enterprises still need to find a way to make their payments on any related loans, but one wonders what happens to banking revenue if a bunch of them get caught in the same crunch.
My takeaway (and perhaps I have it wrong too) is that:
1) The bank doesn't have a mortgage on the commercial property, that's the owner/landlord.
2) The bank can tell the owner, "You can't lease this place for less than $100 per square foot".
3) The benefits to the bank from having "this place goes for $100 per square foot" on their books (or, conversely, the negative consequences of not having that one their books) are strong enough to keep the bank locking that rate in place, even if doing so increases the chances of the landlord going bust.
4) Worst self-percieved case for the bank is: "We own a commercial property worth a lot on paper, because on paper it's worth $100 per square foot, which makes it easy to find another buyer."
Commercial property mortgages and valuations are strongly based on rental rates - and until vacancies hit a certain percentage they’re not counted much at all.
One popular way to “flip” an apartment building of 100 units or so is buy one that is 100% rented and slowly raise rents until it is 80-90% rented and then sell it n
> They'll lower the price when their alternative is that the unit stays empty indefinitely.
That doesn't really square with how large multi-unit properties are valued, though. Once you get past 4 units in a building, you're into the world of commercial real estate. Commercial real estate is commonly valued based on a percentage of the projected (i.e. theoretical) cash flow the building would generate if all units therein were rented out.
Notice how you don't have to actually rent out the units for this formula to work? If you have vacancies, you can just "project" that they'll be rented out at whatever your current asking price is.
At this point, you might be saying to yourself something like "WTF, that's basically fraud, isn't it?" Well, it basically isn't, as long as you can convince at least one person (e.g. a banker or potential purchaser) that your projections are sound in order to either get a loan against any equity you have in the building, or to buy it outright, respectively.
To bring it back to vacancies and rents, that's the reason you see buildings sitting with tons of vacancies and owners not dropping rents. It's also the reason you see those "N months free, then $R per month thereafter" deals (because $R is the value they get to "project" they'll be taking in every month, regardless of the fact that it cost N months' worth of rent to bring in a tenant. If you start lowering rents, then that fucks with your "projections," see.
If you're like me when I first heard all this, you probably think this is insane at best, or shady at worst. And, yeah, it kinda is. But it also explains the phenomenon of units sitting vacant and bringing in $0/month when the landlord could just lower the rent and bring in $POSITIVE/month instead.
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