More than a third of US small businesses couldn’t pay all their rent in October
bloomberg.com
bloomberg.com
We've constructed a bit of a euphemism for this. "I just want to make a living to put food on my plate". Except it's not the food that's expensive. It's the rent. Which in many places, for low income earners amounts to greater than 50% of their take home pay.
In my city there are dozens of empty stores in the CBD "for lease" as if there is no demand for use of these properties. Absolutely ridiculous. Strangely enough, everyone thinks that renting a home or workplace to occupy is a perfectly normal thing to do.
Would be great to have a discussion on this.
The idea that a landlord should invest serious capital to build a business park and then pay people to use it is nonsense. In that arrangement zero business properties would be made. People who wish to start a business would have to foot the bill to purchase or build a space for their business.
Landlords != developers
Again, landlords != developers
Some entities are both of these things, but the economics and incentives of the two modes of business are completely different.
Besides initial construction you also have maintenance, acquiring tenants, property management, renovations and improvements, etc.
If a company has the means and desire to do all this themselves, there's nothing stopping them from buying the land themselves instead of renting, but it's generally more efficient for a business to focus on what they are good at and leave the real estate issues to a company that specializes in it.
I know it sounds weird but that's their function in society, they are one of the many "business lubricant" sellers that allow modern society to work.
A liquidity provider is someone who makes transactions easier. The insurance company will insure you against risk does this. The lender who provides loans does this. The landlord who rents property does this.
You can run an economy without them, but things will cost more and take longer to happen.
treating real estate as a commodity, not as an intimate necessity of everyday life, helps no one except speculators and rent seekers, at the expense of everyone else doing productive work.
Examine the alternative. Should small businesses purchase the space all out, from developers or brokers? If this is so much more efficient, why don't they do so?
Similarly, you could ask the same of residential renters. What would happen if we simply banned all new rental contracts. Would access improve or diminish?
Why then is it ridiculous for me to own 10,000 sq/ft and parcel it out to 5 business that need 2000 sq/ft? I'm taking on the costs of owning and maintaining the property, as will as taxes and other assorted costs. It is fair for me to pass those costs on to the actual tenets of the property for as long as they choose to reside on the premises. They get flexibility and scalability, and I get money for my time and effort to provide their needs.
You have an outlay of capital to acquire the property up front, and you have a minimal amount of risk if a large portion of the property goes unrented. But even a brand new owner will typically only need to reach 30-40% occupancy by square footage in order to break even, and the unrented portions can be written off for a tax credit.
I would love it if the commercial landlords I've rented from in the past were providing services for the exorbitant checks they were getting every month, but the only different I've encountered between commercial landlords and residential slumlords is that there are generally government protections for the tenants of a slumlord, commercial tenants not so much.
To play devil's advocate, what if the tenants are actually fully compensated for that with a rent that would have been much higher across the entire market if the landlords were paying for all that?
> only need to reach 30-40% occupancy by square footage in order to break even, and the unrented portions can be written off for a tax credit
you seem to imply that commercial landlords are raking it, I think? But, afaik (and I'm admittedly not super-familiar with this), commercial real estate is an open, competitive market? So, given that, why doesn't it get flooded with supply of everyone who rushes in to build and collect those fat margins? Maybe there is still something there that makes it not as lucrative as it seems?
There is no 'rush in to build', as there is no land at all remaining in the city to build new on - any construction requires demolition first. Again, permits, historic district permits, etc. all conspire against the newcomer.
One way to change that could be to have mortgages that have an unlimited term and are interest only. The way the landlord wouldn't need to charge (d) to tenants and they only advantage to them being a landlord would be (a). But I'm sure if that were to happen capital costs for properties would increase significantly that at the end of the day rents would be exactly the same as they are today.
Triple net leases are quite desirable for landlords but by no means are the sole kind of commercial lease. The most common splits some of the costs of building maintenance (a ‘modified gross’ lease)
Net income = rent - expenses
If it’s not rented out you can still deduct the expense, and if negative you might be able to carry the loss forward.
But it's crappy because you have no rent to make up for the expense, so you're still losing money, just less than the full rent.
It's not like it's some magic trick or some perk landlord's get that magically gives them free money.
This is a pretext. You get money, give as little of it as possible to the people who are doing what you claim to be doing (maintaining the property), and pocket the rest. Owner is not a job.
Is this an issue? Without getting into an argument about what counts as a "job", what's wrong with someone investing money and getting paid for it?
Please, ELI5, how would there be any landlords left if they had to pay their tenants (rather than the other way around)? Or maybe you’re arguing that there shouldn’t be any landlords?
I hope you're not implying that society should make rules based on the preservation of the passive income of landowners. Landlords don't add value to anything; they speculatively purchased a title, and are trying to extract value from it.
A better more practical approach would be guaranteed basic income, and a land value tax that's somehow tied to average rent prices, so if rents go up, the land value tax goes up so much that it probably would've been better to keep rents lower than pay the higher tax.
Since the money from the LVT goes towards GBI, and people's rents are being offset, the one incruing a lot of the costs is the landlord, and they don't just have a free for all.
They need to double the tax though on airbnb and 'hospitality' designated residences that do short-term leases instead of long-term leases.
I'd even say give some lenience for people w/ less than 3 homes (i.e. you get your home/land free/clear and 1 rental you get 10% of normal LTV, instead of the full tax), then maybe graduate it up... 4-10th house you pay 50% on, 10th+ you pay 100% on.
Foreign investors should pay double the tax, if you want investment property in America, then pay other Americans who can't use those homes.
While I do agree that property needs maintenance, why would a landlord pay somebody to occupy their property? What's the incentive to own the property at all then?
And so what would be the incentive then to own property? Well if you cannot be productive with it, or otherwise enjoy it for personal reasons, then you wouldn’t have any reason to… which would let people who can do something productive with it the opportunity to do so.
Can a landlord contribute something productive? Sure, but that’s probably more akin to a property management company’s value proposition than a landlord’s.
This is patently absurd. Does the Miller not provide anything productive when he brings flour to the Baker? The Landlord provides both a Good and a Service. Just because his contribution is not necessarily concurrent with the Tenet's, does not mean that he is not contributing anything productive.
Please, list contributions made by the landlord specifically.
Remember a landlord is not a developer or builder - they generally buy property that already exists.
I think what you are saying is that the property wouldn't be available to rent, BUT would be available to buy at a potentially lower price (as buyers wouldn't be competing with rent extractors/landlords)?
I know we are talking commercial property here, but look at the market in Sweden, where renting property to live in for more than a month is illegal in most cases. The cost for a young person to buy their first flat (often with family support) is low. The country operates fine with very limited rental. People still build property, young people still get to live.
What does the landlord do? The miller isn't merely holding a millstone captive, he (or another miller) is required to operate it.
If the miller dies, someone else has to operate the mill. What happens when a landlord dies? What meaningfully changes?
To live in or use? That seems like a way better situation!
You have created a false reality, and then cried foul when real life didn't play ball.
Wouldn't a reality where land is only held by those using it and you can buy land for a quarter be better? I don't even mean to be funny or anything but that seems like a much better situation that our current one.
Arguably there are two big problems with the market for land/housing, and landlords aren't one o them:
#1 Increases the value of land due to neighbourhood effects accrue to the owner when they do little to deserve it (you can tackle this with land-value taxes).
#2 Various planning controls inhibit the market's ability to respond to high accomodation prices with the construction of more accomodation, keeping rents at a higher level than they would otherwise be without this government intervention.
Buildings should be 'permitted' to be built on land, and people can own the land insomuch as they pay land value taxes for the utilization of the land. If it's a primary purpose and they don't get income from it, then the tax would be nil, if it's a second home they'd get 90% off as they're still a 'small fry', maybe 3-10 homes is 50% of full tax, and 10+ is the full tax.
LVT can then be funneled into housing programs, housing assistance funds, or straight up basic income.
Land value tax is the tax of the value the owner gets from the land, so if you're airbnb'ing you'd pay more if you make 10k per month in airbnb, then if you're renting long-term for 2k/month. If you still have a mortgage, you could maybe have some sort of deduction - but again that's only if you're owning 3 or less homes, anyone leveraging credit for 10+ homes should be able to afford mortgage out of their normal cash-flows, or they're over-levereged and need to dump a property or two.
Seems like a perverse incentive to me.
Maintaining the property and occupying the property aren't the same thing. It doesn't make sense to equate the two.
Landlords are responsible for maintaining the property. Maintaining commercial real estate is actually quite expensive.
It's definitely less expensive to own and maintain an empty property than to own and maintain a property with $0 renters who are putting wear and tear on it.
Many, if not the majority, of commercial leases, including mine, are Net leases, which have the business maintaining the property (and paying the property taxes in the case of a triple Net lease). And many, if not most, commercial leases are not year to year, but over three or five years.
And why aren't these small business owners buying and building their own property as it would be cheaper for them in long run.
Why don't homeless people just build their own houses?
That's called an occupancy tax and it stops most of the idiocy in the commercial renting sector really quickly.
Edit: meaning land, air, water should belong to the people of said nation, and should be taxed as such and divided out to the people as guaranteed basic income.
Some locales have deeds for land have time limits; you don't own the land, you have been granted rights to it.
Sometimes the FAA will limit airspace usage for private property, for instance restricting airspace around stadiums during sporting events.
You're right that a corporation can't unilaterally declare the airspace over their land their headquarters sits on as a no-fly zone. But the government may still work with them on policy.
Imagine if someone claimed dominion over a chunk of the sky or an acre of water. You'd call him a fool and ignore him.
That's 100% the case actually. With the added subtlety we agree that the bank can pay itself by leveraging the money. Or more precisely, the competitive bank will tell you "I keep it for free and will even give you interests" cause it knows it can pay itself by leveraging the money.
You say this as if paying someone to take care of something for you is a patent absurdity instead of commonplace.
That alone wouldn't be an issue without the second requirement: You can't have any land because all of it belongs to the government. Even CA, one of the most overpopulated states in the US has more acres of land than people.
We need to start opening up land for development: mainly by starting cities in new underdeveloped states and creating incentives for companies to move there. Once people spread out a bit more, we'll see that there's enough land for everyone and it doesn't need to cost a huge amount to own land or real estate.
You can build just as sturdy/sound a home for 10k using earthbags as you can 200k w/ a contractor, albeit there's a lot of hard work, but if you can do it, then you should be allowed to, but zoning laws don't always look favorable on homesteading.
There's a family on youtube who has like 5 homes (1 for each kid, more like little studio apartments as their bedroom), and a big office. All built for <10k each.
Imagine if you could buy 20 acres of land, and put a bunch of outside-the-box homes and apartments and charge minimal fees (like maybe 300/month HOA).
You could build homes using: Earthbags, earthship, dome/concrete, containers, etc.
Any home that uses earth also has the huge advantage of it being an awesome insulator. Earthship homes manage to fluctuate between 50/80 regardless of location or climate (winter/summer respectively).
Creative homing I think could be a big solution to the problems if more people team up and build their own rentals on co-op'd land, then rental prices would go down a lot because demand would go down, or landlords would simply go broke because nobody will rent from them.
When you rent a place out some portion of the rent should be legally required to go toward an ownership stake. The landlord should have to buy you out if you leave, and you should have the option to buy the landlord out as well. Empty properties should slowly fall into public domain and be re-sold to the public at a low cost based on a lottery system or similar. While renting-collecting-systems aren't necessarily bad, they're usually bad and we should really seek to limit the ability of people to create them.
P.S. yes this should also apply to SaaS
> 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.
and
> No sooner is the exploitation of the labourer by the manufacturer, so far at an end, that he receives his wages in cash, than he is set upon by the other portions of the bourgeoisie, the landlord, the…
> Nevertheless in the most advanced countries, the following will be pretty generally applicable. 1. Abolition of property in land and application of all rents of land to public…
Unless you mean by landlords "people who own campsites" - that's probably the closest thing to what Adam Smith was describing. Although even they supply amenities.
‘The wood of the forest, the grass of the field, and all the natural fruits of the Earth, which when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them.’ Adam Smith
‘He must [nowadays] then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land.’ Adam Smith
‘Civil government as far as it is instituted for the protection of property is in reality instituted for the defence of the rich against the poor, or against those who have some property against those who have none’ Adam Smith
And it's not just businesses of course. we all know how high rents have gotten in residential.
but, what really gets me is that it does NOT have to be this way. I've been reading Henry david thoreau a writer from 200 years ago and I was stunned about how much higher their standard of living was for shelter.
Here are some figures from thoreau's book walden:
Unskilled labor was paid 1$ per day
Skilled labor 1.50$ to 2$ per day
Land was 8$ per acre
Average Houses cost 800 days of unskilled labor (800$)
Rent for a "Spacious apartment" with lots of bells and whistles was 50$/yr (25-100$/yr) so about 50 days of labor per year.
Now, look how far we've fallen in the last 200 years: at 100$ a day for unskilled labor The average house now costs 3000 days of unskilled labor plus another 2000 days for property taxes over 50 years. -> that's 5000 days almost 6 times more than 200 years ago.
Apartments: for 50 days of unskilled labor, thats 5000$ a year, you couldn't even rent a room for that much.
* The spacious apartment Henry described included the following: "Rumford fireplace, Venetian blinds, Copper pump and many more things"
Our standard of living for providing shelter has dropped so significantly, that now it takes 30 years to pay off a house whereas back then it took only 10 years, with higher interest rates too! thoreau felt even this was too long and too much of burden, so we went off into the woods and built himself a nice little cabin for just 28$ (cost of building material)
And yes, they didn't have electricity and some of the things we have today. so, there are some differences.
Did we simply get worse at building shelter? No, of course not. The problem is all regulation and zoning and land use policy. Are our regulations so precious that we would give up so much?
Shelter and housing whether its for business or residential doesn't need to be so scarce or hard to come by: it's a political choice people have made.
I mean seriously this minimum wage crap to makes things so expensive, plus I lost half my workforce when I couldn't send 12 year olds down to the mines anymore.
Like I am sympathetic to your argument but to compare the standard of living between now and Therou using one variable and then blaming it on regulations is absurd.
Also you say no electricity very flippantly I don't know about you but the thought of not having to start a fire in the morning when it is 3 degrees outside in order to have warmth is appealing toe.
The regulations I'm talking about that account for the cost of housing are things that allow builders to provide more cost effective buildings. Afterall what other inputs are there: land, cost of labor, building materials and the cost of dealing with regs (non-labor related).
I don't think that's it. There is more than enough affordable housing and developable land in the US, but it's in places that nobody wants to live - because the local economy is crap. It's crap because jobs there are gone. They all moved to dense expensive cities.
The answer shouldn't have to be that we need to cram more people in those cities, and then require everyone there to get a masters in CS in order to live well.
Now there are too many people trying to live close to available jobs, agriculture has mechanized meaning there are fewer jobs in rural locations, America industrialised then peaked and de-industrialised a bit, companies are automating processes. All these changes, I don't think you can confidently point to regulation as a single or primary issue.
Rather than look that far to the past, it would probably be better to identify policy that can help in the present and future. Sure, the past can provide lessons, but we can't idealize it or just transfer what worked when there were only 9 million people in the USA.
but it's also alot more than just population growth. you'd think there would have been at least some technological advancements in the last 200 years that could drive down the cost a little bit and instead we're up x2 to x3 or more in some areas. Something has gone seriously wrong.
Prefab houses can go up pretty quickly but they don't seem that popular. If they were more popular then maybe they'd gain a scale that would make them a much cheaper option.
But, I just checked the demographics in Massachusets in the 1800s and it shows that there were 0 slaves. And it looks like minorities were in very very small numbers: https://en.wikipedia.org/wiki/1800_United_States_census
I don't think the labor supply of oppressed minorities was influential enough to drive down the cost of labor. Yes, for railroads sure but not for construction of buildings.
https://www.alignable.com/forum/rent-delinquency-jumps-7-to-...
> But now, a month later, 37% of small business owners in the U.S. were unable to pay their rent in full and on time in October, compared to just 30% in September.
So 30% was a six-month low, and 7% more is a record surge. This implies that a surprisingly large percentage of small business owners are always behind on rent.
Another thing to remember is that the landlord gets paid last - if you miss a wage payment to your staff the local government will crawl right up your arse and explode, if you miss a tax payment the IRS will do something similar (though a bit later). If you start stiffing your suppliers you'll have nothing to sell, and if you fall behind on utilities you'll get them cut off.
But if you stiff the landlord he's not going to evict you right away, especially if you make a partial payment (note the "in full") and he has nobody better to rent to, anyway.
I'm not shedding tears for landlords. Most of them charge exorbitant rent while still enjoying absurdly low interest rates of the last decade on their loans and doing the bare minimum (or none at all) of maintenance or investment into improvements (e.g. bring electricity and water grids or insulation up to code).
I seriously hope that the current market crash brings down rents massively to affordable prices, but as long as landlords can get tax advantages for un-rented units especially large corporations don't have an incentive to lower rents - it will take a lot of no or partial payments to force their hands. An alternative would be vacancy taxes, but these are hard to pass if half the legislators are bought off by large real estate investors and their banks.
It's part of the reason every valuable downtown is now coffee shops, banks, and lawyer's offices, nothing else can pay the rent (best use? probably from a money perspective, not from any other).
The problem is now that there are no actual shops left because they can rent, community centers end up dead in a vicious cycle as when large traffic attractors leave, the smaller shops that would catch random passersby don't have passersby any more.
To make it worse, city governments usually don't have any way (e.g. via zoning) to regulate what precise kind of commercial activity is allowed in a property - the result is what you describe.
[1] https://www.businessinsider.com/tax-season-outlook-analysis-...
[2] https://www.spiegel.de/wirtschaft/soziales/unterbesetzte-beh...
From the first paragraph of your link: CBO estimates that portions of the Administration’s proposal to increase funding for the IRS by $80 billion over the 2022–2031 period would increase revenues by approximately $200 billion over those 10 years.
Later in the article is the argument that the IRS says previous multiples were 5-9x at peak and then immediately goes into why those numbers would not hold for future incremental investments in enforcement.
So, no, CBO doesn't estimate that it's a 9:1 return.
By regularly auditing especially large employers, the incentive for companies to commit these crimes because they'll get away with it suddenly also goes away. Simply said, if you can make an extra million dollars a year in profit, your company will be fined 100k if caught, and your company has an audit chance of 1 in 20 years, you can expect 19.9 million dollars in extra profit over that timeframe. Now, assuming an audit every five years, you're at only 4.9 million dollars of extra profit and the high chance of getting caught again and getting a harsher sentence as a repeat offender.
Regular tax audits have far-reaching side effects.
If we hire 10k novice IRS agents, I imagine their annual cost will be quite low for the the first years and/or decades. however, At some point it will go negative.
We can extrapolate their cost though. Payment rosters and pension contributions for government jobs are public, which means you can do a worst-case estimate and go with the cost basis of the highest-paid position that they can reasonably achieve in their career.
Additionally, a lot of them are replacements for people who will go into retirement or quit, so as people get promoted, other people leave, freeing up their salary budget for the new promotee. (Pension budgets are a different beast because they obviously depend on how long the person lives)
That said, I think for the most part this is a political issue because of the taxpayers. Many if not most people find taxes stressful and don't want more Auditors looking into theirs.
You can say that they will only audit corporations or high value returns, but the little guys will always worry that it frees up more resources to go after them
The federal government gets larger as a result of this. That might be OK, but we shouldn’t pretend it’s not the case.
[1] https://www.cnbc.com/2022/08/31/irs-is-not-hiring-an-army-of...
[2] https://www.politico.com/news/2022/08/16/irs-spending-new-mo...
To be honest though the IRS has an awful track record of focusing on lower income people :(
[1] https://en.wikipedia.org/wiki/Tax_status_of_Scientology_in_t...
The book _Perfectly Legal_ by David Cay Johnston has a good chapter on this. (The book as a whole has its ups and downs, but the history of IRS management I found particularly interesting.)
> More than half say their rent is at least 10% higher than it was six months ago, and in seven say rents have increased at least 20%.
Who are these people where their rent changes 6 months? When we looked around these are fairly common terms...
I mean technically our rate increased last year so we are part of some, statistics but it's meaningless.
Companies have been aggressively cutting staff for a very long time, often requiring a single person to do the work of two of three people. How much can they lay people off and stay in business at all?
Black Friday is typically the day when business' get 'into the black' for the year. Things typically get tight in October with having to both prepare for a November increase while being a lean month.
This doesn't seem all that different than the position all of the startups and small businesses I have worked at or had insight into from the past.
What is different is the Fed, media, and large corporations are trying really really hard to talk down the economy into a fear based recession this time, complaining loudly about the growing cost of labour and how that is the end of the world, yet bragging about record profits taken 'under the guise of inflation' on their earnings calls.
Meanwhile, consumer confidence is the highest since Feb. https://www.bloomberg.com/news/articles/2022-09-27/us-consum....
I'll go with consumer sentiment and historical knowledge over an artificial narrative and fake hysteria along with a Fed push intended to increase unemployed to keep down labor costs for companies posting record profits in this horrible (yet record setting) economy.
Everything that applies to single family home rentals and even much that applies to apartment/multi family rentals is out the window. (Though arguably triple net leases would make sense in many cases vis-a-vis home rentals.)
Vacancy taxes would also be the easiest thing in the world to get around, you'd just blanket the world with Spirit Halloween stores.
If Spirit Halloween or whatever equivalent you're imagining is offered a rent they're willing to pay, then there is no market failure and policy is working.
How does that represent "getting around" the vacancy tax? Are we imagining that owners are creating Shell Game Seasonal Retail Inc™ and renting to themselves?
I think they could be structured in such a way as to at least help the situation, but they'd for certain be gamed.
Have we seen situations like this where we then see rents drop as far as historical patterns go?
Nothing profitable makes it out of the near future I suppose.
Unless something dramatic changes.
I’m very surprised that dealerships are having troubles. Haven’t they been charging all time high markups?