Two Office Landlords Defaulting May Be Just the Beginning

It's just vulturing and rent-seeking to the extreme, if markets are efficient then they should just go under, they've bet on their risks vs rewards and lost.

Have you considered the possibility that perhaps it makes sense to have certain businesses specialized in certain things?

Say there is a sale-leaseback agreement with a supermarket business. Clearly the supermarket wants to do it, right? It allows them to free up capital that would otherwise be allocated to owning the land, and they can use that capital to expand the business they are actually good at, operating supermarkets.

For the corporate that is now the landlord, the benefits are also clear, they get a steady stream of income.

Both businesses specialized in different things, so they have different costs of capital, time horizons and cashflow needs to it makes sense for them to both do business with each other and for both to exist.

Someone has got to take the risk of owning the property. Don't take it as some kind of moral imperative, I don't mean it that way. It's not inherently good or bad.

But simply put if a thing has value, people need to decide how to structure access to it. You can't get around having some entity that has the thing on its balance sheet, and that entity decides how to finance the maintenance of the thing. Do you pay in cash? Do you get a mortgage? Do you rent it to mom and pop, or some large corporation? What do you allow in the contracts?

These kinds of decisions have an effect on what the thing will be worth, and in the end there's a risk taker who gets rewarded or punished for doing it well or doing it badly.

You can roll the risk into some larger conglomerate that does other things like building the stuff in the first place, or a financial entity that has some financing advantage, or some entirely other thing that might make sense. But in the end, the risk is there somewhere in some entity and needs to be dealt with.

Just because you don't know what they do they must do nothing, right? And as this situation proves there's also no risk involved, right? How does a childish comment like this get to the top?

So, obviously, commercial real estate landlords are just greedy middlemen who provide no value, so, you can't even imagine a world where you'd rent office space, so you're going to acquire it on your own. Naturally, you don't have $300K to buy an office outright. So you seek a mortgage.

Oops! It turns out your experience of buying houses in a zero interest rate environment and loose credit doesn't apply to commercial real estate. Banks know (or knew, at least) they can liquidate houses relatively easily, though often still at a bit of a loss; commercial real estate is often significantly harder to liquidate, even in a good market (let's not think about how hard it may be in the next couple of years; I'm trying to be generic here, not specific to the current situation). So they're somewhat less excited about taking it as collateral, and they want much, much more from your company than you're used to providing for a house-type purchase.

Unfortunately, your business is three weeks old, has no current cash (or what cash there is you need to dedicate to acquiring customers, and you've got precious little of that), and has no positive cash flow it can demonstrate while it can easily demonstrate the negative cash flow of expenses. The bank says no.

So, this is HN so of course we're going to financially hustle. You decide to sell equity in your little business to get the $300K to purchase something outright. Unfortunately, at the present time, a polite and gracious valuation of your business ranges from between $0, and maybe $30K at the top end (a discounted acknowledgement of the franchise you bought), so nobody is going to provide you the money to buy a building outright.

So in the end, it turns out you wasted $50K on your franchise fee because you can't actually buy an office.

Oh, if only there was some business you could patronize that would be able to own a commercial building, even if it just had a track record with a bank so it could get loans to own things, and was willing to rent the space out to you and take on the risk that you might disappear so they may have an empty building for a while that they're still paying on. Fortunately, in this enlightened thought experiment country, the populace rose up and declared they are all scum sucking parasites and banned them, so instead of your business having some money extracted from it for an office, it just went out of business instead. What a close call!

As you scale up, the story shifts some. Larger and older businesses have a better track record with a bank, but, on the other hand, also the business acumen to know that owning buildings is not always their core business, core competency, or something they want to spend lots of money on.

This doesn't mean all commercial landlords are good by any means. In fact if you're reading this as a moralistic tale you've missed the point. It's a story about business. Many of the businesses you see driving down the road couldn't exist, or couldn't have started, if there was a barrier placed in front of them where they had to own a building to get started, just as it would be very difficult for anyone to find a place to live if they had to jump straight to owning a house as their only housing option, and especially if they had to own a house the instant they started their economic life, before they even had a job, and nobody was willing to loan to them.

If you, as a business, don't want a landlord, by all means buy your own building. But by the time your business gets to the size where that's an option, you'll also understand why it's very likely not what you want to be doing with your capital.

The whole office building kind of thing is indeed looking a little more dated with every passing year but I guess I'm missing the Ponzi scheme aspect of it.