Bank financing and bad urban planning make the retail apocalypse worse
businessinsider.com
businessinsider.com
Daydream II - When local zoning authorities require ground-floor retail in new developments, but the local vacancy rate for such space is over (say) 5%, then the developer receives a "lease put option" - allowing him to rent that retail space to the zoning municipality at (say) 80% of the then-current local rental rates for similar spaces. If the municipality fails to pay up, it loses its zoning authority.
I see what you’re getting at but for all of americas zoning woes, I don’t think the answer is to make a patchwork of laws that say “if current zoning causes a bad outcome, cover their losses or lose your zoning authority”
It would basically hold the government and public accountable for the negative externalities of zoning decisions.
This is obviously attractive if you already think free use of private property is the natural state.
Eg if the state says you can't live in or rent your property, they should compensate you for the value they get.
Obviously, I think it would be ripe for corruption
>80% of the then-current local rental rates for similar spaces.
That is to say, you benchmark it. If someone across the street is renting their place for $1000, and the city says you cant rent yours, they would have to pay you $800 to keep it empty.
Benchmarking sounds complicated, but is extremely common. My city reassesses my property value using benchmarks every year to determine property taxes. Of course, they use totally unrealistic numbers, and I have to call them out on it, and then they back down because they are indefensible.
zoning is not driving high density problems. it's capitalism and the fear of "socialism"
the only useful one is a grocer that sources labor from volunteers for discounts on food.
the rest appear empty or have bars /(also empty) or some other useless high expense niche purpose.
it's definitely a situation that zoning alone won't fix. I'm definitely in a food desert and the closest grocer is a coop that probably doesn't support low cost food options.
there's no capitalism or market based fixes here. you need to actually get your hands dirty if you want to improve quality of life
This cascades into consolidation in crisis. Small landholders can’t afford to ride out the trouble. Large ones can.
You can argue whether that’s good or bad but we have governmental policies that encourage productive use of assets so it’s not out of bounds to suggest other policies for land assets.
And, if you have a financing agreement, you will have to shuffle around (and pay tax on) the rent that you officially declare in the financing agreement. You can't just put a nominal rent on it or that violates the financing agreement.
The overall point is simply to make reducing the rent to attract a tenant more attractive than leaving the place empty for multiple years.
I don't think you understand the issue.
The issue here is that many of these financing agreements specify a minimum rent and if you fall below that you are in violation of the capitalization requirements and you owe the bank money. By contrast, missing rent is considered a temporary condition and can be tacked onto the back end of the financing agreement.
So, zero rent does not cause capitialization issues, but lower rent does. Thus, landlords have a perverse incentive to leave a place unrented rather than lower the rent.
An occupacy tax breaks that perverse incentive.
The goal isn't to grind up landlords. The goal is to cause rents to come down when they should. Right now, the back end financing agreements are keeping rents artificially inflated.
You are looking for non-performing loan reporting. The FDIC collects these in detail to the degree that, should you want to override GAAP, you have sufficient model inputs to calculate in the aggregate.
But the second proposal - forcing municipalities to write options with unlimited potential losses - is silly. The whole point of the zoning authority is to say "it'll be best for the neighborhood in the long run for there to be some retail shops here", and it makes sense whether you're talking about a lot or the first floor of a building. If the development isn't profitable with the ground-floor retail requirement, then just don't build it.
Some sort of option might work, but it would have to be something like: the municipality can choose to rent the space for a fixed price if it's vacant for long enough. This encourages the landlord to rent it for some higher price.
If a property is vacant for 6 or more months out of a year, the (government regulating this) can forcefully change the 'offered' terms to be as good as the best for any active lease's term item among all leases within 10 miles, and also go beyond with up to 50% discounts on any monetary restrictions imposed in those terms. This includes deposit and lease rate.
The former part is to break unusually onerous terms that might exist which I'm not aware of. The latter is the club to encourage flexibility and settling on not long term national retail clients.
I think local governments forcing someone to lose everything they own with silly zoning rules is silly.
Why so complicated? If you want a legal fix, look into overturning https://en.wikipedia.org/wiki/Village_of_Euclid_v._Ambler_Re....
Even in areas with much foot traffic, such as downtown Redwood City, about a third of the retail space is vacant.
If you look at thriving ground floor retail in traditional cities, often the storefronts are as small as 25 feet wide.
Free street parking that is occupied all day by the same car results in at most one net new customer, which isn’t good, and most street parking in the US is either free or priced low enough that people park too long.
Almost as bad is street parking: even if it's turning over it does not matter since you have a very limited number of spots and no place to wait for a spot so most people will just move on if they don't find a spot (and won't go to such a place intentionally as the chance of catching a free spot is miniscule).
with most of America though, it's hard work because actually getting to that level of density is chicken and egg; and then of course in California the ghost of Prop 13 rears its head and discourages residential densification in particular.
It’s certainly possible; Seattle and Portland have dense commercial centers outside of downtowns that are lively with little net new parking.
If you just removed the parking and replaced it with nothing, that wouldn't increase patronage.
But if you used that area to increase density instead, that could increase patronage. Especially if you go dense enough for the area to become a destination in itself and to make public transport a sensible option.
Really the root issue is that there is too much retail square footage in the US. Retail sq ft per person is 23 sq ft, compared to 2-5 in Europe and Japan. In that context building new retail is a fool’s errand. https://www.statista.com/statistics/1058852/retail-space-per...
My theory is that they build the first floor facing the street as "retail" because they don't think an apartment in such a location will be profitable (much less so a condo) as it's going to be a very hard sell for the prospective tenants/owners. It's much cheaper than residential space and if somebody leases it - you get some profit but if not, you are not losing much.
In Seattle it’s a lot of dentist offices and new 150-seat restaurants, or at least a revolving door because no restaurant fills that size and they inevitably go under.
Seems like women have been indoctrinated to think that nails are important. Sorry, they are not. No man ever considers nails when regarding a woman. Only women look at nails when looking at other women.
The supposed attraction of long nails is like the pale-skinned attraction in all agricultural communities: pale skin means you are a rich lady-of-leisure, living inside the big house, not a farmer or laborer working under the sun in the fields.
This prejudice used to be true in western societies before the Industrial Revolution. But now it is reversed, with pale complexion meaning you are poor and work in a factory, but sun-tanned complexion meaning you are rich enough to holiday in Spain or Thailand to get sun in the winter, or now even get UV radiated on a sun-bed.
(As long-haul flights have come down in price, sunbeds are even cheaper, and warnings about skin cancer hit home, the inverse prejudice may be reverting back to the original pale-skin preference).
However, the farm-based prejudice is very much alive in East Asia (Japan, China, Korea, Thailand, etc.). Women from these countries carry parasols whenever there is a hint of sun, even if they have paid a lot of money to go to the sun on holiday, in say, Thailand or Bali.
[So there is the bizarre contradiction of western women paying for UV sunbeds, even as eastern women carry parasols on a hazy day.]
Nails are like that: you cannot have long nails if you are a farm worker, or craftsperson, or work in a laundry or a kitchen. Long nails mean you are lady of leisure, hence enviously regarded by other ladies.
Long decorated nails are not an indication of attractiveness to men, they are always and everywhere a signal of class, from one lady to another.
> Only women look at nails when looking at other women.
That's the same as men going to the gym and working hard on their biceps and triceps. (Many women do appreciate some muscles, but when you talk to them you will learn that the butt is the are you should focus on, if you want to maximize attraction for most of them. Leg day, every day.)
But there's nothing wrong with doing anything just for a kind of beauty that opposite gender by and large doesn't care about. As long as you care about it, that's fine.
> However, the farm-based prejudice is very much alive in East Asia (Japan, China, Korea, Thailand, etc.). Women from these countries carry parasols whenever there is a hint of sun, even if they have paid a lot of money to go to the sun on holiday, in say, Thailand or Bali.
I live in Singapore. You are right that many people here don't like to get too much sun. Me included. (But that's far from everyone here. Some people don't care too much.) I don't think there's much of an overlap between people going to sun themselves in Bali and the kind of people who carry a parasol.
Back to the nails: I just clip mine myself, and they honestly look fairly terrible. I could go for the same length but have them done nicely. Not even with decoration or nail polish, just nice and with clear lines and perhaps some polishing. (And whatever else they can do.)
If I worked in a customer-centric job, that would be absolutely vital. Or if my hands showed up on video a lot etc.
None of this has anything to do with long nails or attraction by the preferred sex.
Btw, please compare https://en.wikipedia.org/wiki/The_High_Cost_of_Free_Parking
30 years of us neighborhood residents suffering with a blighted, overgrown lot so that a developer could build their overpriced high-rise. During a good chunk of those 30 years, criminals used the unlit, boarded up lot as a convenient place to victimize passersby from the street.
Right in the middle of Midtown Manhattan. Land Value Tax needs to happen.
A vacancy tax may have helped but maybe not. A useful disincentive would need to reduce the developers anticipated return on combining the parcels - and it’s not even clear that this would be a good goal
This is not true in cities like NYC or Boston; also likely not true in many parts of LA. This is why people tear down houses to build new houses.
Looking at Vancouver for an example it’s easy to see how often the houses themselves are insignificant when compared to the value of the underlying land.
The tax system allowed a developer to take a 30-year speculative bet that eventually they would build their skyscraper. Their plans almost completely fell through the year before construction started because they were planning an even bigger building than they built but couldn't lock up enough tenants. They settled on a 40-story, 1 million square foot tower that stands there today and dwarfs all of the buildings at its feet.
However, I can see a long-term venture fund taking the exact bet you suggested. If the value of the new building that combines parcels is high enough, there is no way a land value tax would address your desire to stop landlords from waiting for opportune development projects.
What you would like is a punitive vacancy tax, perhaps combined with a required sale after a certain amount of vacancy.
My ultimate question is why you might want this. A land value tax is supposed to encourage the highest and best use of a parcel. This developer recognized that the highest and best use of a parcel might actually include the use of adjacent parcels. Shouldn't we encourage this?
I am aware of the history of the term - just frustrated that it’s thrown around as a brand new idea.
A problem with this system is how to assign land values if not using the sales value approach used in property tax assessments
Property tax doesn't adequately tax the value of the land. That's the whole point. This was a vacant, unbuilt lot in the heart of New York City. For ~thirty years. That shouldn't even be a thing ever.
Currently the building pays about 20M/yr in property tax. Having a vacant lot there for three decades is many millions in property tax that the city never recieved.
As you've said, you wish to have a higher tax on land. That is very reasonable, and a policy position that one could examine within the established context of our property tax regime.
> Property tax doesn't adequately tax the value of the land. That's the whole point. This was a vacant, unbuilt lot in the heart of New York City. For ~thirty years. That shouldn't even be a thing ever.
No tax will prevent this behavior if the final benefit to the owner is high enough.
How would a land value tax on three adjacent parcels stop an investor from waiting 30 years for the chance to combine the parcels and unlock far greater value?
Well, naturally. But a speculative bet that a un-/under-developed piece of land will become vastly more valuable in 30 years looks less and less appealing the more the owner is taxed on the value of the land itself, vs. the value of the improvements upon it, which for a undeveloped parcel is by definition very low.
I don't know the specifics for NYC, but I do know that there is effectively no jurisdiction within the US that even comes close to a full LVT as imagined by Henry George.
The goal isn't to stop a developer from combining parcels, or whatever their development objective is — LVT changes the calculus on speculative investments, and hopefully benefiting tax payers as well.
If a developer wants to sit on a parcels for 3 decades, they're still able to do so but they'll also need to pay up for keeping high-value land vacant. That money can then be reinvested into the community.
How is that different from what happens now?
It sounds like what you are saying is that you don't believe that property taxes are high enough since there exist vacant buildings.
That is a fine thing to believe but there is nothing about the current structure of property taxes that goes against this, in principle, besides the tax rate.
If the current structure isn't providing that, then perhaps LVT is the way to go over our current structure. If it turns out LTV didn't provide the desired outcomes, then let's try something else!
The current status quo of letting developers speculate endlessly while holding back growth or even providing negative economic externalities doesn't seem to be working as well as it could be.
All of this has nothing to do with a land value tax; instead, some people believe that cities should not allow vacant properties. This is a fine opinion, but it does not need to invoke a 100 year-old theory on taxation
This sounds like a problem with the police system, if criminals managed to keep getting away with using the building for many years when it was known they operated from there.
If there was a land value tax implemented, it seems like we would need even less tenant laws in order for the property owner to properly maximize the value of the land to pay the hefty taxes they can't control (such as immediate eviciton if a better use for that plot comes about etc).
Or do we expect the property owner to have all the responsibility for this "land value tax" but none of the authority to update his proeprty to meet the new cost in a timely manner?
So which bank had their branch here? :)
No it was literally a lot. No buildings. It didn't end up being developed until 2011 and is now 250 W55th Street.
That's not an oversight either, the original game was made to demonstrate that landlords were bad and with gobble everything up to become despots if not stopped.
Even if those factors did exist, the rules still don't allow players to arbitrarily raise rent, otherwise you could just demand infinity money from another player and it would be a short game indeed.
Being as succinct as possible, land taxes merely adds a new landlord: the government.
Don't change the incentives (very much) for this particular behavior, and watch the behavior not change.
Taxing the land value is a major change to the incentive structure.
The assessor determines the approximate value. That value is theoretically the same whether occupied or not and is already taxed.
I don’t follow what this “land value tax” is proposing to change.
Land value tax flips this, removing some of the risk of adding value to a property while discouraging hoarding.
This will only serve to punish small businesses who will see a huge jump in taxes, forcing some of them to sell to some large developer.
Pure academic nonsense. Punishing people for not doing what YOU want with THEIR land.
No, they tax based on the value of the land... I mean, it's in the name.
Land value + improvements is already taxed pretty much everywhere I am aware of.
Someone has to eat the opportunity cost of sub-optimally used land. Would you rather it be corporations and house-flippers, or renters and homeowners?
> Pure academic nonsense.
Several places have implemented LVT (eg Pennsylvania). What's nonsense is treating it like idle theory-crafting when there's evidence to judge.
> Punishing people for not doing what YOU want with THEIR land.
Not all societies believe in land ownership to begin with. Owning land keeps other people from using it, so it should come with a sense of duty.
Also, no one under either system is arbitrating the correctness of land use to pick winners and losers. The free-market still decides what is or isn't effective land use; it's just that under LVT people are disincentivized from speculating on empty land.
I don't see how this can work in practice. You grant the government infinite power to come in and say that your land could surely be used to build a 50 story luxury apartment building and therefore you now have to pay tax on a $50M imagined value. Even though the land might actually only be worth far less on the open market.
This is basically just a way to arbitrarily take away land from owners without any controls, since nobody can afford to pay taxes on imaginary buildings that don't exist.
> rationally should make as efficient use of the land as possible
These two statements are contradictory.
The value of the bare land (just pure dirt) is low no matter where it is.
But the second statement is where the consequences show up. The LVT idea isn't really to tax the bare land, it is to tax it as if it was being used by the most financially productive way possible.
So, tell me how is that not a tax that is based on something that doesn't actually exist today? The assessor can say: Sure, it's just bare dirt, worth nothing right now, but you could have a skyscraper there and if you did, it'd be worth a lot. So we'll pretend it's worth a lot and tax based on that.
The other bad consequence of LVT is that it's supposed to force every bit of land to the most financially productive use. Do you want to live in such a society? Something like a free playground is never the most income-generating use for a patch of land, but it's a wonderful thing to have in towns.
Yes and no. You're not taxing the land as if it was bare or as if it was full; you're taxing it based on the perceived value to a developer.
> So, tell me how is that not a tax that is based on something that doesn't actually exist today? The assessor can say: Sure, it's just bare dirt, worth nothing right now, but you could have a skyscraper there and if you did, it'd be worth a lot. So we'll pretend it's worth a lot and tax based on that.
The value of an empty lot is approximately equal to the value of the developed lot right next to it. This is already being done.
> The other bad consequence of LVT is that it's supposed to force every bit of land to the most financially productive use. Do you want to live in such a society? Something like a free playground is never the most income-generating use for a patch of land, but it's a wonderful thing to have in towns.
Government-owned land could be tax-free since (in theory) it's being used for public good.
So I feel like you just agreed with my premise, no?
The value (and thus the tax) on my empty lot with nothing but dirt is going to be set by the tax of the developed lot right next to it, which might contain a highrise apartment building.
So you're saying I will be taxed on the value of an imaginary building I don't actually have, just because the neighboring lot has one. So there's no way I can afford to pay that since the bare dirt doesn't give me any income. So I will lose this land due to the tax.
Am I wrong?
Maybe. I can't tell if we're talking past each other.
> The value (and thus the tax) on my empty lot with nothing but dirt is going to be set by the tax of the developed lot right next to it, which might contain a highrise apartment building.
Yes, the empty lot will be higher because of the highrise apartment next to it, BUT...
> So you're saying I will be taxed on the value of an imaginary building I don't actually have, just because the neighboring lot has one.
No, because the appraiser wouldn't include the building's value; they'd only be appraising the average value of land in the area.
> So there's no way I can afford to pay that since the bare dirt doesn't give me any income. So I will lose this land due to the tax.
That's intentional. If the land is only profitable for highrise apartments, then you should sell it to someone who can afford to build some. Note that this would help with the housing crisis.
> That's intentional.
Ok so it's true and intentional. Thus my statement at the top of the thread, LVT is a way to take land away from people.
The problem goes away if you don't treat land ownership as a right. What is the advantage of letting people possess empty lots?
Earlier you said it is intentional, which to me is the same as saying it is a goal.
> What is the advantage of letting people possess empty lots?
Maybe not too bad if it is truly an empty lot. I've been using empty lot in the thread as it is the minimum possible value, but LVT hurts people particularly when the lot isn't empty.
Imagine that lot contains your home, one you've lived and loved for decades and raised your family in and you're rather fond of it. Just because an 8-plex goes up next door, shouldn't mean now you are forced out because they start taxing your little house as if it was an 8 unit building.
LVT is based on the cold clinical idea that land is nothing but an investment that must be squeezed to it's maximum possible profit at all times, without any consideration given to what would be nicer to have there. I would hate to live in a society like that.
Taken to it's logical conclusion, LVT means we should bulldoze Central Park in NYC and fill it with tall apartment buildings. Just imagine the trillions of dollars of increased value!
Except your house wouldn't be taxed like it was an 8-unit building. The tax would only go up if the 8-plex increased demand for the land itself. If it's a poorly-placed 8-plex, the opposite could actually happen; but if the land value does go up, it would only go up a little bit unless they started developing a lot in your area, at which point you'd have the same sorts of problems either way.
> LVT is based on the cold clinical idea that land is nothing but an investment...
No. LVT discourages land investment. LVT is based on the idea that land belongs to everyone, so no one should profit just off of owning land.
You left out the main gist of my sentence:
> nothing but an investment that must be squeezed to it's maximum possible profit at all times
Sounds like that is exactly what LVT is. It becomes unaffordable (due to taxes) to do anything other than squeezing the maximum profit out of every square meter of land.
The result would be every lot in town is built to the same profit-maximization potential and the moment something more profitable comes along everyone is encouraged (due to increasing taxes) to tear all down and build the new thing that squeezes even more profit out of it.
It sounds like a terrible dystopia, I still haven't heard any argument that makes LVT sound like it would lead to building a nice town to live in. The US is already far too concerned about profit above all else to the detriment of mental health, imagine LVT on top of this squeezing maximum profit from land at all times.
This is fundamentally incorrect. It is a tax on the bare land. While the value of bare land is substantially less than the value of both the land and improvements, the land is by no means free. It is a scarce resource. Just try getting someone with an acre lot of beachfront property in a resort town to trade you for an acre of remote and barren tundra.
Let's say you have a vacant lot that you purchased for $25k. You want to build a $300k home on it. Let's say there is a standard property tax of 1%. Before you build your home, your property taxes would be $21 per month. After you build your home and your property gets re-appraised, your property taxes would go up to $270 per month, more than a 10x increase. While this is small compared to the cost of a mortgage, it is owed in perpetuity, even long after the house has been paid off. By leaving the land undeveloped, a landowner can keep their tax burden low.
Conversely with a LVT of say 5% you are paying $104 per month for the vacant plot of land. Build a $300k home on it and your taxes remain $104 per month. Thus there is no tax benefit to leaving the land undeveloped. Note that at no point did the potential use of the land get assessed, other than the free market value of the bare land.
Further, an LVT does not force every bit of land to be optimally financially productive, it just doesn't incentivize unproductive uses. Under the current system, it's better to have an empty lot full of garbage than a free playground, because by cleaning it up and putting in basic amenities you have increased its tax burden. Under an LVT, the land being a public park is the default, and the public gets just compensation for giving up any such spaces to other uses.
A tax on bare land based on what?
I find these LVT discussions fascinating because we seem to be using same words to mean different things; while I see the LVT proponents truly believe what they say, I can't wrap my head around how that meaning comes from the statements.
Let me try a different thought experiment.
Let's say I own that acre of beachfront property in a resort town. Completely undeveloped. For some historical reason, there are restrictions on that land which prohibit any development of any kind in perpetuity. It must be left as-is forever, untouched by human hand.
All the surrounding acre lots are valued at $100M (those lots don't have any restrictions, so they are built up with luxury condos owned by celebrities).
Under LVT, is the tax on that acre very high or very low?
Later something happens, let's say a constitutional amendment is passed which outlaws and overrules all such land restrictions. My bare plot of land is still bare, nothing on it. Under LVT, does the tax skyrocket overnight due to the constitutional amendment?
A good example is the Additional Buyer's Stamp Duty (ABSD) in Singapore. It's an additional tax on foreigners or Singaporeans who buy multiple homes. There is a normal stamp duty when you buy a home, which is 5%.
In order to "tamp down" the housing market, the ABSD in Singapore is now 60% for foreigners. Yeah, the tax on a home is 60% of the purchase price. So a $1M home would have a $650,000 tax when you purchase it ($50,000 BSD + $600,000 ABSD).
Does that stop rich foreigners from buying multi-million dollar properties as investments? Nope. In fact, one wealthy Chinese guy bought a whole building for $293M and had to pay $60M in ASSD (it was only 20% back then).
https://coconuts.co/singapore/news/mystery-chinese-family-dr...
So the argument that a Georgist land tax will magically fix the "unproductive land" problem is a bit naive.
There is enough demand for housing that developers keep building.
This is one of the core principle of Georgism, that the value and usefulness of a piece of land is tied to the infrastructure that the government has built around it. Therefore the titleholder should pay for the upkeep of that government and infrastructure, hence the idea of the land tax as a single tax.
If you have two identical lots, one that’s developed into apartments, a restaurant, and some office space, and the other that’s left as dirt surrounded by a chain link fence, which one has the lower tax bill?
If you have a 20+ year investment horizon, which approach allows you to more easily capture the appreciation created by all your neighbors who are working their asses off to build restaurants and offices and attractions?
> Why do storefronts remain empty for more than a year in some of the world’s highest-rent retail districts? Landlords with vacancies derive option value from two sources of uncertainty. First, increasing downstream retail demand may drive up market rents tomorrow. Second, different tenants may have different willingness to pay for the same space, creating an incentive for landlords to wait for a particularly high rent offer. High move-in costs, search frictions, and high contract dissolution costs for landlords amplify this option value. We estimate the model parameters by matching quarterly vacancy rates, lease-up rates, and tenant exit rates from a comprehensive, high-frequency storefront tracking service, combined with micro data on commercial leases. In a counterfactual exercise, we find that reducing the variance of the match quality distribution by 50% reduces long-run vacancy rates by 33% on average, while reducing the variance of the aggregate state variable has almost no effect. Finally, we use the estimated model to quantify the impact of a retail vacancy tax on long-run vacancy rates, average rents, and social welfare. Vacancies would have to generate negative externalities of $18.72 per square foot per quarter (about 30% of average rents) to justify a 1% vacancy tax on assessed property values.
i was excited to see the number of popups and temporary exhibits / art galleries increase during the pandemic, and was hoping this would lead to the commodification of starting a business in a vacant storefront
turning a lot into an H&M or a bank would definitely require a lot of capital, but is there a way to help encourage short-term businesses like holiday markets and popups to fill these vacancies until a 'real' tenant can take over?
https://www.marketplace.org/2021/10/29/vacant-real-estate-sp...
Possibly an opportunity in a short term brokerage who has the leverage Spirit Halloween has with landlords, with unsophisticated short term lease seekers with no leverage working with the brokerage. Bin packing problem of sorts.
A webshop might be gone and broke but it might not be. The friction of shipping isn't offset when the likelihood is that the popup will be gone.
In general the rent is too damn high and popups don't really solve that problem and I don't know how we can.
sort of like sunglass huts in malls?
pool all the vacant storefronts into an outdoor mall :)
That's less of an option now.
https://www.bloomberg.com/news/articles/2023-04-08/a-1-5-tri... | https://archive.today/ku9Xr ("Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025.")
Assuming we don't get back to ZIRP by then...
Citations:
https://news.ycombinator.com/item?id=37524951
https://news.ycombinator.com/item?id=36694276
Also as you point out later on participation rate is going to be interesting within 10-15 years. It does look grim at the moment but that will change companies will have to pay more which will raise participation rate (not as much as I hope but it will raise it). I remember it was during the oil boom a couple of years ago that mc'ds was having trouble hiring people and were paying 20+ an hour just to compete against the oil riggers and that was when min wage was like 7 bucks. Remember scarcity usually raise prices in a market.
I also posit that this is about to be this generations '1970s 1930s' moment. The boomers are hanging in there because they DO remember those moments. But age gets everyone in the end. It is interesting to see people mad about 5-6% interest rates. My parents had to pay 13%+ interest for a house at one point in the late 70s early 80s. I have the paper receipts to prove it.
I think there are some stores that make lots of sense colocated beside a Home Depot/CostCo/Best Buy/Walmart/Sam's Club/Target/outlets, and some that don't. But of course walkability/car ownership levels are changing.
Doesn't that cause a repossession?
So the banks somehow pushed a minimum rent clause to the mortgages, and now they're going to win big by repossessing in a market where the rent doesn't get high enough?
This means he will need to refinance at a reduced asset value, which means either the loan isn't refinanced or at a higher risk (rate).
Question is, if they are using these fictional valuations to maintain some other sort of financial schemes that helps them pay the monthly. The whole thing will be a pyramid scheme awaiting collapse.
Interest rates are high now, but those new rates don't kick in until the loans hit their maturity dates. As rate are kept high, more loans will refinance to higher rates and more of these borrowers will go under.
I know under Kelo eminent domain can be used for any and all purposes in Connecticut, but that's not true everywhere.
Are there some rules prohibiting them from doing so?
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.
Another subtlety is that "storefront" sounds like "retail" but it really is just a place to do business, it could be a mini-mart, a clothing boutique, or some other goods for sale location, but it could also be a service business like a restaurant, a salon, or pet grooming Etc.
I guess the bank has the property as collateral. But liquidating the property is also expensive and risky. Generally if you want people to borrow money from you, you want those loans paid back with interest. It can't help business to have customers constantly defaulting and leaving you with physical assets and costly legal and liquidation proceedings.
The other thing the article mentioned was "credit tenants": big chains that will take out long leases and continue to rent even if they close the location and it appears vacant. But while clearly the banks would love these tenants, there wasn't a connection made in the article between "borrower is about to default because they can't find a tenant" and "credit tenant swoops in to save the borrower and bank." The only thing credit tenants seem to add to the story is that they are yet another reason there are so many vacant retail locations. A big chain opens a store, and then closes it because the under-performing location costs less to run out the lease than it does to keep it operating.
I'm clearly missing something.
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."
I believe this is the right analysis because the best comeback they have is a straw-man along the lines of "why do you hate Capitalism/America/etc?"
I really can't wait until the Big Bank/Big Real Estate cartel gets busted over this; they almost did in 2008 during the crash and somehow wiggled out of it with minimal losses, while bankrupting Greece, almost bankrupting Spain, and setting back the US economy a decade.
1) I lower the rent $X and lease to someone now. This has a life time value of lease months * X
2) I leave it vacant, and lease to someone later for a premium rent $Y which has a lifetime value of $0 * vacant_months + $Y * lease_months.
The bet is that #2 is more money. What the landlord fears is that because leases are hard to break, #1 will leave them "stuck" for 'n' years at the lower rent.
In the Bay area during lots of competition for space, one could finesse this, if you were able to move easily, by leasing just "month to month".
I find myself imagining a cyberpunk future: The local Megabuilding is ringed with empty sockets along its ground-floor, bays of various standardized sizes and utility-connections, each waiting for tenants--with their treaded "stores"--to drive along, buy a few weeks, and carefully back in before unfurling their colorful interface to the wallets of the public.
On occasion the food truck will become so permanent that it's up on blocks in a parking lot, has a permanent eating area built next to it, maybe even has a cord running into a neighboring business. But that neighboring business is invariably a small business in an old, single-story building.
I don't know the cause of this obvious inefficiency. I assume it's that commercial real estate companies don't want to waste their time with small tenants. They figure it's more profitable to leave a large space open for ten years in hopes of getting a bank branch or chain restaurant, rather than rent each 25-foot section out to a separate tenant with higher turnover. Maybe they're right. Nobody gets rich running fleamarkets.
If I rent out a space to A, they may have clauses that reference the rent/average rent for the building vs. their space. So it might be preferential for me to wait to fill a space at a higher price, financially.
In addition, renting out at a lower rate may end up turning up in surveys of rent in the area, leading to a lower average, meaning that future renters of space that is currently rented will try and negotiate downwards in the future.
I don't know if GP's description is correct, but if it is then I agree with you (I assume) that $0-income spaces ought to be in some way included in the average.
All else equal, both sides prefer paper equity to hard cash, so lose money short term rather than mark the asset to market.
The banks are over-invested in commercial real estate, is my guess, and they're attempting to price fix to prevent the price from dropping too quickly and putting the banks themselves under water
On a larger scale, even if you know some locations are never going to see the demand they once did, so long as some fraction do recover, then it's an overall winning strategy. Where that breakeven point is exactly is tough to say, but I'm sure you can find a good number of people bullish on long term commercial real estate.
Let's say you buy a building with a 50 year mortgage for $50M. You're 10 years into the mortgage, so you've paid off $5M. But real estate in your area has done well, so the building is now worth $80M. If the bank forecloses on you then it's risky for them, but not as risky as it sounds.
They foreclose and fire sale the building for $60M (25% discount to make sure it moves). They get back the remaining $45M on the loan, and the owner gets $15M. Less than the $35M they'd have if they had sold it themselves.
The bank doesn't really care how much the building sells for as long as it's over what they are owed, because that's all they get out of the sale.
E.g. A 20pct rent cut might mean a 100million property portfolio has to be marked down to 80 million dollars for a 20 million dollar loss. That means:
a: lost bonuses for the bankers - self-explanatory.
b: potential balance sheet issues. That loss could mean the bank is now overleveraged and regulatorily required to liquidare assets. It could also drive a bank into insolvency if there are poor risk management practices (think Silicon Valley Bank having to mark down bonds due to interest rates.)
Losing even a few hundred thousand a month in rent isn't that big of a deal in comparison.
Talk to an architect. Even ignoring zoning and fire codes, new-ish small storefronts tend to be long and narrow, with windows only on the street end. That's not a popular footprint for residential.
Take a look at the picture of the boarded up storefronts in the article. Those storefronts share the widths almost exactly of the apartments directly above them, all of which seem to show signs of being occupied.
This would be an easy re-purpose and a good idea, but finance isn't incentivized to do so.
And it seems the entirety of non-luxury apartments in Manhattan also are long and narrow.
There's dozens of Bank Of America Financial Center's all over my city. Old storefronts feel like there's a sizable chance they get converted. I'm not sure but many seem to have automated & video services only, albeit you can schedule in-person meetings?
I wonder if they are also collecting some sort of tax credit for serving impoverished areas, thinking something around the lines of the NMTC: https://www.irs.gov/pub/irs-utl/atgnmtc.pdf (I'm aware of the CRA that's not what I mean, this is different)
I'm shocked the regular shopping mall (Barton Creek) is at high occupancy (>95%) and has substantial foot traffic on a weekday. I incorrectly assumed shopping malls were all but dead.
So. What're those real reasons you wanted to talk about?