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> Lowering the rent to fill their building reduces the value of that building

> Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property

> it's in the bank's interest to let things be vacant and keep the valuations based on the previous rent, rather than lowering the rent and facing the music.

This just seems like everyone involved is playing make-believe about the actual value of their property. A tax on vacant land that increases exponentially year after year might help to correct this behavior, because at some point, it costs less to realize the loss than it does to pay the ever-increasing vacant land tax.

The behavior with a lot of commercial real estate loans atm is literally called “extend and pretend”

> This just seems like everyone involved is playing make-believe about the actual value of their property.

That's precisely what's going on.

It's a common theme among wealthy individuals/organizations to treat property as having value X for some purposes and Y for others - e.g., like pretending stock holdings are worth X for the sake of taxation while being able to secure loans by representing the stock valuation as Y.

Other than some of the residents who don’t want to see empty storefronts, who is incentivized to push for a correction in this case? It’s a “everybody loses” scenario, this everyone pretends to believe the numbers.

Other than some of the residents who don’t want to see empty storefronts, who is incentivized to push for a correction in this case?

That is a tad dismissive. Instead of not wanting to see empty storefronts, consider residents who would like to start a local business, but can not because the rent on commercial properties is prohibitively expensive. Then remember that there are residents who would like more jobs in the area.

But residents understand that if that property value goes down, their own property value will go down as well, no? Unless they're a renter, which is the minority of the population. So, even if they'd want to open a business, they'd need to be ok with the devaluation of their environment as well.

Everyone but current holders of property and loans. Lower property values are good thing. As that means lower rents, meaning lower overheads. Leading to cheaper goods and services for everyone. Overall property values closer to reality is good for everyone including current owners.

But supermajority of the US (and almost majority of the world, I guess?) are property owners in their respective countries. So, by that logic, most people wouldn't want that, no?

By the way, I am very supportive of lower property values. I've just mostly given up on this issue, since from my conversations with random people all around the world, most people don't really want that to happen. Like, they want the property values to go down, but they don't want THEIR property to go down.

> who is incentivized to push for a correction in this case?

Well, the government at the very least. From the article:

> Banks are highly regulated, so they can’t just loan whatever they want. The government insists that banks keep high margins of safety in their portfolio, and commercial loans are risky, so the terms they can offer are designed to limit risk. […] Second, the bank must keep a strict loan-to-value (LTV) ratio — so they won’t lend more than 80% of the value of the building (and often less than that).

The government says banks can’t loan more than 80% of the value of the building because it’s too risky. But what banks have done is instead maintained an inflated value of the property so they can loan out a higher percentage, which has led to the country being full of empty, overvalued property. Ie, a high risk of collapse—which is just what the regulation was intending to prevent. Lying about the value of an object to get around regulations is often considered fraud.

Looking from the perspective that government is a representative and reflection a the general population (yes, i understand it's not the case everywhere and so on), doesn't it mean people don't want this to be enforced, as it would lead to declining property values, which would devalue majority of population's assets?

Well, fundamentally no, I don’t think it reflects the will of the general population, since I don’t think they’re aware that this is how it works. At least, I wasn’t before reading this.

And beyond that: people’s assets are mostly residential real estate, not commercial real estate. So I don’t know that people will get that worked up about commercial real estate devaluing.

They are, value is relative. If the local government did that, it would discourage investors and future growth. They would go somewhere with less risk

> Lowering the rent to fill their building reduces the value of that building

This must just indicate that the model used to value the building is wrong, right?

I'd think insofar the value of the building is tied to the rental price, that value should naturally be a function of the revenue that the building can be expected to generate, which in turn is be a function not only of the chosen rent price but the likelihood of someone renting at that price. Why would a building that offers its units at $N per unit but can only fill half of them at that price be worth more than the same building filling all of its units at $N/2 per unit?

I suppose there's some wiggle room to account for the relative uncertainty in those two cases. But fundamentally the rental price is a choice whereas the value of the building is (or ought to be) based on a combination of the qualities of the property itself and what the market is willing to bear.

Since you brought up treasury bonds, during the 2023 Banking Crisis, the Federal Reserve created the Bank Term Funding Program[1] that let banks borrow against the par value of bonds, rather than the market value.

I thought it was a really elegant solution, and has made me wonder if a similar program could be used for vacant Commercial Real Estate in the cast of a national vacancy tax, land value tax, or similar value-lowering event.

1: https://en.wikipedia.org/wiki/Bank_Term_Funding_Program#Prog...

Lowering the rent to fill their building reduces the value of that building, which means when they sell it, they will recognize a loss that is likely larger than many years of operating loss from the empty building.

The specific buildings I was thinking about have paid more in taxes alone than their asking price.

> first several months free, rather than reducing the rent

Doesn't this only indicate that the algorithm is shite? They can give first 1000 months free but rent is $1T, also we need 1st and last.