From what I heard that and having a investment from which the money might shrink but but randomly disappear lead to super unrealistic inflated prices in NY (not all areas) where it's not uncommon that store spaces are left empty for years (even before covid) because they are to expensive but still don't lower the rent. (Because they don't want to rent it out, they only want to pretend that intend to do so.)
> (Because they don't want to rent it out, they only want to pretend that intend to do so.)
Louis Rossmann has a semi-recent YT video exploring one hypothesis: landlords have mortgages that contain clauses in then which specify that if rents have to be a certain amount, and if they drop too much then that means the property value must have dropped.
And if the property value has dropped, perhaps bringing the mortgage closer to being underwater, then the bank may want the landowner to put more equity in it so that adds to the bank's cushion.
And landowners don't want to put more of their own money into a leveraged investment, so they'd rather just deal with the carrying costs rather than trigger an 'equity event'.
The hypothesis was originally put forward in a Reddit comment:
apartments in my area are fairly expensive, but often come with special concessions for the first year of occupancy, often equivalent to a 15-20% discount. I notice that the lease is always very specific about stating the "actual rent" and the concession amount. I sometimes wonder what fraction of tenants is really paying the "actual rent", especially now that the offered me the first year concession again when I renewed my lease. is this a variant of the same finance strategy?
If you're in New York City, this may be related to rules on rent stabilization. Rent stabilized apartments can only raise their rent by a small percentage each year. These landlords likely want to be able to raise rents quickly if the rental market heats up, so they raise the "actual rent" by the maximum percentage each year but then give a concession so that they can actually find a renter.
it seems like unnecessary complexity. why not just advertise a market-clearing price for the units you need to move? they already have a different quote for each individual unit, which fluctuates a lot based on market conditions. they don't post a price for a currently occupied unit until the tenant has confirmed they will not be renewing, so quotes can't really be used for haggling. there are no rules about max yearly rent increases here either.
Sellers will advertise the lowest price they are willing to accept once they get desperate enough. But generally, for low volume, high value transactions, haggling is almost always worth it for the seller.
Hence car sales, land sales, leases, company mergers etc all have a bit of back and forth as opposed to produce at a store. However, in poorer countries, I’ve seen haggling over vegetables too, but that doesn’t happen in developed countries since it’s not worth anyone’s time.
This makes sense. Something similar has likely happened with some apartment landlords as COVID hit big cities. Rather than lowering rents and triggering a re-valuation, they let occupancy slide but could argue that potential rent was still the same. Both of these cases do require that the debt has the valuation terms in it, which not all do.
I think these kinds of terms typically only apply to commercial real estate, or large, multi-tenant properties, which is what your reddit comment was addressing. But perhaps things are different in Canada?
Yes, I think you are correct. I have never heard of a residential mortgage having a clause like that. It could definitely apply to store-fronts in NYC though
At the time of origination, residential mortgages will have limits on the equity-debt ratio. If you fall below a certain threshold (e.g. sub-20% downpayment) your lender may require you to carry private mortgage insurance (PMI). If your home's value were to fall substantially, your equity-debt ratio could be pushed below the threshold -- e.g. if tax assessments were updated.
I've never heard of situations that have re-triggered PMI... but it doesn't seem outside the realm of possibility.
That sort of investment is 'parking' money. It is parked somewhere to either act a conduit moving from owner to owner (which can be laundering). Or just to park it and not lose much value until better opportunities arise as a good hedge against inflation. Renting can be a pain as anyone who has got a bad tenant will tell you. That the Chinese are/were speculating in this way is not too big of a stretch (but is an assumption) as they have whole cities are that are basically big empty apartment cities.
That’s just a silly premise. Vacancies are because landlords are seeking long term tenants, and the discounting is done in negotiations behind the scene.
Just because you don’t want Ed’s Thrift shop in your retail space on a cut rate month to month lease, doesn’t mean you fight desperately want a tenant. A multimillion dollar investment yielding negative cash flow over years is a disaster, be ye investor or launderer.
There's a youtube channel by a guy who ran/runs an Apple-affiliate repair shop. He has definitely seen storefronts remain idle for multiple years. I see this happen in my local area as well and don't understand it.
I know Louis Rossman has posited that landlords are handcuffed by mortgages that require additional capital calls when rental rates decline.
That may be a factor but it’s not the primary cause. This has been going on forever because commercial leases are usually 5-20 year commitments.
I’ve danced the dance with many landlords where they act interested in having you lease, but clearly your business isn’t what they consider a “good tenant” so they draw things out while they continue to look for a “better” tenant.
I worked with a commercial broker in NYC up till the pandemic broke out.
The empty spots in the city do speak with prospective tenants but often have unrealistic requirements for small companies and unrealistic pricing. Beyond the rent you may be required to have seven figures liquid to be in a position to secure a lease. Especially for a restaurant. Especially if there is a buildout.
Of course you do. Would you spend a hundred thousand on a custom buildout for a $1M lease if there was a significant risk the tenant would stop paying only a fraction of the way into the lease?
Things get a lot easier if you can take the space as is. But even then, if the landlord thinks your business is at a high risk of closing within a year, what’s the point? Why not spend most of that year finding a secure tenant likely to last for a decade or more.
