This explanation seems very implausible to me. By lowering the rent by X%, and therefore reducing annual revenue by X%, you admit the building is worth X% less. But by leaving the building X% vacant, also reducing the annual income stream by X%, you and the bank can somehow pretend the building is worth what it would be if full? I doubt owners and banks actually believe this. Is there some policy that forces this?

I actually think there's a business to be had here.

As described, the landlord can't offer a traditional lease for the actual value of the space.

However, the landlord could offer essentially day rentals without creating a lease. There are systems for this already, such as Peerspace and their ilk, which I've used for small events. I believe these don't trigger the foreclosure clauses.

I think that a property management company managing deeply underwater buildings could play in this, reducing their cost structure by offering day rates. They've often already got a solid NFC entry system. Most of what you need is automated pricing, onboarding and offboarding, and figuring out how you avoid needing physical cleaning/setup/teardown overhead.

How come this obvious workaround isn't used much more often:

>> If the system allows you to pretend that the vacancy is temporary, why doesn’t it allow you to lower rents on the pretense that lower rents are also temporary?

> This does happen sometimes: it’s packaged as “incentive offers,” like 50% off the first 12 or 24 months rent, or 6 months without rent, etc, that lower the average rent over the life of the lease without lowering the “list price.” That’s common in residential leases, and I know it happens sometimes in commercial leases, but I don’t know how prevalent it is.

Has anyone here considered the cost of capital reserves required by the bank for holding this loan? Commercial loans used to be a 100% capital holding requirement, while HVCRE (High Volatility Commercial Real Estate) Loans carry 150% capital holding. So if a bank loans a building owner 100% of a 20 million dollar facility and it meets HVCRE requirements, the bank has to keep 30 million of capital in reserve for the chance of default. Even if the loan receives enough buyer downpayment or for some other reason becomes normal Commercial loan the bank has to hold 20 million in reserve capital for the loan. So you have to net the incentive of the cost of the capital held in reserve against the interest payment on the bank's balance sheet as an economic forcing against continuing to float the loan forever...

Sounds like fraud with extra steps.

Say what you want, but a law that lets you pretend that the value of a building is based on what you ask, rather than what you can actually obtain, is a stupid law.

It’s very clear there is no commercial property investors here, nor commercial borrowers.

Previously: https://news.ycombinator.com/item?id=46305123

(2025).

> The obvious thing cities could try is to put more pressure on building operators to fill their spaces, but the building operators are already under a ton of pressure — they’re losing a bunch of money! So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts.

I agree that this is the obvious remedy. I don't know if it's exactly the right answer, but it's the natural place to start the conversation, and I think it's at least in the ballpark of the right solution. It's the city (and bigger) government's job to create policies that incentivize the right behaviors for the benefit of the community. There clearly has been an oversight here, if extremely valuable commercial properties are literally just sitting unused for no good reason. In my opinion we'd all be better off if the market did correct itself, at least getting us all on the same page about what these properties are actually worth, rather than the current situation.

The city stepping in also helps put the fuckup back in the right place, in the hands of the property owners and lenders who seem to have made these bad bets, rather than externalized to the residents and business owners of the city, who haven't done anything wrong. The article suggests that this leads to "bad consequences" and even bank bailouts, but I'm pretty unconvinced that the problem is widespread enough that the federal government would literally need to start bailing out banks. From what I've seen, it's really bad in a few specific metro areas and not so much in others.

It could be 2 to 4 years to build the space. You can also structure the loan so the interest is amortized over a longer period than the loan which simply requires a balloon payment or refinancing of the interest balance at term which can offset some of the costs presented in this article.

It also does look like San Francisco has a vacant storefront tax although the penalties are fairly light.

https://abc7news.com/post/remember-vacant-storefront-tax-san...

There is also the practice of "deferred interest paid in kind", where vacancy is considered temporary, and the bank agrees that the interest for the term of vacancy will be paid at loan maturity. Not sure how/if it applies to multi-tenant buildings, but plenty of them aren't multi-tenant.

The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that.

The "solution" is that you should have to pay tax on what you claim the rent is after a small grace period (Less than 24 months certainly. Probably less than 12 or at least prorated starting before that.).

If your financial agreement requires and claims that the rent is $5000, no problem! Then the tax authority should expect to receive the tax revenue they would expect if someone was actually paying $5,000 in rent to you. If you want to leave the space vacant even after paying the tax on the revenue--have a blast.

That would short circuit all the financialization shenanigans.

TLDR: lowering the rent would create a direct problem for banks to convince investors the building is worth more. And since they've already given the money of the investor away (usually to construct the building in the first place), effectively the bank would have to pay back the difference if they did this.

So it's a choice between honesty and profit towards investors ...

Oh and obviously the "solution" is waiting for inflation to change the price of the rent effectively. So the real fix is for government to take the initiative and start paying people (by now, a lot) more.

Here is the problem:

> Half empty, the building is only generating $500k per year in net income instead of $1M.

> Let’s imagine the owner lowers the rent by 30% to fill the building.

> Now, reality has proven the operator can only make $700k per year.

No. When the building sat half empty, reality had already proven that it could not generate what they thought it could.

This is the insane fallacy driving this whole thing, and no amount of explanations about commercial mortgages will prove anything other than that a larger number of people than we thought are participating in the same delusion. If you cannot rent the space for what you thought it could rent for, your building is already worth less than you thought, and it is sheer folly to think that you can alter that fact by pretending you are waiting for higher rent later.

> So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts.

There is another problem. What we need is to dig deeper into that theory and push harder and harder for solutions where all the financial loss gets pushed onto the people at the top who have a lot of money. If the banks are making money off this kind of nonsense then they should fail.

> I’ll give this some more thought, but if any actual commercial real estate professionals have ideas I’d love to hear from you in the comments!

No! Commercial real estate professionals are mostly just more people buying into these same fallacies! What we need is more people outside that self-deluding system saying "this is nuts, I'm taking $100 million from you" and resetting the entire system.

It all comes back to fractional reserve banking. It is the root of all evil in our financial system. If Rothbard could only see the current state of affairs...