I grew up in a town that had a booming downtown strip for as long as I can remember growing up.
Then around 2008 you started noticing stores closing up.
Word on the street was that rent was just too high to make a profit, and a lot of the retailers who had been in the same store downtown for decades closed up shop forever.
Fast forward to today, all of those stores and more are shuttered... the rent is still too damn high... and the absentee landlords that own these buildings are actually rewarded with property tax benefits for keeping them EMPTY!
How crazy is that?
Some rich guy owns almost every single building downtown, is asking $75/foot, and gets property tax breaks when his buildings sit vacant... slowly smothering the downtown vibe with an air of death.
The value of his building's keep increasing so he doesn't care. He doesn't live here.
IMHO retail properties should be taxed MORE if they sit vacant for too long, and that increased tax burden should go up exponentially every year that the building sits vacant.
A vacant retail building should be the landlord's problem, not the town's.
I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes." By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%.
This is sort of the same myth as the "I shouldn't take more money because it will bump my tax bracket" (which makes no sense since tax brackets are marginal)[1].
However, it is true that landlords will often have properties empty with rates at what seems to be higher than the market-clearing price.
The only explanation for this I've heard that makes sense is that rents/tenants are bimodal: the average is misleading.
There's one group of tenants (cafes, indie hardware stores, hobby shops, etc) can afford one rent, while Starbucks, Citibank, and Panera can afford a second, much higher rent.
Which tenant you get is a lottery, so as a landlord it may be short-term beneficial to set the rent at the higher mode and "wait out" a high quality tenant. And yes, long term this can be a collective detriment.
[1] Except for things like the EITC, and this was a strong criticism of it.
> By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%.
I think the issue is more with capital appreciation. Yes, month to month you're still losing nominal dollars for not having a tenant, even with lower taxes. However, that land/building are likely still seeing appreciation, even in markets that aren't "hot".
Some friends of mine recently bought a building to open a restaurant. I'm pretty sure it had been vacant for more than half its lifetime, yet trying to negotiate with the owner was a nightmare. They simply didn't want to budge and were apparently very content with saying 'No' to offers and letting it sit there for well over half a decade empty.
The thing I learned recently that happens in Spain is that if you have a property sitting empty, the government will calculate a "virtual rent" so to speak and charge you based on that (normally lower than actual market rate, but not much). If you rent it out, you get taxed based on what you actually make and not on this potential rent. Real estate taxes are apart/independent.
This makes people really want to rent out places, and you see a much higher occupancy than in other countries (you still have squatters, which is a big issue, pushing in the opposite direction so it's still not perfect).
Oh that's a great idea. Especially if the owner is insisting at only renting at a ridiculous price per area -- ok, fine, set your rates at whatever you like even if nobody is remotely willing to pay that, but you'll pay taxes at that rate so best not inflate it too much, hm?
Sounds like a good opportunity for a business to get paid to rent out your place for a profit that's a fraction of the virtual rent. The owner saves money ahead can kick you out when they find a good client
The thing is that you pay a % of the rent, so you'd have to rent it out really cheap for it to make sense. I don't know if you can have an inspection or something happen if you rent it ridiculously cheap.
Example: you rent a place valued at 100k€ (mkt price: 160k€) for 1000€, or the "taxes for the virtual rent" is calculated at +0.9% of the value yearly, which is 75€/month in taxes. Let's say you pay 10% taxes on the rent, so it's either 100€ or 75€. That means the company would need to rent a 1000€ apartment for under 75€/month for it to make sense to you. The sane thing here would be to rent it out normally, you just need to put some effort to avoid squatters (no credit system in Spain).
This applies for normal residencies, I don't know about comercial real estate (though I would expect the same applies). In construction, allowing family to live there, land, etc do not have these taxes.
It should be much more harsh. If you own a building where a store should be but aren't using it as such you should be made to pay an insane tax for lowering the value of the entire shopping area.
I live in a block with around 6000 people and no stores. That what should be the mall was held hostage for decades by a supermarket chain who have a store 10 km from here. They didn't want their competitors to have it. Eventually the entire thing was changed into a giant day care.
"I think the issue is more with capital appreciation."
From the commercial landlords I have talked with SF, the lease term length is the main contributor to vacant retail spaces. When a retail shop moves in the lease term can be 5-7 years. Retail shops invest up to 50-100k fixing up the space - they need the guarantee they can rent the place for a lengthy time. Thus, the landlord needs to be sure the retail tenant has the capital and credit to last. So, landlords will hold out - rather than risk a bad tenant for 7 years. And quite frankly, there just aren't enough business models that work in retail spaces. If you have a brand new tenant with a 7 year long lease - this could also wreck your chances of a sale if the new owner wants the space cleared out.
Also! Commercial tenants have the protection of LLC (or c-corps, etc) - so if their "Grape vape LLC" doesn't work out - they can just walk - and as a landlord you can't go after them personally.
How is this a problem? As far as I can see the landlord takes on zero risk there.
In the best case scenario the landlord gets a 7 years of steady rent. In the worst case, they get a few months and the store goes out of business (breaking the lease).
I see no reason why you couldn’t repeat that ad infinitum?
Some commercial real estate deals will expect the landlord to contribute some amount for tenant improvements. So if you get a bad tenant you might be out that money. In addition, before they go out of business they probably stop paying rent. So if the business fails in the first year that could easily be a net loss to the landlord compared to waiting for a better tenant.
It still appreciates if it's rented out, so that doesn't change anything. When it's rented, you get appreciation plus income, and when it's not rented, you get appreciation only.
Appreciation only + tax deductions can be a great combo in a hot market. why deal with the hassle of tenants when you can have rapid appreciation, and the more property is off the market, the higher the prices become?
You can employ a professional property manager to deal with the hassle of tenants.
Your one property (or a few properties) being empty isn't moving the needle enough in terms of the price of real estate to make up the difference from lack of rent.
But many landlords (especially corporate ones) own a lot of property, and furthermore landlords can and do cooperate. I think you're assuming perfect competition, where all pricing is transparent and all market participants interact with each other exclusively through price signals. In reality landlords compete but also cooperate, and their associations are more integrated/coordinated than those of tenants. There are far fewer landlords than tenants, and a non-rental motivated by collective/cooperative solidarity means a lack of profit maximization for the landlord but often lack of a place to live for the tenant, so the incentives as well as the market structure are wildly asymmetrical.
Because land is finite. Land within an established city even more so. Not only is there rent to collect should they want to, but it’s almost a guarantee that there will be rent to collect indefinitely into the future.
There may be other factors besides what they nominally "want". Depending on their source of financing, landlords changing the rent on these spaces can be both logistically difficult and may cause a huge negative cashflow shock because of the way it effects capital requirements on commercial loans. Louis Rossmann covers it in a video (https://www.youtube.com/watch?v=NdfmMB1E_qk) based on this reddit comment (https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...).
I can only speak to residential, but when I worked in the industry, it was extremely rare for rents to go down because many existing tenants would see the new rate and demand a discount or leave.
It was perceived as cheaper to have a few vacant units at $2000 a month instead of renting them for less and lowering the rate for anybody renewing their lease.
That's how you deal with mobile phone operators :). Threaten them to leave if they won't give you a better offer, and if they don't, then just leave... and come back some time later, to get the much better "new customer" treatment.
A friend of mine did this during the pandemic. Asked for a rent reduction and the landlord refused but offered them an identical unit in the building at the lower price.
I’ve had to do this before to avoid my rent going up several hundred dollars at lease renewal time. They offered me the unit right next door for $500 less than what my then-current unit would cost. The new one was identical in all ways except it was mirrored.
This is definitely true in large apartment buildings, where units are very comparable and leases are identical. Not so much in commercial where lease terms may vary widely, and even units in the same building may be meaningfully different in value based on how they're currently configured and who's looking to rent (e.g. if you want to rent a space to start a restaurant, and it was previously set up as a restaurant, you've got a lot of infrastructure there already, so it's more valuable to you as a tenant than it would be to someone who wants to use it as a hardware store).
If you say the rent is $100/sqft, then the tax break is for $100/sqft of unrealized rent.
If you rent at a reasonable (for the area) rent (say, $15/sqft), then you get the money, true, but it may not beat the tax break.
Accounting is weird.
I learned this, back in the late 1980s. I was wandering around Ann Arbor, and marveled at all the "FOR RENT" signs. The person giving me the tour explained why they were there.
I am no expert, and don't know much about tax whatnots and real estate, but that was the story they told me, and they stuck by it.
Wait, you’re saying they can write off rent that they should’ve gotten but didn’t because of vacancy? Not an accountant, but I don’t think that’s the case?
I do not know the details, but my experience with accounting regulations, is that there's likely to be a lot of heavy-duty checks and balances. I doubt it would be anywhere near as simple as I stated. Remember that I am not an expert in this field.
I worked doing data entry in my teen years for a tax certiorari law firm in NYC and I can tell you that one of the favorite tricks of multiple-building owners is to have a mostly vacant building (or several) as a tax sink. Most of the time they would put their family in the units at no charge and write off the whole building to offset their others.
This is especially true of buildings they were holding for sale to property developers.
They're probably just holding onto the building to sell it to someone else. The next buyer, in turn, is only buying it to sell it for even more. Tenants may even be considered a liability. They don't want to manage a property, they want to hold an asset as an investment.
This only makes sense if tenants are a liability, because you get property value increase + rental income. As long as renting doesn't decrease the property value by more than the net rental income there's gotta be something else going on.
And if you don't want to manage a property, property management companies exist for that exact reason.
Tenants ask for things that family might not necessarily. Also you can leave most of the building in poor shape while keeping up the units you're letting family stay in.
I don't know the guy, but one property owner here is sitting on a lot of property he bought ages ago that he doesn't even bother to rent out.
I think the reason is that the repairs any tenant would demand would be costly, and he paid next to nothing for the buildings. So, in his calculation, he makes enough from appreciation (assuming an eventual sale) that he has no need to rent it.
Once you have enough capital, you no longer need to optimize at this level. He may be leaving money on the table, but he's wealthy enough that it doesn't matter. He can afford to be lazy and still turn a profit, while letting the community bear the negative consequences of his vacant eyesores until he inevitably sells them for dozens of times what he paid.
Speculation is the real value in real estate. If you don't need money from renters to make your loan payments, why even bother with them?
Is this in CA? This is one of the major problems that prop 13 causes, property taxes don’t rise commensurate with the value, so many are content to leave buildings vacant, given that holding costs are so low if the owner bought long ago.
its because they are likely tied up in CMBSs with terms that state that the value of the building is based on the value its renting units out at, and if they lower the rent they have to recollateralize the loan (pay an additional down payment, to cover the lost 'value' of the property), but they can just apply missed rent from empty units to the end of the mortgage and take a tax write off.
What is the rationale for granting the tax write off?
I'd love to be able to take my peak monthly income, claim "missed income" off that peak of my current monthly income, and take a tax write off my personal taxes.
Small point on [1] - it's not only EITC, there are a number of benefits that are income-dependant where a small income increase could make you ineligible for a ton of benefits. Effective marginal tax rates for people right around poverty line is crazy high for their income - because each additional dollar earned turns into lost benefits. https://fee.org/articles/the-welfare-trap-labyrinth-of-progr...
The tax rates still aren't 100% there but even something like 50% may seriously discourage people.
Just to add: a receiver of "Hartz IV" long-term unemployment in Germany can earn an income of 100 EUR/month tax-free, with an 80% marginal tax rate for the next iirc ~700 EUR, due to unemployment benefits going down accordingly (think as if that tax was automatically deducted from your benefits).
There is actually a phenomenon colloquially called "extend and pretend," where it's better for commercial properties to sit vacant or half-vacant than lower the rent.
The reason is, the building is financed based on it's calculated property value, and commercial property value is simply a multiple of the listed rent. Whether or not you're collecting the rent is immaterial -- after all it's perfectly normal to buy a vacant lot and built a building on it, or to buy an old warehouse etc. and refurbish it, etc., such that the bank has to make the lending decision based on projected rent rather than actual rent. So this is what they do.
The problem is only when the projections are proven false, such as when you lower the rent to fill the space. If you do that, the bank must now lower the value of the building, which can easily make the building worth less than the loan.
Further complicating things, commercial properties are usually on short-term financing, for example a 5-year "revolving" loan where the developer pays interest only for 5-years and then is expected to pay off the loan all at once (unlikely) or refinance (99% of the time).
So, suppose the building has a $8M loan based on a theoretical $10M valuation. The developer is making the payments, whether from the partial rent, or his personal bank account, even though the building is vacant. The loan is now due to be refinanced.
If the developer says, "I'll get a tenant in here any day now," the banker can nod and say "I believe you," and refinance the building. The developer keeps paying the payments and doesn't have to go bankrupt. The banker doesn't have to foreclose and write off the loan as a loss.
Conversely, if the developer had cut the rent in half to get the building full, the banker now has to lower the building's value from $10M to $5M, and therefore the maximum loan is reduced to $4M. But the developer owes $8M to the bank, and doesn't have the money to pay it off. Not even the $4M to cover the difference and refinance the rest.
In this scenario, the developer goes bankrupt and the bank has to foreclose on the property.
Thus both parties choose "extend and pretend" as the rational action, even though it's not good for the developer and terrible for the surrounding community.
From my friends in the real estate business, my understanding is that a shocking percentage of commercial real estate is currently operating in this "extend and pretend mode," which ironically just reinforces the pattern, since all the players involved know that if the banks started forcing the issue they would likely kick off a chain reaction of bankruptcies, write-offs, and a destabilized real estate market that would lead to huge losses for most or all of them.
It seems to me that real estate is the locus of a colossal regulatory failure that has already created one trainwreck (2008) and will just continue to spawn more until people start taking a look at the system and honestly evaluating how much of it is rational.
Making everybody who wants to live in a stable home get involved in the real estate market is sort of like making everybody who wants a computer buy tech stocks. It's insane, and leads to a completely insane market. I own a house despite the fact I know nothing about houses and don't want to own a house, because the alternatives are far worse.
When you get a situation where the incentives are all set up to make people act in a way that's not only destructive, but also blatantly unsustainable for everybody involved, it means the government is sleeping at the wheel.
This makes a lot of sense--it seems that the real problem is rent "stickiness."
And there's a lot of factors making rent sticky: the financing structure you mentioned, maybe the bimodal distribution of tenants I'd hypothesized.
In residential there's also the "unintended consequence" of quite a few tenant's rights laws that makes rent extra sticky (why do you think NYC landlords require proof of 40x monthly rent as income?!)
But what doesn't seem to bek
the case is simply chalking it up to "tax breaks" which is a common boogyman.
If I recall correctly, sometimes there are laws that put a % cap on yearly rent increases.
They're intended to protect existing tenants, but they also discourage landlords from reducing rent if they think rents will come back up in the future faster than they're aloud to raise them.
there is certainly a tension between the bank and the developer/owner over potential default, but the mechanism isn't simply the developer/owner presenting financial projections and bankers being relegated to only accepting their word and being stuck with a bankruptcy ultimatum if the deal goes sour. commercial appraisers must validate the assumptions and calculations based on prevailing conditions and comps.
the question is really who should take the risk of getting the projections wrong, and the answer is straightforwardly the bank, although the developer/owner has to act in good faith in both the financing and the operations. a new development is basically a finite business, and projecting the cash flows, and therefore the ultimate valuation, is risky. loan officers' principal job is to assess (and accept/reject) that risk.
all that said, we need to stop propping up banks and loans gone bad. without real downside consequences, we get misallocation, as we plainly see in many commercial real estate markets.
> if the developer had cut the rent in half to get the building full, the banker now has to lower the building's value from $10M to $5M, and therefore the maximum loan is reduced to $4M. But the developer owes $8M to the bank, and doesn't have the money to pay it off. Not even the $4M to cover the difference and refinance the rest.
Why do they still owe $8M if the loan was changed to $4M?
And why can't they pay it back since now they have a full building of paying tenants compared to a previously empty building not making any money?
> Why do they still owe $8M if the loan was changed to $4M?
The loan wasn't changed to $4M, the appraisal of the property was. They bank already paid the $8M to the previous owner (and their bank), but if it gets revalued, then the bank only has $4M of collateral against an $8M loan and starts looking for that lost money.
If rents are bi-modal, as one of the parent posters suggests, then how can all properties be valued based on the higher end (e.g, tenants with deep pockets) when not all tenants actually have deep pockets? Shouldn't the entire demand curve be considered when deriving the multiplier and therefore the price of the commercial property?
Not everyone can get the deep pocket tenant. The staggering number of empty store fronts reflects that.
I don’t think there’s a sane answer to your question.
I think the real answer to your question is “financialization” and zero interest rate policy.
Banks don’t hold loans, they make fees for issuing them and sell them off as securities. There’s so much money chasing so little return that it’s very easy to sell anything that looks “conventional” even if the market really ought to be more skeptical. Since almost everyone involved makes their money off the transaction, they have so many incentives to keep the party going, even though it sure seems like it’s unsustainable and must eventually crumble.
I'm sure you'd make more money after takes renting it out but you have more costs associated with having a tenant (and risks). If you can just sit on a vacant property get some tax rebates and watch it appreciate you don't need to do anything. Your tenant won't break stuff, you don't need to find new ones, its just appreciating slowly and requires less hands on management.
I agree, but not just on land value. If you adjust the base rate for the land by how wide the plot is on the street you end up with a MUCH more walkable city. It's like a more efficient sorting algorithm, because once you get to the store you need you can just walk right in and find everything you need. Right, like imagine how stupid it is for us to be walking by squares. We have to walk across 25% of the perimeter of every building we go by. If they're thin rectangles then you only walk by, say 5% until you get to the store you need.
At least in theory, an ordinary land value tax would have this effect, as if having street side property is considered desirable by the market, the value of such properties with more would increase.
Of course the effect could be amplified by add-on adjustments, but one of the beauties of LVT is the simplicity.
In a dense urban environment the LVT wouldn't cover this case well because the land value of a rectangle of the same area of a square is roughly the same. It's access to the street that is valuable, at least for reasonably sized blocks.
This isn't really theoretical, I've been to cities where this type of taxing system was in place and it's completely different than what I find in, say, Toronto where giant big box stores take up a huge chunk of major downtown streets like Queen St.
I don't understand how this would make a difference. The depth of the block is already fixed so the only way to add area is to make your store wider and increase the space it takes up on the street. Taxing width just seems like it would artifically raise the value of buildings on blocks that are deeper if the blocks are irregular enough to have some variation.
land value tax (or economic land rent) is normally seen as a REPLACEMENT for all other taxation, not an addition to it.
"Land" in economics means natural resources. Land includes three-dimensional space; natural materials such as oil, water, and minerals; wildlife and genetic endowments, and the electro-magnetic spectrum. Nature and natural resources are prior to and apart from human action.
I would whole heartily support replacing taxes on Labor (aka income tax), with taxes on economic land, equality and natural moral law implies equal self ownership. Therefore they should fully own their own wages and products of their own labor. However self-ownership does not apply to what a person has not produced namely natural resources aka economic land.
I however can not support adding a land value tax in addition to our current tax system
> The value of his building's keep increasing so he doesn't care.
By what metric? According to you, they're in an area where people don't want to be and there are no renters. If your description is even close to accurate, the value of the buildings is dropping.
The value of the building drops all the time. The value of the land is also dropping, as described. Loss of foot traffic is a blow to the value of the land, not the building.
Who wants a condo in the middle of nowhere? The replace-it-with-condos plan requires the area to be growing, not shrinking.
We're not talking about the actual middle of nowhere here. There are plenty of towns or smaller cities in the Midwestern US or the Canadian prairie that are still nice places to live but have downtown commercial districts which have shrunk over the last couple decades, and are now adjacent to functional main streets and held vacant by landlords who think commercial tenants will at some point be willing to pay the same high rents again.
Amazon, e-commerce, and remote work mean towns can be growing at the same time as their central business districts are shrinking.
Because the alternatives are going through the same process. It's not like only one neighborhood suffers from this, it's market wide, so as a renter, there is no better elsewhere to move too. The dying once lively neighborhood is still livelier than the dying was never lively neighborhood next to it, etc.
The question is whether it's livelier now than it was last year, or more dead. If it's livelier now, property there is increasing in value. If it's deader now, property there is falling in value.
Not if other neighborhoods have also gone down in liveliness to the same extent.
Imagine a liveliness scale, which is the amount of bars, restaurants, independent stores, coffee shops, music venues, theaters, arts/music expos, and other such things available in the neighborhood.
If the top neighborhood for liveliness in some city last year scored 84 on that scale, but this year it went down 10 points to 74, because of hiking rents and commercial buildings unwilling to lower their prices even if it prices out all such business from the area, preferring to even keep units vacant instead.
Now imagine all other neighborhoods similarly dropped 10 points on that scale. So the next one up last year might have been worth 80, but is now worth 70.
That makes it that the same neighborhood is still the most lively, and therefore still the #1 place where renters hope to live, but overall the entire city is getting less lively. And now imagine this is happening in all cities, making every city similarly impacted.
That would continue to keep prices distributed the same between neighborhoods, the most desirable neighborhood is still the most desirable one, yet the overall liveliness of everything is going down, while simultaneously having prices rise.
I think most people are observing this phenomenon, but the question is why the hell is it happening? Why are landlords choosing to price rentals above market, losing their existing tenants in the process and yet having it vacant as no other business can afford the rent either?
There is no law of conservation of total value over a locality. If one neighborhood declines, and every neighborhood around it also declines, they have all lost value. In your model of real estate, there is no such thing as a ghost town.
> And now imagine this is happening in all cities, making every city similarly impacted.
I can imagine it, but I also know that it cannot occur in reality. Some places go down; some places go up.
> I can imagine it, but I also know that it cannot occur in reality. Some places go down; some places go up.
It doesn't though, that's why you see all those vacant commercial spaces, it's not because no business wants to move in, it's because they don't want to move in given the rent being asked.
The current businesses are forced to close, but not because they are being priced out by someone else, they close because the rent gets jacked, and then the space stays vacant for years after they closed, and yet the rent is never lowered back down.
This goes against common sense, that's why it's so strange and clearly something is broken. You'd expect that the rent would adjust to the market, if no business is willing to rent for the asking price, you'd expect the rent to lower, but it doesn't. You'd expect the value of the building to go down, but it doesn't.
I think you're insinuating that the neighborhood is dying down, because people are choosing to move out or something like that, but that's not the case.
> In your model of real estate, there is no such thing as a ghost town
That's right, because we are talking about major cities. The cities are not dying at all, it is only their liveliness which is. The cities still have all the jobs, and they still have all the infrastructure.
If a neighborhood used to have some of the best coffee shops, and greatest restaurants and comedy club, and those close down. The people in that neighborhood are not going to choose to move out to a small remote town which never had any of that to begin with. They'll stay in the neighborhood, because they go to work at some office job downtown or because they go to the university nearby, or their kids go to the school. Also, the neighborhood might still be livelier than the suburbs which often score very low on my hypothetical liveliness scale, as suburbs generally simply have no such business at all to begin with, only offering residential housing, and even often lacking any walkability.
Edit: I realize maybe saying lively is a bit confusing. I'm not talking about population going up/down, I'm talking about businesses in a neighborhood that create things to do for the people living in the neighborhood. If a neighborhood is only residential, it's not lively, while the more it has of parks, coffee shops, restaurants, bars, libraries, bowling alleys, arcades, bakeries, cute shops, etc., and the more those things are well decorated and designed, and accessible to quickly go to or hop from one to another, the more lively it is.
They were moving out before those rent increases. The problem is the kind of boutique retail people seem to want in cities isn't profitable; even the older midsized or speciality chains got edged out by national ones. This is kind of like wondering what happened to all those computer places back in the 80s and 90s that would build you custom PCs.
And HN did its part to kill it too. Can't have music shops when you destroy physical music as a concept; can't have bookstores when no one wants to buy books. Movie sales and rentals? Internet. Electronics? Online category killers. Second hand stores? Ebay.
The rent jacking up is an issue too, but even if it were lower, you still wont get businesses. There's been a big change in retail overall due to the hyperefficiency of the internet; the kind of stores that existed pre-net can't compete.
> They were moving out before those rent increases
Have we read the same article? That's not what it says. Where's your source that shows that?
You're focused on stores that I don't even include in what I'm talking. I'm specifically mentioning bars, restaurants, music venues, theaters, clubs, coffee shops, arcades and all such things. I'm not talking about retail stores.
Though I think small boutique stores can be a part of it, and the article specifically calls out an example of a local bookstore that the landlord was trying to push out by raising rent, not that it closed as part of waiding demand. And then it went to say this particular landlord is infamous for doing that and sitting on vacant units.
> the kind of stores that existed pre-net can't compete
That's true for a lot of retail stores, but also doesn't explain why commercial rentals are sitting vacant.
How would value be dropping if the commercial space has a $100/ft sticker on it and keeps going up. Its the same mechanism putting Tesla and shitcoins valuation on the moon.
As much as I hate _Kelo vs. City of New London_, I can see the temptation in this case to invoke eminent domain and hand over those vacant properties to another private owner who will put them to good use.
The cause and effects can be weird sometimes. Suppose that guy wants a lot for rent but no one can afford it. He either lowers the price (in turn the value of the property) which depreciates the value of the other property owners in the area. Lower values then shakes out eventually in other taxes.
So the other route is we end up subsidizing small businesses to pay more for rent than they can afford (or to your point, should be charged). This means you the local resident are footing the bill either with local taxes or a federal subsidy.
I don’t have an answer here but these things get complicated quickly. Setting an exponential tax on a vacant property (or any property) sounds like an easy way to drive investors out of the market. Then your downtown is dead either way.
Curious other thoughts or maybe a solution to vacant holdings.
this is visibly happening with retail and commercial properties, but people here swear up and down it absolutely is not happening with residential properties.
This document is dated only 8 months ago. Is there any evidence it has worked so far? (There's a long history of intelligent people gaming laws, where the original intentions of the law were noble enough.)
> Bradford brought a vacancy tax to the council in early 2020. Similar measures were put forward at roughly the same time in other areas, including New York, Boston, and Montreal. But many of these efforts are on hold while cities grapple with the impact of the pandemic on their budgets. A vacancy tax sounds like an easy balm to the problem of chronically vacant storefronts, but counterintuitively, cities have instead often given tax rebates to the owners of vacant property. Until recently, Ontario mandated a flat 30 percent tax break to owners whose buildings had been empty for at least ninety days, with no maximum time limit. It was a measure born of the ’90s recession, intended to help ease the effects of economic downturn and falling property values.
> While vacancy rebates provided some businesses with a needed reprieve in fiscally difficult times, they were criticized for, in Bradford’s words, “incentivizing owners to keep stores empty while they waited for values to get high enough for redevelopment.” A review ordered by the Ministry of Finance showed that the policy had exacerbated the issue of “chronically vacant” street-level commercial real estate. A well-meaning initiative to help struggling property owners had been thoroughly negated through exploitation and speculation.
I'd imagine: having shops, instead of vacant properties. And extending to residential: having more housing supply.
So we want to (1) incentivize landlords to put their property to use, instead of letting it lay vacant & (2) avoid making property owning so risky that no one wants to do it.
It seems like a non-use tax + national economic hardship exception takes care of that nicely.
Taxes on your limited-supply property (e.g. city cores) increase at 30/60/90/180/360 days of vacancy. Where vacancy is defined on average across a timespan (to prevent resetting timers with faux leases). And then coupled to an external index (e.g. national occupancy rates for property type) that decreases the increased tax if there's a deteriorating economic period.
We want it to be financially painful to not have a tenant in your property. To the extent that landlords are incentivized to go to the trouble to offer their property to the public for use.
The owner is still paying property tax and not taking any income from those buildings...their value would have to be growing aggressively each year for that to be remotely worth it.
I think two things happen, the first is that yes, the value is in fact growing aggressively each year. The second is that eventually, it will find some tenant that are willing to pay double, by choking everyone to eventually accept that rent is just now more expensive than ever. Once that happens you'll quickly recoup the time where it didn't rent.
This is not very accurate you can deprecate the building offsetting the rent income and only pay the tax if you sell the building and do not reinvest into a different property.
In reality you can defer taxes indefinitely by just rolling over into the next purchase. If you need the cash you just take out a loan against the property.
it is easy to put all the blame on the land lord, and I am sure they are partially to blame.
However in many area's "downtown" is not a good place to be, there is limited parking, little public transit, high crime, high vagrancy, and the city does not spend much in keeping up their end of the bargin either.
I know more than a few places that left downtown not because of increasing rents, but because of decreasing customers and other issues with being downtown, they moved a little outside the city core where they can have their own parking lot, their own good signage with out tons of regulations, get deliveries with out issue, etc... and the business boomed.
Me personally, I live in the 2nd largest city in my state, I refuse to go to the down town area. There are plenty of businesses down there but there is no parking, higher prices, smaller shops, and it just is not enjoyable to me. I do not like high density...
But dense urban cores tend to subsidize all of the infrastructure that makes suburban life possible. If the money weren't funneled in the wrong directions, there's no way it would make sense to be out of the urban core.
"Wrong" is subjective. I am sure these is a ton of government spending believe is wrong or outside the role of government that you find to be a requirement of government
Sure. I am not clear on your point. I am not defending tax breaks just explaining why "downtown" decay is not simply a by product of "greedy evil landlords"
Right. Its not their job to do city planning, they were just looking to invest in something. Its hard to say when one becomes greedy, does trying not to end up in debt count? What does it matter really, motivation changes nothing to the situation.
IMHO it should be by specific designation and the tax should be like a fine - for not using it. Say, you can buy a train station but you are going to have trains stop there. Buy a gas station and you are going to sell gas. Buy a store front and there shall be a store. Own farm land? Then farm? It should be like that even if local politics doesn't want it. Anything else makes a mockery of city planning and it could destroy decades of work.
Yes but I think the suggestion is that the taxes ought to (eventually) exceed the gains from asset value growth. We should want active main streets, and discourage squatters with empty space.
A much better solution is to eliminate the zoning restrictions that lock properties into specific uses and ease the permitting process that makes it hard to convert these empty storefronts into something else (while also discouraging speculation by letting supply naturally grow to meet demand).
But, frankly, even if I'm wrong about that, the point of my original comment is that the OPs claims make no sense, because, again, the implication that they can come out better under the current regulations by keeping the units empty is incorrect. It is arithmetically wrong.
They would make much more money if they leased the units.
So whatever explains these empty storefronts, it isn't this:
> Fast forward to today, all of those stores and more are shuttered... the rent is still too damn high... and the absentee landlords that own these buildings are actually rewarded with property tax benefits for keeping them EMPTY!
Unless what OP means by "[they're] rewarded with property tax benefits for keeping them EMPTY!" is that they lose money relative to their other options.
I don't know why this explanation appeals to so many people; it doesn't survive a second of scrutiny.
you're correct, when considering a single property.
the problem happens when an absentee landlord owns a dozen buildings on main street. if a third of their properties are empty and they lower the rent to the point where people will occupy them, it drives down the rent for the other two thirds of their portfolio. if they keep some properties empty to hold the rents artifically high, and they don't have to pay property taxes and management fees on the vacant ones, they can just hold the properties for free while the land value appreciates.
> don't have to pay property taxes [...] on the vacant ones
Property tax abatement depends on local laws, correct?
On the other hand, I assume you can claim the usual boatload of expenses (e.g. mortgage interest, upkeep, etc.) against vacant properties, thus generating a paper loss to offset income generated by other properties or activities.
The real lynchpin appears to be: vacant properties are allowed to contribute tax losses to their owner(s).
Whereas in reality, what we probably want is something more akin to "If you have not fully utilized (i.e. leased for a percentage of the timespan) a property in the last X months, you can no longer claim any tax expenses for value-based (i.e. mortgage, financing, property taxes) components of the property. You can still claim expenses related to the improvement of the property (e.g. maintenance, etc.)".
This still doesn't make any sense! Lower rent is worth more than no rent and the property appreciates either way. Keeping a unit off the market to keep the rents up is kind of a silly plan if you never end up actually renting any of the units.
Any tenant comes with risk. Risk has a financial cost.
Ergo, lower rent is not always worth more than no rent, even all else excluded.
Example: you rent your property to a tenant for $100 / month, who does $5,000 worth of damage to the property, and declares bankruptcy when you sue them for recovery, in addition to the time you spent installing them + evicting them + dealing with recovery.
Sure, there is some number at which this becomes true. But we’re talking about landlords who have supposedly kept properties off the market for years at a time in order to rake in the tax benefits.
Keeping properties off the market for years at a time in order to mitigate the risk of actually having tenants is not a very good plan.
My understand is that commercial real estate loans require additional collateral for lower rents than what was agreed to when the mortgage was created. Building value is basically (monthly rent * constant).Accepting lower than when the mortgage was written will trigger provisions that value the property differently and require the building owner to add principal to get back to 25%.
If lowering the rent by 10k a year lowers the value of the building by 100k, the building owner may have to add 25k that they don't have to keep the building from falling into default. If you have a completely empty building and you accept a lower rent in one of ten units, you could need to put down 250k it of you have many building under one loan they may want millions because of how it changes the loan valuations.
I have no idea if this is true, but unlike every other response to me in this thread, this is at least a coherent explanation that isn't immediately and obviously ridiculous. If this is true, it at least makes arithmetic sense.
People don’t keep units empty for tax breaks. That’s absurd.
I don't know which city johnnyApple is commenting on but if it's American ones what is happening is there a glut of commerical/retail properties https://www.bloomberg.com/graphics/2020-commercial-real-esta... (There was excessive retail even before covid aka also why many malls are dying). However the land is still appreciating if it can be converted to residential apartments/homes though it does depending on zoning laws.
I am sorry, but I don't understand this logic. The owner still has to make mortgage and property tax payments on an asset that is not yeilding anything. Sure the value may be growing but how fast is it growing if it is sitting empty. Empty building with no maintenance tend to wear down and often get graffitied and broken into - all of which involves further mitigation costs.
I am not sure what societal benefit we're getting from bailing out failing landlords. It's not as though they're employing a lot of people, or any of the usual justifications we might have for propping up a failing business.
Land is an easily leveraged asset. While an individual can only typically borrow 80% of the value, a bank/investment operation could easily leverage the land to 95%+.
Given that property is returning 8% in competitive districts, all the landlord really needs is for the property to make better than 3% return to make money from ownership.
Actually leasing the property or maintaining it simply adds costs to the arbitrage.
The logic is that you either lower the rent until a building is being used or sell the property to somebody who has a better idea for something to do with it.
The idea is making it expensive to leave a building empty to force down rent prices and property values which is in the best interests of people who want to participate in the economy instead of collecting rent from it.
>The owner still has to make mortgage and property tax payments
they don't have to. if there is no demand for the property in its current state, they can redevelop to a use for which their is demand, or they can sell the property to somebody who will redevelop it.
I grew up in a town that had a booming downtown strip for as long as I can remember growing up.
Then around 2008 you started noticing stores closing up.
Word on the street was that rent was just too high to make a profit, and a lot of the retailers who had been in the same store downtown for decades closed up shop forever.
Fast forward to today, all of those stores and more are shuttered... the rent is still too damn high... and the absentee landlords that own these buildings are actually rewarded with property tax benefits for keeping them EMPTY!
How crazy is that?
Some rich guy owns almost every single building downtown, is asking $75/foot, and gets property tax breaks when his buildings sit vacant... slowly smothering the downtown vibe with an air of death.
The value of his building's keep increasing so he doesn't care. He doesn't live here.
IMHO retail properties should be taxed MORE if they sit vacant for too long, and that increased tax burden should go up exponentially every year that the building sits vacant.
A vacant retail building should be the landlord's problem, not the town's.