I wonder if a vacant parcel tax would help here. Vancouver did this with varying success[1], and Oakland has this on the November ballot[2] If real-estate owners want to "wait" for a better deal, they should pay for the resulting blight (and speculation)

[1]: https://vancouver.ca/home-property-development/why-an-empty-...

[2]: https://www.kqed.org/news/11689739/oakland-wants-to-tax-vaca...

Landlords can take tax write-offs for empty properties, so they’re incentivized to sit on empty storefronts until the perfect long-term lease comes along rather than rent to a less ideal shorter-term tenant.

A tax write off is going to be worth, at best, ~35% of the value gained from actually leasing the property. That makes it considerably worse to hold on to.

Its far more complicated than that. Most of the owners of these properties are institutional, not individuals or small groups. They are far more concerned about the valuation of the real estate than it's cash flow. The cashflow side has issues too, but from a valuation perspective, once you sign a rent at a lower rate, then that will trigger a shift from the inflated, unrealized rent in the valuation model, to the actual rent in the lease. It's entirely likely that the dip in value from the signed lease is more impactful than the actual cashflow from that lease. It doesn't matter that you couldn't get the rent in the model today, since pushing out the assumption results in less of a hit in value than signing an actual lease would. This all gets billed as "the market will bounce back".

Remember there are a lot of upfront costs for the land lord as well. They put in a lot of money upfront for buildouts/base building work, and it may be 2-3 years before they actually break even on the money they put into the space. If you're not sure that the business model is going to last that long then it absolutely makes sense to sit on the vacancy.

Source: worked at a nationally invested REIT that had a good number of properties that have this same issue.

Waiting is a risk that may pay off, so that 35% write off still changes the math.

Suppose you are going to make a coin flip bet. On heads you win 1$ cents tails you win 0$. That's worth ~50 cents. Now, suddenly on tails you get 35 cents. By reducing the downside risk it's more worth it to make the bet (67.5 cents).

Tenants are a pain in the ass. Buildout (for which tenants often expect you to pay) is expensive. Unless you're leveraged to the hilt, you can afford a few quarters of loan payments on an already-built building. That being the case, signing up a marginal tenant is throwing good money after bad.

If the market has changed in permanent ways, and you're never going to see another good tenant, you want to learn that as soon as you can, and then get out. This is why our great leader always structured his deals so the company could declare bankruptcy and he could skate away with the previous profits.

This may be it. Lets take away this write-off option.

I thought the problem was almost the opposite of what the article discussed. I thought that commercial real estate almost always used long term leases and that owners are reluctant to sign them in a fast rising market. If your building is vacant, there is the possibility of selling to a developer with plans for a big development in the short term.

That would argue for being pretty happy about short-term leases, since they maintain that flexibility. But I don't really know much about this, I'd like to understand it better.

It's hard to do short term commerical leases.

One the build out costs lots of money and if the owner doesn't renew you've lost $60,000.

Two if you end up with a successful coffee shop/bar/etc the owner can squeeze you out of every dime of profit because it's disastrous to most of these establishments to move.

It means that there's just not a lot of demand for short term commerical leases. Exceptions are seasonal stores like a Halloween or Christmas store who are happy to sign a short term lease, usually at a discount.

> in a fast rising market

Everything I've read about New York real estate has suggested that it's slowing down considerably and pretty buyer-friendly right now.

Granted that's mostly about residential real estate, but I wouldn't be surprised if it's the same with commercial as well, and would certainly explain the reluctance to sign short-term leases.

Not a legal issue but a financing one. For commercial landlords it’s often better to let a building sit empty at a high posted rent than to lower the rent, since the building value (for financing purposes) is determined by the posted rent not the actual revenue, and lowering the rent may put the building “underwater,” hurting both the landlord and the bank.

https://www.strongtowns.org/journal/2017/11/27/the-paradox-o...

Probably something to do with contract lengths? I can't imagine many businesses wanting to rent a place for less than 2 years (to the point that there may be legal requirements for longer contracts?) and landlords might turn down offers for leases that long that are below what they perceive the value of the place being.

Owning commercial real estate allows one to depreciate it regardless of it collecting rent or not.

It is not possible to close this loophole because 322 Prince St, LLC does not have to rent the space to Joe's Boutique for $7,000 a month rather than Starbucks for $17,000 a month - it can rent that space to "JP772 Holding, Inc" out of Nevada for $10/day which would be owned by the members of 322 Price St, LLC which would satisfy the rental requirement and keep the place unoccupied until someone offers $17,000/mo in rent.

I thought that technically the LL then owes the IRS in imputed income? (Income based on market-rate rental values)?

Imputed income is not taxable in the United States, according to Wikipedia.

i think it may have to do with the type. I won a free yearlong gym-membership in a contest, from a govt workplace and was told I would have to pay imputed taxes on it. Needless to say, I turned it down.

That's because it was a gift of a fixed value that gym declared. If gym ran it as a promotional sale for $1.00 then you would have needed to pay taxes on a $1.00.

It is similar to person A borrows from a person B $10,000. B pays back $100. Person B decides that A is a deadbeat and declares $9,900 a loss. Since B no longer needs to repay $9,900 the $9,900 becomes income to A. B sticks A with a 1099 for $9,900. Now A needs to pay taxes to the IRS on $9,900 that he got from B.

Not in the United States.

Looking at Vienna, it feels like the value of real-estate grows faster than what you'd earn by renting. E.g. you'd probably earn 3,000€ netto per year from a 200,000€ property, but it's value also rises by 4,000€ in the same time frame. Why renting it out for a little cash, and probably having to pay a landlord to manage it, when you're already earning more than that by simply sitting on it.

I've just made some numbers up now but last time I went through renting and buying decisions, this is what it kind felt like.

You often (depending on region and property) have to pay some kind of ground rent and/or non-trivial tax that you can transfer to the occupant. Also they can pay for maintenance and also point out big problems (water leaks - yes they do happen and be very unwelcome even if you have insurance). Overall, the net gain is low but that's better than 3 or 4 years of a minor accumulating net loss. Also the management fee is say 10% to keep your place in shape, so actually quite cheap in reality if your own time is in any way expensive.

[Edit: multiply the costs if you have a portfolio of properties and you then realise that you can easily have a dent in your cash flow while your property is accumulating in value]

yeah but in order to get access to that money you'd have to sell or cash out refi, or take a loan against the property.

So your kind of making money but if prices go down your in a much trickier spot.

I'd say it's like a gambler's addiction. They want to hold the property open because "Someday <SomeBigCo> is going to call me and say they need 30,000 sq ft of retail space by next Tuesday, and I can't afford to lose that deal because there's a Halloween store using 500 sq ft this week and a Christmas tree shop in the parking lot next month"

If a commercial space is owned by the landlord free and clear, then the landlords have zero incentive to rent it to collect smaller than desired revenue unless property taxes are so high that the landlord must lease the space to at least cover the property taxes. If course that means that the rents skyrocket for all properties as the property taxes now eat majority of the rent.

If the landlord has a fairly regular commercial mortgage, it is probably IO + balloon in 10-15 years. The landlord's bet is that the property would appreciate enough that the landlord can refinance it for the next IO + balloon, kicking the can down the road for another 8-10 years. Pretty much no one operates commercial buildings with the idea of paying off the loans on them, which is why as long as the real estate continues to go up in a long term it is makes sense not to engage with small time tenants. The only time landlord has to engage with small time tenants is if appreciation of the property won't create enough equity to refinance the balloon payment.

That makes me feel sick. As a society we really shouldn't be operating based on expecting property to constantly appreciate, it's going to do us in.

We were about to re-learn that lesson during the previous crash but decided that it was better to kick the can down the road.

The thing that I cannot wrap my head around is how we can at the same time believe that real estate goes up over the long term and allow it to be depreciated on financial statements.

I'm not an expert, but I don't think there are a ton of qualified short term tenants out there. Cutting the rent to have some fly by night operation in and then not being able to sign a long term lease with someone else seems not that smart.

Put another way, any business that only wants a very short term lease is probably not a business you want to lease to.

"If you are a hedge fund manager running a portfolio you leave it empty and take a write-off.”

https://www.theguardian.com/business/2017/dec/24/new-york-re...

Right? I thought the golden economic theory we all subscribe to is that if demand is low the price must lower to meet it? Or have we been lied to and there is another hidden principle yet to be named at work for those who have capital and can just sit on it.