Prop 13 is like the anti land value tax. Makes places like Texas look downright progressive.

It makes me think of the "poker game" model of nuclear power plant construction where the vendor is quoting a price lower than they know it will cost because otherwise they wouldn't make the sale. If commercial buildings were properly priced at the outset, banks would be financing fewer of them.

But empty buildings aren't a bad idea under all circumstances. Eg, It might be prudent to have empty living space in a tourist or student area to deal with annual surges in demand. Or maybe someone has a warehouse full of facemasks because they think the price will 10x in the next pandemic. We'd have the same crowd complaining about empty buildings saying they were just doing it to hide the fact that the building is empty when in fact that is a pretty reasonable strategy that would be socially beneficial.

I suppose the model sucks because the community is highly benefited by a low profit cozy coffee shop or book store, which might not be able to afford the property tax rate needed to discourage the "keep it vacant" strategy.

Maybe I changed my mind, and "vacant and/or not being used for its zoning purpose" needs a separate, additional fee.

I had the exact same question before I fully read the article.

This is answered in the article in the "Extend and Pretend" section.

> "And so long as the operator can afford to keep losing $140k per year on the building… they can!"

> [...]

> "The only sticking point here is that the building operator is still losing $140k per year. But remember that, if he gives up, he loses the $4 million he’s already put into the building. Even if he ended up paying $140k per year for 10 years before things turned around, losing $1.4 million is still better than losing $4 million."

Extending the article's example to a scenario where the building was vacant for 15 years, it means the operator was willing to lose $140K per year. In the 15 year scenario, the operator lost $2.1 million ($140K * 15 years) which is still better than losing the $4 million if the operator walked away from the investment.

> Anything that makes owning an empty building a bad investment in all circumstances.

In the final section "This Sucks, What Could We Do About It?", it mentions how adding a vacant store font tax would end up creating more foreclosures. This is the side effect of the financialization of real estate.

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.

Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property. Then when those buildings come up for refinance, either the borrower will have to come up with more funds so that the loan to value max isn't exceeded or the borrower will default and the bank will lose the income stream and be holding another property where their investment is more than the value.

Borrowers usually don't want to come up with more funds on a property where they're underwater and banks don't want to foreclose on property where the bank will be underwater, so 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. You'll also see promos like first several months free, rather than reducing the rent, so you can report it's rented at whatever the headline rate is, even if the tenant is effectively paying much less; of course, the tenant will be looking for somewhere else to rent come renewal.

This is far from the only case in banking where taking some action on an asset that would otherwise be reasonable won't be done, because it would trigger a mark to market on too many other assets. Ex: you can't sell realize a loss to sell treasury bonds to satisfy cash flow needs, because you'll have to mark to market all the similar bonds, and then you won't meet your reserve needs.

  why a bank would hold a completely vacant building for 15 years.

By leasing for cheaper they effectively capitulate and sell at a loss which will hammer their funding ability. It's land speculation similar to tech speculation. Inflate valuations, get a longer runway from lenders, etc.

At some point it has to come back to reality, but as the saying goes: "The market (land owners) can remain irrational longer than you (businesses) can remain solvent."

You're right that nobody can predict correctly that far in the future, but ultimately you have to choose whether you think a business decision will be profitable or not, so you have to predict anyways or else you could never do anything. People build lots of models to try to predict better. And market prices reflect a middle point between the pessimists and the optimists.

Also, it's not no-lose for banks. If the owner walks and the property is re-sold for less than it was originally bought for minus the down payment, the bank very much loses. That's a major point of the article, why the bank would prefer the space to continue vacant for a few years than take that loss.

If the space is vacant, and the last known rent was $X, the assumption is that borrower is bad at advertising space, but a successor would be able to get it rented again at that rate.

OTOH, if the space is rented at 0.7 times $X, the tenants may have a long term lease that fixes that price for a significant time and even a savvy successor would have a hard time raising rents, so the valuation needs to be calculated based on current rent.

There is basically no way for real estate to not be a complex financial product, because almost no one can pay cash-up-front for it. If it wasn't financialized, nobody could ever afford to own anything and we'd all be feudal serfs renting from a couple landlords.

Apartment complexes could also be 50% vacant and still "worth" their original value if the asking rents remain high.

Office buildings that got cleared out after covid, same thing.

Brick and mortar retail are the same.

The article is more of a criticism of how asset values are calculated and loans are managed to avoid foreclosure. Which results in financially valid buildings/loans that are underutilized because the other option is creating economic equilibrium at the cost of lenders and debt holders.

Say a bank is sitting on a pile of very safe bonds. If the interest rate suddenly increases, the mark-to-market value of the bonds goes way down. The bank would still expect to get the full value of all the bonds at maturity. But if the bank has to mark-to-market, the current value may be low enough that capitalization requirements force the bank to sell all the bonds in a fire sale. So even though the bank in theory could have held onto the assets and gotten exactly what it had expected from the start, it instead ends up taking a big loss.

You could probably make this work by donating office space to nonprofit organizations while maintaining high nominal rent (and maybe this already happens) but it's not as practical for storefronts etc.