The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?
> The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?
If its anything like what I saw in Boulder, most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites.
The restaurant I came out of retirement on in 2018 has been vacant since Summer of 2018, just to give context that building was $13k/month before operational costs, which were immense due to it be an incredibly old building. I personally had to patch up the pipesdue to massive leaks as our dishwasher wasn't getting enough pressure and my station was getting all the run off I had run to FOH get some wine cork to plug the holes and used a bunch of duct tape until the plumber could get there for the next week of service.
I think I overheard the Sous and Execs saying where I last worked that rent was 20k/month for the flagship, which on a busy night we could clear in a single days (day/night) service.
The further this has gone on, Colorado only just lifted its stay at home order today, the more I think I've hung up my whites and knives professionally for good this time.
By contrast, this is what is happening in Hong Kong, as they have captured the loyalty of their patrons and are months ahead of most country in terms of Covid19 recovery [1]:
> most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites.
That’s not how taxes and “write-offs” work. You deduct your expenses from your income, and pay tax on a percentage of what’s left. Having more income is always better than having more expenses.
I learnt about two ways, but I am sure there are many more. First you can manage the losses of selected businesses of yours such that you break the tax progression and second if you own the property you rent to yourself (this means to your company) such that the deduction of rent leads to a higher reduction of taxes than the increase by the rent income.
The landlords are gambling. Their bet is that N months with no tenant followed by a tenant paying X% more than the going-rate tenant will net out to more than renting at the going rate. They also bet that by nudging rents higher, they will cumulatively ratchet rents up over time, to the benefit of all landlords (they hope).
I don't know how often this bet comes true - it is truly remarkable to see retail properties empty for so long sometimes. But it's just a bet, not a tax strategy.
> That’s not how taxes and “write-offs” work. You deduct your expenses from your income, and pay tax on a percentage of what’s left. Having more income is always better than having more expenses.
Does that apply to all properties, including commercial buildings? I only said that because a close friend of Tebo's wife (that's his actual name, and he named his business after himself from striking it big in collectors Coins) was a trainer at the gym I went to and we'd often talk about how all the property surrounding the area was owned by him and a lot are vacant, he said that was her rationale. He could be wrong or made it up, I suppose.
He literately is a Feudal Lord in Boulder and has obscene amounts of holdings, its actually alarming how much clout the guy has a result of it and the effect it has on the local population.
One of the things I have noticed is that a lot of the City of San Francisco has prohibitions on new liquor licenses. In many cases this makes wholly new businesses of some types, like nightclubs or bars, impossible or seriously squeezes the margins on new restaurants.
Lease length also factors into this a bit. In NYC, for example, a lot of restaurant leases are 10 years long with an option to renew for another 5 at a new rate at the end. Each year, the rent increases by a percentage (3ish is common).
For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while.
> For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while.
The thing that puzzles me is how willing landlords are to let properties stay vacant. I live in NYC and all of the newer high rise apartment buildings in my neighborhood have retail spaces at the ground floor and usually a few floors above the ground floor also for retail/commercial use. As far as I can tell, almost every building has utterly failed to get any tenants in the ~5 years since the buildings have been built.
> I don't understand what commercial landlords are thinking?
Financial engineering/optimization. I'm not well versed in it myself, but from my understanding:
Commercial landlords can harvest a paper loss from a vacant unit. If you were renting a unit out at $100 per square foot per month, being able to take a $100 sq/ft/month write off from a vacancy may be more advantageous than dropping your rate to $50 sq/ft/month and getting it occupied. Particularly useful if you have a large enough portfolio to withstand the loss in cash flow.
Leasing a unit out at a lower rate can also have other implications on financing (and I believe valuations) for commercial real estate, by essentially re-establishing the cash flow potential of the unit less than what it was (and still is on paper, until you re-lease it at a lower rate).
Everybody keeps repeating that landlords can write off rent not received as a tax deduction. You can’t, and if you think about it for a minute, you’ll see it doesn’t make any sense.
Imagine a landlord with 10 properties that rent for $100 per month. That’s $1,000 per month rental income, or $12,000 per year. Assume 10% tax rate, the landlord clears $11,000 after tax.
Imagine now that half of them are vacant. The landlord is now bringing in $500 per month, or $6000 per year. Is it your expectation that the landlord can somehow deduct the other $6k in rent not paid and pay $0 per year in taxes??? No, the landlord would now pay $600 a year in taxes on that $6k in rental income. Naturally the landlord doesn’t pay taxes on money they didn’t receive, but it’s always better to have 90% of the rent after tax, than 0% of it. It is always always more profitable to receive rent than not.
Now, as others have mentioned, it may be worthwhile to lose a few months of rent in return for signing a higher-dollar lease over a 10 year term.
But if you leveraged to buy the property, then you deduct the interest payment from the rental income. In the case of a vacant property, the interest cost will get deducted from another source (other rental income perhaps).
Then, come tax time, you net out the rental income. If they do it exactly right, it could net out to zero. And so pay no taxes since they did not make any money.
On paper this sounds bad. But because the expectation that property grows in value, they gain capital growth. This isn't taxed until sale time, but capital gains tax is very favourably taxed in most juristictions. Not to mention depreciation over time (a paper loss tbh) can deduct taxation.
After a few more years, they sell the property, using the old (high) rental income value as the valuation figure, pocketing the capital growth while paying little in taxes from the rental (which goes into the cost of debt).
This is why rents would remain high - you need high rents to value the property as high value.
Yes, you can deduct expenses from your rental income and you only pay taxes on the profit (income minus expenses). Of course. But if you have a mortgage, you have to pay it whether you receive rent or not, so it’s totally irrelevant to the discussion - there is still never a case where you are better off, tax-wise, to not earn rent than to earn it.
Then you mention capital appreciation. Same thing. If I sell a property at a profit, then I’m always better off having earned rent from it while I owned it than not. Additionally, you don’t “claim a value” on a property when you sell it, someone pays you for it based on fair market value. For commercial property, the key measure of value is the rental income - when you buy or sell it, you advertise the cap rate (annual percent of investment made back in profits after expenses) and also the vacancy rate. Buyers get a copy of your income statement for the property going back a few years. If the property has been sitting half-vacant, then it will almost always sell for less money, since it’s not earning.
Bottom line, taxes are calculated as a percentage of profits. Outside of some esoteric situations, the money you save on taxes is less than the money you lose in profit.
Then you are committing tax fraud. Also, Airbnb issues 1099’s for their payments to you above a certain amount, which they also helpfully furnish to the IRS. Wouldn’t recommend leaving Airbnb income off your taxes.
This makes sense in aggregate. If you have 100 properties and raise the rent 10% on all of them and only close 5 locations... you're better off on average and actually just added additional rentable units to your inventory.
> I don't understand what commercial landlords are thinking?
The value of a commercial property is (generally, if it has development potential that may be the main factor in valuation) usually multiple of the rental income that it can generate. If landlords accept lower rents then that lowers the value of their property.
