alt Hacker NewsThe whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficult to understand is it?
Replies
Nobody said commercial real estate was risk free free money in some abstract financial product, other than the doofus who wrote this long "note." The hard fact is these are real buildings in real places that aren't really fungible at all. So it seems kind of ridiculous that CRE investors should be insulated from every possible externality. Obviously the right thing to do is to tax vacant properties, and then we shall see how many stay vacant and how many foreclosures there are (hint: owners suddenly find capital and are able to pay the tax or rent things out and nothing ever gets foreclosed in every one of these scenarios where it actually happens).
I mean, it's highly unintuitive, which I would say makes it difficult to understand. The main weirdness is that lowering the rent would force a revaluation whereas letting the building sit vacant for an extended period of time apparently would not. If this is truly driven by regulatory capital requirements, then it seems like a gap in the regulations.
Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank).
I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.