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Busted retailers use bankruptcy to break leases by the thousands

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Re: Busted retailers use bankruptcy to break leases by the thousands

#71

Post by brudgers »

mikestew wrote: post #16

Man, with (currently) four comments mentioning that this is "what bankruptcy is for", I think the point of the article might have been missed. This isn't some sneaky "one weird trick", and that's not the reason Bloomberg is reporting on it. In fact, the tone of the article to me is, "yup, companies do it all the time, but..." And the "but" is: But the moves threaten to upend huge swaths of the real estate market and…

Commercial mortgaged backed securities are an investment. Investments come with risks. Bankruptcy is just part of that risk.

The US is thirty years out from the previous commercial real-estate reckoning. The S&L crisis. Everything that was booming a year ago was built on top of that reckoning.

Re: Busted retailers use bankruptcy to break leases by the thousands

#72

Post by Analemma_ »

cobookman wrote: post #47
Bombthecat wrote: post #45

Earlier quoted context omitted.

Everyone still wants to live in cities. Firms want to settle in cities. If shops close, it wont change much.

You could see commercial real-estate be converted to residential.

How much does that cost, and is anyone going to pay that cost when residential rents are also falling? Commercial property is so different from living quarters that I wouldn't be surprised if "conversion" isn't actually possible, short of just razing it and building from scratch.

Re: Busted retailers use bankruptcy to break leases by the thousands

#73

Post by djrogers »

happycube wrote: post #15
ralph84 wrote: post #12

Not mentioned at all in the article, but what will be more interesting is when all of the landlords start appealing their property tax assessments. Obviously if the government has prevented the property from being used, it's not worth what is was previously assessed at. State and local governments are in for a world of hurt.

The federal tax writeoffs tend to make up for it, AFAIK.

Tax write offs never ‘make up for’ anything - if you write off $1000 in property taxes, it will reduce your tax burden by ($marginal_tax_rate*1000), which will by definition be less than $1000.

Tax write offs are distinct from tax credits.

Re: Busted retailers use bankruptcy to break leases by the thousands

#74

Post by WanderPanda »

derefr wrote: post #57
simonh wrote: post #48

Earlier quoted context omitted.

Then they are doomed. Their current tenants can’t afford the current rent, and no new tenants are going to come along at that rent level while this crisis is still ongoing, so what are they going to do? If the current tenants can be viable if rents are reduced, along with other cost saving measures, then maybe that’s a least worst outcome for society and the landlords. Ultimately though, to me, the actual business le…

The property management company isn't really a company per se; it's more like a conduit for money, an instrument. If that instrument defaults, it's not of so much concern that a property management company will die; but rather, that the companies who were on either side of it, relying on it as a conduit for money to flow through, will end up illiquid, unable to exchange through that instrument. On one side, that's la…

And yet again the cleanest method would be to not bail out the banks and let the assets be actioned to the highest bidder. Everything else is trading off long term efficient ressource allocation in favor of short term stability.

Re: Busted retailers use bankruptcy to break leases by the thousands

#75

Post by brudgers »

derefr wrote: post #30
Digory wrote: post #23

Earlier quoted context omitted.

>ghost towns ...if rents don't fall. And maybe they should.

I think I've seen it stated that property developers and property-management companies are often heavily leveraged, such that they can't lower rents; in about the same way that a VC firm with a ten-year investment time horizon on their fund can't invest in your startup if all your valuation-growth will come only after 11 years. In both cases, the lenders and shareholders of the firm, have contractually obligated the…

What happens is someone with money buys out the deal for pennies on the dollar or there is a successful renegotiation with lenders or there is a successful renegotiation with the limited partners (in the US most real-estate deals are structured as limited partnerships with the general partner as an LLC).

Basically, except in the first scenario everyone agrees to suffer together. In the first scenario, the initial investors suffer and the new investors think they got a good deal. It's worth noting that LP's are usually built from people who have worked together before or from people with track records of being good to work with.

Re: Busted retailers use bankruptcy to break leases by the thousands

#76

Post by ethanbond »

duxup wrote: post #13

Good. I like that. Now if we can just seem to adjust whatever weird tax rules or situations allow real estate to sit largely empty and apparently not not put all that much pressure on prices... that would help too. I see a lot of commercial real estate sit empty for ages and I hear from the local businesses that the rates are still high and even going up. A development not far from me has been at sub 50% capacity for…

If you’re really interested in this topic, you should look into the Land Value Tax, also in more extreme forms called the Single Tax or Georgism. You’re poking at some really fundamental questions with this line of inquiry.

Re: Busted retailers use bankruptcy to break leases by the thousands

#77

Post by elipsey »

mikestew wrote: post #16

Man, with (currently) four comments mentioning that this is "what bankruptcy is for", I think the point of the article might have been missed. This isn't some sneaky "one weird trick", and that's not the reason Bloomberg is reporting on it. In fact, the tone of the article to me is, "yup, companies do it all the time, but..." And the "but" is: But the moves threaten to upend huge swaths of the real estate market and…

Lots of things were already ghost towns. Even before covid, I am always seeing people with no buildings, and buildings with no people. I'm in SF now, but I have seen this in cities and small towns, red states and blue states: empty malls, hobo jungles down the block from me, friends with minimum wage jobs sleeping in cars, squatters getting the bum’s rush. I imagine there are good reasons to have less than %100 percent occupancy like renovation or tenant turn over, but I’m talking about the same places standing empty for months or years without a sale.

If capitalism does what it says on the tin, I don’t get why can't we have a market cleaning price for buildings. Are we doing too much capitalism, or not enough? Is this just all very efficient but I’m not smart enough to figure out how?

Re: Busted retailers use bankruptcy to break leases by the thousands

#78

Post by ethanbond »

ralph84 wrote: post #12

Not mentioned at all in the article, but what will be more interesting is when all of the landlords start appealing their property tax assessments. Obviously if the government has prevented the property from being used, it's not worth what is was previously assessed at. State and local governments are in for a world of hurt.

“I was told that this business was guaranteed upside for zero work” - Landlords

Re: Busted retailers use bankruptcy to break leases by the thousands

#79

Post by cs702 »

In short, we could see a "tsunami" (the OP's word) of unforeseen losses in highly-rated commercial mortgage-backed securities (CMBSs), because credit-risk models used to construct and price CMBS tranches never considered the possibility that a large number of retailers would simultaneously break so many leases via bankruptcy, simultaneously impacting so many malls across the country.

Quoting from the OP:

> By seeking court protection, firms like Neiman Marcus Group Inc. and the parent company of Men's Wearhouse avoid the headache of protracted negotiations with individual landlords. But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities.

> "This is now black-letter law -- a debtor can cram down a landlord," said Melanie Cyganowski, a former bankruptcy judge who's now a partner at law firm Otterbourg PC. "If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change -- the mortgages held by the landlords."

Think: something analogous to the tsunami of unforeseen losses in residential mortgages that triggered a financial crisis in 2008, but with commercial mortgages this time around. It won't be pretty.

Re: Busted retailers use bankruptcy to break leases by the thousands

#80

Post by philjohn »

duxup wrote: post #13

Good. I like that. Now if we can just seem to adjust whatever weird tax rules or situations allow real estate to sit largely empty and apparently not not put all that much pressure on prices... that would help too. I see a lot of commercial real estate sit empty for ages and I hear from the local businesses that the rates are still high and even going up. A development not far from me has been at sub 50% capacity for…

I believe in the UK landlords are on the hook for business rates on commercial property when it's empty, so the incentive to lease at more reasonable rates is there.
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