[fl4regun]

it's because the expected future income is based on what current tenants are paying, extrapolated to the number of units in the building, ignoring vacancies. I get what you are saying, it should be based on total rental income from the building - full stop - but that isn't how it is done, and this is the result.

Simply stated, if you rent a new unit for 25% lower, then the value of the building just dropped 25%. If you don't rent to a new tenant, your value must be the same, that's what the existing tenants are paying (not that I agree with this, it's just how it works right now).

It's similar to how people holding low liquidity assets will claim they are "worth" whatever the last person who paid for this assert, even if the real value of it is dropped, the "book value" is still sky high.

[jamilton]

Why do banks calculate it that way? Do they all do it that way, is it legally compelled? It seems obviously incorrect.

[AnthonyMouse]

> but that isn't how it is done, and this is the result.

And the result is dumb, which is the point. The bank should stop doing that if they don't want to cause problems for themselves.

Review again how this works. The landlord put in $4M and the bank $16M on what was supposed to be a $20M building. They can't find enough tenants, which means in real life it's only worth $14M and the incumbent system is for everybody to pretend that isn't the case when it really is.

As a result, the landlord is collecting $500k in net rent instead of the $700k they could get by lowering rents and getting more tenants, while paying the bank $640k/year in interest. The landlord does this because if the value of the building eventually recovers then they don't lose their initial $4M investment, whereas if they hand over the keys to the bank it's definitely gone. And even if that money was gone, they'd still want to keep operating the building if they were at least turning any annual profit instead of making continuous losses.

This is bad for the landlord (they lose $140k/year instead of making $60k/year) and it's even worse for the bank, because now if the landlord runs out of cash or concludes the value of the building isn't going to recover, the bank has to eat a $2M loss by foreclosing instead of continuing to collect $640k in interest every year, which they could have done indefinitely if the landlord was allowed to keep renewing the loan while making more money by lowering rents and increasing occupancy.

Worse, this is happening at scale. If landlords could lower rents without getting foreclosed on then banks would keep getting their interest payments until inflation catches up to the nominal amount of the mortgage. But if the landlords are required to keep taking a loss, they eventually start to give up -- the article implies that they don't want to give up until the annual loss eats the original $4M, but it really happens as soon as they think the value of the building isn't going to recover. But that's only a problem for the bank if they default on the mortgage, which they do if keeping it makes them lose $140k/year but not if it's still earning them $60k/year. And that's especially a problem for the banks if it happens not just at all but all at once.

[fl4regun]

I'm not defending the status quo, I'm just laying out how it is. I think it's stupid too.

[amenhotep]

That's the trick, isn't it, though? Rationally it's especially a problem if it happens all at once, but realistically if your bank has an awful quarter then you're at fault whereas if every bank has an awful quarter then no one's at fault, it's a systemic issue, chances are you get to collect a bail out and keep going. It's a sort of prisoner's dilemma, a critical mass of banks needs to defect and each individual bank's incentive is to cooperate.

[charcircuit]

If you let a family member move in for free that doesn't make the value of the building go to $0. That valuation strategy is too simplistic.

[Nemi]

Prices are set at the margins