Is Non-Leased commercial property a tax write off? If so then why would commercial land owners even be motivated to rent it?
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[{"id": "hv46w0q", "text": "what the ruck did I just read.", "replies": [{"id": "hv4ls9k", "text": "Read his post history.  It gets worse.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hv4bd6a", "text": "Think of it this way. A write off saves you on the amount of taxes you pay. If you pay 50% taxes on your income and write off 1 million of losses. You save 500k. But you loose 500k too. No reason to ever own something purely as a write off. Only if you have the income and the property benefits you in some way. M2C from a Multifamily broker in MN", "replies": [{"id": "hv4lmje", "text": "What if you were diversified enough that you had new build commercial you could claim as a super high loss and cover a fair amount of taxes? I worked as a property manager and swore this was happening with one of our owners. He owned several campus high rises and a bunch of odd and end units throughout town (it was likely the ballpark of 50 million in property value there) then goes and develops a brand new high rise worth about 50 million on its own downtown. It\u2019s a new neighborhood and he basically started the redevelopment of it single-handedly. He has several commercial tenants including a grocery store, like 6 restaurants, several service providers and office space. But he also has like 10 vacant spaces that have never been used. Could he claim a high enough rent where it honestly stays profitable as a tax write off rather then actually seeking tenants? \nObviously if you have a couple of units the write off loss helps in tough times but it\u2019s no where near as valuable as essentially a blank check to a corporation of a large enough size that the tax losses are making a large dent in revenue. Maybe I\u2019m completely misunderstanding but in as developed of an economy as we are in I don\u2019t think it\u2019s crazy to think the tax advantages could be purposely sought after", "replies": [{"id": "hv4vikq", "text": "Any successful developer would not intentionally leave a newly developed property half vacant. There are more issues involved that you are not seeing. The owner is probably highly leveraged with a loan on the property. Additionally there are operating costs that tenants need to cover. The combined mortgage cost per square foot plus operating cost per square foot is significantly higher for new construction than older buildings with lower loan amounts.\nIf an owner signs a lease at or below this mortgage and operating cost per square foot they are guaranteed to make a loss and possibly go bankrupt on the building during the life of the lease. The lender also probably has a stipulation in the mortgage to ensure the borrow doesn't sign low rent leases that would cause the building go into default in the future.\nIn your retail example, there is a challenge to the amount and diversity of tenants you can lease to in the development. Adding another restaurant will add competition to the existing tenants. At best the owner will try to bring in a restaurant that is different that the other ones already there so that there are not 6 pizza shops and they all end up driving each other into bankruptcy. \nThe remaining vacant space may not be large enough for what a typical fast food chain or larger retailer wants. It could be in a hidden corner that will mean low traffic and slow business that will only be feasible for low rent. The low rent doesn't justify renovating the space for a new tenant so it sits vacant until rents increase more.", "replies": [{"id": "hv4x71d", "text": "But its not half vacant. like I said this owner is not struggling by any means and I know for a fact just refinanced a couple of his very profitable campus high rises to build this mixed use new project. He is nearly rented up but has had several spaces (likely about 10% of the commercial space available at the building) that has sat vacant since construction was finished in 2014. Not just vacant like its empty space, but its built out to be an office space and has furnishings ready to go but no one uses it.\n\nI get the idea of vacant until rents increase more but that doesn't address the legitimate benefit of being able to write off that vacant property on tax paperwork. Is there some sort of break even point where you have enough properties and income taxes where the negative income is justified due to the savings on taxes? \n\nI feel the disconnect here is that this is not some small strip mall space this is a massive 300 unit apartment complex with a whole ass mall on the first - third floors...with two buildings the same size across the street. This owner is not a conglomeration this is a family who has owned buildings in the past and doesn't count based on doors but on acreage of a modestly sized midwest city. I feel like when you are diversified that far there has to be some sort of advantage of tax write offs that could eventually outweigh the missing rent.", "replies": [{"id": "hv52c1d", "text": "For tax write offs it is possible to be 100% occupied cash flow positive and still show a loss after deducting interest expenses and depreciation. \nMy speculation is that the Midwest market you are talking about has weak demand for office space so if  the office market is 10% vacancy then an individual building should also expect to be 10% vacant. Vacancy below 10% would mean renting units below market rates. There could be a disconnect between the space being offered for lease and what companies are demanding that is causing the space to sit vacant.\nSmall Law firms typically want smaller foot print trophy locations, not the 4th floor above a mall. Lager companies want large contiguous space that sounds like it was already leased up at your property.\nOther small and medium size businesses are probably leaning towards cheaper class B or C office space, and don't want to pay the premium for the Class A space at your property.", "replies": [{"id": "hv557ik", "text": "So I hear what you are saying but I think there is a disconnect because the 10% vacancy would be held onto; \n\n1. because its more valuable vacant listed as a high rate and not leased for below market rate\n\n2. because its vacant and listed as a high rate there is a value in the the tax write off that it provides.\n\nWhat you are saying is 1 is the industry standard and what makes economic sense. I agree with that but also believe that then 2 is inherent in the economic feasibility of making 1 economically possible. \n\nSo break it out big picture if you have a massive tax burden because you have tons of properties. Couldn't you do some of your valuation considering a base of \"write off-able\" properties with development? It obviously is better to get places rented, but if you have the ability to stabilize and reduce other losses (ie taxes) with vacant properties why wouldn't you calculate that into your development math? \n\nIts not that people are actively building out strip malls and raising rents, keeping it vacant and writing off a bunch of taxes. But instead when you have the equivalent to a whole ass mall a part of your portfolio vacancies are going to happen and it would be bad business to NOT include them in your math. **At that point when do you start considering the breaking point value of the tax write off over the ideal of having the space rented out?** That is the crux of my question I guess because at some point the value of the tax write off has to be significant enough that you are actively looking for it when doing your bookkeeping.", "replies": [{"id": "hv5cmmk", "text": "I've worked in property management, acquisitions, and lending for real estate.\nI can confidently say a landlord does not take into consideration leaving the building partially vacant in leasing their building. \nWhat I see is small time owners under reporting rent revenue on their taxes to reduce their tax bill or inflating expenses to reduce their taxes. Owners may include lots of mileage on property inspections or include family phone plans improperly expensed to the building business to reduce taxes even though most of these phones are not for business use.\nFor larger owners they also can inflate expenses like buying a new personal car and improperly expense it to the business. \nIf a legitimate owner wants to reduce taxes they can increase their loan amount that will increase interest expenses and reduce or eliminate any profit in the business once depreciation is included.\nIn some case examples a large corporation may sell a building they own and sign a lease agreement with the buyer in order for the buyer to buy the property at a higher price with a loan instead of buying a vacant building. The company that sold the building intentionally leased the property despite vacating the building so they can get a tax deduction on their lease and increase the value of the building sale. The selling company will try to sublease the vacant space to break even on the lease, but it could take years of the building being vacant to find a tenant(s) willing to lease 100,000 + square feet of space. Two instances of this are when BP sold their building in downtown Cleveland and the building was half vacant for years. Another example is Foundry Square 4 in San Francisco was built to be Sun Microsystem HQ. Oracle bought Sun Microsystem. Oracle moved all the employees out of the building and subleased the building to Gymboree.", "replies": [], "depth": 7}, {"id": "hv5esfo", "text": "To add onto my comments on leasing strategy, a lender will include clauses in the mortgage for a springing lock box. This means if a property rental collections drop below a certain level, all rent collections go into a lock box controlled by the lender to decide if the expenses get paid. The lender also has discretion to fire to current property management and leasing broker. A wealthy developer is likely self managing the property and does not wish to lose the income from also managing the property. \nTherefore they do not wish to let vacancy get close to a point where the bank takes control of running the property.\nThe next step after a bank takes control of managing a property is foreclosure if an owner cannot get new tenants to lease the property. \nForeclosure is a very bad tax write off strategy despite what Trump claims. Typically borrowers are either blocked from getting loans or only get loans at higher rates and lower leverage because they are viewed as risky borrowers. Additionally the owners of the building have completely lost their equity they invested in buying or building the property. At a minimum that is 20% of the building value at the time it was last financed and typically higher equity loss for most property types.", "replies": [{"id": "hv5gqd9", "text": "So to be clear the lock box point is what the property owner is trying to avoid obviously. So lets assume the vacancy rate of 10% is a market standard. I am assuming the bank doesn't set that lock box point at 11% but likely a bit higher depending on how trusty the borrower is. At some point in time both the bank and the borrower are taking into consideration a vacancy rate of some sort. I am curious how much that write off-ability that vacancy rate carries and at what point it can bump the property owner from carrying a 9% vacancy rate to a 10% vacancy rate because the value of the write off exceeds the value of the rent for the vacancy. \n\nnow this assumes the lock box point is within a reasonable amount from the vacancy rate...but actually the vacancy rate and the lock box point don't correlate because lock box rate is set based on collection not based on building occupancy. So logistically (in a hypothetical world) if you have a million dollar lock box rate on a 1 million sq ft property but are making 2 million on 900,000 sq feet at what point does the building owner give up on the remaining 100,000 sq feet because they are hitting their targets and the write off+the work to lease isn't worth the work? It just seems that the tax write off is an incentive to hold a market average vacancy rather than ensuring that space is being utilized.", "replies": [{"id": "hv5nepk", "text": "You are talking about picking up pennies in front of a steam roller. You also don't seem to comprehend how tax write offs work.\nAn owner is not going to purposefully have a properly be 10% -20% vacant to get a tax write off when they have a huge risk of having 1 or 2 large tenants leave comprise 20%-30% of the building that will cause the bank to foreclose on the property because now the property is nearly half vacant and can't pay the mortgage. It is not worth the risk of leaving some vacancy for tax write off benefits.\n\nFor profit companies are always in the business of maximizing after tax profits. Purposefully leaving a property vacant will not maximize profits across a portfolio of properties. Leasing a vacant unit above break even operating expenses always makes a company more money than any tax loss deduction on a vacant space when looking at after tax profits. Leasing a unit below break even operating expenses will either be blocked by a lender or ensure the owner loses money on the lease before and after taxes.\n\nIf a company was serious about tax deductions and maximizing profits they would look at buying LIHTC investments that give a tax deduction and give an investment profit to an investor.", "replies": [{"id": "hv5pmbn", "text": "See but the sticking point for me here is that the loss being able to be written off means that it inherently bumps up your break even operating expenses right? Like that tax write off doesn't just stay on the books it goes away therefore bumping up your break even operating expenses. It may not be huge but the write off does pose an incentive to property owners to not lease space in certain circumstances which is odd. \n\nNow obviously it doesn't sound like it is a strategy at all but it absolutely gets factored into the calculations when setting operating expenses. Its not that it is a massive part of the calculation that makes or breaks deals but it is a part nonetheless. \n\nIt reminds me of the incentive structure for realtors being a bit funky as well. if you are a buyers agent there is an incentive for a higher sale price because you get a higher commission. Obviously you shouldn't try to buy at a higher price but aside from \"good business practice\" there really isn't an incentive for the buyers agent to negotiate a lower price for the home. say that in the real estate forums everyone will scream \"but bad business practices\" when in reality they are right its just strange the incentive structure is made in a way that rewards a bad negotiation on the buyers end.\n\nAlso that building owner does have LIHTC which was a stipulation of TIF funding for a portion of the project. I have always been curious what the tax calculation would be for a property owner when building LIHTC because it seems like it is good but at what point does tax savings not make more LIHTC profitable because you have cut your taxes enough", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hv5jd1u", "text": "Typically construction laws are so high interest rates that this would not be at all feasible. It does not make sense to do these deals with cash of your own. You should always love her yourself. That being said if the bank does not think you are getting rents or attempting to get rents, they could almost consider that a violation of the loan and call the note due. NAL\n\nEdit: Loans not Laws. \"Lever\" not \"Love her\"", "replies": [{"id": "hv5kj8z", "text": "I am assuming you meant loans rather then laws, so if they are high interest why wouldn't you consider using cash if you have it? \n\nBeside that point the bank has to consider a certain amount of vacancy thought too don't they? Like they know that there is a marginal advantage to vacant space at the property so they have to consider that math as well or do they not? Its not like they are building out an entire building and claiming it is worth a million bucks and not renting any sq footage, they do have tenants but there is vacancy that has been there since day one. Would they have not written that potential math into their deal at all when signing with the bank? Or at what point do you consider your vacancy as a portion of your tax write off to check your potential future?", "replies": [{"id": "hv603lw", "text": "The bank does require a certain amount of underwriting considering vacancy but they\u2019re typically in the 10% ballpark?\n\nThe only time a property owner would consider not leasing to a client would be if they\u2019re asking for a significantly under-market rate. That is because the value of the building is directly related to the income it makes. Renting it for less reduces the potential value.\n\nSomething that I forgot to mention earlier is that I believe you\u2019re looking at this the wrong way. Loss due to not renting Will never be beneficial. You cannot claim an above-market rate on rents to write off. The amount you can write off as a difference between the mortgage and the income you bring in from rents. So if you\u2019re net is  -200,000. That\u2019s what you can write off. You cannot write off an additional higher amount due to \u201closs of rents\u201d\n\nOnce again I am a multi-family broker so My understanding could be flawed", "replies": [], "depth": 5}, {"id": "i3whivk", "text": "To follow up on my previous comments, I was using voice text and I realize now my wording was messed up. sorry about that!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hv4ftvv", "text": "You sound like someone who doesn\u2019t want a raise because it\u2019ll put you into the next tax bracket.", "replies": [{"id": "hv5o2kz", "text": "Lmao", "replies": [], "depth": 2}], "depth": 1}, {"id": "hv4hiy6", "text": "Name doesn\u2019t check out", "replies": [], "depth": 1}, {"id": "hv4i8vo", "text": "The r/antiwork implosion is washing up in odd places...", "replies": [], "depth": 1}, {"id": "hv4lbt1", "text": "Commercial property takes time to get a tenant because not everyone has use for that large space, thus finding the right tenant takes time. Also leases are very long, since the value of the property comes as a percentage of the lease, this is called cap rate.", "replies": [], "depth": 1}, {"id": "hv4ldmp", "text": "That makes absolutely no sense.  You take a loss to reduce your tax liability by considerably less than the loss, if at all, and you think people want that?", "replies": [], "depth": 1}, {"id": "hv4mnqw", "text": "Commerical property stays vacant for a number of reasons others have mentioned, the most common being it's hard to find the right tenant for the space.\n\nOther reasons include not violating the commerical mortgage contract that the owner has with the bank. In some commerical mortgages you have to put up cash if the rent you charge falls below a certain ratio. Sometimes it makes sense in the long run to keep a space vacant while looking for the right tenant that can pay the right amount.", "replies": [], "depth": 1}, {"id": "hv4uejx", "text": "Uh, no. \n\nNo property owner in their right mind is leaving a space unleased for tax purposes. \n\nWhy they are leaving it empty is completely rational though. It\u2019s because the building is valued based on the income stream it produces. There\u2019s a HUGE incentive to try to get higher rents, and to hold out for the tenant that will pay those. \n\nSay you have a small building (8,000 sq ft.) that you manage to get $5/sq. ft more in a market where product trades at a 4% cap rate. \n\n8,000 x 5 / 0.04 = $1,000,000\n\nThat\u2019s a million dollars more building value for the owner than if they accept lower lease rates. I think you would be a little patient too if that\u2019s the sort of money you could be potentially leading on the table", "replies": [], "depth": 1}, {"id": "hv4wk0c", "text": "Letting buildings sit vacant is not an efficient form of tax write offs. A more efficient from of tax write offs is investing in LIHTC.", "replies": [], "depth": 1}]