'Dogfight' looms as landlords start suing restaurants over unpaid rent

https://www.thisismoney.co.uk/money/news/article-8187559/Dogfight-looms-landlords-start-suing-restaurants-unpaid-rent.html

by finphil • 6 years ago

38 90 6 years ago

thisismoney.co.uk

boznz• 6 years ago

Any form of profiteering in a crisis such as this should result in massive fines and prison time, in war time I believe firing squads were in order.

dahdum6• 6 years ago

How exactly is this profiteering? They aren't demanding extra money or marking services up. They're at a high risk of bankruptcy themselves.

echelon2• 6 years ago

Businesses were told to close by the government to prevent spread of the virus, thus effectively shutting off their income.

The government should shut off rent income, too. And mortgage payments.

We're in survival mode. Nobody gets to make any money right now. We have to wait for the recovery to begin.

zraako• 6 years ago

Not usually a fan but starting to understand why Mao went so salty on landlords now

paulie_a3• 6 years ago

Moa probably has a lot of fans, left. He killed the rest. 9-10x of Hitler.

dang• 6 years ago

Please don't post unsubstantive comments and/or flamebait to HN.

https://news.ycombinator.com/newsguidelines.html

papeda3• 6 years ago

I find this question hard to think about. Who exactly should be pricing in the risk of something like this happening? On both sides there are agents who have taken on risk. Some of the agents paying rent overextended themselves even before the crisis. Some of the agents renting space did the same. So who should take the hit? Nobody (i.e., the government)? Even that solution seems wrong -- do we really want to incentivize agents that leverage their property holdings to the hilt?

My naive reaction is that the agents renting space are somehow "more able" to absorb the costs. Maybe it's because I think banks seem to be doing ok, and in my head banks are the people who lend things to people and charge fees, whereas my friendly neighborhood restaurant seems to be scrabbling harder to make ends meet. Or maybe it's because I think people who own resources are just always doing better than the people who rent them. But that's not a very convincing argument.

FartyMcFarter4• 6 years ago

Both should be pricing in the risk.

If I buy a house as an individual I'm taking some of the risk, but so is the bank that lends me money. We each have different risks (I can lose the house, the bank can lose the money if they can't make it back by selling it), which is fine.

kfrzcode2• 6 years ago

Honest question, how does one factor in risk for a catastrophic decline in cash flow?

I'd suggest having a war chest which could cover six months expenses.

I'm not a business owner though... I imagine it's probably harder to do than it is for an individual.

matz14• 6 years ago

The mistake is the landlord didn't take payment upfront, 6 month / 1 year.

williamdclt2• 6 years ago

What fraction of renters (companies or individuals) can afford 6months of rent?...

eropple• 6 years ago

That's sure a reasonable and thoughtful idea in industrialized countries where most workers live close to hand-to-mouth.

AmVess• 6 years ago

Do you make your mortgage or rent payments 6 months to a year in advance? If not, why do you expect landlords to do the same?

tomp2• 6 years ago

It's an unprecedented catastrophe, and even if we will weather it, someone (well, many someones) will suffer (we'll all suffer, but some more than others).

Besides solving the crisis (to which most of us cannot meaningfully contribute) the main priority is preserving the rest of the society so that we can go on with as little harm as possible when the immediate crisis (virus) is over.

In this specific situation, it's obviously better to prioritize borrowers/renters over landlords, because the former are actually productive. Restaurant fails => no food; landlord goes bankrupt => house remains, it's just gonna be owned by someone else.

What complicates matters, obviously, is second-order effects; first of all, if some / many landlords are leveraged, them defaulting might impact banks, which is definitely something we don't want; if I were the government, however, I'd be saving banks directly in this situation, not landlords. The other consequence is a crash of the housing market, which IMO isn't that much of a big deal, but it's been politically untenable for a while because too much of ordinary people's wealth is tied in housing. It might be a good opportunity for a reset, though.

jandrewrogers• 6 years ago

One of the largest second-order effects of transferring all risk to landlords is that rents will go up because risk has a real financial cost that must be covered by cashflow. That will remain true no matter who ends up owning the property.

ars2• 6 years ago

restaurant fails => no food; landlord goes bankrupt => house remains, it's just gonna be owned by someone else.

Restaurant fails => someone else will occupy that space and be productive. landlord fails => that new building will not get built.

Calculating economic effects is not simple. Landlord fails => doesn't make bank payment => bank fails => people don't get their deposits => government has to make up the difference.

At the end of the day we are all poorer, and we will all have higher taxes and less money because of it.

There is not any one entity that should be singled out as having to shoulder the cost. We all will.

Blackthorn• 6 years ago

I generally don't feel bad about the rich person in this equation taking the hit. 99% of the time that's the landlord.

maxsilver2• 6 years ago

I don't see how this is even in question. The landlord should always be taking on the risk, that's literally their only job -- they provide nothing of value, besides that one thing. (They often don't even maintain the property or upkeep, in the US that's usually entirely on the tenants, through a third-party management service priced into the rent).

If landlords aren't willing to take the risk of tenant defaults on, then landlording should just be universally-illegal, and let the government directly cut rent-like mortgages and property-management-like upkeep for those properties. If the general public is going to keep bailing out wealthy deadbeat landlords every decade, we better at least get to keep the property.

jariel2• 6 years ago

This is upside down.

It is absolutely not a landlord's job to assume the business risks of their tenants. Definitely not.

If the restaurants declare bankruptcy, yes, then there is limited ability for them to get their rent, but otherwise, the restaurants 'owe'. It may be a good idea for renters to renegotiate and for smart landlords to take heed.

But in general - contracts need to be obligated. It doesn't matter that you view the 'landlord' as 'doing nothing'. Also, in most cases, remember that land has been commoditized, it's not like the 'King' owns everything - the land was purchased for some amount, has a value, it's being 'managed' like any other asset, and if there's competition in this industry (there is a lot), the surpluses are going to be thin, just as thin as any other industry.

While there are existential issues about the 'productivity' of real estate, they don't really matter at the most local level, because the most local 'landowner' is just playing in a competitive layer of business like anyone else.

So for now - it's best to honor contracts, re-negotiate, and follow the laws.

The government may want to intervene in a 'really really smart way' but I don't see how this is perfectly possible.

ummonk• 6 years ago

The way to be economically successful in modern America is to leverage yourself to the hilt to get massive returns during good times (while cautious savers miss out on getting such massive gains), and then turn around and ask for a bailout if things go south and the heavy leverage and lack of rainy day savings pushes you underwater.

londons_explore3• 6 years ago

The way to be economically successful is to extract those large profits from your company in the good times, then claim bankruptcy in the bad times. All your assets get sold off cheap, and you can use those extracted profits to form a new company to buy up the assets and continue business.

jariel2• 6 years ago

Does it matter that much who is 'more able' to absorb costs? The original question of who takes the rent etc. is more likely relevant.

It's hard to know who is profiting more, but it's a side question.

Normally - the restaurants would declare bankruptcy, the landlords would follow suit, and due to the pervasive nature of this pandemic ... so would the banks who can't absorb that much loss. The dominos would come down and take the entire economy with it.

BUT

'Real Estate' is not a productive game!

This is one of the weirdest things about our economy - so much is based on rent-extraction, not productive investment.

This is why the central bank can take all the 'worthless investments' off of the bank's balance sheets and give them cash at face value and 'poof' the economy can move on.

2008 was not an implosion of productive assets - it's was a major accounting realignment ... which caused productive parts of the economy to suffer as a result of calamity. But at its core, just a big rebalancing of the balancesheet.

Put another way - what if all real-estate were socialized: it's all free, you just have use it, and everyone is 'allocated' some kind of limit or whatever by whatever rules. Those rules may not be perfectly fair but it could be done.

Then nobody has to pay rent. Then, when restaurants 'pause' operations, they don't go out of business.

Because we are not an agrarian society wherein any specific bit of land is really about its industrial value ... this could actually work. We do it in a fancy way today by having people speculate with huge mortgages, only to sell them later.

I'm only making a rhetorical point here, but if we are going to 'socialize the risky parts of the real-estate economy via central banks' because they need to be unfairly bailed out every 10 years, then there is no 'free market' in such things anyhow. The 'unfair socialization' is happening at the central bank.

In Canada, the average home price increased last year more than the average annual wage (before taxes!). This is insane and untenable. It means the real #1 driver of inequality is simply homeownership: the more you can leverage, the more you are leveraging over others. A $200K income becomes a means to buy a $2M home that increases in value as much as your income. While the flat owners and renters are left with no capital gains there.

This aspect of our economy might essentially be the most truly fragile because.

Ididntdothis2• 6 years ago

I only hope that this won't lead to a situation where people and organizations with deep pockets will take over even more of the housing stock like they did in 2008.

jasonsb• 6 years ago

That's exactly what's going to happen if the prices of real estate will plummet.

ethanbond• 6 years ago

Yep, that’s exactly what will happen.

One crisis closer to having a single mega landlord (or a very small class of landlords) who can charge whatever they want for your right to exist on the face of the planet.

It is time to undo this with the LVT like what Singapore does (almost all land is owned by the state and leased out on 99yr leases). The net effect is that the market sets rent prices, but the revenues not due to the landlord’s actions (I.e. revenues due to nearby employment opportunities, education, or public infrastructure) go back to the state and get reinvested in the community.

dahdum6• 6 years ago

Government should take a hit, in my opinion. It's inefficient for every individual and entity to prepare themselves against things like this, especially since government action (stay at home orders) is exacerbating it. The business "bailouts", at least the in US, are mostly just loans anyway. Taking a "too bad" stance and letting businesses cascade fail prolongs the pain and leaves the country worse off when the crisis is over.

Justsignedup• 6 years ago

In that argument case, what about average citizens? Businesses seem to get bailouts when they fail because of unforeseen circumstances, but citizens are left to pay the bill. so in the end it is either fair, or someone takes a bigger hit.

dahdum6• 6 years ago

Average citizens in need should (and are in many places) getting grants instead of loans. If the government lets businesses fail because they won't issue loans, more people lose their jobs and require grants. Much more cost effective to keep businesses alive.

koolba• 6 years ago

That’s fine going forward but it’s not priced in yet so it’d be get another unfunded liability.

It’s like extending unemployment benefits to gig workers who never paid any unemployment tax.

FartyMcFarter4• 6 years ago

Government should take a hit, in my opinion.

Government means "everyone who pays taxes".

I'm not sure that's fair. I think it's fine to spend taxes rescuing people (including the business owners if they're in personal trouble), but rescuing businesses feels like a very different story.

chrischen• 6 years ago

Businesses exist to serve people—both customers and as employers. In this case the businesses are also the ones being sued, and people only get affected because the business gets sued.

Robotbeat2• 6 years ago

So we just don’t have restaurants (or people working there) for a year even after the stay at home orders end? I think people saying we shouldn’t bail out businesses haven’t fully thought these things through.

dahdum6• 6 years ago

If you don't rescue businesses, you end up needing to rescue a lot more people. You can also give loans (not tax dollars) to rescue business. People require grants.

DanBC• 6 years ago

I don't mind rescuing businesses. People need jobs.

I do get a bit annoyed at businesses who've gone out of their way to avoid as much tax as possible by using a variety of weird schemes, and who've gone out of their way to pay their workers as little as possible using a variety of weird schemes, suddenly deciding that The Government isn't so bad after all and asking for a handout.

jasonjei2• 6 years ago

We just passed the CARES Act in the US, which gives small businesses a loan about 2.5 X their average monthly payroll. It is fully forgiven if used for payroll, rent, or utilities in the first 8 weeks.

rasz3• 6 years ago

Except banks refuse to give you any loan.

amiga_5002• 6 years ago

If society is to underwrite the risk then society should collect when times are good.

If we taxed land, landlords would long get the rent for the building, which would be far, far less, as most of the rent in prominent locations is due to the location.

If we had land value tax the govt could have reduced LVT for the duration of the crisis, leaving businesses only paying for the far smaller amount of the building.

dahdum6• 6 years ago

Reducing the LVT would have been effectively a grant, a real cost to the government that needed to covered by all taxpayers. Issuing them secured loans to carry them through this would not.

tetha• 6 years ago

The thing there is: I'm split on that.

I know plenty of small businesses and their owners. Bars, local cafes, all kinds of little startups, small construction companies, small companies in manufacturing. These businesses had no chance to prepare for a multi-month shutdown with zero income. For those guys, I'm perfectly fine to throw down my tax dollars without interest. This is a sufficient mess, just take it.

That's a situation we need our societies safety net in.

However, I'm concerned that larger corporations will throw more money than all of the small business I know make in a month at legal and siphon that money away. That'd be bullshit.

I hope governments can sort that shit out, at least in europe.

raincom2• 6 years ago

This is what happens when people drink the deadly cocktail mix of low interest rates and leverage. A landlord who has paid off mortgage can afford his tenant to not pay rent for a couple of months. That's not how the world is running now: REITs, individual landlords, partnerships, etc--all of them are profitable when there is a cash flow. The moment rents stop flowing under a certain limit, deleveraging starts. That's what happening in this market.

hash872• 6 years ago

What are you advocating for here- an end to mortgages? Buildings are extremely expensive, and most purchasers need bank financing in order to buy one. They typically have a certain amount of skin in the game because lenders require them to put x percent down, I doubt they're 'highly levered'. They're normally levered- that's how the real estate business works.

If you get rid of leverage entirely, the only people who'll be able to buy real estate will be the enormously wealthy who can pay cash. If you're concerned about inequality, I think that this would be a much worse situation....

raincom2• 6 years ago

Low interest rate is the major factor in the inflation of real estate, thereby increasing the inequality. Bump up interest rates, and reduce the risk taking.

onetimemanytime• 6 years ago

close the courts. Granted is their rent but this is an act of god

danharaj• 6 years ago

Over the past 40 years the West has fallen into a deep capitalist realism which completely erases the contingent nature of our economic system. Debt and property are not basic facts of reality, they require stable, predictable economic relations. Those are all out the window right now.

It may be ideologically impossible for our governments, rentiers and financial institutions to acknowledge that the suspension of daily life means the suspension of business as usual.

Ididntdothis2• 6 years ago

I think it would make sense that if businesses are told to close then to tell the landlords that rent payments will also stop. It seems pretty fair. Same for people whole have lost their job. You could also suspend rent payments for them. This may cause pain to the landlords but it seems fair to share the pain.

JonoW• 6 years ago

Whilst I'm sure landlords are in a tight spot too, what good actually comes from evicting any business right now? It's not like there are any new ones to take their place. Having an existing business with known revenue, waiting to restart once lock down ends seems better than hoping a new one will fare any better.

rebuilder2• 6 years ago

The landlords can probably keep the tenants' deposits if they get evicted or leave before their term is up. This can mean access to quite a bit of money rather quickly. And some tenants will have fixed-term leases with the contract expiring in a few months' time - for the landlord, forcing those tenants out of the contract before that term is up can be a win, because of the deposits.

Also, I don't think most businesses are literally out of cash yet. They're simply prioritizing other expenses, like wages. Landlords stand to benefit by forcing some of that money to go towards rent.

From a business perspective, it would be strange if the landlords did not try to get paid.

ryandrake• 6 years ago

I think Warren Buffet said "only when the tide goes out do you discover who has been swimming naked". What I can't get over is that we just found out basically everyone is swimming naked.

Businesses lose cash flow for one month and they can't pay workers. Workers miss one paycheck and they can't make rent. Landlords miss one rent payment and can't pay their mortgage. Banks start seeing mortgage defaults and immediately need a bailout. Everyone's broke! It's broke all the way down. If any one of those in that chain kept a little emergency fund, we wouldn't be in this situation. How did we all manage to build an economy such that we're all paying each other just-in-time to avoid catastrophe?

pgsbathhouse2• 6 years ago

How did we all manage to build an economy such that we're all paying each other just-in-time to avoid catastrophe?

Stagnate wages. And instead of raising wages, we lowered interest rates to keep the money flowing going.

As we have just discovered, an entire segment of society is being propped up by the borrowing power of the "middle class" in America.

We have been pulling the wrong levers, and as you've said in not so many words, our current economy is a farce. People are being fed the scraps of the economic pie.

We should give the people their money; their due, proper wages. We should stop formulating economic policies on "the rich should get richer no matter what." It might not be too late to return to sound economic policies that benefit the populace and not a select few, and in return we'd have a more robust economy.

Animats2• 6 years ago

Much of brick and mortar retail is just going to be unnecessary after this. Once everyone has online ordering set up, there will be a lot less demand. Really, who wants to go to Safeway? Buy AMZN? Maybe.

Same for office space. Work from home will be the new normal for people who work in offices. People who go to work in person will do something other than use a keyboard and screen. I've been wondering for some time when we'd hit "peak office". It just happened.

It's going to be a year or two before bars, restaurants, nightclubs, and sports get back to normal. Not until there's a vaccine and almost everyone has had it.[1] Or, the hard way, repeated smaller waves of epidemics until about 60% of the population has had it and the disease dies out for lack of new victims. After lockdown, we're still stuck with "social distancing" for many months.

Life will go on fine. There are going to be screams from commercial real estate owners. You want to see entitlement? Talk to a landlord. Manufacturing will be fine. Services will do great. Office space and retail space will hurt. That's OK. We survived the death of malls.

[1] https://www.sfchronicle.com/health/article/What-Bay-Area-res...

Animats2• 6 years ago

Other businesses on the way out:

- Major League Baseball. The average age of a baseball viewer is 57, up from 52 in 2006. Just 7% of baseball’s audience is below age 18. The 2020 summer season will almost certainly be cancelled due to the epidemic. The 2021 season may be cancelled due to lack of interest. Once people get out of the habit, it's hard to get interest going again. Horse racing aged out that way. Who goes to a horse track any more?

- It's going to be amusing if NFL football gets replaced this fall by Madden NFL 20. Could happen. Simulated football, played by the real coaches, with Pixar-quality rendering, on national TV? Basketball, with smaller teams, might carry on; everyone gets tested before the game, and there's no audience. "Audience insertion" in video coverage of sports could become a thing. It's often been done in movies, after all.

- Boeing? Will any 737 Max ever need to fly again? People willbe moving around less in large vehicles for several years.

- Cruise lines? Forget it for a few years.

On the way up:

- Biodefense, of course. Nobody ever shut down the whole world before. This was an accident. Somebody might do it on purpose. It's too easy to scale. That DARPA program to generate antibodies for a new virus will be a big deal. Vaccine R&D and manufacturing will be way up, with plenty of funding from many governments. Watch the anti-terrorism lobby pivot to biodefense.

- Anything associated with working from home, of course.

- Delivery. But expect the "gig economy" to be made more like regular employment. Expect the quality of delivery to improve. The delivery industry needs to keep the cold stuff cold and the hot stuff hot. Only Safeway and pizza delivery try to do that now.

rasz3• 6 years ago

Obviously thats what business interruption insurance is for https://www.youtube.com/watch?v=xLJ4_CPlCr4

'Dogfight' looms as landlords start suing restaurants over unpaid rent

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