Falcon Towers | 170m | 44s | Langham Developments | Arc Studio

What do you think of this project?

  • Total voters
    65
SMayo said:
I believe it's mainly for tax benefits.
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If you lose $1,000 and that allows you to save $450 in taxes, aren't you still $550 in the hole?

I believe it is for one of two reasons. First, the owners of most of these company are not monitoring the performance of individual properties that closely. Someone in Toronto does not see empty store fronts here.

Second, various property owners do not want to start a price war in a weak market, so they avoid doing that to keep rents higher on paper at the sacrifice of more vacancy. It is like a cartel.
 
David A said:
If you lose $1,000 and that allows you to save $450 in taxes, aren't you still $550 in the hole?

I believe it is for one of two reasons. First, the owners of most of these company are not monitoring the performance of individual properties that closely. Someone in Toronto does not see empty store fronts here.

Second, various property owners do not want to start a price war in a weak market, so they avoid doing that to keep rents higher on paper at the sacrifice of more vacancy. It is like a cartel.
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I think your two reasons are the larger portion. However, I do not think these large companies see a vacant space as losing money. They (using your example) see saving $450 in taxes as making $450, and renting the place out as making $1000 dollars. Yes, you could make $550 more but is it worth the effort? Seems like for many landlords the answer is no.

I would strongly be infavor of abolishing the rules that allow businesses to write off losses from vacant properties. They should be taxed at the full value of the last paying tenant until it is rented out again.
 
SarcasticMarmot said:
I think your two reasons are the larger portion. However, I do not think these large companies see a vacant space as losing money. They (using your example) see saving $450 in taxes as making $450, and renting the place out as making $1000 dollars. Yes, you could make $550 more but is it worth the effort? Seems like for many landlords the answer is no.

I would strongly be infavor of abolishing the rules that allow businesses to write off losses from vacant properties. They should be taxed at the full value of the last paying tenant until it is rented out again.
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It must be nice not to worry about losing money, but I do agree about the not worth the effort part.

Sometimes it seems any effort is too much for absentee landlords. Years ago, I knew someone who had a small commercial space downtown and was a good tenant. He wanted to expand and rent part of the space next to him that had been vacant for a while (and by the way still is vacant now over 10 years later). He tried several times to contact the absentee owners in another city to deal with it, but I guess he was too small for them to deal with so they never got back to him. In the end he moved elsewhere and expanded, actually renting from a local landlord who was more responsive.

I have no problem with businesses writing off their losses, that is Federal and Provincial tax money which the city does not see. However, there is an argument to be made for a municipal tax on long time vacant space (say over a year) as it seems to be more of a problem here.
 
I definitely may be wrong, but my understanding was that they consider the vacant commercial space as a loss of revenue for tax write offs and the value of those write off is worth enough to the companies that they would rather hold out until they can find a tenant at their high prices rather than lowering the price significantly and ending up in a long lease at a price lower than they’d like.
Like I said I definitely might be wrong if anyone knows.
 
First of all corps in Alberta are only paying approximately 23% in tax. 2nd of all, losses are not going to benefit a company more than breaking even or making money.

Best case scenario is a unique situation where you book a loss based on non-cash transactions and can carry back 3 years against taxes paid. Again this is only 23% and based on entire company, likely not one property.

People generally don't understand how losses work, and term writeoff is so often misused and misunderstood.

I think a factor people don't often consider is offering a lower lease will immediately affect valuation of property if attempting to sell the property in the short term. Poor leases may offer some immediate cash flow but ultimately cause a greater net loss.
 
jason403 said:
I think a factor people don't often consider is offering a lower lease will immediately affect valuation of property if attempting to sell the property in the short term. Poor leases may offer some immediate cash flow but ultimately cause a greater net loss.
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That is a helpful specific, my knowledge of the business side is definitely surface level. I am mostly trying to understand the problem. However, I think the core issue is the same. Something is very broken in our commercial real estate market when a high value, empty commercial unit in the center of the city is worth more empty than being used. It hurts our communities and it kills our small business creativity.

I am not against private ownership of land by any means, but we have gone so far down the rabbit hole of property's main purpose being as an investment vehicle that we are killing our communities. Land's first function should be as a a part of our community, for people to live, work, and recreate. If it is sitting vacant, something is broken. And alot of space in our city is sitting vacant. I don't know the solution, but the status quo is bad and it will take smarter people than me to fix it, if we even try.
 
Also in particular what you can borrow to finance your next development is dependent on the valuation of your existing assets. You want your empty commercial spaces to be valued high, thus why they don't drop their lease rates.
 
Greenspace said:
Also in particular what you can borrow to finance your next development is dependent on the valuation of your existing assets. You want your empty commercial spaces to be valued high, thus why they don't drop their lease rates.
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Do you know how are valuations changed based on vacancies? Like if a building like fox 2 has had empty CRUs for 6 years, does it eventually get adjusted? At a certain point the cashflow and actual annual revenues have to factor in, right?

Shouldn’t the book value of the asset reflect future cash flow potential? But if the cashflow doesn’t happen, does anything change?

And how is commercial different than residential for this? Seems like companies are happy to drop rental prices or offer big incentives to try to fill units.
 
Based on my personal experience with appraisals (which can vary by appraiser).

Occupied space is calculated: actual rent times market occupancy rate
Unoccupied space is calculated: market rent times market occupancy rate
When it comes to actual vacancy (i.e. you're occupancy is less than market average), I usually see an increase in the cap rate to account for that risk (i.e. you want a higher potential return to own this asset), but this varies wildly by appraiser and I have seen owners exert a lot of pushback to keep the cap rate lower.

It's a bit of a shell game. It's easy to just use market rates, market occupancy and market cap rates (it's all potentially true) and just ignore the reality of your vacancies. Once you lock in a below market lease, you can't ignore that and the calculation will lower the valuation of the building. This impacts your potential sale price, plus any loans you collateralize the asset against.
 
bolo said:
Based on my personal experience with appraisals (which can vary by appraiser).

Occupied space is calculated: actual rent times market occupancy rate
Unoccupied space is calculated: market rent times market occupancy rate
When it comes to actual vacancy (i.e. you're occupancy is less than market average), I usually see an increase in the cap rate to account for that risk (i.e. you want a higher potential return to own this asset), but this varies wildly by appraiser and I have seen owners exert a lot of pushback to keep the cap rate lower.

It's a bit of a shell game. It's easy to just use market rates, market occupancy and market cap rates (it's all potentially true) and just ignore the reality of your vacancies. Once you lock in a below market lease, you can't ignore that and the calculation will lower the valuation of the building. This impacts your potential sale price, plus any loans you collateralize the asset against.
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Seems crazy to me haha. But having a few buddies in commercial real estate, I’m always amazed how it’s less data backed or logical than it might seem. Guess that’s just how it works. And why I think a tax that triggers a different calc, could be effective with the right protections to reduce demolitions and to moreso target newer projects.
 
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