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Senator DOUGLAS. Are you saying that in the past there has been an actual average vacancy of 10 percent?

Mr. FOLEY. There have been in many projects in the past.
Senator DOUGLAS. Is that an average for the past?

Mr. Foley. I wouldn't say an average. It was in many cases used in the industry in the lending field as a factor.

Senator DOUGLAS. Let's see. You mean the vacancies didn't exist, but private industry raised the rents as though they did; that there was a market for a nonexistent cost?

Mr. FOLEY. No; I am not saying that because I don't know that to be the case.

Senator DOUGLAS. That may be true.
Mr. FOLEY, It may be.
Senator DOUGLAS. I have heard it alleged to be the case.

We have $4 a month on that item. I want to see whether it is an illusion or whether it is a reality. If it is a reality it is an advantage. If it is an illusion, we won't be able to realize on it.

Mr. FOLEY. Mr. Greene reminds me that the 7-percent allowance is not necessarily a reflection of actual vacancy. It also reflects loss through failure to collect rents, and so forth.

He points out in the present cooperative operation in the FHA they are using a 3-percent ratio.

Senator DOUGLAS. Let's get down to the nub of the issue: Is it the practice of the real estate industry to have a given mark-up for vacancies irrespective of whether or not those vacancies exist? Is there a general practice in the industry that the rent shall be adjusted on a given percent?

Mr. THOMAS. It is proven experience. You talk to your people in the city of Chicago. Historically, you have to include vacancy factors.

Senator DOUGLAS. How much has it been?
Mr. Thomas. Fifteen percent on industrial buildings.

Senator Douglas. This estimate of 7 percent, then, isn't an illusion? That is fine. It is solid ground, then.

Mr. FOLEY. That is right.

Senator Douglas. What ground is there for thinking you will have only a 3-percent vacancy loss factor in the cooperatives?

Mr. FOLEY. The nature of the cooperatives, themselves, since those who will be occupying them will be themselves the owners of the project. Consequently, their tenancy is certainly to be expected to be much more stable.

Senator DOUGLAS. There are cooperatives in New York; the clothing unions have cooperative apartment houses. What has been their vacancy factor?

Mr. FOLEY. I don't believe I could quote them to you, Senator.

Senator DoUGLAS. Would you be willing to have one of your assistants help you?

Mr. FOLEY. I don't know whether anyone here has that information. I will be glad to get it.

You are referring to the Amalgamated?

Senator DOUGLAS. What is their experience record? There are a number of cooperative ventures. This is not merely a European experiment. In the cooperative experience that we have, what has been the average? Is there enough experience so that a statement can be made?

Mr. FOLEY. I doubt that there is enough experience of the type of cooperative which is a true, pure, all-the-way cooperative as contemplated here.

While there have been some hundreds of co-ops in this country, they have been of all varieties, and cooperatives going only part the way, cooperatives to get the land, cooperatives to build, cooperatives for getting various services, materials, and so forth. Relatively few on the basis of the pure cooperative such as is here contemplated. What we do have here, in the 3 percent vacancy allowance, is based upon the best information we can get on experiences of that type.

Senator Douglas. You don't seem to come out with any definite facts. Will someone submit a memo?

Mr. FOLEY. We will be glad to.

Senator DOUGLAS. On what the actual vacancy rate has been. Until we get that, it is a generality, it is a hope, but it is not a reality.

Mr. FOLEY. I will be glad to submit a memo on such experiences as are available.

(The material referred to follows:)

VACANCY LOSSES IN COOPERATIVE HOUSING PROJECTS The loss of rental income through vacancy in the three cooperative housing projects operating under the New York State limited dividend law amounted to 2.64 percent of the gross rental of the apartments from the inception of the projects through August 31, 1947. The vacancy experience of the individual projects vary over a wide range as is shown in the following table which lists the total gross rental and gross vacancy through August 31, 1947:

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In addition to the dollar loss of rent through vacancy of dwelling units, there was reported for the apartments in the project rent loss and allowances that totaled $7,469.50 over the life of the projects and amounted to less than one-tenth of 1 percent of the gross rental. Including the rent loss and allowances, the total vacancy rate for apartments in the three cooperative projects was 2.65 percent.

The total vacancy of all 10 limited-dividend housing corporations under the supervision of the New York State Division of Housing over the life of the projects amounted to 1.96 percent of gross rental. However, three projects which began operations in late 1934 or 1935 accounted for about $25,824,000 of the total gross rental of $41,806,000, yet had a vacancy loss of 1.33 percent since the inception of the projects. In the year ended August 31, 1947, the 10 limited-dividend corporations had a vacancy loss from apartments of only 0.06 percent, and only one of the cooperatives, Amalgamated Dwellings, Inc., had any vacancies. In this project, the vacancy rate also was 0.06 percent.

City and Suburban Homes Corp., a limited-dividend corporation owning and operating a substantial number of low-rent projects outside the supervision of the New York State Division of Housing, had vacancy losses over a 42-year period ended in 1938 of less than 4 percent from the combined projects. Losses from uncollectible items during the same period amounted to less than 0.5 percent of gross chargeable rents. The peak losses occurred in 1934 when vacancy

amounted to about 16 percent of potential rental income and loss due to uncollectible items was 2.5 percent.

The vancancy allowance used in computing rental rates includes not only loss of potential income through dwelling units remaining vacant, but losses in income resulting from uncollectible rents, concessions to tenants, and losses resulting from tenant turn-over-which is costly to the project ownership when there is sufficient vacancy to create competition for tenants. Since a project, when the rental rate is estimated will have a long life and probably a long term to any financing on it, the vacancy allowance should reflect the expected probable proportion of scheduled rent that will not be collected during the life of the project or at least during the term of any financing on the project. Consequently, the vacancy allowance used in estimating the scheduled rent of a project or unit only will coincide with the actual vacancy rate in a locality or market occasionally. Generally, the actual vacancy rate in a locality will be above or below the vacancy allowance rate used in estimating the schedule rate. Over a long period of time, however, the average of the actual vacancy rate and other rent losses in a project and the vacancy allowance rate used in estimating scheduled rent should approximately coincide, if the vacancy allowance rate used in the estimate has been forecast with reasonable accuracy.

The vacancy allowance of 3 percent used in estimating the scheduled rental rate of the cooperative or nonprofit unit appears reasonable in light of the actual experience quoted above and the purpose of the vacancy allowance. ALLOWANCE FOR VACANCY AND BAD DEBT LOSSES IN SECTION 608 RENTAL

HOUSING PROJECTS In setting up rent schedules for section 608 insured projects the FHA permits mortgagees to provide for the possibility of a 7-percent loss in rental income as a result of vacancies, uncollectible accounts, rent concessions, etc. Such an allowance is based upon actual operating experience of rental housing projects over a long term of years. It reflects a conservative evaluation of the best available experience of the industry as to what the losses of rental revenue can be expected to average over the term of the mortgage. It takes into account, therefore, the probable effects of cylical swings upon occupancy and rental revenues of an apartment project over a period of more than 30 years. It is not, in any sense, a reflection of the situation in any one year. The magnitude of the swings in actual vacancies over relatively long spans of time are well known. The Construction Industry, a study made by Tri-Continental Corp. in 1939, for example, shows that from a low point in 1923 residential vacancies increased more than fivefold during the next 10 years. The rate has subsequently declined again to below the 1923 level. The effect of these wide fluctuations in vacancies is clearly reflected in the operating revenues of rental projects studies by Federal Housing Administration in its survey of apartment dwelling operating experience in large American cities. This shows that during the depression years of the 1930's the decline in revenues from the levels of the low vacancy days of the 1920's in New York apartments averaged 40 percent for elevator apartments and 20 percent for walkup apartments. These declines are traceable to increased vacancies, to rent concessions, and to a stepping up in uncollectible accounts.

What such a situation can mean over a period of years is indicated by the testimony of F. W. Ecker, president of the Metropolitan Life Insurance Co., before the Temporary National Economic Committee of the Seventy-sixth Congress. Speaking of the experience of Metropolitan with its Sunnyside project over a 16-year period, 1922 through 1938, Ecker stated that the average percentage of loss through vacancy over the entire period was 8.12 percent or slightly higher than the 7 percent allowed by FHA for its section 608 projects.

In answer to the question as to "what should be the maximum vacancy allowable in determining the income of property for mortgage purposes?”, Ecker replied that the Metropolitan Life customarily used 10 percent. Another indication of the general acceptance of a vacancy rate of as much as 10 percent is to be found in the Federal Housing Administration's report, Four Decades of Housing with a Limited Dividend Corporation. This study deals with the activities of the City & Suburban Home Co. which has been active in the limited dividend housing field since 1896. In setting up its rent schedules the City & Suburban Home Co. includes "an amount sufficient to provide a vacancy allowance of 10 percent." To illustrate the extent of the cyclical fluctuation in vacancies and the need, therefore, for a long-term average of 10 percent, the report refers as follows to the experience of certain of the projects:

"In the 1920's, little or no vacancy loss was incurred by any project. cent depression years caused the greatest inroads. The Tuskegee-Hampton,

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East Seventy-third Street, East River Homes, and Dudly Homes developments all suffered vacancy losses amounting to as much as 25 percent or more in some one year since 1932 and 20 percent or more in 2, 3, or 4 of the years since that time. The loss in the large Avenue A project has exceeded 10 percent in 5 of the years since 1932, and almost reached 20 percent in 1934."

Material compiled by the Office of Price Administration on rental-housing operations, January 1939 through June 1943, further substantiates the fact that vacancy losses play a very significant role in the income and expense experience of rental-housing projects. Thus a study of operating records of apartment houses in 25 cities disclose that not until 1942, by which time housing was at a premium, did vacancy losses drop below 7.9 percent. Vacancy losses for apartment houses in 25 cities

Percent of

rental income 1939.

9. 9 1940.

10. 2 1941

7. 9 1942.

4. 5 1943 1

2. 5 112 months ending June 30, 1943. Source: Office of Price Administration, Rent Department.

With vacancy losses running 8 to 10 percent of rental incomes in relatively prosperous years like 1939, 1940, and 1941, there can be little question but that in the depression years which preceded, the vacancy losses for these cities must have been at least as severe as those experienced by the City & Suburban Home Co. in New York.

The FHA allowance of 7 percent for vacancy losses actually presupposes a more favorable occupancy and rent-collection experience than that experienced by either Metropolitan Life or City & Suburban Home in the projects mentioned above. It would also appear to look to a better experience than what has probably been the long-range experience of the apartment houses covered in the Office of Price Administration's 25-city study.

Senator DOUGLAS. May I now turn to the question of operating costs? You give the operating costs at $30 a month for privately owned units under section 608, and operating costs of $24.40 under the cooperatives, or a difference of $5.60, roughly 18 percent.

Now, how did you get this 18-percent saving on the operating costs?

Mr. FOLEY. The footnotes on the table that you have, Senator, point out that the operating cost figures used are based upon the experience in Public Housing Administration of similar types of

operation in which tenant maintenance and participation in the operational services has been tried out, over some period of years, and I think in some considerable number of projects; and that has a basis in experience.

Senator Douglas. In other words, the field of examination consists of the PHA projects.

Mr. FOLEY. That is the best experience we have.

Senator Douglas. Then you divide those into two groups: First, where operating costs such as janitor service are provided by the Housing Authority and, second, where it is primarily provided by the tenants; is that right?

Mr. Foley. In general, that is right. It is also due, in part, of course, to the fact that the less elaborate services are furnished in public housing than in private rental projects operated for profit. I don't know all of the details of the table, Senator, on which this is developed, but it is the actual experience of the PHÁ.

Senator DOUGLAS. A difference of around $5.60 a month. In what way would that come. Does this mean individual heating? If you have central heating, you can't very well have self-service in heating.

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Mr. FOLEY. The gentlemen who made up the detailed experiencesI don't know whether they have that detail here or not. This, I think, will give you what you want of the detail of the PHA experience.

Mr. HUESMANN. The Public Housing Administration figures are based on the project in approximately the Washington area, and are broken down in this manner

Senator DOUGLAS. How many housing units?

Mr. HUESMANN. It was an average of larger projects; but it was broken down here-

Senator Douglas. How large was the sample?

Mr. HUESMANN. I am sorry, I cannot answer that because I was not in on the conference.

Senator DoUGLAS. It makes a difference whether you have a sample of thousands of cases or merely a sample of a few score cases. This would probably run up toward several thousand units?

Mr. HUESMANN. That is right; this would probably run up toward several thousand units.

Senator DOUGLAS. Will you submit a statement on that?
Mr. HUESMANN. I will find out exactly how many it was based on.
(The information requested will be found on p. 60.)
Mr. SPARKMAN. Very well.

Mr.HUESMANN. The administrative expense would amount to $3.25. Utility, including the heating of public space, the utilities used by the tenant for cooking and lighting within the dwelling unit, water, the fuel for heating and the pay roll amounted to about $8.50 per dwelling unit per month. Repairs, maintenance, reserves for replacement, including decorating, repairs, miscellaneous maintenance, about $9.55 per unit per month. Operating services, including janitor service and a small amount of miscellaneous operating expenses, $2 per unit per month. The insurance, including hazard and public liability, I believe, about $1 per unit per month.

Senator DouglAS. The total?
Mr. HUESMANN. The total is $24.30.

Senator DoUGLAS. Those are where a large portion of the operating expenses are met, and a large part of the operating services are performed by the tenants themselves?

Mr. HUESMANN. That is true. In part, it is due to that, and in part it is due to the fact that less services are furnished in public housing than in private rental projects operated for profit. May I say, Senator, there is also a factor in the difference or type

of service, that are expected in a rental project conducted for profit, as against those that are cooperatively owned by its own people, and which they would demand of themselves.

Senator DOUGLAS. Your figure of $30; where does that come from?

Mr. HUESMANN. Those are FHA projects. I have the break-down on that.

Would you care for that?
Senator DOUGLAS. Yes.

Mr. HUESMANN. There is some difficulty in presenting this material because it was estimated in detail on a basis of per room, per year.

Senator DOUGLAS. The other is on the basis of a 4.5-room unit. Mr. HUESMANN. Per dwelling unit per month.

This was transferred at a 4.5-room rate. I can make a statement of detail.

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