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Senator Douglas. But it would be hard to get comparability with figures on a different basis. Will you submit a table showing the conversion ratios which you have used ?

Mr. HUESMANN. Yes.

Senator DOUGLAS. Are you comparing comparable things? You are comparing FHA projects for the country as a whole, are you not?

Mr. HUESMANN. No. These figures were arrived at in a conference at which a representative of the Federal Housing Administration, a representative of the Public Housing Administration and a representative of the Office of Administrator sat down and worked it out for a comparable area.

Senator DOUGLAS. What area did you take?

Mr. HUESMANN. We took an area of this middle-Atlantic portion of the United States.

Senator DOUGLAS. It wasn't confined, then, to Washington?
Mr. HUESMANN. It was not confined entirely to Washington; no.
Senator DOUGLAS. Was it primarily confined to Washington?

Mr. HUESMANN. It was confined primarily to the area probably within- I would not want to say exactly where it was confined to, because I was not at the conference—but I know they took an area bigger than the Washington area. I know they considered Baltimore and other nearby communities.

Senator Douglas. You will submit a statement, also, on the number of units in which self-service was largely provided for, upon which the estimate of $2.34 was largely based?

Mr. FOLEY. Yes, sir.

Senator Douglas. And the number of units included in the FHA provision of section 608?

Mr. FOLEY. Yes; we will furnish that. (The information referred to follows:)

The estimates of operating expenses of the 608 project unit were based upon the review of the operating experience of 54 walk-up apartment projects containing an average of 155.8 units per project or a total number of units in excess of 8,400. Walk-up apartment projects were chosen to provide a basis for estimating operating costs because such projects would be more comparable than elevator structures with the probable type of building constructed by cooperative or nonprofit organizations.

These projects were chosen from an area extending from New York and Chicago metropolitan districts on the north to Virginia on the south and to as far west as St. Louis, Mo. This area was chosen for two reasons: First, the major concentration of urban and nonfarm population is in the northeastern region of the United States and it is in such areas that cooperative projects are more apt to be located. Second, the northern part of New York State, New England, and the more extreme northern portions of the Midwest were eliminated because of the much higher costs due to climate. Likewise, the experience in the more southern regions of the country was not considered because of the much lower costs resulting from the milder climate.

The projects which were selected for review were those which had been in operation for at least two full years in order to have available cost information for an entire year other than the first such year after completion. The mortgages on the selected projects were insured under both section 608 and section 207 of the National Housing Act. Consequently, some of the projects had been in operation since before the war, others were completed during the war, and others shortly after the end of the war.

The following estimate was based on an item-by-item review of the major expense components. For each major expense category, a reasonable middle ground was chosen in view of the actual range of variation in the average expense item of each of the 54 projects. This examination included all of the operating cost data that were available for the year 1949 and reflects a small decline in

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some expense items that apparently occurred in most of the reporting projects during 1949. Administrative expense.

$4. 50 Utilities, including lighting of public space, miscellaneous power, utilities

(gas and electricity used by the tenant), water (hot and cold), fuel for heating, and pay roll--

10. 95 Repairs, maintenance, and replacements, including decorating, repairs,

grounds expense, miscellaneous maintenance, and maintenance pay roll.- 9. 16 Reserve for replacements..

2. 63 Operating expense, including janitorial service, and miscellaneous operating expense

2. 63 Insurance.

1. 03

Total.

30. 90 This operating cost estimate of $30.90 per unit per month was deliberately rounded downward to $30 per unit per month to insure against possible overestimating of operating expenses and an overstatement of the possible reduction in rent resulting from the proposed terms for moderate income cooperative and nonprofit housing.

The estimate of $24.40 per unit per month operating expense for the cooperative and nonprofit project was based upon the most recent national average operating expense of low rent public housing of $20.50 per unit per month. This figure includes administrative expense, all utilities and heat, repairs, maintenance, replacements, operating expenses, and insurance. On December 31, 1948, there were 636 projects, including PWA projects, with a total of 193,807 dwelling units.

With the national average figure as a base, upward adjustments were made to allow for any amount of services that a cooperative or nonprofit project might be expected to render that was greater than provided in a low-rent public housing project. For similar reasons, PH A actual utility costs were also adjusted upward. Additionally, upward adjustments were made to allow for the location of nonprofit or cooperative projects in the larger higher cost urban areas, with particular emphasis being given to the experience of the larger eastern urban localities within the area from which FHA experience was drawn. The resulting estimate is as follows on the assumption that in a cooperative or nonprofit project tenants would undertake to perform certain of the operating and maintenance functions which are performed by the management in the ordinary private operation. Estimated monthly operating expense per dwelling unit in a moderate income

cooperative or nonprofit project Administrative expense.

$3. 25 Utilities, including lighting of public space, miscellaneous power, tenant utilities, water, fuel and heating, pay roll..

8. 50 Repairs, maintenance, including decorating, repairs, grounds expense, and miscellaneous maintenance.

6. 03 Reserve for replacements.

3. 52 Operating services, including janitorial service, and miscellaneous operating expense

2. 00 Insurance

1. 00

Total..

24. 30 This estimate was rounded upward to $24.40 for use in the illustrative examples.

The estimate of the cost of replacements for a nonprofit or cooperative project unit of $3.52 is higher than the replacement cost of $2.63 per 608 unit per month because of the longer term of loan used for the cooperative project. The use of a longer term over which replacements are to be made requires the inclusion of more items of longer life in the estimate of cost. With the use of a 50-year term, the estimate for the 608 project would be raised substantially:

These estimates originally were made early in the spring of 1949, as the joint product of several officials of the Housing Agency. Every effort was made to arrive at estimates that would be comparable from the standpoint of location and from the standpoint of the general type and design of projects, i. e.,walk-up projects of the garden type. Exact comparability, of course, cannot be achieved because of differences in design, methods of operation, and services provided the tenants.

The estimates were reviewed within the past month, and a few downward adjustments in the estimate of operating expenses of a 608 project were made, as previously indicated.

60838-50-5

Further data which supports the estimate of $24.40 as a reasonable estimate in the case of cooperative projects is found in the actual experience of cooperative projects in New York City. These data are as follows: Operating expense estimate 1 for a 442-room unit based on the operating experience in 3 cooperative apartment projects located in New York City for the 12 months ending Aug. 31, 1947

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Number units in project Amalgamated Dwellings, Inc.

236 Amalgamated Housing Corp..

665 Farband Housing Corp..

130 1 The estimate of operating expenses of a 442-room unit hased on the per room figures of the smaller sized units will overstate the operating expenses to some extent of the larger units because operating costs do not increase in proportion with an increase in the number of rooms per unit.

Source: Annual report of the Commissioner of Housing, New York State, for the year ending Mar. 31, 1948.

Senator DOUGLAS. Now, we have discussed the interest rate this morning. On the question of amortization, do I understand correctly that you provide for approximately 33 years, in the case of private projects; and 50 years in the case of the cooperative?

Mr. HUESMAN. In the case of the private project the term is just under 33 years. It is 32 years, 7 months.

Senator Douglas. In the case of public projects; 50 years?
Mr. HUESMAN. Yes.

Senator Douglas. So that it is a difference between an average amortization rate of approximately 3 percent, or a little over, and two percent?

Mr. FOLEY. Yes. On the level rate, the 50 would be 2 percent. Mr. HUESMAN. A little over three on the other.

Senator DOUGLAS. It is 3.03, if my arithmetic is correct. So a saving of 1 percent in the interest there, or on an $8,000 unit for housing costs per family, $80 a year, or roughly $7.60 a month.

Do you feel certain that you are on firm ground there; that the actual physical depreciation would be so much greater in the case of FHA, and section 608, building, as here?

Mr. HUESMAN. You mean, to account for the difference in term?

Senator Douglas. No; your difference in charges comes from a difference in concept as to the physical life of your structure. In one case you estimate 33 years for the private, but you estimate 50 years for the cooperative venture.

Now, what I am asking is: How firm is that figure?

Mr. HUESMAN. You want to know wherein we think there is that much difference between the two types of project?

Senator DOUGLAS. Yes; and what is the evidence to indicate that?

Mr. HUESMAN. I think that the difference is not entirely related to the rate of actual physical depreciation. I think it is more a matter of policy. I think Mr. Greene could answer that for the FHA.

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Senator Douglas. I can understand the argument, as Mr. Foley said this morning, that a tenant does not naturally have the same interest in keeping up a building that a cooperative tenant does. I can understand that. No man ever shouldered a gun in defense of a boards inghouse. I suppose it is probably true that you don't keep up rented places the same way you keep up housing in which you have a stake. But you provided for a difference of 16 years. That works out into quite a figure per month. It works out into a difference per month of almost $7.

I am trying to get at facts to see what is the solid basis for these estimates.

Mr. FOLEY. Would you care to have Mr. Greene discuss it?
Senator DOUGLAS. Y es.

Mr. GREENE. Before we had section 608 we had a declining annuity basis in which there was a level principal and a declining interest payment, as you went along. That was the more economical pro

, cedure. When we came into section 608 we had a level annuity which meant that your early payment of principal was low, but it increased as you went along, as your interest decreased. We did that in order that the rent could be lower in the early stages of the operation. In other words, we do not feel that section 608 is limited to the economic life of the 32 years, 7 months.

Mathematically the 1.5 percent on that basis pays off the mortgage in 32 years, 7 months.

Senator DOUGLAS. Now, what we have is a double factor. have amortization determined not merely on the physical rate of depreciation, but also some idea as to the rate which you should apply to cut down the principal and get the building out of the debt, so to speak. Can you segregate your figures? Instead of saying interest and amortization are lumped together, coming to a total of $25.83 in one case and $33 in the other, almost 40 percent of the total cost; instead of having that covered under a blanket figure, could you submit that to show the effect of differences in the interest rate and differences on physical depreciation?

Let's put it this way: If this adjustment that you make in the rate of depreciation is purely a bookkeeping adjustment, does it come out of differences in operating economies? You can make it for one as you can for the other.

Mr. Foley. May I point out that it was not the intent in presenting this to present anything other than the factual situation. Not to draw a comparison as to what the possibility might be if you apply different terms.

Senator DOUGLAS. Here is the crucial issue: If these figures can be believed, we can cut the monthly rental from $90 to somewhere around $65 for comparable accommodations, or effect savings of around $300 a year. You make decent housing possible for people whose incomes are $1,500 less per year than they would have to be if they got it under 608.

Now, I want to find out how solid these figures of reductions in cost are. It now turns out that this lower annual provision for amortization is not merely a difference in the actual physical rate of depreciation, but it is some intangible third force that Mr. Greene started to explain, and which I confess is not perfectly clear.

Mr. GREENE. May I add, using the same type or amortization in both cases, that your difference would be the difference in the debt service which would be reflected in the lower interest rate in the one case.

Senator DOUGLAS. That comes out of the 50-year, as opposed to the 32.

Mr. FOLEY. Yes.

Senator Douglas. Could you isolate the savings made in the debt service?

Mr. FOLEY. We could apply the same type of amortization to both cases.

Senator DOUGLAS. You can apply the 4-percent interest rate to the cooperative figure or apply the 3.25 and 3.5 to 608?

Mr. FOLEY. We can do that.

Mr. GREENE. Then the difference will show up exactly. The difference in this case would reflect in the difference in the interest rate.

Senator DOUGLAS. Then that is a derivative, so to speak, a derivative advantage, of the interest-rate factor?

Mr. GREENE. Yes; I am assuming that using the same amortization basis that your debt service would only be affected by your interest rate.

Senator DOUGLAS. I hope that your agency will not rest content with this 1-page table that you have submitted to us, but that you justify each item in some detail. e Mr. FOLEY. We will be glad to submit any detail that the committee wishes.

Senator DOUGLAS. Of course, that could be made part of the record?

Senator SPARKMAN. It will be incorporated in the record at this point; such detail as the Senator has asked, and any other detail that the committee may wish.

(The information referred to follows:)

The savings in debt service that result from the lowering of the interest rate and the lengthening of the loan term from the current terms used for mortgages insured under section 608 are shown in the following tables. Amount of savings, per dwelling unit per month, for an $8,000 442-room unit with

a 90-percent mortgage insured under section 608, resulting from selected lowered interest rates and longer terms

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The following table shows the dollar amounts of debt service on a $7,200 mortgage loan on the basis of the various interest rates and loan terms and the resulting differences in rental rates.

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