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. The recent depression years caused the greatest inroads. The Tuskegee-Hampton, 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 1939. 1940_ 1941 1942 1943 1 Percent of rental income 9.9 10. 2 7.9 4. 5 2. 5 1 12 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 HomeCo. 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 PHA. 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. 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. 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 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 some expense items that apparently occurred in most of the reporting projects during 1949. Administrative expense. 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.. $4.50 10.95 9. 16 Repairs, maintenance, and replacements, including decorating, repairs, grounds expense, miscellaneous maintenance, and maintenance pay roll. Reserve for replacements__ 2. 63 Operating expense, including janitorial service, and miscellaneous oper- 2. 63 1. 03 Total___ 30.90 This operating cost estimate of $30.90 per uņit 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, PHA 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 2.00 1. 00 expense. Insurance 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 |