considering to meet this need: a possible adaptation of the public housing program under which local authorities might purchase and remodel homes, then make them available on a rent-option basis to those of its tenants capable of assuming the responsibilities of homeownership.

Farm labor centers

These farm labor centers are used for the housing of migrant and permanent agricultural labor and are leased under a 20-year purchase and sale contract between the Public Housing Administration and local housing authorities. The local housing authorities are required to underwrite all deficits but must submit all net proceeds to the Public Housing Administration. Local housing authorities are also prohibited from rehabilitating or replacing units in these centers. This association feels that these centers could be operated more efficiently and provide more habitable housing if they were relinquished to the local housing authorities.

URBAN RENEWAL

S. 1800 recognizes that the original $500 million capital-grant authorization is now almost completely committed, and therefore it provides for an additional $400 million over the next 2 years plus $100 million to be authorized by the President whenever he sees fit. If the Congress wants the urban renewal and urban redevelopment programs to continue, it is essential that additional capitalgrant authorization be provided in this legislation. Without it, our communities will be unable to undertake any additional urban renewal and urban redevelopment projects. This program offers our cities a real opportunity to remove slums and to improve housing conditions. Many cities have already undertaken slum-clearance projects but others are just getting underway. Without additional capital-grant authorization, such a program would be impossible in most of our cities.

Title I

In operating under the Housing Act of 1954, we have found two areas where a change in the law would improve the operation of the program. The first of these has to do with planning advances. If a city wishes to participate in the urban renewal program, it submits an application to HHFA, asking for a planning advance in order to plan the project. Under the urban renewal concept, many of these projects will involve rehabilitation as well as slum clearance and redevelopment. The wording of the present law is such, that HHFA says it is necessary that in the application for the advance, the city determine before it receives its planning advance, the areas to be cleared and the areas to be rehabilitated. This means in effect that the city must plan its project before it receives the planning advance. The purpose of the advance is to make studies in the area to determine how various portions of the area should be treated; that is, whether they should be cleared or rehabilitated. But the city must now make these determinations before it receives the advance.

We would recommend that the language of the Housing Act of 1949, as amended, be changed to make it clear that the city does not have to make these determinations prior to applying for an advance but can use the planning advances to make the studies necessary to decide how portions of the area should be treated. We have language if you wish to have it.

The second change in the law to improve the operation of the program has to do with the rehabilitation and conservation portions of the program, the part added by the Housing Act of 1954. In an area to be rehabilitated or conserved, the city has two tools to see that owners bring their properties up to the standards set for the area. One of these is intensive enforcement and inspection within the area, a much more intensive operation than carried on in other parts of the city. The second tool is the provision of technical advice and assistance to owners and tenants in advising them on how to improve their property. The city will have to employ architects and financial advisers to meet with owners and tenants and advise them on how to meet the standards set for the area, how they can finance the improvements, and what they can expect such improvements to cost. Most of these owners and tenants will need this kind of advice; for without it, they may overextend themselves financially or undertake improvements that do not meet the standards set for the area.

In the present law, there is some question whether the latter item, technical assistance, may be included as part of the cost of the project, and HHFA has ruled that the former item, inspection, and enforcement is definitely not a part of the cost of the project. Since both of these items are relatively costly, we

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would recommend that the law be changed to make it clear that both technical services and inspection and enforcement services in the urban renewal area may be included as part of the cost of the project. We have specific language on these changes if you would like to have it.

Section 220

In our testimony last year on the Housing Act of 1954, we stated that section 220 would provide an excellent vehicle for the financing of multifamily redevelopment projects on cleared land. We felt at that time that by providing a new section and by eliminating the "economic soundness" requirement and substituting "acceptable risk" that the problems of FHA valuation for redevelopment projects would be eliminated. In practice, however, we find that this has not been the case. Because these projects are in central areas and the surrounding environment has not yet been improved, FHA still finds it difficult to establish a value commensurate with replacement cost. We feel that these projects are large enough to be self-sufficient, providing in effect their own environment and that they should not be penalized with a reduced valuation because of their location. Under FHA's present application of the value concept, the builder receives something less than a 90-percent mortgage on his structure.

Since Congress wrote cost certification into the Housing Act of 1954, it is now impossible for the builder to mortgage out. The mortgage is 90 percent of either the estimated value or his certified costs, whichever is the lesser. In one instance the value concept is applied; in another, the cost concept is used. It would seem logical to us to replace "estimated value" with "estimated replacement cost." In no case could the mortgage exceed 90 percent of certified costs, and it would be less if FHA's "estimated replacement cost" were less than certified costs. The inefficient builder would have to have more cash in the project; the efficient builder would merely increase his equity. His mortgage would be reduced because he would be able to build more efficiently; his certified costs would be less than estimated replacement costs.

By substituting "estimated replacement cost" for "estimated value" in section 220, FHA would not feel compelled to reduce value because of the environment. Builders would be able to obtain a true 90 percent mortgage. With the kind of valuation FHA now applies to redevelopment projects, not many builders find it attractive to build redevelopment projects. Section 220 has not become the financing vehicle for 220 projects that we anticipated. We have specific language if the committee wants it.

There is one other item under section 220 that has given us difficulty in obtaining builders for our redevelopment projects. No changes in the law are necessary, but congressional recognition of the problem would help HHFA and FHA in meeting the problem administratively. The question has to do with those instances where the builder and mortgagor are one and the same; the usual situation for builders of multifamily, rental housing. The Housing Act of 1954 states that under cost certification, costs may include a reasonable allowance for builder's profit. Your committee's report of the bill stated that 10 percent should be the maximum.

We have found, however, that FHA has been very conservative in interpreting "reasonable allowance," and 5 percent seems to be the maximum they are permitting on large projects.

Somehow there seems to be a misconception of builder's profit. Some seem to have the impression that the builder walks off the job with this amount of cash in his pocket. The opposite is true. Builder's profit is merely the equity the builder creates by building the project, by managing and supervising the construction without charging a general contractor's fee, and by taking the entrepreneurial risks. He can receive this profit only from the earnings of the project. In fact, even with a full 10-percent allowance for builder's profit, the builder still must have cash in the project equal to roughly 3 percent of the cost of the project. When this allowance is reduced to 5 percent, the builder must have cash in the project equal to close to 7 percent of the cost of the project. The amount of the allowance for builder's profit merely determines how much cash he has to have in; the lower the percent, the greater the cash.

If the builder is required to have cash in the project equal to some 7 percent of the cost of the project, he is not likely to be an enthusiastic bidder for these redevelopment projects. He will look elsewhere for more attractive ventures. He will build luxury rental housing, sales housing, motels, hotels, shopping centers, and so forth. He will be attracted to these ventures, for the opportunity of return will be considerably greater. He will be discouraged from undertaking

redevelopment projects, for his cash as well as his profit must be paid from the earnings of the projects. It will take him quite a while to get his money out; and if he uses up his cash in this manner, he will be out of business.

In short, Congress with cost certification, made it impossible for builders to mortgage out; builders under 220 must have cash in the project. But an overly conservative policy on allowance for builder's profit means that the amount of cash required is so great that builders will not be willing to undertake these projects. A congressional statement on the desirability of a more liberal interpretation of this provision would be helpful.

If the committee would like to see an example of how the builder's profit is computed and the effect of allowing both 5 and 10 percent, we have copies of such an example, and will be glad to make them available to the committee.

As I said earlier, Mr. Slayton will be glad to answer questions on the urban renewal program and section 220. Thank you.

Senator SPARKMAN. The committee will stand in recess until 10 o'clock tomorrow morning.

(Whereupon, at 12:45 p. m., the subcommittee was recessed, to reconvene at 10 a. m., Thursday, May 19, 1955.)

HOUSING ACT OF 1955

THURSDAY, MAY 19, 1955

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON HOUSING,
Washington, D. C.

The subcommittee met, pursuant to recess, in room 301, Senate Office Building, at 10:05 a. m., Senator John Sparkman (chairman of the subcommittee) presiding.

Present: Senators Sparkman, Lehman, Capehart, Bush, and Payne.

Senator SPARKMAN. Let the committee come to order, please.

We are starting this morning with Gen. Curtis E. LeMay, commander of the Strategic Air Command, as our first witness. General, we are glad to have you with us.

Military housing

STATEMENT OF GEN. CURTIS E. LeMAY, COMMANDER IN CHIEF, STRATEGIC AIR COMMAND

General LEMAY. Thank you, sir.

Senator SPARKMAN. You just proceed in your own way, General. General LEMAY. I have a prepared statement I would like to read. Senator SPARKMAN. Fine.

General LEMAY. Mr. Chairman and members of the committee, I have been asked to express my views to this committee on how the shortage of adequate housing affects the combat capability of my command.

I am particularly grateful for this important opportunity. For a number of years I have been in the position of demanding that my people work long hours under constant pressure to insure that we are ready to fight if the time comes. I have been able to give them comparatively little in return for their devotion to duty-a devotion which is responsible in a large measure for the combat capability we now enjoy.

It will please them to know that I have been able to appear before you to discuss a problem that is so very important to them-a matter actually of great importance to us all.

The lack of adequate housing on or near Strategic Air Command bases has three inevitable, immediate, and direct bearings on the ability of this Nation to survive a major nuclear war, and has in addition a long-range effect on our capability to build and maintain a professional force.