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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 472-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. understand that. No man ever shouldered a gun in defense of a board

a 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 à 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. Yes.

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 procedure. 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.. We 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.

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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.

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 $8,000 472-room unit with

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

Reductions per unit per

month in

Debt service

Rental rate

Changes in mortgage terms from 4 percent for 32 years,

7 months to-
33 years at 342 percent..
33 years at 3/4 percent.
33 years at 3 percent..
50 years at 4 percent.
50 years at 342 percent.
50 years at 3/4 percent.
50 years at 3 percent.

$2. 20
3. 22
4. 21
5. 14
7. 50
8. 64
9. 74

$2.36
3. 46
4. 52
5. 52
8. 06
9. 29
10. 47

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.

Comparison of estimated gross monthly rental on an $8,000 472-room unit financed under proposals for nonprofit and cooperative housing for

families of moderate income and with a 90-percent mortgage insured by FH A under sec. 608 on a privately owned (for profit) project at selected mortgage terms and interest rates

$84. 80

2 5.94

78. 86

4 30.00 3 10.67

40.67

38.19

14 27.86
15 3. 00

30. 86

17 7.33

3 Operating expenses-including all utilities and a reserve for replacement--of $24.40 per unit per month, assuming same experience as on PHA low-rent housing assisted under USHA Act.

These figures for estimated operating expenses represent actual operating experience on large-scale rental-housing projects insured by the FHA, adjusted to reflect what in the opinion of FHA represents a national average operating cost on a well-run project, including utilities used by the tenants.

Sec. 608 project at

Moderate-
income coop-
perative or
nonprofit
project

50 years, 50 years,

Current
terms

33 years, 33 years, 50 years, 3 percent 33 years, ! 344 per

342 per

3 percent cent cent

3-4 per

322 per

50 years,
4 percent

cent

cent

Income:

Gross dwelling income
Less vacancy allowance

$64. 67
11. 94

$90. 32
2 6. 32

$85. 80
26.01

$86. 86
26.08

$87.96
2 6.16

$79.85
2 5. 59

$81.03
2 5. 67

$82. 26
2 5.76

62. 73

84.00

79. 79

80. 78

81.80

74. 26

75. 36

76.50

Gross income expectancy.
Operating expenses and taxes:

Operating expenses.
Real estate taxes.

3 24. 00
6 10. 67

4 30.00
5 10. 67

4 30.00
5 10. 67

4 30.00
8 10. 67

4 30.00
3 10.67

4 30.00
5 10. 67

4 30.00
5 10. 67

4 30.00
5 10. 67

Total.

35.07

40.67

40.67

40. 67

40.67

40. 67

40. 67

40. 67

Cash available after operating expenses and taxes

27.66

43. 33

39.12

40.11

41. 13

33. 59

34. 69

35.83

Debt service:

Interest and amortization. 12 percent on outstanding balance

0 25.83

7 33.00
15 3.00

8 28. 79
15 3.00

9 29.78
15 3.00

10 30.80
15 3.00

11 23. 26
15 3.00

12 24. 36
15 3. 00

13 25.50
15 3.00

Total debt service

25. 83

36.00

31. 79

32, 78

33. 80

26. 26

27.36

28. 50

Cash available after debt service.

16 1.83

17 7.33

17 7. 33

17 7.33

17 7. 33

17 7. 33

17 7. 33

17 7.33

1 Vacancy reserve of 3 percent used in view of cooperative feature and low rental rate. 2 Vacancy allowance of 7 percent.

• Real-estate taxes at 1.6 percent annually on total cost.

Loan at $8,000 for 50 years on a level annuity basis.
! Includes principal and interest payments on a $7,200 mortgage at 4 percent for 32 years, 7 months, on a level-annuity basis.
8 Includes principal and interest payments on $7,200 at 3 percent for 33 years on a level-annuity basis.
Includes principal and interest payments on $7,200 at 374 percent for 33 years on a level-annuity basis.
10 Includes principal and interest payments on $7,200 at 342 percent for 33 years on a level-annuity basis.
11 Includes principal and interest payments on $7,200 at 3 percent for 50 years on a level-annuity basis.
1. Includes principal and interest payments on $7,200 at 344 percent for 50 years on a level-annuity basis.
18 Includes principal and interest payments on $7,200 at 343 percent for 50 years on a level-annuity basis.
14 Includes principal and interest payments on $7,200 at 4 percent for 50 years on a level-annuity basis.
18 Mortgage-insurance premium of one-half of 1 percent of the outstanding balance.
16 Contingency reserve of 3 percent of taxes, operating expenses, and debt service,
17 Funds available for income tax, reserves, and dividends.

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The allowance for real-estate taxes of 1.6 percent annually on the estimated total cost or appraised value was estimated on the same basis as the operating expenses. The actual taxes paid by 608 and 207 projects in the area covered in the operating expense estimate were reviewed, and a middle ground was chosen which resulted in an average relationship to estimated cost of 1.6 percent annually. The question of the level of taxes was considered in the same meeting and by the same staff members of the Federal Housing Administration, the Public Housing Administration, and the Office of the Administrator, Housing and Home Finance Agency that considered operating expenses. The level chosen appeared reasonable in view of the available experience, but is not typical of areas with either high or low levels of real-estate taxes. This percentage was set up in relation to estimated cost or appraised value and not assessed value, which is often a smaller amount than cost. Thus, if the assessed value of a project were 50 percent of estimated cost, the allowance for taxes would amount to 3.2 percent of assessed value.

The cash available after debt service was estimated by providing a 672 percent after the payment of operating expenses and real-estate taxes, which on an $8,000 unit would amount to $43.33 per month. Out of this amount, the debt service, which includes monthly payments on interest and principal and the mortgageinsurance premium of one-half of 1 percent on the outstanding balance of the loan, must be paid, leaving a balance of $7.33 per unit per month. From this balance the owning corporation must pay the Federal income tax of approximately 38 percent of net taxable income, any State or local income tax and corporate or business tax, the amount of which would vary between States and localities. Additionally, any reserves other than for replacements must be established out of these funds.

The estimating of amounts for the items that are to be paid from the $7.33 balance is difficult. For example, the amount of the Federal income-tax liability would increase each year as the interest paid on the outstanding balance decreased so that toward the end of the term of the mortgage loan a substantial proportion of this balance would be used for paying Federal income tax. Without assuming a definite location for a project, the amount of local or State income tax, if any, and of corporate and business taxes that have to be paid are indeterminate. The exact allocation of the balance of $7.33 to taxes, reserves, dividends, and mortgage prepayments does not appear feasible. However, the methodology of permitting a 672 percent return on the estimated cost of the operating expense and real taxes was that administratively adopted in conjunction with rent control shortly after the war.

The 3 percent allowance for contingencies used in estimating the rent level of a nonprofit or cooperative housing project was set up to provide funds for any reserves deemed desirable, a possible underestimation of operating expenses if such should prove to be the case, any State or local business tax which the organization might have to pay, and the small amount of income tax which a cooperative may have to pay. Three percent of operating expenses, real-estate taxes, and debt service was deemed reasonable for this purpose. If the amount of the contingency allowance is larger than required, the excess may be returned to the occupants of the units as rent rebates, and if it is too small the rental rate would have to be increased.

Senator SPARKMAN. Are there any further questions? ?
Senator DOUGLAS. No; no further questions.

Senator MAYBANK. I notice this book has a great deal of information in it.

Mr. FOLEY. That is a report of the Department of Labor. It is one of a series of at least two that I have seen which is very informative.

Senator MAYBANK. Yes; I wouldn't ask permission to put the whole thing in the record, but I might suggest that the staff look this over and whatever is directly affecting the questions I have asked or Senator Douglas has asked, that a résumé be made of it and put in the record.

(The information referred to follows:)

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