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and that this is somewhat balanced out by their ability to earn a substantially higher income by reason of a more favorable location to a downtown office building. In one of our largest and most modern first-class office properties are housed 7,549 persons. This property has the highest base rental rate in Cleveland. The average rental cost per person, including cleaning and all the other services which go with such occupancy, is $32.28 per month. In many small buildings this cost is less than $20 per person per month. Office rentals paid by several large corporations with headquarters in our buildings, according to their published annual report, represent less than one-fourth of 1 percent of their total expense. A modest adjustment of this business rental expense, either up or down, would not in any way affect the cost of living. This is indicative of the great service that Cleveland office buildings render to business in meeting its office space requirements at a comparatively nominal expense, which does not involve any sizable capital investment on the part of the tenant.
The major and substantial cost of doing business is the item of salaries and wages. By comparison, rentals are a relatively small fractional part of business expense.
Rentals do not add appreciably to the cost of living nor to the inflationary spiral. As a matter of fact, office building rentals and office building operating costs are the victims of inflation rather than contributing factors. As it has become necessary to pay higher wages and salary to our own operating personnel to enable them to live and pay their taxes, and as material costs and real-estate taxes have increased correspondingly, we have been forced to make modest increases in rental rates from time to time so as to at least partially keep abreast of the inflationary spiral. Competition has forced us to confine these rent increases to the percentage necessary to balance increasing operating costs. Net profit has not been enhanced, quite the contrary is true.
We in Cleveland know full well that, no matter how rigid the controls which may be placed on the wages we pay and on the operating and maintenance material which we buy, we are faced with other items of increasing operating expense which are exempt from such controls. Our local city, county, and State governments have put us on notice that higher real estate and other taxes will be needed to repair unusual and excessive winter damage to roads and streets, and for civil defense. Our local public utility, which supplies the central station steam to heat our buildings, has announced a 174-cent increase in the base rate of steam, to which is added an increase in the cost of coal or freight rates. Public utility rates are exempt under the present Defense Production Act of 1950.
Competition and a constant excess supply of vacant space is actually now keeping our Cleveland office building under effective rent control. We are typical of the industry Nation-wide. Further control by legislation would neither hold down the cost of living nor combat inflation. It would only complicate and confuse the issue. Space in office buildings involves complex dealings in leases between the lessor and the lessee. For example, the amount and kind of space involved, the length of lease, the various times of the year at which the lease commences, the alteration investment, all these have a direct and important part in the final rental paid by the tenant. Any attempt to set up a system of controls which would cover all such normal business involvements in the office building industry would be very complicating in the operation of an office building. It would unquestionably involve large governmental organizations requiring personnel and space, with the end result that an additional burden would be placed upon the taxpayers, a burden which would be unjustified by reason of the fact that Government would be attempting to control an industry in which historically competition has been able to do a better job in favor of the tenancy than has any other means.
May we respectfully suggest to your committee that, in view of the foregoing facts, such sections of title IV-A as pertain to business accommodations should be adversed.
Thank you for this opportunity of telling you the Cleveland story.
SUPPLEMENTAL STATEMENT ON BEHALF OF BUILDING OWNERS AND MANAGERS
AssociaTION OF Los ANGELES, LOS ANGELES, Calif. For the record, my name is Mark C. Cohn. I address you as the executive vice-president of the Building Owners and Managers Association of Los Angeles. In that capacity I speak for a group comprised of a large majority of the owners, owner-representatives, and managers of the major office and loft buildings in the
Los Angeles area, including Pasadena, Beverly Hills, Glendale, and Los Angeles, in the State of California.
The group here represented reflects the ownerships of major structures that contain an aggregate rentable floor area of approximately 13,000,000 square feet or about 300 acres of floor space, with an invested capital of several hundred million dollars.
Members of this group individually and collectively are unalterably opposed to any type or form of legislative control of rents for commercial, business, and professional occupancies.
In support of this opposition we respectfully submit:
1. There is no justifiable necessity for control of commercial and business rents as proposed in the form of amendments to the Defense Production Act of 1950 and contemplated by the provisions bearing on the subject hereof set out in H. R. 3871. Neither is there any public demand nor any appreciable tenant demand for the proposed control.
2. Testimony to be presented to your honorable committee by the President of the National Association of Building Owners and Managers, with records consistently compiled annually in the form of printed experience exchange reports, shows definitely that the over-all ratio of percentage-increase of rents for commercial, business, and professional occupancies in the office and loft buildings within the Los Angeles area does not exceed and in many cases is below the percentage increase of other comparable indexes such as consumer price index, cost of living, wages, and taxes.
3. Current rental rates for such occupancies compared with the rates that prevailed in 1940 likewise are within the range of percentage increases indicated by other comparable records in spite of the fact that in a substantial number of cases the rental rates for 1940 were based on leases made during the economic depression of the 1930's.
4. Your honorable body enjoys the use of facilities through appropriate agencies to confirm the fact that at the present time an estimated 1,000,000 square feet of vacant space is readily available in the Los Angeles area for commercial, industrial, business and professional occupancies. One governmental agency recently instructed to determine the amount of vacant space available for use of Government and military agencies, reported that at least 1,000,000 square feet of space is available within the Los Angeles area-and this agency did not take into consideration ground-floor stores in the smaller buildings, of which many stand vacant.
This same governmental agency we believe would, if you so requested, report there has been no appreciable increase of commercial rents over the pre-Korean rates, and that in some cases leases have been renegotiated at reduced rentals for use of governmental agencies.
5. The innumerable variations that obtain in the field of commercial occupancies and the immeasurable diversification of such occupancies make it inconceivable that any practical and equitable administration of such control could be effectuated.
6. Imposition of control of commercial rents would not in any manner further the defense effort as clearly evidenced during World War II when the war effort was in no way hindered or adversely affected by the absence of control of rents for commercial properties. On the contrary, such control might readily adversely affect business generally and possibly create unemployment among the class of personnel too aged or handicapped to undertake more arduous employment identified with war activities.
7. It seems reasonable to assume therefore that facts such as the foregoing impelled the Congress during World War II to refuse the enactment of legislative control of rents for commercial occupancies. Likewise, the California Legislature on three different occasions had before it proposals for such rent control and in each instance refused passage of bills that proposed control of rents for commercial occupancies.
(a) There is no justifiable necessity for, neither is there any public demand for, nor even any appreciable tenant demand for, any type or form of legislative control of rents for commercial, business, or professional occupancies.
(b) It would be infeasible, if not practically impossible to administer control of rents for commercial properties with any degree of uniformity or equity because of the wide variations and diversity of such occupancies. The cost to the taxpayers of attempting to administer such controls would far exceed in a monetary sense any alleged benefits that might accrue to a relatively small number of isolated tenant cases.
(c) And, in conclusion, records will show that the over-all percentage ratio of increase of rents during any period within the past 10 years is within the range of other comparable indexes; that vacant space is available; and that some governmental agencies have renegotiated leases at reduced rental rates.
We, therefore, respectfully and earnestly urge you to weigh all facts here presented on the basis of the whole, allowing also for the comparatively small number of isolated cases that have required reasonable and normal rent increases designed to recapture the cost of modernizations.
(By Mark C. Cohn, executive vice president.)
SUPPLEMENTAL STATEMENT ON BEHALF OF BUILDING OWNERS' AND MANAGERS'
ASSOCIATION OF PHILADELPHIA, PHILADELPHIA, PA. We usually think of price controls where shortages exist and prices have been drastically increased because of this shortage and at increased and unwarranted profits. This is definitely not the case in the office-building industry in Philadelphia.
In 1943 office building rents had receded from the 1924 high, which was higher than today's rates, to a point at which most buildings were actually operating at a loss. Since that time rentals have been increased, but operating costs, of which labor is the major item, have been increasing steadily and the rental increases have been absorbed to a great extent by these increased costs of operation. Any profits obtained are exceedingly modest and further increases in wages would again put some buildings in the red.
A spot check of rental conditions in Philadelphia reveals an average rent for desirable central city office space of $3.25 per square foot.
Our latest survey of Philadelphia office buildings, April 1, 1951, shows 334,183 square feet of vacant space available. Practically any size space requirement can now be obtained in Philadelphia at reasonable rates, and there is evidence of competition in rates quoted. With these facts in mind, it is the feeling of the Philadelphia managers that any control of rents in office buildings is unnecessary.
Our office space is being rented in every building in the city well below the cost of reproduction. We have checked construction costs with three leading construction companies and have arrived at a figure of $1.75 per cubic foot for the cost of construction of a first-class office building at today's construction rates in Philadelphia. Taking into consideration all the costs involved in putting an office building on the market, a building of 156,000 square feet of net rentable area above the ground floor and first floor and basement area of 8,070 square feet each without air conditioning, but including land value, would cost approximately $7,000,000.
Assuming a 50-percent mortgage of $3,500,000, the maximum allowed under Federal Government regulation X, and assuming an interest rate of 4-percent on this mortgage, a rental of $6.40 per square foot would be required to produce 5-percent net income after expenses and corporate raxes. It is unlikely that an investor would be interested in such a low return on a speculative venture of this type. A detailed breakdown of this figure is attached hereto.
This figure of $6.40 per square foot, the rental required to induce the produetion of additional space at today's construction costs, against the average rate now received at $3.25 per square foot, with a top building average of $1.22 per square foot, is the best possible indication that office rental rates in Philadelphia are not exorbitant.
It can further be stated that the cost of living is practically unaffected by commercial rents. Rental is a very small proportion of the cost of doing business in the average office. Percentage leases on retail stores show that rentals paid range from 1-percent of gross sales in chain food stores to about 10-percent of gross sales in jewelry stores. So it bocomes simple mathematics to see that if a chain food store rental was increased a drastic 50-percent the cost of the item to the public would only be affected one-half of 1 percent.
It has further been recognized by the Price Stabilization Committee that retail merchants will have mounting operating costs as prices rise and they are therefore not freezing retail merchants on a dollar basis but are freezing their profit on a percentage basis. This is to allow for their increased operating costs and part of this cost should be for rent in accordance with custom and definitely would be on a percentage lease.
We also respectfully wish to call to your attention that the cost of government to administer this commercial rent control section of this bill would be great, at a
time when economy in government is essential to our economy, and would obviously serve no purpose in the rearmament program and our fight against inflation. 25-story building containing: Square feet of net rentable area above the first floor..
156, 000 Square feet of net rentable area, first floor..
8, 070 Square feet of net rentable area, basement.
8, 070 Total.-
172, 140 Cost to place space on market: Cost of land.
$1,000,000 Cost of building 3,000,000 cubic feet at $1.75..
5, 250, 000 Cost of original tenant alterations.
410, 000 Interest at 4 percent and taxes during 12 months' construction period
180, 000 Rental campaign and rental commissions and probable rental loss (vacancy) during first year..
7, 000, 000
Annual operating costs at $1.30 per square foot.
and 5 percent on equipment)-
193, 050 140, 000
(5 percent of $3,500,000 equity is $175,000.)
499, 822 140, 000
Total gross income required...
Ground floor and basement rental.
65, 000 141,400 square feet at $6.40 per square foot (156,000 square feet less 10 percent vacancy allowance, 141,400 square feet).
905, 010 Total gross income.
970, 010 Mr. Brown. Thank you. Does anyone have any questions?
Mr. GAMBLE. I am very much interested, Mr. Cook, in your presentation. I think you have gone into this very fully. Certainly you are the first witness who has gone into commercial rents in any detail.
How long, in your opinion, would it take to establish commercial rents if this law was enacted, or would the emergency be over before it was established.
Mr. Cook. Mr. Gamble, because of the complexity of commerciallease contracts alone, I would have to tell you that honestly I believe the emergency would be over before it could be worked out.
Mr. GAMBLE. That has been my thought on it. Of course, it doesn't affect New York particularly because New York City has its own commercial rent law anyway.
Mr. Cook. That is right.
Mr. GAMBLE. Also Albany, N. Y. But not the rest of the State. That is all, Mr. Chairman.
Mr. BROWN. Mr. Multer.
Mr. MULTER. Vr. Cook, what parts of the country today have commercial rent control?
Mr. Cook. New York City, and I was just informed Albany has. Mr. GAMBLE. Albany has it too, I believe.
Mr. Cook. The New York law is the only law applying to commercial rent control.
Mr. GAMBLE. No other State has it?
Mr. Cook. No, sir. A number of the States, from time to time, have considered it. The State of Ohio recently rejected it, as did the State of Oklahoma and the State of Massachusetts.
Mr. MULTER. How long did it take to set up the administration of the commercial rent control law in New York State?
Mr. Cook. Mr. Multer
Mr. Multer. We enacted the law and we had commercial rent control in New York; isn't that so? There was no administrative problem there; was there?
Mr. Cook. You understand, Mr. Multer, I am not personally too familiar with the New York law. We have representatives of the New York association here who could probably better answer that question, if you wish.
Mr. MULTER. The facts and figures that you have given to us are for the entire country?
Mr. Cook. Yes, sir.
Are the facts and figures you have given us--are they averaged for the entire country?
Mr. Cook. They are actual figures reduced down to an average per square foot, and, of course, that makes the average for the country;
Mr. Multer. Where did the figures come from?
Mr. Cook. They came from the owners or managers of these various buildings.
Mr. MULTER. And where were the buildings located?
Mr. Multer. And they took in cities with low rents as well as cities with high rents?
Mr. Cook. Yes, sir.
Mr. Cook. I do not feel that I am qualified to answer that question, because frankly I do not know the list of the defense areas.
I could furnish you with a list of cities that are included it.
Mr. Multer. Did they include any areas around defense installations?
Mr. Cook. You understand, Mr. Multer, office buildings are characteristic of the larger cities, so in the main these figures come fromI wouldn't say the 88 largest cities in this country, but characteristically from the larger cities.
Mr. MULTER. So far as the office buildings are concerned, it would be those larger cities that would come under control, rather than the smaller communities, as far as commercial rent control is concerned.
Insofar as it affects offices, it would be in those 88 cities.
Mr. Multer. How about the stores? Where did your figures and facts come from with reference to the stores? The same 88 cities?
Mr. Cook. In my testimony I stated that the figures on stores came not only from the same 88 cities, but from the same 500 buildings. Because those are the figures that we have that are factual, and we did not go beyond that.