If this practice be followed, as is no doubt done by conservative investors, the scale of estimated capital values of improved property would be related to the returns reduced by the depreciation fund, and perhaps the fund would form part of the negotiable property. Where it is not done, there is liable to be an eventual disappointment in the results of the investment. There would seem to be immense opportunities for insuring corporations in the establishment of such funds or their equivalent.

As buildings are not only a part of real estate investment which is subject to elements of financial deterioration, but are liable to not wholly predictable changes of circumstances, such anticipations should not be ignored in their planning, and provision for both forms of contingency would be to the general advantage of real estate from the investor's point of view. And since this is the case, it is of vital importance that no undue extent of capital should be embarked in the construction.

Some difficulty has been expressed by investors with whom the foregoing matter has been discussed, in deciding upon the period which should be allotted to the existence of their buildings, due to the causes herein discussed, apart from the question of physical decay or deterioration.

Such a period may naturally be the subject of very close investigation and of expert opinion in any given instance, yet as such study and views must depend largely on personal observations of results in other structures, some general consideration such as herein given may be of value.

Taking observed effects of the past third of a century in Manhattan as a guide - and it may be noted that we have only such past experiences to aid us in our estimation of future probabilities - it seems that the progressive deterioration of the earning capacity of buildings is the result of the influence of fashion, change of habit, competition, development of new territory and shifting of the centers of population and business, altering of lines of transit, and other causes, all of which act in the same direction of deterioration, but in different degrees in the various classes of buildings.

Any interested observer can place alongside a scale of years the instances which have come under personal observation, by which Table D may be confirmed or modified.

It may be reasonably assumed that any graduated arrangement ranging from the ephemeral "taxpayer" to the "monumental" institution will not extend beyond approximately half a century of effective earning life.

It must be remembered that Table D is not a tabulation of mere existence, which might be as prolonged as that of the pyramids, but which would have little effect upon prolonging effective income-producing existence, which can only be increased by changes, remodeling, or reconstruction.

A comparison of the periods thus allotted to the effective existence of various classes of buildings, with those derived from the study of their physical life, brings out the feature that the effective or economic life thus suggested, even when extended or renewed by the remodeling as indicated, falls within the period of and is substantially shorter than the limit of physical existence, which indicates that the assumptions regarding the former are based on reasonable conclusions.

The economic value of many buildings is dependent to a considerable extent upon the maintenance of its character or purpose, by effective service, and by careful maintenance and repair. Good results in these directions to a certain extent offset the competition of modern improvements, or postpone the necessity for remodeling: or reconstruction.

Table D. Economic Existence Of Buildings

Type of building

Life in years

"Taxpayer"....................................................

12-15

Hotels.................

I5-I8

Apartment-houses...............................................

l8-2I

Store buildings................................................

21-25

Tenements and flats.....................................................

25-27

Office and business buildings................................................

27-33

Lofts and factories................................................................

33-37

Residences..............................................................................

37-44

Banks and institutions........................................................................

44-5°

From this observation it may be gathered that the conservative course is to adopt the shorter period on which to base the fund for the amortization of the original cost of the building.

The whole matter may be summarized by stating that the course of physical depreciation or deterioration of buildings follows character of construction, and is the average of the relative life of the various component parts of a building. This life presupposes reasonable care and repair and partial replacement in detail during the period of existence, or what is known as "upkeep." Economic depreciation or deterioration may bring about, and generally does so under city conditions, a shorter •period to the existence of the building, even with a substantial reconstruction during that economic existence.

The result of remodeling or partial reconstruction is to renew to a certain extent, at the time of its undertaking, the effective earning capacity of a building; but inasmuch as the practical effect is seldom more than a compromise, the result cannot be considered wholly effective or equally as permanent as the original outlay. The previous process of economic deteriora-

Rate of

Interest

YEARS OF EXISTENCE

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

6

7.58

6.68

5.9

5.29

4.75

4.29

3.89

3.54

3.23

2.96

2.71

2.5

2.3

2.12

1.96

1.82

1.69

1.57

1.45

1.35

1.26

5

7.95

7.0

6.28

5.64

5.1

4.63

4.22

3.86

3.55

3.27

3.02

2.8

2.6

2.41

2.24

2.09

1.95

1.82

1.71

1.6

1.5

4 1/2

8.1

7.2

6.4

5.8

5.28

4.8

4.4

4.0

3.7

3.44

3.18

2.96

2.75

2.56

2.39

2.24

2.1

1.97

1.85

1.74

1.64

4

8.33

7.41

6.65

6.0

5.46

4.99

4.58

4.22

3.9

3.61

3.35

3.12

2.92

2.73

2.55

2.4

2.25

2.12

2.0

1.88

1.78

■ 3

8.7

7.8

7.0

6.4

5.85

5.37

4.96

4.59

4.27

3.98

3.72

3.48

3.27

3.08

2.9

2.74

2.59

2.45

2.32

2.21

2. 1

2 1/2

8.9

8.0

7.24

6.6

6.05

5.57

5.16

4.79

4.46

4.17

3.91

3.67

3.46

3.27

3.9

2.92

2.77

2.63

2.5

2.39

2.27

Rate of Interest

YEARS OF EXISTENCE

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

60

6

1.18

1.1

1.0

0.95

0.89

0.84

0.78

0.73

0.69

0.64

0.6

0.56

0.53

0.5

0.47

0.44

0.41

0.39

0.36

0.34

0.18

5

1.41

1.32

1.25

1.17

1.1

1.04

0.98

0.92

0.87

0.82

0.78

0.74

0.7

0.66

0.62

0.59

0.56

0.53

0.5

0.47

0.28

4 1/2

1.54

1.45

1.37

1.29

1.22

1.16

1.09

1.04

0.98

0.93

0.88

0.84

0.79

0.75

0.72

0.68

0.65

0.61

0.58

0.56

0.34

4

1.68

1.59

1.51

1.43

1.35

1.28

1.22

1.16

1.1

1.05

1.0

0.95

0.9

0.86

0.82

0.78

0.75

0.71

0.68

0.65

0.42

3

1.99

1.9

1.81

1.73

1.65

1.58

1.51

1.44

1.38

1.32

1.27

1.22

1.17

1.12

1.07

1.03

0.99

0.95

0.92

0.88

0.61

2 1/2

2.17

2.07

1.98

1.9

1.82

1.74

1.67

1.6

1.54

1.48

1.42

1.37

1.32

1.27

1.22

1.18

1.14

1.1

1.06

1.02

0.73

Table E. Percentage Of Original Value To Be Invested Annually

to bring back total at end of various terms

Building for Profit tion sets in at a new rate, and the net result is a prolongation for a period less than the original term.

The rates for amortization which should apply to provision of depreciation funds either for economic or physical deterioration are tabulated in Table E, in the form of a percentage on original value to be annually set aside, at various rates of compound interest.

Since the rates at which the process of compounding can be followed with the least amount of care are those obtainable in savings-banks, the scale has been carried as low as 2 1/2%, but there will be cases where the sum annually set aside for depreciation may be reinvested in the business of the investor, and may therefore be capable of bringing in a higher annual return.

The conservative course to be pursued is naturally the actual physical setting aside of money for a depreciation fund in some definite investment, and the effects of neglect of this practice may be seen in buildings in which remodeling is overdue or reconstruction is unduly postponed for lack of funds, and in others where the increase in value of the land has failed to offset the loss in the building.