The relation of rentals to invested values is generally over 9%, and the operating expenditures, if taxation does not exceed 12% of the rentals, are about 36%, making returns of about 6%. The convenience of hot-water service only slightly affects this return, but the addition of steam heat makes a decided reduction.

Large advances in the cost of operation and taxation have substantially raised the general level of rentals on this class of property. Their invested value will not be maintained unless the rents provide for a higher rate of return upon the investment to meet prevailing conditions in the money market.

The elevator apartment-house is in course of development, and it is difficult to define the controlling conditions at present, since the recent course has been one of over-production, resulting in large proportions of vacancies and reduction of rentals, and an appraisal under such conditions would scale down their value.

When fully occupied and divested of the prevalent concession of free rents, such properties may show returns upon moderate values of land exceeding other classes of buildings.

Rentals In Fashionable Apartments, West Side Borough Of Manhattan

Location

Stories

Elevators

Rooms per suite

Rent per room per month

Rent per gross sq. ft. per annum

93d Street.....

I 2

3

8 to 10

$25-26

81 cents

108th Street ....

12

3

6 to 8

16-23

76 "

116th Street ....

10

2

7 to 8

18-21

74 "

West 55th Street . .

I I

2

8 to 8

I9-28

73 "

113th Street ....

12

3

6 to 9

l6-l8

70 "

111th Street ....

8

1

3 to 7

15-l6

69 "

130th Street ....

6

1

4 to 7

9-11

46 "

The annual rentals paid for residential apartments appear large, but when reduced to the basis of the occupied area they present a very moderate comparison with the rents paid in other classes of buildings, in which the conveniences included are less in number and in cost, and where the occupancy of the space is restricted to a much shorter daily period.

Thus a fashionable apartment-house renting suites of eight rooms at $2000 to $2500 per annum is bringing in an average of less than 75 cents per square foot of building per annum, or

See additional observations on residential properties in Chapter VIII, p. 119.

Rentals In Fashionable Apartments West Side Boroug 15

"Reasonable excess expenditures are justified in decorative effects which may be attractive to prospective tenants"

Values Established by Buildings about the same rate as that of a high-class loft, and much less than the lowest rate for an office building. Rentals of older apartment buildings located in the immediate vicinity of lower Fifth Avenue are found to vary from 72 to 81 cents per square foot per annum, and the higher rate is paid on the same street and block as the lower.

The six-story elevator apartment on the upper West Side, with modern conveniences, rents for rates less than 50 cents per square foot, which is less than the rent paid on the lower East Side for space in a "cold-water" tenement.

Such diverse figures are only apparently contradictory, as the rents are really controlled by the value of the land, for residence upon which the tenant is paying, and which is therefore the element fixing the rate of rental.

The square foot of high-class apartment building, burdened though it be with additional costs of construction and of operation, is located on land of less present value, and the total investment per square foot is therefore less than in the cheaper building on land of high value.

Operating expenses of such buildings are relatively high, especially where electric lighting and refrigerating services are afforded gratuitously. Without this accompaniment, the average proportion, when taxation does not exceed 13% of rentals, would be near 51%, and with lighting and refrigeration added, about 65%.

Rentals being approximately 13 or 14% of invested values, the return may be 6 1/2 to 7%; and as mortgages upon such properties are commonly based upon interest rates of 5 to 5 1/2%, the net returns upon the equities, while showing considerable variation due to the irregularities of occupancy and expenditures, are attractive.

All these instances lead naturally to the conclusion that the true values of improved properties are those at which the interest returned by the building will equal or somewhat surpass that of a mortgage or bond issue upon similar property.

When rates of interest on good investments exceed 7 to 8% the present scale of expense, taxes, and interest on mortgage money require the gross income from modern flats, "walk-up," and elevator apartments to be 18 to 20% of the marketable value.

If a higher appraised value is to be maintained, some appreciation of the value of the land must be annually assumed to exist to the credit of the equity, and the amount of such appreciation must equal the difference between the real return and the market return, but it is evident that such a method would be problematic and indefinite. The appraised value not infrequently represents actual outlay on the property, and in the cases above cited is not in excess of commonly accepted appraisals based upon the gross incomes.

As an instance may be cited the recent purchase of a fine modern business building on Fifth Avenue, bought specifically for investment purposes at a price nearly eleven times the rate of its present earning capacity.

It is clear, therefore, that a direct relation exists between the earnings of any building as reduced by its expenditures, and the capitalized values of the land and the building upon which interest is paid by those earnings, so that where the relation of expenditure to income is known or may be reasonably estimated, the relative capitalized value of the property may be readily established. Relations so established are shown in a convenient form in the accompanying diagram, Fig. 9, at rates of interest varying from 3 to 6%. In this diagram the horizontal scale is that of the expenditures out of the total income, and the vertical scale is that of capital value per $1000 of gross income.

Reading up from any point of relation or percentage of expenditures to the diagonal line of desired rate of interest, the horizontal line to the right gives the capital value thus established.