Or, reading from any assumed invested value to its intersection with the desired rate of interest, a vertical line from that point will show the percentage of gross income within which all expenditures, other than interest, must be limited.

Fig. 9. Capitalized Value.

This diagram can be utilized for higher rates of interest by proportionate division; thus at 7% interest the results are one half those shown at 3 1/2%.

Example:

Building with rents of \$52,000.

Operating expenditures, say 40%. At rate of 4% this gives \$15,000 per \$1000 of income.

15,000 x 52 equals \$780,000 as the established value of the property on a 4% basis.

Further dissection of the matter will bring out the point that a certain proportion of operating expense to income may be expected under present conditions in certain classes of buildings, so that the prospective investor or constructor of a building may decide what extent of expenditure upon a building would be warranted upon a certain capital value of the land, provided that it also be known what class of building is proposed and what prevailing rentals are to be competed with. This introduces the subject of the average rate of rentals corresponding to various classes of buildings, and an examination of a number of instances in Manhattan shows, as no doubt must be the case elsewhere, that a graduated scale of rentals ranges between defined figures of minimum and maximum rates over the different grades of each distinct class of building, viz., the business, the warehouse, and the apartment.

A number of observations taken from existing Manhattan conditions are averaged and tabulated in Table A. In this table the rentals are stated on the basis of a square foot of the gross area of the building, and are also given on the basis of a cubic foot of gross contents of the building, in order that a direct comparison may be made between the cost and the rentable values of buildings. It will not be difficult from these or parallel statistics elsewhere to estimate the total returns likely to be obtained from a building of a certain class and of any given number of stories.

 Type of building APARTMENTS LOFTS OFFICES Flats Medium High-Class Light Manufactur'g Warehouse or Mercantile Height in stories from street 4 to 6 6 to 8 9 to 12 5 to 8 9 to 12 8 to 12 13 to 17 18 and Over Height per story in feet 11.83 12.0 11.75 11.83 11.91 11.91 12.83 12.83 Rate Low Aver High Low Aver. High Low Aver. High Low Aver. High Low Aver. High Low Aver. High Low Aver. High Low Aver. High Rentals per sq. ft., net area 53 68 90 80 100 135 96 115 150 52 78 104 97 I20 156 150 179 200 175 203 250 200 250 300 Rentals per sq. ft., gross area 33 42 55 5° 63 85 60 72 94 40 59 80 75 92 I 20 105 125 140 122 140 175 140 175 2I0 Rentals per cu. ft., gross contents 2.8 3.5 4.6 4.2 5.2 7.0 5.1 6.1 8.0 3.3 5.0 6.8 6.2 8.0 10.0 8.8 I0.5 11.7 9.5 IO.9 13.6 IO.9 13.6 16.3 Construction cost per cu. ft., gross 18 24 28 30 33 36 32 35 38 18 22 26 26 30 34 29 33 37 37 44 51 50 54 58 Relation of rent to construc'n cost in % 15.5 14.6 16.4 14.0 15.7 19.4 16.0 17.4 21.0 18.3 22.7 25.3 23.8 26.6 29.4 33.4 31.8 31.6 25.6 24.7 26.6 21.8 25.2 26. I

## Table A Approximate Rentals And Costs Of Construction In Various Types Of Buildings New York City

All costs and rentals are in terms of cents

The height, the rentals, and the costs include a proportion of a basement

The figures in the table were those well established prior to 1917. Although construction costs and rents have increased, the original figures serve to illustrate the relation of rentals to height, and through that to cost of construction.

For conditions prevailing in 1922 it may be assumed that rentals average 80% increase, and that construction costs have advanced not less than 60%. But such rentals and costs of construction still increase with height of building.

Analysis of these figures brings out some interesting features bearing upon the nature of the earning capacity of the several classes of buildings. The ratio of income to cost of building is highest in the case of office buildings of moderate height, and decreases with height in excess of twelve stories. The ratio is much higher in the case of lofts and warehouses than in the case of apartments. The land value in each case varies and really follows these returns.

It will also be noticed how the rate of rental follows the height of the building, indicating the necessity for higher rentals in those buildings which are combined with high ground values.

This is a natural outcome of an increase in the number of floors, which involves greater relative cost of construction of the whole building, and greater relative expenditures in operation.

At any rate of rental, repetitions of the site or additional floors can, by metal frame construction, be carried to a height where the interest on the cost of construction and the cost of operation would absorb all the return and leave nothing to support the value of the land.

The rate of rental must therefore to a certain extent follow the height of the building. If tenants are willing to pay higher prices for accommodations a certain distance vertically from a desirable center, rather than for equal accommodations in some other building at an equal horizontal distance, the upper levels of sky-scrapers may show a profit, and the process may be extended to the construction of towers without limit as to height.

Unless higher rental be paid, however, excessive height constitutes a burden on the returns from the lower part of the building. Thus towers may form part of a larger and lower building, returns from which may cover the deficiency resulting from the tower, and make it an apparent financial success.

In these average rentals it may be assumed that the ground-floor rents raise the general average.

In a building on a commercial thoroughfare, the ground floor, with the use of the basement, will usually bring in, for business purposes, the highest rate of rental. This rental being averaged over the whole rented area, it follows that the higher the building the less will be the influence upon the average of the rate of the ground floor and basement.

Thus in a six-story building, the ground floor being rented at \$4 and the upper floors at \$1 gives an average of \$1.50 per square foot. But if the building be twelve stories, rented on upper floors at the same rate, then, to bring the average to the same amount, the ground floor must be assumed to be rented at \$7.50 per square foot, otherwise the general average will be but \$1.33 per square foot.

Basements with direct access from the street are of course of greater value than those which are suited only to serve as an adjunct to the ground floor.

The recent large advances in rentals, even if they should prove to be permanent, cannot be assumed to have increased the book value of properties unless they return a net income upon the original book or invested value at a prevailing rate of interest. Nor is it to be assumed that the increased cost of new building construction has advanced the value of existing buildings, particularly as construction costs are not fixed.