The rate of interest on the value thus ascertained should be commensurate with prevailing circumstances in the money market, and the net return should be graduated according to the character of the building and its location.

The following tabulation shows the rentals necessary to maintain upon any book value and for various classes of buildings the graduated rate of return suggested, and also gives the relation which such rentals bear to the book value of the property.

Class of Building

Book Value of Rents

Ratio of Rent to Book Value

Operating Expense and

Taxes of Gross Rents

Net Income of Gross Rents

Rate of Interest on Book Value

Cold-water tenements .

%

15.87

I to 6.3

37

% 63

10

Hot-water tenements .

16.66

1 to 6

46

54

9

Flats, heat and hot water .

l8.l8

1 to 5.5

53.8

46.2

8.5

New law "walk-up" . .

19

1 to 5.25

57.9

42.1

8

Elevator apartments

19.73

1 to 5.06

62

38

7.5

Many buildings pass through periods of depression and excessive competition during which their net earnings are less than a prevailing rate of interest, and even in some cases result in actual loss.

This situation has been used by some owners to justify, during the period of acute shortage, an increase of rents to a level sufficient to recoup them for these prior losses.

The policy may appear justifiable, but its application is unfair. To the extent that a new basis of rentals will reestablish the current market value of the property, the present tenant can have no complaint, but to require tenants to make good deficiencies created by past conditions over which they had no control, and the benefit of which passed to other tenants, is evidently unfair. The owner of improved real estate must expect variations in certain conditions affecting the income which, if understood and anticipated, may be largely discounted or negatived. Misfortune of course may attend the best efforts, but on the whole real estate has afforded relatively less disturbance and loss than other lines of investment.

In a rather despairing effort on the part of the public authorities to induce the construction of new housing, resort was had in the State of New York to a system of temporary reduction of municipal taxation. New buildings for residential purposes are at present exempted from taxes up to certain values, the taxes on the land, however, continuing.

The concession proved sufficiently attractive to recommence the construction of a large number of new dwellings and tenement buildings. Though constructed at a high cost of materials and labor, buildings erected under these circumstances find tenants at the same prices as existing buildings of equal character. Evidently, therefore, the ten-year reduction in taxation may be regarded as practically offsetting the increased cost of production.

In that case, the owner cannot afford to ignore the fact that the annual relief is but temporary, and that the extra cost of construction of his building - over and above that incurred by earlier buildings with which he is competing - must be disposed of within the period of exemption.

After the building reverts to full taxation, unless by then the excess costs shall have been written off, it will stand at a disadvantage in regard to its competitors of less invested value, and may be worth in the market no more than they are.

The owner, therefore, is justified in regarding the reduction in taxes as a concession intended to meet his temporary excessive overexpenditure and as being designed to provide relief in the present necessity for housing. The amount which is thus saved in taxation cannot be applied in reducing the rents of tenants.

This matter has taken a very definite form in some cases in which mortgagees have required that the excess cost of building shall be paid off by annual instalments upon the mortgage. It is evident that the funds for such instalments can be derived only from rentals.

Objection has been made by tenants - who are now beginning to show a very desirable concern in such subjects which have long affected their own interests - to the inclusion of depreciation in the computation of an official rate of rental, on the ground that the tenant is thereby purchasing the fee of the property for the landlord. But this view is unsound. The tenant is interested in providing for depreciation as a means of continuing the existence of the building or its successor. If the sum set aside for depreciation were invested its gradual accumulation would replace the capital expended upon the building, and rentals should be reduced when the fund has entirely accumulated. But the reduction could be carried on only as far as the end of the economic life of the structure, for by that time the capital invested in it has disappeared and its renewal or replacement requires the use of the accumulated depreciation fund.

It cannot be assumed that investors will be willing to lay out a sum of money in the construction of a building which at the end of a term of years is entirely to disappear. By neglect of provision for depreciation in only too many cases this has actually occurred, and often as much to the incon-venience of tenants as to the detriment of landlords.

Depreciation is therefore properly included in rentals, though it should be compounded by crediting interest so as to accumulate at the most rapid rate possible.

The present complexities of ownership and the existing discordance between the interests of owners and tenants will be desirably modified by a more general understanding of those underlying principles controlling the improvement of habitable real estate, which have been set forth in these pages.

And we may look forward to a time when, by a better comprehension of their mutual interest in the development of the homes and business buildings of our country, a new spirit of cooperation will arise between those who use and those who own improved real estate.