Basis of gross business rents, what the property earns for the tenant; of gross residence rents, what the tenant can afford to pay. - Deductions from gross rents in properties of different character, and table of percentages. - Effects on net rents of fluctuations in gross rents. - Capitalization rates.
While gross rents are fixed by competition, the question arises how do bidders determine what they can pay? The basis differs radically between business property which earns income for the occupant as well as the owner, and residence property, which for the occupant consumes income only.
Example of misplaced building. Expensive building on cheap land. Foreclosed and sold at heavy loss. East Portland, Ore.
The gross rents of business property are gauged from the economic standpoint, these being in the long run the normal proportion of what the property can earn for the tenant. The proportion of gross receipts which a shopkeeper pays as rent varies according to his ability as a tradesman, the character and class of his business, and the location, a fair average being from 20% to 40%. The better the location for retail trade the higher the proportion of receipts paid for rent. For retail trade the location and the consequent advertising perform the vital function of selling the goods, and the shopkeeper can largely devote
No. 1. Contrast of income between extravagant and cheap buildings. This building, which cost $396,000, has always yielded, in good times and bad, less net income than the building across the street, which cost under $20,000. This due both to bad planning of expensive building and to high ratio of expenses, 50% to 60% versus 15% for the cheap buildings. Second and Cherry Streets, Seattle. (See following picture.) his energies to selecting what the people want. Similarly, though in a less marked way, prominent office buildings help to advertise the business of their tenants. On the other hand, mercantile property not on traffic streets, wholesalers, etc., pay but a small proportion of their receipts as rent, the saving, however, going to the hire of drummers to sell goods.
The gross rents of residences represent the proportion of income which various classes can afford to pay for house rent. While the return for such expenditure is chiefly the satisfaction of suitable surroundings, social ambition influences all classes to live in the best neighborhoods within their reach. The proportion of rent to income varies from 15% or 20% among the wealthy, up to 25% or 35% among tenement dwellers. Taking as
No. 2. Contrast of income between extravagant and cheap buildings. These cheap buildings opposite expensive building shown in previous picture:
Gross rents .......................
.. . 2,900
Net rents ..........................
Or 6% on ...............
Deduct building .................
Property earns 6% net on
In other words, the expensive building is capital wasted.
gross rents the amounts actually received and not the full rental value, from which an allowanace for vacancies must be made, we may note first the great difference in the proportion of operating expenses according to the class of property, this varying from 10% for one or two story brick store buildings, up to 50% for office buildings or apartment houses.
Example of misplaced building. In the despression of 1893-1898 this building did not quite pay expenses, leaving no return for the land, which cost $100,000, or for the building, which cost $240,-000, while adjoining one and three-story buildings on less valuable land, covering same area, paid 6% net on value of building, and $600 per front foot for the land. The error consisted in placing bank and office building in small retail section. Yester Way, Seattle.