BUILDING FOR PROFIT PRINCIPLES GOVERNING THE ECONOMIC IMPROVEMENT OF REAL ESTATE BY REGINALD PELHAM BOLTON AUTHOR OF "POWER FOR PROFIT," "ELEVATOR SERVICE** MEMBER OF THE AMERICAN INSTITUTE OF CONSULTING ENGINEERS THE THIRD EDITION NEW YORK THE DEVINNE 1922 Copyright, 1911, 1922, by R. P. BOLTON CONTENTS CHAPTER PAGE I. RELATION OF SITE AND BUILDING 5 II. APPRECIATION OF VALUE OF LAND 15 III. VALUES ESTABLISHED BY BUILDINGS 35 IV. DEPRECIATION OF THE VALUE OF BUILDINGS i. PHYSICAL DETERIORATION 50 n. THE ECONOMIC LIFE OF BUILDINGS 66 V. DEPRECIATION OF MECHANICAL EQUIPMENTS AND POWER PLANTS i. PHYSICAL DETERIORATION . 79 ir. ECONOMIC DETERIORATION 85 VI. COST OF OPERATING BUILDINGS 94 VII. MANUFACTURING OR POWER MACHINERY 108 VIII. APARTMENT-HOUSES, FAIR VALUES, AND FAIR RENTS . .119 547f,?9 TABULATIONS TABLE PAGE A. RENTALS AND COSTS OF CONSTRUCTION 47 B. LIFE OF COMPONENT PARTS OF BUILDINGS 62 C. ASCERTAINING THE MEAN LIFE OF A BUILDING 65 D. ECONOMIC EXISTENCE OF BUILDINGS 76 E. PERCENTAGE OF VALUE TO BE INVESTED ANNUALLY ... 77 F. PHYSICAL EXISTENCE OF MECHANICAL APPARATUS ... 82 G. ECONOMIC EXISTENCE OF MECHANICAL APPARATUS ... 89 H. OPERATING EXPENDITURES 95 DIAGRAMS FIGURE PAGE 1. Relative Costs of -Construction 8 2. Elementary Building n 3. Increase in Value of Land 17 4. Loss on Building Balanced by Land 19 5. Loss on Building Exceeded by Land 21 6. Gain on Land Less than Loss on Building 23 7. Effect of a Gain in Land Value 25 8. Ratio of Land Value to Net Earnings 27 9. Capitalized Value 45 10. Depreciation of Various Buildings 58 11. Depreciation of an Office Building 64 12. Depreciation of Brick Buildings 67 13. Depreciation of a Mechanical Equipment 84 14. Operating Expenditures 101 15. Effect of a Manufacturing Plant 115 PLATES Accumulating Floor Area on One Site . . . . . . Frontispiece FACING PAGE Effect of Local Conditions on Land Values 15 Pledges Involved in Over-investments 30 Value of Frontage for Advertising 35 Gain by Reduction of Building Area 38 Justifiable Expenditures for Decorations 42 Change in the Isolation of Manhattan 50 Temporary Enjoyment of Light and Air 54 Over-expense, a Cause of Decay 72 Confusion in Developments 79 Buried Piping .86 Antiquated Machinery 90 Irregularities in Improvements 94 Monotonous Developments 108 Unremunerative Machinery 116 INTRODUCTION TO THE THIRD EDITION THE absorption of two editions of this work, and many expres- sions of a desire for its re-issue in a third edition, indicate that it has rendered practical service to those interested in real estate. Its presentation of the subject proved of value in the discussions of the methods and effects of the zoning system and its application to the City of New York, a system by which some of the unregulated and ill-considered building operations, to which attention was directed, are now considerably and beneficially restricted. Since the second edition of "Building for Profit" was issued, the real estate and building interests have passed through the disturbed and inflated conditions resulting from war, and have entered upon a course of slow readjustment. The cessation of new construction brought about a shortage of available space in all types of building, and a general increase of rentals fol- lowed. Many unremunerative properties thus became self- supporting, and others exchanged ownership at substantially advanced prices. While these results afford the appearance of an advance in the value of improved real estate, the actual effects demand careful consideration and analysis. The expense of operation and upkeep of buildings also increased very largely, while the cost of mortgage money as well as the prevailing rate of in- terest upon investments moved to higher levels. Such condi- tions, however, are subject to reaction, and deflation has al- Introduction ready commenced. The figures of rents, operating costs, and values which were used in this book to illustrate the funda- mental principles which it sets forth, have not been altered in this edition, as they still retain their value for comparative purposes. Moreover, re-computation of these illustrations on present prevailing rates, prices, and costs, demonstrates that the same principles hold good under existing developed con- ditions. In this edition foot-notes have been added to direct atten- tion to the effect of such changes as have taken place. The interested reader, with a knowledge of any prevailing prices or values, can make deductions applicable to existing con- ditions. Certain new elements have entered into the operation of improved real estate, to which attention is drawn in new ma- terial added to this edition. The income tax has now made it necessary to give consideration to depreciation and obsolescence as determinate elements in the cost of operation. The rela- tively short period of economic life of modern buildings, to which particular attention was directed, has been demonstrated by many illustrative occurrences. The large increase in the cost of materials and labor affecting the operation and upkeep of buildings has had a beneficial effect in directing the attention of owners of buildings to the subject of economy, and the re- duction or elimination of the burdens of gratuitous services afforded to tenants. The principle of payment for services supplied has been widely applied to electric light and power. Substantial economies have been developed by the abandon- ment of power-generating apparatus and by the reduction of mechanical and heating apparatus to the simplest elements. The difficulties which have thus been solved in this manner may prove of permanent benefit to both the owners and occupants of buildings. Introduction The ownership of residential property, particularly multi- family buildings, has become involved in legislative restrictions and is now subject to responsibilities which appear to be per- manent. Personal liability is now incurred by owners in the maintenance of services and adequate upkeep and repair. Rentals are subject to court review, involving careful ascer- tainment of expenses, costs, and property values by which fair rates of rent are determinable. To these new problems as well as to those of old standing the third edition of "Building for Profit" will, it is hoped, bring intelligent consideration, help- ful suggestions, and practical solutions. R. P. B. I RELATION OF SITE AND BUILDING AmiLDiNG is a mechanical composite construction of various materials, serving the purpose of shelter for its contents and occupants. The interior is its utilizable portion. The primary object of its exterior is to resist the ingress of the atmospheric elements, though it is secondarily utilized and extended for decorative, esthetical, or advertising effects. Such additions to the exterior and to the interior are economic only to the extent to which they contribute to induce a higher value to be placed upon the use or occupancy of the structure. The materials forming the exterior construction or decora- tion are subject to special physical deterioration, due to expo- sure to atmospheric action. A commercial building is one the object of which is to pro- duce, by a rental paid for its occupancy, a return or percentage upon its cost and upon the value of the site which it occupies. The value of the land or site on which any building is erected may appreciate, but such appreciation is of no present value to the owner unless the building returns an interest upon such in- creased value; thus any increment in value of land, unaccom- panied by proportionate income from the building, is reducible by such a rate of interest upon the increment as would be earned if it were sold and the money invested elsewhere. The value of the site, unimproved, is that which some pur- chaser may be willing to place upon it, by reason of its desira- 5 Building for Profit bility, its local surroundings, or its effect on other structures. It is not mathematically determinable unless improved by a building upon the site, the earnings and life of which decide the actual financial value of the site. The fundamental form of real estate improvement is a habit- able structure of one story occupying the entire area of the site. When the site, by reason of the scarcity of other available land, or by the effect of contiguous developments, becomes so en-, hanced in marketable value as to require a return in the way of interest exceeding the renting capabilities of such a limited structure, it becomes commercially necessary to increase its rentable area by the addition of other stories. Modern facilities of construction in the direction of height place in the power of a single property-owner the ability to create a disproportionate competition affecting neighboring properties. Whereas, in bygone times one building was cus- tomarily or perhaps necessarily of height similar to its neigh- bors, it may now vastly exceed them, and may introduce into their immediate vicinity a disproportionately large addition to the habitations of the neighborhood, increasing the local com- petition for tenants, and tending to lower the prevailing rate of rentals, either by directly reducing the rate, or by involving the current rate in the costs of conveniences or inducements offered as part thereof. While the process of accumulating floor area on one site can, by modern methods, be extended to an almost unlimited height, the addition of height to the structure is accompanied by a rela- tive increase in cost, which involves a progressive relative in- crease of earning capacity, and acts as an economic restriction. Comparisons of cost of construction of modern buildings are conveniently based on computation of their cubical contents, and this may then be utilized to compare relative costs. The elements composing the cost are many and varied, yet for any 6 Relation of Site and Building given set of surrounding or local conditions the variation of values relative to height will be found to follow practically similar relations. Thus, if a typical or normal building of a given height be adopted as a standard of comparison, other buildings of similar character, but of greater or less height, will be found to bear a certain proportion in relative cost of con- struction. Prices of materials and labor may and do rise and fall, but this merely affects the total costs and not the relative costs. In Fig. i the relative costs of construction, as regards height, of two classes of building, viz., the business or office building and the loft or light manufacturing building, are plotted from a number of observations of actual expenditures, and the form of the variation shown by the curves indicates a harmonious gradation from a unit of a basic or normal build- ing, which may in the one case be taken as including twelve floors, or a height of 150 feet above the curb, and in the other case eight stories, or a height of 96 feet. The cost of a certain design of building being ascertained or estimated at the basic height, the result as a total, or by the rate per cubic foot, may be multiplied by the factor given in the curve, for any Other height in the diagrams. The elements which compose this difference of relative cost will be readily perceived to consist of extra material such as steel and foundations, and additional thickness of walls, added to which are additional costs in handling materials as height is extended, and a relative increase of carrying charges on the financial side of the undertaking. Added to this are progressive additions of equipment, such as those involved in elevators, stairways, fire-escapes, and sanitary appliances, and progres- sive additions to the proportions of heating, water, sanitary, electrical, and other systems of piping and conductors. All these elements render construction relatively more expensive as height is added, so that in the result a cubic foot of business 7 Building for Profit FIG. 1 150 7 / / JU t 29 > 28 in 1 t -/ 27 Approximate Scale of Feet g g / / / /" 1 ''S 8 BiscHeKht ,'' ^ 9 1 ; / 7 - ^ [ 23 275 7 / / LOFfT 6 t __L BU LDINGS ____/_. t 0) u. -250 ^ O 0) (U - 225 I "ca .E "x o -200 *- 20 - 18 .9 1.0 1. Scale of 1 1.2 1.3 1.4 > en 7* / U. o 7 / 0) u. 'o / 17 g < w i**. ** !- 7 ^ : ^ Asses nents ^ ot in^ Assesi ludin nents I "JP* (/> go begar U^ ^ ' aO\ - 1 <$ d of years 1st 2nd 3rd 4th 5th 6th '7th 8th 9th 10th llth 12th 13th 14th 15th 16th 17th 1892 1893 1894 1895 1896 1897 1898 18991900 1901 1902 1903 19041905 1906 1907 1908 1909 Increase n Value of lot sold at auction in 1892 showing interest and Taxation on increasing Value over and above the first sellrng value after purchase. profit of 25%, but thereafter the interest upon that value, and the taxation, kept equal pace with the selling value, so that a sale at a market price during the succeeding eight years would have yielded practically no further profit. The general development and improvement of the locality, which began at the end of the eighth year, rapidly advanced the value, but it must be assumed that it also brought with it a parallel advance in taxation, as well as the payment of assess- ments. The advance in value continued for five years, and reached the highest point of profit in fourteen years from the original purchase ; but there the advance in value ceased, a result due to the settlement of its capitalized value, in company with others, by the development of improvements erected in the vicinity. 17 Building for Profit The owner or the purchaser who continued to hold such a property at this price without improvement would find that at the end of ten years the ostensible profit would have entirely disappeared in interest charges and taxation, or at an earlier date if assessments should have to be met. If a commensurate improvement should have been made upon the land at the period of highest profit, then the value of the land would have been established and carried along, re- lieved by the earnings of the building of the deductions for interest and taxation. But since the new capital embarked in the building must be released if that building should become ineffective by age or other causes, a new fund must be established to meet this con- tingency, which the land may not provide and which should therefore be derived from some part of the earnings of the structure. It must be conceded that the annual setting aside of a propor- tionate percentage of the value of a building is likely in many cases to be a heavy charge upon net income. Thus, on a prop- erty returning a net 5%, the building being two thirds of the whole, the setting aside of a sufficient sum to cover thirty years of life at 4% compound interest involves a reduction of the return upon the investment of 1.068%, reducing a 5% invest- ment to a 4% basis. But unless a regularly invested and proportionate sinking- fund be maintained, an inevitable dependence must be placed upon the speculative increase in land value to offset the eventual loss of the building. The burden of the entire original cost of the building is then laid upon the land, the increment in value of which is expected to respond to the demand. As buildings of a permanent character usually cost more than the value of the land they occupy, it follows that within the term of their useful existence the land is required to increase at a ratio com- 18 Appreciation of Value of Land FIG. 4 100 90 80 70 60 50 40 30 20 10 \ -35.32 years- 10 15 20 25 Scale of Years 30 35 Loss 100 Profit=100 Loss on building exactly balanced by gain on land. Neither loss nor gain at any part of term Building for Profit mensurate not with its own value, but with that of the expendi- ture on the building. Thus, if on land of a value of $10 per square foot there be erected a building of a value of $20 per square foot of area of its site, the land will be required to advance in value during the term, say, of forty years, at the rate of 5% per annum, in order to bring back its own value and that of the loss on the building at any time. If the building be unduly large, or if the expenditure, especially upon decorative and non-earning fea- tures, be extravagant, the whole burden of such additions would have eventually to be borne by the land. It is evident that most careful regard is required to be paid to the avoidance of undue cost of construction. An examination of the effects of the method of shouldering upon the land the depreciation of the building brings out some curious features which exhibit the undesirability of the practice. If the rate of increase in land value during the time of useful existence of the building does not exactly follow that of the loss on the building, then there is eventually either a greater loss or a lesser degree of profit, by extending the process until the end of the term. Fig. 4 shows a term of useful existence of a building of 35.32 years, and a rise in land value exactly equivalent to that of building depreciation, eventuating in neither gain nor loss at any time. Such a combination would seem rare if not wholly unlikely. In Fig. 5 the loss on the same building is shown, largely over- balanced by gain in land value, but the eventual profit is just as well secured by sale at one half the term and investment of the profit on the land at 4% compound interest. In Fig. 6 the land fails to respond to the depreciation of the building, and an eventual loss must result. This may, however, be minimized substantially by cutting the loss at half the term 20 Appreciation of Value of Land FIG. 5 -35.32 y I Profit ( f> 50 / , / 90 80 \ / n f / / \ \ i; / H " y / 1 1' /# \ / F ' V /Wit / ^ / c J' 60 \/ f *&" \ / ^ 50 a / \y f / /o\ 40 69 / 'r- t * ~f j t' 30 / / & tg 20 *>$ 5 / / \ ^ 10 // V / / \ I/ \ n / \ 5 10 15 20 25 30 35 Scale of Years Loss on building exceeded by gain on land. Profit if realized at half of the term produces equal result 21 Building for Profit and investing the proceeds of the then increase of the land value at compound interest. The effect shown in Fig. 6 is further developed in Fig. 7, in which an assumed life of 35.32 years is again adopted for a building having twice the value of the land. Here the rate of increment is assumed to be 50% greater than even this amount of depreciation, and the total land value at the end of the term to be 400% that of the original. Even with this large ratio of appreciation the eventual profit would be increased by sale of the property about the middle of the term, and the investment of the then profit at 5% compound interest. The diagonal line P K shows the enhanced values obtained by selling off the property at periods in the existence of the building from fifteen to twenty-one years, and the investment of the profits at 5% compound interest for the rest of the term or any part thereof. The common practice of dependence upon increment of land values to offset depreciation of buildings is thus found to be erratic and is evidently financially unsound. It is sometimes the case that the purchaser of an improved property has paid a low price, which is practically a market value of the property, more or less discounted by the deprecia- tion of the building up to that date. This is, in effect, a re- settlement of the relation of the land value and the building value, but the process of depreciation is merely started from a new point on the scale, and either the income or the land value must take up the progress of the burden. There can be little hesitancy, in view of all these features, in pronouncing the common method of dependence upon rising value of land to be unsound. Figures are often quoted of phenomenal rises in land values. These do not all bear investigation, or, sometimes, show that, with enhanced taxation and long lack of earnings, the property 22 Appreciation of Value of Land FIG. 6 10 15 20 25 30 35 Loss by holding \to end of term 50 .= > Profit 50 Gain on land less than loss on building. Loss reduced by sale prior to end of term Building for Profit might have represented a better result if realized at some prior date. The reason for such failure to realize at the opportune time is often not far to seek. After reaching the level at which the average class of buildings erected in the locality return a rea- sonable income upon book values of the combined properties, the land value of any neighborhood is apt to become steadied, and if the interest of investors, as well as the demand by speculative builders, has for the time ceased, it has no active market. The growing absorption of all land on the island of Manhat- tan will naturally set some increase of value on all desirably located land as being a restricted commodity, but the investor in buildings cannot afford entirely to ignore the fact that the isola- tion of Manhattan is rapidly disappearing by reason of tunnels and bridges to other districts. These observations reinforce the point that the rate of appre- ciation of land value is speculative, whereas the rate of struc- tural and of earning depreciation of buildings is reasonably determinable. From either point of view it is economically desirable that the land should not be overburdened with unnecessary expenditure in its improvement. It has been observed that the increase of the value of the land, whatever be its rate or relation to original cost, is unproductive in itself, and unless the building provides a return upon it, it brings only upon its owner the attentions of the taxing au- thorities. It may be suggested that the best policy to pursue is to provide in advance for such an enhanced value by erecting so large a building that its net returns will capitalize the increase as time proceeds. Such a suggestion looks like a short cut to an entire disposition of this question, but in reality it offers only a partial solution of the problem even when very conservatively practised. 24 Appreciation of Value of Land The cost of. construction of a tall building is relatively greater than a lower one, and there are relatively greater burdens im- Fic. 7 15 20 Scale of Years 35. as years Showing the effect of a gain in land value in excess of the depreciation on the building, when a greater return is secured by realizing profit before the end of the term of existence mediately set up by its additional value, in taxation and assess- ments and its own depreciation. Not only so, but it will offer a greater obstruction to future improvement after its maximum 25 Building for Profit effect has been reached. Its investment constitutes a pledge upon the ability of the land to maintain its desirability and of the locality to maintain a rate of rental, and any untoward future occurrences in either regard are magnified in their effects by its additional engagement of capital. Modern methods of steel construction afford very wide oppor- tunity for building ahead of the values of any site, and some of the unrelated and intrusive structures to be seen in the borough of Manhattan are the present result. The ruling consideration in this connection should not be the maximum expenditure which can be placed upon a site and earn interest on its own cost of construction, but with how small an investment in cost of construction the capitalized value of the land can be maintained. The relation which the earnings necessary to establish or maintain the value of a site bear to that value is shown in Fig. 8, covering annual rates of interest on the investment of 4, 5, and 6%, and including any relation of the cost of the building to that of the land, up to ten times the value of the latter. The lower diagonal is that of taxation, based upon a rate of i % of the gross value of the whole property. The second line comprises the addition, to taxation, of a fund for amortiza- tion of the original cost of the building during a life of thirty years, a rate of compound interest being assumed for this fund of 4% per annum. The upper lines add to the two former the rate of annual interest upon the whole investment, at 4, 5, or 6%. This diagram illustrates the extent to which the earning ca- pacity of a site may be pledged or overburdened by excessive building. In the extreme case of a building costing ten times the value of the site, an amount practically equaling the entire value of the site must be earned every year in order to maintain its value as a 6% investment. 26 Appreciation of Value of Land FIG. 8 RATIO OF LAND VALUE TO NET EARNINGS 90- 80^ 70- "2 60- ' CO -a 50- 10 r 345678 Building Cost Times Land Value 10 Building for Profit EXAMPLE : Land value $8 per square foot, or ..... $20,000 per city lot of 2500 square feet. Cost of a building assumed to be ....... $60,000 or three times that of land. Then interest at 5%, added to depreciation and taxation, requires the improved property to re- turn annually 29^/3 % of the value of the land, or $5,870 This return of 5% upon the value of land and building requires a gross income of about . . . $12,000 In other words, the renting capacity of this piece of land, which in its unimproved condition requires only that provision be made for its taxation of say ............ $200 and for interest, at 5% on its value, of .... $1,000 or a total of ............. $1,200 or 6% of its value, would, by the improvement assumed, require the owner to concentrate on it interests or uses capable and willing of paying a gross income of ten times that amount, or about 60% of the actual value of the land every year for its use in connection with its improvement ! The relation which the investment on the building should bear to the marketable value of the land is really determinable by the expenditure justified by the prevailing rate of rentals for any given form of occupancy. When the value of the site combined with the building is to be established from known or assumed rates of rental, the follow- ing method will afford the means of determining the established value at any desired rate of interest : loox i 28 Appreciation of Value of Land S == rate of rental per square foot occupied or rentable area. u = per cent, of net rentable area to gross area of building. r ratio of net income to total income. / = number of stories in the building. i = rate of interest, per cent, per annum. b = area of the building in square feet. T = total invested value of site and building. From the result of such a computation the actual cost of the building may be deducted, when the value established for the site remains. If this value be largely above the existing mar- ketable value, then too great an investment in building has been assumed to be made, a result which may be exemplified by the following examples of the application of this method to a com- parison of values. EXAMPLE I: It is proposed to erect either (i) an 8-story or (2) a 12-story housekeeping apartment-house upon a certain plot, the rentals in which will be $1500 per annum for a suite of 1120 square feet, or an average of $1.34 per square foot per annum. What will a net return of 5 % per annum jus- tify for the value of the land plus the cost of the building? S = rate of rental $i-34 n = ratio of net rentable area to gross building area 60% r = ratio of net income to total income, with allow- ance for 10% vacancies, or 35% /= (i) 8 stories, (2) 12 stories. i= interest - 5% Then, substituting for the nomenclature in the formula, we obtain for T, or the total investment on which the returns would pay interest : 29 Building for Profit / X ~i 1.34x60x3^x8 (K r r (1) ;r==-^! =$45.02 per square foot of 100 x z , ., ,. building area. , 1.34x60x35x12 <,.,. r r (2) 7 : =$67.50 per square foot of building area. Assuming the proposed structure to be erected upon a plot, say, 75 feet by 100 feet, of which the building occupies 80%, the area of the building will be 6000 square feet. (1) Then the 8-story building would justify a total investment of $45 x 6000 square feet, or $270,000 (2) The 12-story building would justify a total investment of $67.50 x 6000 square feet, or $405,000 These, then, are the total values established by the respective buildings in the land and the structure. The cost of an 8-story building may be estimated at 30 cents per cubic foot and its height at 96 feet, so that the total cost would be $172,800 This cost would then establish the value of the land at $97,200 out of a total investment of $270,000 The cost of a 1 2-story building taken at 36 cents per cubic foot and a height of 144 feet would be ... $31 1,000 which would establish the value of the land at. . . . $94,000 with a total investment of $405,000 There would thus be no advantage in the erection of the 12- story building. Let it be assumed, however, that the larger building might be built for 33 cents, or a difference in cost of only 3 cents, per cubic foot, in which case it would cost only .... $288,000 This would leave for the land value $117,000 or an apparent advantage in favor of the 1 2-story building of $20,000 30 "Over-investment involves an additional pledge on the part of the land to maintain its attractiveness as a site, and of the building to continue to fulfil its original purpose" Appreciation of Value of Land It is noticeable, however, that in order to secure this addition to the invested value of the land of $20,000 an increased investment in the building has had to be made of $105,200 and the depreciation upon this increased cost at thirty years' life at 5% compound interest would be 1.5% on difference in cost, or $1,578 which would use up more of the returns than would pay the interest of $1000 upon the additional value established for the land. Therefore, these results show that a 1 2-story building would not be a really remunerative investment as compared with the more moderate expenditure upon the 8-story building, at even so small a difference in cost as 3 cents per cubic foot. EXAMPLE II : It is proposed to erect (i) a 1 2-story or (2) a 2o-story building for office purposes on a certain plot, the prevail- ing rate of rentals in the surrounding vicinity being an average of $1.75 per square foot net rentable area; invest- ment at 4% ; building area, say, 5000 square feet. 5 = rate of rental $1.75 n = ratio of net rentable area to gross building area, say 65.,% r = ratio of net income to total income, with allow- ance for 10% vacancies, or 45% /= (i) 12 stories, (2) 20 stories. i = interest . 4% Then ( i ) T = ^75 * 65x45x12 = $I5 6o e foot of TOO V A the building. Building for Profit Therefore, 5000 square feet x $153.60 = say, total invest- ment of $768,000 or / \ T 1.75x65x45x20 <> /- r r ,1 (2) /=- =9256 per square foot 01 the building. Therefore, 5000 square feet x $256 = total investment of $1,280,000 12 stories, cost 37 cents x 144 x 5000 = $266,400, leaving a land value of $501,600 20 stories, cost 54 cents x 240 x 5000 $648,000, leaving a land value of $632,000 Increased apparent value of land by 2O-story building is $130,400 But increased investment in building is . . . $381,600 Income on $130,400 at 4% is $5, 216 But loss by depreciation on excess cost of building is, at 4% compound interest on 30 years' life .... $6,792 Therefore the 1 2-story building is the better investment by $1,576 per annum at a difference in construction cost of // cents per cubic foot. And should the difference be reduced to 14 cents per cubic foot, then the two proposals would stand on an equality as regards net rate of returns; but the larger investment would still load the land unnecessarily. Such unnecessary expenditures, while they may be and are assumed to be remunerative to the extent of a return of annual interest, are speculative risks upon the ability of the building to maintain them. As has been previously remarked, over-invest- ment of any kind involves an additional pledge on the part of the land to maintain its attractiveness as a site, and of the build- ing to continue to fulfil its original purpose for the full term Assuming an increase of 60% in the cost of building construction and a rise in the prevailing rate of interest to 7'fi , it will he found that the rentals assumed in these illustrations are practically doubled. But by such an advance in rental the value of the site has not been affected. 32 Appreciation of Value of Land of a period in which its value shall be offset by the land appre- ciation or by a fund out of net earnings. If either pledge should fail, as in the recent instance of a 17- story office building, then the property suffers by the premature removal of the too costly structure, which has really hastened its own demise, while the failure or even the over-success of a more moderately proportioned building, which might bring about its removal in the same time, would do so with a justifiable and reasonable loss. The erection of steel-framed buildings of one particular height cannot fit in with all values of the sites they occupy, especially on narrow plots in side streets, where great depen- dence must naturally be placed on the temporary conditions obtaining prior to similar improvements of contiguous prop- erties. Some of the tall, narrow buildings thus located are of the nature of excess investments, or are indications of too great an expenditure in the site. Such buildings, while they tem- porarily enjoy superior benefits of light and air, derived from their location among smaller neighbors, are bound to lose much of this advantage later, but anticipation of this contingency is very commonly ignored or subordinated to the demand for re- turns on all the area possibly to be crowded on to the site. It is an open question whether a large variety of buildings would not gain by a substantial reduction of their floor areas, whereby an increase of the access of light and air to their in- teriors may be secured. There is a special value to be attached in certain cases, for mere advertising purposes, to those spaces in a building which front on a street, which advantage is not possessed by rear spaces ; but the main asset of street frontage is light and air, for which additional rentals are obtainable. Direct and abundant light and access to wide unoccupied space increase the rentable value of any part of commercial 33 Building for Profit buildings, over any other part not equally advantaged. Those portions in a building which are more or less deprived of air and light make so low a return as to become unremunerative, constituting a mere burden on the building, reducing its average of rentals. Mr. F. H. Heywood has recently stated, as a result of wide investigation, that the value of court offices decreases 10% per floor from the rental of the floor at the top of the court. Equal expense is, however, involved in the construction of each part of the structure, and if this feature be carefully con- sidered at the outset, it may be found that some large proportion of the building could be omitted with advantage, reducing the total cost of the building, and raising the rentals of the rear or poorly lighted parts by affording space for light and air, ap- proximating that of the most open or best-lighted space, such as the street frontage. It is better to have a small building all of which produces a high rate of rental than a large building rented at high rates in front and low rates at rear, averaging the same as the smaller building. The following illustration, based on a scale of 100 parts, brings out this consideration. Exam- pie Lot BTd- ing Cost Occu- pied area Net area Rent front Rent rear Aver- age rent Total in- come Exp. Re- turn Interest on cost A IOO 80 800 80% 6 4 I. 2 5 0-75 I . OO 6 4 50% 32 4% B IOO 60 600 80% 4 8 *.5 !- 2 5 !. 2 5 60 50% 3 5% 34 TfTrri iJTl //TLTfiiil r o -i be O C 5 c rt o & ij c 1 2 000 o o o o 1 1 000 . O 10000 9000 6000 5000 CAPITALIZED VALUE This diagram can be utilized for higher rates of interest by proportionate division; thus at 7% interest the results are on half those shown at 3 l / 2 %. 45 Building for Profit EXAMPLE: Building with rents of $52,000. Operating expenditures, say 40%. At rate of 4% this gives $15,000 per $1000 of income. 15,000x52 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 in- stances in Manhattan shows, as no doubt must be the case else- where, 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 com- parison may be made between the cost and the rentable values of buildings. It will not be difficult from these or parallel statis- tics elsewhere to estimate the total returns likely to be obtained from a building of a certain class and of any given number of stories. Analysis of these figures brings out some interesting features s-, 1) x M S o ro o cs (*5 oo IO vo N 6 d f*3 00 N > < 10 N vO t M vO r*J * IO \r> M a oc & o J O O N O Tj- o> 6 o IO 00 N u 3 j~- bo S o 1O N < ro N O Tj- M & 6 HH r)- 4- r~- 4 M Pi c 5 to HH o J m t-~ PJ cs hH VO a> r^ ro VO vo N N X be S o IN O Tt- t^ HH r^ ro vo g M O ON > 4< 0> t-~ IO N 10 6 h- ( fO ro 00 M 00 O o 1O 10 M 00 00 <^ M rj- fO CO i_ 4, CU ~ N s s VO 1O M O N O 6 M * CO T)- ON N 3 C rt 2 o pC i-i O o ij u < o M rH N CT\ 06 O ro VO vo N CO H fa SS ON 1 _3 t^ c\ VO r-- N vO VO M 00 *J M q HH J30 *i-i be S It M o 00 00 VO VO M fO uo N ^ ^ ^uH J 3 O fO oo V > < 00 t o VO o 10 M O t n N H c a3 o h4 N VO O rj- fD w 00 HH tO 00 !/l 1/3 a N J3 be S O IO M rf O o 00 00 ro o N U bC O t-~ M V > < VO HH N t-^ VO vO ro * t^ IH CO ffi \ <^ * o hJ VO C* vO VO N fO o VO H Z g bo IO fO IO 00 O r VO CO * o\ M ^; H 9 -3 10 VO VO 4- 00 M "t . VO rt fa o T ^- 00 S < 00 VO N Tf VO ro * N VO 4- o *3 VO I*) fO 00 H to _c '3 .T3 . 3 ,0 Height in stones from street OJ OJ >M .s ee V-< u CH X ba 'C K aj rt P^ rt u E ^ rt M-i qj cr c 91 u V CL, (/3 c3 4-) C 0) e^ 3 u E - aj % . O CT JH w bC b V D. t/3 3 c V ti Rentals per cu. ft., gross contents Construction cost per cu. ft., gross Relation of rent to construc'n cost in % CO O P3 O CO W H co H- O H I P4 O 8 |.||2 < ^ "rd J H O 5 2_2" a g U _0.5P ^ S , V- ^ Iti r^H O r~ o O C 2- CH ^ O CO ^ en m H ^ 2 tn co "35 2 jj O 3 >- rt U 2*0 w "a ^ ~ > ? N I- 1^- (S > * t vO ? o vo ^ O VO *: o Os O Tt- M 10 PI PI 00 M C~N O N N N cs * I- N M O- N ^ Tt- t o Os ? o 00 . o 00 T o PD : 00 M . H "t PI VO Os + PI fl O\ fO N vO VO N o-. N o\ o (*5 VO Tj- t : N * o P) r o PI oo o o M PI PI M* w i*5 PI N i ">! H4 <* N vO VO r) ? C( 00 O ro I** M fO Tj- r}- ? o VO * o vo l-~ O vo 1 P) ". M t PI u fe w PI PI ro r) O N VO j^ N P) Cs -- N fO VO Tj- ro U ^ ro <* fo ^ o t o Os ^7 o * o ! N CO M I 1 C/} I 1 Sx< M PI to PI OO N VO c\ N N M 'C 00 Tf ^ r^ VO ") B i i M * VO VO O ? o Tf 00 o VO i PI N . M I-- fO a ten O PI M N O fo 00 f*3 UO ro (T) N *: *5 Os fO X w [t, M rf VO O 00 t^- o 00 00 o . HH r ". HH PI Th M o in i*> Os VO ON Pi t M <3 * ^ ro fO 00 Os r^ r^* >H Tj- o CA; O Tf * vO O N 00 o p^ : ! M *? 00 ^f M PS 00 fO T^- N N . * ON VO -t Os I Tf >< 00 ro fO t^i O N Os Th I "2 n- ' O M VO Os 00 fj M N 4 rh Tt- 00 VO * vo ON 4 O h-l VO t^. fO 00 t^ o 00 Os o ON 5 p : ? M t-^. : VO Os PI ro VO Tf 00 * OS 0> * 1 t-^ j t-i "? M : CO Os H 00 . vO c r M . r^ * J^ M . t-- 00 N CO - N <0 vo Th ON ? M ? I O PI O 00 VO r- 10 ^ r^ 00 ro rO 00 r~ CO Os OO *) OO M Tt- Tt- VO M CO VO M Os Os r- fi u rt . of Interest VO 10 ^ n- T ro ^ p i; c3 Qt! O o - w o W U 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 deteriora- tion are tabulated in Table E, in the form of a percentage on original value to be annually set aside, at various rates of com- pound 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 l / 2 %, but there will be cases where the sum annually set aside for depre- ciation 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. bo a DEPRECIATION OF MECHANICAL EQUIPMENTS AND POWER PLANTS I. PHYSICAL DETERIORATION THE depreciation of engineering equipment and appli- ances appears to follow equally well the same general principles as apply to other elements in building con- struction, but in a markedly increased ratio. Where its costs bear any large relation to the total cost of a building, the inclusion of an elaborate system of piping, and especially of machinery, adversely affects and reduces the total life of the combined structure, a fact to which very little obser- vation has heretofore been directed. The effects of the inter- relation of metallic apparatus with other parts of the structure are generally similar to those already discussed, but are in- creased by the more perishable class of the materials em- ployed, by their more active character, and by the mechanical movements, and the thermal, electrical, and chemical effects, which they introduce into the structure. It therefore follows that their character not only affects the general average of their own existence, but detracts appreciably from that of the building. Throughout modern structures, miles of buried piping lie beneath other materials, which would have to be destroyed if it should at some period be necessary to renew or replace the pip- ing, and thus these materials are affected and their life limited by the piping they conceal. Decorative features, including trim of all kinds, are affected 79 Building for Profit by what supports them, and thereby affect the permanency of the support. Tile, terrazza, and cement floor surfaces, which have little or no expansive capacity, are laid on steel-framed supports, which are capable of expansion. One portion of a modern building may be overheated by flues, by pipes or radi- ators, while another part is cold. After a building 1 is completed, the framing is heated to 70, while the exterior may be zero. The interior, therefore, may rise, and expand sidewise, while the exterior is contracting in both directions, by which process the building face is minutely cracked, either in the joints or in the material. In mechanical appliances a new feature has been imported into buildings which, bearing no inconsiderable relation to the total cost, is of fragile, impermanent character. We do not know the length of life of some of the parts of the equipment of buildings, but we are aware of the fact that much of it is sub- ject to conditions tending toward a perishable character, due to the very services it performs. Sanitary equipment has im- mensely increased in extent and expense, yet less than a quarter of a century has brought about radical changes in methods, and has demonstrated the perishability of some materials, which were at one time thought to be of the very highest type of permanency. -Mechanical equipments may be considered in two parts- fixed and motive. Fixed equipments are largely in the form of piping, for a variety of services of more or less importance, affording the means of usage of electrical, steam, sanitary, water, gas, air, and vacuum appliances. Most such systems are liable to become superannuated at an early period, being subject to the course of progressive invention and improvement, requiring their modification or alteration in order to secure effi- cient results. Such changes are, however, very difficult of attain- ment, involving serious expenditures and disturbance of the 80 Depreciation of Mechanical Equipments and Power Plants structure, not only on account of the amount, but of the general inaccessibility of piping. The ramifications of such systems may be illustrated by those installed by the writer in a large apartment-hotel, the extent of which is, in miles, as follows: Sanitary 15-8: Refrigeration ... 3.35 Water 44.01 Pneumatic .... 1.07 Fire 2.11 Electric 39- 2 S Gas 37.30 Bells ...... 5.43 Elevators 1.99 Flues and ducts . . . 4.61 Steam 18.56 Total miles . . . 173.57 Even one of the minor elements, if disturbed, would affect a considerable portion of the buil v ding materials. Motive appliances are also quite extensively installed in mod- ern buildings, and comprise, elevators and engines, ventilating- fans and motors, refrigerating, pumping, and electrical gener- ating machinery. The life of such apparatus is affected largely by the rapidity of its operation, the shocks or variable loads to which it is applied, and also to some extent by the suitability of its proportions to the work to be performed by it. The greater the effort which is made to secure economy in operation, the greater will be the complexity of appliances ; and the trend has been toward a multiplication of engineering ap- paratus in buildings. These introduce into the structure new features tending toward physical deterioration, by vibration, strain, and temperature. In electrical apparatus, not only have materials, frail in themselves, been introduced, but a new ele- ment aiding the processes of decay has been developed in elec- trolysis. Apparatus such as the elevator, imposes new and irregular strains on the structure, and power machinery intro- 81 TABLE F PHYSICAL EXISTENCE OF MECHANICAL APPARATUS Life of most durable part, 40 years I. FIXED EQUIPMENT Year Per cent. Most durable elements steel construction, foundations, elevator guides, and overhead framing 40 100.0 Exterior framing, copper-cased housings, etc., heating pipe systems used part of the year, gas piping ... 33 82.5 Buried vents and ducts when painted 32 80.0 Steel-plate stacks and smoke-ducts, cold-water piping, electric conduits 30 75.0 Heating-boilers used part of year 28 70.0 Roof-tanks, sanitary piping systems 27 67.5 Pressure steam piping and appliances 26 65.0 Interior drums and tanks, hot-water and pneumatic pip- ing 25 62.5 Exposed and unpainted vents and ducts 24 60.0 Highest-class pressure steam-boilers 22 55.0 Sanitary fixtures, refrigerating piping, kitchen fixtures, and valves 20 50.0 Drip and drain piping, cheaper class of pressure steam- boilers 1 8 45.0 Electric switches, wiring, and connections 15 37.5 Exhaust heads, exposed galvanized ironwork, hot-water drums 12 30.0 II. MOTIVE APPLIANCES Years c p e e n r t Slowest-speed apparatus, apparatus intermittently used . 24 60.0 Dumb-waiters, switchboards, elevator gates, slow-speed elevator engines, shafting and bearings, slow-geared apparatus, elevators intermittently used 22 55.0 Motor-driven pumps, compressors, and moderate-speed fans 20 50.0 Slow-speed reciprocating apparatus, such as pumps, ele- vator reversing gear, platform lifts 17 42.5 Elevators in regular use, laundry, kitchen, refrigerating, electric devices, and other apparatus frequently re- versed i 6 40.0 Moderate-speed reciprocating engines, medium-speed rotary apparatus, dynamos and motors 15 37.5 Fan engines, high-speed rotary apparatus on large varia- tions of loads, dynamos, motors, high-pressure en- gines, condensers 12 30.0 High-speed, high-pressure, reciprocating engines and machines on extreme variable loads 10 25.0 82 Depreciation of Mechanical Equipments and Power Plants duces vibrations, while boiler plants and flues increase the effects of expansion and contraction. These and many other considerations all point to the neces- sity for equal conservatism in assuming a life for those less durable features which affect the life of the more durable elements. Proceeding along such lines, we may reasonably conclude that the life to be assigned to the mechanical appliances in build- ings may be classified as shown in Table F. The mechanical elements in a building may be related to the life of the building materials, and their depreciation combined therewith ; but as the life of mechanical apparatus is relatively shorter, it would appear to be the best course to work out its rate of depreciation independently, and assign a special fund to cover it. The fixed and motive equipments of a large apartment build- ing bear relations which are plotted on Fig. 13, and very inter- estingly indicate the same general form in the resulting curve as in the case of building materials. Of the total cost, the fixed equipment was 60% and the motive apparatus was 40% of the cost of the whole equipment. The combined equipment has a relative life compared with that of its most durable part, which has been assumed to be such material as elevator guides and fixed ironwork, of 40%. The fixed equipment has an average of 52.0% But the motive apparatus is only 21.8% The effect of the motive apparatus is, therefore, the greatest in reducing the total life of the building. The cost of the entire equipment in this case approximated 20% of the total cost, and if the building, upon dissection of its elements, should show, without equipment, a mean relative life of 77%, then the intro- duction of the equipment reduces the combination to 70%, or, in other words, the building alone would have a mean life of 57^4 83 Building for Profit FIG. 13 10 20 Scale of years 30 35 40 45 Depreciation of Mechanical Equipments and Power Plants years ; but this would be reduced by the effect of the equipment to 52*^ years, involving on each one million dollars of total in- vested value an annual addition to the necessary sinking-fund for depreciation of about $7500 a year. In an office building where no power plant is installed, but elevators and heating-boilers are included, we find that the rela- tive life of this equipment is 45-7% The building without the equipment is . . . . . . 77-O% and the effect of the equipment is to reduce this to . . 74.7 r < In a dry-goods building the investment in the equipment and in a power plant was : For the fixed equipment, elevators, sprinklers, and boilers for heating .... 20% of the cost of the building For the motive apparatus, or generating plant 6% of the cost of the building The relative life of building alone being . . . . 77.00% The relative life of fixed equipment is * 52.00% Thus the building and fixed equipment average . . 73.00% The relative life of the motive plant is, however, only 18.00% Reducing the average relative life of all to ... 70.25%- and reducing the mean life of the whole by about . 9.00% and increasing the proportionate sinking-fund by about 20.00% The introduction of delicate and short-lived machinery into buildings, therefore, affects not only the proportion of funds for its own replacement, but that covering the duration of life of the entire structure. II. ECONOMIC DETERIORATION OF EQUIPMENT IN BUILDINGS THE economic as well as the physical depreciation of buildings involves the deterioration of their equipments . or mechanical 85 Building for Profit appliances, which to-day form no small part of their first cost, and constitute some of the largest items of expenditure in their operation. The effect is felt in fixed apparatus and in motive appliances, but the latter are subject to more rapid effects. With regard to this part of modern buildings, a personal occupation during a third of a century has afforded the means of observation of the progress of economic deterioration in both classes of apparatus. While physical deteripration of equipments has usually received consideration, the subject of depreciation in economic value has received less attention, with unsatisfactory results which have- adversely affected some building investments. If no fund is regularly apportioned or laid aside for the purpose of replace- ment of apparatus on reaching the inefficient or uneconomic condition, the day of reconstitution or replacement is unduly delayed, and costs of operation become excessive. Many instances of this nature could be cited and may to-day be observed ; one or two must here suffice. A large office building constructed twelve years ago was equipped with elevators of a type which at that time was advo- cated as of the highest known efficiency. A considerable amount over and above the cost of other then applicable forms was paid for these appliances. From the first they proved expensive in physical upkeep, and this cost has advanced with age at an in- creasing ratio, which is provided for by the usual methods. But the property has suffered also by their ineffective service, and is to-day operated at an increasing cost by reason of growing in- efficiency of the machines. The result is that the building's renting credit has suffered, and rentals are not what its position and importance would appear to-day to justify. Had a sinking- fund been established at the time of installation, money would have been in hand toward the replacement of the apparatus with up-to-date appliances. Since the foregoing was written electric elevators of effective and economic type were installed, affording a more efficient service. A direct increase resulted in the rentals of the building which covered the entire cost of elevator reconstruction in less than two years. The subject of adequate elevator service and the economic proportioning of elevator installations is laid down in detail in "Elevator Service." 86 "The vast ramification of piping buried within the construction of modern buildings" Depreciation of Mechanical Equipments and Power Plants The deterioration, both physical and economic, of fixed equip- ment in buildings, which largely consists of piping systems, is an element which has not come into much notice, as the multipli- cation of services provided by their means is of comparatively recent introduction. But it is a fact that the growth of the uses and demands for pipe systems has been accompanied by a radical reduction in their permanency, for the material of w r hich much of the vast ramification of piping is composed, and which has been buried within the construction of modern buildings, is not of the substantial character which was at one time obtainable. As an instance may be cited the experience of one large mod- ern hotel, in which a considerable proportion of the sanitary piping has been recently replaced under difficult and expensive conditions. Remodeling operations in a number of buildings have af- forded opportunities of similar observations. The proportion of cost which the modern equipment bears to the total cost of a building varies with the elaborateness of each, but may be expected to involve not less than from 9 to 15% of the whole cost of the structure when unaccompanied by power machinery, and when the latter is included, to involve from 1 6 to 26*70 of the total. The economic deterioration of these appliances and apparatus is more rapid than in the case of the building they occupy, and may be greatly accelerated by maldesign or poor construction. In allotting the periods of effective or economic existence to such equipments, the results of actual experience and observa- tion again must be the guide, reinforced by knowledge of the extent of usage and the character of their operation. The results of such observations are embodied in Table G, in which the arrangement of motive apparatus is in the order of rapidity of operation, a feature which has a greater effect on physical and economic deterioration than mere continuity of Building for Profit operation. It is needless to add to the table the effect of cheap- ness or poverty of construction in every class included in the list. From the table the conclusion may be reached that the average economic life of fixed equipment is about one half the aver- age effective life of the buildings it occupies, which agrees with many observable conditions. In other words, the fixed equipment requires reconstitution to an efficient point at least once during the effective life of a building, unless the rate of general deterioration of the whole is to be accelerated, or, other- wise stated, if the equipment be not brought "up to date" at least once during the effective life of the building, the general life of the investment is reduced. Here again the reader must be reminded that the mere length of existence of such appliances is not the question. There are to-day in existence mechanisms which have been in operation of a certain sort for a century, a life which may by some surround- ing circumstances be even further prolonged. But the effective earning existence of all apparatus is a different matter, and in the case of appliances installed in buildings operated for profit, the results of ineffective service may be and are much greater than mere mechanical inefficiency would represent under other conditions. For the successful operation of high buildings the elevator forms an integral part of the building. The physical deteriora- tion of this part of the equipment is compound, consisting of that due to the fixed portion of the construction, the hoistway guides and beams and that of the motive portion or engine with accompanying apparatus, such as valves, gears, wheels, bearings, drums, shafts, ropes, and motors. An adequate number of such appliances, providing not only an ample but an easily operated service, will have a longer phy- sical life than one in which, by a shortage of machines, the ser- vice becomes severe, involving heavy loads, frequent reversals, 88 Depreciation of Mechanical Equipments and Power Plants TABLE G ECONOMIC EXISTENCE OF MECHANICAL APPARATUS I. FIXED EQUIPMENT Life in years Steel construction, foundations, elevator guides, and overhead fram- ing 30 Exterior framing, copper-cased housings, heating pipe systems used part of the year, gas piping 27 Buried vents and ducts when painted 26 Steel-plate stacks and smoke-ducts, cold-water piping, electric con- duits 24 Heating-boilers used part of year 22 Roof-tanks, sanitary piping systems 21 Pressure steam piping and appliances, interior drums and tanks, hot- water and pneumatic piping 20 Exposed and unpainted vents and ducts 19 Highest-class pressure steam-boilers 17 Sanitary fixtures, refrigerating piping, kitchen fixtures, and valves . 16 Drip and drain piping, cheaper class of pressure steam-boilers ... 14 Electric switches, wiring, and connections n Exhaust heads, exposed galvanized ironwork, hot-water drums . . 9 II. MOTIVE APPLIANCES Slowest-speed apparatus, apparatus intermittently used 20 Dumb-waiters, switchboards, elevator gates, slow-speed elevator en- gines, shafting and bearings, slow-geared apparatus, elevators in- termittently used 1 8 Motor-driven pumps, compressors, and moderate-speed fans ... 17 Slow-speed reciprocating apparatus, such as pumps, elevator revers- ing gear, platform lifts 15 Elevators in regular use, laundry, kitchen, refrigerating, electric de- vices, and other apparatus frequently reversed 14 Moderate-speed reciprocating engines, medium-speed rotary appa- ratus, dynamos and motors 12 Fan engines, high-speed rotary apparatus on large variations of loads, dynamos, motors, high-pressure engines, condensers 9 High-speed, high-pressure, reciprocating engines and machines on extreme variable loads 7 Building for Profit and general wear and tear. The elevator, like any other moving apparatus, requires constant care and minute supervision to maintain it in thorough serviceable order. If all the elevators in a building are in constant urgent use, there is not available time for this work of upkeep to be properly effected. The effective life of much of the appliances is thus reduced, and its upkeep is at the same time rendered burdensome as well as a source of much anxiety to those charged with its mainte- nance. But apart from the foregoing, the economic side of the matter requires an ample provision of elevators in a building, inasmuch as inadequate or irregular service directly affects the rentable value of the upper floors, which are totally dependent for access, in lofty structures, upon the elevators. The economic life of the apparatus is, moreover, affected by the march of mechanical improvement, and an elevator installa- tion maintained in excellent condition may be properly aban- doned in favor of another affording greater efficiency in service and perhaps in cost of operation. It cannot be assumed that the effective life of an elevator installation is equal to that of the building it serves, and, in fact, the evidence of past experience in this line is to the effect that this part of the motive appliances must be reconstituted at least once and perhaps twice during the period of effective life of the building. This has been the case in a number of instances. In the build- ing in which one of the earliest forms of hydraulic elevator was installed, the apparatus was replaced, after about seventeen years of service, by others of more modern hydraulic pattern. But it is reasonable to suppose that in another equal period, should the building's existence be so prolonged, another re- placement by still better appliances will take place. The steam-driven machines in several office buildings saw service of approximately a similar length of time, so that a period of about twenty years certainly has covered the life of 90 ''Extending this existence by reconstruction may be of so expensive a nature and of so limited an effect, that replacement may be preferable" Depreciation of Mechanical Equipments and Power Plants such apparatus in the past, and there is no reason to anticipate a greater length of economic life in the future. On the contrary, in elevator engines, as in other lines of development, modern devices nearly always take the direction of high speed, which in itself contributes to physical deterioration. An ample number of elevators, of moderate speed and moderate size of cars, is the best form of economic investment in this important part of building equipment. A noticeable feature in connection with equipment is the in- crease in the demand which arises as time proceeds, and which directly affects the economic side of the investment. The apparatus, which is originally designed or purchased for a given service or combination of services, is not, by the process of use and age, improved in its capacity to respond to this in- creased demand, and it therefore often happens that efficiency decreases at a ratio accelerated by these two causes. This is an effect specially noticeable in boilers, the working value of which is decreased directly by age and accompanying reduction of allowable pressure, and indirectly by irregular usage and wear and tear, so that an increased demand for out- put comes upon a weakened and aged appliance incapable of efficient response. Further, when the power thus generated has been planned to operate machinery with a given economic pres- sure, the lowering of that pressure adversely affects the economy of the machinery. A boiler when installed may have an allowable working pres- sure of 100 pounds per square inch, and the engines it supplies do their work best and most economically with that pressure. As time proceeds, the boiler itself becomes less efficient by leaky setting, by fouled and choked smoke-passages, and by scaled interior, and, to cap these deficiencies, the local inspector re- duces the allowable working pressure. The engines are there- fore supplied at less pressure, reducing further as time proceeds, Building for Profit and their product is affected in both quantity and economy, until some point is reached in the scale where the owner is compelled to undertake rebuilding or replacement. The operation of extending this existence by remodeling, by reconstruction, or by additional apparatus may be of so expen- sive a nature, and of so limited an effect, that their entire recon- struction or replacement may be economically preferable. Radical remodeling, involving more or less reconstruction, may bring the appliance up to reasonable mechanical efficiency, yet may not bring it to the point of full effectiveness to meet the growth of demands for its work. Therefore the conservative practice will be to set aside an annual percentage of value which will cover complete replacement within the period of effective earning existence, so that provision may.be made in advance for such contingencies as have been referred to, which percentage can be readily ascertained by reference of any item to the cor- responding rate of compound interest in Table E. As regards the life of usefulness of power-generating machinery, the further consideration must be applied that the commercial value of such apparatus ends as soon as the cost of its operation reaches the price at which its output could be pur- chased from another source of supply or supplied by some other substitute. Lenders of money upon security of improved real estate some- times demand the installation of machinery therein, regarding it as a part of their security ; but the value of motive machinery in such a connection is discounted by its relatively short period of useful existence and by the probability of necessary replace- ment more than once during the life of the structure. More- over, the mortgageable value of such apparatus, even if re- garded as part of the building, is but second-hand value as soon as it is put in operation. 92 Depreciation of Mechanical Equipments and Power Plants If a mortgage or bond is secured in part upon motive appli- ances, that part of the security declines at a much more rapid rate than the building, and would seem to require the establish- ment of a special and regularly invested sinking-fund in order to maintain its stability, since the relative life of motive appliances as compared with that of the building is only from 20 to 27%. 93 VI COST OF OPERATING BUILDINGS THE details entering into the operation of a building and composing its cost are not always accessible, on account of the natural hesitancy of owners to afford informa- tion as to their expenditures. It would seem, however, that the publication of statistics, comparing costs of operation in percentages of the rentals, such as those recently compiled by C. T. Coley, M.E., would be of general advantage, creating, as they would, a greater interest in the subject, and directing attention to certain elements upon which relief or improvement might be especially desirable. If, for instance, it should develop that in certain classes of buildings some practice was common which was productive of undue expense, or some burden was unfairly or unevenly laid upon them, the comparison of details would doubtless tend to bring about an economic modification to the advantage of own- ers of such properties. The best method of comparison seems to be that of the rela- tion of each item to the gross rental, which brings out very clearly the burden laid upon the ownership for each element of outlay and gives its direct bearing upon the returns, and through the returns, upon the capitalized value of the investment. A comparison and study of a number of actual instances affords the following approximate averages as classified in Table H. In examining the outgoing expenses upon any class of im- proved property, the largest item, and that which, therefore, naturally first attracts attention, is taxation. Any system by which taxes are raised in this country must, to 94 rt 4-> Si J-i O o . I I rt ^ sr ~ "> 3 "B ^ = 3 > i sty. Building fcost $136.45 Site Cost $110.00 Total $246.45 Building for Profit cost of these floors, leaving available 31.7 cents per floor, or from the two and one-third floors the 74 cents required for interest on the plant and space below ground. The additional total capital expenditure is $33.15, which is an increase of 32% on the cost of the building. It will be evident that if this capital be not expended upon apparatus and its interest-producing rental space, there will be resultant effects which may be properly credited toward any additional cost, if such there should be, of public services or sup- plies taking the place of the output of the manufacturing ap- paratus. Thus, not only will the interest on the capital outlay be saved, but a smaller amount of capital will have been engaged upon the maintenance of the land value, and a lesser extent of deprecia- tion and deterioration of the whole building will have been in- volved, while the property will be proportionately less of a target for present and future taxation. Increase of height, which is required, may also be avoided, which would have in- volved not only additional relative cost of the construction of the whole building, but also an addition to the relative cost of operation of the building. In further considering this investment of capital upon the appliances and the rentable space connected therewith, the ques- tion will naturally arise whether the engagement of capital therein can produce returns or offer advantages equivalent to that of additional renting space provided by the same capital expenditure. This consideration may be applied to many other conditions than the operation of buildings ; for instance, the manufacturer who engages his capital in the competitive manufacture of some special material entering into part of his product may not be advantaged by the transaction, because the same amount of funds expended in means or apparatus for extending the sale or 116 ABANDONED MACHINERY "The commercial value of such apparatus is limited to its ability to compete with an exterior service" Manufacturing or Power Machinery enhancing- the value of the complete product might bring in a greater net profit by increasing the gross output. The same principle appears in the application of manufactur- ing machinery in buildings. If it be found, for instance, that a supply of gas be desirable or necessary in a building, it does not follow that a gas-manufacturing plant competing with the pres- ent price of a public supply of gas will produce enough return by any difference between price of that supply and cost of its own output to justify the expenditure accompanying its installa- tion, when compared with the results derivable from an ex- penditure of the same capital in enlarging the area or improving the rentable character of the tenantable part of the building. Thus, to refer to the previous illustration of a 1 5-story build- ing, if we assume that the expenditure of $18.57 involved in a plant should be expended instead in constructing additional renting space, it would add (at the same rate of cost of con- struction) three stories to the assumed square foot of vertical section of the building. The rentable space thus provided would bring in a gross addition to rents of $3.78 per annum. If we should assume that the purchase of supplies of a mechanical nature from public services instead of their manufacture on the premises would involve an addition of as much as 25% to the cost of the entire mechanical services, this would be but one quarter of one fifth of the gross income, and in this instance would amount to 95 cents. Deducting this entire amount from the gross return o the three added floors, still leaves a net addition to the rentals of $2.83. Reducing this amount to the net of 45%, leaves $1.27, which, upon the expenditure of $18.57, brings back interest at nearly 7% per annum, a return which is much higher than that obtain- able by the investment in the plant and cellar. Finally, the security afforded by a building to" a mortgagee Building for Profit is not proportionately increased by the capital expended upon machinery, because the life of the latter is shorter than that of the building, and involves future expenditures which might fall upon the mortgagee. Such apparatus does not form a security for bonded or mortgage funds of the same stability and life as a building or land. 118 VIII APARTMENT-HOUSES, FAIR VALUES, AND FAIR RENTS IN residential apartment and tenement buildings the short- age of housing which is not, of course, a permanent condition enabled many owners of such properties to fill all vacancies and thus increase their gross income. In spite of large accompanying advances in the cost of fuel and labor, by close economy in upkeep and services they have been able to maintain that income with moderate increase in rents. But in other instances less considerate owners advanced the rent to extremely high rates. Upon a new level of value, thus created, speculative purchasers or lessees endeavored still further to add to the rate of return by additional increases in rental. The process became so ill regulated and oppressive that a large number of tenants combined to demand restrictive legislation, which has been enacted in several States, whereby the courts are now empowered to decide upon the rate of rental in resi- dential buildings, and the owner is also made personally re- sponsible to the law for the adequate maintenance of such services as heat and elevator operation, for the proper upkeep of the structure, and can be fined or even imprisoned if in default. The speculative process of successive sales and the substi- tution of the irresponsible lessee for the owner were thus in- continently checked, and the sale of such properties at enhanced speculative values became restricted. New buildings now com- ing into existence with unexampled rapidity will eventually 119 Building for Profit meet the demand for housing accommodation, and excessive rates of rental must decline, bringing down with them any un- substantial assumed values of the properties. Residential property was and is entitled to substantial in- crease of income required to cover the advanced prices of fuel, labor, and repairs, and sufficient also to earn a net return upon a properly established invested value at a rate not less than that obtainable in the investment market for securities of equal standing. Such an increase is necessary merely to maintain the investment. But any additional income is dependent upon the permanency of high rentals, and the conservative investor will do well to consider the question whether rent raised to a high level during a period of emergency can be regarded as per- manent. Xor can it be assumed, merely because the cost of new build- ing construction has advanced to high levels, that an existing building has thereby advanced in value to a similar extent. Such comparative worth could only come into practical consid- eration in case of the destruction of an existing building, and meantime it constitutes only a very good reason for increasing the extent of fire insurance to cover the- enhanced cost of reproduction in case of disaster. In point of fact these ad- vanced costs of construction rendered new buildings so un- attractive to the builder, operator, mortgagee, and investor that the process of new construction was completely halted, and was only recommenced when a reduction in taxation was brought about roughly commensurate with the added cost of construction. It has always been the case that the tenement class of resi- dential property is required to produce a high rate of return in order to render it attractive and marketable, while the more elaborate class of apartments in which leases are obtainable, and which have heretofore been managed with little risk and 1 20 Apartment-houses, Fair Values, and Fair Rents personal liability, find a market at a lower rate of interest on their investment. This scale of rates of return presents the same complexion under conditions of high rents and higher prices of money. But the one-time, well established return providing 5 to 6 l /2% on investment in residential property has now advanced to rates of 7 to 10%. It is probable that this higher level will be permanently required to attract investors to properties to which legal complexities and personal liabilities are now at- tached. Thus as an illustration the first of the tenement buildings in the table on page 41 would require, in order to cover enhanced expenses and return 10% upon its established book value, a rental of 86 cents per square foot, or an increase of nearly 60%. If io r r should have been added to book value, either by assumption or by a sale, then to maintain that value the rent would have to be raised to 90 cents, or 68% . A second sale or addition to book value of another 10% would require another increase in rentals to $1.00, or 83% increase. The proportion of the book value of the property repre- sented by the annual gross rent has changed by the general advances in rents and rates, so that in the cold-water class of tenement, at a return of 10%, the gross rent becomes about 15 4/10% of the book value, and the ratio of the rents to the book value is as i to 6 4/10. Where the operating expense is greater, as in the steam- heated class of apartments, a return of 10% involves rentals aggregating 17 2/10% of book value, or a ratio of rents to value of i to 5 8/10. Rentals have also greatly increased during the housing shortage in the more expensive class of apartment buildings. The occupancy of such apartment buildings has been the sub- ject of much acrimonious discussion and a vast extent of litigation in regard to what constitutes a proper rental. The 121 Building for Profit ascertainment of a fair rental presents much difficulty because it necessarily introduces the question of what is the real value of the property, and also what constitutes a reasonable rate of return upon that value. The assessed valuation has been suggested as a basis for fixing fair value. The proposal is made that 1570 be added thereto, constituting a "minimum" value which, being thus determinable by established official figures, could be utilized by the courts as a general basis, leaving it to the owner to prove any higher value. By this plan the assumed basis of assessment would be &$% of market value. This plan offers a workable basis, and if adopted it would become the means of adjusting assessments to some fairly uniform relation to true values, because it would then be to the interest of all parties to see that the assessment accurately indicated that value. 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 build- ings 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 Va'.ue Cold-water tenements . . % I5-87 I tO 6.3 *>/ /O 37 % 63 */ SO 10 Hot-water tenements . . 16.66 i to 6 4 6 54 9 Flats, heat and hot water . 18.18 i to 5.5 53-8 46.2 8-5 New law "walk-up" J 9 i to 5.25 57-9 42.1 8 Elevator apartments . . "9-73 i to 5.06 62 38 7-5 122 Apartment-houses, Fair Values, and Fair Rents Many buildings pass through periods of depression and ex- cessive competition during which their net earnings are less than a prevailing rate of interest, and even in some cases re- sult in actual loss. This situation has been used by some owners to justify, dur- ing 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 un- fair. To the extent that a new basis of rentals will re- establish 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 resi- dential 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 tene- ment buildings. Though constructed at a high cost of ma- terials 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. 123 Building for Profit 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 dis- posed 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 ex- cessive 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 build- ing shall be paid off by annual instalments upon the mortgage. It is evident that the funds for such instalments can be de- rived only from rentals. Objection has been made by tenants who are now begin- ning to show a very desirable concern in such subjects w r hich have long affected their own interests to the inclusion of de- preciation 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 124 Apartment-houses, Fair Values, and Fair Rents 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 dis- cordance 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 com- prehension of their mutual interest in the development of the homes and business buildings of our country, a new spirit of co- operation will arise between those who use and those who own improved real estate. 125 INDEX Advance in Rental 39, 49, 119 Advertising, Value Attached to 33,35 Age, Effects of 52 Amortization Table 77 Ancient Buildings 61 Annuity Table 77 Apartment-houses 29 30, 41, 72, 119 to 122 Fair Rents in 121, 122 Fair Value of 1 19, 120, 122 Minimum Value 122 Operating Expense 41 43,97, 121, 122 Rentals in 42, 43, 47 Apparatus Earning Existence of 88 Electrical 81 Inefficient 86 Mechanical 82, 83 Motive 81 Non-earning 113 Appliances Complexity of 8l Mechanical 80 Motive 86 Appreciation 5, 66 A Real 16 An Assumed i, 15, 32 Capitalized 16 Established 16 Not Realizable 15 Of Land Value l S~ 2 7i 66 Of Rentals i, 14 Rate of 15,16,24,27 Area Increase in 9 Reduction of 33, 34 Assessed Values 122 Assessed Value Related to Earnings 97 Assessments 17 B Basements 13, in Rentals -of 49 Boilers, Depreciation of... 91, 92 Brick Buildings 58, 59 Bronx, Land Values in 16 Building Capital Embarked in 18 Over- 24 Buildings Ancient 61 Brick and Stone. . .58, 59, 66, 67 Business 69, 70 Commercial 5 Component Parts of ... .57, 62 Composite 5, 54 Cost of 18, 29, 32, 47 Definition of 5 Depreciation of 19 24,26,50,51 127 Index Buildings (Continued) Durability of 54 Earning Ability of 15, 68 Economic Life of 56 66, 68, 75, 76 Effect of Increased Cost. ... 49 1 20, 124 Effect on Taxation 25 Elementary 5, 10, 1 1 Frame 58, 59 Height of 6, 7, 9, 13 Hotel 68,69 Loft 39, 40 Modern 60, 6 1 Xot Permanent 68 Office 37.38,58,59 Purpose of 5 Removal of 33 Residential 40, 72, 1 19-122 Sinking-fund for 18 Substantial Parts of .... 57, 59 "Taxpayer" 75, 76 Usage of 54, 60 Useful Life of 7 Carrying Charges 7, 13, 65 Coley, C. T 94 Component Parts of Buildings 62 Construction Ancient 50 Brick 62 Character of 56 Comparative Cost 6, 25 Complex 61 Costs of 47 Exterior . 61 Frame 62 Modern 50 Modern Fireproof 62 Over-expense in 70, 73 Relative Costs of 6, 7, 8, 25 Conveniences 72 Cost of 101, 102, 109 Mechanical 103, 104, 105 Costs Construction .6, 25, 47 Cubic Foot 6, 7, 8 Operating 10,94,95 Relative 65 Relative Construction. . .6, 7, 25 Costs of Conveniences 101, 102, 109 Power Machinery 112 Courts, Light 34 D Davies, J. Clarence 16 Decay Financial 51, 74 Physical 51 Decorating 71 Decoration ... 5. 20, 36, 37, 79, 102 Decorative Features Expenditure on 20 Non-earning 20 Depreciation 22 24,25,31,32,37,50,52 Classification of 55 Economic 5 1 , ?6 Effects on Land by 20 Funds for 18, 26 Included in Rent 124, 125 Physical 53,76 128 Index Depreciation (Continued} PAGE Process of 67 Depreciation of Boilers 91, 92 Buildings 19, 24, 26, 50, 51 Deterioration 5, 50, 51, 52 Deterioration of Equipments 85 Motive Appliances 86 Piping 87 Power Plants 79 Durable Parts of Buildings . . 62 63,64 E Earnings 15 Divisions of 9~ I 4 Fall in 15 Ratio to Land Value. 26, 27, 28 Rise in 14 Economic Depreciation ... .51, 76 Economy in Operation 107 Electric Apparatus 81 Electric Service . .2, 105, 106, no Electricity Metering 105 Wastage of 105, 106 Elementary Building . . . .5. 10, n Elevator Service 86, 104 'Elevators 88-91 Inefficiency of 86 Equipments 7 Demands on 91 Economic Deterioration of. 85 Mechanical 79, 80 Motive 108 Proportion of Cost of 87 Relative Life of 83, 84, 85 Remodeling 92 Sanitary 80 Expenditures Operating 35, 36, 95, 101 Over- 70 Proportion of 44, 45, 46 Relation to Increased Rents. 95 Unnecessary 32, 71 Factory, Modern 66, 67 Financial Decay 51, 74 Flats 41 Rentals in 41, 46 Formula for Increase in Rentals Neces- sitated by a Plant 113 Rental to Produce Interest on Building 12 Rental to Produce Interest on Site 10 Total Invested Value 28 Frame Buildings 58, 59 Life of 5, 62 Frame Construction . . 62 Gillender Building 70 H Heating 104 Gas 107 Plant 109 129 Index Height Addition to 9 Economic g High-speed Machinery. .81, 82, 85 Hotel 68,69 Houses Apartment .29,30,41,42,47,72 Tenement 41, 47, 72, 73 Hurd, Richard M 55 Income Tax 2, 53 Increase of Light 33, 40 Increment in Land Value Apparent 16 Dependence upon 22 Phenomenal 22 Realized 16 Relative to Loss on Build- ing 20-22 Remunerative 14 Time to Realize 24 To Offset Depreciation ... 22 Unearned 16 Unearning 16 Inducements 104, 105 Interest Rates i, 32, 120-122 Invested Values 44, 45 Investments Disproportionate 16 Over- 29,31,32,68 Land, Burden Laid upon 18 Land Values Appreciation of I 5~ 2 7y 66 Building Ahead of 26 City 55 Effect on Rentals 43 Established ...30,31,32,35,41 Improved 5 In Bronx 16 Increase in .... 14, 16, 20, 22, 24 Rate of Advance in 20 Ratio of, to Building 28 Ratio of, to Income 28 Relation between, and Building 9 Tide of 72 Legislation 3, 1 19 Life of Brick Buildings 58, 59 Mechanical Apparatus . . .82, 83 Motive Apparatus 87-90 Motive Appliances 82 Office Buildings 58-60, 65 Light Increase of 33, 40 Value of 102 Locality Development of 16 Effects of Improvements in. 16 Loft Buildings 39, 40 Power in 106 Relative Costs of 7, 8 M Machinery Commercial 1 10, 1 18 Cost of 112 Expenditure on 117 High-speed 81,82,85 130 Index Machinery (Continued} PAGE Power 108, 118 Maintenance . .52, 53, 100, 101, 103 Manhattan Absorption of Land on .... 24 Isolation of 24 Mechanical Apparatus 82, 83 Appliances 80 Conveniences 103-105 Equipments 79, 80 Meters, Electric 105, 107 Modern Buildings 60, 61 Mortgage Rates i, 14, 37 Motive Apparatus 81 Life of 87,88,89,90 Motive Appliances Economic Deterioration of. 86 Physical Life of... 82 N Net Earnings Division of 9, 10, 12, 13, 14 Related to Site 26, 27, 28 Obsolescence 53 and see Economic Deprecia- tion Office Buildings ....37,38,58,59 Life of 58, 59, 60, 65 Relative Costs of 7, 8 Rentals in 47 Operating Costs 94, 95 Economics in . , 10 Operating Expenditures 35 36,95, 101, 107 Over-building 24 Over-expense, Effect of 70 Over-investment ... .29, 31, 32, 68 Past Losses 123 Personal Liabilities 3, 119 Physical Decay 51 Depreciation 53-76 Piping 79 Deterioration of 87 Systems of 81 . Plants Heating 109 Power Plants 38, 79 Power for Profit 53 Power Machinery 108, 118 Capital Involved in 114 115, 116 Commercial Value of 92 Cost of 112 Economy of 1 1 1 Power Plants 38, 79 Abandonment of 107 Deterioration of 79 Loans on 92, 93 Power Supplies 106 Property Improvement of 18 Unimproved 5 Value of 5 Public Supplies no Index Rate of Appreciation 15, 16, 24. 27 Depreciation 67 Interest, Effect of 43 Real Estate, Fundamental Form of 6 Reduction of Building Area. 33, 34 Remodeling 53, 57, 68 Removal of Buildings 33 Renewals ^6 Rentals Advances in 39, 41, 49, 119 Affected by Land Values. . . 43 Apartment-house . . . .42, 43, 47 Appreciation of i, 14 Basement 49 Competition in 6, 46 Fair 121. 122 Flat-house 41, 46 Formula for 10, 12 Ground Floor 40 Office Building 47 Per Cubic Foot 47 Per Square Foot 10 12,13. 14-47 Prevailing Rate 28, 47 Proportion to Value ....37-43 Rate of 10, 16, 35, 47 Relation of, to Cost 47 Relation of, to Height. . . .47, 48 Relation of, to Value. . . .43, 122 To Justify Investment 14 Repairs 52, 53, 56 Resale of Electricity 107 Residential Buildings 40, 72 Roundhouse 66, 67 Sanitary Equipments 80 Shortage of Buildings i, 14 Sinking-funds, for Building. . . 18 Site Earning Capacity of 26 Excessive Building on .... 26 Street Frontage 33 Sub-basements 109, no, 112 Supplies Power 106 Public !.. ,.iio Table of Amortization 77 Annuity 77 Apartment-house Rentals.. 42 Component Parts of Build- ings 62 Costs of Construction 47 Depreciation 55 Economical Existence of Buildings 76 Economical Existence of Mechanical Apparatus . . 89 Flat-house Values 41 Life of Parts of Buildings. . 62 Operating Expenditures ... 95 Physical Existence of Mechanical Apparatus . . 82 Rentals and Costs of Construction 47 Taxation per Room 100 132 Index Table of (Continued) PAGE Taxation Related to Rentals 97 Tenement-house Values ... 41 Taxation 1 6, 17, 26, 94-100 Income 2, 53 Irregularities 97 Per Room 100 Remission of 123, 124 "Taxpayers" 75, 76 Tenancies Multiplied 9 Tenement-houses ... 41, 47, 72, 73 Alterations to 73 U Unimproved Property, Value of 5 Unoccupied Space, Value of 33.34 Upkeep 9>5 2 >53>?6 Power Machinery 92 Property 5 Unoccupied Spaces 33, 34 Values Actual Land 16 Building Ahead of Land ... 26 Capitalized 44, 45, 46 Enhanced 22 Example of Computation for 29,32 Formula for Total Invested 28 Increment in Land 14 16, 20, 22, 24 Invested 44, 45 Providing for Enhanced. ... 24 W War Conditions L, 14 Value of Light . 102 Zoning System I 133 INITIAL FINE OF 25 CENTS YE 01245 . ER ELEYUBRARIET V/.f