Columbia University Libraries Digital Collections: The Real Estate Record

Real estate record and builders' guide: [v. 101, no. 2615: Articles]: [April 27, 1918]

Text version:

Net Revenues From Office Buildings Decline Higher Taxes and Greater Operating Costs Not Fully Covered by Increased Gross Rentals DURING the discussions over the terms of the Boylan bill limiting the tax on real estate which failed to pass the Legislature, the claim was fre¬ quently made that realty taxes were passed along by owners to occupants of buildings in the form of rentals, these being advanced in proportion to the increased taxes, and that therefore a higher tax rate worked no disadvantage to the holders of property. Real estate men have admitted that a certain propor¬ tion of the increased cost of the operation of high-class buildings has been covered by the advance in rentals that has taken place in the last year or two. But they have also contended that the new scale of rents does not equal the larger operating expense. The Boylan bill, they have pointed out, was introduced as much for the benefit of tenants as owners of buildings, because unless the relief w^as granted it would be necessary to make further additions to rentals. The burden of the constantly augmented cost of city operation would, therefore, unless the bill became law, fall more and more heavily on the tenants. Without a fixed tax rate, as provided in the bill, the probability of higher taxes was sufficiently strong to justify a promise of higher rents. In the hearings before Senator Cromwell's Committee on the Affairs of the City of New York it was freely predicted that unless the Boylan bill was passed the tax rate next year would be 20 to 30 points higher than for this year. It was also universally conceded that it was practically impossible to reduce or even to materially retard the constantly increasing cost of running the city government. Those who opposed any change in the existing system of taxing realty to cover about ninety per cent, of the city's budget declared that the burden of taxation did not fall upon the owners of real estate, but upon the tenants and that this was the most equitable form of taxation because it reached the largest possible number of citizens, many of whom would otherwise escape pay¬ ing any share of the expenses of the city government. That this phase of the question may be justified to a certain extent was admitted by real estate men, but it was emphatically stated that gross rentals had not begun to keep pace with the great increase in operating expenses, which included the considerable item of taxes and insurance, and that it was always impossible to advance rentals in the same ratio that these expenses mounted up. With the object of ascertaining what is the real situation with respect to these various issues, the Real Estate Record and Guide has obtained the actual figures bearing on the question of the relation between oper¬ ating expenses, including taxes and insurance, and the I rentals which can be obtained. For this purpose the i managers and owners of ten modern office buildings in 1 the district south of City Hall were induced to give the I real figures covering these items and these statistics are I presented to the readers of this newspaper for their careful consideration. These figures were secured on the understanding that the totals only for the ten buildings were to be used, the classification of items having been arranged so^ as to cover all the expenses incurred in the operation of structures of this character. By this arrangement two things were accomplished—the owners are protected as to the exact figures relating to any one building, and the analysis itself made much more valuable as showing the actual condition of realty, because an average can be struck which applies generally to office buildings of high type in the downtown district. It was essential to the value of this statement that the buildings should be uniform in character and conse¬ quently only office structures of the first class were included in the analysis. It was equally important that the figures should be genuine, and these conditions have been rigidly adhered to. The buildings are all well known, and some of them have national reputation, and the figures have been carried out to dollars and cents. As the real estate fiscal year ends on May 1, it was necessary to obtain figures for eleven months, to March 31, and for the comparative period of eleven months of the previous year. The comparison of the gross and net returns on these buildings shows conclusively that the owners did not receive as large net income on their investments during the eleven months ending March 31 last as they did for a similar period of time in 1917. The cause for the great increases in operating expenses are shown in the accom¬ panying table. Of these, the increase in taxes was con¬ tributory, but the full effect of the high tax rate now in force will be felt this year. Only three months of the time for which the figures are taken were affected by the new and increased rate. The gross rents for the ten buildings for the period ending March 31, 1918, were $6,287,804.30, and for the corresponding months in 1917 were $5,970,323.34, show¬ ing an advance in gross rentals of $317,480.06, or 5.32 per cent, increase. The operating expenses were $1,801,533.80 in 1918 and $1,403,522.00 in 1917, the gain being $398,011.80 or 28.4 per cent, increase. Fixed charges (taxes and insurance) for 1918 were $1,156,242.20, and for 1917 were $1,120,058.94, the addition to this item being $36,183.26, a gain of 3.23 per cent. These figures might be considered fairly satisfactory, unless the comparison between the two years is worked out. Deducting the total operating expenses, including taxes and insurance, from the gross rentals it is found that the net rentals for 1918 were $3,330,028.30, and for 1917 were $3,446,742.40, showing a loss in net of $116,714.10, or 3.38 per cent. With gross rentals increasing this year 5.32 per cent. over last, the net rentals actually decreased 3.38 per cent., which the owners of the buildings say is sufficient evidence that conditions are very unsatisfactory. There are several other unfavorable factors to be taken into consideration. Building managers of many years' experience state that a safe estimate of operating cost for a modern building should be based upon 18 per cent, of the gross rents, with the building 85 per cent, rented. This year, as the statistics compiled show, the operating costs have amounted to as high as 30 per cent, in some cases, or within from 6 per cent, to 10 per cent, of what operating expenses and taxes and insurance combined used to cost. What is equally important is that the figures pre¬ sented are made up for the 1918 period to include eight months' taxes at the former rate of $2.02 per thousand, and only three months, since January 1, at the new rate