trol of all other kinds and types of hotels located elsewhere throughout the entire Nation. In 1951 Congress corrected this discriminatory treatment of Chicago residential hotels by enacting sectio 207 of title II of the Defense Production Act Amendments of 1951, which repealed those portions of the act which recontrolled Chicago residential hotels in 1949. At the time I appeared before your committee in 1951 in support of the elimination of this discriminatory treatment of our hotels, I emphasized to the committee that there was a substantial and increasing vacancy factor in Chicago residential hotels sufficient to justify their decontrol, and I assured your commitee that the removal of ceilings would not result in abnormal rental increases. I am pleased to report that the events subsequent to decontrol have fully justified the representation which I made to you. In 1942 when rent controls were first imposed on all housing, Chicago residential March 1951, 87.09 percent of total occupancy. It is significant to note that Horwath & Horwath, another firm specializing in hotel accounting, reported that Chicago residential hotels for the month of December 1951 were running at 83.49 percent of total occupancy. These figures graphically confirm the considered judgment of Congress that removal of Federal rent controls from Chicago residential hotels in 1951 was necessary and required in the light of the steadily increasing availability of residential hotel units. The vacancy figures above detailed clearly establish that there no longer is any shortage of housing accommodations in Chicago residential hotels, nor conceivably can there be any threat of any such a shortage. There has been a substantial amount of new construction, particularly of multiple unit unfurnished apartments located on the north and south sides of Chicago and primarily located on the lake front and near lake front areas. Permits for the construction in Chicago of 18,676 apartment units costing $121,147,379 were issued during the period 1949-51. This is to be compared with 255 new apartment units in 1940, and 514 new apartment units in 1941. These new units are, of course, directly competitive with our member buildings. The self-evident competitive character of new multiple unit unfurnished apartments is confirmed by the fact that 28.2 percent of the tenants renting accommodations in these new units moved from Chicago residential hotels. The impact of this competition is further dramatically and forcefully illustrated by the recent experience of one of our member hotels located on the South Side of Chicago. This hotel, consisting of approximately 80 units, within the course of a very short period of time saw 22 of its tenants take up residence in a new multiple unit unfurnished apartment which had been erected within a short distance of the hotel. Rental increases occurring subsequent to decontrol in 1951 have, of course, been modest. The removal of controls permitted residential hotels to correct distortions in rent structures which had resulted from the arbitrary and capricious effect of rent control. In many instances out-of-line rentals were reduced. There was generally an averaging decrease and increase in rentals for units within a hotel to correct long existing inequities which the administrators of Federal rent controls had refused to adjust. It is thus safe to conclude that the judgment of Congress in decontrolling Chicago residential hotels in 1951 was a sound and constructive one. The law of supply and demand is fully operative with the number of vacancies increasing rather than decreasing. Our residential hotel members feel themselves fortunate in their return to a free and competitive economy requiring them again to meet the tests of the law of supply and demand. Furnished service buildings should be decontrolled Congress, when it decontrolled hotels by the Housing and Rent Act of June 30, 1947, did so not because there was any magic in the word "hotel," but because hotels provide a large number of services which set them apart from the ordinary apartment or multiple-unit dwelling, which offer, primarily, bare space nonservice The 1949 act was so worded as to recontrol only nontransient hotels in New York City and Chicago. However, when New York shortly thereafter extended State control over New York City hotels, Chicago tai hotels were the only type of hotels under Federal rent control in the country. 96315-52-pt. 3-3 accommodations. This basic reason which correctly prompted Congress to decontrol hotels applies as well to any establishment which provides customary hotel services and which, because of some freak of circumstance, may not have been commonly known in the community as a hotel and thus not eligible for decontrol under the Housing and Rent Act as it now exists: There is no reason to discriminate between an establishment known as a hotel and an establishment located next door to it not having any sign or similar indicia designating it as a hotel, each of which provides exactly the same hotel services to its guests and occupants, and each of which bears the same costs of providing the same hotel services. Eligibility for decontrol therefore should be drawn between establishments which provide customary hotel services and those which do not. This distinctive test would be simple of application and would fully effectuate the basic reason underlying the decontrol of hotels by the Housing and Rent Act of 1947, as amended. The Office of Rent Stabilization has recognized this inequity in part by decontrolling rooms in any establishment (including establishments other than hotels), which provide customary hotel services. See sections 5 and 55 of Rent Regulation 2, Rooming-House Rent Regulation. It is our considered belief that this administrative decontrol with respect to rooms should be legislatively affirmed and extended to include all housing accommodations in any establishment (whether known as a hotel or not), which units are provided "customary hotel services" within the definition of the present Housing and Rent Act. We therefore respectfully propose that section 202 (c) of the Housing and Rent Act of 1947, as amended, be revised to exclude the hotel qualification and so as to read as follows: "(c) The term 'controlled housing accommodations' means housing accommodations in any defense-rental area, except that it does not include "(1) Those housing accommodations, in any establishment which are occupied by persons who are provided customary hotel services such as maid service, furnishing and laundering of linen, telephone and secretarial or desk service, use, and upkeep of furniture and fixtures, and bellboy service;" All housing accommodations should be decontrolled with the exception of currently controlled housing accommodations in areas found to be critical defense areas Finally, we strongly recommend that all Federal rent controls be removed except for currently controlled housing accommodations in areas properly declared to be critical defense areas pursuant to those provisions of the Housing and Rent Act relating to the designation of critical defense areas. The discriminatory effect of rent control in the city of Chicago is well illustrated by statistics published by the Census Bureau and by the United States Department of Labor. For example, the median monthly rental for 1930 for Chicago was reported to be $49.75, whereas the median monthly rent in 1950 was $44.25 per month, a decline of $5.50, or 11 percent. Thus rentals in Chicago in 1950 were 10 or 11 percent lower than they were 20 years prior thereto. In 1951, average rents for Chicago were almost exactly at the same point as in June1931; yet the expenses of operating buildings has increased spectacularly. Coal, for example, costs twice as much now as it did in 1931. Taxes, wages, salaries, costs of new supplies such as linens, furniture, floor covering, and similar items, have risen markedly. Thus, the landlord's net income from apartment buildings completely occupied in 1931, is now substantially reduced and so is the purchasing power of whatever profit remains. This inequitable and discriminatory treatment of landlords has resulted not only in a decrease in their income, but has caused a proportionate decrease in taxes which they otherwise would have paid. It is therefore the considered recommendation of our association that, measured under any standard, Federal rent controls should be removed and as soon as possible, save only in those few areas where, by reason of defense activities, there has been an actual and substantial in-migration of labor. Such action would give proper weight to the lessening need of related economic controls (such as price controls); would continue the further orderly termination of Federal rent controls over housing accommodations; and would effectuate the declaration of policy contained in section 201 of the Housing and Rent Act, as amended, that: "Congress therefore declares that it is its purpose to terminate at the earliest practicable date all Federal restrictions on rents on housing accommodations.” DISCUSSION OF FAIR NET OPERATING FORMULA The fair net operating-income formula as devised by the rent director is a cruel hoax perpetrated on millions of property owners who were hopeful of relief and on Congress itself. In my estimation when Congress stipulated that a fair net operating income be granted it meant just what it said- a proper return based on sound economics-which should definitely not enrich the property owner but return a fair net operating income for the type of property he holds. The bitter truth is that the fair net operating-income formula does none of these things. What is wrong with the ORS formula for fair net operating income: 1. It is very difficult to prepare-I believe that 95 people out of 100 would not be able to prepare it without an accountant. 2. It requires records that the little owners, the very people you are trying to help, do not possess. Should go back 20 years. 3. It forces the little owner to take a low depreciation figure-less than that permitted by the collector of internal revenue. 4. Interest on mortgage indebtedness is not recognized as a proper charge by the Rent Director although it is by any accountant or the collector of internal revenue. 5. The fair net operating-income formula gives a return that is neither fair nor proper. It permits less return than the Government charges for mortgage interest-and puts rental property return in the same category as Government bonds. 6. It has a declining scale of net operating income so that the resulting net operating income after increase can be only 3 percent of the gross incomemanifestly being neither fair nor proper. Let us look at what happens to a piece of property under the fair net operating formula as devised by the housing expeditor now the ORS. We have under consideration the following property purchased at a fair market price in 1942. The ORS states that 2.7 percent is a fair return-the same as Government bonds, overlooking completely the inherent risks of ownership and operation. Example 2 Now suppose this owner had a mortgage of $5,000 on this property at 5 percent. Former net.... Interest on mortgage.. Present net.... No increase allowed return on investment (percent). $273. 20 250. 00 23. 20 0.23 A person who owns a property with a mortgage on it is allowed no consideration for mortgage interest; or can even operate at a loss without a permitted increase in rent under the fair net operating formula. According to the ORS this is a fair net operating income; less than the return on real estate mortgages or preferred stock. Return on investment, 2.9 percent, again about the return on Government Increase permitted.... Return on investment, one-half of 1 percent. The CHAIRMAN. The next witness is Mr. Fitzgerald. $1,080. 00 1, 154. 20 74. 20 226. 80 301. 00 353. 00 52.00 STATEMENT OF HARRY J. FITZGERALD, ACCOMPANIED BY CALVIN K. SNYDER REPRESENTING THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS The CHAIRMAN. Mr. Fitzgerald, how long do you think you will take? Mr. FITZGERALD. Better than 30 minutes. The CHAIRMAN. We will not have time to hear Mr. Hayden. We will have to put him off until around 4 or 5 o'clock this afternoon because we have Governor Arnall down here at 2:30 and I think that is going to take quite a while. I believe we should tell Mr. Hayden that in view of the fact that these gentlemen have taken so long this morning. Senator DIRKSEN. Mr. Chairman, may I suggest it is entirely likely that we will have some votes on the floor of the Senate immediately after lunch. The CHAIRMAN. We set this hearing with Mr. Arnall, several days He has prepared himself on these matters and he will be with us at 2:30 in executive session for a half hour and then in open session at 3. I hope everybody will be here for Governor Arrall. Is it the wish of the committee that we try to get another room? Senator DIRKSEN. I was going to suggest that. The CHAIRMAN. Suppose we get a room over at the Capitol. We will then have to notify everybody. You may proceed, sir. Mr. FITZGERALD. Mr. Chairman and members of the committee, I am Harry J. Fitzgerald, Evansville, Ind. I am chairman of the rent decontrol committee of the realtors' Washington committee, National Association of Real Estate Boards. The National Association has a membership of 47,287 realtors and 1,118 member real-estate boards throughout the Nation. Our offices are at 1737 K Street NW., Washington, D. C., and 22 West Monroe Street, Chicago, Ill. We appreciate this opportunity to appear before your committee. I have been a member of the Evansville Rent Advisory Board since its inception. It is my understanding that our testimony today is to be limited to the inequities and the administration of the existing rent-control law. Although we are of the firm conviction that inequities are inherent in the rent-control law, nevertheless we shall endeavor to point out some inequities which we feel are susceptible of administrative or legislative remedy. Therefore, in accordance with the letter we received from the committee, we are filing herewith a statement of the National Association of Real Estate Boards containing reasons why we believe Federal rent control should be allowed to terminate on June 30, 1952. We are also attaching to that statement certain documents to support this position. We respectfully request, Mr. Chairman, that the statement and its attached documents be made a part of the record at this point. (The information referred to follows:) STATEMENT SUBMITTED BY HARRY J. FITZGERALD ON BEHALF OF THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS Mr. Chairman, the expressed policy of the Congress in the matter of rent control is to remove the Federal controls from rents as early as practicable. This policy has been restated in one form or another for nine consecutive years. The Housing and Rent Act of 1947, as amended, actually is the Emergency Price Control Act of 1942 all dolled up in a new suit. In 1951 the Congress extended rent control until June 30, 1952, despite the administration's recommendation that such controls should be extended for 2 years. It must have been apparent to the committee then that a reappraisal of the necessity for such controls after 1 year was desirable-or, in any event, the consideration of amendments based upon the year's experience with such contre We cannot help reflecting on the implications of another extension of F rent control. Such action strengthens rather than lessens the unfortu cept prevailing for the last 10 years that rent control may be justified ev the rest of the economy operates in a free competitive market. |