New-York tribune., 1920-12-19

/ nate the consideration Of encum-
btances. Combine the underlying Sc
curties issued by corporations with
the common stock, and add to earnings
The interest paid thereon. Divide the
total net earnings thus determined BY
the total capitalization of the corpo-
ration (made Up of bonds, notes, pre-.
ferred and common stoch), and the rc-
suit is the percentage Of earnings Of
the corporation as if it wele free and
clear of all Indebtedness.
The market price of the common
stock will furnish a means of deter
mining reasonable return based on
public opinion, which is the deciding
factor in all matters Of finance.
"With respect to real estate the
same result can be obtained by elimi-
mating the mortgage indebtedness and
capitalizing the mortgage into the
equity. BY this process you leducc
real estate and corporation securities
to the same common denominator and
formulate a scientific basis upon which
TO arrive at reasonable return.
''lt this process be accepted as valid
an analy sis Of the net earnings OF q
large number Of corporations Of dif-
terent classes and d comparison Of
these earn ngs w tn the markes value
Of the stock VIII give j. pcnGao,. data
in establishing what MT earn ngs
should be permitted real estate to
maintain value at u given level
at will be noted in this study that
we avoid the consideration of eqn:ties
dcterm ming reasonable return.
both in the case of corporations and
real estate. The equity il. almost every
piece of mortgagod real estate differs;
c. Do
the risk OF loss and the larger VIII BE-
the return expected to compensate for
this risk. A standard OF reasonable
ness on equities would vary from q
very large return on very small
equity to much smaller return on a
large equity.
How Get Back Capital
an order to attract capital to real
estate investments return must be
permitted equal to that which the same
Gmount Of capital would earn in other
forms Of security. Any attempt to
force real estate to take a lower re-
turn than is received on corporate
securities of like character will be de-
st uctvc and disastrous in the long
run.
The public quotations of common
stock in thirteen of TIE best known and
best managed corporations in the coun-
try indicate that the public has set a
market value thereon based on an aver
age Of lis per cent net earnings on
the entire capital of the respective COM
panies. In other words, in the greatest
market in the world, with the largest
amount OF available capital, it is neces-
Sary on the average for a company to
earn l.S per cent, not on its common
stock but on its entire capital. in order
to maintain the value of its common
stock at par
Applled to real estate a reasonab'e e
return would be represented by a net
income of lis per cent on the total
value or. given piece of properly
after deductng all carrying charges,
including taxes and moderate allow
nee for depreciation or obsolcscencc
reasonable return on an equity in
real estate shou.d be higher lncrcas-
ing somewhat as the equity or margin
Of safety decreases. Given sound
basis for computing n reasonable re-
turn on q free and clear real estate
one may oscly approximate what
would be n fair return on an equity.
"Ihe conclusions reached in this |
study can be thus stated:
"hiajor Premise Equity in real cs-
tate Is essentially the same as com
mon stock in u corporation.
Minor Prcmisc-A corporation must
earn ll.S per cent on its entire capital
before its common stock Will be sal
able at par under current money mar
ket conditions
"Concl clusion--Thercforc reasonable
rent will give about 1lS per cent nct
ncome on fair valuation Of real estate. ~