Evening star., 1938-06-18
LOWER RATE SEEN
FORB|G HOUSING
Where Risk Is Reduced,
Sponsors Can Take
Less Return.

Study of number of large-scale
housing projects submitted to F. H.
A. for mortgage insurance has DEM
onstrated that where risk has been
notably minimized adequate sponsors
are willing to undertake their
financing even though the expectation
Of return is considerably lower than
was formerly accepted from apart
ment investments, Leonard Downe of
Washington said in addressing the
Northwest Regional Conference of
the National Association of Real
Estate Boards.
In special session on appraisal
method conducted by the American
Institute Of Real Estate Appraisers,
he discussed the important bearing
this may have on the appraisal of
such properties, inasmuch as the de-
gree OF risk that the appraiser esti-
mates to exist as to expected earnings
OF the property is an important fac
tor IN determining the capitaliza ton
rate he selects as the proper one to
apply in its valuation Selection of
the income capitalization rate is the
critical act in the appraisal process.
Data Are Inadequate.
Prior to study of the question of
selection of the income capitalization
rate" Mr.. Downie said, "it is essen
tlal to arrive at some standardiza-
tion OF the income and expense items
set forth by the appraiser. Present
data available, as, for example, on
amount Of existing and expected va
cancy, are in most cases inadequate
and in other cases not sufficiently
well qualified to enable us to come
to satisfactory conclusions. Consid-
cradle research and study covering
the item OF income and expense state
ments should be undertaken. There
exists here an excellent opportunity
for some research foundation or re-
search group to qualify such data so
that all appraisers might arrive at
standard Technology and classifica-
ton OF these items. 1t is an accepted
fact that Standardization of these
statements must be achieved before
we are willing or able to undertake
a definite formula for the selection
Of capitalization rate"
Mr.. Downie presented for discus
sion several theories on selection OF
the capitalization rate and reviewed
basic reasoning behind each theory,
then presented his own theory. All
theories, he said, are based upon the
going rate Of interest and the risk
and hazards Of the particular invest
ment
Cut Risk, Lower Rate.
my study Of large number OF
r. H A. large-scale housing projects"
he said, has satisfactorily demon
strated that a much lower rate of
capitalization can be used when risk
Is minimized. Those projects have
eliminated to a considerable extent
the risk from poor planning, poor
location, inadequate heat and light.
They have insured proper manage
ment and assured the establishment
of proper reserves for requirements.
contingencies, etc. Through these very
carefully planned projects we have
found that there are adequate spon-
sors willing to undertake projects
which show a maximum allowable
return Of 8 per cent on the equity,
the maximum dividend permitted un-
der section 207 of the act governing |
F. H. A. 1t was formerly supposed |
that a prudent investor would have
to expect more. The maximum cost
Of mortgage money for the properties
We are discussing Is now approx
mately per cent, as contrasted with
the old rate, averaging 6l2 per cent.
And these two factors allow an over
all capitalization rate considerably
under that used upon the formerly
accepted theory as to expected net
return on which apartment projects
must be set up in order to be prac-
tically marketable, to attract invest
ment capital"