as they were on July 1, 1947; in other instances they were 15 percent above the July 1, 1947, level because the landlords were doubtful whether the units were decontrolled and therefore requested the tenants to sign voluntary leases. In other instances the rents were frozen at certain rates because of the Chicago rent control ordinance, and in still other instances the rents on March 1, 1949, were rates which had been established on a free market during the decontrol period and were considerably higher than the rates in effect on July 1, 1947. With such a varied rate structure our conclusion was that there was no equitable method of adjusting rents on the basis of comparability. We have studied the new formula recommended by Mr. Williams and have reluctantly come to the same conclusion. It appears to us that this is a purely arbitrary method of adjusting maximum rents and has no support in the act or the congressional history. We find nothing in the history of the present law which would indicate that Congress intended that a large group of rates in a structure be raised on a purely arbitrary basis without making a corresponding reduction in the rates which are above so-called comparability. Moreover, we do not believe that the prescribed method would be equitable to the tenants in the building. If, for example, 90 percent of the units in the establishment were in the lower rent structure all of these rents would be raised substantially if 10 percent of the rates had been raised in a substantial manner during the decontrol period. We still feel that the provision in the regulation for granting rent adjustments on the basis of increases in cost of operation is the most equitable method of adjusting hotel rates in Chicago and that there would be no justification for an amendment to the regulations to provide comparability adjustments on the basis of March 1, 1949, rates. 3. COST INCREASE ADJUSTMENTS At the Chicago conference you complained that Form D-122, which is a petition designed for use by Chicago hotels in applying for rent adjustments because of operating cost increases, was too complex and burdensome and that the procedure did not grant the relief needed by these establishments. First, let me iterate that this form and the procedure for granting hotels rent adjustments on the basis of operating cost increases was devised in a series of conferences with representatives of the hotel industry, including representatives of the American Hotel Association and two of the largest hotel accounting firms. In developing this form and procedure consideration had to be given to the fact that in hotels some of the rooms, suites, and apartments are decontrolled and others are under Federal rent control; that many of the establishments derive part of their income from commercial units, such as stores, offices, etc.; that many hotels have dining rooms, cocktail lounges, and bars; that the hotels as distinguished from apartment houses, have variable rates for different terms of occupancy and different numbers of occupants. All of these considerations tended to make the procedure somewhat complex. In devising these procedures we were assured by the accounting firms that most hotels followed a uniform system of accounting and that it would be quite simple for them to fill out the Form D-122. At the conference you stated that most of the hotels represented by your association were residential hotels and did not have restaurants, dining rooms, or cocktail bars; and that very few of them rented to commercial enterprises. If such is the case, it should not be difficult for your members to fill out these forms. You complained at the conference that some of your members were unable to get relief under this procedure. This may be true and is probably due to the fact that they have had rent increases which exceed their increases in operating costs. Many of the units in the hotels represented by your association were decontrolled during the period July 1, 1947, to March 1, 1949. It is possible, therefore, that during this decontrol period the rates were substantially increased and that these increased rates were in effect on March 1, 1949, and became the maximum rents and absorbed the cost increases. Permit me to assure you that our area rent office stands ready at all times to assist any hotel which desires to petition for relief on the basis of operating cost increases or any of the other adjustment provisions and is prepared to explain the appropriate procedures to any interested parties. Sincerely yours, WILLIAM G. BARR, General Manager. Hon. TIGHE E. WOODS, Housing Expediter, Washington, D. C. NOVEMBER 20, 1950. DEAR MR. WOODS: Under date of August 23, 1950, I took the liberty of writing both Senator Douglas and Congressman Sabath with respect to the denial by your Office of fair net operating income relief to residential hotels located in Chicago, as well as with respect to the total inadquacy of rental relief under the “comparability" formula. Both Senator Douglas and Congressman Sabath sent these letters to you for your comments. This letter is in reply to a letter from Mr. Ed Dupree setting forth the reasons on which your Office relies to sustain its position with respect to the foregoing. FAIR NET OPERATING INCOME ADJUSTMENTS With the exception of hotels, all controlled housing accommodations are eligible for fair net operating income adjustments (Form D-106). The reasons advanced by your Office to sustain this discriminatory denial of needed rental relief either ignore our arguments or are based on facts which have no revelance to residential hotels. (1) The major premise on which your asserted position rests is that hotels differ from all other types of controlled housing accommodations, and thus hotels should not be accorded rental relief available to all other controlled housing accommodations. Your Office, in drawing this arbitrary distinction, relied on the difference between commercial hotels, having substantial income derived from nonhousing sources such as cocktail lounges, dining rooms, ets., on the one hand; and on the other hand, units without such outside sources of income. However, the typical residential hotel has no major source of income other than rentals derived from housing accommodations. This is true, for example, of more than 90 percent of the members of our association. The typical residential hotel is nontransient in character, and offers customary hotel services to its occupants. The typical residential hotel does not have dining rooms, cocktail lounges, etc. Its income is derived (like any apartment building, for example) solely from rentals of the housing accommodations contained therein. Thus, the sole basis drawn by you between hotels and other controlled housing accommodations, for purposes of applicability of the fair net operating income formula, has absolutely no validity as applied to residential hotels. Therefore, the formula should be made available to residential hotels of the character I have described. (3) The failure of your Office to distinguish between commercial as opposed to residential hotels for the purpose of applicability of the fair net operating income formula finds confirmation in the fact that many residential hotels, to my own knowledge, qualified for fair net operating income increases by petitions filed with the Chicago area rent office during 1949. When all such petitions were arbitrarily dismissed by order of your Office on January 23, 1950, these hotels sought to qualify under the new Form D-122. None of them were able to so qualify. See, for a few examples, the establishments located at 5860 North Kenmore Avenue, Chicago; 6321 Winthrop Avenue, Chicago; 909 Foster Avenue, Chicago; and 3318 Lake Shore Drive, Chicago. Form D-122 was drawn up solely with a commercial hotel in mind, the income sources of which includes not only rentals of rooms and apartments, but substantial income from nonhousing sources such as dining rooms, cocktail lounges, etc. It was not drawn up with the typical residential hotel in mind, and it is wholly inapplicable to a typical residential hotel. Not one residential hotel whose income is derived from rental of housing accomodations, has ever qualified under Form D-122. The proof of the pudding is in the eating. Our actual experience adds conclusive support to our arguments. (3) Form D-122 was not drawn up after consultation with me or any other authorized representative of the residential hotel industry as is inferred in your letter. The first knowledge I had of Form D-22 was in December 1949, when I obtained a copy of it. The next thing I knew, on January 23, 1950, your Office summarily and without prior notice excepted all hotels from the applicability of the fair net operating income formula for the future, and dismissed all of the many pending petitions, each one of which qualified for a rental increase. I vigorously protested this action, and was assured by your Office that at least the petitions pending on January 23, 1950, would be processed. As a measure of your intentions, you sent two of your officers to Chicago to make personal investigations and process the forms. These men carefully spot-checked the ap plications, verified figures by actual physical examinations of the premises, and left for Washington, D. C., with the understanding that orders granting required increases would be there entered. However, shortly thereafter, I was informed that even this relief would be denied our members whose files had been taken to Washington, because they were hotels. I am sure that these conferences are hardly the conferences you refer to in your statement as having been held with representatives of the hotel industry. (4) The argument contained in your letter of September 19, 1950, also suggests that the inability of residential hotels to obtain rent increases might be ascribed to rental increases obtained during the period of decontrol (1947-49). If income had increased greatly in proportion to costs, as you suggest, then hotels would not have been able to qualify for fair net operating income increases. But, the fact is that many residential hotels qualified for fair net operating income increases. When the further admitted fact is added that practically none of the hotels which qualified for a fair net operating income adjustment could qualify under Form D-122, the conclusion seems obvious that Form D-122 was designed and tailored for commercial-not residential-hotels, and this is the decisive reason residential hotels can find no basis for rental relief under its terms. (5) There is no mention in your letter specifically meeting our arguments that Congress intended the remedial provisions of the fair net operating income provisions to apply to all controlled housing accommodations; and that your discriminatory denial of that avenue of relief to hotels as a class is inconsistent with and in derogation of this expressed intent of Congress. In any event, we think it clear that your denial of the remedial fair net operating income provision is clearly unwarranted insofar as it applies to typical residential hotels. For the reasons we have stated, we respectfully and most strongly urge that the residential hotels whose income is wholly or primarily derived from rentals of housing accommodations, again be accorded the benefits of the fair net operating income provisions of the rent regulations. (6) The experience of one of our member hotels serves further to illustrate the discriminatory and unreasonable application of rent controls to residential hotels in Chicago. This establishment from 1947 to 1949 did not, in the judgment of the management, fall within the definition of a hotel as contained in the Housing and Rent Act of July 1, 1947, and the regulations of your Office issued thereunder. Accordingly, it was operated from 1947 to 1949 as a controlled establishment. The only rental increase enjoyed during this period was by reason of the 15 percent statutory lease. In 1949, it filed a Form D-106 to avail itself of fair net operating income relief, and qualified for a substantial increase. However, your office also required it to file a Form D-95A, although it had conducted itself as a controlled nonhotel establishment from 1947 to 1949. Your Office then determined it to be a hotel, and after your amendment to the rent regulations denying fair net operating income relief to hotels, dismissed this hotel's petition. Unable to obtain any rent relief, this hotel then sought to reduce its losses by petitioning your Office for a reduction in rent by reason of a proposed reduction in services. However, your Office refused to permit any reduction in services. Your Office has thus, on the one hand, taken away the possibilities of rental increases, while also, on the other hand, preventing the establishment from reducing its losses. COMPARABILITY RENTAL INCREASES The comparability rental formula, as originally applied to hotels recontrolled by the 1949 Housing and Rent Act, provided that rentals might be adjusted upward for low-rent units to rents for comparable units in effect as of March 1, 1949. However, this necessary and needed avenue of rental relief was denied to residential hotels by making the comparability date March 1942, rather than March 1, 1949. This has effectively foreclosed any rental adjustment under this formula. The reason advanced by your Office is that in some instances there were very large increases during the decontrolled period for hotels. (1947-49.) However, I think it illogical to penalize the very great majority of hotels, by reason of the few out-of-line increases you suggest, even if such isolated cases occurred. Furthermore, an administratively feasible and economically equitable procedure exists to raise inequitably low rentals on the comparability formula without the unfair consequences which you suggest might occur. Our member hotels now have two separate rate structures, as the attached exhibit A indicates. The two structures are made up of the older tenants, on the one hand, and the tenants obtaining possession during the 1947-49 decontrol period on the other. This distortion of rents occurred because of the desire of landlords to maintain their good will and satisfactory relations with their older tenants, because many of these tenants were given 15 percent rental leases, because the city of Chicago controlled rentals in hotels until February 11, 1948, and for other related reasons. New tenants customarily were charged rentals higher than rentals in existence for older tenants. The result has been a clearly defined double-rate structure for most residential hotels, as exhibit A so clearly reflects. This distortion has resulted in severe financial hardship on landlords because of the large number of vacancies. Although mounting costs of operation in the past were offset in part by a very low vacancy factor, the steadily increasing vacancy factor has made the increasing costs of operation a serious threat to the financial stability of the residential-hotel industry. My suggestion would therefore be to average the low-rate rentals for comparable units, average the high-rate rentals for the same type of units, and then take the median between the high and low averages, and raise the low-rental units by that amount. Thus, for example, if the lowrate average were $50, and the high-rate average $70, the difference would be $20, and the increase to be applied would be $10 to each of the low-rate units. This would be fair to both the landlord and tenants, would be administratively feasible, and would be simple of operation. CONCLUSION I firmly believe that residential hotels are entitled to the benefits of the fair net operating income formula, and to a revision of the comparability formula, for the reasons have indicated. I believe that such relief is in accord with the intention of Congress, and is in accord with common sense. If there is any information you might desire, or any further explanation of our position, I should be only too happy to consult with you or your representatives with respect thereto. Very truly yours, Hon. PAUL H. DOUGLAS, R. L. VANDERSLICE. OFFICE OF THE HOUSING EXPEDITER, United States Senate, Washington, D. C. DEAR SENATOR DOUGLAS: I have your letter of August 29, 1950, addressed to Mr. Woods, enclosing a letter to you by Mr. R. L. Vanderslice, secretary to the Chicago Residential Hotel Association. Mr. Vanderslice sent a similar letter to Congressman Sabath, who also forwarded his letter to Mr. Woods for comments. Mr. Vanderslice is critical of the rent regulations issued under the Housing and Rent Act of 1947 as they pertain to the residential hotels in Chicago. He particularly objects to the provision in the regulation which excepts hotel accommodations in Chicago from the benefits of the fair net operating income provision. He also objects to the provision in the regulation relating to comparability adjustments. You may recall that in the Housing and Rent Act of 1947, as originally enacted, hotel accommodations were decontrolled. In the 1949 extension, however, hotel accommodations in Chicago and New York, which were rented on a permanent basis, were recontrolled at the rents in effect on March 1, 1949. In the same extension act, Congress directed the Housing Expediter, in making rent adjustments, to "observe the principle of maintaining maximum rents-so far as is practicable, at levels which will yield to landlords a fair net operating income from such housing accommodations.' After considerable study, we concluded that it was not practicable or feasible to apply the fair net operating income adjustment formula to hotels. We found that there were so many extraneous factors in the operation of a hotel which were not directly related to the control of rents that it was impossible to apply the formula adopted for other housing accommodations. We made every effort to secure statistics on which a reasonable standard for such adjustments for hotels could be based, but without success. Having reached the conclusion that the fair net operating income provision could not be applied to hotels, we undertook to devise a new procedure which would give hotels in New York and Chicago adequate relief from inequitable maximum rents. We developed a form and procedure under which these hotels could obtain increases in their maximum rents which would relieve them from increases in the cost of operation since the freeze date. These procedures were developed after many consultations with representatives of two of the leading hotel accounting firms in the United States, as well as with representatives of the industry. Most of the suggestions which were made by the representatives of the industry and by the hotel accountants were found to be acceptable and were incorporated into the new procedures. We felt that we had really solved the problem of hotel adjustments, and still feel that this provision gives Chicago hotels adequate relief from increased costs of operation. Perhaps some of the hotels, which Mr. Vanderslice refers to in his letter, were unable to get relief under this cost-increase-adjustment provision because they were adequately compensated for such cost increases by substantially increased rates, which were established during the period July 1, 1947, to March 1, 1949, when they were decontrolled, and which rates were preserved as maximum rents when these accommodations were recontrolled on April 1, 1949. This relief for increased costs, of course, is in addition to the relief allowable under all of the other adjustment provisions which are equally applicable to hotel accommodations as well as other controlled dwelling units, such as adjustments for major capital improvements, increases in services, etc. Mr. Vanderslice also complains that the regulations do not permit the adjustments of rents to the rent generally prevailing in hotels in Chicago on March 1, 1949. In recontrolling hotel accommodations in Chicago and New York in the 1949 act, Congress provided that the rents in effect on March 1, 1949, would be the maximum rents. We found from experience that these rents varied greatly, from freeze-date rents to rents which were 200 percent or more of the freezedate rents. In view of this rental picture, any attempt to select a point as representing the rent generally prevailing would be unrealistic and arbitrary. It would be an impossible task, and any application of the March 1, 1949, comparability formula would result in gross inequities to tenants. Although we have taken the position in both of these matters which we believe to be equitable and according to law, Mr. Woods would be happy to sit down with Mr. Vanderslice or other representatives of the Chicago Residential Hotel Association to discuss this entire problem. It may be that some of our procedures relating to cost-increase adjustments should be modified so that these Chicago residential hotels may benefit more from this adjustment provision. Mr. Woods will be glad to meet with Mr. Vanderslice at his convenience and consider any recommendations which he desires to make with reference to a change in our adjustment provisions as they relate to accommodations in these Chicago hotels. Thank you very much for your inquiry and your interest in this matter. If we can be of any further service to you please do not hesitate to call upon us. Sincerely yours, Hon. PAUL H. DOUGLAS, ED DUPREE, Acting Housing Expediter. CHICAGO RESIDENTIAL HOTEL ASSOCIATION, Senate Office Building, Washington, D. C. August 23, 1950. DEAR SENATOR DOUGLAS: In accordance with the suggestion of Mr. McCulloch, I would like to take this opportunity to invite your attention to the denial by the Office of the Housing Expediter of the fair net operating income formula to recontrolled Chicago residential hotels; as well as his denial of comparability rent increases to recontrolled Chicago residential hotels. The Congress, in the Housing and Rent Act of 1947, exempted from rent control all accommodations in a hotel which offered customary hotel services. Housing and Rent Act of March 30, 1949, recontrolled all accommodations in hotels which were not predominantly transient in character. The effect of this provision was to bring back under control all residential and apartment hotels. The rental of these units were frozen at the rate in effect on March 1, 1949. The recontrol of these establishments has resulted in the almost complete breakdown of the administration of this segment of controlled rental housing. 83762-51-pt. 2-28 |