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impact of housing code enforcement upon house operating firm decision-making Yardley , Jim Robert 1972

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THE IMPACT OF HOUSING CODE ENFORCEMENT UPON HOUSE OPERATING FIRM DECISION-MAKING by JIM ROBERT YARDLEY B.A., University of British Columbia, 1969 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in the School of Community and Regional Planning We accept this thesis as conforming to the required standards THE UNIVERSITY OF BRITISH COLUMBIA May 1972 i i In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make i t freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written per-mission. School of Community and Regional Planning The University of British Columbia Vancouver 8, Canada ABSTRACT In the f i e l d of planning and policy-making, there is often in-sufficient concern for the nature and patterns of decision-making in the private sector. It is fe l t that improved knowledge of these patterns would provide an additional significant input to aid policy-makers in the d i f f i c u l t task of assembling the most appropriate program from a host of available alternatives. To develop this theme, this thesis has focused upon private sec-tor response to housing code enforcement as a tool for eliminating sub-standard housing and increasing the supply of standard housing for low income tenants. Two models of rehabilitation decision-making by absentee owners of multiple rental housing (i.e., house operating firms) are pre-sented and operationalized. The f i r s t model assumes that a community does not enforce a set of minimum housing standards. Consequently, house operating firms are free to adjust their operating, replacement and remodelling expenditures, thereby raising or lowering the position occupied by their buildings in a distribution of rental housing quality. Since each position in this quality distribution generates a different level of rent, the firm must choose that position which maximizes profit from i t s building. In the case where minimum housing regulations are not enforced, this pattern of decision-making often implies the existence of a significant quantity of profitable substandard rental housing. Since firms in this instance are free to decide to operate their buildings at substandard levels without iv fear of prosecution, we have termed this the "unrestricted decision-making model." The second model, which we have described as the "restricted decision-making model," assumes that a housing code has been enacted and is s t r i c t l y enforced. In this case, house operating firms owning.sub-standard buildings have certain restrictions placed on their decision-making. These restrictions require that the firm either increase i t s expenditures on i t s building to raise the level of quality to a certain minimum standard or withdraw the building from occupancy. The result is that such firms face a potential loss in profit which they wi l l at-tempt to minimize in their decision-making. An examination of the housing code enforcement experience of selected communities points toward a number of serious issues which must be resolved i f such programs are to succeed in restricting house operat-ing firm decision-making. These issues include administration, inspec-tion, staffing, legal, land use and vacancy problems. A l l but the latter problem appear to be soluble, given the appropriate steps. However, under conditions of low vacancy rates in non-luxury rental housing, the st r i c t enforcement of a housing code threatens to dislocate significant numbers of low income tenants. This undesirable outcome is to be ex-pected according to the restricted decision-making model; however, i t is contrary to the stated aims of code enforcement. To alter this outcome, i t is contended that communities should concentrate on manipulating the important variables in the house oper-ating firm decision-making process by introducing a range of policies into their code enforcement programs. In the fin a l chapter of this the-s i s , then, certain policy alternatives are considered with respect to V their potential impact upon the decisions of house operating firms, with the emphasis placed on stimulating rehabilitation where i t might other-wise not occur. TABLE OF CONTENTS Page LIST OF TABLES x LIST OF FIGURES xi Chapter 1. LOW INCOME GROUPS AND THE HOUSING MARKET 1 INTRODUCTION 1 LOW INCOME GROUPS AND THE HOUSING MARKET 2 Subsidized Residential Construction 4 Non-subsidized Residential Construction 5 The Existing Housing Stock . . . . . . 5 The National Building Code and the Housing Supply 9 Landlord Decision-making and the Need for Housing Regulations 10 Housing Codes . 12 SUMMARY 13 2. HOUSE OPERATING FIRM DECISION-MAKING THEORY 16 INTRODUCTION 16 A THEORY OF DECISION-MAKING FOR HOUSE OPERATING FIRMS 17 The Opportunity to Move a Building in the Rent-quality Distribution 17 Limitations on the Upward Movement of a Building 19 vi v i i Chapter Page Limitations on the Downward Movement of a Building . . . . . 23 An Example of the Concepts . 24 THE RESTRICTED DECISION-MAKING MODEL 26 THE UNRESTRICTED DECISION-MAKING MODEL 36 SUMMARY 43 3. OPERATIONALIZING THE DECISION-MAKING MODELS 45 INTRODUCTION 45 AN ADAPTED VERSION OF THE FORMULATION OF RATCLIFF AND SCHWAB 46 An Example of the Use of the Model 48 The Calculation Procedure 49 The Return to Equity 51 Discussion of the Adapted Version of the Model of Ratcliff and Schwab 52 Operationalization of the Restricted Decision-making Model 57 Strategy A: Remodelling 58 Strategy B: Increasing Replacement Expenditures 59 Strategy C: Increasing Operating Expenditures 59 Strategy D: Replacing the Building 59 Strategy E: Abandoning the Building 60 Strategy F: Selling the Building 60 Discussion of the Restricted Decision-making Model 61 A.H. SCHAAF'S FORMULATION 62 The Model and the Calculations . . . . . 63 v i i i Chapter Page An Example . 65 Discussion of Schaaf's Formulation 67 THE KEY VARIABLES 69 SUMMARY 71 4. EXPERIENCE AND PROBLEMS IN HOUSING CODE ENFORCEMENT . . . 73 INTRODUCTION 73 The History of Housing Codes in the United States 73 CODE ENFORCMENT IN SELECTED U.S. CITIES 76 Baltimore 77 Philadelphia 81 Charlotte 82 CODE ENFORCEMENT PROBLEMS 83 Administrative Problems 83 Legal Problems 85 Land Use and Servicing Problems 90 The Market Problem 91 THE EFFECT OF CODE ENFORCEMENT ON DECISION-MAKING 92 SUMMARY 95 5. DIRECTIONS FOR CODE ENFORCEMENT POLICY 97 INTRODUCTION 97 FULFILLING THE CONDITIONS NECESSARY FOR MANIPULATING THE RESTRICTED DECISION-MAKING MODEL 98 Administrative Organization . 99 Budgetary Requirements 99 Staffing and Inspection Requirements 100 ix Chapter Page CODE ENFORCEMENT UNDER VARIED MARKET CONDITIONS 102 Under High Vacancy Rates 103 Under Low Vacancy Rates 107 Property Tax Deferral and Abatement 110 Direct Grants and Low-cost Loans I l l Rent Supplements 112 Increasing Public Expenditures on Community F a c i l i t i e s and Services 114 Summary 117 CONCLUSIONS 118 BIBLIOGRAPHY 120 LIST OF TABLES Table Page I. N.H.A. Borrowers and Family Income Groups in Large Urban Centres - 1954-70 6 II. Dwelling Costs, Down Payments, Gross Debt Service and Incomes by Area - 1970 6 III. Dwelling Costs and Incomes by Area and Type of Lender - 1970 7 IV. Hypothetical Results of Varying Rate of Replacement of a Structural Element 34 V. Deferring Operating and Replacement Expenditures: Pessimistic Estimate . 53 VI. Deferring Operating and Replacement Expenditures: Most Probable Estimate 54 VII. Deferring Operating and Replacement Expenditures: Optimistic Estimate . . . 55 VIII. Characteristics of Renewal Standards 66 IX. Proposed Per Capita Expenditure Guidelines for Basic Services Under a Systematic Inspection Program in Housing Code Administration 100 x LIST OF FIGURES Figure Page 1. A Hypothetical Rent-quality Distribution 24 2. Hypothetical Cost, Rent and Profit Curves '. 28 3. Hypothetical Marginal Rent and Cost Curves 28 4. The Unrestricted Decision-making Model . 31 5. Hypothetical Marginal Rent and Cost Curves Resulting from Variations in the Rate of Replacement 35 6. Hypothetical Cost, Rent and Profit Curves 37 7. The Restricted Decision-making Model 39 8. Hypothetical Frequency Distribution of Rates of Return 47 9. The Impact of Code Enforcement and Rent Control Under High Vacancy Rates 108 xi ACKNOWLEDGMENTS The author would like to acknowledge the advice and constructive criticism of Professor B. Wiesman during the preparation of this study. Similarly, I would like to extend thanks to the Central Mortgage and Hous-ing Corporation for their financial support. Finally, I wish to express my indebtedness to my wife, Linda, for her continued affection, support and valuable typing s k i l l s during the preparation of this study and over the course of the past two years. Jim Robert Yardley x i i CHAPTER ONE LOW INCOME GROUPS AND THE HOUSING MARKET INTRODUCTION This chapter can be conveniently divided into two distinct parts. The f i r s t part provides a brief analysis of the position of low income families within the context of the housing market in Canada today. The essential point which emerges from this part is that most low income families are restricted to acquiring accommodation either in privately- or publicly-owned rental housing or in poor quality existing detached houses. Owing to their lack of effective demand in the hous-ing market, then, low income groups appear to be heavily dependent on accommodation supplied by absentee landlords, over whom they can exert l i t t l e control. This observation leads into the second part of the chapter, which emphasizes the need to understand the decision-making processes of absentee owners with respect to the provision of housing services. The possible effect that the National Building Code might have in influencing these decisions is then considered. The ineffectiveness of the National Building Code demonstrated by this discussion points to the need for considering alternative devices of public policy to pro-tect low income groups in the housing market. One such alternative device, housing code enforcement, has been widely employed as a tool to control absentee owner decision-making. In the hypothesis presented 1 2 at the end of this chapter, however, i t is contended that the lack of a clear understanding of the decision-making processes of absentee own-ers of rental accommodation has rendered this device ineffective. LOW INCOME GROUPS AND THE HOUSING MARKET The Canadian Conference on Housing (1968) declared that a l l Canadians have the right to be adequately housed whether they can afford i t or not.* The Task Force on Housing declared that every Canadian should be entitled to clean, warm shelter as a matter of basic human 2 right. These declarations have important implications for both the demand and supply sides of the housing equation. On the demand side, 3 i t is implied that the effective demand of Canadians for housing should be raised to levels higher than those currently realized. On the sup-ply side, i t is implied that a portion of the existing supply of housing in Canada is less than adequate in terms of quality and therefore requires some improvement. Both the demand and supply implications of the above-noted declarations are of extreme importance and merit inten-sive study. In the course of this study, however, the analysis w i l l be limited primarily to the latter. The Special Senate Committee on Poverty found that the "rights" referred to above have not been realized. "The undeniable fact per-sists: a substantial number of Canadian families must exist from day M. Wheeler (ed.), The Right to Housing (Montreal: Harvest House, 1969), p. 331. 2 Task Force on Housing and Urban Development, Report (Ottawa: Queen's Printer, 1969), p. 22. 3 Effective demand is demand supported by purchase dollars. 3 to day without benefit of any of the comforts traditionally associated with home--including protection from the elements, privacy and adequate 4 sanitary f a c i l i t i e s . " The magnitude of this problem was clearly indi-cated by the Task Force on Housing, which estimated that half a million 5 of the 5,500,000 housing units in Canada in 1968 were substandard. Similarly, the Castonguay-Nepveu Commission found that one-third of the houses in the province of Quebec were inadequate and stated that the present situation constituted a real danger for the physical and mental 6 health of families. While these macro observations convey the scale of the problem, i t s intensity can be summarized by a letter presented to the Special Senate Committee on Poverty. A woman wrote: I have four daughters living with me . . . . I have been on Mother's Allowance since September, 1969, receiving $291. . . . We have moved six times in two years, constantly running from cockroaches and landlords with greedy hands. If I complained we got our notice. No one wanted four girls . . . . We nearly froze in one apartment and had to move in December. I took this place because i t had a thermostat. We are nice and warm now. We are again on the third floor. The plaster is f a l l -ing from the ceiling and walls. It needs painting badly. The toi l e t doesn't work properly. There is one wall plug in the mid-dle room and we have to use about 200 feet of extension cord to a l l the rooms and t r i p over i t constantly. The light in the bathroom doesn't work, so we have to use the extension through two windows to get around. The place is over-run with cockroaches. The landlord promised to re-decorate before Christmas but hasn't touched i t except to put in a sink. He took three weeks to connect the gas stove. Heat, gas and light was supposed to be included in the rent. Clearly, then, the lower income groups in Canada are at a disadvantage Special Senate Committee on Poverty, Poverty in Canada (Ottawa: Information Canada, 1971), p. 133. 5Task Force on Housing and Urban Development, op. c i t . , p. 14. 6 Quoted in Poverty in Canada, p. 134. 7Ibid., p. 134. 4 in their search for adequate housing. If we accept the declarations of the Canadian Conference on Housing (1968) and the Task Force on Housing, then we must examine the alternative sources of supply of adequate housing and their availability to a l l groups in the income spectrum. In any given year, the housing supply consists of a modest amount of new construction plus a substan-t i a l inventory of existing housing. By the end of 1970, annual new residential construction in Canada amounted to approximately 200,000 units, while the supply of existing housing units numbered approximately 8 5,880,000. It is immediately apparent from these figures that the existing stock of housing units constitutes by far the majority of the total housing stock in any given year (96.6% in 1970). Subsidized Residential Construction Generally speaking, new subsidized residential construction does not substantially increase the supply of housing for that portion of the income spectrum which can express only limited effective demand. Government involvement in low income housing reached i t s peak to date during the period 1969-70, in which an annual average of 41,670 units 9 were constructed. While this figure represents a substantial increase 10 in the government's performance in the sphere of low income housing, This estimate is based upon an addition of 400,000 units (con-structed in 1969-70) to the 1968 estimate of 5,500,000 units, less an estimated annual removal of 10,000 units. 9 Central Mortgage and Housing Corporation, Economics and Statis-tics Division, Canadian Housing Statistics, 1970 (Ottawa: March, 1971), p. 39. 10 During the period 1960-69 only an average of 5,150 units were constructed annually. 5 i t s t i l l represents only 20.7% of a l l new residential construction for that period. Moreover, the significance of this improved performance is further diminished when viewed in the light of the total housing stock, as the low income housing units constructed constitute but 0.66% of a l l residential units in Canada in 1970. The above statistics serve to con-firm a preliminary assumption of this study: newly constructed subsi-dized housing represents only a small proportion of the total supply of housing available to low income groups. Non-subsidized Residential Construction It is generally assumed that non-subsidized new residential construction i s beyond the reach of low income groups. Support for this assumption can be gleaned from Table I below, which indicates that fami-lies with incomes in the lowest third of the income distribution were able to obtain only 5.3% of a l l N.H.A. mortgages for newly constructed housing in 1970. Table II below indicates that in 1970 a family living in a major metropolitan area required an income of $9,022.00 and a down payment of $4,193.00 in order to finance the average new dwelling con-structed during that year. These figures clearly indicate that almost the entire supply of new residential construction is currently unavail-able to the lowest third of the income spectrum. The Existing Housing Stock If new residential construction, whether subsidized or not, supplies only a small portion of the housing requirements of lower income Canadian families, i t can then be expected that the vast supply of exist-ing housing supplies the remainder. Table III below, however, indicates that the plight of the prospective low income purchaser is not relieved 6 TABLE I N.H.A. BORROWERS AND FAMILY INCOME GROUPS IN LARGE URBAN CENTRES - 1954-70 Percentage of N.H.A. borrowers from each Family income group family income group in selected years 1954 1961 1963 1965 1967 1968 1970 Lower third 6.6 9.5 10.4 17.9 11.2 7.7 5.3 Middle third 44.2 48.3 57.4 54.2 52.0 50.7 54.2 Upper third 49.2 42.2 32.2 27.9 36.8 41.6 40.5 Total 100.0 100.0 Source: Canadian Housing Statistics, 100.0 1970, 100.0 Table 100.0 99, p . 100.0 79. 100.0 TABLE II DWELLING COSTS, DOWN PAYMENTS, GROSS DEBT SERVICE AND INCOMES BY AREA - 1970 Average Average Average Average Metropolitan dwelling down gross debt minimum area • - cost payment service income Calgary 22,626 3,788 2,519 9,330 Edmonton 23,909 4,302 2,560 9,481 Halifax 25,140 5,661 2,772 10,267 Hamilton 28,690 7,800 2,833 10,493 Kitchener 24,208 4,028 2,605 9,648 London 24,421 5,159 2,657 9,841 Montreal 17,655 2,715 2,166 8,022 Ottawa-Hull 26,640 6,121 2,713 10,048 Quebec 17,596 2,727 2,027 7,508 Regina 18,697 2,853 2,087 7,729 Saint John 21,219 4,598 2,220 8,222 St. John's 22,104 3,782 2,073 7,678 Saskatoon 19,115 2,642 2,172 8,044 Sudbury 26,249 6,587 2,714 10,052 Toronto 29,350 6,649 3,066 11,355 Vancouver 25,488 6,590 2,494 9,237 Victoria 27,340 7,269 2,577 9,544 Windsor 28,439 7,069 2,886 10,688 Winnipeg 22,543 4,361 2,392 8,859 Average 22,304 4,193 2,436 9,022 Source: Canadian Housing Statistics, 1970, Table 104, p. 83 . 7 TABLE III DWELLING COSTS AND INCOMES BY AREA AND TYPE OF LENDER - 1970 EXISTING HOUSING Approved-lender loan CMHC loan Average Average fam- Average Average fam> Metropolitan dwelling i l y income dwelling i l y income area cost of borrower cost of borrower Calgary 19,288 11,536 17,365 9,806 Edmonton 20,489 12,160 17,270 9,628 Halifax 21,938 11,120 17,666 4,280 Hamilton 22,404 11,029 Kitchener 18,980 11,527 London 17,120 11,279 16,523 8,364 Montreal 18,022 12,362 14,079 8,853 Ottawa-Hull 19,229 11,101 16,015 9,974 Quebec 19,112 13,071 16,060 8,116 Regina 14,563 10,154 12,155 6,600 Saint John 17,565 10,638 St. John's 21,917 12,155 17,152 8,197 Saskatoon 14,186 10,536 13,372 7,653 Sudbury 19,471 10,953 18,520 9,780 Toronto 24,626 12,479 31,360 12,236 Vancouver 22,959 12,012 24,580 7,528 Victoria 20,425 10,978 Windsor 19,169 11,427 Winnipeg 14,603 9,451 13,751 7,715 Average 18,798 10,914 15,169 8,525 Source: Canadian Housing Statistics, 1970. Tables 88 and 89, pp. 74-71 substantially in the market of existing housing. The fact remains that in order to purchase even an existing detached house, one must have a relatively high income or, alternatively, must possess a substantial down payment. It might be contended that the low income groups have access to housing which is less expensive than that referred to in Table III. Unfortunately, at least from the prospective purchaser's point of view, 8 both the conventional lenders and CMHC require that housing meet cer-t a i n q u a l i t y standards before they w i l l approve a mortgage. While t h i s requirement protects the lender's investment, i t must i n e v i t a b l y r a i s e the cost of e x i s t i n g housing and thereby reduce the opportunity of the lower income groups to acquire that housing. The p i c t u r e painted to t h i s point i s bleak. The low income groups i n Canada, having f o r the most part been denied access to the market of new non-subsidized detached houses as well as to the stock of well maintained, r e l a t i v e l y high q u a l i t y e x i s t i n g houses, must e i t h e r turn to r e n t a l accommodation or purchase poorer q u a l i t y e x i s t i n g detached housing. This s i t u a t i o n i s not r e s t r i c t e d to Canada, but also e x i s t s i n the United States. The importance of the stock of lower q u a l i t y e x i s t -ing housing to the low income sector has been emphasized by Royal Shipp: Because of the high mobility rates i n the U.S. and because of the dominance of the e x i s t i n g housing stock, around 5 - 6 times as many used housing units become ava i l a b l e f o r occupancy each year as newly constructed houses . . . . This would suggest the f e a s i b i l i t y of giving r e l a t i v e l y more emphasis to upgrading the q u a l i t y of the lower end of the e x i s t i n g housing stock to an acceptable standard of decency, instead of b u i l d i n g new houses fo r underhoused f a m i l i e s . S i m i l a r l y , the Special Senate Committee on Poverty has stated that: One answer to the housing problems of the poor may l i e i n more e f f i c i e n t use of the e x i s t i n g stock of housing, the 97 per cent or so which i s not brand new. The importance of im-proving the e x i s t i n g housing stock cannot be overestimated, even though t h i s requires re-thinking Canadian housing p o l i -cies which have t r a d i t i o n a l l y been concerned almost e x c l u s i v e l y with new housing. Royal Shipp, "Evaluation of Federal Housing Programs: Pro-gress and Prospects," Proceedings of the American Real Estate and Urban  Economics Association, V (1970), pp. 102-103. 12 Special Senate Committee on Poverty, op. c i t . , p. 137. 9 It i s apparent, therefore, that the stock of e x i s t i n g housing, i f maintained to s u f f i c i e n t l y high l e v e l s , o f f e r s the greatest p o t e n t i a l r e l i e f to the underhoused poor. The National Building Code and  the Housing Supply Ce r t a i n l y a portion of the housing supply a v a i l a b l e to the lower income groups has been constructed and maintained to the standards f o r o r i g i n a l construction prescribed i n the National Building Code. Such 13 housing would thus comply with the declarations of the Canadian Confer-ence on Housing (1968) and the Task Force on Housing. However, i t i s not mandatory under the National Building Code that even the most recent-l y constructed housing be maintained to the leve l s prescribed by i t f o r new construction. Indeed, only when mortgage funds are required from the conventional lenders or CMHC as a r e s u l t of a change i n ownership or fo r the purpose of making substantial s t r u c t u r a l a l t e r a t i o n s , are the standards of the National Building Code l i a b l e to be enforced to ra i s e the q u a l i t y of an e x i s t i n g structure to an acceptable l e v e l . Thus, when a low income family seeks accommodation, i t i s faced with the following s i t u a t i o n . F i r s t , the q u a l i t y of e x i s t i n g r e n t a l accommodation i s unregulated, due to the ineffectiveness of the National Building Code. Secondly, the conventional lenders and CMHC are re l u c -tant to enter the market of poorer q u a l i t y e x i s t i n g detached housing, as evidenced by the more r e s t r i c t i v e loan-to-value r a t i o s which they o f f e r . What, then, becomes of the low income groups i n t h e i r search f o r adequate housing, and how are they to be protected from a s i t u a t i o n 'See page 2 of t h i s chapter. 10 which forces them to occupy housing of inferior quality? As increasing numbers of housing units are constructed under the National Building Code and increasing numbers of older units which pre-date the adoption of the Code are removed from the stock, some marginal net increase in the quality of the housing stock can be expected. How-ever, such a process can occur only over a long period of time, since new construction amounts to only 3% and removals amount to less than 1% of the total stock in any given year.^ Since the demand for adequate housing remains high over the short run, i t is necessary to look to devices other than the National Building Code to improve the quality of housing. Landlord Decision-making and the Need  for Housing Regulations To this point an attempt has been made to identify the position which lower income groups occupy in the housing market. Basically, they have been restricted to acquiring accommodation in rental housing, usually privately owned, and in existing poor quality single detached houses. In the sphere of rental housing, the low income groups have l i t t l e or no means of assuring that their accommodation w i l l be main-tained to acceptable standards of quality. Enforcement of the National Building Code cannot be relied upon to ensure that proper maintenance standards for such housing are met. The low income groups are thus v i r -tually unprotected in the rental housing market. Their lack of effective demand and the absence of effective public controls expose them to potentially unilateral decisions by absentee landlords as to the quality Canadian Housing Statistics, 1970, Table 124, p. 97. 11 of a v a i l a b l e r e n t a l accommodation. It cannot be denied that substan-dard r e n t a l housing e x i s t s and that lower income groups lack s u f f i c i e n t e f f e c t i v e demand i n the housing market. It would therefore appear that p u b l i c controls, perhaps i n the form of minimum housing regulations, are required to eliminate or improve the substandard r e n t a l housing found i n a l l major metropolitan centres i n Canada. While some form of p u b l i c control i s required to regulate hous-ing conditions, and while some landlords have the opportunity to make u n i l a t e r a l decisions regarding the q u a l i t y of housing offered, i t i s inappropriate to assume that the slum landlord i s ne c e s s a r i l y e v i l and motivated s o l e l y by greed, Jacob R i i s unfortunately adopted t h i s p o s i -t i o n when he stated that a man "has no r i g h t to slowly k i l l h i s neigh-15 bours, or h i s tenants, by making a death-trap of his house." Further, he asserted that "reform by law must aim at making i t unprofitable to own a bad t e n e m e n t . O n the other hand, Lawrence Friedman adopts a somewhat d i f f e r e n t view. He finds that "while the notion of the e v i l 17 slumlord i s not completely untrue," the evidence that "some buildings are losers"*** and that "code enforcement i s var i a b l e and uncertain"*^ has had the e f f e c t of plac i n g the slumlord i n an unenviable and poten-t i a l l y disastrous f i n a n c i a l p o s i t i o n , i n that he i s often unable to make a p r o f i t and yet unable to s e l l the b u i l d i n g . 1 5Jacob R i i s , How the Other Half Lives (New York: H i l l and Wang, 1957), p. 205. 1 6 I b i d . , p. 217. 17 Lawrence Friedman, Government and Slum Housing (Chicago: Rand McNally and Company, 1967), p. 42. 1 8 I b i d . , p. 43. 1 9 I b i d . , p. 57. 12 The debate as to whether the slumlord is necessarily evil or merely a product of successive unfortunate circumstances is not of cen-t r a l concern to this study. It does, however, serve to identify a c r i t i c a l problem relating to housing of lower income groups: too l i t t l e is known about the factors which underlie the decisions made by owners and operators of rental housing regarding the quality of housing ser-vices provided. Too often housing authorities have attempted to enforce s t r i c t minimum regulations in a housing code without seriously consider-ing how such regulations might affect the decision-making variables relevant to the owners of rental housing. Housing Codes The above criticism i s far more applicable to communities in the United States than in Canada. Canada, like the United States, has a large stock of substandard housing, but for some reason Canadian o f f i c i a l s have not u t i l i z e d housing codes to any extent to regulate the quality of that housing. The one exception in Canada has been the pro-vince of Ontario, which in the past decade has actively entered the area of housing code enforcement, particularly in the city of Toronto, Usually, Canadian housing regulations have been included in a variety of specialized municipal codes, such as health, f i r e , building and zoning codes. In the United States, however, the trend in more recent times has been to simplify this rather complex arrangement. Hence regu-lations regarding structural soundness, f i r e safety, maintenance, sani-tation and occupancy have been combined into a single housing code. Unlike the National Building Code in Canada, which, as mentioned previ-ously, is ineffective in regulating existing housing not undergoing alterations, housing codes have been extensively applied in the United States in an attempt to eliminate existing substandard housing. Obviously, housing code enforcement has a tremendous potential for eliminating substandard housing. Superficially at least, i t is expected that the s t r i c t uniform application of such codes should con-stitute the major, i f not the only, step required to eliminate substan-dard housing. Simply stated, enforcement of the code would require owners of substandard housing to either improve the quality of their buildings to the acceptable limits defined in the code, or close down their operation. In either case, substandard housing would be removed from the market. Unfortunately, seldom can a multi-faceted issue such as substandard housing be considered in such clear, distinct terms. As with most important issues involving public programs and private sector responses to those programs, i t is necessary to examine the latter c r i -t i c a l l y in order to improve the effectiveness of the former. Such has not been the case with housing code enforcement. As Friedman has 20 noted, too often "there has been a great rush to enact housing codes." Not often enough, i f ever, has there been a corresponding rush to con-sider how the owners of substandard housing might respond to the housing codes, and therefore how the effectiveness of the enforcement programs might be improved. SUMMARY In this chapter the writer has attempted to focus on the posi-tion of the lower income groups in the Canadian housing market. It was contended that these groups occupy a disadvantaged position, in that Ibid., p. 50. 14 they are usu a l l y r e s t r i c t e d by t h e i r lack of e f f e c t i v e demand to acquir-ing accommodation i n re n t a l housing or i n poor q u a l i t y e x i s t i n g s i n g l e detached houses. In the re n t a l market, t h e i r p o s i t i o n i s not only d i s -advantaged but also unprotected, i n that the low income groups are exposed to p o t e n t i a l l y u n i l a t e r a l decisions by owners regarding the q u a l i t y of housing services offered. The National Building Code o f f e r s l i t t l e r e l i e f i n the short run i n regulating the q u a l i t y of renta l housing. Rather, i t s value l i e s c h i e f l y i n the long run, where i t can be expected that the o v e r a l l q u a l i t y of the housing stock w i l l grad-u a l l y increase as a r e s u l t of regulating the q u a l i t y of new construction. It i s apparent, therefore, that a l t e r n a t i v e devices must be found to improve the q u a l i t y of re n t a l housing over the short run. One such device, housing code enforcement, o f f e r s prospects f o r r e l i e f . Although widely employed i n the United States, t h i s device has been used by Canadian a u t h o r i t i e s only i n the province of Ontario. Unfortunately, too often the approach taken i n code enforcement programs i s that absentee landlords are the source of a l l housing i l l s . Conse-quently, few attempts, i f any, have been made by housing a u t h o r i t i e s to determine the motivating factors which influence landlord decision-making. Surely such understanding would be highly b e n e f i c i a l i n improv-ing the effectiveness of the enforcement programs. In the remaining portion of t h i s study, an attempt i s made to es t a b l i s h possible patterns of landlord response to housing code enforcement. F i r s t , a framework f o r landlord decision-making i s dev-eloped. The experience of selected communities i s then examined with respect to the general effectiveness of housing code enforcement and i t s p a r t i c u l a r e f f e c t on decision-making. The hypothesis upon which 15 the remainder of this study is based may be stated as follows: Given an understanding of the decision-making practices of absentee owners of rental housing, housing code enforcement could become more effective in i t s attempts to eliminate substandard housing. CHAPTER TWO HOUSE OPERATING FIRM DECISION-MAKING THEORY INTRODUCTION In the following pages we wi l l attempt to explain the decision-making practices of absentee owners of multiple dwellings. To simplify the terminology, this ownership group wi l l hereafter be referred to as "house operating firms." It is noted that for the purposes of this study, the term "firm" is used in a broader sense than i t s usual defini-tion. As defined herein, the term may be applied to an individual who owns and perhaps operates, but does not necessarily reside in, a mul-tiple dwelling. The word "firm" may also be used in i t s more usual sense to describe a corporate entity which owns and operates but does not reside in a multiple dwelling. The term "multiple dwelling" also requires definition. In the context of this study, "multiple dwelling" refers to a structure, either purpose-built or converted, containing three or more dwelling units of unspecified size. Thus, both family and non-family dwelling units are included in the definition. Two models are constructed in this chapter. The f i r s t accounts for the decisions of house operating firms whose buildings are not regulated by minimum housing regulations. That i s , either the community has not adopted a housing code or i t has never enforced or threatened to enforce a code which i t has adopted. Under such circumstances, a house 16 operating firm would not be expected to take into account minimum hous-ing regulations in i t s decision-making practices. The second model accounts for the decisions of house operating firms whose buildings are actually regulated by minimum housing standards or potentially regulated by an active threat of code enforcement. In this case, i t is expected that the decision-making practices of house operating firms would be substantially affected by the housing code. The f i r s t model w i l l thus be described as the "unrestricted decision-making model," and the second as the "restricted decision-making model." A THEORY OF DECISION-MAKING FOR HOUSE OPERATING FIRMS The Opportunity to Move a Building in  the Rent-quality Distribution In the absence of housing regulations, the house operating firm can alter the condition of the housing i t offers in order to produce changes in the demand for that housing. Note that the above statement is likely to be true even in cases where housing regulations do exist but have consistently not been enforced. In the process of altering the condition of the housing supply offered, the house operating firm i s , in fact, shifting the position of the building relative to the position of other buildings which constitute the total stock of multiple rental accommodation in a given location. This shift in the relative position of the building in the housing supply distribution causes a shift in the relative position of the building with respect to a distribution of rents. Thus, within certain limits, a house operating firm can move i t s 21 building either upwards or downwards in a rent-quality distribution. This possibility was f i r s t noted by H.W. Robinson, The Economics 18 How are these shifts achieved? In this regard, i t is suggested that the quality of housing services offered by a house operating firm can be varied in the following manner, given the prior condition regard-ing the absence of housing regulations. First , a firm can vary the supply of housing services within a given building by remodelling that building. A number of remodelling alternatives can be considered, 22 including those identified by W.W. Nash: prestige, middle income or low income. For example, the prestige alternative might involve a reduc-tion in the number of units in the building, thereby increasing the size of each unit. Also, i t might involve providing higher quality fixtures, finishes and equipment for each unit. Conversely, remodelling for low income occupants might involve increasing the number of units in the building and thereby reducing the size of each unit. In any case, re-modelling a building can include a host of alternatives, each of which could result in a change in the position of the building with respect to the rent-quality distribution mentioned previously. A second method which the house operating firm might employ to shift the relative position of the building which i t operates is to vary the rate at which i t replaces equipment and structural elements. For example, although the plumbing within a building might have a potential lifespan of 50 years before ceasing to function entirely, i t of Housing (London: P.S. King, 1939), p. 83. Later authors such as James Heilbrun assumed a similar position: "Reforming the Real Estate Tax to Encourage Housing Maintenance," Land and Building Taxes: Their  Effect on Economic Development, ed. Arthur P. Becker (Milwaukee: Com-mittee on Taxation, Resources and Economic Development, The University of Wisconsin Press, 1969). 22 W.W. Nash, Residential Rehabilitation: Private Profits and  Public Purposes (New York: McGraw-Hi11, 1959). 19 is apparent that some deterioration in the quality of service must occur before the end of that time. Thus, the house operating firm might choose to replace this plumbing every 10 or 20 years to ensure that i t continues to function perfectly at a l l times. It is obvious, then, that different replacement rates w i l l have the effect of moving the position of the building with respect to the rent-quality distribution. A third method which the house operating firm might employ is to vary the operating expenditures of the building in the short run. Expenditures such as those for the cleaning of exterior windows, garbage collection, ja n i t o r i a l services and minor maintenance can be varied over the short run, with the result that the building shifts position in the rent-quality distribution. Limitations on the Upward Movement  of a Building In total, real opportunities exist for the house operating firm to shift the quality of i t s building relative to that of other buildings in order to alter the demand for the housing services i t supplies. The principal techniques which are evident to this author include the vari-ation of remodelling practices, replacement practices and operating practices. However, some restrictions exist which limit the degree to which the building can be moved in the rent-quality distribution. These limitations include the location of the building, the demand for housing amenities, the design of the structural shell and housing regulations. A l l but the latter, which w i l l be discussed in much greater detail later, are discussed below. The f i r s t limitation, the location of the building, is an impor-tant consideration which the house operating firm cannot overlook. 20 "Appraisers often say that the three most important influences on value 23 are: (1) location, (2) location, and (3) location" --that is to say, the location of the building in the neighbourhood, the location of the neighbourhood in the city, and the location of the city within the region. In considering the potential movement of i t s building, the house operating firm must thus be aware of the relative desirability of the location of the building. Knowles suggests a host of variables with respect to location which the house operating firm should consider. They include: 1. Relative economic st a b i l i t y , 2. Protection from adverse influences, 3. Freedom from hazards and nuisances, 4. Adequacy of c i v i c , social and commercial f a c i l i t i e s , 5. Adequacy of u t i l i t i e s and conveniences, 6. Adequacy of transportation, 7. Level of taxes and special assessments, 24 8. Appeal or amenities. The demand for the housing services offered by a building which is located in a neighbourhood rating high on each of the above indices w i l l inevitably exceed the demand for services of a less ideally located building. It is important, then, that prior to making any decisions regarding the operation of i t s building, the house operating firm ask: 25 "Is this building needed in this community and neighbourhood?" Due 23 Jerome Knowles Jr., "City and Neighborhood Data and Analysis," The Appraisal Journal, XXXV (1967), 260-268, p. 263. 2^Ibid., p. 264. 25 K.K. Stowell, Modernizing Buildings for a Profit (Englewood C l i f f s , New Jersey: Prentice-Hall, 1935), p. 4. 21 to i t s size, a multiple dwelling is fixed in location and there is really no opportunity for the house operating firm to move i t to a more desirable location. Consequently, the house operating firm is highly unlikely to attempt to improve the quality of services offered by a building in any neighbourhood beyond the levels demanded in that neigh-bourhood. The second limitation is the demand for housing amenities. In other words, a point is reached where providing additional amenities, and thereby increasing the quality of housing services, no longer results in an increase in the demand for the total supply of services offered by a house operating firm. At that point the demand for the level of hous-ing services provided becomes totally inelastic. For example, providing a doorman for a fashionable apartment would likely result in an increase 26 in the rent which tenants are willing to pay. In this case, i t can be said that the house operating firm has moved i t s building upwards in the rent-quality distribution. However, i f the firm were to provide gold-plated fixtures in place of the existing high quality fixtures in a l l suites of that same fashionable apartment, i t is doubtful that the ten-ants would be willing to pay more for the accommodation. It is apparent, therefore, that beyond a given point, any increase in the amenities offered in the total package of housing services offered by the firm w i l l not generate any additional increase in the rents tenants are willing to pay. As a less extreme example of the above point, consider the impli-cation of supplying a doorman for an apartment in a low rent d i s t r i c t . James Heilbrun, Real Estate Taxes and Urban Housing (New York: Columbia University Press, 1966), p. 18. 22 In theory, such an addition would shift the building to a higher posi-tion in the rent-quality distribution. In fact, however, the presence or absence of a doorman is likely to be of l i t t l e or no importance to a low rent tenant. Such a tenant w i l l not be willing to raise his rent in order to account for the "improved" quality of his housing. In this case, i t is observed that limits do indeed exist with respect to the potential movement of a building achieved by altering the amenities pro-vided by a house operating firm. Moreover, the two examples indicate that not only is there an absolute upper limit which no conceivable building can exceed, but also there is a separate upper limit for each building, which may or may not l i e well below the absolute upper limit. Finnaly, the structural shell limits the potential movement of a building in the rent-quality distribution. Internal structural alter-ations in any building are governed in the final analysis by the shell of the building i t s e l f . Thus, a house operating firm cannot in every instance shift i t s building to the upper limits of the rent-quality dis-tribution by restructuring and improving the internal space. Rather, the f l e x i b i l i t y and structural soundness of the shell dictate the upper limits to which the building can be moved. While this is likely to be a more serious constraint in the case of an older building, i t is applicable to buildings of more recent construction as well. To this point the discussion has been limited to cases where the house operating firm desires to move i t s building upwards in the rent-quality distribution. But what of the case where the firm finds that a downward movement could be potentially more profitable? The answer is immediately obvious. The firm simply chooses to reduce or perhaps elim-inate entirely expenditures on operating, replacement and remodelling 23 practices. The quality of services offered decreases correspondingly with the rents which tenants are willing to pay. Limitations on the Downward Movement  of a Building As with upward movement, the house operating firm faces limita-tions with respect to the downward movement of it s building. There is a point where the housing services offered in a building have declined so far that they can no longer command any rent whatsoever and the build-ing remains vacant. In this case the lower limit of the rent-quality distribution has been reached. This holds true even though the movement of a building to this point may take place only over a long period of time, during which rents decrease very slowly and vacancies remain very low. Eventually, the quality of the housing services offered becomes so poor as to threaten the very health and safety of prospective tenants and thus the building is no longer occupied. A second limitation is mentioned here only briefly, as i t w i l l be discussed in greater depth later in this chapter. This limitation i s , of course, the existence and enforcement of minimum housing regulations. Faced with such regulations, the house operating firm cannot conceivably move it s building downward to a point where i t cannot command any rent. Thus minimum housing standards serve to limit the extent of downward movement of a building by a house operating firm. A third limitation on the potential downward movement of a building concerns the recapture of the house operating firm's equity. Any model of the decision-making practices of a house operating firm must consider recapture value as well as cash flow. For example, con-sider a house operating firm which chooses to defer maintenance and 24 improvements to i t s building for a long period of time. In such a case, we note that the net cash proceeds from the sale of the building would lik e l y be substantially less than i f the building were well operated and maintained. We also note that in the latter circumstance, the economic l i f e of the building is increased, although admittedly at higher costs. It i s obvious, therefore, that the concern of a house operating firm for the ultimate resale value of i t s building w i l l affect the firm's operat-ing, replacement and remodelling decisions and w i l l serve to limit the potential movement of the building in the rent-quality distribution. An Example of the Concepts To this point, the broad concepts of a theory of the house operating firm have been outlined in some det a i l . It is appropriate at this time to refer to Figure 1 below to exemplify the workings of these concepts. c o Index of Quality FIGURE 1 A HYPOTHETICAL RENT-QUALITY DISTRIBUTION 25 Figure 1 represents four buildings, A, B, C and D, placed along a hypothetical rent-quality curve. The position of D on the curve is such that any increase in expenditures w i l l result in a shift to the right along the quality index but w i l l not result in an upward shift along the rent index. Thus even the addition of gold-plated fixtures to D w i l l not increase the rents tenants are willing to pay. Over the short run, however, the firm which operates D may choose to reduce oper-ating and replacement expenditures so as to move i t s building to the lef t along the quality index and downwards on the rent index, toward the position occupied by C. C, unlike D, can be moved in either direction along the rent-quality curve. For example, by increasing operating and replacement expenditures, i t may be moved at least marginally to the right on the quality index toward D. By remodelling, C could be moved a substantial distance toward D, perhaps even to that point occupied by D. The fac-tors limiting this movement would be the location of the building and the f l e x i b i l i t y of i t s structural shell. Downward movement of C could also occur i f operating and replacement expenditures were deferred. Downward movement would be limited by the ultimate reversionary value of the building. Similarly, B could also be moved either upwards or downwards along the rent-quality curve as a function of expenditures on replace-ment, operating and remodelling. Compared to C, however, B is probably older, less ideally located and less suitable for remodelling (i.e., i t s structural shell is less flexible), as evidenced by i t s relatively lower position on the rent-quality curve. Consequently, i t is less likely that the quality of B could be increased to equal that of D, 26 although downward movement toward A is possible. The factors limiting downward movement would again be concern for the ultimate resale value of the building, in addition to any minimum housing regulations in force. A occupies the lowest point on the hypothetical rent-quality curve. The quality of the accommodation is so low that the building remains vacant. While such a building may provide a "roof over one's head," i t would likely endanger the lives and safety of i t s tenants. Potentially, however, A may be moved upward along the curve toward B. Again, such factors as an inflexible structural shell and an undesirable location would limit the degree of upward movement which A could exper-ience. Having described the range of positions which a building may occupy in the rent-quality distribution, we wi l l now construct a model demonstrating how a house operating firm decides upon the position i t s building should occupy in that distribution. Actually, the model to be constructed consists of two sub-models, the unrestricted decision-making model and the restricted decision-making model, which were defined pre-viously in the introduction to this chapter, THE UNRESTRICTED DECISION-MAKING MODEL The following model is constructed on the assumption that given the absence of minimum housing regulations, a house operating firm w i l l adjust i t s operating, replacement and remodelling expenditures so as to maximize profit. As Heilbrun has so aptly stated: "The owner's object-27 ive is to maximize the spread between rent and operating costs." But Heilbrun, Real Estate Taxes and Urban Housing, pp. 16-17. 27 how is the point of maximum profit determined? The concept of profit maximization can perhaps be best explained by referring to Figures 2 and 3 below. In Figure 2, hypothetical cost, revenue and profit curves have been drawn for a given building operated at various levels of quality. Similarly in Figure 3, hypothetical mar-ginal revenue and cost curves have been drawn. In both figures i t is assumed that quality is perfectly divisible; hence the curves are smooth rather than "stepped." While this is undoubtedly an oversimplification, the error introduced is of minor importance, since the figures are intended for descriptive use rather than for actual calculation pur-poses. From Figure 2 i t is apparent that profit is maximized at a level of quality Q3, which is supplied by the house operating firm at a cost and which generates a rent R^ . At the slope of the total profit curve is zero and the slopes of the rent and cost curves are iden-t i c a l . It i s readily noted that a shift in the position of the building described in Figure 2 either to the right or le f t along the quality axis results in a decline in total profit. For example, total profit is greater at than at or at Q^ . By definition, then, profit maximi-28 zation occurs at Q^ . From Figure 3 i t is apparent that profit is maximized at Q 3« At that point, one additional dollar of costs w i l l generate exactly one additional dollar of rents. Moving beyond to Q^ , one additional dollar of costs w i l l generate less than one additional dollar of rents; hence, profit is not maximized. Similarly, moving to the left along Paul A. Samuelson, Economics (8th ed.; New York: McGraw-Hill, 1970), p. 473. 28 FIGURE 2 HYPOTHETICAL COST, RENT AND PROFIT CURVES Quality FIGURE 3 HYPOTHETICAL MARGINAL RENT AND COST CURVES 29 the quality axis from to Q 2 > although one additional dollar of costs w i l l generate more than one additional dollar of rents, total profit is not maximized. By definition, then, profit is maximized only when mar-29 ginal costs equal marginal rents. In less theoretical terms, one might ask how well the curves in Figures 2 and 3 represent the experience of the house operating firm. Since the total profit curve and the marginal cost and rent curves are derived from the total cost and total rent curves in Figure 2, only the latter two curves require explanation. At Q = 0, we can conceive of a house operating firm owning a building which is completely unfit for human occupation and thus cannot command any rents. Even at Q = 0, how-ever, the firm is faced with some fixed costs, including property taxes and perhaps mortgage payments. Moving toward Q^ , the firm makes some minor, low-cost improvements to the housing services offered so that the building attracts tenants willing to pay reasonably low rents. Be-tween and Q2 the building begins to show a profit. Costs increase as the firm improves the quality of the building, but total rents increase at a faster rate, due to a combination of a rise in occupancy and an increase in rents. At Q3, the difference between total rents and total costs is maximized. Moving toward Q , the firm is faced with rising 4 costs as i t increases the quality of the building. At the same time, however, total rents do not rise as quickly as costs, because the a l -ready high occupancy levels cannot be raised substantially and because tenants are unwilling to accept a rise in rents equivalent to the rise in quality of the housing services. Between Q and Q a saturation point Ibid., p. 472. 30 is reached at which the firm must make extremely high expenditures to improve the quality of the building (remember our previous example of gold-plated fixtures), while tenants are unwilling to increase their rents at a l l . A firm which moved i t s building to this position would thus soon realize a loss in i t s operation. Point for a given building w i l l , of course, vary according to i t s location, the condition and age of i t s structural shell and the demand for housing amenities. How, then, does a house operating firm determine the position at which to operate i t s building in order to achieve maximum profit (i.e., Q. )? The following model is offered (see Figure 4). For the purposes of this discussion, let i t be assumed that the house operating firm is willing to shift the position of i t s building in order to achieve maximum profit. Further, let i t be assumed that the firm operates only one building, so that i t s operating decisions are based solely on the conditions surrounding that particular building. Finally, let i t be assumed that the house operating firm has access to perfect information regarding the rent-quality distribution. The house operating firm must f i r s t compile an operating analy-sis of i t s building based on i t s records of income and expenditures. This operating statement must then be tested against the criterion of profit maximization previously defined in this chapter: If one addi-tional dollar of costs generates exactly one additional dollar of reve-nue, then the building is being operated at the point of maximum profit. In this case, the house operating firm needs only to maintain the oper-ation at i t s current level. If, however, the building i s not being operated at maximum profit, then the firm must consider the alternative FIGURE 4 THE UNRESTRICTED DECISION-MAKING MODEL 31 INCOME ANALYSIS O P E R A T I N G ANALYSIS MAXIMIZATION OF PROFIT NO C H A N G E . OPERATION ALTERNATIVES DECISION TO R E M O D E L NO E X P E N S E ANALYSIS Y E S C O N T I N U E O P E R A T I O N Y E S MAXIMIZATION OF PROFIT NO Y E S DECISION TO ALTER R E P L A C E M E N T RATE N O Y E S MAXIMIZATION OF PROFIT NO YES DECISION TO ALTER OPERATING PRACTICES Y E S MAXIMIZATION OF PROFIT Y E S 32 methods of changing the position of i t s building in the rent-quality distribution. There are three alternative methods for the house operating firm to choose from: altering the replacement schedule, altering basic oper-ating practices, and remodelling. Of these alternatives, remodelling offers the greatest potential movement of a building upwards in the rent-quality distribution. Consequently, the decision as to whether or not to remodel the building is assigned the highest priority (i.e., A) in the decision-making model in Figure 4. The choice to remodel the build-ing is based upon three factors, including the expected increase in rent due to the increased quality of housing services, the effect of remodel-ling on the reversionary value of the building, and the costs of remodel-ling. Thus, i f the increase in the discounted cash flow and the increase in the discounted reversionary value which w i l l occur as the result of remodelling exceed the costs of remodelling, then the firm w i l l choose 30 that alternative. If the opposite i s the case, i t is expected that the firm would not choose to remodel. Note that the decision-making criter-ion dictates not only whether or not a building should be remodelled, but also the type and scale of remodelling to be undertaken. Referring again to Figure 4, let i t be assumed that the firm has decided to remodel. That accomplished, i t must determine again whether or not the building is being operated at maximum profit. If remodelling has indeed resulted in shifting the building to i t s optimum operating point, then the firm needs only to continue operating at that point. If, however, remodelling has brought the building closer to the optimum Richard U. Ratcliff, Real Estate Analysis (New York: McGraw-H i l l , 1961), pp. 130-131. 33 operating point without reaching i t , then the house operating firm must examine the possibility of altering i t s replacement schedule (referred to as B in the model in Figure 4) so as to achieve maximum profit. This also applies to a firm which decides against remodelling and thus does not obtain maximum profit. Each piece of equipment and structural element of the building is characterized by an optimum period of replacement. Naturally, i f the replacement period is short, then higher rents may be obtained. How-ever, these higher rents w i l l be gained only through increased costs. In order to determine the appropriate period of replacement for each ele-ment, the house operating firm must employ the following decision-making criterion: equipment and structural elements should be replaced at a rate such that the last additional dollar spent annually on replacement generates just one additional dollar of rent. Reference to Table IV and Figure 5 below w i l l serve to c l a r i f y this criterion. Table IV compares replacement of a structural element at inter-vals ranging from eight years to one year. It is noted that the total annual cost of replacement increases simultaneously with the rate of replacement. Similarly, as the rate of replacement increases, the mar-ginal cost also increases, while the marginal rents obtained decrease. When the marginal rents and costs are plotted in Figure 5, i t is noted that the resulting curves intersect at a point lying between a replace-ment interval of once every four years and once every five years. This point coincides with the optimum rate of replacement where one addition-al dollar spent annually on replacement generates just one additional dollar of rent. At this point the house operating firm is realizing the maximum profit obtainable by varying the rate of replacement of 34 structural elements and equipment. Consider the firm which is not replacing elements of i t s building at the optimum rate and thus alters this rate in order to achieve optimi-zation. Maximum profit may or may not be achieved by taking this step. If indeed maximum profit is reached, then the firm w i l l simply maintain the building at that level (as indicated in Figure 4). If, however, the optimum operating point is not reached even after altering the replace-ment rate, then the firm is lef t with the alternative of examining and changing i t s operating practices (referred to as C in the model in Fig-ure 4). TABLE IV HYPOTHETICAL RESULTS OF VARYING RATE OF REPLACEMENT OF A STRUCTURAL ELEMENT* Rate of re-placement (1/L) Annual replace-ment costs (D) Marginal cost of increasing rate of replacement Marginal increase in annual rent ob-tained by increasing rate of replacement 1/8 $ 12.5 $.... $7 1/7 14.3 1.8 6 1/6 16.7 2.4 5 1/5 20.0 3.3 4 1/4 25.0 5.0 3 1/3 33.3 8.3 2 1/2 50.0 16.7 1 1/1 100.0 50.0 0 *Assume a structural element with a replacement cost of $100.00. If L is the assumed l i f e of the element, then the annual charge for re-placement (D) is given by $100.00 x (1/L). Source: James Heilbrun, Real Estate Taxes and Urban Housing, p. 33. 3 5 Rate of Replacement Source: Table IV. FIGURE 5 HYPOTHETICAL MARGINAL RENT AND COST CURVES RESULTING FROM VARIATIONS IN THE RATE OF REPLACEMENT While decisions to remodel or alter the rate of replacement operate over the long run, the decision to change operating practices operates over the short run. In a sense, then, changes in operating practices constitute the fine tuning by which the house operating firm ultimately moves i t s building to the position where maximum profit is achieved. These changes might include, for example, collecting garbage daily instead of weekly, repainting annually instead of every ten years, and reducing or increasing j a n i t o r i a l services. The decision-making criterion (referred to as C in the model in Figure 4) for these and other operating inputs is quite straightfor-ward. The house operating firm attempting to maximize profits w i l l 36 increase expenditures on that operating input which adds the largest 31 increment to the quality of service and thus to rents. As the firm increases expenditures on successive operating inputs, i t w i l l find that the quality of service increases only marginally, to the point where further expenditures generate no further increases in rent. Thus, i t wil l be able to determine which operating inputs generate which rents and subsequently increase or decrease expenditures on these inputs in order to maximize profit. This completes the discussion of the unrestricted decision-making model, which applies to the house operating firm not constrained by the existence and enforcement of minimum housing regulations. The focus now shifts to an examination of the restricted decision-making model, in which the house operating firm must contend with minimum housing standards. THE RESTRICTED DECISION-MAKING MODEL The following model attempts to explain the decision-making process of firms operating buildings regulated by minimum housing stan-dards. The same assumptions are made here as in the previous model. For the sake of convenience to the reader they are repeated below: 1. The house operating firm is willing to shift the position of i t s building. 2. The house operating firm operates only one building. 3. The house operating firm has access to perfect information regarding the rent-quality distribution. Heilbrun, Real Estate Taxes and Urban Housing, p. 17. 3 7 How do minimum housing regulations affect the decision-making practices of the house operating firm? Expressed in the simplest of terms, housing regulations restrict the potential movement of a build-ing in the rent-quality distribution. In so doing, they may prevent a house operating firm from realizing the optimum operating point for i t s building. This situation is represented in Figure 6 below. According to the unrestricted decision-making model, the building referred to in the figure would maximize profits at the point 0^. However, the minimum housing regulations require that a l l buildings be operated at a level of housing service at least equal to or greater than Q^ . Since the opti-mum operating point for the building is less than Q^ , i t i s expected that the firm must accept less than maximum profit (i.e., by an amount equal to P_ - P ), as i t must operate at a level at least equal to Q . FIGURE 6 HYPOTHETICAL COST, RENT AND PROFIT CURVES 38 It is conceivable, however, that another building may have i t s optimum operating point lying above Q^ . In this case, the enforcement of mini-mum housing regulations w i l l not affect the profit position of the house operating firm. Thus i t is clear that the restricted decision-making model (see Figure 7 below) need only consider those firms whose optimum operating points l i e below the level of quality required by the minimum housing regulations. Firms whose buildings exceed the minimum regulations w i l l , of course, proceed through the model on the basis of profit maximization, as in the unrestricted decision-making model presented in Figure 4. When a building must be moved from i t s optimum operating point to meet minimum housing standards, the main concern of the house oper-ating firm is to minimize the loss of profit incurred. This concern determines whether the firm w i l l (A) remodel the building, (B) increase replacement expenditures, (C) increase operating expenditures, (D) re-place the building with a new structure, (E) abandon the building, or (F) s e l l the building. Upon selecting one of the above alternatives, the firm may s t i l l realize a profit from i t s building. In no case, how-ever, w i l l the profit be equal to that obtained when the building is operated at i t s optimum point. Thus, i t is expected that the firm w i l l choose that alternative which minimizes i t s loss in profit. Decision-making in the model in Figure 7, then, i s based upon "least loss alter-natives." Having defined "least loss alternatives" in a preliminary manner, we w i l l now examine in depth the restricted decision-making model pre-sented in Figure 7. By proceeding through the model, the definition of "least loss alternatives" w i l l be further defined and operationalized. 39 CONDIT IONS S T A N D A R D S FIGURE 7 THE RESTRICTED DECISION-MAKING MODEL CONDITION A N A L Y S I S M E E T S S T A N D A R D S Y E S C O N T I N U E O P E R A T I O N NO C H A N G E O P E R A T I O N A L T E R N A T I V E S DECISION TO R E M O D E L MEETS STANDARDS NO Y E S LEAST L O S S DECISION TO ALTER .REPLACEMENT RATE M E E T S STANDARDS NO Y E S LEAST L O S S DECISION TO ALTER OPERATING PRACTICE M E E T S STANDARDS NO Y E S L E A S T L O S S DECISION TO R E P L A C E BUILDING M E E T S S T A N D A R D S Y E S L E A S T L O S S N O Y E S DECISION TO ABANDON BUILDING M E E T S STANDARDS YES LEAST L O S S N O Y E S RE - INVEST DECISION TO SELL ORIGINAL OWNER LEAST LOSS YES 40 When confronted by the existence and enforcement of minimum housing regulations, the house operating firm f i r s t analyzes the condi-tion of i t s building relative to the standards prescribed in those reg-ulations. If the minimum housing standards are met, then the firm must examine the position of the building with respect to the profit maxi-mization criterion. In the case where the building is operating at maximum profit, the firm w i l l choose to continue the operation at the current level. If, however, the building is not operating at maximum profit, then the firm must work through parts A, B and C of the model to determine an optimum operating point for the building. Upon reaching this optimum operating point, the firm w i l l continue operating at that level. Note that this optimum operating point must be above the mini-mum housing standards and this is not necessarily equivalent to the maximization of profit. If the analysis of the building's condition indicates that the minimum standards are not met, the firm must consider changing i t s oper-ation and examine various alternative plans. The f i r s t decision which the firm must consider is whether or not to remodel the building. Two factors are relevant to this decision: the physical condition of the building in relation to the minimum standards, and the cost-revenue re-lationship. If the building is in such poor condition that i t cannot be brought up to the minimum standards through remodelling, the firm must then proceed directly through the model to part D (i.e., the deci-sion to replace the building), since increasing operating and replace-ment expenditures (i.e., parts B and C) would not raise such a building to the minimum housing standards. If, however, the building can be remodelled to meet at least the minimum housing standards, the firm 41 must then consider the cost-revenue relationship. In this regard, the firm w i l l remodel the building to meet the minimum housing standards i f the loss in profit compared to the potential profit is minimized with respect to the alternatives B, C, D, E and F. For example, i f the rate of return (r') from operating the building at the optimum point is 9% and the rate of return after remodelling (r ) is 7.5%, then the loss (L.) due to remodelling is expressed as (r' - r ) or 1.5%. If the loss from a adopting any of the other alternatives always exceeds 1.5% (i.e., L ), A. then the firm w i l l choose remodelling as the least loss alternative. It might be questioned that a firm could, in fact, remodel the building to a standard higher than that required by the minimum housing regulations. However, such a decision implies that the optimum operat-ing point for the building originally lay above the minimum housing stan-dards. In this case, the model in Figure 4 is more appropriate than the model in Figure 7, as the latter is wholly applicable only to those firms whose buildings do not meet minimum housing standards. Having determined the potential losses incurred by remodelling, the firm must examine the other alternatives. The second decision to be made is whether or not to alter the rate of replacing structural ele-ments and equipment. This decision is limited to those firms which own buildings operated at a level only marginally below the minimum housing standards because, unlike remodelling, alteration of the replacement rate can move the building only a small distance in the rent-quality distribution. If the condition of the building is far below the mini-mum housing standards, then i t is highly unlikely that i t can be brought up to those standards by altering the replacement rate. If the deci-sion is relevant, however, i t must be viewed in relation to the other 42 alternatives. Thus a firm will alter the replacement rate only i f i t minimizes losses when compared to the other alternatives. Let r equal the rate of return from the building after increas-b ing expenditures for replacement to meet the minimum housing standards. Thus the loss (i.e., L ) incurred w i l l be equal to r 1 - r . If L is B b B less than L or the loss from any other alternative, then the firm w i l l A choose to increase replacement expenditures as the least loss alterna-tive. The third decision, alteration of operating practices (C in Fig-ure 7), is also relevant only to buildings with optimum operating points just slightly below the minimum housing standards. If a house operating firm can raise i t s building to minimum levels by changing operating practices, i t w i l l choose this alternative when r* - r minimizes i t s c losses. In the case where the building cannot be brought up to the min-imum housing standards, the firm may choose to replace the building with a new structure (D in Figure 7). It is assumed that such a structure would then meet the minimum housing requirements. The loss (L Q) incur-red by the firm in this case is equal to r' - r , where r is the rate d d of return from adopting strategy D. Alternatively, a firm which i s unable or unwilling to bring i t s building up to minimum housing standards may choose to abandon or board up the building (E in Figure 7). The loss to the firm in this case w i l l 32 equal i t s equity in the building. Again the firm must compare this loss to the loss incurred by choosing any of the other alternatives. It is assumed here that the land upon which the building is situated may not be put to any alternative use other than residential. 43 Finally, a house operating firm may choose to s e l l i t s building (F in Figure 7), regardless of i t s condition with respect to the minimum housing standards. Naturally, the firm w i l l obtain a higher price for the building i f indeed i t can be brought up to the minimum housing standards. The rate of return realized from selling the building, r , would thus directly reflect the condition of the building with respect to the minimum housing regulations and the potential for improving that condition. The loss (L^) incurred by the firm in this case would be equal to r' - r^, which again must be evaluated in terms of the five previously listed alternatives. This completes the discussion of the restricted decision-making model. This model attempts to explain decision-making behaviour of a house operating firm whose building contravenes minimum housing regula-tions when operated at i t s optimum operating point (i.e., when profit is maximized and the rate of return equals r * ) . Six alternative decisions are open to the firm, the relevance of each decision being determined in a given situation by the condition of the building in relation to the minimum housing standards. The firm chooses i t s strategy so as to min-imize i t s loss in profit and thus adopts the "least loss alternative." SUMMARY In this chapter an attempt has been made to formulate a theory of decision-making of house operating firms. It was proposed that a house operating firm can move i t s building to some degree either upwards or downwards in a rent-quality distribution, thereby altering the pro-f i t position of the building. Certain constraints were recognized which limit the potential degree of movement, including the location 44 of the building, the condition and f l e x i b i l i t y of i t s structural shell, the concern for the reversionary value of the building, and f i n a l l y the existence and enforcement of minimum housing standards. These con-straints serve to define the position in the rent-quality distribution at which the building may be operated most profitably. Two decision-making models were constructed based on the general theory of the house operating firm. The unrestricted decision-making model is applicable in the absence of minimum housing regulations. The restricted decision-making model applies when minimum housing regula-tions have been enacted and are actively enforced. The former model postulated that the house operating firm varies i t s expenditures on re-modelling, replacement and operating practices so as to move i t s build-ing to the point where profit i s maximized. The latter model postulated that a firm which operates a building with an optimum operating point below that prescribed in the minimum housing standards responds by sel-ecting a strategy which minimizes losses to the firm while meeting the minimum housing requirements. In the following chapter, an attempt w i l l be made to further refine and operationalize these two decision-making models. CHAPTER THREE OPERATIONAL1.ZING THE DECISION-MAKING MODELS INTRODUCTION It has been proposed that in the absence of minimum housing reg-ulations, a house operating firm w i l l vary i t s expenditures on remodel-ling, replacement and operating practices in order to move a building to the point in the rent-quality distribution where maximum profit may be achieved. In this chapter an attempt is made to operationalize a deci-sion-making formula which a house operating firm might employ to ensure maximum profits from i t s building. In effect, two fu l l y operationalized formulas are considered. The f i r s t is an adaptation of the model for 33 real estate investment proposed by Ratcliff and Schwab. The second is proposed by A.H. Schaaf as a tool for evaluating public subsidization of 34 private renewal efforts. Both formulas are presented in detail and evaluated in terms of their applicability to the decision-making models presented in the previous chapter. Richard U. Ratcliff and Bernard Schwab, "Contemporary Decision Theory and Real Estate Investment," The Appraisal Journal, XXXVII (1969), 165-187. 34 A.H. Schaaf, Economics of Urban Renewal (Berkeley: Institute of Business and Economic Research, University of California, 1960); see also Schaaf, "Economic Feasibility Analysis for Urban Renewal Housing Rehabilitation," Journal of the American Institute of Planners, XXXV (1969), 399-404; and also Schaaf, "The Potential for Subsidized Housing Rehabilitation," Proceedings of the American Real Estate and Urban Eco- nomics Association, V (1970), 105-116. 45 46 In the discussion of the operationalized formula, an attempt is made to establish the factors which are crucial to the decision-making practices of a house operating firm. These factors must be clearly identified, since the success of any housing code enforcement program or similar public effort to improve rental housing conditions is largely dependent upon the degree to which the responsible public authority can manipulate these factors and affect the ultimate decision-making process. With this concept in mind, the examination now focuses on the formula-tion of Ratcliff and Schwab. AN ADAPTED VERSION OF THE FORMULATION OF RATCLIFF AND SCHWAB According to individual perceptions of the housing market, i t is conceivable that a house operating firm may arrive at different projec-tions as to both the future productivity and ultimate reversionary value of i t s building, which determine the ultimate rate of return to the firm's investment. Ratcliff and Schwab suggest that given these di f f e r -ent perceptions, the expected return to an investment can be classified 35 as (1) pessimistic, (2) most probable, or (3) optimistic. In plotting a frequency distribution of the possible rates of return to an invest-ment, i t is expected that by far the majority of the rates of return wi l l f a l l under the "most probable" classification. In a few cases, i t is expected that the rate of return w i l l l i e under the t a i l s of the frequency curve and thus be classed as "pessimistic" or "optimistic." Figure 8 below illustrates this concept. 35 Ratcliff and Schwab, op. c i t . , p. 176. 47 Rate of Return Source: R.U. Ra t c l i f f and B. Schwab, "Contemporary Decision Theory and Real Estate Investment," p. 176. FIGURE 8 HYPOTHETICAL FREQUENCY DISTRIBUTION OF RATES OF RETURN In order to derive the various estimates of the expected rate of return, i t is necessary to project the cash flow and ultimate rever-sionary value of the building at the termination of the investment period based upon the pessimistic, most probable and optimistic assump-tions regarding the housing market. For example, a firm might expect that vacancy rates w i l l rise along with rising operating and replacement costs over the course of the investment period. Similarly, the firm might expect that the resale value of the building upon liquidation w i l l be relatively low. Such perceptions regarding the housing market w i l l result in a "pessimistic" expected rate of return. With different per-ceptions of the housing market, the same firm can arrive at a "most probable" as well as an "optimistic" expectation regarding the future 48 rate of return from the building. Having determined the expected rates of return under each of these assumptions, Ratcliff and Schwab suggest that these rates be weighted according to their probability illustrated in Figure 8. Thus the pessimistic rate of return (r ) is multiplied by 10%; the optimistic rate (r ) by 10%; and the most probable rate (r ) by 80%. The sum of o mp these values determines the overall expected rate of return to the investment. Using this procedure the overall rate of return for each operating strategy can be determined, thus providing the firm with a sound basis for decision-making. An Example of the Use of the Model How exactly might a house operating firm calculate the overall rate of return for a given operating strategy under the Ratcliff and Schwab formulation? For the purposes of the discussion, assume that the house operating firm wishes to calculate the "pessimistic", "most probable" and "optimistic" rates of return from adopting a strategy of deferring operating and replacement expenditures. The procedure and calculations which follow are based upon a hypothetical example. The emphasis i s , of course, on the method rather than the actual numbers employed. The property in question is a three-story apartment building of frame construction containing 25 units, either studio or one-bedroom suites. The building is 20 years old and has been well maintained and is located in an area of slightly less than average attractiveness within the community. The house operating firm has recently acquired the building for $275,000.00, of which the land component is estimated to be $70,000.00 and the building $205,000.00. The firm has put up 49 $91,000.00 i n e q u i t y and f inanced the remainder o f $184,000.00 at 9.5% over a 20-year term. The f i r m operates t h i s b u i l d i n g o n l y and d e s i r e s t o achieve maximum p r o f i t from the b u i l d i n g over the next t en y e a r s , at the end o f which time the b u i l d i n g w i l l be s o l d . The d e s c r i p t i o n o f the model and the c a l c u l a t i o n s based upon these assumptions f o l l o w below. The C a l c u l a t i o n Procedure L ine 1. Assume 100% occupancy and es t imate the gross annual income f o r each year accord ing t o the o p e r a t i n g s t r a t e g y proposed. L ine 2 . Es t imate the occupancy r a t e f o r each year accord ing t o the o p e r a t i n g s t r a t e g y proposed. L ine 3. C a l c u l a t e the e f f e c t i v e gross income ( l i n e 1 m u l t i p l i e d by l i n e 2 ) . L ine 4 . Est imate the o p e r a t i n g expenses f o r each year accord ing t o the o p e r a t i n g s t r a t e g y proposed. L ine 5 . Es t imate the replacement expenses f o r each year accord ing to the s t r a t e g y proposed. L ine 6. Es t imate the cos t s o f r e m o d e l l i n g i n the case where t h a t s t r a t e g y i s proposed. L ine 7. C a l c u l a t e the i n t e r e s t on the mortgage f o r each y e a r . L ine 8. C a l c u l a t e the book va lue o f the b u i l d i n g at the b e g i n n i n g o f each year (the d e p r e c i a t i o n base i n year one minus the cumu-l a t i v e annual d e p r e c i a t i o n ) . L ine 9 . C a l c u l a t e the d e p r e c i a t i o n al lowance f o r each year (assume 5% s t r a i g h t l i n e d e p r e c i a t i o n ) . L ine 10. C a l c u l a t e the p o t e n t i a l t axab le income f o r each year ( l i n e 3 minus the sum o f l i n e s 4, 5 , 7 and 9 ) . L ine 11. C a l c u l a t e the a c t u a l t axab le income f o r each year ( l i n e 10 minus accumulated los ses o f the prev ious f i v e y e a r s ) . 7 •7/L In order to s i m p l i f y the example, a s t r a i g h t l i n e d e p r e c i -a t i o n r a t e o f 5% has been employed. However, the model a l l ows the f i r m to choose any d e p r e c i a t i o n technique which s u i t s i t s r equ i rements . •57 The method used here i s based on Canadian t a x laws i n 1970 and i s taken from A.W. G i l m o r e , Income Tax Handbook, 1970-1971 (20th e d . ; Toronto : R i c h a r d DeBoo L t d . , 1970), p . 487. 50 Line 12. Calculate the taxes for each year 3 8 (line 11 multiplied by 0.18). 3 9 Line 13. Calculate the annual mortgage principal payments. Line 14. Calculate the remaining principal on the mortgage after each year. Line 15. Calculate the cash flow after taxes (line 9 plus line 10 minus the sum of lines 12 and 13). Line 16. Estimate the sale price of the property after a 10-year hold-ing period. Line 17. Calculate the value of the land component at the time of sale (assumed to remain constant in the case of this example). Line 18. Calculate the value of the building at the time of sale (line 16 minus line 17). Line 19. Calculate the book value of the building at the end of the holding period. Line 20. Calculate the capital gain realized from the sale of the pro-perty (line 18 minus line 19). Line 21. Calculate the capital gains tax. (Where depreciable property is sold for a price in excess of the remaining undepreciated capital cost, the taxpayer is required to take into income any depreciation claimed in previous years. The amount included will be the lesser of (a) the excess of the selling price over the remaining undepreciated capital cost, or (b) the excess of the original cost over the remaining undepreciated capital cost. The excess is taxed at a rate of 18% on the f i r s t $35,000.00 and 47% on the remainder exceeding $35,000.00.) Line 22. Calculate the net proceeds to the house operating firm after the capital gains tax (line 16 minus the sum of lines 14 and 21). 3 8The benefit of a tax shield is not considered in this for-mulation, since i t has been assumed that the firm in question operates only one building. Such provision could easily be incorporated into the formulation, however. For a f u l l e r explanation, see R.U. Ratcliff and B. Schwab, "Contemporary Decision Theory and Real Estate Investment." p. 689. 3 9The taxation rate of 0.18 is taken from Gilmore, op. c i t . , 4 0 T h i s method of tax calculation is presented in Canadian  Master Tax Guide (23rd ed.; Don Mills, Ontario: C.C.H. Canadian Limited, 1968), p. 412. 51 The Return to Equity 41 Wendt and Cerf suggest the use of the following formula to calculate the rate of return to equity: n R+ - I*. - A. - T + P - GT - UM E = £ - - V - 1 * -t=l (1 + r ) t (1 + r ) n Where: E = Equity R = Net income in period t (i.e., line 3 minus the sum of lines 4 and 5). 1^  = Interest paid on mortgage in period t (i.e., line 7). A = Principal payment on mortgage in period t (i.e., line 13). T = Income tax in period t (i.e., line 12). P n = Sales price in period t = n (i.e., line 16). GT = Capital gains tax (i.e., line 21). UM = Unpaid mortgage principal at period t = n (i.e., line 14). r = Rate of return. The expression (R - I - A - T ) is equal to the cash flow in t t L t line 15 of the Ratcliff and Schwab model. Similarly, the expression (P n - GT - UM) is equal to the sum of line 16 discounted at (r) plus line 22 discounted at (r) for the period t = l,...,n. While (r) can be cal-culated by hand using methods of approximation, as has been done with the example, the use of data processing would substantially speed up the process for a house operating firm. Having calculated the rate of return for each estimate for the particular strategy (i.e., deferring expenditures on operating and P.F. Wendt and A.R. Cerf, Real Estate Investment Analysis and  Taxation (New York: McGraw-Hill, 1969), p. 27. replacement practices in the case of this example), the remaining step is to account for the probability of these rates. As stated earlier, each of the three estimates of (r) (i.e., r , r and r ) is assigned a o mp p probability under the Ratcliff-Schwab formulat ion. Thus, the "pessi-mistic" estimate is assigned a probability of 0.1, the "most probable" estimate is assigned a probability of 0.8, and the "optimistic" estimate is assigned a probability of 0.1. To determine the overall estimated rate of return, these probabilities are multiplied by their correspond-ing estimated rate of return. In our example, the overall rate of return (i.e., r') from adopting a strategy of deferring operating and replacement expenditures is the sum of (-0.1%) (0.1) + (6.18%)(0.8) + 42 (7.62%) (0.1), or 5.69%. Where: The pessimistic rate of return (r ) = -0.1%. P The most probable rate of return (r ) = 6.18%. mp The optimistic rate of return (r Q) = 7.62%. In Tables V, VI and VII below, a set of income and operating streams are estimated for the particular strategy in question. The required calculations are performed based on these estimates and the results are presented in the same tables. Discussion of the Adapted Version of the  Ratcliff-Schwab Formulation The model presented here is tailored to a house operating firm involved in the operation of one building only. However, the taxation position of such a firm differs greatly from that of a firm which oper-ates several buildings and holds other assets. Thus the model must be These rates of return are derived from Tables V, VI and VII respectively. TABLE V STRATEGY: D e f e r r i n g O p e r a t i n g and Replacement E x p e n d i t u r e s ESTIMATE: P e s s i m i s t i c " 1 2 3 4 Y e a r 5 6 7 8 9 10 1. P o t e n t i a l g r o s s income 3 8 , 8 8 0 3 8 , 8 8 0 3 8 , 5 0 0 3 8 , 1 0 0 3 7 , 7 0 0 37 ,300 3 6 , 8 0 0 3 6 , 3 0 0 3 5 , 7 0 0 3 5 , 1 0 0 2 . O c c u p a n c y r a t e . 9 5 . 9 3 . 92 . 91 .89 .87 .85 .83 . 82 . 8 0 3 . E f f e c t i v e g r o s s income 3 6 , 9 4 0 3 6 , 1 6 0 3 5 , 4 2 0 3 4 , 6 7 0 3 3 , 5 5 0 3 2 , 4 5 0 31 ,280 3 0 , 1 3 0 2 9 , 2 7 0 2 3 , 0 8 0 4 . O p e r a t i n g expenses 1 1 , 2 0 0 11 ,100 10 ,900 10 ,650 10 ,350 10 ,000 9 ,600 9 ,150 8 ,600 8 ,000 5 . R e p l a c e m e n t expenses 2 , 8 0 0 2 , 7 7 0 2 , 7 3 0 2 , 6 6 0 2 ,890 2 ,500 2 ,400 2 ,290 2 , 1 5 0 2 , 0 0 0 6 . R e m o d e l l i n g expenses . . . . 7 . M o r t g a g e i n t e r e s t 1 7 , 4 8 0 1 7 , 1 6 0 1 6 , 8 0 0 16 ,400 1 5 , 9 9 0 15 ,530 15 ,020 14 ,460 1 3 , 8 5 0 13 ,180 8. Book v a l u e o f b u i l d i n g 2 0 5 , 0 0 0 194 ,750 1 8 4 , 5 0 0 174 ,250 164 ,000 153 ,750 143 ,500 133 ,250 1 2 3 , 0 0 0 112 ,750 9 . D e p r e c i a t i o n a l l o w a n c e 1 0 , 2 5 0 1 0 , 2 5 0 10 ,250 10 ,250 1 0 , 2 5 0 10 .2S0 10 ,250 10 ,250 1 0 , 2 5 0 10 ,250 1 0 . P o t e n t i a l t a x a b l e - 4 , 7 9 0 - 5 , 1 2 0 - 5 , 2 6 0 - 5 , 2 9 0 - 5 , 9 3 0 - 5 , 8 3 0 - 5 , 9 9 0 - 6 , 0 2 0 - 5 , 5 8 0 - 5 , 3 5 0 income 1 1 . A c t u a l t a x a b l e income 1 2 . Taxes . . . . 13 . A n n u a l mor tgage 3 , 4 0 0 3 , 7 2 0 4 , 0 8 0 4 , 4 8 0 4 , 8 9 0 5 ,360 5 , 8 6 0 ' 6 , 4 2 0 7 , 0 3 0 7 ,700 p r i n c i p a l 14 . O u t s t a n d i n g mor tgage 1 8 0 , 6 0 0 176 ,880 172 ,800 168 ,320 163 ,430 158 ,070 152 ,210 145 ,790 1 3 8 , 7 6 0 131 ,060 p r i n c i p a l 1 5 . Cash f l o w 2 , 0 6 0 1 ,410 910 480 - 5 7 0 -940 - 1 , 6 0 0 - 2 , 1 9 0 - 2 , 3 6 0 - 2 , 8 0 0 16 . E s t i m a t e d s a l e s p r i c e 2 4 5 , 0 0 0 1 9 . Amount und e n r e c i a t e d 112 ,750 2 2 . Net a f t e r s a l e 107 ,910 1 7 . Land component 7 0 , 0 0 0 2 0 . C a p i t a l ga i n 6 2 , 2 5 0 2 3 . R a t e o f r e t u r n - 0 . 1 % 1 8 . V a l u e o f b u i l d i n g 1 7 5 , 0 0 0 2 1 . G a i n s t a x 6 , 0 3 0 TABLE VI STRATEGY: D e f e r r i n g O p e r a t i n g and Rep lacement E x p e n d i t u r e s ESTIMATE: Most P r o b a b l e 1 2 3> 4 Y e a r 5 6 7 8 9 10 1. P o t e n t i a l g r o s s income 3 8 , 8 8 0 3 9 , 1 8 0 3 9 , 4 8 0 3 9 , 7 8 0 40 ,100 4 0 , 4 0 0 4 0 , 7 0 0 4 1 , 0 0 0 4 1 , 3 0 0 4 1 , 6 0 0 2 . Occupancy r a t e . 9 5 . 94 . 94 . 9 3 . 9 2 .91 . 9 0 . 88 . 8 6 . 8 5 3 . E f f e c t i v e g r o s s income 3 6 , 9 4 0 3 6 , 8 3 0 3 7 , 1 1 0 3 6 , 9 9 0 3 6 , 8 9 0 3 6 , 7 6 0 3 6 , 6 3 0 3 6 , 0 8 0 3 5 , 5 2 0 3 5 , 3 6 0 4 . O p e r a t i n g expenses 1 1 , 2 0 0 1 0 , 6 4 0 1 0 , 0 8 0 9 , 5 2 0 8 ,960 8 ,400 7 ,840 7 ,280 6 , 7 2 0 6 , 1 6 0 S . Rep lacemen t e x p e n s e s 2 , 8 0 0 2 , 6 6 0 2 , 5 2 0 2 , 3 S 0 2 ,240 2 , 1 0 0 1,960 1,820 1,680 1,540 6 . R e m o d e l l i n g e x p e n s e s 7 . M o r t g a g e i n t e r e s t 1 7 , 4 8 0 1 7 , 1 6 0 1 6 , 8 0 0 1 6 , 4 0 0 15 ,990 1 5 , 5 3 0 1 5 , 0 2 0 14 ,460 1 3 , 8 5 0 1 3 , 1 8 0 8 . Book v a l u e o f b u i l d i n g 2 0 5 , 0 0 0 1 9 4 , 7 S 0 1 8 4 , 5 0 0 174 ,250 164 ,000 1 5 3 , 7 5 0 1 4 3 , 5 0 0 133 ,250 123 ,000 1 1 2 , 7 5 0 9 . D e p r e c i a t i o n a l l o w a n c e 1 0 , 2 5 0 1 0 , 2 5 0 1 0 , 2 5 0 1 0 , 2 5 0 10 ,250 1 0 , 2 5 0 1 0 , 2 5 0 1 0 , 2 5 0 1 0 , 2 5 0 1 0 , 2 5 0 .0 . P o t e n t i a l t a x a b l e - 4 , 7 9 0 - 3 , 8 8 0 - 2 , 5 4 0 :. - 550 470 1.S60 2 , 2 7 0 2 , 2 7 0 3 , 0 2 0 4 , 2 3 0 income 11. A c t u a l t a x a b l e income 210 4 , 2 3 0 2 . T a x e s 40 760 3 . A n n u a l mor tgage 3 , 4 0 0 3 ,720 4 , 0 8 0 4 , 4 8 0 4 , 8 9 0 5 , 3 6 0 5 , 8 6 0 6 , 4 2 0 7 , 0 3 0 7 , 7 0 0 p r i n c i p a l :4 . O u t s t a n d i n g mor tgage 1 8 0 , 6 0 0 1 7 6 , 8 8 0 1 7 2 , 8 0 0 168 ,320 163 ,430 158 ,070 1 5 2 , 2 1 0 145 ,790 138 ,760 1 3 1 , 0 6 0 p r i n c i p a l s. C a s h f l o w 2 , 0 6 0 2 , 6 5 0 3 , 6 3 0 3 , 5 1 0 4 , 8 1 0 5 , 3 6 0 5 , 9 5 0 6 , 1 0 0 6 , 2 0 0 6 , 0 2 0 .6 . E s t i m a t e d s a l e s p r i c e 2 6 0 , 0 0 0 1 9 . Amount u n d e p r e c i a t e d 1 1 2 , 7 5 0 2 2 . Net a f t e r s a l e 1 0 5 , 1 4 0 7 . Land component 7 0 , 0 0 0 2 0 . C a p i t a l g a i n 7 7 , 2 5 0 2 3 . R a t e o f r e t u r n 6.18% 8. V a l u e o f b u i l d i n g 1 9 0 , 0 0 0 2 1 . G a i n s t a x 2 3 , 8 0 0 TABLE V I I STRATEGY: D e f e r r i n g O p e r a t i n g and Replacement E x p e n d i t u r e s ESTIMATE: O p t i m i s t i c 1 2 3 4 Y e a r 5 6 7 8 9 10 1. P o t e n t i a l g r o s s i n c o m e 3 8 , 8 8 0 3 9 , 2 8 0 3 9 , 7 0 0 4 0 , 1 3 0 4 0 , 5 7 0 4 0 , 9 0 0 4 1 , 2 5 0 4 1 , 6 0 0 4 1 , 9 0 0 4 2 , 2 0 0 2 . Occupancy r a t e .95 .95 .95 .94 .94 .93 . 9 3 .92 . 91 . 9 0 3 . E f f e c t i v e g r o s s income 3 6 , 9 4 0 3 7 , 3 2 0 3 7 , 7 1 0 3 7 , 7 2 0 38 ,140 38 ,040 33 ,360 38 ,270 3 8 , 1 3 0 3 7 , 9 8 0 4 . O p e r a t i n g e x p e n s e s 1 1 , 2 0 0 10 ,700 10 ,100 9 , 5 0 0 8 ,900 8 ,300 7 ,600 6 , 9 0 0 6 , 4 0 0 5 , 9 0 0 5 . Rep lacemen t e x p e n s e s 2 , 8 0 0 2 , 6 8 0 2 ,530 2 ,380 2 , 2 3 0 2 ,080 1,900 1,730 1,600 1 ,480 6 . R e m o d e l l i n g e x p e n s e s 7 . M o r t g a g e i n t e r e s t 1 7 , 4 8 0 1 7 , 1 6 0 16 ,800 16 ,400 15 ,990 15 .S30 15 ,020 14 ,460 1 3 , 8 5 0 1 3 , 1 8 0 8 . Book v a l u e o f b u i l d i n g 2 0 5 , 0 0 0 1 9 4 , 7 5 0 184 ,500 174 ,250 164 ,000 153 ,750 143 ,500 133 ,250 1 2 3 , 0 0 0 1 1 2 , 7 5 0 9 . D e p r e c i a t i o n a l l o w a n c e 1 0 , 2 5 0 1 0 , 2 5 0 . 10 ,250 1 0 , 2 5 0 10 ,250 10 .2S0 10 ,250 10 ,250 1 0 , 2 5 0 1 0 , 2 5 0 1 0 . P o t e n t i a l t a x a b l e - 4 , 7 9 0 - 3 , 4 7 0 - 1 , 9 7 0 -810 870 1,880 3 ,590 4 , 9 3 0 6 , 0 3 0 7 , 1 7 0 income 1 1 . A c t u a l t a x a b l e i ncome .... . 2 , 1 5 0 6 , 0 3 0 7 , 1 7 0 1 2 . Taxes ---- 390 1,080 1 ,290 1 3 . A n n u a l mor tgage 3 , 4 0 0 3 , 7 2 0 4 , 0 8 0 4 , 4 8 0 4 , 8 9 0 5 , 3 6 0 5 ,860 6 , 4 2 0 7 , 0 3 0 7 , 7 0 0 p r i n c i p a l 14 . O u t s t a n d i n g mor tgage 1 8 0 , 6 0 0 176 ,880 172 ,800 168 ,320 163 ,430 158 ,070 1 5 2 , 2 1 0 145 ,790 1 3 8 , 7 6 0 1 3 1 , 0 6 0 p r i n c i p a l 15 . Cash f l o w 2 , 0 6 0 3 , 0 6 0 4 , 2 0 0 4 , 9 6 0 6 , 2 3 0 6 , 7 7 0 7 ,980 8 ,370 8 , 1 7 0 8 , 4 3 0 1 6 . E s t i m a t e d s a l e s p r i c e 2 7 5 , 0 0 0 1 9 . Amount un d e p r e c i a t e d 112 ,750 2 2 . Net a f t e r s a l e 1 1 0 , 7 5 0 .17. Land component 7 0 , 0 0 0 2 0 . C a o i t a l g a i n 9 2 , 2 5 0 2 3 . R a t e o f r e t u r n 7.62% 1 8 . V a l u e o f b u i l d i n g 2 0 5 , 0 0 0 2 1 . G a i n s t a x 3 3 , 1 9 0 extended to account for the tax shield benefits which might accrue as a result of operating the building in question. A firm holding several buildings may find that the operation of the particular building in the example needs to be modified so as to provide the largest possible tax shield for other investments of the firm. In such a case, this building w i l l not be operated to maximize it s own profit position, but rather to maximize profit from the total holdings of the firm. The application of an accelerated rate of depre-ciation might aid in achieving this end. Such a policy would, however, tend to disallow maximization of returns from the building in question. It can thus be concluded that while the model can account for the bene-f i t s accruing from a tax shield, i t is most applicable in the case of a firm operating a single building. Perhaps the most significant point which can be raised in the discussion of the model and the data in Tables V, VI and VII concerns the degree of certainty surrounding the projections, principally in lines 1, 2 and 16, but also in lines 4 and 5. With perfect information, there is l i t t l e doubt that the firm could predict with relatively high accuracy, annual gross incomes, occupancy rates, expenses and the u l t i -mate sales price of the building after the holding period. However, 43 such is not the case. Louis Winnick has stated: Rational investment always requires the assembly and analysis of various kinds of dependable information. In this respect, the market for residential property is primitive and the level of business ethics far from high. Accurate and regular reports on sales, costs and earnings such as are required of large corpora-tions are notoriously lacking in the real estate market. The Louis Winnick, Rental Housing: Opportunities for Private  Investment (New York: A.C.T.I.O.N., 1958), p. 101. 57 prospective investor in an existing apartment building has no sure way of obtaining the current and past gross and net earn-ings of a given property. The information supplied by the would-be seller is seldom accepted at face value and the prin-ciple of caveat emptor prevails. This statement tends to cast the assumption regarding perfect information in rather poor light. Fortunately, the previously outlined model com-pensates at least in part for this lack of market information by making three projections of the relevant income and expense streams based upon different assumptions and assigning different probabilities to the r e a l i -zation of the projections. It is maintained that by using this method, as opposed to a single projection, some of the uncertainty caused by the lack of perfect information is factored out. While the Ratcliff-Schwab formulation may be validly c r i t i c i z e d as indicated above, i t should not be rejected outright. Given i t s f l e x i -b i l i t y and comprehensive nature, i t allows for variations in a s i g n i f i -cant range of "real world" operating and investment inputs. For example, different financing formulas may be injected into the model at any stage of the holding period. It also allows incorporation of annual changes in the taxation position and depreciation practices of a house operating firm possessing numerous assets other than the building. In addition, a host of variations in operating, replacement and remodelling practices can be incorporated in the model and their effects gauged in terms of the profit criterion. Finally, these variations can be incorporated in terms of both the time at which they occur and their magnitude of value. Operationalization of the Restricted Decision-making ModeT To this point the discussion has dealt only with a house oper-ating firm which is not constrained by the existence and enforcement 58 of a housing code. In the case where a housing code is enforced, i t is necessary to operationalize the concept of least loss alternatives. The calculations required to derive the loss incurred by adopting any one of the strategies presented in the restricted decision-making model f o l -low below and are based on the adaptation of Ratcliff and Schwab's model. Let us assume that a house operating firm has been operating i t s building at maximum profit at a level of quality which, due to deferred operating and replacement expenditures, is below that required by a recently enacted housing code. Through the use of the previously dis-cussed model, the firm has calculated the overall expected rate of return (r 1) from the building. However, as the building is below the minimum level of quality, the enforcement of the housing code does not permit the firm to earn this rate of return. By following the procedure below, the firm can determine which of strategies A - F w i l l involve the least loss while at the same time allowing i t to meet the requirements of the code. Strategy A: Remodelling Step 1. Calculate (r*) (follow steps 1 - 22 as previously outlined and apply the formula from Wendt and Cerf).44 Step 2. Calculate the expected rate of return to equity (r ), assum-ing that the building is remodelled (use the same procedure as in step 1). Step 3. Calculate the decline in the rate of return to equity (line 1 minus line 2). Step 4. Calculate the loss (L^) incurred from remodelling (line 3 multiplied by the equity in line 2 times the number of years remaining in the holding period). See page 51 of this study. 59 Step 1. Step 2. Step 3. Step 4. Step 1. Step 2. Step 3. Step 4. Step 1. Step 2. Step 3. Step 4. Step 5. Step 6. Strategy B: Increasing Replacement Expenditures Calculate (r'). Calculate the expected rate of return to equity (r^) assuming that the replacement expenditures were increased so as to comply with the minimum housing standards. Calculate the decline in the rate of return to equity (line 1 minus line 2). Calculate the loss (Lg) incurred by increasing replacement expenditures (line 3 multiplied by the equity in line 2 times the number of years remaining in the holding period). Strategy C; Increasing Operating Expenditures Calculate ( r 1 ) . Calculate the expected rate of return to equity (r c) assuming that the operating expenditures were increased so as to com-ply with the minimum housing standards. Calculate the decline in the rate of return to equity (line 1 minus line 2). Calculate the loss (LQ) incurred by increasing operating expenditures (line 3 multiplied by the equity in line 2 times the number of years remaining in the holding period). Strategy D: Replacing the Building Calculate (r'). Calculate the expected cumulative discounted cash flow up to the time at which the minimum housing regulations were en-forced (use the rate of discount (r 1) determined in line 1). Calculate the i n i t i a l equity. Calculate the expected discounted cash flow and discounted reversionary value of the building for the remainder of the holding period after the minimum housing regulations were enforced (line 3 minus line 2). Calculate the remaining mortgage debt at the time that the decision to replace the building is made. Calculate the costs of demolishing the building. 60 Step 7. Calculate the total loss due to the decision to demolish the building (the sum of lines 3, 4, 5 and 6 minus line 2). Step 8. Calculate the expected total discounted return from the new building, assuming i t i s operated at maximum profit for the duration of the holding period (use the rate of discount (r') determined in line 1). Step 9. Calculate the total loss (L Q) due to the decision to replace the building (line 8 minus line 7). Strategy E: Abandoning the Building Step 1. Calculate (r'). Step 2. Calculate the expected cumulative discounted cash flow up to the time at which the minimum housing regulations were enforced (use the rate of discount determined in line 1). Step 3. Calculate the i n i t i a l equity. Step 4. Calculate the expected discounted cash flow and discounted reversionary value of the building for the remainder of the holding period after the minimum housing regulations were enforced (line 3 minus line 2). Step 5. Calculate the total loss (L E) due to the decision to abandon the building (the sum of lines 3 and 4 minus line 2). Strategy F; Selling the Building Step 1. Calculate the expected discounted return to equity assuming that the building was operated at maximum profit for the holding period. Step 2. Calculate the discounted return to equity assuming that the building was sold when the minimum housing regulations began to be enforced (use the discount rate (r') in line 1). Step 3. Calculate the opportunity cost of capital. Step 4. Calculate the discounted return to the equity in the build-ing i f i t were re-invested for the remainder of the holding period (use the discount rate in line 3). Step 5. Calculate the loss due to selling the building (line 2 plus line 4 minus line 1). 61 Discussion of the Restricted  Decision-making Model The operationalization of the foregoing decision-making strate-gies through the use of an adapted version of Ratcliff and Schwab's model serves to delineate several key variables in the decision-making process of a house operating firm faced with code enforcement. For example, in strategy A (remodelling), i t is essential that the house operating firm be able to predict the income and expense streams as well as the ultimate sales price of the remodelled building. Similarly in strategies B and C, i t is again essential that the firm be able to predict the income and expense streams which w i l l result from increased operating and replace-ment expenditures. In the case of strategy D (replacing the building), the firm must be able to project the cash flow and ultimate sales value of a new building prior to it s construction. The firm is probably on i t s surest ground in respect of strategy E (abandonment of the building), since i t can assess the f u l l costs to be incurred with a high degree of accuracy. Finally, in the case of strategy F (selling the building), the key variable becomes the opportunity cost of capital, which can again be established with some degree of certainty. Not only do the operationalized strategies identify and quantify the key variables central to the firm's decision-making process, but they also serve to further reveal the effects of certain antecedent conditions on the decision-making process of the house operating firm. For example, a house operating firm which has a substantial investment in equity or mortgage funds i s unlikely to adopt strategy D or E (replacing or aban-doning the building), since these strategies w i l l result in minimizing losses only when the firm has a limited investment of equity and mortgage funds in the building. Adopting strategy F (selling the building) w i l l 62 be more appropriate when the opportunity costs of capital are high than when the equity funds which are re-invested produce only low returns. In considering this strategy, however, the firm must realize that the market value of a building which violates the minimum housing regulations is l i k e l y to be somewhat depressed, perhaps to the point of off-setting the potential gains from re-investing the equity. Strategies A and B are likely to be adopted when the condition of the building is only mar-ginally lower than the minimum housing standards. Finally, the firm which has a substantial mortgage debt and equity investment in a build-ing of much lower quality than that prescribed in the minimum housing standards w i l l tend to minimize losses by remodelling, rather than by the other strategies. A.H. SCHAAF'S FORMULATION Having presented the adapted version of Ratcliff and Schwab's model for operationalizing decision-making, we w i l l now examine the model of A.H. Schaaf. Unlike the Ratcliff and Schwab model, Schaaf s model is not aimed at the investment decisions of entrepreneurs per se. In fact, Schaaf states that: Considerations such as the personal income tax consider-ations of rehabilitation and new construction expenditures, while of great importance to a private investor making a ^ rehabilitation or replacement decision, do not concern us. However, he adds that this does not mean that the private profit c r i -46 teria w i l l not be considered. It can thus be concluded that although A.H. Schaaf, "Economic Feasibility Analysis for Urban Renewal Housing Rehabilitation," p. 399. 4 6 I b i d . , p. 400. 63 Schaafs model was developed primarily to determine the most efficient method of subsidizing housing improvement, i t can nevertheless be applied in the context of the private investor or house operating firm. This conclusion is supported by our model's assumption that the house operat-ing firm operates only one building, and consequently i t s decision-making is less affected by personal tax, depreciation rates and tax shields. The Model and the Calculations Schaafs model deals only with the case where minimum housing regulations are enforced. He recognizes three basic strategies: 1. Rehabilitation to the code compliance standard, 2. Rehabilitation to the modernization standard, 3. Replacement. The f i r s t of Schaafs strategies, code compliance, is comparable to our strategies B and C, increasing replacement and operating expenditures respectively. It would, however, also be equivalent to our strategy A, remodelling, in cases where the building was so run down that increases in operating and replacement expenditures would not result in code com-pliance. The second strategy, modernization, is undoubtedly equivalent to our strategy A, but to a degree which surpasses the minimum housing regulations and thus may tend to move a substandard building further away from i t s point of maximum profit. The third strategy, replacement,: cor-responds to our strategy D, replacement. The operationalized form of Schaafs model takes into account the following variables: cost of new construction, cost of moderniza-tion, cost of code compliance, l i f e of the structure, differences in rent levels and differences in maintenance costs. The basic formulation 64 of the model states that rehabilitation is preferred to replacement i f : C > R + M 1 - CI • i ) " " + c CI - nr) + D 1 - (1 • i ) ' n i (1 + i ) n i Where: C = New construction cost. R = Cost of rehabilitation. M - Difference in maintenance costs between a new structure and a rehabilitated one. D = Difference in rent levels between a new structure and a rehabilitated one. i = Rate of discount. n - Life of the present structure following rehabilitation, r = Depreciation factor. The above formulation serves only to compare rehabilitation of any standard and the cost of new construction generally since, as Schaaf states, i t is not possible to represent a l l of the alternative invest-47 ment situations in one generalized formulation. Since i t is conceiv-able that several standards of rehabilitation are feasible, the most appropriate standard is that which maximizes the difference with respect to the cost of new construction. To account for the situation where the building is rehabilitated to different standards at different times, Schaaf extends his formula-48 tion in the following manner. Rehabilitation is preferred i f : 4 7 I b i d . , p. 403. 48 Where the method of rehabilitation in this case is to rehab-i l i t a t e the structure to the code compliance standard three times over and then rehabilitate to the modernization standard. 65 R l % R 3 [ r 3 ( n c - 3 n i ) ] C > + _________ + ________ + (1 + i ) n l (1 + i ) 2 n l (1 + i ) 3 n l + Mx 1 - (1 * i ) " 3 " 1 + D l 1 - (1 + i) •3ni l 1 - (1 • j ) - ( n c - 3 " l ) 1 - (i , j ) - ( n c - 5 " l ) M3 i j D3 (1 + i ) 3 n l (1 + i ) 3 n l Where: R^  = Cost of code compliance. R.j = Cost of modernization. C = Cost of new construction. n^ = Life of structure rehabilitated to the code compliance standard. n = Life of structure rehabilitated to the modernization standard. 100 r = — — percent. 3 n 3 * n = Life of new structure, c = Difference in maintenance costs between a new structure and one rehabilitated to the code compliance standard. D = Difference in rent levels between a new structure and one rehabilitated to the code compliance standard. M = Difference in maintenance costs between a new structure 3 and one rehabilitated to the modernization standard. D - Difference in rent levels between a new structure and one 3 rehabilitated to the modernization standard. An Example The above formulation is illustrated by the hypothetical data in Table VIII below. 66 TABLE VIII CHARACTERISTICS OF RENEWAL STANDARDS Renewal standard Renewal cost Structural l i f e (yrs.) Expected ave-rage annual future main-tenance cost Expected ave-rage annual market rental value Code compliance $ 8,000 10 Modernization $ 40,000 40 New $100,000 SO $2,000 $1,000 $ 800 $3,600 $6,720 $9,600 Inserting these figures into the formulation, i t becomes: $100,000 < $8,000 • ,$8.,000 + $8,000 + $40,000 [.025(50 - 30)] 1.0610 1.0620 1.0630 + $1,200 1 ~ 1 - 0 6 5 0 + $6,000 1 ~ l t Q 6 3 0 .06 ' .06 1 - 1 0 6 - ( 5 0 - 3 0 ) 1 1 06"C 5 0 " 3 0 ) $200 1 i , U b $2,880 1 i , U b  .06 + .06 1.0630 1.0630 $100,000 < [$8,000 + $4,525 + $2,492 + $3,486 + $16,524 + $82,620 + $399 + $5,947] Solving this inequality results in the observation that new construction costs $23,993.00 less than the proposed pattern of rehabilitation in the example. Thus, i t would be more appropriate to tear down and replace the existing structure than to bring i t up to the code compliance stan-dard three times at ten-year intervals and f i n a l l y to modernize i t in thirty years. It is noted that other methods of rehabilitation can be 67 tested as well by altering the formula only slightly. While i t would be pointless to l i s t a l l the possible combinations of rehabilitation and their corresponding variations in the equation, i t is important to note that the optimum standard of rehabilitation is the combination that max-imizes the cost difference. If no combination has a total cost less than that required for new construction, the latter is the optimum standard. Discussion of Schaafs Formulation Unlike Ratcliff and Schwab, Schaaf does not restrict his model to a particular investment period, but rather to the lifetime of the structure undergoing analysis. This observation is particularly impor-tant in that although extending the term of the model adds potential f l e x i b i l i t y , seldom w i l l a house operating firm continue to operate a building for the whole or even a large part of i t s economic lifetime. 49 50 In fact, Grebler and Sporn have found that average turnover rates for slum properties range from once every eleven years to once every thirteen years respectively. By fixing a term for the holding period, Ratcliff and Schwab tend to reduce the uncertainty regarding future long-term pre-dictions of income and expense streams. In Schaafs formulation, i t is assumed that certain incomes and costs w i l l remain constant over the long term. Superficially, i t would thus appear that Ratcliff and Schwab's assumption regarding variations in the income and expense streams is more appropriate. However, since in both models these streams must be e s t i - mated, i t is uncertain whether a variable estimate w i l l yield a better 4 9Leo Grebler, Housing Market Behavior in a Declining Area (New York: Columbia University Press, 1952), pp. 75-77. 5 0Arthur D. Sporn, "Empirical Studies in the Economics of Slum Ownership," Land Economics, XXXVII (1961), p. 337. 68 result than a fixed estimate. Schaaf*s model does not account for the case where the property-is either abandoned or sold. While this might be viewed as a shortcoming regarding the applicability of the model to the house operating firm, i t should be remembered that these strategies are of only minor importance in our decision-making model. It has been noted that abandonment of the property is likely to occur only when the firm has a small investment in equity and mortgage funds in the property. Further, although sale of the property may appear to be a potentially important and more common stra-tegy, the fact remains that the new owner wi l l be faced with the same set of decisions as the original owner with one exception, namely immediate resale of the property. Thus, while Schaaf*s model cannot account for the decision to s e l l the building on the part of the original owner, i t can effectively deal with the alternative strategies available to the new owner of the building. Perhaps the most significant shortcoming of Schaafs formulation in i t s application to our decision-making model is that i t does not ac-count for the reversionary value of the property. Rather, i t assumes that the building is rehabilitated, thus extending i t s l i f e for a certain period of time, after which i t ceases to have any value and is replaced. While this is an appropriate assumption given that the model was devel-oped for a local housing authority, i t is perhaps inappropriate in the case of a house operating firm which may wish to s e l l the building at some time in the future after i t has complied with the minimum housing regulations. For a firm in this position, then, the formulation of Rat-c l i f f and Schwab is more appropriate. 69 THE KEY VARIABLES Having presented and discussed two alternative techniques for operationalizing our decision-making models, the next step is to extract from these formulations the c r i t i c a l variables which may be influenced by public policy. One such variable is the cost of rehabilitating a residential structure. This is particularly important to firms with buildings having optimum operating points lying below the minimum hous-ing standards. Generally, the higher the minimum standards, the higher are the costs involved in meeting those standards. Since higher mini-mum standards involve higher costs to the house operating firm, i t is apparent that public policy can potentially alter a firm's choice of strategies by varying the level at which the minimum housing standards are set. A second key variable upon which public policy can exert an influence and thereby affect house operating firm decision-making is the 51 property tax. Ernest and Robert Fisher have said: In addition to providing revenue, the general property tax on real estate may be used to further the purposes of urban planning and public welfare. For by controlling the amount of taxes to be levied or exemptions to be granted against rights in different types of spatial units, public policy can i n f l u -ence the use of land and affect the distribution of wealth and income. The relative importance of the property tax to the house oper-52 ating firm cannot be denied. Nash, for example, has estimated that property taxes represent in the order of 20% of the operating costs of Ernest M. Fisher and Robert M. Fisher, Urban Real Estate (New York: Henry Holt and Company, Inc., 1954), p. 456. 52 W.W. Nash, Residential Rehabilitation, p. 171. 70 53 apartment buildings. Sternlieb found that in substandard rental hous-ing the median expenditure for property taxes represented 34.4% of a l l operating expenses. Thus by varying assessment rates or adopting a sys-tem of tax deferrals or exemptions, public policy may significantly affect the operating position and ultimately the decision-making prac-tices of house operating firms. A third variable of v i t a l importance to the house operating firm is effective gross income. As stated earlier, this variable is a func-tion of potential gross income times the occupancy rate. Again, this variable can be indirectly manipulated by public policy. For example, public land use and servicing policies affect the relative attractiveness of a particular location and thus affect the demand for housing services offered at that location. To some extent, then, changes in public policy in this regard w i l l result in changes in housing demand, which in turn w i l l affect the potential gross income, occupancy rates and ultimate sales value of residential structures. Again the ultimate result may be alteration of a firm's decision-making practices. A fourth key variable i s the firm's access to capital to make improvements to i t s building. Naturally, for a firm operating a build-ing with an optimum operating point lying below the minimum standards, the tendency to rehabilitate the building declines, ceterus parabus, as the cost of capital increases. Thus, through a system of low-cost loans or grants, public policy can reduce the cost of capital and again may potentially affect the decisions of a house operating firm. George Sternlieb, The Tenement Landlord (New Brunswick, N.J.: Rutgers University Press, 1966), p. 78. 71 A f i n a l key variable which public policy may influence is the depreciation rate for residential structures. This is a particularly important consideration for house operating firms which own more than one building and are keenly interested in the potential benefits of a tax shield. Accelerated depreciation coupled with a high rate of turnover is generally not conducive to a high standard of maintenance or the re-habilitation of poor quality buildings. While a local housing authority is powerless to directly affect turnover rates or depreciation rates, i t can exert pressure on the senior levels of government to effect changes in the latter regard. By restricting the opportunity for the use of accelerated depreciation rates, public policy might again affect the financial position of the house operating firm and ultimately i t s deci-sion-making practices. SUMMARY This chapter has attempted to identify and quantify some of the key variables connected with our decision-making models. The formula-tions of A.H. Schaaf and Ratcliff and Schwab were considered. Only the Ratcliff and Schwab formulation can be applied in the case where minimum housing regulations are either not in existence or not enforced, and thus profit maximization is the decision-making criterion. However, in the case where minimum housing regulations are enforced, i t is d i f f i c u l t to state v/hich formulation is more appropriate. From the point of view of the individual house operating firm, Ratcliff and Schwab's formulation is more appropriate. On the other hand, from the point of view of a local housing authority attempting to eliminate substandard housing and u t i l i z e community resources eff i c i e n t l y , Schaaf s model is more useful. 72 In this chapter we have demonstrated how a house operating firm can indeed quantify the effects of alternative decisions with respect to the operation of i t s building. By examining the experience of selected communities, we w i l l now attempt to determine the effect of housing code enforcement on the variables identified in this chapter as they relate to the decision-making practices of house operating firms. CHAPTER FOUR EXPERIENCE AND PROBLEMS IN HOUSING CODE ENFORCEMENT INTRODUCTION In this chapter we w i l l investigate two aspects of housing code enforcement. First, we w i l l examine the effectiveness of code enforce-ment as a means of eliminating substandard rental housing. Secondly, we w i l l try to determine how housing code enforcement has affected the key decision-making variables relevant to house operating firms. For the most part, the material presented in this chapter relates to the experience of communities in the United States. Unfortunately, the lim-ited experience of Canadian communities^4 in code enforcement has not been sufficiently documented to warrant i t s inclusion in this study. We must, therefore, rely upon the U.S. experience and assume that i t is relevant and applicable to the Canadian context. The History of Housing Codes in the United States The origin of housing codes in the U.S. can be traced back to 1867 and the New York Tenement House Law. This law concerned i t s e l f solely with the gross physical characteristics of tenement buildings and Only the Province of Ontario has undertaken to enact legisla-tion in the f i e l d of housing code enforcement per se. The remaining provinces attempt to regulate housing conditions via a variety of spe-cialized municipal codes, including zoning, building, f i r e and health codes. 73 74 the control of physical abuses. Enforcement of this legislation was virtual l y non-existent; hence tenement conditions did not improve. For example, in 1894 the New York Tenement House Committee found that "in 3,984 tenements, with a population of 121,323, there were only 51 p r i -vate to i l e t s ; others had to content themselves with access to toilets in 55 yards, basements or halls." 56 DeForest and Ve i l l e r espoused the tenement reform cause and were largely responsible for the New York Tenement House Law of 1901. This law recognized the social requirements of light, air and space as well as the physical requirements set down in the earlier law. Most importantly, the law of 1901 focused on the problems of administration and enforcement of housing regulations. This constituted a vast im-provement over the older law, which was characterized by a discretionary pattern of enforcement. It was this law, then, coupled with the con-tinued efforts of Vei l l e r , that shaped housing reform in the U.S. for the next twenty years. Between 1901 and 1920 what might be described as the national 57 housing movement came into being. During this period V e i l l e r pub-lished a "Model Tenement House Law" (1910) and a "Model Housing Law" (1914). As a result of his efforts, by 1917 Kentucky, Indiana, Massa-chusetts, Pennsylvania and California had enacted state housing laws. 5 5 L . Friedman, Government and Slum Housing: A Century of Frus- tration, p. 30. 5 6Robert W. DeForest and Lawrence Veil l e r (eds.), The Tenement  House Problem, II (New York: Macmillan, 1903). 57 Roy Lubove, The Progressives and the Slums (Pittsburg: Uni-versity of Pittsburg Press, 1963), p. 143. 75 Michigan, Minnesota and Iowa had followed by 1919. Finally, by 1920 about twenty U.S. cities had enacted new housing codes and twenty more had inserted housing provisions in their building and health ordinances. According to Lubove, virtually a l l of these cities adapted their codes 58 from the New York version or Veiller's model laws. Between 1920 and the end of World War II, interest in housing codes diminished and the public housing movement came to the forefront 59 as a cause among housing reformers. However, with the creation of federal urban redevelopment by the Housing Act of 1949, interest in the housing code movement revived. At that time the focus of the movement shifted somewhat, from the use of housing codes in regulating tenement conditions to their use in aiding the redevelopment of "blighted" areas. In 1954 the status of housing codes was further improved when the con-cept of urban renewal was introduced to the Housing Act, along with the 60 requirement of a "Workable Program." Embodied in the Workable Program concept was the idea that a housing code would substantially aid in the arrest and removal of blight. By 1964 the adoption of a housing code became a requirement of the Workable Program under the revised Housing Act. In 1965 the Federal Government extended the housing code leg-islat i o n even further through additional amendments to the Housing Act. 5 8 I b i d . , p. 146. 59 Friedman, op. c i t . , pp. 48-49. 60 The Housing Act of 1954 stated that no city could qualify for urban renewal funds without a "Workable Program" to u t i l i z e appropriate private and public resources to eliminate and prevent the development or spread of slums and urban blight and to encourage rehabilitation. 76 Under Section 117 of this Act, federal financial assistance was made available in the form of grants to municipalities to assist them in planning and carrying out a concentrated code compliance program. Low-cost federal loans and direct grants were also made available to owners for rehabilitation of their properties to applicable code standards. While the f u l l effects of this legislation are not yet apparent, i t is reasonable to state that the past one hundred years has witnessed a sharp rise in the level of public involvement with housing codes. Indeed, the early outcry against the f i l t h y crowded conditions of the old New York tenements has been replaced by a potentially massive transfusion of fed-eral f i s c a l resources (via the Housing Act of 1965) into code enforcement programs. The rate of adoption of housing codes by local governments in the United States increased rapidly with the revised provisions of the Housing Act. For example, by 1955 only 56 communities had enacted hous-ing codes. By July 1961 this number had increased to 493, and by July 61 1965, to 736. By 1968, 4,904 local governments had enacted housing 62 codes. Thus, while not yet equal to zoning by-laws in terms of the number of local ordinances adopted, housing codes appear to be rapidly approaching this level. CODE ENFORCEMENT IN SELECTED U.S. CITIES The history and development of housing codes having been briefly outlined, i t is now proposed to examine the code enforcement programs ^Friedman, op. c i t . , p. 50. ^A.D. Manvel, Local Land and Building Regulation (Washington, D.C.: The National Commission on Urban Problems, Research Report No, 6, 1968), p. 23. 77 of selected U.S. cities in order to obtain an insight into the problems and key issues of code enforcement. This is achieved by detailing the experience of the cities of Baltimore, Philadelphia and Charlotte. The examination attempts to reveal those factors which either aid or hamper code enforcement. Baltimore Perhaps the most highly publicized and best documented code enforcement campaign in the U.S. was the Baltimore Plan, commonly refer-red to as the "Fight Blight" plan. Expressed in simplest terms, the city of Baltimore attempted to "enforce to the letter a l l the housing laws that were on the books and in that way compel owners of slum proper-63 ties to vacate them or rehabilitate them to minimum legal standards." In order to get the program underway in 1947, the city estab-lished a separate "Housing Court" to deal with a l l housing law cases. Rather than waiting for complaints to come in, a score of policemen were assigned to a "Sanitation Squad" and block-by-block inspections of the slums were made in search of violations. By 1950, however, only 100 blocks had actually been inspected, while over 2,000 remained. The sheer number of inspections required pointed out the d i f f i c u l t y of undertaking such a large-scale campaign. Indeed, i t was noted that as fast as in-spections and improvements were made in one area, the surrounding unim-64 proved area would tend to drag that area back down again. As a more practical alternative to this approach, i t was decided 63 M. Millspaugh and G. Breckenfeld, The Human Side of Urban  Renewal (Baltimore: Fight Blight Inc., 1958), p. 3. Ibid., p. 4. 78 to limit a code enforcement program to a single neighbourhood. The area chosen for test purposes (the Pilot Area) covered 14 square blocks in East Baltimore. In this area were some 750 dwelling units, of which 90% 65 were rated as "substandard" and 40% as "seriously deteriorated." The area's population consisted mainly of Negro families, of which approxi-mately 40% owned or were purchasing their own homes, while the remainder rented accommodation. The code enforcement program for the Pilot Area followed the pattern given below: 1. Each house was inspected by a team of specialized inspectors, whose individual reports were then combined into a single report on the overall status of the house with respect to the code. 2. A notice of a l l violations was sent to the owner or landlord, who was given 30 days to correct the violations. 3. If, after the 30 days, repairs had been made, the case was closed. If, however, repairs were not made, the case went before a "Hearing Board," which either recommended court action or, in case of hardship, delayed such action until a solution was found. 4. Remedies for non-compliance included both a maximum fine of f i f t y dollars per offence per day that the offence continued and, in the extreme, an order to vacate the property, which thus cut off any rental income. The pattern given above represents only part of the total program Ibid., p. 5. 79 for the Pilot Area. Administrative machinery, separate from the inspec-tion-notification-court procedure, was also set up. The most noteworthy element of the additional machinery was the "Fight Blight Fund." This fund was organized on a non-profit basis to assist those owners who could not finance the required rehabilitation, no matter how long court proceedings were stayed. While the fund did, in fact, provide valuable financial aid through a system of low-cost loans, i t s main contribution was one of public education. Few of the applicants for loans from the fund had had any previous legal or financial experience and thus were 66 easy victims for unscrupulous realtors, lenders and contractors. Consequently, the Fight Blight Fund provided more in the way of needed advice and education and less in the way of actual financial assistance. The Pilot Area campaign also included a program to rehabilitate the residents themselves. The organizers of the Pilot Area project f e l t that both formal and informal education, together with a program to increase neighbourhood morale and organization, were v i t a l to the suc-cess of the enforcement program. The formal education program was not well received by the residents and was consequently considered a failure by the organizers. However, the informal education which the residents received through contact with the inspectors, volunteers and other work-ers proved highly beneficial. It served principally to raise the r e s i -dents' faith in the enforcement program and i t s workers, reduce their fear of the landlords, and i n s t i l l a desire to upgrade their neighbour-hood. Having outlined the Pilot Area enforcement campaign i t s e l f , we Ibid., p. 31. 80 w i l l now examine some of the problems encountered and some of the even-tual effects of the campaign. With respect to the eventual physical effects of the campaign, Millspaugh and Breckenfeld found that of the 16,671 violations which were noted by the inspectors, 89 per cent were corrected in two years. "The U.S. Public Health Service, which made a 'before' and 'after' sur-vey of the houses, reported that substandard conditions in the average dwelling had been reduced by 35 to 45 per cent. The most drastic changes were in maintenance, where researchers found an average improve-67 ment of 74 per cent." While the above statistics indicate a marked improvement in the average dwelling, they neglect the consideration of tenure. Most owner-occupants became at least somewhat involved in the campaign and often went beyond the minimum improvement standards. On the other hand, the absentee owners of multiple dwellings in the Pilot Area tended to make only those improvements necessary to meet the minimum standards, i f in-deed they made any improvements at a l l . In the extreme case (but what later became almost the rule), the landlords attempted to shift the responsibility for repairs to their tenants. This was achieved by means of "contracts for sale," whereby the landlord "sold" his property to a tenant through a no-down-payment, weekly-instalment contract. "The landlord kept t i t l e and i f any pay-ments were missed he could declare the contract void, confiscate a l l previous payments as damages, and order the buyer to vacate the prem-68 ises." The great advantage of this arrangement was that the tenant-Ibid., p. 19. Ibid., p. 12. 81 buyer was responsible for a l l repairs. In addition to the "contract for sale," landlords found other devices to avoid complying with the code enforcement program. The sim-plest and most common device was to choose to be tried in Criminal Court instead of the Housing Court. This usually meant a six months' delay in proceedings, during which time the landlord could arrange cheap repairs or s e l l the property. Alternatively, the landlord could simply choose to pay the fines, which often were lower than the cost of making the required repairs. If a landlord chose to make repairs, he could recover his costs by raising rents, and this i s , in fact, what happened. During the f i r s t eighteen months of the code enforcement program, rents in the Pilot Area rose 17.6%, while in the remainder of Baltimore, they „ 6 9 rose only 6.5%. Philadelphia In Philadelphia, a program of code enforcement quite similar to Baltimore's was established in the late 1950's. Under the Philadel-phia program, which was entitled the "Leadership Program," the results obtained in experimental areas were to provide an example or leadership for other areas. The experimental areas themselves ranged from a dis-tinct slum to a moderately blighted area. The success of the code enforcement program varied almost directly with the housing quality in 70 the area, which had been previously measured. Two significant observations emerged from the experience in Office of Development Coordinator, City of Philadelphia, Partnership for Renewal: A Workable Program (Philadelphia, 1960), p. 13. 82 Philadelphia: f i r s t , the limited effect of code enforcement in areas where the housing stock is highly deteriorated; and secondly, the effect of the environment and physical infra-structure in which the housing stock is set. The areas in Philadelphia with the most dilapidated hous-ing stock were those characterized by a mix of non-residential land uses 71 which carried a non-conforming status under the zoning by-law. For example, the housing stock might be set in a substandard environment cre-ated by objectionable non-residential land uses (e.g., slaughterhouses, junkyards and auto body shops) coupled with a lack of adequate street systems, off-street parking and recreational land. Charlotte In Charlotte, North Carolina, code enforcement attained a degree of success not found in either Philadelphia or Baltimore. The key to the success of the campaign in Charlotte lay in i t s f l e x i b i l i t y . It was decided that property owners would co-operate most readily i f they were allowed to make the required improvements at a rate which they could 72 easily absorb. The strictness characteristic of other code enforce-ment campaigns was not evident in Charlotte. Instead, a flexible system where owners could determine their specific rate of making improvements was instituted. Such a program reduced in part the major problem of relocation, which was encountered in the "hard-line" enforcement cam-paigns of other c i t i e s . '""ibid., pp. 66-67. 72 W.W. Nash, Residential Rehabilitation: Private Profits and  Public Purposes, p. 106. 83 CODE ENFORCEMENT PROBLEMS It appears useful at this point to consider the problems sur-rounding housing code enforcement. Broadly speaking, they can be cate-gorized into four major problem areas: (1) administrative problems, (2) legal problems, (3) land use and servicing problems, and (4) market problems. Each of the problem areas is discussed below. Administrative Problems In the area of administration, problems may arise with respect to staffing, inspections, departmental relations and multiple standards. If a code enforcement program is to succeed, i t is imperative that such problems be overcome. For example, staffing a code enforcement agency is a c r i t i c a l administrative problem, due to the complexity of the codes themselves. Carlton et al point out that i n i t i a l l y three inspec-tors per 20,000 population are required. After the program has been in operation for some time, this number can be reduced to two per 20,000 73 population. Assuming that a city can afford to employ such a large staff of inspectors, the problem of their selection and training s t i l l remains. Carlton estimates that housing code inspectors require at least five years' experience in a building trade, building maintenance or sanitation. Furthermore, he suggests that the inspectors must be able to explain to property owners the nature of a violation, why i t should be eliminated, and how to correct i t and to prevent recurrence 74 of similar violations. R.E. Carlton, R. Landfield and J.B. Loken, "Enforcement of Municipal Housing Codes," Harvard Law Review, LXXVIII (1965), 801-860. 74 Ibid., p. 803. 84 In order to decrease the number of staff required or reduce the responsibility and thus the required training of the inspectors, a code enforcement agency might carry out only complaint-initiated inspections. Such a system might employ a team of inspectors, each having specialized knowledge. In total, the team would possess a f u l l range of inspection a b i l i t i e s . Hence an inspector with specialized knowledge of the subject matter of the complaint might be able to make a quick inspection and thereby deal effectively with the complaint. Restricting inspections to those cases involving complaints w i l l , however, certainly result in a non-uniform pattern of enforcement and may possibly lead to discrimina-tion. Even i f a code enforcement agency possesses the required f i s c a l resources and properly trained personnel, administrative problems s t i l l remain. Indeed, i t has been recognized that code enforcement agencies are not autonomous, but are subject to jurisdictional overlap with other departments of local government. In many communities the administrative basis for code enforcement has not been planned but has merely happened. Typically, responsibility and authority are fragmented and dispersed among several departments, including the building, plumbing, ele c t r i c a l , f i r e , health and, sometimes, housing departments. In Baltimore, for example, twelve different agencies representing four major departments 75 bring cases into the Housing Court. Departmental isolation, jealousy and pride often hamper co-operation, while co-ordination is hindered as each department carries on i t s own specialized inspection a c t i v i t i e s . Metropolitan Housing and Planning Council of Chicago, Conser- vation, I (Chicago: A Report to the Conservation Committee of the Metro-politan Housing and Planning Council, 1954), p. 97. 85 Consequently, strong centralized administration is necessary before code enforcement can be made effective. If a city seriously wants to achieve results from code enforcement, then the need for a separate and distinct authority to administer the program cannot be over-emphasized. Adding further to administrative problems is the involvement of different levels of government in setting minimum standards. As men-tioned previously, there is the potential in the United States for a transfusion of federal funds into housing rehabilitation. Since the legislation was enacted in 1965, a serious problem has arisen regarding the different standards of different levels of government. On the one hand, there exists a federal standard which must be met before an owner has access to funds to make repairs. On the other hand, there exists a set of typically lower local standards. The private owner thus finds himself facing the problem of meeting higher standards i f he wishes to get low-cost federal money in order to make repairs. If he chooses to finance the rehabilitation of his property privately, he is required to meet only the local housing code with i t s attendant lower standards. This results in a curiously inequitable situation where a higher stan-dard of rehabilitation is applied to the "poor" and a lower standard to those in better financial circumstances. Legal Problems The question of appropriate legal remedies for housing code violations is c r i t i c a l to any code enforcement program. A punitive ap-76 proach involving fines, although widely used, has proven unsuccessful. For an excellent discussion of the problems regarding code enforcement and appropriate legal remedies, see R.E. Carlton et a l , "Enforcement of Municipal Housing Codes." 86 If the fine i s too small, the owner w i l l probably not make the required repairs, but w i l l simply treat the fine as a small part of the cost of doing business. If the fine is. too large, i t may deplete the owner's financial resources so that he cannot comply with the code. While a range of fines exists between the two "extreme" cases identified above, the d i f f i c u l t i e s involved in determining an appropriate fine must be noted. It has been the usual practice of criminal courts to levy a fine of an amount consistent with the seriousness of the crime. Thus, in theory the heavy fine acts as the strongest deterrent to the most cul-77 pable offenders. It is uncertain whether such a theory i s applicable to housing code cases. For example, violations of f i r e safety standards must be considered as very serious offences and, given the above, would thus require a heavy fine. However, since f i r e regulations are changed from time to time and the ascertainability of the law is therefore questionable, i t is doubtful that the offenders are always culpable. In this case, therefore, a heavy fine would not always be appropriate. The problem of mens rea can be overcome in part by considering the offender's attitude. It i s reasonable practice to impose more severe fines on those offenders who have the necessary resources to make repairs but appear reluctant to do so, as evidenced by recurrent court appearances. For those offenders who might face financial hardship from any fine or who might fear the stigma of criminal prosecution, a small fine might induce compliance. Any fining practice, therefore, must be tempered by the responsiveness of the offender, the cost of compliance Ibid., p. 821 87 and the financial resources available to the offender. Only in cases where imminently dangerous conditions exist should the fining practice take into account the severity of the offence. The d i f f i c u l t i e s encountered in regard to the fining process have hastened the search for other, perhaps more appropriate, legal rem-edies for code violations. To this end, four significant alternative remedies have been found which do not involve criminal prosecution or fines per se. They include the use of mandatory injunctions, vacate orders, repair by the city with lien on costs, and receivership. Each of these remedies is briefly discussed in turn. The mandatory injunction i s "an order of the court addressed to a defendant commanding or prohibiting specified conduct, with failure to comply punishable as contempt of court. . . . Rather than punishing for past conduct, the injunctive process compels compliance with law in 78 the future. The use of an injunction thus can both prohibit behaviour and demand behaviour; yet i t is not without f l e x i b i l i t y . It can be s t r i c t l y enforced when conditions so demand; for example, when dangerous or hazardous conditions exist. It can be more leniently applied in hardship cases which involve non-hazardous conditions. In this case, the court demands compliance as and when funds become available. The second remedy, the order to vacate, involves strong economic considerations for the owner of a substandard building. In effect, the owner's source of income (i.e., rents) is almost immediately cut off by the order to vacate. He can restore the source of income only by making Frank P. Grad, Legal Remedies in Housing Code Enforcement in  New York (New York: Columbia University Legislative Drafting Fund, 1965), p. 87. 88 the required repairs to bring the building up to code standards. Once the repairs are completed, a new certificate of occupancy is issued and the building can be re-occupied. This remedy is most effective under two conditions: f i r s t , the existence of a reasonably high vacancy rate; and secondly, the lack of an alternative use for the building. With respect to the f i r s t condition, i t would be pointless to close up a building when no alternative accommo-dation is available. In essence, some shelter, regardless of is condi-tion, is better than none. Concerning the second condition, i f the building can be used for purposes other than residential accommodation, there is less incentive for the owner to make the required repairs to restore his income and "save" his equity. Essentially, then, while the order to vacate is potentially a powerful tool, i t is generally used only when hazardous conditions exist. The third remedy, in which the municipal government undertakes the repairs and then places a lien on the property for the costs incur-red, appears to be an appropriate solution to effect prompt repairs. Naturally, some costs are incurred by the local government, as i t must i n i t i a l l y make funds available for the repairs. Unfortunately, the re-covery measure (i.e., the lien) is tempered by the fact that in the case of foreclosure, the payment of local taxes, mortgages and prior liens takes precedence over the municipal lien. It is conceivable, therefore, 79 that the municipal investment in repairs might be non-recoverable. 79 This is indeed a moot point. If, for example, foreclosure does occur and the building is vacated and boarded up or torn down, then neither are the costs to the municipality recoverable nor is any benefit derived from the repairs. If, however, after foreclosure the building is placed under new management and re-opened, the costs may s t i l l be re-covered and some benefit from the repairs is certain to result. 89 This possibility suggests that the remedy should be employed only in cases where a short-term, relatively inexpensive program of repairs is required. Where a longer-term repair program is required, another remedy, the use of receivership, may be applied. This remedy is invoked after the following procedure. The building is f i r s t thoroughly inspected and a notice of violation is sent to the owner, as well as any mortga-gees and lienors of record, informing them of the required repairs. If upon re-inspection the offences against the code have not been corrected and the hazardous conditions persist, then a f e a s i b i l i t y study is con-ducted with respect to the economics of repairing the structure in terms of i t s projected l i f e span and projected rents. If the study shows that the building is worth saving, receivership proceedings are instituted. In effect, the court appoints the municipal administration to assume responsibility for collecting rents and making repairs. Any excess monies are paid out by the receiver on unpaid taxes, mortgages and liens. The owner s t i l l remains responsible for operating the build-ing and paying any outstanding debts. Finally, after the costs of repairs have been fu l l y recovered, the owner regains control of his building. The receivership remedy is attractive in that i t i s : . . . the only legal weapon that generates activity by a l l parties who have an interest in the property. Property owners who studi-ously avoid service of criminal process suddenly appear at the department's offices to personally request the opportunity to com-ply with the violation schedules in order to avoid receivership. For the f i r s t time in i t s history, the department has obtained active response from mortgagees and lienors of record. Formerly complacent mortgagees and lienors are shocked out of their leth-argy and actively pressure property owners to remove violations. In other words, everyone financially interested in the property becomes involved in the process of removing violations. F.P. Grad, op. c i t . , p. 117. 90 In summary, when one compares the remedies involving court pro-secution and punitive quasi-criminal fines with those involving economic sanctions, i t is immediately apparent that the latter go much further in achieving desired code compliance. Land Use and Servicing Problems Usually, code enforcement programs have not f u l l y considered the effects of the physical environment on the housing stock. In other words, attempts have been made to rehabilitate residential structures without making corresponding improvements to the neighbourhood. As a rule, most substandard housing is located in the older central portions of the cit y - - i n short, those areas which tend to have the greatest mix of incompatible land uses, the highest volume of through t r a f f i c , and the smallest provision of public open space and other essential services. Thus the implementation of a code enforcement program which does not provide for improvement of the overall environmental conditions of an area must be considered as an attack on the symptoms rather than the 81 causes of "blight." Since the housing stock cannot be treated independently of i t s surrounding environment, i t is evident that a code enforcement campaign must inevitably be woven with a program to upgrade public u t i l i t i e s and social services. This suggests that closer liaison must exist between the agencies responsible for housing and planning. If, for example, an older residential area is to be given over to industrial usage, i t would be pointless to attempt to enforce housing codes in that area. However, Reuel Hemdahl, Urban Renewal (New York: The Scarecrow Press, 1959), p. 31. 91 once an area has been designated for residential usage and code enforce-ment has been applied to bring i t up to standard, then a l l efforts pos-sible should be made to provide the desired services and f a c i l i t i e s . Thus, the planning function should be: (1) to reduce the incidence of through t r a f f i c ; (2) to discourage the establishment of any further in-compatible land uses and to encourage the discontinuance of those already present; and (3) to provide the previously lacking open space. The Market Problem The question of vacancy rates is crucial to effective code enforcement in rental housing. In this regard, E.M. Fisher's remarks are most appropriate: Regardless of the menace of the slums, unless alternative accom-modations are available to i t s occupants, housing which threat-ens the public health, safety, and welfare cannot be abolished and regulations governing i t s use enforced. Public authorities cannot morally pursue a course which leads to throwing any con-siderable number of persons out onto the streets, whether they be families or roomers. With the above quotation in mind, let us examine the major effects of a code enforcement program. Basically, housing codes have the effect of upgrading building standards for existing structures. If a landlord is required to make improvements to meet these standards, he must recover the costs incurred in order to maintain the profit from his operation. In the absence of rent control, the landlord's f i r s t alternative i s to raise the rents to cover these costs. The effect of any substantial increase in rents is two-fold. One effect is that men-tioned by Fisher, the dislocation of tenants; the other is doubling up. 82 E.M. Fisher, "A Study of Housing Programs and Policies of the Housing and Home Finance Agency," Interim Report on Housing the Econom- i c a l l y and Socially Disadvantaged Groups of the Population (New York: A.C.T.I.O.N., Inc., 1960), p. 25. 92 As to the latter, as tenants are forced to pay higher rents, they may choose to double up; this in turn defeats one of the basic aims of any housing code, namely the regulation of standards of occupancy. With respect to the dislocation of tenants, the enforcement of a housing code may again be self-defeating. One of the severest c r i t i -cisms surrounding urban renewal to date concerns the tremendous reloca-tion problems i t has caused. Ideally, the use of code enforcement as a tool in the rehabilitation process should raise the quality of the housing stock in a given area, while at the same time retain the existing residents within that area. This ideal cannot be met i f vacancy rates within that same area are too low to accommodate those residents ordered to vacate under the code enforcement program. When vacancy rates are low, code enforcement may result in a level of resident dislocation which, although lower than that caused by the typical urban renewal project, is nevertheless quite significant. Thus, a vacancy study is one of the f i r s t prerequisites for a community implementing a code enforcement pro-gram. To date, most cities have proceeded without making such an essen-t i a l study. THE EFFECTS OF CODE ENFORCEMENT ON DECISION-MAKING Having identified and examined in some depth the key problems of code enforcement, we wi l l now investigate the effects of code enforce-ment on house operating firm decision-making. It is apparent from the discussion that code enforcement programs to date have been relatively ineffective, especially in the sphere of rental housing. Generally, the house operating firm's decision-making alternatives have not been re-stricted to the degree assumed in our restricted decision-making model. 93 Under the terms of that model, i t was inconceivable that a house oper-ating firm could make substandard rental housing available for rent for any significant length of time after the imposition of a code enforcement program. However, such i s obviously not the case. Substandard rental housing s t i l l exists in large quantities in cities where code enforcement has been active. In Baltimore, for example, two years after the Fight Blight campaign was instituted, the city was reverting to i t s former con-83 84 ditions. Philadelphia's Leadership Program faced the same problem. Having recognized the d i f f i c u l t y of effectively enforcing mini-mum housing regulations, we are led to include another alternative in the restricted decision-making model. Essentially, this alternative con-sists of a series of delaying tactics employed by the house operating firm. In addition to these tactics, the firm would rely on the relative anonymity of it s building in the context of the large stock of substan-dard rental housing present in most major c i t i e s . The delaying tactics referred to above are discussed in depth by Frank Grad. Basically, they are a function of the d i f f i c u l t y of pro-secuting those violating housing codes. In New York, for example, the prosecution of a recalcitrant landlord who adopts these tactics is a 85 time-consuming process: At present i t takes 35 to 65 days in the "easy" cases from the inspection to the f i r s t return date in court—this is when there are no unusual problems . . . and the defendant responds without delay to a mail summons. Twelve to fifteen additional days wi l l be required for the preparation of a white court 83 M. Millspaugh and G. Breckenfeld, The Human Side of Urban  Renewal, p. 21. 84 City of Philadelphia, Partnership for Renewal, pp. 16-22. 85, F.P. Grad, op. c i t . , pp. 40-41. 94 summons, and for personal service in advance of the return date. Again this assumes that the identity and whereabouts of the de-fendant are known. . . . If he evades service the time gap . . . may lengthen considerably. In one "typical" court day, the gap between charge date and f i r s t return date ranged from 43 days to more than five months. From f i r s t return date to date of disposition, the time gap ranged from 1 1/2 months to 10 months. In the last case . . . three of the violations had been recorded as much as 3 1/2 years prior to ultimate disposition. The anonymity mentioned above is clearly established by Lieberman in his study of the code enforcement programs in thirty-nine U.S. c i t -86 ies. He found that 18% of the cities made inspections only upon com-87 plaint, rather than on a "systematic" basis. Of those cities which did undertake "systematic" inspections, most adopted a very unsystematic approach: For instance, several cities considered annual inspections of multi-family structures or of rooming houses prior to the issu-ance of the annual licence as a systematic house-to-house pro-gram. Other cities considered i t a systematic program when public pressure required them to make a house-to-house inspec-tion in a very bad neighborhood. S t i l l others considered i t a systematic program when they inspected vacant houses on an area basis or made survey inspection for the renewal agencies* rehabilitation program.8* It is apparent that i f these "systematic" approaches are followed in a large metropolitan area, a house operating firm can be assured of considerable anonymity. Thus, unless the firm owns a building in a par-ti c u l a r l y bad area or houses a vocal tenantry, the threat of enforcement is less than imposing. Given this anonymity, together with an already ponderous court machinery, i t is not expected that a house operating firm 86 Barnet Lieberman, Local Administration and Enforcement of Hous- ing Codes (Washington,DC: National Association of Housing and Redevelop-ment O f f i c i a l s , 1969). 87 , , Ibid., p. 7. 88 Ibid., pp. 7-8. 95 w i l l react noticeably when minimum housing standards are "enforced." Rather, i t may be assumed that a firm w i l l attempt to continue operating a substandard building at i t s optimum operating point irrespective of the threat of code enforcement. Fortunately, not a l l firms can effectively ignore code enforce-ment, as was discovered by Joseph Schwind, a slumlord in the Hyde Park-89 Kenwood neighbourhood of Chicago: In time Levi (the executive director of the enforcement program) gained the upper hand. Schwind was arrested. By early 1957, he was no longer managing properties. His fight had cost him $65,000 for building repairs, $7,000 in fines and $10,000 in legal fees. However, in spite of this example and a limited number of others found in the literature, i t is the general rule that the decision-making prac-tices of house operating firms owning substandard buildings are less restricted as a result of code enforcement than is immediately expected. Code enforcement was deemed to result in a shift away from the optimum operating point for substandard rental housing structures, but to date this result has proven elusive. SUMMARY In this chapter the discussion has centred upon the housing code enforcement experience of communities in the United States. The success of most programs appears to have been limited by a number of significant problems, including: (1) budgetary and staff inadequacies, (2) the lack of effective legal remedies, (3) inconsistent land use policies and i n -adequate servicing, and (4) the lack of sufficiently high vacancy rates M. Millspaugh and G. Breckenfeld, op. c i t . , p. 101. 96 in the substandard rental housing market. As many inspection procedures are unsystematic or complaint-initiated, house operating firms may achieve a degree of anonymity with respect to violations of minimum housing standards in their buildings. The degree of anonymity increases with the size of a city's stock of substandard housing, as the probability of a particular violation being noted and acted upon decreases. If a house operating firm is singled out and accused of a violation of the code, i t may adopt a tactic of delaying already ponderous court proceedings through non-appearance, change of venue and the like. In view of the apparent ineffectiveness of current code enforcement programs, therefore, i t i s concluded that our restricted decision-making model must be revised by the inclusion of one further alternative. Thus, avoidance of any improvements to the building followed by subsequent withdrawal or sale of the building becomes an alternative which at least some house operating firms suppos-edly regulated by code enforcement can consider. In the fi n a l chapter of this study we shall focus upon the pub-l i c policies which can be incorporated into code enforcement programs in order to eliminate this "delaying" or "avoiding" tactic as an alterna-tive for house operating firms. The main question to which the final pages w i l l be addressed then becomes: "How might a local housing author-it y improve i t s program of code enforcement to account for and manipulate house operating firm decision-making so as to benefit low income tenants and eliminate substandard rental housing?" CHAPTER FIVE DIRECTIONS FOR CODE ENFORCEMENT POLICY INTRODUCTION This chapter has two objectives. First, we wi l l specify the characteristics of a code enforcement program which could prevent house operating firms from relying on delaying tactics or their anonymity to avoid compliance. A community adopting such a program would be assured that house operating firms would follow the pattern of decision-making outlined in the restricted decision-making model. Consequently, since the community could predict the pattern of responses of the house oper-ating firms, i t could adopt policies which would modify these patterns and thus achieve the desired aims of eliminating substandard rental housing while providing standard housing for low income tenants. To achieve the second objective of this chapter, we w i l l demon-strate the practical application of the decision-making theory. Our main concern here i s to develop a set of housing policies which, when combined with a code enforcement program, w i l l induce house operating firms to make decisions appropriate to the conditions in the rental housing market. For example, when vacancy rates in non-luxury rental housing are high, policies which encourage decisions to remove or with-draw substandard buildings would be most appropriate. However, when vacancy rates in that sector are low, the public objective would be to stimulate the rehabilitation rather than the removal of substandard 97 98 rental housing to minimize dislocation of low income tenants, and thus different policies would be required. The exact nature of the policies selected is determined by their effectiveness in manipulating the re-stricted decision-making model. FULFILLING THE CONDITIONS NECESSARY FOR MANIPULATING THE RESTRICTED DECISION-MAKING MODEL If a local housing authority is to significantly affect house operating firm decision-making through code enforcement, certain con-ditions must be met. Basically, these conditions include adequate bud-getary and administrative arrangements. When a code enforcement program is backed by a sufficient number of well trained staff, systematic in-spection procedures, and a f u l l range of legal remedies, i t can reduce successfully the incidence of house operating firms avoiding or delaying enforcement. Upon effectively eliminating the opportunity for the firm to neglect i t s building, code enforcement programs can then be addressed to manipulating the other strategies as they are defined in the restric-ted decision-making model. It is insufficient, however, to state simply that "adequate" budgetary and administrative arrangements are required. What constitutes "adequacy"? With this question in mind, we w i l l attempt to prescribe those conditions which are necessary to make the restricted decision-90 making model truly "restricted." In the next pages we rely heavily upon the work done in this area by Joseph S. Slavet and Melvin R. Levin, New Approaches to Housing  Code Administration (Washington, D.C: The National Commission on Urban Problems, Research Report No. 17, 1969). 99 Administrative Organization A single administrative agency should have the authority and 91 responsibility for housing code administration. This agency should be separate from the various agencies responsible for the inspection and control of new buildings, particularly in larger urban centres (over 100,000 population) where the stock of existing substandard housing is usually most concentrated. The program administrator should be placed on a level equal to that of other major department heads in local govern-ment to ensure that the importance of the function of code enforcement is not overlooked by the p o l i t i c a l decision-makers. Budgetary Requirements To ensure that house operating firm decision-making is truly restricted by code enforcement, a local community w i l l need to undertake a "systematic" program. Such a program should exhibit at least the f o l -lowing characteristics: 1. It is a planned, rather than ad hoc, program. 2. It has recourse to a complete range of inspectional devices 92 applied on a regular basis. 3. It incorporates a f u l l measure of administrative remedies and workable court remedies. 4. It is a program of services and incentives. 9 1 I b i d . , p. 98. 92 These inspectional devices would include a range from a wind-shield survey in basically sound neighbourhoods (with additional com-plaint and spot check inspections to confirm suspicion of violations) to a concentrated and detailed inspection system in obviously poorer neighbourhoods. 100 In determining the minimum operating expenditure required for systematic code enforcement, account must be taken of: (1) population, (2) total housing stock, (3) relative deterioration of the housing stock, (4) workload standards and staffing ratios, and (5) salary levels for 93 administrative, inspection and cl e r i c a l positions. With these facts in mind, Table IX below proposes the expenditure required for a commun-ity to undertake a systematic code enforcement program. TABLE IX PROPOSED PER CAPITA EXPENDITURE GUIDELINES FOR BASIC SERVICES UNDER A SYSTEMATIC INSPECTION PROGRAM IN HOUSING CODE ADMINISTRATION Population Percentage of substandard housing* Category Under 20 20-30 30-40 40-50 Over 50 Under 5,000 $1.00 $1.00 $1.00 $1.25 $1.50 5,000 - 10,000 1.00 1.00 1.25 1.50 1.75 10,000 - 25,000 1.00 1.25 1.50 1.75 2.00 25,000 - 50,000 1.25 1.50 1.75 2.00 2.25 50,000 - 100,000 1.50 1.75 2.00 2.25 2.50 100,000 - 250,000 1.75 2.00 2.25 2.50 2.75 Over 250,000 2.00 2.25 2.50 2.75 3.00 *Based upon most recent Census. Source: J.S. Slavet and M.R. Levin, New Approaches to Housing Code  Administration, p. 152. Staffing and Inspection Requirements The number and training of inspectors are c r i t i c a l to the suc-cess of a systematic code enforcement program. There are certain rules of thumb concerning the number of inspectors required. For a five-year cycle of inspections, one inspector is required per 10,000 population or, 93 J.S. Slavet and M.R. Levin, op. c i t . , p. 151. 101 94 alternatively, one inspector for each 1,000 substandard housing units. In addition to the latter requirement, there should also be one inspec-95 tor for each 3,000 standard units. As to the training of inspectors, Slavet and Levin state that a successful systematic code enforcement program requires inspectors who are experienced in the fields of construction, repair, maintenance and occupancy of dwelling units, as well as in the f i e l d of human relations. The scope of training required by an inspector is indicated by the f o l -lowing outline of his duties: Personally inspects dwellings to determine their fitness for human habitation by examination of their structural safety, sanitary f a c i l i t i e s , means of egress, lighting, ventilation, electrical equipment, heating equipment, and refrigeration equipment. Inspections also include examination of dwellings for overcrowding and maintenance of structures and equipment. F i l l s out inspection record forms, prepares notices of viola-tions, reinspects substandard dwellings, by persuasion and tact gains compliance of landlords and tenants, prepares other detailed records and reports and performs related work as required. 9^ It is contended, then that systematic code enforcement programs characterized by the above-noted budgetary, administrative and staffing conditions w i l l restrict the opportunity of house operating firms to ignore the minimum housing regulations and maintain the status of their U.S. Housing and Home Finance Agency, Codes Administration, "Systematic Housing Code Compliance" and "Budgetary and Staffing," Workable Program Guideline, G-8 and G-2 (Washington, D.C.: U.S. Govern ment Printing Office, 1965). 95 J.S. Slavet and M.R. Levin, op. c i t . , p. 127. 9 6 I b i d . , p. 120. Advertisement for a Renewal Inspector I, City of Providence, Rhode Island, Department of Planning and Urban Development, March 1, 1968. 1 0 2 buildings. Thus the authority responsible for housing code enforcement w i l l be able to concentrate upon manipulating the decision-making prac-tices of house operating firms as outlined in the restricted decision-making model. CODE ENFORCEMENT POLICY UNDER VARIED MARKET CONDITIONS Let i t be assumed that a community is engaged in a "systematic" code enforcement program characterized by the aforesaid administrative, budgetary and staffing requirements. The two basic aims of such a pro-gram w i l l be to eliminate substandard rental housing and to increase the supply of standard housing to low income tenants. How might that com-munity improve i t s program to account for and manipulate house operating firm decision-making so as to benefit low income tenants? The answer to this question depends largely on the condition of the rental housing market in the community in question. As stated in Chapter Four of this study, the vacancy rate is the principal variable in the rental housing market which affects the potential success of code enforcement. It is this variable which directly affects the effective gross income as well as the reversionary value of a rental structure, and thus affects house operating firm decision-making. Moreover, i t is this variable which affects the degree to which low income tenants may be dislocated as a result of code enforcement. The remainder of this study examines the approaches that housing code enforcement programs might assume under varying vacancy rates. Two hypothetical cases wi l l be considered, one assuming high vacancy rates and the other assuming low vacancy rates. Both cases focus on the man-ipulation of house operating firm decision-making through housing code 103 enforcement in order to eliminate substandard housing while providing low income tenants with standard housing. Code Enforcement Under Conditions  of High Vacancy Rates In the non-luxury rental housing sector, high vacancy rates threaten the cash flow position of a firm owning a substandard building. Consequently, i t is expected that such a firm w i l l defer as much as pos-sible replacement and operating expenditures. It is also expected that the firm w i l l not consider seriously the possibility of remodelling the building. There i s one exception to this observation; namely, a firm may decide to undertake extensive remodelling to move i t s building out of the high vacancy non-luxury market into what might be a lower vacancy luxury market. Most often, however, just as high vacancy rates discour-age new construction of rental housing, they also discourage improvements to existing structures. The potential sales value of a rental structure is also depressed under conditions of high vacancy rates. This fact, together with the reduced cash flow, indicates a potentially lower rate of return from sub-standard buildings. When vacancy rates are high, therefore, house oper-ating firms acting on the basis of profit maximization w i l l generally defer expenditures and move their buildings downward in the rent-quality distribution. Again there is an exception to this rule. A few firms wil l choose not to defer expenditures but rather to lower rents, in the hope of attracting more tenants and thereby raising the effective gross income of their buildings. It is unlikely that such a strategy wi l l be commonly chosen, as explained below. Fi r s t , in order to induce tenants to relocate, the firm must offer a significant reduction in rent, most 104 likely a minimum of $10.00 per month. Let us assume for the moment that a firm operates a substandard building with 25 dwelling units rented at the prevailing market rate of $100.00 per month. Let us further assume that the building is 80% occupied. To raise occupancy levels to, say, 90% the firm offers a $10.00 reduction in rent. Assuming that this re-duction is applied both to the occupied as well as the vacant units in the building, the monthly effective gross income of the building would be $2,025.00, as opposed to $2,000.00 prior to the rent decrease. If these figures are truly representative, then there is reason to doubt that many firms would risk dropping rents in order to gain such a mar-ginal increase in revenue. The imposition of an effective "systematic" code enforcement program under these circumstances can have a significant effect upon the firm attempting to maximize profit from a substandard building. While such a firm may choose from six alternative strategies (i.e., A - F in the restricted decision-making model), there are only two possible con-sequences of importance to the local housing authority: f i r s t , that the building is removed from the stock (either'through abandonment or demolition), and secondly, that i t is brought up to the minimum housing standards (either through increased replacement and operating expendi-tures, remodelling or reconstruction). Both of these consequences are desirable from the point of view of the local housing authority. In the f i r s t case, a house operating firm w i l l most likely choose abandonment or demolition when i t s building occupies a low position in the rent-quality distribution due to profit maximization. The worst slums thus can be expected to be eliminated when vacancy rates are high and syste-matic code enforcement is implemented. In the second case, a firm w i l l 105 most likely choose increased operating and replacement expenditures or remodelling when i t s building's optimum operating point is near to but below the minimum housing standards. Consequently, additions to the supply of standard rental housing can also be expected when high vacancy rates are coupled with effective systematic code enforcement. The impact of code enforcement and high vacancy rates upon low income tenants is readily discernible. As the worst slums are removed, some degree of dislocation is inevitable. Given the high vacancy rates, however, i t is assumed that substitute accommodation could most often be found by the dislocated tenant near his original residence. Such accom-modation would be in buildings which had always met the minimum housing standards or which had been brought up to the minimum standards as a result of code enforcement. It is expected that few of the dislocated low income tenants would be forced to seek new accommodation outside their original neighbourhood. Since the c r i t i c a l issue in dislocation is not so much removal from one's household as removal from one's neighbour-hood and i t s attendant social and physical relationships, the effects of dislocation in this case are not too harmful. Apart from the limited impact of dislocation, there is another implication for the low income tenant. Due to increased costs, firms which bring their buildings up to the minimum standards may find i t nec-essary to increase rents. Thus, while the low income tenant is assured of standard accommodation as a result of code enforcement and the pre-vailing market condition, he must also pay for i t , either by doubling up or allocating a greater percentage of his income to housing. Neither of these results is very acceptable, however, considering the original intentions of the code enforcement program. Consequently, i t is necessary 106 to inject into the program policies which can counteract these implica-tions. One such policy which might be appropriate in this case is the enforcement of rent control. Faced with rent control, firms operating very low quality buildings which would require significant increases in expenditures to meet the minimum housing standards w i l l tend to withdraw their buildings from the housing stock. This fact has been documented in the city of New York. In that city, despite the fact that new r e s i -dential construction has almost come to a standstill, 33,000 apartment units are being abandoned each year, mostly in the rent controlled sec-98 tors. Landlords of these buildings cite the rent control measures as 99 the reason for their decision to abandon. This outcome is desirable. The worst dwelling units are most likely to be abandoned f i r s t , since i t is these buildings which require the greatest expenditure to be brought up to the minimum housing stan-dards. However, such expenditures are strongly discouraged by the eco-nomics of rent control. Only those buildings which are marginally below the minimum housing standards w i l l be retained in the stock, since only the firms operating such buildings w i l l be able to absorb the increased expenditures in the face of fixed rent increases. As more of the poorest quality buildings are withdrawn from the stock,the dislocated tenants w i l l have to find accommodation in those buildings which meet or are only marginally below the minimum standards. Vacancy rates in these buildings w i l l then tend to drop from their for-merly high levels. As a result, the effective gross income for these 9 8"The Wildfire of Abandonment," Business Week, April 4, 1970, P- 5 7 » 9 q "When Landlords Walk Away," Time, XCV, 8 (March 16, 1970), 64. 107 buildings w i l l increase, thus tending to off-set the effects of rent con-tr o l experienced in the poorest quality buildings. For buildings only marginally below the minimum standards, then, the costs of meeting the standards w i l l tend to be balanced by the increased revenue due to higher occupancy rates. In summary, then, under conditions of high vacancy rates in the non-luxury rental housing sector, a combination of systematic code en-forcement and fixed rent increases w i l l persuade the owners of the poor-est quality rental housing to withdraw that housing from the market. Simultaneously, rental housing which is marginally deficient with re-spect to the minimum housing standards w i l l be brought up to these standards, thus increasing the supply of standard housing for low income tenants. Some dislocation of low income tenants w i l l result as the poor-est buildings are removed, but the availability of alternative housing located nearby and regulated by rent control tempers the typically harm-ful effects of dislocation. In Figure 9 below an attempt is made to portray graphically the effects of code enforcement and rent control when vacancy rates in the non-luxury rental housing sector are high. Code Enforcement and House Operating Firm  Decision-making Under Conditions of Low  Vacancy Rates When low vacancy rates exist in the market of non-luxury rental housing, systematic code enforcement may create significant problems regarding the dislocation of low income tenants. Thus, a local housing authority must develop an approach very different from that adopted under high vacancy conditions. The ultimate concern of code enforcement in this case must be to stimulate rehabilitation of and thereby increase the supply of standard housing, rather than to eliminate substandard FIGURE 9 THE IMPACT OF CODE ENFORCEMENT AND RENT CONTROL UNDER HIGH VACANCY RATES MARKET CONDITIONS SUBSTANDARD HOUSING HIGH VACANCY RATES PUBLIC POLICIES - CODE ENFORCEMENT RENT CONTROL ABANDONMENT OR REMOVAL HOUSE OPERATING FIRM DECISIONS RELOCATION IN STANDARD HOUSING LOSS OF EQUITY & CASH FLOW IMPLICATIONS FOR HOUSE OPERATING FIRMS' AND LOW INCOME GROUPS2 .1 1 LOW INCOMES COMPLI ANCE INCREASE IN COSTS IMPROVED HOUSING CONDITION IMPLICATION FOR THE HOUSING MARKET LOWER VACANCY RATES -IMPROVED HOUSING STOCK 109 housing from the stock. Let i t be assumed that a community is able to apply systematic code enforcement and thus force house operating firms to withdraw or improve their buildings. Given the potential problem of wide-scale dis-location, i f significant numbers of buildings are withdrawn, such a pro-gram may be too narrow in scope. Therefore, other policies must be incorporated into the systematic code enforcement program to account for the rea l i t i e s of house operating firm decision-making. The nature and extent of these policies are described below. According to the restricted decision-making model, house operat-ing firms w i l l choose that alternative which involves the least loss in profit from their buildings. The local housing authority desires to eliminate the worst housing stock and to minimize dislocation. At the same time, i t wishes to avoid burdening low income tenants with increased costs or forcing them to double up. Thus, there w i l l inevitably be a conflict between the aims of the local housing authority and the decision-making practices of house operating firms. Resolution of this conflict can only occur through the manipulation of the losses involved in the alternative strategies open to the house operating firm. To minimize dislocation and s t i l l keep housing costs down for low income tenants when low vacancy rates prevail, a local housing authority must ease the burden of house operating firms in meeting the minimum housing standards. To achieve this, i t can choose from several courses of action. Direct measures include property tax deferral and abatement, direct grants and low-cost loans to house operating firms. Indirect measures include rent supplements to low income tenants and increased spending on public lands, works and services. Each of these measures is 110 discussed in the following pages in terms of i t s effect on the house operating firm and the low income tenant. Property Tax Deferral and Abatement. By deferring or abating the property tax for selected buildings, a local housing authority could substantially improve the cash flow position of a house operating firm over the short run. Such an abatement would most likely involve an agreement not to raise the assessment of a property during some limited period i f the house operating firm agreed to undertake specified improve-ments in the quality of i t s housing services. For a firm owning a build-ing only marginally below the minimum housing standards, such a policy would tend to encourage increasing operating and replacement and, pos-sibly, remodelling expenditures. Consequently, the building would be brought up to the required standard. The outcome for the low income tenants in such a building would be favourable. F i r s t , there would be no dislocation, since the building remains in use. Second, there would be only a limited, i f any, increase in rents, since the required increase in expenditures for the building would be counterbalanced by the decrease in the property tax. One potential drawback to the use of tax deferral and tax abate-ment is a decrease in revenue to the local community over the short run. Superficially, i t would be expected that the community would have to find alternative methods to raise revenue to offset this narrowing of the tax base. This consideration is significant enough to discourage the widespread application of tax deferral and abatement. Nevertheless, i t should not deter a narrower but concentrated application to certain geographical areas which may ultimately require public redevelopment i f rehabilitation i s not stimulated. Since public expenditures on such I l l redevelopment are likely to be far greater than the potential decrease in revenue due to tax abatement and deferral, i t would appear to be short-sighted to reject this program outright. Direct Grants and Low-cost Loans. For buildings which are sub-stantially below the minimum standards but are s t i l l sufficiently sound to be rehabilitated, a policy of direct grants or low-interest loans may provide the appropriate stimulus for house operating firms to rehabili- , tate rather than withdraw their buildings. In exchange, the house oper-ating firm would be required to bring i t s building to the minimum housing standards and, at the same time, agree not to raise rents. A direct grant or low-interest loan w i l l stimulate rehabilitation in the following manner. First, the house operating firm is supplied with a source of capital which otherwise must be borrowed at high inter-100 est rates over short terms and often with attendant bonus clauses. Under the latter conditions, rehabilitation is out of the question unless substantial increases in rents can be anticipated. With a direct grant or low-interest loan, however, the house operating firm can raise i t s building up to the minimum standards without necessarily raising rents. It might be argued that the improvements to the building w i l l generate an increase in assessment, thereby increasing costs to the firm. In the absence of a policy of tax deferral or abatement, the profit pos-ition of the firm w i l l undoubtedly be weakened. While this is true, i t is doubtful that the loss in profit incurred by the firm due to increased taxes w i l l be greater than the loss due to withdrawing the building from George Sternlieb, The Tenement Landlord, pp. 107-120. 112 service i f i t is not improved. Moreover, the firm may have an opportun-it y to reduce this potential loss through refinancing an improved build-ing at lower interest rates and a better term. Lenders are likely to offer better loans in this case, as the risks are reduced and the collat-eral has been improved. Finally, the improved building w i l l tend to have a higher resale value, thus again offsetting the effects of higher taxes and restricted rents upon the profit position of the firm. The result of public policy in this case is again favourable for the low income groups. Dislocation w i l l result only in those cases where buildings are at the bottom of the quality continuum and cannot be improved to the minimum housing standards. This form of dislocation is not undesirable, particularly i f i t does not occur on too great a scale. The exact extent to which i t can be permitted to occur w i l l be determined by the availability of alternative accommodation for the dislocated ten-ants and the extent to which the community is willing to commit addi-tional funds for public housing. As a further consequence of this policy, low income tenants have access to improved housing at no increased cost. There is a simple method for calculating the costs to the com-munity: one needs only to weigh the costs of such grants or low-interest loans against the costs of building additional public housing. A for-mulation very similar to that of A.H. Schaaf as presented previously in this study can be employed for this comparison. Rent Supplements. Another approach which might be taken by a local housing authority when vacancy rates are low involves the combina-tion of systematic code enforcement with rent supplements. Thus, the worst buildings are eliminated and low income tenants are provided with rent supplements to acquire accommodation in those buildings which are brought up to the minimum hous ing s tandards . The supplements are r e q u i r e d i n t h i s case s i n c e f i rms w i l l i n c r e a s e t h e i r r e n t s to cover the cos t s i n c u r r e d i n meeting the minimum hous ing s tandards . Without such supplements , the low income tenants would be f o r c e d t o double up or to i n c r e a s e the a l l o c a t i o n o f t h e i r resources t o h o u s i n g . Both o f these e f f e c t s a r e , o f course , u n d e s i r a b l e . A bonus o f the rent supplement system l i e s i n i t s p o t e n t i a l t o a i d i n the enforcement o f the minimum hous ing r e g u l a t i o n s . Assume, f o r example, a d e l i v e r y system whereby the tenants present rent supplement coupons t o the l a n d l o r d a long w i t h a p a r t i a l cash payment. The l a n d l o r d must then take the coupon to the l o c a l hous ing a u t h o r i t y f o r payment. Before making payment, the hous ing a u t h o r i t y would check the records f o r hous ing code v i o l a t i o n s . I f those records r e v e a l e d uncor rec ted code v i o l a t i o n s , the coupon would not be honoured and the house o p e r a t i n g f i r m would be p r e s s u r e d , assuming tha t the f i r m c o u l d not e v i c t the t e n -a n t . Suspension o f payments when code v i o l a t i o n s are found thus has the dua l e f f e c t o f (1) a s s u r i n g t h a t p u b l i c funds are not i n d i r e c t l y support-i n g substandard h o u s i n g , and (2) p r o v i d i n g a d d i t i o n a l i n c e n t i v e f o r the f i r m to b r i n g i t s b u i l d i n g up to the minimum hous ing s t andards . While the cos t s i n v o l v e d i n rent supplements are l i k e l y to be q u i t e h i g h , i t i s doubt fu l t h a t the cost o f s u b s i d i z i n g newly c o n s t r u c t e d p u b l i c hous ing c o u l d be comparably low. P u b l i c p o l i c y has a l ready ac-knowledged the importance and n e c e s s i t y o f c o n s t r u c t i n g p u b l i c hous ing Note t h a t the problems i n v o l v e d i n the procedure o f s e l e c t -i n g the r e c i p i e n t s o f r en t supplements are not d i s cus sed h e r e , s i n c e our c e n t r a l concern i s the e f f e c t t h a t such supplements have on house oper-a t i n g f i r m d e c i s i o n - m a k i n g . With t h i s i n mind, i t matters l i t t l e which low income tenants r e c e i v e the supplements. 114 to aid low income tenants. Thus, i t should be equally acceptable ( i f not more so, given the lower cost) to subsidize low income groups in the manner described above. The implications of such a program include the removal of the worst rental housing and an increase in the supply of standard housing at rent levels which, due to subsidization, remain constant for the low income tenants. The program introduces an additional effective control over rental housing conditions. Finally, given the opportunity to ob-tain higher rents through the supplements, the majority of firms with substandard buildings would be willing to improve them. Consequently, the problems of dislocation would be minimized. Increasing Public Expenditures on Community F a c i l i t i e s and Ser- vices. As noted earlier in this study, the most important variable which influences a building's value is i t s location. House operating firms consistently take this variable into account in their decision-making practices. For example, Sternlieb noted the following comments from slumlords in response to the question of whether their buildings could be made more profitable by improving them. One landlord said: "I won't 102 touch them due to their poor locations." Another said: "We wouldn't 103 do a thing in this area for we wouldn't get our money back." And fi n a l l y : "Banks won't make loans in our area . . . but i f we were in a better area, I would probably put on at least new aluminum siding. It 104 pays." It is immediately apparent from these comments that the house operating firm i s strongly influenced by locational factors in i t s deci-sion-making. 1 0 20p. c i t . , p. 163. 1 0 3 I b i d . 1 0 4 I b i d . , p. 155. 115 If public policy were directed toward improving the location and thus the resale value of substandard buildings through increased expenditures on community f a c i l i t i e s and services, i t can be expected that the firms owning such buildings would be motivated to improve them. Nash presents a strong case for the impact of public expenditures on 105 community f a c i l i t i e s and services when he states: Community f a c i l i t i e s and services w i l l contribute to the desir-ab i l i t y and st a b i l i t y of an area. New or improved schools, parks, transportation, trash collection and other services w i l l improve the physical environment of the neighborhood, thus increasing i t s potential rent and decreasing i t s potential vacancy rate. A city can use a community f a c i l i t i e s program to direct private invest-ment into areas of it s choice. A program of increased public expenditures on community f a c i l i -ties and services is likely to be most effective when applied to a par-ticular area, rather than on a city-wide basis. In determining the appropriate areas in which to increase expenditures, the local govern-ment should consider house operating firm decision-making and the role of mortgage lenders. Generally, conventional lenders are reluctant to finance rental housing in poor quality areas, where the need for re-habilitation or removal is often the greatest. Firms with buildings located in such areas must, therefore, turn to other lenders, who w i l l take greater risks in exchange for higher interest rates and shorter terms. It has been previously noted that when vacancy rates are low, removal of any rental housing except that which cannot be rehabilitated causes serious dislocation problems. Thus, in order to encourage the conventional lenders to finance rehabilitation projects in poor quality areas, public policy must be directed toward improving those areas. This W.W. Nash, Residential Rehabilitation: Private Profits and  Public Purposes, p. 191. 116 can be done by concentrating public expenditures on f a c i l i t i e s and ser-vices in poor quality areas which have a deteriorated, but s t i l l sound, stock of rental housing. It might be argued that such a policy tends to be discrimina-tory, in that i t favours investment in less desirable areas over invest-ment in better areas. This argument may be answered as follows: F i r s t , i f rehabilitation is not stimulated when vacancy rates are low and the firms choose to withdraw or remove a significant number of buildings, substantial dislocation results. The dislocated tenants must be re-housed, ideally in or near their former neighbourhoods. Assuming that the community chooses to construct public housing at such locations, i t is probable that large expenditures on f a c i l i t i e s and services w i l l be required for location improvements. Again, such expenditures w i l l tend to be made in a discriminatory manner, favouring one area over another. Inevitably, then, the expenditures w i l l be made, and the question be-comes one of timing rather than discrimination. Systematic code enforcement combined with increased public expenditures on f a c i l i t i e s and services in poor quality areas with a deteriorated but sound housing stock yields important implications for low income tenants. In the case where the worst housing is removed, some dislocation of low income tenants w i l l result. Remember, however, that such a program is only appropriate for areas with a deteriorated but sound housing stock. The majority of house operating firms in such areas would have a substantial investment in their buildings and thus would be more inclined to rehabilitate than to abandon or remove their buildings. This is especially true considering that the program w i l l raise the buildings* ultimate resale value and stimulate availability 117 of better financing for improvements to substandard buildings. It would be a mistake to apply the program in the areas with the poorest stock of housing. The realities of house operating firm decision-making indicate that in these areas, profit loss to a firm as a result of code enforcement w i l l be minimized by abandonment or removal, rather than rehabilitation (even given the stimulus of the program in this dir-ection). Increased public expenditures for f a c i l i t i e s and services in these areas w i l l not provide a sufficient stimulus toward rehabilitation. Given, then, that the program should be applied only in those areas described, i t can be expected that dislocation of low income tenants w i l l be minimized. As rehabilitation is stimulated by the program, rent levels w i l l inevitably rise as a result of the increase in the quality of housing services and the corresponding increase in the quality of the local en-vironment. This implication for low income tenants is far more serious than the minimal amount of dislocation which w i l l occur. In this case, tenants w i l l experience significant hardships unless some form of rent supplementation is made available. Such supplements could be financed in part through the increased tax base of the rehabilitated buildings. However, i f tax abatement or deferral is introduced into the program, then other sources of funding must be considered. The argument that the costs of this program are likely to be quite high can be answered simply by considering the costs of the alternative of building public housing to improve the housing conditions of low income tenants under low vacancy rates. Summary. There exists a broad range of policy alternatives which must be incorporated into a systematic program of code enforcement in 118 order to improve housing conditions for low income tenants when vacancy rates in the non-luxury rental housing sector are low. These alterna-tives range from direct to indirect action. Direct action alternatives include tax deferral or abatement, outright grants and low-interest loans for rehabilitation. Indirect action alternatives include a system of rent supplements and increased public expenditures for f a c i l i t i e s and services in areas with a deteriorated but sound housing stock. Each of these policy alternatives has numerous consequences for the house oper-ating firm. Thus each significantly affects the decision-making prac-tice of choosing that alternative which minimizes the decline in profit from substandard housing due to code enforcement. By intervening in the house operating firm decision-making process, the policy alternatives discussed in this section can have a substantial and, perhaps more importantly, predictable influence on the housing situation for low in-come tenants. CONCLUSIONS This study has attempted in a modest fashion to overcome what is f e l t to be one of the most significant shortcomings in the planning and policy-making fields, namely the lack of understanding of how the private sector responds to programs instituted by the public sector. Using the example of housing code enforcement, we have tried to estab-l i s h the probable patterns of response in the private sector to publicly instituted programs. To some extent, the study f a i l s in i t s attempt to empirically validate the pattern of decision-making proposed in the sphere of rental housing. However, this shortcoming can be corrected through further research which focuses on documenting the actual experi-ence of proprietors of both standard and substandard rental housing. 119 Particular emphasis in such research should be given to an analysis of the shifts in expenditure patterns which are deemed to occur as rent levels and vacancy rates vary. What does emerge from this study is a description of how know-ledge of private sector decision-making may be applied by the public sector in selecting appropriate policies to achieve a given end governed by certain limitations. In this case, the end is the elimination of substandard housing while at the same time increasing the stock of stan-dard housing available to low income tenants. The limiting factors governing this end include the minimization of dislocation for low in-come tenants, the minimization of increases in housing allocations or the doubling-up of low income tenants, and the minimization of public expenditures. Only through considering the response patterns in the private sector and by adapting policy alternatives to manipulate these patterns to achieve the desired responses, can the planning function increase i t s effectiveness. To the extent that this study has effect-ively illustrated this principle can some claim be made as to the val-i d i t y of the hypothesis. In the declarative sense, then: An understanding of the decision-making practices of house operating firms is essential to the effective use of housing code enforcement as a tool to elimi-nate substandard housing. Hopefully, this study has aided that understanding. BIBLIOGRAPHY Banfield, Edward C. and Morton Grodzins. Government and Housing in Metropolitan Areas. 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Riis, Jacob. How the Other Half Lives. New York: H i l l and Wang, 1957. Robinson, H.W. The Economics of Housing. London: P.S. King, 1939. Samuelson, Paul A. Economics. 8th ed. New York: McGraw-Hill Book Co., 1970. Schaaf, A.H. Economic Aspects of Urban Renewal. Berkeley: Real Estate Research Program, Institute of Business and Economic Research, University of California, 1960. . "Economic Feasibility Analysis for Urban Renewal Housing Rehabilitation," Journal of the American Institute of Planners, XXXV, (1969), 399-404. 123 . "The Potential for Subsidized Housing Rehabilitation," Proceedings of the American Real Estate and Urban Economics Associ- ation, V, (1970), 105-16. Schoor, Alvin L. Slums and Social Insecurity. Washington, D.C: U.S. Government Printing Office, 1963. Schoor, P. "Only as Much as the Rents Will Bear," The Appraisal Journal XXXV, (1967), 348-54. Segal, E.A. 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"Budgeting and Staffing," Workable Program Guideline, G-2. Washington, D.C: U.S. Government Printing Office, 1965. U.S. Housing and Home Finance Agency, Codes Administration. "Systematic Housing Code Compliance," Workable Program Guideline, G-8. Washing-ton, D.C.: U.S. Government Printing Office, 1965. Wendt, Paul F. and A.R. Cerf. Real Estate Investment Analysis. New York McGraw-Hill Book Co., 1969. Wheeler, M. (ed.). The Right to Housing. Montreal: Harvest House, 1969. "When Landlords Walk Away," Time, March 16, 1970, pp. 64-65. Winnick, Louis. Rental Housing: Opportunities for Private Investment. New York: McGraw-Hill Book Co., 1958. 

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