The recommendation of the Bureau of Operations as contained in the above communication was approved by the board. Meanwhile a lease was negotiated between the Norfolk Tidewater Terminals (Inc.) and the city of Norfolk for the operation of the municipal terminals contingent upon similarly acquiring the Army base. On August 8, 1925, the board approved the lease contract now in force between the Tidewater Terminals and the Shipping Board. Both lease contracts contemplated joint operation of the Army base and the municipal terminals, the net profits to be divided three ways equally between the lessee, the Tidewater Terminals, and the lessors, the city of Norfolk, and the Shipping Board, respectively. The city of Norfolk agreed that the Shipping Board as far as necessary should administer all questions of control contemplated to be exercised by the lessors. COMPARISON OF PROPERTIES A brief description of the Army base and the municipal terminals is as follows: ARMY BASE (UNITED STATES SHIPPING BOARD) Pier 1, 1,328 feet long by 300 feet wide. The shed on this pier is 1,280 feet long by 228 feet wide. Pier 2, 1,328 feet long by 300 feet wide. Shed on this pier is 1,280 feet long by 257 feet wide. Inner half of this shed has upper floor. Warehouses numbered 1, 2, and 3, 10 sections in each of 140 feet by 160 feet. totaling 672,000 square feet. Warehouses 4, 5, 6, 7, and 8, 12 sections each of 140 feet by 160 feet, totaling 1,344,000 square feet. The aggregate number of square feet in the combined warehouse space is 2,016,000, less one section in warehouse 1, and three sections in warehouse 3, which are reserved for the Emergency Fleet Corporation. Seventy-eight acres east of Maryland Avenue and 561 acres west of Maryland Avenue, making a total of 639 acres. Approximately 50 miles of railroad track. MUNICIPAL TERMINALS (CITY OF NORFOLK) One concrete pier 1,285 feet long and 494 feet wide. There are two sheds on this pier each 1,175 feet long by 100 feet wide. Each shed is divided into three sections of 40,000 square feet, aggregating 240,000 square feet in the two sheds; 5 miles of railroad track. A fair measure of the value of the Army base as between the board and the city might be said to be the price at which it was offered the city for purchase in 1924, namely, $5,000,000. The municipal terminals, of comparatively recent construction, are alleged to have cost $5,200,000, exclusive of the land. COMPARISON OF REVENUE The gross receipts and net profit or loss to the Shipping Board for the five months' period September to January, 1924-25, under the city of Norfolk operation (War Department lease) compared with the corresponding period 1925-26 under Norfolk Tidewater Terminals operation (Shipping Board lease), respectively, are as follows: September 1, 1924, to January, 1925, including city of Norfolk September, 1925, to January, 1926, including Norfolk Tidewater Terminals While this latter five-month period covered initial operation by the Tidewater Terminals, by comparison it shows a net increase in revenue to the Shipping Board of 65 per cent over the net revenue for the first period of operation by the city of Norfolk. Division of profit.-Under the lease the division of net profits is one-third to Shipping Board; one-third to city of Norfolk; one-third to Norfolk Tidewater Terminals, the lessee. This division as between the Shipping Board and the city of Norfolk is covered in later paragraph. As between the lessors and the lessee it should be stated that from figures cov ering period September 1, 1925, to January 31, 1926 (the first five months of operation of Tidewater Terminal), the gross income was $209,260.54. The lessee received as his share of the net profit $25,198.35, or 12 per cent of the gross. This 12 per cent is not considered excessive. Concentration of business.—During the period September to December, 1925, the gross revenue derived immediately through the Army base and municipal terminals, respectively, in the joint operation is as follows: While these figures show that the business actually handled through the Army base in point of revenue is over six times that handled through the municipal terminals, although there is an equal division of the net profits as between the city of Norfolk and the Shipping Board, this apparent inequality is explained when all the facts and circumstances surrounding the transaction are considered. This condition was anticipated at the time the lease contract was made, the board adopting a more liberal policy toward the city of Norfolk than would have been followed had the board been dealing with private business interests on a strictly competitive business. In such latter case a more proper division of the profits in the joint transaction might have been fixed at 4, 3, 2; that is to say, four-ninths to the Shipping Board, three-ninths to the lessee, and two-ninths to the city of Norfolk. This policy of dealing liberally with the city or State concerned was confirmed by the board in the recent lease of the Army base to the city of Charleston. The following is noteworthy as supporting the liberal policy toward the city of Norfolk to the possible extent of the one-ninth division of profits: 1. Neither lease carried any provision as to the division of the business between the properties, but in the interest of economy the lessee was left free to handle this in a manner more expeditious to the entire joint operation. 2. The municiapl piers and sheds have purposely been kept in large part idle while the business was concentrated through the Army base, the policy being to handle "through" and quick-moving business at the Army base and slow mov ing and less profitable storage business, such as nitrate and fertilizer, at the municipal terminals, thereby saving expense in handling clerical help and labor. 3. The policy of concentrating business at one point at the expense of another which might be competing each with the other is in line with general commercial practice. Large corporations often acquire control of competitive concerns and then keep them idle rather than divide the buiness at the expense of efficiency and cost of operation. 4. The joint 50-50 operation shows production of higher revenue to the board than operating separately by competing companies, to say nothing of the undesirability of operating the Army Base in open competition with the city of Norfolk terminals. 5. The support and joint interest of the city of Norfolk is a large factor in making the operations a success. The merchants doing business at these terminals are Norfolk taxpayers and it is conceivable that they might take their cotton and tobacco to the municipal terminals if competing with the Army base. 6. The city has equal waterfront and could have put in additional piers and warehouses as originaly contemplated had competitive interest acquired the Army base. 7. The municipal property by reason of being new and of more modern construction will have comparatively little maintenance cost during the term of the lease but the lessee will constantly be called upon to make current repairs to the Army base out of operating revenue as provided in the lease. In any event, the city of Norfolk is obligated to make current repairs on the city property at city expense, while under the Shipping Board lease these are paid out of operations. Comment. The business which the lessee, the Norfolk Tidewater Terminals (Inc.), with the assistance and local support of the city, is enabled to bring to the terminals is steadily increasing. In this connection, several negotiations are now pending between the Tidewater Terminals and the railroads, and is is with good reason expected that there will be a 75 per cent increase in gross business this fall over that of last fall, which means at least 100 per cent increase in net revenue to the Shipping Board. As between the city of Norfolk and the Shipping Board, it is felt that the present lease arrangement is working out equitably and is in line with the aims of the board to give consideration to the interests of the port involved rather than primarily to seek return on invested capital even if such return were possible in any event. With the present lease we accomplish three very desirable things: (a) Placing the operation of the property in private hands and minimizing supervision by the Government; (b) increasing almost immediately the net revenue to the Shipping Board with greater prospects for the future; besides (c) having effeted an arrangement which not only avoids open competition with, but enlists the assistance and cooperation of, the city of Norfolk. CHARLESTON ARMY SUPPLY BASE Location. Located on the Cooper River about 11 miles from the city of Charleston. Description.-Consists of wharf of about 2,000 feet and two headhouses at right angle to which are six warehouses one story in height. How acquired.-By War Department under Executive order dated November 3, 1925. (Possession December 15, 1923.) Terms of lease.-On July 10, 1924, the board leased to the Port Utilities Commission the Charleston Army base for a period of five years from July 10, 1924, to July 10, 1929. Under lease, the board receives unconditional rent of 414 per cent per annum on the aggregate amount of all expenditures made by the lessor for reconditioning property and a contingent rent of 60 per cent of net operating revenue accruing from the use and operation of the terminal. Profit or loss.-Under lease of July 10, 1924, above referred to, the board in 1925 received $4,944.65 covering interest on money expended for deferred maintenance. The Port Utilities Commission, the lessee, lost $15.319.43 in operations for the years, broken down as follows: New lease. On February 27, 1926, the committee on piers and wharves, to which the matter was referred by the board, submitted the following memorandum and lease submitted therewith was executed, effective March 1, 1926, after the approval by the board. Repairs. The board has appropriated $400,000 for deferred maintenance and reconditioning. This work is now in progress under direction of Emergency Fleet Corporation. Future policy. The following report of that committee is made a part of this report. The Charleston Port Utilities Commission recently through representatives stated to your port terminals committee that they find their present contract of lease for the Charleston Army base is not satisfactory. They state that it is hence necessary for them to cancel this contract of lease in accordance with the terms provided by that contract. It is their opinion that the Charleston Army base property can, if put in operating condition as contemplated in the present contract of lease, be made ultimately a profitable property, but they state that they are at present undergoing a net loss of something like $20,000 a year on this property and that their legal status and the pressure of local public opinion does not permit them to longer carry even a small loss, although the port commission believes now, as it has in the past, that such loss is temporary and that the terminal can ultimately be placed on a handsomely paying basis. Your port terminals committee also believes that the Charleston Army base can be ultimately made to pay and that it has an emergency value which should not be lost through neglect of the property. It believes the property should be operated by the Port Commission of Charleston and that a liberal policy is justifiable to achieve this end. The Charleston Port Utilities Commission state that they are willing to enter into a new lease in place of the old, which they desire to cancel. Such a new lease has now been negotiated by your committee on port terminals. The port utilities commission asked for a lease similar in general outline to the present leases in force at your northern terminals, as they felt such a lease would better meet their requirements. Your committee agreed to accept the northern leases as a basis of negotiation but stated it would be necessary to make special stipulations to meet special physical and other practical conditions existing at Charleston. Your committee stated also it would accept in principle as a basis of negotiation the plan of smaller immediate returns for the Shipping Board and larger ultimate returns for the Shipping Board, which plan had been urged by the port utilities commission. The proposed new contract of lease resulting from our negotiations is appended hereto. There is also attached a letter of the general counsel commenting on the proposed lease. The lease has the approval of the comptroller and the head of the department of operations of the Shipping Board. The new lease has the approval of your committee on port terminals. It is recommended for the approval of the board. In effect the larger difference between the proposed lease and the present Charleston lease are as follows: 1. The Shipping Board will grant more liberal terms to the lessee in the period during which the lessor is establishing a profitable business. 2. The Shipping Board will receive a correspondingly larger share of profits if and when a profitable business is established. More particularly the main differences between the present Charleston lease and the proposed lease are discussed in the following notes: 1. The Port Commission instead of guaranteeing to pay rental in an amount equal to 44 per cent on such funds as are spent by the board to place the base in operating condition up to but not exceeding $400,000, and in addition thereto pay 60 per cent of the net income or profits, agrees to pays as rent two-thirds of the net income. In other words, the profits or net income shall be split, onethird to the Port Commission and two-thirds to the Shipping Board instead of dividing 40 per cent and 60 per cent as at present. Furthermore, no part whatever of the annual net income or profits shall be retained by the Port Commission until the Shipping Board has been paid an amount computed at the rate of 44 per cent per annum of the aggregate amount spent by the board on accrued maintenance. 2. The interest on money spent for accrued maintenance is not proposed to be a cumulative charge from year to year, however, it being felt that to handle it as such might undesirably discourage operations in case of losses for a considerable period of time in the beginning. The new terms we believe better for both parties. This property is served by three railroads. It is in a rapidly growing section of this country. It is capable under favorable circumstances of very great earnings. However, time and patience will be required before they are realized. We believe the Government may well be patient and liberal with Charleston while they are developing business for this terminal, that as we are dealing with a public agency we shall not be criticized for so doing, and furthermore that we are promot ing commerce and preserving an emergency equipment for possible future emergencies. Complaints of rival ports: No rival port can reasonably complain we believe if the Government permits the use of properties created in the war emergency for building commerce in the communities where they are located. We are not here in peace time building new facilities. We are only making provision for securing a good use for existing facilities. 3. Insurance. The present contract requires coinsurance by the lessee under which it shares fire losses on a 25 per cent basis, lessee's total liability being limited to $25,000 for each fire. It also requires lessee to carry $2,000,000 of insurance. We believe these requirements may safely be somewhat altered. In this connection we find it has been the traditional policy of the United States Government to carry its own insurance. We believe this policy to be amply approved by experience. We find, too, that the requirement of coinsurance by the lessee is al unusual requirement in a contract of lease, and has not been usually required of the lessees of Government or private property. And the responsibility of the lessee to use ordinary care in administering the property and his liability if he does not do so is clear as a matter of law in any event. We do believe, however, that an unusual situation exists at this base. It is far removed from regularly organized fire departments and is absolutely dependent on its own equipment for safety. We hence realize that there is justification for the present requirements. Bit we wish also to go as far as we can in removing unnecessary operating burdens from the lessee. We believe, therefore, that the coinsurance clause may well be omitted. We believe that sufficient protection can be secured from ordinary insurance and from the lessee's obligation to use ordinary care in operation. The requirement of ordinary commercial insurance, we believe, should remain in order to secure the advantage for all of a systematic and rigorous supervision of all equipment by the trained inspectors of underwriters. We believe insurance should be required in amount of $2,000,000 as at present, this amount being sufficient to secure the Government from probable loss, due regard being had to the subdivision of risk, sprinkler system, inspection of underwriters, etc. The port commission points to the fact that no such requirement for insurance was made in our leases at the northern terminals now operated by private parties, and they state that a municipality or other public agency is entitled to at least as liberal treatment as any private party. Your committee feels, however, that a requirement of $2,000,000 insurance is justified by the physical situation, the Charleston base being further removed from immediate assistance by local fire departments. etc., than the northern bases. 4. Dredging and deferred maintenance.-The new lease requires current dredging to maintain existing water, to be done by the port commission and charged against operation, as at present. This will secure the maintenance of at least |