Transit corridor valuation: issues and methods.
The methodology for transit and communication corridor valuation is debated in the literature. The debate is whether corridors. particularly rail corridors, are comprised of excess land outside the actual rail location or whether all the lands in the corridor have an integrated use and equal value. A pivotal issue of this debate is an understanding of the history of corridor creation. We explore the history and methodology of corridor valuation and walk through an example of this unique appraisal problem as applied within the context of valuation for eminent domain.
The valuation of rail corridors is a specialized area of analysis that has evolved over a hundred years of legislation and practice, but it is debated to this day. To explore this specialized valuation, this article discusses federal legislation that affects lands in Colorado to illustrate what valuation concepts and methods are appropriate based on the circumstances at hand.
The discussion starts with the history of rail-corridor development in the western United States and is followed by a discussion of corridor valuation concepts. These concepts are then illustrated, using the determinants of the concept of larger parcel and how the enactment of a rail system fits within the larger parcel test. Next, a synopsis of the available methods is given with guidance on when each method may be appropriate. Last, the methods for corridor valuation are discussed based on the results of the analysis of a railroad enactment example.
History of Railroad Development
The US Congress passed the Pacific Railway Act in 1862 (1862 Act). This federal legislation created the legal framework for connecting the Missouri River Valley to the Pacific Ocean by rail. Signed into law by Abraham Lincoln on July I of that year, the 1862 Act codified our growing nation's need to link the vast western territories with industry and agriculture in the East. Specifically, Section 2 of the 1862 Act provides, "the right of way through the public lands ... is hereby, granted ... for the construction of ... railroad and telegraph" This right of way is to be, "two hundred feet in width on each side of said railroad ... including all necessary grounds for stations, buildings, workshops, and depots, machine shops, switches, side tracks, turntables, and, water stations." (1) Congress restricted this broad grant of land and authority with geographic constraints to serve the end purpose of transnational transportation and communication:
The line of said railroad and telegraph shall commence at a point on the one hundredth meridian ... between the south margin of the valley of the Republican River and the north margin of the valley of the Platte River ... thence running westerly upon the most direct, central, and practicable route, through the territories of the United States, the western boundary of the Territory of Nevada, there to meet and connect with the line of the Central Pacific Railroad Company of California. (2)
Furthermore, beyond direct linkage of the east and west, other railroads operating at the time on smaller, more regional levels, were to be included in the new, transcontinental system. These companies included, but were not limited to, the Leavenworth, Pawnee, and Western Railroad Company of Kansas; the Pacific Railroad of Missouri; the Hannibal and St. Joseph Railroad; the Baltimore and Ohio Railroad; and, as provided in Section 15 of the 1862 Act, "any other railroad company now incorporated, or hereafter to be incorporated, shall have the right to connect their road with the road and branches provided for by this act." (3)
As anticipated in Section 15 of the 1862 Act, Congress passed additional enabling legislation (Acts) allowing for growth of the railroad and telegraph industry. These subsequent Acts were largely aimed at additional spurs or ancillary lines and their connection to the main, transcontinental, line delineated in the 1862 Act. All of the subsequent acts contained consistent language with respect to the rights of way granted. Specifically, Section 15 of the Act of 1864 provides, "the several companies authorized to construct the aforesaid roads are hereby required to use said roads and telegraph for all purposes of communication, travel, and transportation, so far as the public and government are concerned, as one continuous line [emphasis added]" (4) The 1872 Act, which addresses railroad construction in Colorado states, "for the construction of railroads and telegraph lines ... [and] for the extension and operation of its railway and telegraph line ..." (5) The 1875 Act enables condemnation by the United States of lands necessary for road and telegraph lines linking the Missouri River to the Pacific Ocean. (6)
After passage of the 1862 Act, and completion of rail line construction, the nation's rail system became paramount to commerce and grew by tens of thousands of miles. This unprecedented growth necessitated federal, rather than state, oversight. In 1887, the Interstate Commerce Commission (ICC) was created for such purpose and charged with oversight of railroads to regulate rates and prevent rate discrimination. Under the ICC's regulation, the railroads argued they should receive an adequate return on their investment. Therefore, the ICC developed a method for determining how much land was utilized for railroad and related purposes as well as its worth; that method, still in use today, is called the across the fence (ATF) method of real estate valuation. (7)
Corridor Valuation Concepts
Originally, the ATF method was only applied to railroad corridor valuation. However, over time the method became useful to a number of industries whose operations make use of linear rights of way or corridors, including telecommunications and energy. Accordingly, two common definitions of a corridor follow:
A strip of land used for transportation or transmission purposes (e.g., rail, highway, power, information, slurries, liquids). (8) A corridor is a long, narrow strip of land or property rights for which the highest and best use is to provide an economic or social benefit by making it possible to connect important end points, and sometimes serve intermediate points along the way, or providing a passage through an area congested by intense real estate development or obstructed by severe topography. (9)
The unique attributes of corridors embody several appraisal and land valuation concepts. Among these concepts are assemblage, plottage, multiple uses, connecting end points, limited market property, and the larger parcel. These concepts ultimately result in an underlying valuation debate; these are described next.
Corridors are generally created by assembling two or more parcels into a strip of land used for transportation or transmission purposes. Assemblage, in and of itself, does not necessarily create added value.
Plottage is the increment of value created when two or more sites are combined to produce greater utility. (10) In other words, two or more sites when combined into a single parcel may have greater utility and value than the aggregate of each of the individual lots when separately considered; this increment of value is inherent to the created parcel. Applied to a corridor, plottage value is measured by the enhancement or corridor factor.
From inception, transportation corridors have been avenues for multiple uses; indeed the 1862 Act contemplated a right of way for railroad and telegraph purposes. Some corridors are shared with other transportation/utility users; in other cases a corridor may be comprised of adjacent or overlapping easements used by various utilities.
Connecting End Points
Incremental value in a corridor is created or determined by its linear connectivity and contiguity, i.e., a continuous line between end points. A typical corridor is crossed by hundreds of streets, creeks, culverts, bridges, trails, power lines, and sewer and water lines; these crossings do not break the continuity of the corridor. (11) However, some practitioners argue a corridor is a series of short, narrow strips of land laid end to end and separated by physical interruptions. (12) Others argue that interruptions to the corridor do not break its contiguity and, in fact, are secondary to a corridor's primary use for transportation/communication purposes. Moreover, rail corridors, for the most part, were established prior to any dedicated roads or other perpendicular rights of way along their length.
While there is some disagreement in the literature about whether a corridor constitutes a special-purpose property, at the very least, corridors are limited-market properties that have relatively few buyers at any given time.
Underlying Valuation Debate
The debate centers on the analysis of the highest best and use. Some take the position that the land under the corridor improvements should be worth at least as much as the land through which the corridor passes regardless of the improvements placed in, on, or over the corridor. (13) Others maintain that only the land under the trackage is essential to the corridor use; the balance of the land within the easement is treated as excess land at a lesser value.
The term larger parcel, for the most part, is unique to eminent domain. It is the beginning for any condemnation appraisal and presents unique valuation challenges as applied to a multiuse transportation/communication corridor. A proper understanding of the larger parcel (also known as the parent tract) is critical to both highest and best use analysis and comparable sale selection. Moreover, in partial takings cases, the efficacy of damages/benefits analysis is dependent upon determination of the larger parcel. As used herein, the Uniform Appraisal Standards for Federal Land Acquisition (the Yellow Book) defines larger parcel as, "that tract, or those tracts, of land which possess a unity of ownership and have the same, or an integrated, highest and best use." (14)
In this article's example of a transcontinental railroad and communication corridor, as defined in the Pacific Railways Act of 1862 and subsequent amendments, the overall larger parcel consists of a corridor between the Missouri River and the Pacific Ocean. Depending on the appraisal assignment (linear connection to be valued), this larger parcel, or any portion thereof, may be analyzed based on land-use nodes or complementary land uses. These nodes delineate segments appropriate to the selection of market indicators for valuation but otherwise do not define the larger parcel.
Tests of the Larger Parcel
There are three tests used for determination of the larger parcel: unity of ownership (title), unity of use, and contiguity. These three criteria as they generally apply in condemnation appraisal are expanded on next.
Unity of Ownership (Title)
Generally, unity of ownership is the first test and often considered the least important. Quality of title need not be identical; however, unity of title generally requires equal legal control over the ownership and future of the lands in question. (15) For example, if one parcel is owned by an individual and a second parcel is owned by a corporation under the control of that same individual, unity of ownership may be met.
The second element of the larger parcel trinity-contiguity--normally requires physical contiguity be present for a larger parcel to exist. However, this condition is not always mandatory. Depending upon circumstances, this concept could be expanded to include integrated but noncontiguous properties, e.g., a mill site and one or more parcels providing raw material for the mill. Thus, despite the physical separation, the properties could be considered one integrated unit or one larger parcel. (16)
Unity of Use
Normally the third test for the larger parcel is unity of use, which more appropriately may be termed unity of highest and best use rather than actual use. Even if two properties have the same highest and best use, they may not constitute a larger parcel unless the uses are integrated. Dependency is the determining factor--this means the two parcels must be related to the extent that they constitute one economic unit rather than two.
Larger Parcel Application to Railroad Corridors
As applied to a transcontinental railroad, the three larger parcel tests are not so concise and require inquiry into the original creation and intention of the corridor. Section 2 of the 1862 Act provides establishment of a right of way for "railroad and telegraph line ... to the extent of 200 feet in width on each side ... where it may pass over the public lands, including all necessary grounds for stations, buildings, workshops, and depots, machine shops, switches, side tracks, turntables, and water stations" Section 12 provides, "the whole line of said railroad and branches and telegraph shall be operated and used for purposes of communication, travel, and transportation, so far as the public and government are concerned, as one connected, continuous line" This language is determinative of a unity of use not only along the length of the corridor, but also along the 400-foot width.
With a corridor, establishing contiguity is straightforward. In fact, a paramount determination in establishing the larger parcel of a transcontinental corridor is fixing end points. Indeed, Section 14 of the 1862 Act requires, "construct[ion] of a single line of railroad and telegraph from a point on the western boundary of the State of Iowa ... upon the most direct and practicable route ... so as to form a connection ... at some point on the one hundredth meridian" Sections 8, 14, and 19 of the 1862 Act provide copious additions to the above direction, which resulted in the current rail configuration spiderwebbing across the western United States.
The lands assembled under the 1862 Act constitute a unity of title to make certain the corridor was (is) contiguous and continuous. The fact that the corridor was subsequently crossed in places does not interrupt its continuity, as any crossings are secondary to corridor use. Moreover, the corridor traverses many ravines, waterways, etc. on its continuous path to an end point. It cannot be said that fiber optics, petroleum, trains, or cars within the corridor stop and restart at each crossing or change in land form. Thus, the corridor meets the test of contiguity. In fact, the 1862 Act states, with respect to the corridor,
the whole line of said railroad and branches and telegraph shall be operated and used for all purposes of communication, travel, and transportation so far as the public and government are concerned, as one connected, continuous line ... (17)
In 1862 it was difficult to predict future uses and users of the railroad corridor. Today it is similarly difficult to anticipate advances in technology and benefits to future users. Thus, there is no need to strip down an assembled corridor into a primary right of way and secondary rights of way for valuation purposes. The market of buyers and sellers of corridors determine how the property is to be valued. Investigations of buyers and sellers of corridor property indicate that the value, or price, is not parsed between the uses in the sale of an operational corridor.
The third and usually the most important test for determination of the larger parcel relates to (unity of) highest and best use in an open market sense. Where the subject property is a viable multiuse corridor, it would remain that way in an open market sale, even when its use is not exclusive to rail. For example, utility companies may have a right of way within the corridor, and there may even be sufficient width that other land users could be added in the future. However, a key question to establish a unity of highest and best use is whether the entire right of way is an integrated, economic unit and would sell as such. The BNSF line bought by Warren Buffett is illustrative of a purchase of a railroad enterprise. (18) The acquisition was based on conveyance of shares of stock; the components of the corporation, including corridors, were not sold separately.
Highest and Best Use: Excess Land
Within the literature, some practitioners take the position that all land within the corridor not needed by a railroad--that is, land not improved with the actual rails, ties, and ballasts--is excess land and consequently of lesser value. This notion of different highest and best uses within the right of way is premised on the idea that land outside the actual rails is secondary, and the land is to be valued as if for sale and assemblage with adjacent property for some future use. (19) The value then of this excess land is dependent upon demand for it. This theory is consistent with only one of the three options on a highest and best use decision tree developed by George Karvel. (20) Karvel offered three highest and best use paths when considering continued use of a railroad line:
* The first assumed the entire right of way is needed for railroad operations;
* The second assumed assemblage with ATF land and sale to abutting owners;
* The third scenario assumed corridor use for coal, fiber optics, utilities, etc. with valuation based on sale to private (secondary) users.
For railroad and telegraph corridors that had their genesis in the late 1800s, options 2 and 3 are contradicted by the intent of the 1862 land grant, which dedicated the railroad and telegraph corridor specifically for transportation and communication purposes. The 1862 Act specifically provided the 400-foot-wide transportation and communication right of way for "all necessary grounds for stations, buildings, workshops, and depots, machine shops, switches, side tracks, turntables, and, water stations" in addition to the obvious railroad line itself. When considering the 1862 Act's original purpose, the land not actually improved with rails and ballasts was seen as an integral part of securing "safe and speedy transportation. (21) Thus, there was no excess land as defined in the current literature.
While it is true a portion of the corridor may be leased to other users such as utilities or for fiber optics, this in and of itself does not mean the land is of any lesser value, but rather it remains an integrated highest and best use for transportation and communication purposes of which the railroad is included. Recent case law in Colorado supports this notion. In 2005, the Surface Transportation Board (STB) (22) addressed three questions referred to it by the US District Court for the State of Colorado. Specifically, the district court asked, whether the outer portions of a railroad right of way are "necessary for the safe and convenient use of the central portion of the [right of way], which is 25 feet wide and which accommodates the tracks and side clearance on both sides of the tracks." (23) In its answer to the district court, the STB stated,
Many railroads have a wider [right of way} than might be used, but that does not mean that all of the property is not needed for railroad operations. As noted by [the railroad], extra width on the sides of the tracks allows room to maintain or upgrade the track, to provide access to the line, to serve as a safety buffer, and to ensure that sufficient space is left available for more tracks and other railroad Facilities to be added as needed, as rail traffic changes and grows ... Thus, it cannot be said that property at the edge of a railroad's [right of way] is not needed for transportation just because tracks or facilities are not physically located there now. (24)
The STB concluded in its answer to the district court, "we find [the railroad's] planned activities on the entire [right of way] are part of rail transportation." (25) This language supports the proposition that the entire width of the railroad right of way, beyond the tracks and balasts, maintains a unity of use that meets the tests for the larger parcel under the definition of highest and best use.
The primary determinant in selecting the appropriate valuation methodology results from the highest and best use analysis as based on the larger parcel determination. If the highest and best use of the subject property is continued use as a functioning, multiuse transportation/communication corridor, the available valuation methods are reduced to accommodate the unique nature of the larger parcel.
Eaton recognizes that special procedures have been developed for the valuation of operating and nonoperating railroad and utility corridors. (26) Depending on the characteristics of the corridor, there are several valuation methodologies available. According to The Dictionary of Real Estate Appraisal, 5th edition, valuation approaches may include methods such as the across the fence method, sales comparison, the alternate route (cost avoidance) approach, and estimation of net liquidation value. (27) All of these approaches may be applied to corridor valuation depending on the circumstances. Richard Zulaica, in an adaptation from remarks presented at the International Right of Way Association (IRWA) 45th Annual International Education Seminar, is more inclusive and provides the following Ladder of Value:
* Replacement cost approach
* ATF (across the fence) plus enhancement factor
* Across the fence (ATF)
* Liquidation value (LV)
* Going concern value. (28)
Rahn identifies and discusses essentially the same approaches but adds the cost and income approaches. (29) A survey of the commonly considered approaches to corridor valuation, as well as their strengths and weaknesses, is found in Table 1.
Table 1 includes definitions and descriptions of the appraisal approaches to value for corridors, including the three main approaches to value: the cost, income capitalization, and sales comparison approaches. The three main approaches to value each have limitations for the use in corridor valuation. The sales comparison approach is limited because of the lack of arm's-length sales. The income capitalization approach is limited because of the inability to apportion income to a small segment of the corridor. The cost approach, while it is the sum of the direct and indirect cost of assemblage, is considered at best an upper bound to value, because it typically results in an estimate of value that may be many times the price the market is willing to pay. Because of the inadequacies of the three approaches to value, specialized methods with their roots in the three approaches have been developed. These approaches include the liquidation, going concern, alternative route, ATF, and ATF x corridor factor approaches.
Liquidation value is applied when the highest and best use is no longer a corridor. It typically establishes the low end of the value range. In contrast, going concern value relates to a sale of an entire railroad operation, and it is difficult to separate real property value from business value. The alternative route method is a subset of the cost approach. The criticism of this method is that it is based on what the buyer gained and not what the seller lost.
The ATF methodology is a form of the sales comparison approach based on a comparison with adjacent or across the fence properties. The method is modified by the use of an corridor factor that recognizes an assemblage premium for an established corridor.
Across the Fence Valuation Methodology
As initially promulgated by the ICC, and now endorsed by the STB, the across the fence methodology has come into common use. It presumes the corridor is worth at least as much as the lands through which it passes.
The term across the fence, as used herein, is defined as follows:
In corridor valuation, a value opinion based on comparison with adjacent lands including the consideration of adjustment factors such as market conditions, real property rights conveyed, and location. (30)
The literature is replete with articles on the appropriateness/inappropriateness of the across the fence method. Typical statements include the following:
If, in the appraiser's opinion, the highest and best use of the site is for continued corridor operation, then ATF methodology is the correct approach to be used. (31) The reasonableness of the Across the Fence method of valuation is manifested by its common use. (32)
Public agencies such as the US General Services Administration (GSA), railroads, and utility companies commonly use the technique when acquiring or disposing of property. Thus, the technique mirrors the market. Dolman and Seymour observe,
By deriving the upper limit (replacement cost) and lower limit (liquidation value) of a corridor, we ... [can define] the range in which value was to be found.... The upper limit for the buyer is the cost of assembling a new corridor. The lower limit for the seller is the value for alternative, noucorridor use. (33)
Additionally, the following cases endorse the use of across the fence methodology. In, Bi-State Development Agency of the Missouri-Illinois Metropolitan District v. Ames Realty Company, the court states, "The across-the-fence methodology is a variation of the comparable-sales approach and is used to value corridors, which are special-use properties assembled from portions of adjacent properties." (34) The Bi-State court goes on to state,
As long, narrow strips of special-use land, corridors are not usually bought and sold in the traditional real-estate market, and there are generally no similar properties in the area that an appraiser can use to determine a corridor's value via traditional application of the comparable-sales approach.... the methodology is based on the premise that corridor property should be worth at least as much as the land through which it passes.... The inability to build single-family homes on the [corridor] is immaterial. (35)
The Illinois Second District Court of Appeals ruled that the historic-cost method of valuing a utility corridor was improper and the across the fence method of valuation was file correct method to determine the value of the subject property. (36)
Although the across the fence methodology is widely accepted and applied to corridor valuation, when used alone, it does not take into account any value premium for plottage. The methodology that recognizes this premium is called the across the fence x corridor factor method.
Across the Fence Methodology x Corridor Factor
The across the fence x corridor factor method of valuation is predicated on the belief that the corridor can be worth more than the land through which it passes, due in part to the entrepreneurial reward for assemblage and in part to the resulting economic benefits. In corridor valuation, a corridor factor (also called an enhancement factor) is defined as, "the ratio of the market value (or market price) of a corridor to the corridor's across the fence value." (37) The corridor factor is simply an adjustment to ATF value that accounts for the greater utility of the assembled corridor over the individual parcels that were assembled to create the corridor. (38)
The first step in this methodology is to examine sales of typical properties in the vicinity of the corridor. Because the corridor often passes through a variety of land uses, this comparison is made by segmented land use. The sum of these ATF valuations results in the value of the corridor. The usual adjustments for differences in the ATF sales are applied by comparison to typical properties, not to the corridor itself. (39) Then, actual corridor sales are analyzed for the presence of a premium called a corridor or enhancement factor. This is based on the ratio of price to ATF.
Dolman and Seymour recognized that plottage can add value and found actual assemblage costs range from two to six times ATF value and examined market data for an enhancement (corridor) factor to be applied (if appropriate) to ATF value. (40) This ATF x corridor factor methodology is now, with some exceptions, accepted within the appraisal community.
Corridor factors are calculated by dividing corridor sale prices by their ATF values. Seymour, in his various analyses, found that most corridor sales support a factor of 1.1 to 2.0, and that sales for freight rail corridors tend to support 1.1 to 1.2. (41) The highest factors tend to be found from sales of corridors that connect major urban centers, are relatively straight and of suitable width, and in situations where costs to assemble a substitute corridor would be both economically and socially prohibitive. (42)
At the 2002 symposium, Corridors and Rights of Way: Valuation & Policy, sponsored by the Centre for Advanced Property Economics, Seymour presented a progress report on the state of corridor valuation, which essentially summarizes his article titled, "The Continuing Evolution of Corridor Appraising (Back to the Basics)," published in the journal Right of Way. In his paper, he outlines the following methodology for corridor appraising:
1. Divide the corridor into segments based on nearby land use.
2. Gather and analyze nearby land sales for each of these uses and adjust them to typical parcels as of the date of appraisal, using the square foot measure.
3. Apply these rates to the corridor segments and add them together to get ATF value.
4. Gather sales of other corridors.
5. Estimate their ATFs as of the dates of the corridor sales.
6. For each sale, divide its sale price by its ATF to derive a corridor factor or CF (previously known as enhancement factor).
7. Compare each of the sale corridors to the subject and select the most appropriate CF for it.
8. Multiply the selected CF by the ATF of the subject to get an expression of corridor value.
These steps describe the commonly accepted method for appraising corridors. (43)
After ATF market indicators (ATF sales) are analyzed, the next step in the valuation process is to determine if a corridor factor applies and if so, quantify it. This is done by examining corridor sales that pass through cultural and physical terrain similar to the land through which the subject property passes. The corridor factor (CF) is determined by dividing the corridor sales' prices by the ATF value on the date of sale. (44)
The corridor factor does not simply represent a benefit to the buyer; rather it is the inherent physical and economic characteristics unique to the corridor that give it value. (45) These characteristics are enhanced by the real estate appraisal principle of plottage, which means that an increment of value may be created by combining two or more parcels into a single parcel having greater utility than the aggregate of each of the individual parcels when considered separately.
Dolman and Seymour identify several characteristics that influence the value of a transportation/communication corridor. These characteristics include, among others, the size, quality, value, use, and activity at the ends of the corridor; the presence or absence of competing corridors in relationship to the need to connect specific end points; and the avoidance of cost.
The cost of assembling a substitute corridor does not determine value per se, but it is an element to be considered. Under the principle of substitution, the cost of creating an ideal new corridor is clearly the upper limit of value. Nevertheless, an existing corridor seldom sells for this amount for two principle reasons: (1) it is seldom ideal for the buyer, and (2) the seller has a very limited market--frequently there is only one potential purchaser for corridor use. In effect, the upper limit for the buyer is the cost of assembling a new corridor. The lower limit for the seller is the value for alternative non-corridor use. (46)
The appraisal literature is replete with articles and data on corridor factors. For example, Rahn published data on 45 corridor transactions illustrating sale price/ATF ratios of 1.00 to 2.62. (47) Only 6 transactions yielded corridor factors greater than 2.00, and only 4 resulted in no factor premium at all. Of those that did result in a corridor factor greater than 1.00, 17 were 1.50 or less. The remainder, or about an equal amount, were between 1.50 and 2.00. The majority were [+ or -] 1.50. Seymour's published results are virtually identical to Rahn. (48) That is, Seymour finds most corridor factors fall between 1.10 and 2.00, rail corridors tend to support 1.10 to 1.20, and sales for electrical transmission lines are more often in the range of 1.50 to 1.70.
Dolman and Seymour identify eleven factors for comparison between sold or assembled corridors and the subject property: (49)
1. The relative importance of end points
2. The importance of other points along the corridors
3. Density of development along the corridors
4. General level of ATF value along the corridors
5. The demand for corridor use in each location
6. The availability of substitute corridors
8. Width, related to use
9. Straightness and curvature
10. Grade, particularly as compared with surrounding terrain and site preparation implications
11. The number of parcels that might have to be acquired to assemble a substitute parcel
Dolman and Seymour note that if the subject property connects end points of little significance, is crooked and narrow, and cost-avoidance in comparison to assembling a new corridor is minimal (e.g., a rural electric transmission corridor), the enhancement (corridor) factor may be near one or even less. But if the corridor connects major urban centers, is relatively straight and of suitable width, and the cost to assemble a substitute corridor would be both economically and socially prohibitive, a factor at the upper end of the observed range will prove appropriate. (50)
Zoll reports similar results. He finds the following factor ranges generally apply. (51)
Liquidation 0.25-0.50 Continued use 1.00-1.74 Acquisition 4.00-6.00
Aside from the published literature, one can collect corridor sales data illustrating factors generally falling within the aforementioned predicted ranges. More specifically, those purchased by railway/ transportation companies tend to cluster around 1.20-1.30, but some may approach 1.50 or greater.
The Pacific Railway Act of 1862, signed by President Abraham Lincoln, created a legal framework within which rights of way for transportation and communication were conveyed to any railroad, between the Missouri River Valley and the Pacific Ocean, that wanted a connection to the transcontinental system. The 1862 Act recognized all land within the corridor, or right of way, was integral to transnational transportation and communication. It did not parse uses within the right of way but recognized one connected, continuous line, i.e., a corridor. In effect, the right of way or corridor established by the 1862 Act constitutes an integrated, multipurpose alignment of land uses principally related to transportation/communication, an intended use that has not effectually changed since its creation.
In 1887, Congress created the Interstate Commerce Commission (ICC) to provide oversight of railroads, and as a result, it developed a method for determining the worth of rail corridors: the ATF methodology for valuation. The ATF method has as its premise the belief that land within a corridor can be worth no less than the land through which it passes. Ultimately, the market realized purchasers, in many cases, would pay a premium for an already assembled corridor and that premium became known as an enhancement or corridor factor. Thus, the primary valuation method evolved into what is now known as the ATF x corridor factor method. For this method, two types of sales are used: ATF sales (called market indicators) and actual corridor sales. The latter are compared to their ATF prices or values to determine if a corridor premium exists and to quantify the premium if it exists. The total ATF value of the subject is multiplied by the appropriate ratio to estimate the probable market value of the subject land.
For more than a century, the methods available for use in valuation of rail corridors were debated. The methods include liquidation value, going concern, alternate route, across the fence, and across the fence with corridor factor. This methodological debate is in addition to whether one believes a corridor meets the tests of the larger parcel. A determination of the purpose of the corridor and a review of any enabling legislation and intent of parties are necessary to a determination of and support for the evaluation of the larger parcel prior to the selection of an appropriate method for corridor valuation. The appropriate method for valuation is determined by the larger parcel decision, and as is illustrated herein, the ATF x corridor factor method is particularly applicable to western US railroad and communication corridors.
(1.) The Pacific Railway Act, Ch.120, 12 Stat.489 (1862), Sec. 2 (1862), Thirty-Seventh Congress, Session II, Chapter 120, US Statutes at Large, Vol. XII, 489-498.
(2.) Ibid., Sec. 8.
(3.) Ibid., Sec. 15.
(4.) The Pacific Railway Act, Ch. 216, 13 Stat. 356 (1864), Sec. 15.
(5.) The Pacific Railway Act, Ch. 354 (1872).
(6.) The Pacific Railway Act, Ch. 152 (1875), Sec. 3.
(7.) Arthur G. Rahn, Corridor Valuation--An Appraiser's Overview (Fairfield: CA: Arthur G. Rahn, October 2005), 5. See also, Arthur G. Rahn, "Across the Fence Methodology for Valuation of Corridors: What Is It and How Is It Used?" The Appraisal Journal (July 2001): 270-271.
(8.) Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago, IL: Appraisal Institute, 2010), 47.
(9.) Rahn, Corridor Valuation, 7.
(10.) The Dictionary of Real Estate Appraisal, 5th ed., 147.
(11.) Rahn, Corridor Valuation, 31.
(12.) John T. Schmick and Robert J. Stracheta, "Overhead Utility Crossings: Is the Impact Based on Perception or Reality?" Right of Way (July/August, 2010): 29.
(13.) Arthur G. Rahn, "Exploring a Unique Aspect to Transportation Corridor Appraisals," Right of Way (May/June 1999): 15.
(14.) Interagency Land Acquisition Conference, Uniform Appraisal Standards for Federal Lands Acquisition (Chicago: Appraisal Institute, 2000), A-14.
(15.) James D. Eaton, Real Estate Valuation in Litigation (Chicago, IL: Appraisal Institute, 1995), 83.
(16.) Ibid., at 85.
(17.) The Pacific Railway Act, 12 Stat. 489 (1862), Sec. 12.
(18.) See http://www.businesswire.com/news/home/20091103005847/en for details of the transaction.
(19.) John T. Schmick and Robert J. Strachota, "Appraising Public Utility Easements," Right of Way (January/February, 2006): 19.
(20.) George R. Karvel, "Public Utility Easements in Railroad Right-of-Ways," The Appraisal Journal (January 1989): 100.
(21.) The Pacific Railway Act, Ch. 120, 12 Stat. 489 (1862), Sec. 3.
(22.) The Surface Transportation Board (STB) was created in the ICC Termination Act of 1995 and is the successor to the Interstate Commerce Commission.
(23.) City of Creede v. Denver & Rio Grande Railway Historical Foundation, No. 01-RB-318 (D. Colo. May 9, 2003).
(24.) 2005 WL 1024483 (S.T.B. Finance Docket 34376, May 3, 2005). See also Midland Valley R&R v. Jarvis, 29 F.2d 539, 541 (8th Cir. 1928). Examples from Colorado and the 8th Circuit are cited; however, precedent may vary according to jurisdiction, as condemnation laws differ from state to state.
(25.) Ibid., 8.
(26.) Eaton, 243.
(27.) The Dictionary of Real Estate Appraisal, 5th ed., 47.
(28.) Richard J. Zulaica, "Valuing a Corridor Within a Corridor," Right of Way (March/April 2000): 6-9.
(29.) Rahn, Corridor Valuation, 51-58.
(30.) The Dictionary of Real Estate Appraisal, 5th ed., 3.
(31.) Rahn, "Across the Fence Methodology for Valuation of Corridors," 273.
(32.) Rahn, Corridor Valuation, 35.
(33.) John P. Dolman and Charles E Seymour, "Valuation of Transportation/Communication Corridors," The Appraisal Journal (October, 1978): 514, 517.
(34.) Bi-State Development Agency of the Missouri-Illinois Metropolitan District v. Ames Realty Company, 258 S.W.3rd 99 (Mo. App. E.D. 2008).
(35.) Ibid., 108.
(36.) Commonwealth Edison Company v. Illinois Property Tax Appeal Bd., 882 N.E.2d 141, 317 (111. App. Ct. 2d Dist. 2008).
(37.) The Dictionary of Real Estate Appraisal, 5th ed., 47.
(38.) Rahn, Corridor Valuation, 36.
(39.) Charles E Seymour, "The Continuing Evolution of Corridor Appraising (Back to the Basics)," Right of Way (May/June 2002): 16.
(40.) Dolman and Seymour, 520.
(41.) Seymour, 17.
(42.) Dolman and Seymour, 521-522.
(43.) At the same 2002 conference, Charles W. Rex III, MAI, reiterated the acceptance of the methodology and demonstrated its usage, see Charles W. Rex III, "On the Right Track with ATF Corridor Valuation" (RMI Midwest, 2002), 1.
(44.) Rahn, Corridor Valuation, 36.
(45.) Ibid., 37.
(46.) Dolman and Seymour, 516.
(47.) Rahn, "Across the Fence Methodology for Valuation of Corridors."
(48.) Seymour, 17.
(49.) Dolman and Seymour, 521.
(50.) Ibid., 521-522.
(51.) Clifford A. Zoll, "Rail Corridor Markets and Sale Factors," The Appraisal Journal (October 1991): 512.
Internet resources suggested by the Y. T. and Louise Lee Lum Library
Federal Highway Administration http://www.fhwa.dot.gov
International Right of Way Association http://www.irwaonline.org/eweb/startpage.aspx?site=IRWA2010
Rails to Trails Conservancy--Corridor Valuation http://www.railstotrails.org/ourwork/trailbuilding/toolbox/informationsummaries/ corridor_valuation.html
Surface Transportation Board http://www.stb.dot.gov/stb/index.html
by Wayne L. Hunsperger, MAI, SRA, Amy McGuire, JD, and Ron Throupe PhD
Wayne L. Hunsperger, MAI, SRA, is president of Hunsperger & Weston, Ltd., a Greenwood Village, Colorado, real estate appraisal firm specializing in valuation of conservation easements, valuation for eminent domain, and valuation of environmentally impaired properties. He holds both the MAI and SRA professional designations awarded by the Appraisal Institute. He is on the CLE International and ALI-ABA faculties and is a frequent lecturer on the topics of valuation for eminent domain and valuation of environmentally impacted real estate. In addition to being a member of the Appraisal Institute, Hunsperger is an advisor to the Colorado Brownfields Foundation and currently serves on the Colorado Board of Real Estate Appraisers. Contact: firstname.lastname@example.org
Amy McGuire, JD, received her juris doctor from the University of Denver in 2006 and holds a bachelor of science in natural resource management from Colorado State University. She currently works as an associate appraiser at Hunsperger & Weston, Ltd. in Greenwood Village, Colorado. McGuire specializes in valuation of environmentally contaminated properties and real estate appraisals for eminent domain and condemnation proceedings. In addition to being a member of the Colorado Bar, she is a registered appraiser with the State of Colorado and previously held a real estate broker's license. Contact: email@example.com
Ron Throupe, PhD, MRICS, is an assistant professor at the Franklin L. Burns School of Real Estate and Construction Management in the Daniels College of Business at the University of Denver. He is a certified general appraiser who specializes in real estate valuation in litigation, including eminent domain and detrimental conditions. He is a partner with American Valuation Partners in Issaquah, Washington, and was previously the director of operations with Mundy Associates and later Greenfield Advisors, in Seattle. Throupe has a PhD and MBA from the University of Georgia in real estate and finance, along with a BS in civil engineering from the University of Connecticut. Contact: firstname.lastname@example.org
Table 1 Valuation Techniques Approach Definition Procedure Cost A set of procedures Sum of direct and Approach through which a value indirect costs required indication is derived to assemble a like for the fee simple corridor; may include interest in a property environmental impact and by estimating the mitigation costs. Could current cost to also include severance construct a reproduction damages, relocation of (or replacement for) assistance, right of way the existing structure, clearance, as well as including an legal and litigation entrepreneurial fees. incentive, deducting depreciation from the total cost, and adding the estimated land value. (The Dictionary of Real Estate Appraisal, 5th ed., 47.) Income A set of procedures After gross income and Capitalization through which an expenses are estimated, Approach appraiser derives the the residual income of value indication for an the property is income-producing connected or capitalized property by converting into a lump sum present its anticipated benefits value. This can be (cash flows and accomplished in one of reversion) into property two ways: either by value. (The Dictionary direct capitalization or of Real Estate discounted cash flow Appraisal, 5th ed., 99.) analysis. Sales The process of deriving Based on sales of like Comparison a value indication for or similar corridors. Approach the subject property by Market data available comparing market for analysis of corridor information for similar properties is much more properties with property limited than data for being appraised, more conventional identifying appropriate property types. In the units of comparison, and case corridors, an making qualitative important criterion in comparisons with or the selection process is quantitative adjustments the relative density of to the sale prices (or development in unit prices, as substantial portions of appropriate) of the the corridor. For comparable properties example, transactions based on relevant, involving the corridors market-derived elements in areas of similar of comparison. (The density as well as Dictionary of Real similar use are usually Estate Appraisal, 5th the most meaningful ed., 175.) indicators of enhancement factor. (Charles F Seymour and David W. Anderson, "Lessons Learned from Two Decades of Corridor Appraising;' The Appraisal Journal (April 1997): 181.) Liquidation In the valuation of Liquidation value as Value (also transportation/ related to rail known as Net communications corridors is the sum of Liquidation corridors, the current the prices in dollars at Value) appraised market value which the property would of such properties for sell if offered in other than rail parcels to the various transportation (or other owners of adjoining land transportation/ or others. Further, the communication) purposes, property must be on the less all costs of market for a reasonable dismantling and time and should sell at disposition of a price below that of improvements necessary the "market price" as to make the remaining usually defined. (Zoll, properties available for 505.) their highest and best use and complying with applicable zoning, land use, and environmental regulations. (The Dictionary of Real Estate Appraisal, 5th ed., 134.) Going-Concern The market value of all Based on sale of an Value the tangible and operating corridor to intangible assets of an another company in the established and same business. Includes operating business with elements of business an indefinite life, as value. if sold in aggregate. (The Dictionary of Real Estate Appraisal, 5th ed., 88.) Alternative Another term for the Compares cost of Route Theory avoidance of cost acquiring an easement in approach. Assuming that an established corridor demand exists to connect to the cost of selecting two points and that no a different route. existing corridor connects those two points, the only alternative available to a buyer is to acquire a new corridor and encounter all the severance costs, building acquisition and demolition expenses and delays, and political and social obstacles that may be involved. (Dolman and Seymour, 516.) Across the In corridor valuation, a Presumes the corridor is Fence value opinion based on worth at least as much comparison with adjacent as the lands through lands, including the which it passes. consideration of adjustment factors such as market conditions, real property rights conveyed, and location. (The Dictionary of Real Estate Appraisal, 5th ed., 3.) Across the Traditional across the Similar to the across Fence x fence value factored by the fence approach but Corridor the ratio of the market recognizes a premium in Factor value (or market price the marketplace for determined from an assemblage or actual sale) of a aggregation of corridor to the properties into a corridor's across the corridor. fence value. Approach Application Cost Limited application, Approach usually for corridors with structural improvements. Represents the upper limit of value and may range from two to six times the ATF value. Income Limited application. Capitalization Difficult to separate Approach business and real estate income from a small portion of an integrated system, among other limitations. Sales Limited by lack of Comparison arm's-length data but Approach useful to determine corridor factor. Liquidation When highest and Value (also best use is no longer known as Net for a corridor. This Liquidation constitutes the lower Value) limit of value. Going-Concern Limited application Value to eminent domain because compensation is generally not paid for business value. Alternative Limited or no Route Theory application to eminent domain. Based on what the buyer gained, not what the seller lost, thus ignoring the assemblage premium of a corridor. Across the Widely recognized Fence because it best mirrors the market. Supported in real estate appraisal texts and has its roots within ICC guidelines. Across the When highest Fence x and best use is a Corridor corridor. A factor Factor is determined by comparing ratios between sale prices and ATF prices for other corridors that have been sold. The total ATF value of the subject is multiplied by the appropriate ratio to estimate the probable market value of the subject land.
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|Author:||Hunsperger, Wayne L.; McGuire, Amy; Throupe, Ron|
|Date:||Jun 22, 2012|
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