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Rail right-of-way valuation.

Several thousand miles of rail right-of-way have been abandoned in the United States over the last 20 years. In a number of cases they have simply been disassembled and sold on a piecemetal basis. When an alternative corridor use is found, however, a right-of-way may well sell at more than at-the-fence (ATF) value.

During 1970s the concept of net liquidation value, which included the premise that the highest and best use of rail right-of-way was for non-rail purposes, dominated the valuation of rail right-of-way. Many Eastern railroad companies were then in bankrutpcy. To preserve a semblance or rail service, the United States Congress enacted the Regional Rail Reorganization Act of 1973 and the Railroad Revitalization and Regulatory Reform Act of 1976. In addition, the Consolidated Rail Corporation and Amtrak were created. The rights-of-way of many bankrupt roads were conveyed to these new corporations using legislatively and administratively defined concepts rather than market value concepts. (1)

In the current market appraisers may be asked to value rail rights-of-way because of abandonment, to facilitate the sale of individual parcels subsequent to abandonment, and for alternative corridor use.



National carriers currently analyze routes to determine their profitability. When a particular route is unprofitable and is likely to remain so, service is often discontinued. In some instances, the tracks may be leased to a regional carrier who is in a position to operate more profitably than the national carrier. (2) In other cases, a national carrier may decide to abandon the line. Because it is the public policy of the United States to maintain rail service when possible, abandonment is not a unilateral decision of the carrier. Any abandonment proceeding must be files with the Interstate Commerce Commission (ICC).

Users of rail service and the public in general have the right to oppose an abandonment. If, however, the ICC determines that an abandonment is appropriate, the carrier involved must first offer the right-of-way to other railroads.

The ICC has established guidelines for valuing a right-of-way in an abandonment proceeding. When an abandonment is contemplated, the appraiser must follow ICC guidelines. Those guidelines were first delineated as a result of the Chicago and Northwestern Transportation Company abandonment between Ringwood, Illinois, and Geneva, Wisconsin. The ICC decision indicated that the concept of net liquidation value should include portions of right-of-way owned in fee only and that other rights in land were not to be valued, which is the general rule. In respect to easements and other lesser interests, state law is followed. This policy further requires an appraiser to consider the disposition of a number of small land parcels, the cost of marketing those parcels, and the preparation of documents of conveyance as well as the time involved in marketing. (3)

In this article, "Rail Corridor Sales," Clifford A. Zoll discusses the Staggers Rail Act of 1980 and the decision of the ICC in the Chicago and Northwestern Transportation Company Abandonment. According to Zoll, "The Staggers Act has brought an entirely new dimension to the appraiser's approach to the valuation of rail corridors. Because of the flexibility of the Act, many railroads now request the appraiser to estimate first the net liquidation value as interpreted by the ICC in C & NW GLA hearing and then provide either an ATF value estimate or a going-concern value estimate." (4) The ICC definition of value for abandonment purposes is as follows.

The net liquidation value, for their highest and best non-rail use purposes, of the rail properties on the line to be subsidized which are used and required for performance of the services requested by the person offering the subsidy. This value shall be determined by computing the current appraised market value of such properties for other than rail transportation purposes, less all costs of dismantling and disposition of improvements necessary to make the remaining properties available for their highest and best use and complying with applicable zoning, land use, and environmental regulations. (5)

In an abandonment appraisal, and appraiser normally estimates the ATF value of land adjacent to the right-of-way. The characteristics of adjacent land are likely to be at least somewhat different than the characteristics of the right-of-way--particularly in terms of topography, shape, and soil characteristics. Typical purchasers may therefore assign the right-of-way a different value than that of surrounding lands. When possible, an appraiser should research case studies on past right-of-way sales to determine the difference, if any, between the ATF values assigned by the marketplace and the values of actual rights-of-way.

In the experience of the author, typical buyers are willing to pay between 40% and 60% of ATF values for agricultural lands in the Midwest. On a parcel-by-parcel basis, considerable variation occurs. The 40% to 60% range represents a typical reaction to right-of-way offerings. The difference is less a result of size and shape than of the fact that a typical buyer must bear the cost of clearing a right-of-way to merge it into a farming operation. To some extent, a typical buyer also considers the fact that because some ballast will remain in the cleared right-of-way, the productivity of a right-of-way is somewhat less than that of adjoining lands--particularly in dry years. Further, a typical buyer places a right-of-way under a heavy program of fertilization for the first two years to four years to bring the former right-of-way to reasonable productivity levels.

The reaction of buyers to urban land may be different. In many instances, urban right-of-way is at grade or nearly at grade with surrounding lands, and little, if any, clearing is required. In such cases a buyer may be willing to pay ATF value for that land. Unlike in agricultural areas, productivity is not a considertion in urban settings.

Often railroads own land outside of an operating right-of-way. Such parcels as former station sites as well as excess land acquired for nonoperating use are typically excluded from an abandonment appraisal. It therefore is necessay to appropriately classify operating and nonoperating lands.

In most instances, case studies can serve as a basis for discouting ATF values. The costs associated with a sale of a number of small parcels must then be considered. These costs include brokerage fees and legal fees. It appears reasonable, for example, to apply prevailing brokerage fees in the area as a sales expense, and to provide for deed preparation and other legal expenses.

The last step in an abandonment valuation is to consider the issue of a holding period. Some right-of-way parcels may be attractive to adjoining property owners and will thus sell quickly. In other cases, the parcels may be less attractive to or the adjoining property owners may not have the financial strength to acquire them. Such parcels may take longer to sell. With the help of an aggressive marketing effort, a typical disposal perior for a stretch of rail right-of way is from one year to three years. However, a typical holding period is more difficult to define. The author has thus arbitrarily assinged an average holding period of approximately 1.5 years and further discounted the value of the right-of-way by a present worth factor that reflects the risk associated with investments in land.

While the ICC definition value for abandonment purposes raises the issues of the cost of dismantling as well as the disposition of improvements, these aspects have not been factors in the author's past assignments. Typically, the salvage value of rail, ties, and other track materials greatly exceeds the cost of their dismantling. When a property is not conveyed to another railroad company, the rail and other track materials are usually salvaged. Depending on the status of the metals market, this can be extremely profitable to a railroad company.



Occasionally, an appraiser may be asked to value specific land parcels that have previously been abandoned. In such cases, ICC guidelines do not apply. While it is appropriate to consider whether the market reacts differently to right-of-way than it does to ATF property, the consideration of sale expense and legal fees required under ICC regulations is not necessary. The discount for a holding period may be applicable, depending on the nature of the specific parcel to be appraised.

In an abandonment appraisal, an appraiser may analyze several hundred parcels. In a post-abandonment appraisal, however, an appraiser typically examines one parcel. In the case of a single parcel, the motivations of typical buyers are both easier to consider and more significant. In some instances, those motivations might cause a buyer to be willing to pay more than ATF values. For example, a right-of-way that cut diagonally across several farming parcels sold to surrounding property owners for more than ATF value. Their motivation was to join their farms into a single unit and to eliminate point rows, thus increasing the efficiency of overall farming operations.

In another instance, a right-of-way in an industrial area also sold for more than ATF value. The purchaser, an adjoining land owner, was able to significantly increase the security of his industrial facility by acquiring the right-of-way and fencing it. In older areas, buildings commonly encroach on rail right-of-way. After abandonment, a premium may be attached to those parcels on which an encroachment exists.

Post-abandonment appraisals are market value appraisals; therefore, prevailing appraisal theory and practice are followed. This is not the case in an abandonment appraisal because of the use of net liquidation value concepts, even though the process begins with the market value of ATF parcels.

Corridor Enhancement

An early reference to the possibility of enhanced value for rail corridors appears in George R. Beetle's "Railway Right-of-Way Use and Economic Value," in which he notes that, "Proposals to abandon railroad branch lines are numerous today. If those proposals are implemented, many miles of assembled right-of-way may be lost. The difficulties encountered and the costs incurred by many in recent years attempting to assemble new right-of-way confirm the fact that assmbled right-of-way represents a resource for society that should not be discarded lightly. Railroad right-of-way now perceived as uneconomic may have valuable future uses for highways, utility lines, pipelines, and even special-purpose railroads that may become necessary if energy resources continue to be depleted. (6)

Further, John P. Dolman and Charles F. Seymour list 22 alternative corridor uses in their article, "Valuation of Transportation/Communication Corridors," observing that, "A long narrow strip of land has value because of its ability to connect two points with resulting benefit. If there is economic advantage to connecting these points with a long narrow strip of land, it becomes a transportation/communications corridor, which, in truth, enjoys special value characteristics." (7) Dolman and Seymour further not that "The best evidence of real estate value usually is the price obtained for similar properties in the market place. . . . The two sources of data to development enhancement factors are acquisition cost of a substitute corridor and sales of other existing corridors." (8)

In "Rail Corridor Sales," Zoll examined 82 right-of-way sales between 1975 and 1983. Of those transactions, 72 involved abandoned corridors, 46.34% were purchased for continued transportation use, 14.64% were for return to agricultural use, and 13.41% were for transmission line use.

One of the main objectives of this analysis is to determine the relationship of an appraiser's at the fence (ATF) estimated unit value to the sale unit price to determine what effect, if any, continuity has on sale prices. In 41 transactions the independent appraiser's per acre unit value and per acre ATF unit value were furnished. In these 41 cases, the range in ATF unit value to sales price was 0.18 to 3.73. The median ratio was 1.0000. Twenty sales had ratios below 1.0000, 21 sales had ratios of 1.0000 or above, and the ratios above 1.00 ranged from 1.05 to 3.73.

Two of the sales whose ATF/sale price ratios were below 1 (0.96 and 0.873) included in the total sale price a very substantial amount of non-real estate. "Engineering" succeeded in getting a major portion of the price allocated to non-real estate either to avoid showing a loss or to minimize loss for that department. The amount remaining was allocated to real estate and was not representative of the corridor price. This may be the case with other sales with ratios below 1.00, because in many sales only a small portion of the price was allocated to real estate. In most sales with ratios above 1, however, the full sale price applied to real estate and none to non-real estate. (9)

In respect to rail corridors, Zoll concludes that, "When a need for a corridor exists, a reasonable ATF price ratio will vary from 1.10 to 2.00 depending upon the extent of the need and the cost of substitution. The upper range of this ratio may be higher in special urban situation." (10)

In a working paper, David Harris equates the value of rail corridors to the cost of acquiring electrical transmission line easements in Mississippi and Tennessee. His analysis of the acquisition of some 241 parcels reveals that of total costs, the land costs were approximately 55% and acquisition costs were 45%. (11) Clearly, ATF values are not the only component to consider when a corridor is prepared for use.

Harris further notes that the Tennessee Department of Transportation estimates its administrative costs at $2,500 per parcel and that, if condemnation is involved, those costs are 33% of the fee simple value. (12) In the case of the Virginia Department of Transportation, administrative costs were estimated at $1,500 per parcel, and condemnation costs at approximately 30% of fee simple value.

Harri's study shows that significant differnces exist between the acquisition of an electrical transmission line and a rail corridor. He suggests such adjustments as changing from easement to fee simple, accounting for more significant damages to the residue, and considering administrative costs, and concludes that the corridor enhancement factor may be as much as 2.52 times greater than ATF value. This estimate is within the range of enhancement factors found in the Zoll study previously discussed. Both the Zoll and Harris studies support the general conclusion reached by Dolman and Seymour that, when economic benefit is derived, corridor enhancement value exists. In addition, the acquisition cost of an existing corridor clearly may be less than the cost of establishing a new corridor, and an existing corridor also may be acquired more quickly. Both, however, are economically beneficial to a potential user of the corridor.

In 1985 a railroad acquired 28.63 acres in northeastern Indiana. The purpose of the acquisition was to establish a new rail corridor to serve an industrial plant. The acquired land area was in a largely agricultural neighborhood. The acquisition cost was $13,338 per acre, which was substantially higher than prevailing agricultural values. This transaction demonstrates the relatively high cost of acquiring new corridors.

The author has examined several transactions in which a premium has been paid for a corridor. For example, in 1989 Penn Central Corporation sold 21.85 miles of right-of-way averaging 100 feet in width to a pipeline company in east central Indiana. The purchase price was equivalent to $1,159 per acre. ATF values were $500 per acre to $700 per acre. Assuming an average ATF value of $600 per acre, this sale produced an enhancement factor over ATF values of 1.93. In another instance, in 1986 a railroad sold 24.2 acres in 4.14-mile strip to a power company. The property, located in northeastern Indiana, was purchased at approximately $2,479 per acre. At the time, the prevailing agricultural values were from $600 per acre to $700 per acre. Assuming an average ATF value of $650 per acre, this corridor enhancement premium was 3.8 times ATF values. Another case occurred in 1981, when Penn Central Corporation sold 16.7 miles of right-of-way in Ohio to a utility company for $3,125 per acre. Land values in the area ranged from $1,250 per acre to $2,439 per acre. Again, there is evidence of enhanced corridor value. Finally, in 1984, a railroad sold 15.5 miles in central Illinois to a utility company for $2,794 per acre for the 187.88 acres. When contrasted with their sale in the following year of 20 miles for non-corridor use at $536.26 per acre, the corridor sold for approximately 5.29 times the disassembly or speculative purchase price in the same locale.


The relevant rail right-of-way literature reveal that both at the time of rail reorganization in the 1970s and under current ICC regulation, rail right-of-way has been valued differently depending on whether for legal or administrative purposes. Such approaches do not conform with normal market value definitions.

Further, those familiar with the valuation process clearly perceive that corridor values may be greater than ATF values. The independent studies of both Harris and Zoll, respectively, suggest that viable corridors have a value higher than ATF value. The Zoll study is particularly relevant because it is based on the analysis of actual rail corridor transactions. The author's investigation of rail corridor transactions suggests that enhancement of corridor values does occur. That enhancement generally is within the range of 1.10 to 3.73 found in the Zoll study.

In the case of rail corridor enhancement, several unresolved issues remain. The fact that a number of rail corridors have been disassembled and sold piecemeal implies that not every corridor is a candidate for non-rail corridor use. Little research has been undertaken to identify which attributes make a continuation of a corridor viable.

Another issue is timing. Some corridor sales examined by the author in which a premium was paid occurred considerably later than the abandonment. Thus, even if a particular strip of rail right-of-way has attributes that make it a viable corridor for non-rail use, there is no assurance that the non-rail use will emerge quickly. In some instances, holding cost and opportunity cost could conceivably offset the enhanced value finally received.

(1) For a general discussion of net liquidation value, administrative and legal matters, see Edward B. Atherton, "The 120,000-Mile Valuation Problem," The Appraisal Journal (July 1978): 340.

(2) More regional carriers are in existence than is commonly thought. The Official Railway Guide, (New York: International Thompson Transport Press, Sept.-Oct 1989) for example, lists over 20 regional carriers operating in Indiana. These carriers operate from as few as 1 mile or 3 miles of tracks to 150 miles or more of tracks. See pages C98-C103.

(3) Interstate Commerce Commission, AB-1 (Sub-No. 70F), Chicago and Northwestern Transportation Company-Abandonment Between Ringwood, Illinois, and Geneva, Wisconsin, 1981.

(4) Clifford A. Zoll, "Rail Corridor Sales," The Appraisal Journal (July 1985): 381.

(5) ICC Regulation 49 C.F.R. [section] 1152.3 (c).

(6) Georged R. Beetle, "Railway Right-of-Way Use and Economic Value," The Appraisal Journal (October 1977): 518.

(7) John P. Dolman and Charles F. Seymour, "Valuation of Transportation/Communication Corridors," The Appraisal Journal (October 1978): 515

(8) Ibid., 519.

(9) Zoll, 384.

(10) Ibid., 387

(11) David Harris, unpublished working paper, 1989.

(12) Ibid.

Frederick D. Miltenberger, MAI, is principal in Miltenberger Associates, real estate appraisal and consulting firm in Muncie, Indiana. He received both a BS and an MBA in real estate from Indiana University.
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Author:Miltenberger, Frederick D.
Publication:Appraisal Journal
Date:Jan 1, 1992
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