1st
Pass
abstract
The methodology for
transit and communication corridor valuation
Transit Corridor Valuation:
Issues and Methods
by Wayne L. Hunsperger, MAI, SRA, Amy McGuire, JD, and
Ron Throupe PhD
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.
T
he 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 1 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
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.
235 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
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.
Assemblage
Corridors are generally created by assembling two or
more parcels into a strip of land used for transportation
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.
236 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
or transmission purposes. Assemblage, in and of itself,
does not necessarily create added value.
Plottage
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.
Multiple Uses
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.
Limited-Market Property
While there is some disagreement in the literature
about whether a corridor constitutes a specialpurpose 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.
Larger Parcel
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 landuse 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.
10.The Dictionary of Real Estate Appraisal, 5th ed., 147.
11.Rahn, Corridor Valuation, 31.
12.John T. Schmick and Robert J. Strachota, “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.
Transit Corridor Valuation: Issues and Methods
The Appraisal Journal, Summer 2012
237
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.
Contiguity
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.
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.
238 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
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
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.
Transit Corridor Valuation: Issues and Methods
The Appraisal Journal, Summer 2012
239
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.
Valuation Methodology
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, it 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 × 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.
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.
240 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
Table 1Valuation Techniques
Approach
Definition
Procedure
Application
Cost Approach
A set of procedures through which
a value indication is derived for the
fee simple interest in a property by
estimating the current cost to construct
a reproduction of (or replacement for)
the existing structure, including an
entrepreneurial incentive, deducting
depreciation from the total cost, and
adding the estimated land value. (The
Dictionary of Real Estate Appraisal, 5th
ed., 47.)
Sum of direct and indirect
costs required to assemble
a like corridor; may include
environmental impact and
mitigation costs. Could also
include severance damages,
relocation assistance, right of
way clearance, as well as legal
and litigation fees.
Limited application,
usually for corridors
with structural
improvements.
Represents the
upper limit of value
and may range from
two to six times the
ATF value.
Income
Capitalization
Approach
A set of procedures through which an
appraiser derives the value indication
for an income-producing property by
converting its anticipated benefits (cash
flows and reversion) into property value.
(The Dictionary of Real Estate Appraisal,
5th ed., 99.)
After gross income and
expenses are estimated, the
residual income of the property
is connected or capitalized into
a lump sum present value. This
can be accomplished in one
of two ways: either by direct
capitalization or discounted
cash flow analysis.
Limited application.
Difficult to separate
business and real
estate income, from
a small portion
of an integrated
system, among other
limitations.
Sales
Comparison
Approach
The process of deriving a value
indication for the subject property
by comparing market information for
similar properties with property being
appraised, identifying appropriate
units of comparison, and making
qualitative comparisons with or
quantitative adjustments to the sale
prices (or unit prices, as appropriate)
of the comparable properties based
on relevant, market-derived elements
of comparison. (The Dictionary of Real
Estate Appraisal, 5th ed., 175.)
Based on sales of like or
similar corridors. Market
data available for analysis of
corridor properties is much
more limited than data for more
conventional property types. In
the case corridors, an important
criterion in the selection
process is the relative density
of development in substantial
portions of the corridor. For
example, transactions involving
the corridors in areas of similar
density as well as similar use
are usually the most meaningful
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.)
Limited by lack of
arm’s-length data but
useful to determine
corridor factor.
Liquidation Value
(also known as
Net Liquidation
Value)
In the valuation of transportation/
communications corridors, the
current appraised market value of
such properties for other than rail
transportation (or other transportation/
communication) 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. (The Dictionary
of Real Estate Appraisal, 5th ed., 134.)
Liquidation value as related to
rail corridors is the sum of the
prices in dollars at which the
property would sell if offered in
parcels to the various owners of
adjoining land or others. Further,
the property must be on the
market for a reasonable time
and should sell at a price below
that of the “market price” as
usually defined. (Zoll, 505.)
When highest and
best use is no longer
for a corridor. This
constitutes the lower
limit of value.
Transit Corridor Valuation: Issues and Methods
The Appraisal Journal, Summer 2012
241
Table 1Valuation Techniques continued
Approach
Going-Concern
Value
Definition
The market value of all the tangible and
intangible assets of an established and
operating business with an indefinite
life, as if sold in aggregate. (The
Dictionary of Real Estate Appraisal, 5th
ed., 88.)
Procedure
Application
Based on sale of an operating
corridor to another company in
the same business. Includes
elements of business value.
Alternative Route Another term for the avoidance of cost
Theory
approach. Assuming that demand
exists to connect two points and that
no 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 Fence In corridor valuation, a value opinion
Limited application
to eminent
domain because
compensation is
generally not paid for
business value.
Compares cost of acquiring an
easement in an established
corridor to the cost of selecting
a different route.
Limited or no
application to
eminent domain.
Based on what the
buyer gained, not
what the seller lost,
thus ignoring the
assemblage premium
of a corridor.
Presumes the corridor is worth
based on comparison with adjacent
at least as much as the lands
through which it passes.
lands, including the 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 Fence Traditional across the fence value
× Corridor Factor factored by the ratio of the market value
(or market price determined from an
actual sale) of a corridor to the corridor’s
across the fence value.
Widely recognized
because it best
mirrors the market.
Supported in real
estate appraisal texts
and has its roots
within ICC guidelines.
Similar to the across the fence
approach but recognizes a
premium in the marketplace for
assemblage or aggregation of
properties into a corridor.
The term across the fence, as used herein, is
defined as follows:
The literature is replete with articles on the
appropriateness/inappropriateness of the across the
fence method. Typical statements in the following:
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
When highest
and best use is a
corridor. A 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.
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
30.The Dictionary of Real Estate Appraisal, 5th ed., 3.
31.Rahn, “Across the Fence Methodology for Valuation of Corridors,” 273.
242 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
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, noncorridor 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 the 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
× corridor factor method.
Across the Fence Methodology x Corridor Factor
The across the fence × 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
× 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
32.Rahn, Corridor Valuation, 35.
33.John P. Dolman and Charles F. 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 (Ill. App. Ct. 2d Dist. 2008).
37.The Dictionary of Real Estate Appraisal, 5th ed., 47.
38.Rahn, Corridor Valuation, 36.
39.Charles F. Seymour, “The Continuing Evolution of Corridor Appraising (Back to the Basics),” Right of Way (May/June 2002): 16.
40.Dolman and Seymour, 520.
Transit Corridor Valuation: Issues and Methods
The Appraisal Journal, Summer 2012
243
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 right of way.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
Corridor Factor
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.
That is, 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 43 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 ±1.50. Seymour’s published
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.
244 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
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
7.Length
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
Liquidation0.25–0.50
Continued use
Acquisition4.00–6.00
1.00–1.74
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.
Summary
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 × 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.
Conclusion
For more than a century, the methods available for
use in valuation of rail corridors were debated. The
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.
Transit Corridor Valuation: Issues and Methods
The Appraisal Journal, Summer 2012
245
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.
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: [email protected]
Amy McGuire, JD, received her juris doctorate 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 protected]
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: [email protected]
246 The Appraisal Journal, Summer 2012
Transit Corridor Valuation: Issues and Methods
Web Connections
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
Transit Corridor Valuation: Issues and Methods
The Appraisal Journal, Summer 2012
247