The points in favor of inspection to determine the physical condition of the object to be valued are convincing, where the structure may be readily inspected. Mortality tables mean little without a history of maintenance. With perfect maintenance there would be no physical depreciation.
Maintenance versus Depreciation.—Depreciation and maintenance are interdependent, so much so that some engineers have advocated dropping the term, "depreciation," and substituting "deferred maintenance." A little thought will make this clear. While this term would not apply in the case of a single rail or car, it is not illogical when applied to a system, built and renewed piecemeal and maintained at a certain standard of usefulness, that is, on all well-managed undertakings of magnitude, units are constantly being replaced, thus maintaining a standard of efficiency. This standard, on the entire system, is usually found to be between 70 and 90% of the cost of reproduction. Some items are even improved, and the cost is charged to the maintenance account, such as that referred to in the paper as "consolidation and adaptation" of roadbed; and only a few, such as steel rails, steadily and progressively become less useful, and even these have a bottom value, that of scrap steel. Nor are examples numerous where all the rails are laid at one time, and they are extremely rare where all are replaced at approximately the same time. When the rails on a street or section are renewed, the cost cannot properly be charged to capital account, except in so far as the new rails are of a more valuable type than the old ones; for, if this were done, there would be no limit to the capitalization as time goes on. Furthermore, the moment it is admitted that, by reason of a change in the art, we may have depreciation through obsolescence, we admit that through a change in the art we may have appreciation through the opposite of obsolescence. This being the case, the use of "mortality tables" to determine present value is misleading, unless it is done with the full itemized accounts of maintenance, which are seldom, if ever, available. The author's position in regard to the need of inspection of each item is well taken.
Dead versus Live Properties.—These, perhaps, are not happy expressions, but they serve to emphasize a vital distinction which must be made in the valuation of properties. The difference may be as great as between a corpse and a man; here, also, the distinction is hard to define. We say the soul has departed, or the spark of life is extinguished, but these expressions do not contain a satisfactory scientific definition. So, as Mr. Riggs points out, the physical property of a going business may not be valued as so much junk, even if the non-physical values are to be determined separately.
The Franchise a Contract.—The Courts hold a franchise to be a contract, something often forgotten, both by the public and by corporations. The speaker, however, understands this only to mean, even where the franchise is in perpetuity, that the property of the corporation cannot be taken for public use without just compensation. In a sense, then, there can be no such thing as a perpetual franchise. Using the word franchise with its restricted meaning, the unreasonableness of the rates may be measured by the value of the franchise.
Physical versus Non-Physical Values.—The following division has been made by the author between physical and non-physical property, for the purpose of valuation:
"That the Physical Value, or present value of the physical property, should fairly represent the actual capital invested in the property at the date of appraisal; that it should be made up of the sum of the various elements which constitute the cost of reproducing the property together with any appreciation which may have been added to any of them, less all depreciation.
"That the Non-Physical Value is the difference between the 'fair value' as defined by the Courts, or the reasonable value of the property as a business or producing property, and the physical value, or actual present worth; and that the only proper method for determining such values involves a study of income accounts.
"This Non-Physical Value may be: positive, or a value in excess of the physical property, or negative, or less than the physical value. In the case of a property having a negative intangible value, a deduction should be made from the physical value."
This division is convenient but arbitrary. It is the division of an engineer rather than of an economist; for these so-called non-physical values are like the breath of a man's life; without them, the physical value is like the discarded body. Again, the use of negative non-physical values, while convenient, may not be wholly logical. These remarks are not directed at Mr. Riggs, for he is careful to say that he is dealing only with active enterprises, and not with those which are inert, and the speaker realizes that he is not attempting primarily to build up a logical argument, but to formulate certain rules to overcome practical difficulties met by all who have attempted valuation work. As many who have not given this matter much thought are apt to be misled by the distinction made between physical and non-physical values, they should bear in mind that the line between them is like the equator, an imaginary one.
Water.—"The water is as much a part of the cost of putting that line there as the rails," remarked a corporation official, of admirable character and wide experience, pointing to a trolley line from the window of a Pullman car; and, bearing in mind what he meant by "water," this is undoubtedly so. The cost of promoting the enterprise, the discount on the hazard, the loss of interest during its infancy, the labor of building up the undertaking—these are all real elements of cost, and may remain in the property as value, but, like all other items of cost, they have their reasonable limits, which, in each individual case, can be determined within narrow bounds.