If an engineer, or a commission of engineers, is directed to examine a certain property and report the true cost of reproduction, depreciation, or present value, taking into account all facts connected therewith, the final figures should not differ, whether the report is to be used as a basis for reorganization, sale to another corporation, or is to be used by a State legislature as a basis for formulating a rate bill, or as a basis for a value for taxation. The result secured is a necessary preliminary on which depends the accuracy, fairness, and justice of the other work which is to follow. This is an engineering work, a statement of certain physical property, the estimated cost of reproducing it new, less the estimated depreciation, and, beyond the differences due to personal judgment, these figures may not vary.
The word "value" is in common use, and yet, in the minds of many people, its exact meaning is vague. It is true that the "value" of a property is an unstable figure, subject to fluctuations due to natural or artificial causes, and that a material change in value may occur suddenly, but the "value" of any given property on any given date is, or should be, from an engineering standpoint, a definite sum which may not be varied or changed to suit the whim or will of the people for whom the work is done.
In all the subsequent discussion of values and methods of obtaining values, it is assumed that, unless specifically limited to a determination of cost of reproduction and depreciation, a valuation commission should be governed by the following rules:
1.—No account may be taken of the purpose for which the resultant figure of value is to be used; and the result should not vary, no matter what that purpose may be.
2.—The resultant figure should be the honest judgment of the men composing the commission, as to the actual cost of reproduction, present physical value, or "fair value," and should be ascertained by a systematic and scientific method which takes into account all the facts concerning the property, its physical value, its strategic location, its operating revenues and expenses, and its franchises, rights, competition, opposition, and all other tangible or intangible elements which would affect values. The method of valuation should be such as to minimize or entirely eliminate all differences due to errors of personal judgment.
3.—All properties being appraised are considered as operating properties. One which is dead, inert, and not in use, cannot be considered as coming under such a discussion as this, and such properties are not treated in this paper. The term "going concern" is not used in connection with the physical property, any element of value implied by the term, over and above the "overhead charges," being treated as an intangible or non-physical element of value.
In stating this position, the writer is aware that it is a difficult matter indeed to get away from the fact that some specific purpose—taxation, for example—is the definite end in view in every valuation, and that, instinctively, men engaged on the appraisal will find themselves modifying their figures to meet some real or fancied condition which they conceive might arise, or to prevent some injustice which they believe might be done. Every subordinate employee needs to be watched, every man in charge must watch himself, or he will find himself unwittingly, almost instinctively, coloring his results by some old prejudice of his early years of employment, or some loyalty to his own ideas of governmental or economic policy. The writer has noted this in every appraisal on which he has been engaged, and calls particular attention to it as the first difficulty which must be overcome in the organization of the force for a large appraisal.
In the following pages all complications which might arise from the purpose of the appraisement are considered as eliminated, and the possibility of erroneous conclusions being reached by reason of the personal factor (while recognized as being ever present) will not be specially emphasized.
[1]. Presented at the meeting of January 4th, 1911.