It is the writer's opinion that the application of an intangible subtractive value is the proper solution, except in the case of roads which would not to-day be rebuilt. In fixing a uniform price for identically the same labor or material, whether on a small poverty-stricken road or a main trunk line, no serious injustice is done, provided the price fixed is one which, from a strictly engineering standpoint, is a reasonable figure for cost of reproduction. The differences in class are due, not to special differences in cost of physical property, but rather to differences in earning ability on account of good or poor territory served, efficient or inefficient management, or other reasons not connected with the physical structure; hence such differences are reflected in the earnings, and are clearly elements to be adjusted in the non-physical valuation.
(b) Unit Values.—The general reliability of the appraisal rests very largely on the reasonableness and fairness of the various prices which are applied to the different parts of the property in making the estimate of cost of reproduction. These unit prices should be determined before any actual figures are made. They should be made up from the most complete data available, and, before being tabulated, should be carefully reviewed by all the experienced men engaged on the appraisal, in order that no figure which is either too high or too low may be used.
As a basis, the average of either 5 or 10 years should be used in preference to current prices on all such material and equipment as is fairly stable. Rail, and all forms of rail structures, machinery, locomotives, cars, etc., can be reduced to such a unit that averages can be secured which will eliminate the error due to a period of extreme high or low prices.
In the case of such materials as lumber and ties, the price of which has been steadily rising, due to the growing scarcity of the material, a price based upon a long average is unfair to the corporation, and it would appear to be proper to use current prices. There can be no hard-and-fast rule which will be applicable to all appraisals. The unit prices must be such reasonable figures as can be sustained in Court. Their adoption should not be final until every possible test of their accuracy and reasonableness has been made. When they have been adopted, and such modification made as may be fair for certain territory, on account of local conditions, transportation facilities, or other consideration which may affect them, the adopted figures should be applied to all property alike. The use of different unit figures for different roads in the same territory is highly undesirable, and should be avoided.
(c) Right of Way and Real Estate.—The valuation work which has been accomplished during the past decade, and the study of values for taxation and rate-making, have brought into prominence the perplexing features of land values as applied to corporation property. It is comparatively simple to fix within very close limits the reproduction cost of tracks, bridges, locomotives, or any of the other elements of physical structure. Not so with the land. A few years' development may change farm land right of way into city right of way, surrounded by factories, or it may change desirable residential property adjacent to a road into slums.
In view of the clear language of the Court in 82 Fed., 839, and 157 Fed., 849, it is evident that any valuation which does not take into account the appreciation or depreciation of land values cannot be sustained. There can be no serious objection to the doctrine that the property of a corporation generally increases or decreases in value in the same proportion as adjacent property, and it must therefore be admitted that a value based on the sale value of adjacent lands is a reasonable one and must stand. This reasoning, of course, will be subject to exceptions, in the case of terminal properties, docks and water-front properties, and right of way in large cities, but it is believed to be sound when applied to right of way in the country and in small towns and cities.
The next question to be determined is whether the increment of value due to the use of the land is a proper one. It would appear that in the use of land for water-works, gas-works, street-car barns, or other isolated tracts of land used for corporation purposes, this increment would be much less than in the case of a steam or interurban railroad, the holdings of which form a continuous and unbroken strip; and, in the case of street railroads, water-works, and like properties, it would be indeed difficult to compute and afterward sustain any considerable increment.
In the case of railway properties, however, it is quite evident that the following facts can be sustained: The actual cost of property purchased for railway purposes will range from two and one-half to five times the selling price of similar and adjacent property used for other purposes. While the actual percentage will vary somewhat, as between land in cities and in the country, and as between fully settled districts well served by roads and sparsely populated regions, yet the difference is very marked, and is capable of determination by an examination of the public records.
This difference can be determined either by a comparison of railway purchases and other transfers, as was done in the later studies in Michigan and in Wisconsin, or by extending the investigation to include assessed valuations, and using the averages, as was done in the work of Mr. Morgan in Minnesota.
In establishing figures for use in a valuation, it would appear to be better to base them on an analysis of actual transfers than to undertake to fix values by any methods of examination and personal appraisal. Enough instances of the wide divergence of expert opinion have been cited to show conclusively that such a method, applied to the thousands of acres of a large corporation, may lead to serious error.