Non-Physical Values.

TABLE 2.—Country Land.—Additional Strip for Widening Right of Way, Gravel Pits, Etc.

Actual purchases are averaged from recent transfers, and represent consideration paid owners, but not cost of acquiring.

The 1900 appraisal averages show country land after fixed charges and percentages are added.

The tables given herewith are summarized from a very large mass of information introduced as evidence in a suit of Michigan Central Railroadet al.vs.Powers (The Michigan Tax Cases), and are selected as average examples of conditions throughout the Southern Peninsula.

It is evident from the figures in Table 2 that no such naked land values as those used in 1900 were considered by the farmers in placing values on their lands, as the sales covered in that table do not involve any large element of damages. All transfers are of a strip a rod or more in width adjoining an existing right of way.

II.—It is true that in some sections of Michigan there are large tracts of barren or low-priced land. In 1900 barren land prices were used, and were much lower than farm land; in the poorer parts of the State large percentages of barren land were used. This fact brought the average per acre of country land, as applied in the appraisal, very low in many of the counties, and justified the appraiser in using the average country price of 1900 as the base price for a re-valuation. Generally, the 1900 appraisal averages for country lands were fair indices of the difference in actual value in different parts of the State.

In the 1900 appraisal, the Michigan Central was credited with having, in Jackson County, 309.1 acres of farm land (naked value, $38, average rate $93.30), and 34.35 acres of barren land at $5 per acre. The field inspectors reported that part of the district between Parma and Albion, in the vicinity of Bath Mills, was waste or barren land. The Jackson and Battle Creek Traction Company parallels and adjoins the Michigan Central Railroad right of way from Parma to Bath Mills. An investigation of records of deeds showed that they bought 25.02 acres of land in this district at $65.79 per acre, and that the average price of all their land in the county was $239.52 per acre.

While there was a marked difference in the rates of different grades of country land, no one would be justified in putting any land south of a line drawn from Saginaw to Muskegon at prices as low as $2 to $10 per acre. An average based on the 1900 classification of lands would probably eliminate all waste land classifications, without doing any injustice.

TABLE 3.—Average Values per Acre of Country Lands, of the 1900 Appraisal, of the Jackson, Lansing and Saginaw Railroad, After All the Percentages and Fixed Charges were Added.

Table 3 illustrates quite clearly the extremely low figures applied in many counties in the 1900 appraisal, and also represents quite well the relative difference in value in the different counties.

That the 1900 rate varies about as the purchase price, is shown by the fact that the Pere Marquette Railroad built a line in Montcalm County, buying 155.3 acres at an average price of $135.19 per acre, while the 1900 appraisal showed an average of $29 on the 918 acres appraised. The purchase price was 4.66 times the 1900 appraisal.

In Calhoun County, the Grand Trunk Railroad bought 63.2 acres at $491.13 per acre, while the 1900 appraisal was $61.44 on all the country land in the county, or only one-eighth of the actual purchase price.

III.—There can be no doubt that a railroad right of way costs much more than an equal acreage of farm lands. The writer has always been inclined to hold the view that an ordinary right of way through good farming country would cost from two to three times farm prices, no matter how much care is used in the acquisition of the land. In recent years the price of right of way has been greatly increased. The Newton and Northwestern Railroad right of way, in Iowa, cost $267 per acre, on a line 80 miles long. This is nearly all country land, about 1 mile in the outskirts of Boone (population 12,000), and about ½ mile in Newton (population 6,500), being the only city land to increase the average. The Rock Island System and the Chicago Great Western paid higher country prices in the same territory. This line is in such country as Southern Michigan, and land is held at from $65 to $100 per acre.

The Toledo Urban and Interurban right of way, in Lucas County, Ohio, was bought by the writer in 1901 at an average net price of $329.21 per acre. The average assessed valuation is $55 per acre. The going value of farm lands will range from $100 to $225; probably a fair average is $135 per acre. The prices paid by Michigan railroads are fully sustained by these personal experiences.

The figures in Table 4 show that the actual average price paid for new right of way is greater than the average of the 1900 appraisal, after the 125% and fixed charges are added, by from 230 to 726 per cent.

The argument that a change of line costs more than a new line is not sustained by Table 4. In Jackson County, the Michigan Central Railroad changed its line at an average cost of $165.67 per acre. The Jackson and Battle Creek, a new line, parallel with and adjoining the Michigan Central, paid $239.53; the Jackson and Suburban, a new electric line, paid $293.34, and the "Ypsi-Ann" Electric paid $393.74. All the new lines in Monroe County are higher than any changes of line in similar country. The Ann Arbor change in Washtenaw County, located by the writer, is at one point 3 miles from the old right of way, and only at the two ends of the 7-mile line does it run on farms owned by parties crossed by the old road; therefore, to all intents and purposes, it is a new line.

The naked land values used in 1900, being clearly too low, were of no use and were dropped. The so-called market price of right of way as given in 1900 was misleading.

TABLE 4.—Comparison of Country Land Values.

The actual purchases are averaged from recent transfers, and represent consideration paid to land owners, but not the cost of acquiring.

The 1900 appraisal averages show all country land after fixed charges and percentages were added, per rule of 1900.

Having shown that there is an increase in cost of railroad over farm land, the question arises: Is it legitimate? If it is a proper item of cost, has it a place in the present value column?

In building a new railroad, engineers prepare their estimates of cost, including grading, rail and fastenings, ties, bridges, and, among other items, right of way. Their clients provide funds to build the line, and furnish, among other items, cash for the right of way. The right-of-way account in no wise differs from that of any other item of physical cost. The right of way, with all its hold-ups, items for damages, court costs, legal expenses, bills for personal services and expenses in securing it, abstracts and recording of deeds, is just as much an element of physical cost as the rails. The cost of acquiring the right of way is as proper an element as charges for inspecting the rails, freight charges on them, the loading and unloading, or any other charges that enter into the cost of rails delivered to the track-laying contractor.

Should the cost of reproduction of right of way be carried to the present value column? Clearly, yes. If a road is unfortunate enough to buy its rails when they are at a price of $60 per ton, the full price is charged to capital account; and when the line is sold to some large corporation, no reduction is made, even though the price of rails be much less at the time, but the selling price is based on the construction account as a whole.

The same is true of the right of way. In no case which has come under the writer's notice has a new company, or a set of promoters disposing of a new line or a new right of way, ever consented to deal except on the basis of construction account, plus promoters' profit. The cost of a right of way is increased on account of continuity. A farmer is justified in increasing his price per acre by reason of the fact that the road must have a continuous line, regardless of how it affects the individual. He must rearrange his fields, replant his orchard, change his fences, ditches, and tile lines, and re-adjust his entire property to accommodate the necessity of the road. He must also take into account severance or damages. He is compelled to cross the line at an inconvenient place, open and close two gates in every lane or at every crossing, drive his cattle back and forth to water, haul his produce over a short heavy grade across the track, and he must not interfere with the railroad. He is in constant danger of loss of property from fire or from accident, and he is in personal danger every time he passes from his own land on one side of the railroad to his own land on the other side. Every one who has bought right of way knows these arguments,and is aware that the farmer knows them and charges extra on account of them.

The law provides that, in condemnation, the jury shall take into account two elements, the value of the land, and damages. The railroad pays them, and very promptly charges the entire cost to the right-of-way account. No one will question the propriety of the farmer taking them into account in fixing his price. The value of continuity to the railroad can hardly be measured in dollars and cents.

A fair illustration of continuity may be found in coal lands. A promoter will secure option on a large acreage. As long as his holdings are disconnected and widely separated they are of no more value than adjoining lands, but let him close options on a large block of land all in one body, and immediately he can add from 100 to 200% to the value of his land for mining purposes. This added percentage is due to continuity.

The conditions surrounding the purchase of railway lands in Michigan have changed materially in the past few years. In a new country, without means of transportation, land values are low, and, in order to open new markets, land owners can afford to donate the right of way. Undoubtedly, a very large percentage of the total right of way on the older lines was either donated or bought at very low prices. As a community grows and develops, acquires new industries, and receives new improvements, property values increase; and, along with a general appreciation of other values, those of railroad property must increase. It would certainly be true that the present value of the site of the Majestic Building, in Detroit, is not the same as it was in 1850; the argument that its actual cost in 1850 was, say, $200, would not be any justification for such a value to-day. Equally is it true that the value of property owned by the Michigan Central Railroad is not to be measured by the price paid for it 50 years ago. The greater business, and the larger income derived from that business, make the Detroit of to-day a much more valuable terminal for the road than the Detroit of 50 years ago.

The same argument will apply to any city which has grown up after the construction of railroads. The original right of way was farm land and may have been a donation, but the change from farm to city certainly increases the value of the railroad land just in proportion as the surrounding land increases.

The same reasoning is properly applicable to lands which decrease in value. Where a railroad buys right of way to gain access to valuable timber lands, and, after the removal of the timber, the land is too poor to support a population, the present value should depreciate in the same ratio as the surrounding land, and immediately on its abandonment as a right of way it would cease to have a railroad value.

In an appraisal, it appears to be fair to base the cost of reproduction on the cost of building a new line on the location of the road under appraisal, all other means of transportation remaining as they are to-day, so as to secure as nearly as possible the conditions that would be encountered by a new company building a new line on this location.

The argument was made in 1900, and reiterated frequently, that railroad companies secure many donations. It may safely be said that, in a developed country, such as in the south half of the Lower Peninsula, the donations are of little account. Few donations were found in an examination of records of deeds covering 10 years; and in some cases the conditions were so burdensome that it may be said that the gift land was the most expensive. A condition for a cattle-pass costing from $400 to $600, a side-track costing from $1 to $1.50 per ft., and other like specifications are found; and in many deeds where a liberal consideration is named conditions which add greatly to the cost are not infrequent.

The recent new lines in Southern Michigan secured but few donations, although all considerations of $1 and other good and valuable considerations were classed as donations unless the contrary was susceptible of proof. In the case of the Ann Arbor Railroad, in Washtenaw County, the $1 consideration represents a higher price than the average, this being known by the writer, as he bought it. The same is true of the Detroit and Toledo Shore Line, in Monroe County. In making an appraisal, no deductions should be made for donations, if there are any, as the fact that land is donated does not indicate absence of value; nor should an addition be made to the appraisal value on account of the fact that a road has been held up and compelled to pay exorbitant prices in certain localities.

In some counties the base values of land in villages and small towns were given at ridiculously low prices in 1900; some are as low as from $50 to $100 per acre in towns of from 1,000 to 3,000 population. When one stops to consider that a lot 4 by 8 rods contains ⅕ acre, andthat such lots in a town of considerable size range from $50 to $300 each, it is readily seen that from $250 to $1,500 per acre are not excessive figures. The figures for an adjoining county were often very high, and village values were put up to substantially full value. The result of adding percentages in 1900 was to magnify discrepancies, and little villages of from 200 to 500 population in one county were appraised at a higher rate than towns of from 2,000 to 5,000 in the next.

In 1902 the appraiser undertook to equalize all such discrepancies, and found that no hard-and-fast rule would apply. A comparison of village values, as determined by actual purchase, with the 1900 appraisal, is given in Table 5.

The 1900 appraisal for city lands, outside of Detroit and Grand Rapids, was generally very conservative or low. In some cases the figures were extremely low.

TABLE 5.—Average Price per Acre for Village Land.

Actual purchases are averaged from recent transfers. The 1900 appraisal averages are averages of prices as applied after all percentages and fixed charges are added.

The conclusion reached by the appraiser in 1902 was that, for railroad purposes, right of way is worth what it costs to produce it. It would be just as consistent to claim that a railroad has a misfortune in having a river to cross, and that no value should be placed on the bridge which spans it, as to claim that right of way, which costs three times farm-land values, should not be valued at a higher figure than farm land.

TABLE 6.—Comparison of Valuation Figures with Actual Considerations—Comparison of Immediately Adjoining Properties, Grand Rapids, Michigan.The prices are per square foot or per acre.

TABLE 6.—Comparison of Valuation Figures with Actual Considerations—Comparison of Immediately Adjoining Properties, Grand Rapids, Michigan.

The prices are per square foot or per acre.

The problem of an appraiser is to determine, with the best evidence at hand, what land is fairly worth for railroad purposes at the time of appraisal. He must take into account the railway-purpose increment, if he is consistent in his appraisal.

The foregoing narrative account of the general field and office handling of the Michigan appraisal of physical property, while not touching on matters of principle of valuation, except as to land values, is submitted as describing briefly the machinery of the appraisal. A number of very important issues were raised which have to do with the theory of valuation. These are worthy of discussion at length, in the subsequent consideration of the method of determination of a fair value, but are not here referred to. Within any short limits it is impossible to give a comprehensive description in detail of all the work of the Michigan appraisal. Several articles descriptive of this work have been written, giving quite full extracts from thevarious sets of rules which were promulgated, and describing some phases of the work in much more detail than is here attempted.

The physical valuation, as represented by two figures—the cost of reproduction of the physical property, and its present value—was submitted to the Board of State Tax Commissioners as the work of Professor Cooley, and in most of the literature descriptive of it, it has been termed the "Cooley Appraisal."

After the completion of Professor Cooley's work, his figures were submitted to Professor Henry C. Adams, who had been making a study of the income accounts of the various companies, and to whom had been assigned the duty of determining the non-physical or franchise values of the properties.

Professor Adams has described[5]very fully the plan adopted for this work, and this plan has been commented on so fully that any lengthy description is deemed unnecessary. It appears to be perfectly proper, however, to correct certain misstatements regarding this work.

When it was first determined to make the appraisal, Professor Cooley—not Professor Adams—was requested to take charge. The assignment to Professor Adams of the non-physical valuation was made after the physical valuation was well under way.

The use of a negative or subtractive non-physical value was considered, and advised by Professor Adams. The work was not undertaken with a view of "increasing the assessments," but to put the Tax Commission in possession of a figure which would represent the business value of the property as well as the physical value.

Professor Adams held that the non-physical element of value was not a simple commercial element, but included:

{to be a corporation,The franchise {to use public property,The possession of traffic not exposed to competition,The possession of traffic through connections,The benefit of economies due to density of traffic,The value due to organization and vitality of industries served.

{to be a corporation,The franchise {to use public property,

{to be a corporation,

The franchise {to use public property,

The possession of traffic not exposed to competition,

The possession of traffic through connections,

The benefit of economies due to density of traffic,

The value due to organization and vitality of industries served.

He also held that, as nothing visible or tangible gave support to this value, it must be determined on the basis of information secured from the income accounts of the company.

Without going into any complete description of Professor Adams' method, it may be said that he made an analysis of the income accounts, and, after providing for operating expenses and taxes, he deducted, as an annuity properly chargeable to capital, a certain percentage of the appraised value of the physical properties. Any remainder was capitalized to give the true value of the immaterial element, or the business value.

In the rates of capitalization and annuity used in 1902, there were certain changes, making them differ from those used in 1900, and certain changes in the detail of analysis of income accounts and methods of determining the rates of interest which are entirely immaterial to the present narrative. The work was of great importance as being the first exposition of this method of obtaining non-physical values. It was a fair, logical, and business-like attempt to determine those elements which give a well-designed, economically-built, or advantageously-located property a greater value as a money-earning concern than the actual capital invested, or than the actual value remaining in its physical property.

It will be seen that, in the case of a property in which the surplus earnings depend on excessive rates for service, it will fail as a method of determining a value for use as a basis of rate-making; and it fails, in the form in which it was used in 1900 and 1902, to bring out those negative or subtractive elements which may be determined from the income accounts, in the case of properties which do not earn a fair return on the investment. This, however, was due to the fact that the taxation laws of Michigan made no provision for any reduction of value because property was idle or non-productive, and any such deduction in the case of corporation property would place it on a different basis from other property. Professor Adams and his associates, therefore, applied only positive values, where any such were found, although advocating the use of negative values.

The writer has seen no criticism of Professor Adams' work which is not apparently incited by, either the direct interest of corporations in lowering valuations for taxation, or by an effort to confuse the subject of valuation so as to discredit the work in the eyes of taxing authorities. Any person competent to discuss the matter, who has given Professor Adams' method careful thought, will be forced to the conclusion that this was a long step in the direction of the final solution of these important and perplexing elements of value.

History and Results of the Michigan Appraisal.

Based on the valuation of 1900, the Board of State Tax Commissioners was enabled to comply with the statute in reporting to the Legislature. New laws were passed, sundry suits were brought, and, finally, the case of the Michigan Central Railroadvs.Perry F. Powers, Auditor-General, and a number of other cases in behalf of other roads, were brought to trial before the United States Court for the Western District of Michigan.

This Michigan Central case was a suit to restrain the collection of taxes based on the new assessment, the railroads claiming that their property was assessed at full value, while general properties of the State were assessed at a considerably lower percentage than full value. This suit was essentially a valuation of the railroad properties as of April, 1902. This work was done along the same line as the former valuation, by a portion of the same staff. The old work was brought down to date, and certain special studies were made, which resulted in a change of right-of-way valuation, as has been related.

In the trial of the case of Michigan Central Railroadvs.Powers, the two valuations were fully testified to by all the men engaged, and the record relative to the appraisal fills several volumes.

Subsequently, in 1906, Professor Cooley was engaged by the Attorney-General, and, re-assembling the staff, brought the work down to date as of April, 1906.

There has been no permanent force engaged on the work in Michigan, and the re-appraisals have only been made as actual necessity demanded.

Market Value of Stocks and Bonds.—During the progress of the appraisal of 1900 an independent force of men was engaged in studying the market values of stocks and bonds of Michigan roads with a view to securing information on every possible line that would aid the appraiser in reaching proper conclusions, or enable him to check his figures. These figures were used only as a check, and no report of the details of this work was submitted.

Error in Published Reports as to Michigan Work.—In several articles descriptive of the Michigan work, one quite serious misstatement of fact has inadvertently been made. The writer is not quite sure how or where the wrong impression originated, but it has been noted in several articles and editorials.

Substantially, all accounts are similar to that of Professor Taylor,[6]which is:

"In looking over the notes and results of the work done in Michigan, it was noticed that Mr. Cooley's engineers, car-men and other experts went over the property of each railway company and enumerated and valued the same, and then the railway company generally had its own men perform the same work in order to check up the appraisal made by the State authorities. Thus, this expensive work was unnecessarily duplicated."

Undoubtedly this statement was made in good faith, and has gained currency by not having been corrected, but it is not the fact.

The Chicago and Northwestern Railway took immediate steps to make surveys and secure data, as has been described, and made a complete appraisal, using the Michigan forms. The result of this appraisal was:

In this case the railroad had no records, and the work was of value to them, not only as a check on the work of the State, but also as giving them complete records of permanent way. It was not done independently of, and after, the State work, but was organized so that the field work of both railroad company and State was done at the same time.

No other complete work of valuation was done by the railroad companies. During the trial of the cases, no contrary or different valuations were set up. No special attack was made on the work, except to select here and there some specific example of a building which was appraised at a higher figure than cost, perhaps half a dozen in all, and to introduce expert evidence, particularly on land and right-of-way values. Aside from the money expended on the litigation, there were no expenditures by the roads in checking up the work. On the contrary, a number of managers, at their own expense, had typewritten copies of the final report as to their own lines made, in order to file in their records.

It is a fact that only one of the seventy-eight roads made a complete appraisal, covering 387.8 miles of main line, and none of the other roads or mileage went to any considerable expense.

The Cost of the Work.—No complete statement of the total cost of the work of valuation in Michigan has ever been issued as a public document. The cost of the work, including salaries of appraiser, engineers, assistants, clerks, all expenses of the Board of Review, all expenses connected with Professor Adams' non-physical appraisal, also all office rent, stationery, supplies, telegraph, telephone, and railroad expenses, printing and binding—in short every dollar chargeable to the Michigan railroad appraisal of 1900—footed up to $70,604.21.

The exact mileage of roads in the State was:

The exact figures of cost of the subsequent work of appraisal, or the costs of the litigation, are not available to the writer. In a general way, it may be said that the cost to the State of the railroad tax cases was not far from $75,000, and that the expenses of the second and third appraisals were less than $50,000, so that, to date, the entire cost to the State of Michigan is less than $200,000 for the three appraisals and the litigation growing out of them.

Some information as to details of costs may not be out of place. All employees were paid a salary and required to provide their own subsistence. Salaries ranged from $250 to $500 per month for experienced men, from $125 to $250 for men with only a few years of experience, and from $75 to $125 for assistants and clerks.

All traveling expenses (except hotel and subsistence) were paid, the State issuing mileage books to all employees, and receiving a complete check on the movements of every man through the mileage bureau. The telegraph and long-distance telephone were used almost exclusively in communication between the office and the men in the field, all bills being paid by the State. All expenses of inspection by hand-car, velocipede-car, etc., were paid by the State, except as the roadmasters made trips with the inspectors.

The unvarying policy of the appraiser was to reimburse the companies for all extra expenses incurred on account of the work, and to accept no transportation or favors from any company.

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