work, and in securing that absolute uniformity of method necessary to
give the appraisal standing.
It may not be amiss to state here that in such a work no set of unit
prices could possibly be adopted which would not work some apparent
injustice. A number of Michigan lumber roads were of the cheapest
possible type of construction, and any unit price applied to ties or
timber, which would be at all reasonable for such roads as the Michigan
Central, Grand Rapids and Indiana, Pere Marquette, and others, would be
far in excess of the actual money paid out by these little roads. A few
individual instances of such apparent discrepancy were cause of
complaint and criticism, but, on analysis, very generally, these did not
appear to be anything but a disagreement with book values, in which ties
cut off the right of way were treated as having no cost; or in some
similar item certain local conditions may have made the first cost so
low as to amount to a donation of property. Conceding the propriety of
the objections, the reason for making the appraisal was to furnish
information on which the legislature might determine whether the State
should go from a specific to an ad valorem basis, and in view of this
purpose the objections became unimportant, as they applied to but a few
miles of road.
_Classification._—All work of computation was classified in strict
accordance with the Interstate Commerce Commission's classification of
construction accounts, to which were added one or two classifications
not recognized by that Commission, and final summaries were returned on
sheets similar to those illustrated by Figs. 1 to 10.
In computing, the staff made use of all data of every nature which was
before them, checked the judgment of the field inspector wherever any
reliable data were furnished, took into account age, special notes, or
costs, and, in case of any serious discrepancy in his percentage,
reported to the head of the department for either a re-inspection or for
a conference with the appraiser and inspector. In this department every
possible safeguard was thrown around the work to insure its absolute
mathematical correctness, and to guard against errors in the personal
equation.
_Compilation._—After the calculations were checked and completed they
passed to the compilers, who arranged and classified them, and prepared
the form of the final report. This consisted of a detailed list of every
piece of property and every structure, with a short description and
specification, and a statement of estimated cost of reproduction and
present value. The division is made by roads, by divisions of roads, and
by counties. This was done after the completion of all other work, and
the disbanding of the organization, a small force being retained by the
State to compile and put in permanent form all the papers of the
appraisal. This work was done under the direction of Messrs. James
Walker and O. C. Le Suer in consultation with Professor Cooley.
The final compilations were typewritten on large sheets and bound, and
constitute the final record of the physical valuation. After the
completion of the 1900 appraisal, all papers connected with the work of
the computing office were arranged in proper order and bound.
Special Problems of the Mechanical Department.
The Civil Engineering section dealt wholly with fixed property located
entirely within the State; and the work offered no special difficulties
in the way of assignment of values. It is true that, when the question
of terminal values was under discussion, the Wisconsin and Michigan
Railroad offered a very pretty example, in that the revenue-producing
half of its mileage lay in Michigan, while its shops, yards, docks, and
car ferries, comprising the great bulk of its physical property, were in
Wisconsin. This instance merely emphasized the fact that no State
valuation of an interstate property can settle finally and definitely
all the questions that arise.
_Assignment of Value to States._—The Mechanical Department was compelled
to handle the valuation of moving property, and to assign values as
between the States on such a basis as would be fair to all parties. The
Courts have been inclined to view the distribution of values between
territorial units on the track-mileage basis as being a fair one. The
study of the problem in Michigan indicates that while this method,
perhaps, is just in most cases, it will not hold in all. Assignment was
made upon several bases, as follows:
(_a_) Main-line mileage;
(_b_) Total track-mileage;
(_c_) Car- and locomotive-mileage of equipment operating in
Michigan;
(_d_) Car- and locomotive-mileage, entire equipment;
(_e_) Freight-car mileage of the entire system.
The results secured by these different methods show, in many cases, very
little difference; all are close, and no injustice is worked by any
method, while, in other cases, the figures are widely divergent.
The Lake Shore and Michigan Southern Railway owns a high-class main line
between Chicago and Buffalo, and for part of the way there are two lines
several miles apart; the entire line is double-tracked, and there is
much third track. None of this line is located in Michigan, except some
80 miles of single-track main line of the Michigan Division between
Toledo and Elkhart. The company, however, has several hundred miles of
branch line in Michigan, which comprises most of the branch-line mileage
of its system. These lines, generally, are far inferior to its main
line.
Any apportionment of its equipment between States on the basis of either
line-mileage, total track-mileage, or locomotive- and equipment-mileage
of total equipment will result in the assignment to Michigan of a value
far in excess of a proper or fair amount. An apportionment of locomotive
and passenger-car equipment on the basis of equipment-mileage or
equipment operating in the State, and for freight cars on the basis of
car-mileage of total equipment, was found to be most fair.
In making the assignment of values, this study was made for all
interstate roads, and such basis used as was apparently most fair in
each case, the department making a special effort not to assign to
Michigan undue values or those which could not be sustained.
_Freight Car Inspection._—One of the most perplexing problems which was
faced by the Mechanical Department was the proper and satisfactory
inspection and valuation of freight equipment. The freight cars owned by
the companies were scattered over the United States and Canada, and the
inspection of any considerable percentage of those owned by any company
was, of course, an impossibility. The fact that these cars had been
purchased in series, so that there were considerable numbers in a group,
all of the same age, and built according to the same specifications,
made possible a valuation by groups. The acceptance, however, of any
arbitrary percentage of depreciation by years, or the acceptance of the
rules of depreciation of the Master Car Builders Association, without
making independent investigation with a view of establishing the
correctness of the rule, appeared to be unwise.
The several companies submitted carefully prepared statements of
equipment. These statements were compared with the equipment register
and the reports to the Commissioner of Railroads. The prices used were
those of the rules of interchange of the Master Car Builders Association
wherever applicable.
Prices were furnished by the leading manufacturers, and in many cases
were secured from the books of the railroad company.
In order to determine the condition of the equipment, the inspectors of
the department personally examined 32,000 freight cars in Michigan and
adjoining States. Their reports were separated, classified, and analyzed
by groups, with the result that the inspection fully confirmed and
justified the use of the rule for depreciation of the Master Car
Builders Association, which was therefore applied. In the 1902 appraisal
this rule was accepted without any inspection or further study of the
problem.
The criticism of this part of the work by the appraiser of the State of
Washington is wholly unjustified, as the work was necessary in order to
qualify in Court and defend the rule adopted, and the actual cost of the
work was small.
_Locomotives._—The inventory of locomotive equipment was secured from
the companies, and checked against reports and the equipment register.
Personal inspection was made of every locomotive in the State, then a
complete description was prepared, and the percentage of depreciation
assigned. Curves of depreciation had been computed and plotted, and the
figures of the inspectors were compared carefully with the curve in
order to eliminate possible errors.
_Vessels._—Professor Sadler's appraisal of vessels involved a personal
examination of every vessel. This survey included:
(_a_) The hull of the vessel and general equipment;
(_b_) The machinery and boilers.
An independent estimate of the cost of reproduction and depreciation was
made, and, wherever possible, this was checked by comparison with the
detailed original cost. In case of material difference, various
shipbuilders were consulted, and independent estimates of cost were
secured. In every case these latter estimates were confirmatory of the
estimated cost of reproduction, which figures were used throughout the
appraisal.
Overhead Charges.
There are certain expenses connected inseparably with the construction
of any public work, which, on the completion of that work, are not
capable of physical identification, but which, nevertheless, belong to
and must be a part of the cost of the physical property. These expenses
are legitimate; and, as long as the property is operated, a very large
part, if not all, of the entire expense remains in the present value of
the property as a "going concern."
Appraiser Cooley and his staff took up the discussion of these items and
disposed of those which were carried into the valuation by the placing
of a percentage. These items are:
_Engineering._—This covered all the cost of preliminary and
location surveys, design, and supervision of construction of
the work, and all expenses connected therewith. This was
covered by a charge of 4% of the cost of reproducing the
permanent way and structure, but not the equipment.
_Legal Expense._—This item is inseparable from the construction
work, and was fixed at one-half of 1% of the cost of the
same items as affected by the engineering charge.
_Organization Expense._—This covered the cost of promotion,
financing, and general supervision of construction, together
with general office expense. These items were covered by an
application of 1½% of the cost of the above items.
_Interest._—This item is intended to cover interest on money
during the period of construction. The length of time taken
to build would, of course, be variable. It was assumed that
3% on the entire cost of construction and equipment would be
conservative, and this figure was used.
_Discount on Bonds._—This was not included, for the reason that
it was considered, not as a proper capital charge, but
rather as an adjustment of the interest rate to the existing
market condition, and as chargeable to interest account and
not capital.
The discussion among members of the staff indicated such a wide range of
opinion as to the proper percentages to apply, that the final
determination of the rates was passed upon by the Board of Review. There
can be no question as to the propriety of these items as proper elements
in the first cost of construction of a new railroad. On the theory that
the cost of reproduction of the physical property should include every
item of expense which would enter into the cost of reproducing the
property as it existed on the date of the appraisal, they are proper
terms to include in the appraisal. As to whether the fixed rates were
high enough in every case, is an open question.
_The Charge of Ten Per Cent. for Contingencies._—Perhaps no single
feature of the Michigan appraisal of physical property has been so
generally criticised as the charge of 10% of the entire estimated cost,
including all the percentage charges, to cover "contingencies."
At the time the first appraisal was made, the writer was not at all
satisfied that such an item, in such amount, should be included. The
reasons advanced were so strong that it was done, and the writer's
subsequent work has fully convinced him that it was proper and
justifiable, because:
(_a_) The conditions under which this particular inventory and
appraisal were made, as to time and lack of co-operation of
the companies, made it practically certain that some items
of value were missed in the appraisal, such as station and
miscellaneous equipment, frogs, switches, track structures,
buildings owned by the companies and occupied by others,
etc.
(_b_) That there were many and large elements of physical cost
not ascertainable by a physical inspection, such as deep
foundations, many thousands of yards of earth in swamps and
sink holes (a very general condition of roads in the
Southern Peninsula), concealed classification due to growth
of grass or washing of banks, and many other cases of work
actually done, invisible after a lapse of years. The writer
knows of many such instances on property which was in his
charge many years ago; in several cases there were
expenditures of from 0,000 to $50,000 which are now entirely
invisible to an engineer passing over the line.
(_c_) The failure on the part of railroad companies to keep
anything like a complete history of construction operations,
and the changes of operating officials from year to year,
cause the loss of record of practically all the expense due
to extra hazard and risk which the construction engineer
provides for by his "contingencies."
(_d_) The inclusion in operating expense, every year, of sums
which are properly construction, and which, if added to unit
prices of construction work, would cause the cry that such
unit prices were too high. For instance, the appraisal
estimate on earth was 17 cents per cu. yd., with no
allowance for overhaul. Very much of the grade in the State
had actual costs far in excess of this figure, and
practically every road spends a large sum annually for the
first four or five years, which is charged to operation but
is in reality a part of the cost of completing the roadbed.
(_e_) No account was taken of appreciation of any of the
elements entering into a road. There is no doubt that
roadbed, for example, does appreciate, due to ballasting and
track work. These items go far toward accounting for the
contingencies item on an old road such as the Michigan
Central.
(_f_) There is a considerable amount of cost, which cannot be
taken out of capital, where facilities are abandoned or line
or grade changed. These changes are common to all growing
roads; they are due to the demands for greater traffic; they
are necessary to the welfare of the community served; they
are often made at points where no charge of defective design
will apply. They might be termed expenses due to the
development of the State, and, in the development of the
railroad business, they were absolutely necessary for its
present standard of efficiency. They are incapable of exact
and definite determination, and must of necessity be
included as contingent expenses.
In the case of a new road, where the exact cost is ascertainable, the
records have been fully kept, the original plans are on file, and the
history is fresh in the minds of the officials, it will be readily
admitted that a charge for contingencies in large amount would not be
justifiable; but, in the case of the Michigan Central Railroad, a line
more than 50 years old, which has changed, rebuilt, and added largely to
its property; in the case of the Pere Marquette Railroad, made up of the
union of a dozen lesser properties, without any complete history; in the
case of dozens of little lines, without maps, profiles, or records, some
such allowance is fully justified and proper.
The experience of the writer, in the years that have passed since these
appraisals, leads him to the opinion that the difficulty of estimating
values on an old property are such that in many cases an appraiser might
add, with perfect propriety, even more than 10% for the contingency
item.
In computing overhead charges, no allowance was made for working
capital, and no addition to the physical valuation was made to cover any
such element as "going concern" value.
Right-of-Way Values.
Land values were the subject of a great deal of discussion during the
appraisal of 1900, but subsequent investigations as to actual railroad
purchases resulted in quite radical changes in some of the figures in
the later valuations. In view of the fact that many criticisms of these
values have been made by railway attorneys, special emphasis is here
given to the subject. The conclusions reached in Michigan in 1902 agree
so closely with the conclusions of Taylor in Wisconsin and Morgan in
Minnesota that it is thought advisable to give a rather full account of
the methods used in both appraisals, and the line of reasoning which
brought about the changes made in 1902.
The 1900 appraisals methods were as follows: Work in Detroit, Grand
Rapids, Saginaw, Bay City, and some other large cities was assigned to
special appraisers, who visited the cities, examined critically all the
property, conferred with leading real estate men and experts in values,
and placed an estimate per acre or per square foot. This part of the
work was done with great care, and was substantially unchanged in the
later appraisals.
In all other land valuations, in cities and villages, and country right
of way, a personal examination was out of the question without making a
very large and expensive addition to the staff, as the field engineers
generally were not familiar with realty values, and could not take the
time to make the large number of inquiries. The appraiser did not see
his way clear to organize a special department, therefore the matter was
turned over to a sub-department of the Civil Engineering Section, the
work of which may be briefly outlined, as follows:
Lands were classified as:
(_1_) Farm land,
(_2_) Barren land,
(_3_) Villages having a population of less than 500,
(_4_) Villages from 500 to 3,000,
(_5_) Cities having less than 10,000,
(_6_) Cities having more than 10,000.
The percentage of waste land was fixed as a result of interviews with
roadmasters, superintendents, and other officials and employees of the
roads, by reports from field inspectors and others.
Letters of inquiry were sent to real estate men and bankers in every
county in the State (some 500 being communicated with), as to land
values in the town or county of each. The responses, which were numerous
and indicated considerable care in preparation, were classified, and on
these data, supplemented by as much personal inspection as it was
possible for a few men to give in a limited time, the values of the
various classes of land were determined by a system of averages. The
naked land values were then taken, and to them were added, as follows:
South of a line east and west through Saginaw, 125% plus a fixed charge
varying from $8.50 per acre downward was added to the so-called naked
land values for farm land. No waste land values were considered in this
district. North of this east and west line: Farm land, 100% and a fixed
charge of $3 per acre and upward; waste land, 200% plus a fixed charge
of $3 per acre; for all village lands, 125% plus $8.50, fixed charge;
for all city lands, 100% plus $8.50, fixed charge.
The fixed charges were intended to cover the expense of acquiring
abstracts, recording deeds, etc. Slightly different figures were made
for the Upper Peninsula.
The result of this work was a set of very low figures in many counties,
the average price per acre hardly reaching the going price of improved
farm lands. There was so little time to review these figures after they
were in shape that they were used in 1900, although the appraiser was
convinced that they were generally too low.
In the appraisal of 1902 a very careful study of real estate values was
made. The offices of Registers of Deeds in ten or twelve counties were
visited, a careful abstract of all railway transfers for a period of 10
years was taken off, the acreage determined, the average price per acre
for different classes of land computed, and then a very careful study of
transfers of adjacent improved and unimproved lands was made. As a
result, material increases were made in the farm land values, waste land
values were eliminated, the 1900 valuation, made by special appraisers
in large cities, was practically unchanged, while very radical changes
in the way of equalization of values of lands in villages and small
cities were made.
Inasmuch as the 1902 valuation was at issue in the Courts, the writer
believes he is justified in discussing at some length the deduction of
the staff on the conclusion of the 1902 preliminary studies, which led
to the final adoption of the new figures.
One would fall into error if country values for farm purposes were
conflicted with country values for railroad purposes. There is,
undoubtedly, a close relationship between the two classes of values;
this the writer has endeavored to discover, and it is indicated in
Tables 2 to 6. The use to which land is put can and does change its
value. Farm land in a certain township may be worth $50 per acre for
farming, but the discovery of oil would affect values, as far as oil
purposes are concerned. The presence of a vein of coal would give a
distinct value for mining purposes. Farm prices would not govern values
for any special use, such as oil drilling, mining, or railroad
operation.
In the case of city business property, farm prices cannot be applied, as
the use to which the land is put and the buildings placed on it give it
a greatly increased earning power, and hence increased value. Thus, with
a railroad right of way, the continuity of the strip of land, the
severance of lands crossed by it, the greater earning power it derives
from the construction placed on it, in short, the uses to which it is
put, give it a value far in excess of adjoining lands. An excellent
proof of this is found in the fact that many thousands of miles of right
of way have been bought by promoters and either sold to a company, which
built the lines, or used in financing the road. In no case has the
selling price been based on farm values.
It is not contended that railroad land values do not bear a direct
relation to land values for other purposes, as those things which tend
to increase general values usually make the construction of a railroad
profitable, and the better and more fully developed the country, the
greater is the need for transportation facilities and the higher the
prices of land for all purposes. This is shown in the figures submitted
herewith.
For purposes of appraisal, therefore, in 1902 the average value, as
derived from the 1900 appraisal, was taken, and, by comparison with
actual purchases, an attempt was made to ascertain the relation existing
between the appraisal figures of 1900 and the usual purchase price for
railroad properties, as determined by actual transfers. In making these
figures the appraiser was forced to the following conclusions:
(_1_) That the naked land value is not a proper one to use in
country lands, but that the going value of country lands
with all improvements should be used as a basis for
computing the added increment due to railway use;
(_2_) That a classification of farm land and waste land should
not be made, except as a basis for arriving at the relative
differences in quality of land in different sections of a
county;
(_3_) That the added value for railroad purposes is due to the
three elements:
(_a_) Continuity,
(_b_) Severance or damages,
(_c_) Changed earning power,