Chapter III: Front Matter (3)

Every man in the computing room was furnished a large bound blank-book, in which he was required to make all his notes and computations, no figures of any sort being made on loose paper. The name of each man was placed on his notebook, and each set of field and office inspection notes worked upon by him was signed with his initials. It was easy to trace the work of every man, and in the subsequent trial of the Tax Cases, every man in the service returned, and, not only testified as to his office and field inspection, but was able to turn to and identify all the computations made by him, and produce his original figures and memoranda.

Very soon it became evident that such a volume of reports, notebooks, memoranda, maps, plans, pamphlets, and other data was being accumulated that, unless a special system was developed for filing and handling in the office, the confusion would be serious and costly.

_Filing in Office._—The system of filing and record keeping had the merit of being simple and inexpensive. There was borne in mind, in devising this plan, the necessity of keeping all papers connected with one division of any road together, the need for reducing to a minimum the labor of filing and indexing, the constant use of papers, and their frequent withdrawal from the files, making it necessary that they could be at once located when they were not in the files.

The vault in the appraisers' office was arranged so that large manilla envelopes, each of sufficient size to hold all the reports, notes, maps, etc., of each road or division, could be filed vertically. Each road was given a number; if there were several divisions, each division was given a letter, as "15-_A_," "15-_B_," etc., and each division was filed separately.

Every report, book, map, or other paper was stamped with its road or division number and letter, and given a sheet number. In this manner every paper was identified, and could be at once placed. A record was kept in a book, describing every paper filed in each envelope.

In issuing papers for work, the entire file was taken and kept together at all times.

One man had charge of the filing and recording, and no one else was permitted to enter the vault. When a file was withdrawn, a receipt was taken, and was put in the place of this file; and when the papers were restored to the vault the receipt was destroyed.

The system proved adequate, and was much less cumbersome than a more elaborate system of card indexing of separate papers could possibly have been.

The net result of office and field inspection had been an inventory based on the railroad records, checked by a man in the field, with a percentage representing the field inspector's judgment as to depreciation, together with a considerable number of special data as to original cost, etc. It was now necessary to place figures of estimated cost of reproduction and depreciation in terms of money.

The State of Michigan is made up of two peninsulas, widely separated, with radically different conditions prevailing as to certain items of the cost of construction.

_Computation Tables._—This appraisal involved seventy-eight incorporated and forty-seven unincorporated railroads. It was necessary to adopt such a system as would apply uniform methods and prices to all like property. Accordingly, the field inspectors were assembled, and, after conference, it was determined to prepare a set of tables, covering all classes of railway construction, material, and structures, values being computed for 100% value, and for each 10% depreciation. These tables covered different weights, sizes, and types of structures and material, and were all computed on the basis of the agreed estimated cost.

_Unit Prices._—The unit prices were the result of a most careful study and discussion. For many items, such as clearing, grubbing, earthwork, masonry, etc., the price was fixed by agreement during the discussion at a figure which represented the fair average cost of this particular item during the 5-year period preceding the appraisal.

For rails and rail structures, an average price was secured from market quotations for a period of 10 years, a price was determined as the value of scrap, and the percentage of depreciation was applied to the wearing value of the rail. The unit price was $28; the agreed scrap value was $12, leaving $16 as the wearing value of the rail. If an inspector reported rail at 90%, or at 30%, this percentage was taken from the $16 wearing value and to this was added the scrap value. The tables were arranged so that, for any weight of rail and any percentage, the cost of reproduction and the present value could be taken from the tables in dollars per mile. The same was true of bolts, spikes, angle-bars, fish-plates, and frogs and switches.

In the case of material such as ties, where no scrap value could be attached, the percentage was applied directly to the first cost.

In the case of bridges, the tables gave weights per foot and per span for various lengths, types of structures, and loadings, and only the cost of reproduction was estimated.

Estimated costs per cubic foot were deduced for buildings of various standard railroad types and per square foot for depot platforms. These figures were obtained by reducing to this basis the cost of a large number of buildings of known cost, by comparison with data obtained from railroad companies and from a number of engineers who had kept such records, and by consultation with architects. These building tables did not apply to the more elaborate and costly structures, all of which were appraised specially.

Ballasting, track laying, and surfacing were divided into three and four classes, in order to cover the different general types of railroads, and prices per mile were fixed. On Upper Peninsula roads ballasting was estimated at a higher price than on Lower Peninsula roads, while ties and timber construction were estimated at a lower figure.

In addition to these prices, secured by averaging several years' quotations, or by agreement of experienced construction engineers, many valuable figures were obtained from manufacturers of locomotives, cars, mechanical equipment, and bridges; and in several cases access was given to the mechanical cost data of the larger roads. Specifications for locomotives, cars, and shop tools were sent out to builders with a request that they give average prices for a period of years.

From all this mass of data the unit prices for the valuation were determined. For locomotives, values were plotted for engines of different weights, in order to establish a curve, and curves representing deterioration, scrap value, and major repairs were also plotted, so as to ascertain diagrammatically the value of an engine of given weight and stated condition.

The tables and diagrams proved of incalculable benefit in reducing the 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,

all of which the farmer or owner has cognizance of in making
his price;

(_4_) That in making up land values, account should be taken of:

(_a_) The cost of acquiring the land, or expense,

(_b_) The cost of the land itself.

The reasons are:

_I_.—In making a price on a 40-acre farm, the owner does not make two prices, one on land and one on improvements. He arrives at a flat price per acre for the entire farm, and usually asks more per acre for a part than the whole. A man who valued his land at $100 per acre, with improvements, would hardly sell 5 acres from a corner of his land, even for residence purposes, at naked land prices.

The 1900 appraisal was based on naked land prices, as estimated by a number of citizens of each county, and this flat rate was used in making figures for the so-called "Market Value of Right-of-Way." It is fair to assume that a railroad company can purchase large tracts of land for gravel pits, or a narrow strip adjoining and widening its existing right of way, at about market prices, as the elements of severance, abutting damages, etc., are absent. Prices for this class of land ought to be, and usually are, lower than those paid for a new right of way.

TABLE 2.—COUNTRY LAND.—ADDITIONAL STRIP FOR WIDENING RIGHT
OF WAY, GRAVEL PITS, ETC.

═════════╤════════════════════════════════════════╤══════════╤═════════ County. │ Description: Road and purpose. │ Average │ Average │ │per acre, │per acre, │ │ 1900 │transfer. │ │appraisal.│ ─────────┼────────────────────────────────────────┼──────────┼───────── Jackson │Michigan Central. Widening right of way │ $84.47│ $156.08 Kalamazoo│Michigan Central. Additional right of │ 89.41│ 140.00 │ way near Augusta │ │ Kalamazoo│Grand Trunk Western. Additional strip │ 94.59│ 120.50 │ for double tracking │ │ Cass │Michigan Central. Gravel pit │ 84.97│ 94.15 Cass │Grand Trunk Western. Additional strip │ 71.79│ 203.53 │ for double-tracking │ │ Berrien │Michigan Central. Additional right of │ 109.40│ 113.66 │ way │ │ Washtenaw│Michigan Central. Additional right of │ 49.35│ 130.68 │ way │ │ Washtenaw│Ann Arbor. Additional right of way │ 88.60│ 116.12 Ionia │Pere Marquette. Gravel pit │ 77.50│ 125.00 ═════════╧════════════════════════════════════════╧══════════╧═════════

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
Railroad _et 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.

════════════╤═══════
County. │Price.
────────────┼───────
Jackson │ $75.71
Ingham │ 74.90
Clinton │ 42.38
Shiawassee │ 67.18
Saginaw │ 40.80
Bay │ 38.69
Arenac │ 32.47
Ogemaw │ 8.69
Roscommon │ 10.74
Crawford │ 8.41
Otsego │ 15.62
Montmorency │ 12.38
Cheboygan │ 17.13
════════════╧═══════

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.

═════════╤═══════════════════╤══════════╤═══════════════════╤═════════
County. │ Railroad. │ 1900 │ Railroad. │ Actual
│ │Appraisal,│ │transfer,
│ │ average │ │ average
│ │per acre. │ │per acre.
─────────┼───────────────────┼──────────┼───────────────────┼─────────
Jackson │Michigan Central. │ $71.36│Michigan Central │ $165.67
│Air Line │ │Air Line. New Line │
│Michigan Central. │ 88.47│Jackson and Battle │ 239.53
│ │ │Creek. Average │
│ │ │entire county │
│Michigan Central. │ 5.00│Jackson and Battle │ 65.79
│Waste land │ │Creek. Wasteland │
│Michigan Central. │ 93.30│Jackson and Battle │ 298.51
│First-class farm │ │Creek. First-class │
│ │ │farm │
│Jackson, Lansing │ 75.72│Jackson and │ 293.34
│and Saginaw. │ │Suburban. │
│Average country │ │ │
│values │ │ │
│ │ │Detroit, Ypsilanti │ 393.74
│ │ │and Ann Arbor │
Monroe │Flint and Pere │ 93.30│Flint and Pere │ 215.21
│Marquette. │ │Marquette. Monroe │
│ │ │to Toledo │
│Michigan Central. │ 93.30│Toledo and Monroe. │ 461.13
│ │ │Electric │
│Lake Shore and │ 93.30│Detroit and Toledo │ 214.38
│Michigan Southern. │ │Shore Line. (Duffy)│
│ │ │Detroit and Toledo │ 262.49
│ │ │Shore Line. (Burt) │
Kalamazoo│Michigan Central. │ 89.41│Michigan Central. │ 236.22
│ │ │Kalamazoo to │
│ │ │Mattawan │
Van Buren│Michigan Central. │ 66.54│Michigan Central. │ 196.00
│ │ │Kalamazoo to │
│ │ │Mattawan │
Cass │Michigan Central. │ 84.97│Michigan Central. │ 260.61
│ │ │Cut-off near │
│ │ │Pokagon │
│Michigan Central. │ 10.00│Michigan Central. │ 60.00
│Wasteland │ │Waste on cut-off │
Genesee │Grand Trunk │ 98.10│Grand Trunk │ 337.56
│Western. │ │Western. Improved │
│ │ │line │
Genesee │Pere Marquette. │ 80.81│Flint and Pere │ 234.00
│ │ │Marquette. Change │
│ │ │of line │
Montcalm │Pere Marquette. │ 29.00│Pere Marquette- │ 135.81
│ │ │Greenville-Stanton.│
Calhoun │Grand Trunk │ 61.44│Grand Trunk │ 491.13
│Western. │ │Western. Change of │
│ │ │line west of Battle│
│ │ │Creek │
Calhoun │Michigan Central. │ 74.38│Jackson and Battle │ 218.74
│ │ │Creek. Electric │
Tuscoia │Michigan Central. │ 60.75│Michigan Central. │ 73.04
│ │ │Caro-Owendale │
St. Clair│Pere Marquette. │ 43.18│Rapid. │ 287.05
│ │ │Anchorville-Marine │
│ │ │City │
Washtenaw│Ann Arbor. │ 38.60│Ann Arbor. Change │ 285.50
│ │ │of line near Ann │
│ │ │Arbor │
Ionia │Pere Marquette. │ 77.50│Pere Marquette. │ 112.30
│ │ │Lowell-Belding │
Manistee │Ann Arbor. │ 25.40│Ann Arbor. Change │ 47.33
│ │ │line near Harlan │
Osceola │Pere Marquette. │ 40.03│Pere Marquette. │ 57.93
│ │ │Change line near │
│ │ │Evart │
═════════╧═══════════════════╧══════════╧═══════════════════╧═════════

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, and that 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.

══════════╤════════════════════╤════════════╤════════════╤════════════ County. │ Name of road. │ Name of │ Appraisal, │ Actual │ │ village. │ 1900. │ transfer. │ │ │Average per │Average per │ │ │ acre. │ acre. ──────────┼────────────────────┼────────────┼────────────┼──────────── Jackson │Michigan Central │Parma │ $177.25│ $1,166.65 Van Buren │Michigan Central │Mattawan │ 571.00│ 2,439.04 Tuscola │Michigan Central │Caro │ 571.00│ 733.42 Oakland │Pere Marquette │Clyde │ 346.00│ 333.00 Oakland │Pere Marquette │Milford │ 571.00│ 1,136.37 Genesee │Pere Marquette │Grand Blanc │ 121.00│ 327.87 Kent │Pere Marquette │Lowell │ 571.00│ 1,552.26 Ionia │Pere Marquette │Belding │ 1,000.00│ 967.77 Washtenaw │Michigan Central │Dexter │ 571.00│ 718.75 Washtenaw │Michigan Central │Delphi │ 233.50│ 2,383.34 Cass │Grand Trunk Western │Cassopolis │ 458.50│ 1,600.00 Cass │Grand Trunk Western │Edwardsburg │ 222.25│ 466.67 ══════════╧════════════════════╧════════════╧════════════╧════════════

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.