Corridor Valuation

The railroad company may appear to know everything about the corridor, including the value of the property, but before entering into negotiations with the railroad, conduct your own initial corridor research to determine its physical and legal components. You will first need to determine what needs to be bought, as corridor acquisition may include a full bundle of physical rights, or perhaps only a part of the surface, subsurface or air rights. Also learn about any restriction on the use of the property and verify legal ownership: is the corridor owned in fee simple, or is it held under easement agreements?

History

Learning more about freight activity on the line is necessary to determine environmental implications. Railroad records may provide some of this data, but you may also find a wealth of information in local newspaper archives.

Condition

You can obtain permission from the railroad to conduct an on-the-ground inspection. Performing a complete assessment of the corridor’s physical condition is necessary to be able to prepare a feasibility study or corridor management plan.

Taxes and Charges

The railroad probably pays local real estate taxes and complies with other local ordinances. These payments are all public records that may provide clues as to how the local tax assessor’s office values the corridor. Your state may have a designated official—comptroller of the treasury, for example—who handles property tax assessments for railroads and is qualified to appraise railroad corridors. Visit the National Association of State Auditors, Comptrollers and Treasurers to search for a representative in your state to have your corridor appraised.

Appraisal Methods

Adequately and fairly assessing the value of rail corridors is a topic of much debate. No clear consensus has emerged on the best method to use for valuation, in part because no single approach appropriately accommodates the unique and complex issues associated with each specific corridor. The most widely used methods of valuating rail corridors, however, are:

Across-the-Fence Approach

• The Across the Fence (ATF) value refers to the market value of the land adjacent to the rail corridor. The assumption is that the land in the corridor would hold similar value to the land “across the fence,” meaning the nearby or adjoining land. For example, if a rail corridor runs through an industrial area, and the industrial land next to it sells for $100,000 per acre, the ATF value would typically be set at the same $100,000 per acre for the corridor.
• However, challenges arise when a rail corridor spans multiple land uses over several miles—such as industrial, residential or commercial areas—and the appraiser must segment the corridor accordingly. Land use on each side of the corridor might differ, creating more complexity. Additionally, appraisers may have varying interpretations of the ATF value due to differences in comparable sales, as well as variations in factors like topography, bodies of water, location and size of the parcels.
  • Corridor Factor
• Once the ATF value is determined, the corridor factor (CF) is applied to it. The CF reflects the premium associated with the fact that the corridor is already established and could be difficult or costly to recreate. Essentially, the CF recognizes the added value of the land as a continuous strip, which can be used for specific purposes (such as a trail or utility line) that may not be achievable through simply assembling disconnected parcels of land.
• The CF varies widely depending on the characteristics of the corridor—whether it’s urban, suburban or rural—and the demand for that type of land use. For instance, in a suburban area with high demand for transportation or utility corridors, the CF might be around 1.2, meaning a 20% premium is added to the ATF value. In other situations, the CF might be lower, as in rural areas where there’s less demand, or even higher in highly sought-after urban areas.
• This valuation method can be contentious, particularly in cases where rail corridors are donated or partially donated for tax purposes. The IRS has upheld the legitimacy of using CFs in some of these disputes, though the exact factor applied can be subject to debate, based on local circumstances and appraiser judgment. Therefore, it’s essential to consult with an appraiser who has experience with trail or rail corridor valuations, as they can provide the most accurate estimate for the specific context.
• A CF is usually considered reasonable only if the corridor remains whole, either through complete ownership (fee-simple) or protection under railbanking. If the corridor has been abandoned and easements have reverted back to adjacent landowners, making it incomplete, a CF generally wouldn’t be used.

Net Liquidation Value

• Net Liquidation Value (NLV) is an accepted appraisal methodology that is often used to value assets that have reached the end of their life. In layman’s terms, it is comparable to a “bulk-sale, liquidation price.” Trail sponsors and advocates have argued for this method to be used, but are often unsuccessful in such a pitch to the railroad because, after all, a willing seller must agree to the price. Some appraisers have taken a similar position to NLV in using the ATF x CF method but placing a CF of lower than 1.0.

Other Methods

• Comparable sales approach: This method assigns value by researching comparable rail corridor transactions. Market value is then established by analyzing the terms negotiated in these other transactions. The challenge with this method is to find past transactions that are truly comparable, such as those with similar population density, land-use demands, adjacent land uses and zoning, acquisition date and intended use.
• Income approach: This method determines value based on a property’s potential to generate income. A railroad may generate revenue from easements or licenses with billboard or utility companies that use portions of the corridor. Yet this approach is rarely applied to rail line acquisitions for trail purposes since such specified revenue information is usually difficult to obtain.

Sale of Excess Property and Railroad Materials

Generally, state and federal regulations require railroads to return corridors to their original condition upon abandonment, which includes the removal of tracks, ties and other structures. In most cases, the railroad will remove all salvageable materials before the final property transaction of a railroad corridor. However, you may find that the railroad is willing to sell more than just the corridor, and salvaging railroad materials, such as steel rails, could raise significant funds for trail development. The value of these materials and any excess property will need to be taken into account when appraising the corridor.

Resources

‣ Manual – Acquiring Rail Corridors: A How To Manual (see chapter 5, “Researching the Property,” and chapter 9, “Due Diligence”)

‣ Report – Valuation of Railroad Right of Way

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