upon this value, which has grown from almost nothing to vast proportions without the expenditure of money or the assumption of risk, is a question of tremendous importance.

Elaborate briefs have been submitted by counsel, at the request of the Commission, upon this. question, but it does not seem profitable to discuss or decide it in this connection. We shall assume, in disposing of this case, that the cost of reproduction is properly estimated upon the basis followed by these defendants, and that the item of value of right of way is to stand as a part of that cost, like any other item.

The same question is discussed at considerable length by the Interstate Commerce Commission in Advances in Rates, Western Case, 20 I. C. C. R. 307, 337-347, decided February 22, 1911. Commissioner Lane's opinion is quoted at length above in § 108. The Commission holds that an increase in land value should not justify an increase in rates and apparently concludes that actual cost of land is the more equitable basis of valuation though there may be some doubt as to what will be determined to be the true legal basis.

§ 119. Allowance of no return or a reduced rate of return on land.

The theory has been advanced that in a valuation for rate purposes, real estate may be considered separately and allowed only such a return as together with the profit from appreciation will constitute a fair return on the investment in real estate. This theory is stated in the brief of the City of New York before the special master in the 80 cent gas case as follows:

The complainant is not only not entitled as against the consumer to include in the investment on which a return is to be based the appreciation on its real estate, the unearned increment, but it may be seriously questioned whether it is entitled to any return on its real estate investment at all.

One per cent., over and above the taxes, has been quoted as reasonable for a real estate investment (the consumer is paying the taxes, as included in the operating expenses), and the suggestion is made in the following case that capital can be found to invest in real estate without return, except by appreciation. (Canty, J., in Steenerson v. Great Northern Ry. Co., 72 N. W. Rep. 713, at 718.)

4

The master in his report brushes this argument aside with the statement that there is nothing in the proof to support the contention that capital can be found to invest in real estate without expecting a return therefrom except through appreciation. This theory is not referred to in the opinions of Judge Hough or of Justice Peckham. Nevertheless it is common knowledge that the investor in urban land does look to future appreciation as well as to rents. He accepts a small nominal rate of return in the shape of current rents but supplements this in all calculations as to the adequacy of his profits by his estimate of the annual percentage appreciation in the value of his holding. An adequate return in the land holdings of public service corporations could justly be determined in exactly the same way. If it is found that the annual appreciation in land is 5% and that a fair rate of return to the company on the fair value of its property is 7%, then a net return of 2% plus this 5% appreciation is a fair return on the present value of the land.

§ 120. Reduced return allowed on terminals-Minnesota Supreme Court, 1897.

The case of Steenerson v. Great Northern Railway Company, 69 Minn. 353, 72 N. W. 713, decided October 20, 1897, involves the valuation of a railroad for rate purposes.

Consolidated Gas Co. v. City of New York, Circuit Court of United States, Southern District of New York, Report of Arthur H. Masten, Master in Chancery, May 18, 1907.

In this case the cost of reproduction of railroad land and structures was made the basis of determining fair value. The reproduction cost of the terminals in St. Paul and Minneapolis amounted to about one-third of the total reproduction cost of the railroad. Inasmuch as the reproduction cost of the terminal lands was determined by the market value of neighboring lands, which value was largely of a speculative character, the court determined that a net return of 22% on the terminal land constituted an adequate return for an investment of that character. Judge Canty, delivering the opinion of the court discusses this question at length. His discussion is in part as follows (at pages 718, 719):

7. (2) Let us now consider what in these times is a reasonable income on $14,000,000, invested in these terminals, and $30,000,000, invested in the rest of the road. The great value of the real estate covered by these terminals is given to it by anticipating the future. Very little of this real estate is in or near to the business center of either city. Most of it is outlying city property and suburban property. It is safe to say that other real estate similarly situated, in the same portions of St. Paul and Minneapolis, does not, on an average, yield an income of 1 per cent. per annum above the taxes on the price or valuation at which it is held; and there is, as a general rule, no use to which such property can be put that will cause it to yield any greater income. In fact, it is doubtful if the same area of other property along and around these terminals could, on an average, by any use to which it could be put, be made to yield an annual income of 1 per cent. on one-third of the valuation placed on these terminals. Again, it is safe to say that in ordinary times, at least, capital could readily be found to buy such property at its market value for the purpose of renting it for 1 per cent. per annum above the taxes on it. In fact, millions have often been invested in such property without any prospect of any income at all from it for many years, and undoubtedly such will be the case again. Such

real estate is valued, not on account of its present power to produce an annual income, but because it is believed that it will be still more valuable in the future. The owner of such property cannot expect to eat his loaf and still have it. He cannot expect that the property will pay a full-sized annual dividend, and at the same time double or treble in value every 10 or 20 years. He expects his dividends to accumulate in the form of increase in value. Thus, according to the railroad company's own showing in the present case, much the greater portion of the terminals which it now values at $14,000,000, were originally procured for the sum of $381,117. If this is true, the company has already realized some tremendously large dividends on these terminals. Again, if it and the owners of other property similarly situated have anticipated the future too much, and have set too high a value on their property, so that, in the opinion of the public, there is no prospect of any material increase in its value in the near future, that does not prove that the property should produce greater annual dividends. It simply proves that this property cannot be sold on the market for what they pretend to value it at, and that before sales can be made the price asked must be reduced, so that there will be a prospect of future increase in value sufficient to warrant investment, because the public, who fix the market price, do not and cannot expect that the annual income derived from such property will ordinarily be sufficient to pay interest on the investment. The market price of such property is not controlled, or, at most, is controlled only in part, by its power to produce immediate annual income. Again, the public, and not the court, must be the judge of whether or not such property will increase in value in the future, and, if so, how much. Whether the conditions warrant the opinion of the public in the matter is a question which the courts cannot go into, in such a case as this, any more than in many other cases where public opinion establishes market prices. And, where such property cannot be made to produce a reasonable annual income on the present market price of the same, it is clear that the public have anticipated a future increase in such market price. It is no answer to this argument to say

that the railroad company may not want to speculate, and is entitled to more definite, and perhaps more substantial, returns on its investment. It necessarily becomes a speculator when it invests in such property. It has so invested, and profited enormously by its speculations. The investments of a railroad company in this class of property are no more sacred in the eyes of the law than the investments of private parties in the same class of property. For the purpose of determining what is a reasonable income to a railway company from its investments in this class of property used for railroad purposes, we have a right to consider what is a reasonable income to private persons from their investments in the same class of property when used for private purposes.

There is another consideration which, it seems to us, adds most conclusive proof that our position here is correct. The traffic on these railroad terminals will not bear any such excessive and unreasonable charges as it would be necessary to make in order to produce full-sized dividends on the enormous valuation placed on the terminals. In this case the cost of reproducing the terminals is, as we have seen, one-third of the cost of reproducing the whole railroad system within the State. . . Then, from all of these considerations, it is clear that where real estate outside of the business center, and in the outlying districts of a city, has been given a large speculative or prospective value, it cannot, whether used for railroad terminals. or other purposes, be made, ordinarily, to produce a reasonable annual income on the investment, and the profits which are expected from such investments are not annual, but accumulated profits, to be realized by future increase in value. Neither do these considerations deter railroad companies from investing liberally in such property. They, as well as other investors, have always been desirous of taking advantage of any such expected increase in value, and it has been quite common for companies having the means to acquire terminals in a growing city far beyond their present needs. It is not necessary to determine here what rate of annual income on the cost of reproducing these terminals is the lowest which the court would uphold before declaring the rates fixed by the commission