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4. METHODS OF APPRAISING LAND

§ 146. Sales method defined.

In ordinary land appraisals the customary method has been to secure the opinion of local real estate experts in regard to the value of a particular piece of land. The sales method or the sales and assessment method has been used in certain public utility valuations. The sales method was used partially in the Michigan Railroad Appraisal of 1900 and 1902. It was used in the Wisconsin Railroad Appraisal of 1903 and in the Minnesota Railroad Appraisal of 1907. The Wisconsin Railroad Commission has made use of it in a number of public utility valuations. It has been described as follows by W. D. Pence, Engineer of the Wisconsin Railroad Commission: 19

The sales method may be defined as a plan or process for the systematic collection and comparison of data relating to real estate transfers for the purpose of estimating true market realty values. It consists in a study of the transfers of neighboring property having conditions or characteristics similar to the land whose value is to be determined, and is intended to duplicate, as nearly as may be, the mental or judicial processes ordinarily employed by the so-called "local real estate expert," with a view to arriving at results approximating those which would be reached by such local expert acting without bias or suggestion. The sales method is capable of application in a variety of ways; in fact, is as flexible in its possible applications as are the varied methods employed by individual local experts. Two interpretations of the sales method have been most commonly employed. In one of these the area and consideration in each sale of similarly situated land is found, and the average unit price (per square foot, per foot frontage, per lot, per acre, etc.), ascertained, and this unit applied to the tract under investigation. The other appli

19 See State Journal Printing Co. v. Madison Gas and Electric Co., 4 W. R. C. R. 501, 528, March 8, 1910.

cation of the method introduces what, in many cases, is believed to be an additional safeguard, consisting of the use of the average assessed value of adjacent or similarly situated lands, in combination with an average ratio or percentage representing the relationship of the assessed value of transferred lands to the total consideration paid for such transferred lands in the district or locality under consideration, all of these figures being based on the "ground values" exclusive of the improvements thereon. Such use of assessment figures is designed to introduce, as far as may be, the results of the judicial processes of the assessor who, at least in theory, serves on behalf of the public as an unbiased expert in the matter of relative valuations, and who attempts to make allowance for the peculiar attributes or characteristics of individual parcels of real estate in any given locality or neighborhood of a city. In the broader and more flexible applications of the sales method, the expert adopts one or the other of the processes just outlined, or blends the two together in such fashion as to yield the most consistent and trustworthy final result.

§147. Sales method discussed.

The sales method is discussed by Dwight C. Morgan, in his report to the Minnesota Railroad and Warehouse Commission, on the Minnesota Railroad Appraisal of June 30, 1907.20 Mr. Morgan states that particulars and detailed information as to the sales method may be found in an address by T. A. Polleys, Tax Commissioner of the Chicago, St. Paul, Minneapolis and Omaha Railroad, and in a paper by Prof. T. S. Adams, in the Proceedings of the Minnesota Academy of Social Science, Vol. 1, 1907. The sales method in relation to the Michigan Railroad Appraisal is discussed at length in a paper by Henry Earle Riggs, Proceedings of American Society of Civil Engineers, November, 1910, page 1369. The Wisconsin Railroad Commission discusses the sales method very fully in

20 See Annual Report, Minnesota Railroad and Warehouse Commission, 1908, pages 29-36.

State Journal Printing Company v. Madison Gas and Electric Company, 4 W. R. C. R. 501, 535, decided March 8, 1910. The Commission says in part:

It is, of course, a fact that the determination of the market value of any piece of real property is ultimately a matter of judgment, and that no method of valuation yet discovered will disclose the exact value or do much more than indicate, within perhaps fairly narrow limits, the figure at which the value should be placed. But it is believed that the methods thus employed by the staff are the best that have thus far been used for this purpose. While in actual application they may not disclose the actual figure at which the value should be fixed, they can not fail to be of the greatest importance in appraisals of this kind. When properly employed, they will disclose facts that indicate approximate values, and facts that are of the greatest aid to the judgment in arriving at the fair value in each particular case.

§ 148. Sales method rejected in Minnesota Rate Case.

In the Minnesota Rate Case, Judge Charles E. Otis, special master in chancery, in his report of September 21, 1910, declines to give much weight to appraisals made by the sales method. In this case the valuations found by the state's witnesses using the sales and assessment method were much lower than those testified to by the experts employed by the railroads. The master in his report says: 21

It is conceded that when applied to any particular tract of land it cannot be relied upon, but it is claimed that when applied to extensive contiguous tracts, as are rights of way, the doctrine of averages will bring about reasonably correct results. To make a market value assessment, the assessor could

21 Shepard v. Northern Pacific Railway Co., in equity, Report of Charles E. Otis, special master in chancery, United States Circuit Court, District of Minnesota, Third Division, September 21, 1910, § 73.

not rely on such methods with respect to any particular tract, but would be compelled to make a personal inspection and determine whether assessment must be reduced or increased and where it stood with reference to such average. We can understand that, for the purpose of equalizing values as between counties where many contiguous sections of land are under consideration and for the purpose of making each county pay its relative proportion of state taxes, such method would be of great value by reason of the broad base for purposes of comparison, but the relative market value for the counties having been ascertained, then a personal inspection by the assessor would be necessary of each tract assessed to determine whether the assessment must be reduced or increased, that is, whether as previously assessed it was above or below the general average.

The evidence shows that the railroad lands in St. Paul constitute about eight per cent. of all the assessed lands in the city, and, distributed among all the railroads owning terminal properties, each has but a very small per cent. thereof. These considerations, added to the notoriously gross inequalities of assessments, compel the master to give little weight to testimony of this character. On the other hand, he does not conceive he is bound to accept opinion testimony as absolute but only as a large determining element in connection with all the facts and circumstances disclosed in the evidence, and this has been done in reaching his conclusions. He has given careful consideration to actual purchases recently made in acquiring property for railroad purposes and cited to show that they substantiate values fixed by the witnesses on either side, for of course they are of great value for such purpose.

CHAPTER VII

Pavement Over Mains

§ 160. Consolidated Gas Case.

161. Consolidated Gas Case-Appeal to Supreme Court of the United

States.

162. Iowa Supreme Court in Cedar Rapids Gas Case, 1909.

163. Wisconsin Railroad Commission-Rate Cases.

164. Wisconsin Railroad Commission-Purchase Cases.

165. Opinions of Hagenah, Corey and Marston.

166. Purchase of water plant at Trenton, Mo.

167. Des Moines Water Rate Case, 1910-1911.

168. New York Public Service Commission in Gas Rate Case, 1911. 169. Summary and conclusion.

§ 160. Consolidated Gas Case.

In the New York City Eighty Cent Gas Case involving the right of the state to reduce the price of gas charged by the Consolidated Gas Company the question of the treatment of the cost of pavement over mains and services came up for consideration. The book value of the mains was $7,852,151 and the book value of the services was $1,212,071. This book value was considered a fair estimate of the cost of constructing the mains and services. The estimated cost of replacing the mains was, however, placed at $12,636,000 and the estimated cost of replacing the services at $1,994,000. The cost of reproduction or replacement cost of the mains and services was therefore $5,605,000 in excess of the book value or original cost. This difference between book value or original cost and replacement cost or cost of reproduction was admitted to be due to the fact that the city had at its own expense built costly pavements over the mains of the company and to the fact also that since the laying of the mains the

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