titled to earn. If the real estate should have depreciated in value since its purchase by the Company, it follows that a return upon such depreciated value only would be allowed, as is done in the case of the other physical property of the Company. This appreciated value is in the nature of a profit reinvested for the use of the public.

§ 117. Minnesota Railroad Rate Case, 1911.

In Shepard v. Northern Pacific Railway Co., 184 Fed. 765, 806, decided April 8, 1911, Circuit Judge Sanborn holds that:

The measure of the value of real estate is its market value for its most available use. There was uncontradicted evidence that the most available use of the terminal lands in Duluth, the use for which they were of the greatest value, was their use for railroad purposes, that they were indispensable for those purposes, that the real estate dealers who testified to their values had fixed them originally in 1906, without regard to their value for railroad uses, and that since that time they had advanced in value from 15 to 25 per cent. Thus the proof is ample to sustain the addition to this 1906 estimate of the value of these lands of 25 per cent. thereof for railroad value, cost of acquisition, and consequential damages which the master allowed.

§ 118. Interstate Commerce Commission-Problem discussed but not decided.

The Interstate Commerce Commission in the case of Spokane v. Northern Pacific Railway Company, 15 I. C. C. R. 376, 414, decided February 9, 1909, considered but did not decide the question as to whether the increased value of railway right of way and terminals should be included in the fair value for rate purposes. In this case the Great Northern Railway Company estimated the value of its right of way and terminals at $87,000,000 of which $55,000,000 was for terminals in ten cities. The

Northern Pacific Railway Company estimated the value of right of way and terminals at $107,000,000, $73,000,000 of which was for terminals in eight cities. The following is from the opinion of the Commission:

The practical importance of this question will be readily apprehended. The Northern Pacific Railway extends through a comparatively thinly settled portion of this country. In comparison with other sections land values along its line are small. Its lines penetrate no city which can fairly be called a great city. Nevertheless, the cost of its right of way equals almost one-third of the entire cost of reproducing that property.

The original cost of this right of way to the Northern Pacific Company was insignificant as compared with the present valuation placed upon it. What of it was taken at the time of the original construction, cost practically nothing. Much of it was given by the Government for the purposes of a right of way, which, it should be noted, is entirely distinct from the land grant of the company. The terminals in Spokane are mainly located upon the right of way of the railway. They cost the railway nothing whatever, and they are extended in this statement at $7,000,000.

A considerable portion of its terminal property in Seattle has been purchased within the last seven or eight years, but the prices paid for this were nothing like the values now placed upon it. It was said by one witness for the defendants that the terminals of the Northern Pacific and Great Northern in Seattle had appreciated within the last few years 150 per cent., and that portions of their terminal lands had increased within that time from 500 to 600 per cent.

Whatever may be true to-day, in the comparatively near future the structures of the railways of this country will be less in value than the land upon which they stand, estimated as the value of the right of way has been estimated in these cases. Whether, under the laws and Constitution of the United States, our railroads can demand a return not only upon the money which has been actually invested in these properties, but also

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.)

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.

4

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