exist but that the city were otherwise as it is to-day; (2) that an imaginary company starting in under such circumstances would seek to duplicate the system which the applicants in fact have; (3) that it would want, for car storage barns and similar purposes, the exact parcels now owned by the applicants' system, even though the parcels still used by the applicants' system for such purposes are located in highly developed and valuable areas; (4) that upon every such parcel the imaginary carrier starting anew would find buildings similar to those now surrounding the property; (5) that it would proceed to tear them down and erect other buildings on the land, the value of the land itself to be added to the reproduction cost of the buildings torn down and the reproduction cost of the buildings now in fact maintained on the land by the applicants' system, to arrive at the fair present value of the land and buildings. The applicants presented no data showing that when the land was actually acquired, buildings were in fact torn down. The Commission did not accept this theory of land valuation. The Commission says (at pages 139, 140):

The theory is clear. The applicants assume that the Metropolitan system does not exist, that otherwise the city is as it is to-day, that an imaginary company starts in to duplicate the existing system, that it would want the exact parcels now owned by the Metropolitan system, that upon every parcel it would find buildings similar to those now surrounding the property, and that it would proceed to tear them down and erect other buildings on the land.

There are several violent assumptions in this list, but one illustration will suffice. The Metropolitan Company owns a whole block bounded by Fourth and Lexington Avenues, and 32d and 33d Streets. North and west of this block stand the Seventy-first Regiment Armory, the new Vanderbilt Hotel and the Park Avenue Hotel. South and east are apartments,

stores, warehouses, etc. Mr. Wheelock estimates the market value, plus cost of acquisition, of the land in the block at $1,680,000, and at the request of counsel adds $340,000 to represent the cost of buildings like those just mentioned which it is assumed would be razed to make way for a one-story car barn; and counsel asks that the Commission find the fair value of the land in this one block to be practically $2,000,000.18 In another instance, the imaginary buildings are said to increase the "value" of the land by over 50 per cent. of what is acknowledged to be its fair value as between a willing buyer and a willing seller.

If this theory be sound, then when the block comes to be entirely surrounded with buildings of fifteen or twenty stories. (that is the tendency in that district), the capitalizable value of that land will be not only the fair market value of the land itself, but that value plus the cost of these ten, fifteen or twentystory buildings, upon the assumption that "such buildings would be cleared off." The company could then with equal propriety appear before the Commission and ask that securities be authorized for the difference between the estimated cost of the surrounding buildings at present and the cost of the taller buildings then existing.

The Commission does not accept any such theory as proper or as affording the basis for determining the reasonable value of the land, and no precedents or court decisions have been cited to support it. It should be noted, also, that the applicants have not presented any data from the records of the company to show that when the land was actually acquired buildings were torn down. If a company were forced to make such expenditures, they might be charged to capital subject, perhaps, to amortization in part, but that is not the situation. at present. No such facts have been shown, and the question is not what might be done to increase expense, but what is the present reasonable and fair value of certain real property-not including imaginary buildings.

18 It should be noted that the imaginary improvements to be purchased and thrown away are not valued at their scrap value but as commercial

enterprises.

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.