worn out and have to be replaced. The item of contingencies is of such a doubtful character that it had best be segregated, if it is used at all. At first sight it would seem that interest during construction was an item of expense that would have to be reincurred and, in consequence, that it should be made a part of the cost of each element and, consequently, depreciated with it. But a consideration of the practical conditions existing at the time of renewal shows that but an extremely small portion, so small as to be practically negligible, of the original charge for interest during construction will have to be reincurred. Interest during construction is the loss of return on money tied up in plant under construction and, in consequence, not earning. In most cases, at the time of replacement, the plant is earning, and even the material required to replace that no longer serviceable forms a part of the working capital and, consequently, can be figured as a portion of the assets upon which a return can be obtained.

From general considerations and for the reasons above briefly stated, it would seem best to include the amounts derived through overhead charges as individual elements of plant costs.

Relative to the second consideration as to whether overhead charges should be applied in such a way as to be compounded, it must be admitted that there has been such a wide variation in the methods employed in large valuations made in the past as to have established no definite precedent.

Theoretically, engineering should be made an independent item and included with the others to which the percentage representative of loss of interest during construction should be applied. This seems logical when it is remembered that most, if not all, engineering expense is incurred prior to the completion of the construction

work and, in consequence, the interest on the money required for such engineering is lost during the construction period. This practice has been followed in many of the largest appraisals.

It is difficult to see why interest during construction should not be applied to organization and legal expenses, following the same line of reasoning, but there is substantially no precedent for such a practice.

50. Real estate. The valuation of land is one of the most difficult elements of an appraisal, due to the fact that the value of such property is looked at ordinarily from many points of view. A real estate investor or speculator may give land one value, whereas bank officers or others lending money upon real estate are naturally inclined to place the value of the property at a considerably lower figure. What is required for the replacement cost is the fair market value of the land at the time of the appraisal, or in other words such a sum of money as would be paid by a willing buyer to a willing seller.

Fair values for real estate can be given by the engineers making the appraisal of the physical property of undertakings in but few cases. The engineers must depend largely upon the personal opinions of men familiar with the prices paid for similar property in that locality, upon whose judgment as to local values reliance can be placed. The appraiser must establish what, in his opinion, the proper value should be, after properly weighing all the evidence and figures obtained from local real estate experts. In presenting the final figure as to the value of the property, the engineer will find it best, in most cases, to present the figures obtained from the real estate experts, giving his own reasons for adopting the final figure. Frequently it will be of advantage,—simply as corroborative evidence, to obtain the prices paid in recent sales for surrounding or similarly situated land and

determine the ratio which such sales bear to the assessed valuation. Such a ratio applied to the assessed value of the land in question would throw some light upon the correctness of the value obtained for the appraisal.

The value of land determined by comparison with current sales of similarly situated real estate and by the best expert opinion will give as good figures as probably can be obtained for most cases where the uses to which the land is put may not result in a change in its value. Thus land used by telephone companies is developed usually by the construction of buildings conforming in outward appearance to the character of those in the vicinity, nor are there any special features introduced by its use to influence the value of surrounding property more than would be caused by the construction of a similar high grade building for business or residential purposes.

For the land used by railroads as a right-of-way or for terminals, the conditions are very different. The rightof-way, being a relatively narrow and continuous strip of land, frequently cuts up the property of an owner so as to seriously damage that which is not sold: it makes access in some cases from one part of the remaining property to the other more difficult, and in most cases it is claimed that the railroad itself tends to damage the property contiguous to the railroad. Whether or not all of these reasons should hold as good against the general enhancement in the value of land due to the increased ease of communication incident to the operation of the railroad and the encouragement thereby afforded to the construction of manufacturing establishments or for the disposal in more distant markets of the products of the farms, the fact remains that the railroads have had to pay more for the land which they occupy than is usually paid for land similarly situated and used for farming, residence, or business purposes.

In view of these facts, it has been the custom, in the appraisal of railway property to determine with the greatest care based upon as many individual cases as possible for land in thickly settled, sparsely settled and in farming or wild country, the ratio of the prices paid by railroads for their land to the fair present usual prices as given by real estate experts after the manner of valuation described above. Their figures, based on current prices for ordinary sales, have been raised by the ratios properly applicable to the land under appraisal.

In many cases, particularly in appraisals of the lands forming the right-of-way and terminals of railroads, it may be found best to eliminate expert opinion and derive the present value entirely from the records of the prices paid by railroads for land as compared with those paid by others for contiguous or similarly situated property.

The difficulty in obtaining satisfactory expert opinion is that such personal judgment is influenced almost invariably by the present uses of the property. Theoretically, the value that is desired is what the fundamental fair market value is without any regard whatever as to the purposes for which the land is to be used. If the value of land is increased by the ratio of such price to the mean advanced price which railroads usually have to pay for their land, and if this value is advanced still further as a portion of the entire property of the company, when recognition is made of the value inherent in the property as a whole as a "live" operating entity, and, still further, by the percentages representative of overhead charges, such as engineering, legal and contingencies, — it is apparent that the value of land will become abnormally inflated. Manifestly it is unfair to base the fundamental value of the land upon the estimates of men who cannot but be influenced by its use for a par

ticular purpose. Such a method would be somewhat analogous to enhancing the replacement cost by the presence of the plant being replaced, which, as has just been shown, is inequitable.

A somewhat similar question enters in the valuation of the land occupied by a telephone central office building. Such a building must be at the centre of distribution of all lines radiating from the central office. In the cases of large offices, the difference in the first cost of plant at the centre and one fifty or one hundred feet away would amount to many thousands of dollars. A telephone company in acquiring the land originally would be justified in paying more for land at the centre of distribution of its system of wires than the usual or current market value of similar property, and in many cases it may have paid such enhanced price. But in making the appraisal, such special value due to strategic position cannot be made a portion of the replacement cost. The advantages or disadvantages of location are properly cared for by considerations of the value inherent in the live property.

In addition to the value of the land, the expenses usually incurred in buying the land, in abstracting titles, recording the deeds and other similar expenses should be added.

51. Cost of land affected by cost of hypothetical buildings. Further, it is usually difficult, if not impossible, to acquire land properly situated, upon which there is not already a building of a kind unsuited to the purposes of the undertaking. The undertaking, when it acquired the land originally, had to purchase the buildings found upon it and to incur some expense in their removal. Thus the original cost of the land included not only the land itself but the buildings found upon it and with such cost should have been included the amount paid for their removal. In determining the replacement cost, it is not