By: John T. Schmick
(Note: The following is a summary of an article written by Shenehon appraiser John T. Schmick and Jeffrey K. Jones, MAI, Chief Appraiser of the Alabama Department of Transportation. The full article appeared in the Fall 2014 issue of Appraisal Journal . Appraisal Institute members and associate members may access the entire article at appraisalinstitute.org.)
Appraisal literature on corridor valuation most often discusses Across the Fence (ATF) methodology, which originated back in the 1880s, and is the most widely used corridor valuation methodology in practice today. However, ATF has not been updated to comply with the Uniform Standards of Professional Appraisal Practice (USPAP) adopted in 1987 by the Appraisal Foundation. ATF is based on an assumption that a corridor is at least as valuable as the land it passes through. This assumption is often disclosed in appraisal reports but is rarely (if ever) tested or proven. Combined with hypothetical conditions inherent in the methodology, reliance on ATF has produced an entire database of corridor transactions (sales and leases) contaminated by unsubstantiated extraordinary assumptions and hypothetical conditions. As a result, ATF value opinions, based on current practices, are not considered compliant with USPAP and may not credible.
The appraisal industry is split in its opinion on whether excess land exists in an active railroad corridor. Part of the appraisal community believes the corridor should be valued as one parcel, typically 100 feet wide. Other appraisers say there are distinct differences in the land within a rail corridor: there is land needed for track operations and land not needed for the track operations or excess land. When analyzing highest and best use for rail corridors, these opposing opinions lead to appraisers reaching significantly different conclusions regarding larger parcels, highest and best use, and values, for similar properties.
The article authored by Schmick and Jones discusses the economic properties of active rail tracks operated by Class 1 railroads as well as guidance established by decisions from the Surface Transportation Board. Suggested economic analysis of average track corridors by the authors illustrate that the ATF assumption, that corridor land value is the same as adjacent land, is rarely supported by market data. The article identifies this basic ATF assumption as an Assumed Minimum Value.
The discussion establishes that the excess land approach is often the correct approach.
The authors explore the reasoning behind the current common practice of not making adjustments to sales data used in corridor valuations for size, shape, topography, etc. Writings from early articles on ATF are referenced, uncovering that the reason for not adjusting corridor appraisals is a belief that if the land was not part of a corridor it would be part of a typical lot, and that comparing sales data to a typical lot does not need adjustments. This rational constitutes a hypothetical condition which is typically not disclosed in appraisal reports.
Finally, the authors assert that eliminating extraordinary assumptions and hypothetical conditions from valuing active rail corridors is necessary to achieve credible value opinions. Returning to basic market analysis and applying adjustments can transform ATF from a flawed methodology to a usable tool to determine market value.