Discussion Draft - Version 10/25/2001
The Capitol Hill Declaration on Corridor Valuation:
An Appeal for a Paradigm Shift from Monopolistic to Market
Corridor Valuation Methods
And
Federal Rights-of-Way Rent Schedules
For consideration before
The Workshop on
Corridor Valuation Methods and Right-of-Way Fee Schedules
U.S. Bureau of Land Management (BLM)
and
U.S. Forest Service (USFS)
Phoenix Park Hotel
520 North Capitol Street, N.W.
Washington, D.C.
9:00 AM to 3:30 PM
Submitted by
The Ad Hoc Task Force on Corridor Valuation
December 4, 2001
Charles Warren, ASA, San
Francisco, Visiting Professor of Real Estate,
Istanbul Technical
University *
Wayne Lusvardi,
Appraisal Certificate/UCLA,
Metropolitan Water
District of Southern California *
James Wheyland,
ARA, Pacific Consultants, San Diego, California
Stephen Denton, SRWA, MBA,
Los Angeles County Sanitation Districts
Peter R. Steuer, SRWA,
Member California State Bar,
Alameda Corridor Engineering
Team, Los Angeles
Paul Norlen, MAI,
Metropolitan Water District of Southern California
John Wright, MAI, MBA,
Independent Appraiser/Expert Witness, Chatsworth, California
* Principal co-authors
No endorsement is intended or implied by any professional appraisal trade associations.
The views and opinions expressed are solely those of the authors.
Neutral Reviewer:
Patricia Watters, PhD.,
Economics
Abstract
Many
of the conventional methods we have historically used to value corridor real
estate and property rights therein (“corridors within corridors”) are beginning
to look questionable - and most certainly, severely limited -in light of recent
market developments in the deregulation of “network industries” (railroad,
electric power, telecommunications, natural gas). In today’s deregulated economy, the value of secondary uses in
corridors have become uncoupled from land-based valuations and reflect
enterprise value and the cost of capital. Miniaturization of fiber optics and
wireless technologies, and new fractional property rights, have resulted in the
capability, for example, of “co-locating” fiber optic conduit in transportation
corridors without any discernible impact on the highest use or special use of
corridors. Federal land management agencies would likely realize significantly
higher rents and easement values from enterprise-based valuations rather than
from traditional land-based valuations in rural areas where most government
lands are situated. Much like harvesting timber on Forest Service lands, the
underlying land value is immaterial to the market value of the trees.
In
a deregulated economy “seller’s market” prices (aka “across-the-fence” or “land
based” values) for non-damaging secondary use rights within corridors, or
potential corridors, no longer comport with the definition of “fair market
value criterion.” We contend that
“buyer’s market” prices (aka “going prices” or “alternate route” values), while
still one-sided, offer the closest approximation to the “fair market value
criterion” within limited and closed market corridor properties where all
transactions are unavoidably one-sided.
Both law and government appraisal standards are averse to the use of
“seller’s market” values (e.g., hold-out value, captive market value, value to
owner, sentimental value, distressed sales, related-party transactions).
Without
a postulate of choice there is no such thing as fair market value. Rental schedules and administrative
protocols for the appraisal of easements should conform in concept to what is
called the Coase Theorem in economics that incorporates a postulate of choice
or flexibility into the valuation equation, as restated below.
A Proposed Corridor Valuation Corollary to the Coase
Theorem: The secondary user of a
corridor may be able to eliminate or reduce the cost of assemblage of a
corridor by selection of an alternate route or a minor, non-interfering
property interest( easement, lease, license). Without such choice there is no
such thing as fair market value (i.e., The Coase Theorem Proposed
Corollary).
We
are doubtful that corridor “sellers” will accept “buyer’s market” prices or
appraisals in limited to closed market corridor properties especially where the
seller remunerates the appraiser.
Nonetheless unlike private sector valuations and appraisals, government
corridor rental schedules should uphold the higher “fair market value” standard
reflected in “buyer’s market” price as there are no pure “open and competitive”
markets in corridor properties. A major
impediment to resolving the problem of equitable rental schedules and easement
values for use of Federal lands is that whatever thin market data is available
almost entirely reflects “seller’s market” (ATF) prices. The use of “going
prices,” percentage rents, and auction prices (buyer’s market prices) for
corridor rents comes nearest the “fair market value” criterion rather than
land-based values and corridor premiums (seller’s market prices) that are
predicated on the unavailability of an alternate route. For easement “corridors
within a corridor,” alternative route adjusted values and/or fair division
algorithms to allocate the “buyer’s gain” may serve as the best proxy for fair
market value.
Salient
Quotes
“The seller’s capacity to control prices is
constrained by the availability of an alternative or substitute to which the
buyer can turn. This is the key idea in
understanding monopoly: availability to customers of alternatives or
substitutes.” Excerpt from Charles E. Lindblom, Professor Emeritus
of Economics, Yale University, The Market
System: How It Is, How It Works, and What To Make of It (2001): 156.
“In the absence of prices, there are no
obvious choices, and choices become irrational in their ignorance of
(alternative) costs.…prices must measure cost. It is implicit in what has been
said that prices pulled out of a hat will not do, for prices must in some sense
measure value. But since nothing is of
value except as someone puts a value on it, we must ask whose values are to be
represented in prices (e.g., buyers or seller prices)…There exists no correct
value, no correct estimate of cost, no one maximally efficient choice, no
correct price. It all depends on whose
values are to count.” Charles E. Lindblom, The Market System (2001):133-134.
“In the real world, pricing has
little to do with cost, since entrepreneurs will charge whatever price they can
get away with,” Geoff Mulgan, “Cost
and Prices: Whatever You Can Get Away With,” Paper presented at the
International Communications Society Meeting, Cambridge, Massachusetts, 1988,
cited in Lee W. McKnight and Joseph P. Bailey, Internet Economics (MIT Press, 1999): 191.
“The principle of substitution
affirms that when several similar or commensurate commodities or goods, or
services are available, the one with the lowest price will attract the greatest
demand and the widest distribution.
Opportunity cost, a related concept, is the cost of options foregone or
opportunities not chosen.” Appraisal of Real Estate, 10th Ed.
(1992): 65.
“Fair value for purposes of the
award is the loss to the owner of the easement, not the gain on the other side
of the extinguishment.” Redevelopment Agency vs. Tobriner (“Toberiner II”)
215 California Appeals Court, 3d 1099, footnote 7 (1989).
“All comparables are sales, but not
all sales are comparables.” Common phrase used by real estate
appraisers.
“If among a nation of hunters…it
usually costs twice the labour to kill a beaver which it costs to kill a deer,
one beaver should naturally exchange or be worth two deer.” Adam Smith, The Wealth of
Nations (Random House, 1937): 47.
“If the individual hunter knows that he is able, on an outlay of one day’s labor, to kill two deer or one beaver, he will not choose to kill deer if the price of a beaver is three deer, even should he be a demander of final purchaser of a deer alone. He can ‘produce’ deer more cheaply through exchange under these circumstances…Nothing is said or implied to the effect that market price should equal cost of production…The labor input that measures the cost of a beaver is that required to produce an alternative, two deer…’The cost of beaver is deer and the cost of deer is beaver, and that is the only objective and scientific content in the cost notion. The opportunity cost of a commodity is measured in units of alternate or displaced product’…’The cost of any alternative chosen is the alternative that has to be given up; where there is no alternative to a given experience, no choice, there is no economic problem, and cost has no meaning’. Economic cost, then, consists in the renunciation of some ‘other’ use of some resource or resource capacity in order to secure the benefit of the use to which it is actually devoted.” James M. Buchanan, Cost and Choice: An Inquiry into Economic Theory (Liberty Fund, 1996): 1-15. Mr. Buchanan is a recipient of the Nobel Prize in economics.
Synopsis of
Propositions
Proposition 1 – The current state of the
art of corridor valuation is methodological chaos.
Proposition 2 – Conventional corridor
valuation methods reflect a market cultural lag.
Proposition 3 – The secondary user of a
corridor may be able to eliminate or reduce the cost of assembling a corridor
by selection of an alternate route or a minor property interest (easement,
lease, license; without such choice there is no such thing as fair market value
(i.e., Proposed Corridor Value Corollary to Coase Theorem).
Proposition 4 – The “highest and best
use” of adjacent land applies in those situations where full fee replacement of
the corridor is called for, while the least cost concept contained in the
“Principle of Substitution” most pertains in those situations where a
non-damaging and non-replaceable “corridor within a corridor” is sought.
Proposition 5 – In a deregulated
environment, secondary use rights in corridors have become uncoupled from
land-based (ATF) values and imputed corridor premiums predicated on the
unavailability of alternate routes.
Instead such rights derive from enterprise value and the cost of capital
as measured by fluctuating “going prices,” percentage rents, and auction
prices.
Proposition 6 – A corridor “buyer’s
calculus” (“going price”) is the best proxy for fair market corridor rent in
closed or limited markets where few, if any, transactions meet the tests of an
open and competitive market. The Federal government is likely to realize
significantly higher rents from “going prices” in rural areas where most of
their properties are located than from land-value based rents; and, conversely,
“going prices” would likely result in lower rents in urban areas.
Proposition 7 – Sometimes corridors impart
cost savings or opportunity costs to new users without imposing any costs on
corridor owners.
Proposition 8 – To comply with the fair
market value criterion, any use of ATF values for establishing easement values
need to hypothetically assume the availability of an alternate route that is
competitive to the proposed route across Federal lands or rights of ways even
where no such route exists.
Proposition 9 - Undervaluation of corridor
use rights may result in the tragic overuse of the corridor commons. Overvaluation of corridor rights may result
in the inefficient use of corridors for both corridor owners and the larger
economic welfare.
Proposition 10 – Appraisers and government
agencies can no longer ignore the inconsistency between government appraisal
standards that require treatment of “navigational servitudes” as reflecting a
nominal valuation in governmental acquisition, and conversely appraise high
values for the same property when the government seeks to lease or license
it.
Proposition 11 – Corridors are
multi-dimensional properties and must be appraised as such.
Executive
Summary
Capitol Hill Corridor
Valuation Declaration
An Appeal for a Paradigm
Shift from Monopoly to Market
Corridor Valuation Methods
And
Federal Rights of Way Rent
Schedules
Synopsis In
Question and Answer Format
Posed by BLM/USFS
The Workshop on
Corridor Valuation Methods and Right-of-Way Fee Schedules
U.S. Bureau of Land Management (BLM)
and
U.S. Forest Service (USFS)
U.S. Capitol Building
Washington, D.C.
November 26, 2001
Condensed Answer: Conventional corridor valuation methods (e.g., Across-The-Fence (ATF) Method, Reproduction Cost Method, Liquidation Value Method, Value for Non-Corridor Use), and legal case law approaches such as the Nominal Method, are both self-interested and polarizing approaches that do not solve the corridor fair market rent valuation or easement valuation problems at hand in a “new economy” in a deregulated environment. Deregulation of the natural gas, telecommunications, and regional electric utilities requires consideration of alternative methods that reflect “buyer’s market” value that assumes the availability of an alternate route in contrast with “seller’s market” value (ATF value, corridor premiums) that are predicated on no alternate route:
· The Going Rate Method (based on a buyer’s calculus) for estimation of fair market corridor rents;
· Percentage Rents and Auction Prices uncoupled from land-based valuations.
· The Alternate Route Method for estimation of the fair market value for compatible use easements within existing corridors or Federal lands;
· Fair Division Algorithms for estimation of easement percentage interests;
The recommended change from conventional corridor valuation methods, that worked in a monopolistic regulated environment, to the emerging market based methods in a partially deregulated environment, reflects a paradigm shift:
· From “cost-driven” to “market-driven” going prices and rents,
· From “Across-The-Fence” prices to “Across-The-Board” Prices,
· From “seller’s market” values that are predicated on no choice, to
“buyer’s market” prices that assumes the availability of alternate routes,
· From a Loss Paradigm and a Gain-Capture Paradigm to a Cost
Avoidance and Fair Division Paradigm.
The shift from conventional to emerging methods of corridor valuation is based on the Coase Theorem in economics, adapted from Nobel prize winning economist Ronald Coase, restated and applied below to the problem of the valuation of a “corridor within a corridor”:[1]
A Proposed Corridor Valuation Corollary to the Coase Theorem. The secondary user of a corridor may be able to eliminate or reduce the cost of an easement or rent within a pre-existing corridor by selection of an alternate route or a non-interfering property interest therein (e.g., permanent easement, lease, license, relocatable easement). If no cheaper alternate route is available, an appraiser must assume one or otherwise the valuation produced will not reflect fair market value because market value is indisputably predicated on a postulate of choice (syllogism: if no choice, then no market value). If a cheaper and lesser property interest can be acquired without the need for replacement corridor by the corridor owner, then such lesser interests should be valued based on the appraisal Principle of Substitution that assumes several similar or commensurate routes or property rights are available and the one with the lowest price will attract the greatest demand and highest distribution.[2]
In principle, the
most feasible route would be less costly than an alternate. One of the frequent oversights of right of
way acquisition appraisal is the time value of money. It has little bearing in government corridor acquisitions where
orders for possession can be judicially obtained and where the all-in
acquisition cost is rarely given much consideration and, in any event, may be
judicially determined. However, with
market-driven acquisition of property interests within corridors or Federal lands,
the most feasible, direct route may have a higher cost than alternatives
because of the greater time necessary to assemble an alternative and the
associated cost of capital. Another
variant on this theme is that a more circuitous alternate route may have a
lower true, all-costs-included, capital price and thus be more attractive than
the shortest distance between two points.
Permits and licenses within Federal lands and utility corridors
typically have arduously long processing times compared to similar private
properties; but offer the opportunity to deal with only one property owner and
may avoid private property “hold-out” prices.
Setting rental or
easement compensation based on the highest and best use as a corridor as
measured by ATF values only comes into play when there is need for replacement
corridor. Any cost savings that accrue to the secondary user of the corridor by
avoiding the higher cost of real estate “across-the-fence” (surplus value or side-benefit) should
not be the basis of monetary consideration for a lease or an easement unless
deemed legally permissible. An exception could be where the seller’s calculus
of across-the-fence value approximated the buyer’s calculus of alternate route
cost. It is conceivable that such a price could be freely bargained for based
on some fair division formula (algorithm) for just and equitable distribution
of the surplus between the parties.
It should be noted
that the value of rights of ways in a partially deregulated environment might permanently
decrease just as the prices of economic goods produced under deregulation are
meant to decline in a more competitive environment (e.g., natural gas,
electricity, communications, airline fares, trucking rates). On the other hand, deregulation may manifest
more efficient and intensive use of utility corridors than the economic
barriers to entry imposed in the past, and thus, a higher and better economic
use for corridor owners and the general economic welfare of all may result
(i.e., a win-win solution).
Condensed Answer: The Going Rate Method (or Across-The-Board Approach),
although unavoidably one-sided, as are conventional corridor valuation methods,
is believed to come nearest to the fair market value criterion (i.e., open and
competitive markets) in closed or limited corridor markets where few, if any,
of the transactions meet the requisite tests of fair market value (i.e., the
rule of “second best”). Going Rates are
flat rental rates per linear mile of corridor that reflect the “law of one
price” in economics that says that identical goods will sell for identical
prices. Uniform rents prevent what is
aptly called “rent seeking” in economics; or the exploitation of profit
opportunities by arbitrageurs where two identical goods are sold at different
prices. “Going Rates,” although expressly precluded under the Uniform Appraisal
Standards for Federal Land Acquisitions, should be the preferred appraisal
methodology for establishing corridor use rental schedules, as it comes closest
to the fair market value standard.
Appraisers could render valuable services where there is a corridor
rent dispute because of an appraiser’s use of transactions that do not meet the
fair market value criterion or that come closest to meeting such a standard by
a “buyer’s calculus” that is preferred under the law as shown in the table
below:
|
|
No.
of Sellers |
||
|
|
1 |
2+ |
|
|
No.of
Buyers |
1 |
1-1 “1-Buyer/1-Seller” or “Captive Market” (No
substitution) |
2-1 “Buyer’s Market” (supply-side
substitution) |
|
2+ |
1-2 “Seller’s Market” (demand-side
substitution) |
2-2 “Open & Competitive
Market” (full
substitution) |
|
|
|
Captive Market Value Or Monopoly Value |
Market Value or Fair Market Value |
|
|
Copyrighted
Material – Wayne C. Lusvardi, August 2001 (All Rights Reserved) |
|||
Corridors are special use properties and corridor transactions
typically reflect closed-market or limited market conditions of sale. Typically “one-buyer/one-seller” or “captive market” (Cell 1-1) or “seller’s market” (Cell 2-1)
transactions prevail in corridors and result in hold out values or value
premiums being extracted from secondary corridor users by corridor owners that
do not reflect the legal fair market value criterion. Credible fair market rent
or easement corridor appraisals must either rely on market data from “buyer’s market” (Cell 1-2)
transactions, as often preferred by law; or must hypothetically assume “market
value” or “fair market value” transactional conditions which would require
substantial adjustment of market data from “one-sided” or “seller’s market” transactions.
Ideally, open and competitive market transactions should be sought but
are unlikely to be found in closed and limited corridor markets (Cell
2-2). Where “one-sided” or “seller’s
market” transactions are the only transactional market data available and were
predicated on ATF base land values, substantial adjustments using “fair
division algorithms” are believed the only way to arrive at a “just and
equitable” result. Such adjustments
should be predicated on the “postulate of choice” contained in the definition of
market value and the hypothetical assumption of the availability of an
alternate route to secondary corridor users.
Appraisers could perform a valuable service by collecting and verifying
rental “going prices” for secondary use of Federal rights of ways and lands
that meet the minimum criterion of a “buyer’s market”; or ideally an “open and
competitive market” however unlikely in closed and limited corridor
markets. Conversely, appraisal and
appraisal review services should be provided to screen and purge market data
from appraisals that reflects “captive market” (“one-buyer/one-seller”) or
“seller’s market” conditions of sale or lease.
The all-important role for appraisers, for which there is no adequate substitute
service, is the ascertainment and discernment of whether market data meets the
fair market value standard, or comes closest to meeting the “buyer’s market”
conditions minimally required/preferred by law.
The continued use of the ATF Method, although appropriate for appraisal
purposes where replacement of full
fee or exclusive easement interests is required, is not preferable unless there
is no “fair market” transaction market data available for setting rental fee
schedules. ATF values are believed to be inappropriate for setting fair rent
schedules where corridor “going rental rate” market data is available because
it measures an inequitable natural advantage to the seller and can reflect the
side benefit or avoidance cost of having to pay for much higher external land, or
discontiguous land under multiple ownerships, rather than the actual “fair
market rent” of a corridor.
Appraisal review services are also needed to cull out “equivalency appraisals” that, for example, assume that ocean bottom land for undersea fiber optic cable routes is of equivalent value to the value of terrestrial corridors through dense urban areas. Such “equivalency appraisals” fail to consider alternate route cost savings. Moreover, using “comparable” rental transactions based on one-sided “seller’s market” (ATF) transactions would not meet the requisite test of fair market value.
Where a modified ATF Method may be indicated is for valuation of
easements within Federal lands or corridors.
However, Federal land management agencies must provide instructions to
appraisers to consider the hypothetical availability of a more advantageous
alternate route so as to comport with the central Principle of Substitution
incorporated into the definition of fair market value (e.g., assuming available
alternatives so that neither party has a natural advantage over the other, the
alternative with the lowest price attracts the greatest demand). Market value
means voluntary choice. Without an
assumed choice of an alternate route, there is no market value.
Most importantly, where no replacement corridor is required, Federal
corridor rent schedules should not inadvertently include the value of positive
side-benefits (e.g., benefit transfers from avoided cost of higher-priced
external land) that are often indirectly conferred on secondary users by joint
use of Federal corridors and lands as reflected in appraisals employing the
Across-The-Fence (ATF) Method of corridor valuation. Where replacement corridor is unnecessary and there are no
discernible damages, basing the value of rents or easements on land values
“across-the-fence” is charging for an external side-benefit, or avoided cost,
that does not inhere from the value of the corridor itself.
However, if extra monetary consideration beyond the annual land rent is
sought by Federal land management agencies for the conferral of positive
side-benefits (i.e., positive externalities) to secondary users of Federal
corridors and lands, such consideration can usually only be bargained between
nominal value and ATF value, rather than valued by a point-estimated
appraisal. Appraisers could render
valuable services in such cases where extra compensation for positive
externalities is sought by recommending “fair division algorithms” (i.e.,
formulas) to arrive at a “just and equitable” division of avoid costs (e.g.,
50% rule, Lesser-Of Rule, Benefit Offset Rule, etc.). Alternatively, should such positive externalities, side-benefits,
enrichments, or benefit transfers be legally deemed to be excluded from an appraisal,
appraisers should adeptly identify and separate out such avoided costs or
opportunity costs for non-consideration.
For example, in the State of California case law has specifically
prohibited the valuation of easements appurtenant based on side benefits or
cost savings that derive from the transaction (see Redevelopment Agency vs.
Tobriner [“Tobriner II”] [1989] 215 Cal. App. 3d 1087).
Condensed Answer: An
appraiser should consider the following factors in adjusting comparable
easements or leases for secondary corridor uses of Federal lands and rights of
ways:
o Seller’s vs. Buyer’s Market
Value. Above all, comparable corridor rental data needs eliminated,
weighted, or adjusted based on whether the transaction approximated the
requisite criteria of fair market value.
The problem with the reliability of corridor rental market data is who
established the price: the seller, the buyer, or an appraiser based on prior
“hold-out” prices from the “old monopoly economy” perpetuated into the present
deregulated market? Appraisals should
not set market values; they should reflect them. The law prefers buyer’s market prices over seller’s market prices
(e.g., hold-out prices, sentimental values, hypothetical values, related party
transactions). Every comparable may be
a transaction, but not every transaction is a market value comparable. Unless auctions are held for use or Federal
lands or corridors, similar to the auctions held for radio spectrum under the
1996 Telecommunications Act, the property transactions typically encountered in
Federal lands and corridors do not closely approximate open and competitive
market value conditions. Merely because a private property owner or another
public agency obtained many times over the amount of compensation for use of
their property than the Federal government derives may mean nothing from a
market value perspective.
o Enterprise-Based Rents vs.
Land-Based Rents. Federal land management agencies are likely to realize
significantly higher rents for secondary uses of their corridors and lands from
enterprise-based rents than from land-value based rents especially in rural areas
where the bulk of its properties are located.
Based on widely-advertised going rents from major fiber optic companies
it is roughly estimated that average rural land values would have to exceed
$21,780 per acre to be equivalent to quoted “going rents” in the fiber optic
industry. This is believed a highly
unlikely scenario given that most Federal lands under control of the BLM and
U.S. Forest Service probably have average unit values from say $100 to $500 per
acre. In other words, land-based values would likely yield rents from around
2% of what enterprise-based values might generate in rural areas; but may yield
less than land-value based compensation in urban areas (see table below)
Comparison of 1-Time Going Prices with Land-Based
Easement Values
|
Rural |
Price Per Lin.Ft. |
Price Per Sq.Ft. |
Equiv. Value Per Acre |
Typical Market Value Land Per Acre |
Ratio of Land Value to Going Price |
|
Williams Com |
$0.50 |
$0.05 |
$21,870 |
$500 |
2% |
|
Urban |
|||||
|
Broadwing (LA) [source: Robert Ball,
Qwest] |
$10.42 |
$1.04 |
N/A |
$5-$15 per SF |
7% to 20% |
o Reseller or Carrier? Communications companies such
as Williams Communications, Petronet, and Telecom Cubed are “real estate
businesses” that assemble, develop, and market rights of ways and conduits to
communications carriers. They are
wholesalers not retailers and the prices paid for easements or leases may
accordingly reflect the price of a wholesale middleman rather than the price to
a carrier.
o Mainline or Redundant
Route? Fiber optic carriers often construct redundant fiber optic systems in
the event of failure of the primary system.
Reportedly, all things being roughly equal fiber optic companies are
willing to pay the same price for property rights for mainline or redundant
routes. However, fiber optic companies
are not willing to pay an annual rent for “dark” fiber optic lines and instead
prefer to make a one-time payment for a permanent easement.
o Co-Location or Stand-Alone? Fiber optic cable co-located
on an underground pipeline and “Skywraps” of fiber cable on electric
transmission line towers avoid the assemblage cost of the right of way and the
full installation cost of conduit.
o Liability or De Minimus Use. A distinction may be made by
corridor owners between secondary uses that present clear and present
liabilities and/or interference with corridor use or highest and best
non-corridor use of corridor property, possibly such as energy-related
facilities (e.g., power lines) and those secondary uses that can be reasonably
co-located or compatibly accommodated within a corridor without significant
liabilities, such as fiber optic cable conduit or wireless antenna sites (de
minimus uses).
o Exclusion/Inclusion of Side
Benefits. Any side-benefits, value transfers, or enrichments resulting from
joint use of a corridor (where no replacement corridor is required) should be
separated from the rental valuation estimate for separate bargaining or
non-consideration as law or public policy dictate. However, where secondary use of operational corridor property
will entail acquisition of replacement corridor, the ATF Method must be used to
estimate the internal value of the corridor based on external land values
(“internalization of externalities”).
o Cost of Capital. In a deregulated economy, the
price of natural resources varies with the overall enterprise value and the cost
of capital. The market value of the business enterprise and the cost of money
vary with a multitude of sensitive conditions (time, supply, demand, weather,
consumer confidence, inflation, regulation, etc.) such as in the stock and bond
and commodity markets. Thus, one of the major adjustment factors in corridor
rents are the market conditions under which a transaction was consummated. For example, fiber optic corridor rents
prior to the crash of the “Dot-Com” economy in the year 2000 were established
on a different cost of capital than that prevailing in the low interest rate
environment of the now apparent economic recession of 2001 in the post WTC new
world order.
o Market Conditions. A problem with using
land-based values for secondary use rents within corridors is that such rents
do not change with the volatility of prices in the communications
industry. After the recent past crash
of the Dot.Com industry, many fiber optic communications companies are either
insolvent, restructuring, or in a liquidation mode. In such a market scenario, the value of corridor easements may be
nominal or only a fraction of what they were acquired for. The volatility of markets begs for
“non-linear pricing” of corridor use rights wherein a base rent is charged possibly
predicated on nearby land values and an additional percentage rent is charged
when the industry is in a profit making situation.
Table of Contents
|
Title
Page |
1 |
|
Co-Signatories |
2 |
|
Abstract |
3 |
|
Salient
Quotes |
4 |
|
Synopsis
of Propositions |
5 |
|
Executive
Summary (in question & answer format) |
6 – 13 |
|
Table of
Contents |
14 |
|
Background
(excerpted from BLM/USFS) |
15 |
|
Propositions |
|
|
·
Proposition
1 – The Current State of the Art of Corridor Valuation is
Methodological Chaos Mainly Due to a Prevalent Misunderstanding as to What
Fair Market Value Is and the Changed Regulatory Environment in the new
economy |
18 |
|
·
Proposition
2 – Conventional Corridor Valuation Methods Reflect a Market Cultural
Lag. |
21 |
|
·
Proposition
3 – The secondary user of a corridor may be able to eliminate or reduce
the cost of an easement or land rent within a pre-existing corridor or
potential corridor by selection of an alternate route or a non-damaging and
non-replaceable property interest; otherwise without such choice there is no
such thing as fair market value (i.e., Proposed Corridor Valuation Corollary
to the Coase Theorem). |
24 |
|
·
Proposition
4 – The “highest and best use” concept applies in those situations
where full replacement of a corridor is necessary; while the “least cost”
calculus of the appraisal Principle of Substitution prevails where no
replacement or liability is imposed by a corridor within a corridor. |
26 |
|
·
Proposition
5 – In a deregulated environment, secondary use rights in corridors
become uncoupled from land-based (ATF) values and imputed corridor premiums
and inhere from enterprise value and the cost of capital as measured by
fluctuating “going prices” and percentage rents. |
27 |
|
·
Proposition
6 – A Corridor “Buyer’s
Calculus” (“Going Price”) is the Best Proxy for Fair Market Rent in Closed or
Limited Corridor Markets where few, if any, Transactions Meet the Tests of an
Open and Competitive Market |
28 |
|
·
Proposition
7 – Sometimes corridors impart cost savings that first need to be
identified and separated for property corridor valuation. |