California Eminent Domain Report

In the aftermath of last year’s Rails-to-Trails Decision, Marvin M. Brandt Revocable Trust v. United States, 572 U.S. ___ (2014), the valuation of rail corridors may become increasingly necessary.  Typically there are three approaches to valuing rail corridors:  1) Across-the-Fence approach, 2) Comparable Sales approach and 3) Income approach.

1. The Across-the-Fence approach (ATF Method) -- the most popular approach for valuing rail corridors -- appraises land utilized as a right-of-way by assuming that its market value per square foot is equal to the value of adjacent or adjoining land.  Such value is then altered depending on the permissible and actual uses of the property, the typical parcel size and other factors considered in conventional appraisals.  This value then may be further adjusted by the enhancement or corridor factor, and the use factor.
2. The Comparable Sales approach appraises land through comparison of the subject property with similar properties that have recently sold.  Adjustments can be made based on various elements of comparison.  However, transportation corridors are special use properties, meaning that they are not usually found in the traditional market.  And even when there are comparisons, there can be great discrepancies depending on the location of the corridor.  Thus, the Comparable Sales approach may not always be usable in the traditional manner when valuing rail corridors.
3. The Income approach values property by determining the future net income that the property can be expected to earn.  This approach is difficult to use when valuing transportation corridors due to the difficulty in allotting income from a small segment of a larger railroad system.

The California Court of Appeal has found the use of the ATF Method appropriate when valuing a transportation corridor.  (See e.g., Union Pacific Railroad Company v. Santa Fe Pipelines, Inc. (2014) 231 Cal.App.4th 134; Southern Pacific Transportation Co. v. Santa Fe Pipelines, Inc. (1999) 74 Cal.App.4th 1232.)  In Union Pacific Railroad Company, the Union Pacific Railroad Company utilized the ATF Method to determine the amount of rent owed under an agreement between the railroad company and Santa Fe Pipelines.  While the Court approved the ATF Method as an approach to valuation, it concluded that the trial court did not make a proper finding regarding the interest the railroad company had in the subject property, such as whether the railroad cpmpany owned the property in fee.  The Court remanded the case, in part, directing the trial court to first make a proper determination of the railroad company’s property interest and then to analyze the ATF Method factors.