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reason of the fact that land-holders are desirous of obtaining
railroad facilities. A new line through districts already well
supplied with railroads, however, obtains no such favors.

4. — The direction of a railroad line has some effect on the extent
of damages. A line running diagonally across the country
cuts all farms into triangular pieces, but a right of way which
parallels the section lines, preserves the shape of fields and
causes less damage.

5. — One of the chief factors in the cost of acquiring railroad lands
is the skill of the company's buyers. There are instances
where right of way has cost a railroad company 50% more
than it should have, owing to poor buying.

There are many other influences which are of a minor or local
nature.

The only way to determine the cost to acquire a given strip of right
of way is to learn from the company's records what was actually paid
out in acquiring it and deduct from that sum the estimated market
value of the land. Investigations of this kind show that the cost under



VALUATION OF LAND 617

different conditions varies tremendously, ranging all the way from 5 to
600% of the market value. If it is necessary to make an estimate of
this cost and no records are available, a study should be made of the
results of purchases of railroad lands in near-by territory, under sim-
ilar conditions to those affecting the right of way under consideration.
If such a guide is not to be had, an estimate is largely guesswork.
Although the variation is great, the average of the cost to acquire land
for railroad purposes in a number of instances has been from 50 to
100% of the market value in cities and from 200 to 300% of the market
value in country districts.

Cost of Land Appraisals.

The cost of making appraisals of property generally runs from one
to two-tenths of 1%, and, as a rule, the work done on the land should
not be more expensive than that on other classes of property in an
inventory. Real estate men charge fees for appraising land which
range as high as one-quarter of 1% for city property and one-half of
1% for suburban property. The cost of valuing the land of a utility
should increase according to the number of scattered parcels to be
handled, and should decrease in proportion to the increase in the value
of lands to be appraised. It may easily require less effort to appraise
a single parcel of land worth several hundred thousand dollars than to
place a value on several parcels, the aggregate value of which is not
nearly as great.



61S DISCUSSION OX VALUATION OF LAND

DISCUSSION



Mr. W. I. King,* Esq. (by letter). — There is a dangerous and tinie-

'"*^' honored economic fallacy hidden in the sentence "The true value of
land is the ground rent capitalized". After two thousand years of
search for the "true value", economists are in agreement that no such
thing exists. Furthermore, "ground rent capitalized", unless the
phrase is broadly interpreted, gives no kind of value of any significance.

Every prospective buyer or seller of land has in mind a maximum
price which he will pay or a minimum price which he will take. These
subjective prices are finally based on the beliefs as to the probable
future income which may be expected from the land. In other words,
each person, using his own rate of interest, discounts these anticipated
future rentals and finds their entire present worth. With their sub-
jective prices in mind, bidders enter the market, and, by the well-known
principles of supply and demand, fix the market price for the land.

At some periods, nearly every one becomes unduly optimistic as
to the future outlook; at other times pessimism reigns. This change
in the point of view of the majority causes land values to fluctuate
widely on the market. If these values are plotted, it will be noticed,
however, that there is a rather definite trend in a certain direction.
This trend records values arising from the normal consensus of opinion,
and may be said to represent normal land values ; but value is always
based on anticipation, and, until the veil is rent from the future, no
man will ever be able to state correctly that any figure represents the
true value of the land.

In a progressive commxmity, land values usually stand well above
the capitalized present net rentals, because people do not expect that
rentals will remain constant, but rather that they will rise. To correct
for this error by varying the rate of interest used in capitalizing the
current rent is, at the best, a very crude method of adjustment. The
writer has described, in "The Valuation of Urban Realty for Purposes
of Taxation",t ways of solving the problem which appear to be more
logical.

The writer notes, also, an apparent misconception of the word
"economic" as used on page 586. The demand of wealthy persons for
pleasant residence sites is certainly as strictly economic as the demand
of a railway for a site for a new depot or roundhouse.

Mr. Jerrard's discussion of such topics as the movement of the
business section, "plottage", "cost of acquiring land", and "values
based on special utilization", is both able and interesting, and appears
to be better developed than any writings on the subject which the writer
has previously read. The author is to be congratulated on the scientific
and scholarly nature of the paper as a whole.

* Asst. Prof, of Political Economj% Univ. of Wisconsin, Madison, Wis.
t Bulletin No. 689 of the University of Wisconsin. May be obtained from the
Librarian of the University.



DISCUSSION OX VALUATION OF LAND 619

Hugh A. Kelly * Assoc. M. Am. Soc. C. E. — This paper is a Mr.
valuable addition to our records. The speaker, being in constant touch ^^^^y-
with the Taxing Department of Jersey City, has become familiar with
the question of "land valuation", and when he read this paper he
realized that it was practically flawless. In order to be sure, however,
he handed it to the two men whom he thought best qualified to judge:
Mr. J. Stewart Walker, formerly Chief Engineer of the Jersey City
Map Department, and Mr. Raymond C. Buckley, the present Chief.

Jersey City issued last year a manual for the guidance of the
working force in the Bureau of Tax Assessment of the Department
of Eevenue and Finance. This "Assessors' Manual", the first issued
by any city in the United States, was written by these gentlemen,
under the direction of Commissioner George F. Brensinger, and after
reading Mr. Jerrard's paper, they also agreed that he has left little to
discuss. Nevertheless, the following few points may be well taken.

If one examines cases of tax appeal one will find that the real estate
man must have his builder, his architect, to support him. In the more
important cases, such as railroad cases, it is the engineer who knows
real estate who is called on to testify. In a town the speaker has
in mind he knows of but two real estate men who have carefully
compiled their sales and put them in proper form for immediate use
in appeal cases.

This only emphasizes Mr. Jerrard's contention that the engineer
should check the real estate man, and verifies the statement that the
average real estate dealer's appraisal is but a look, a thought, an
interview, and an opinion.

The author states:

"The ground rent is the net income which remains after paying
the taxes on the land and the taxes, depreciation, interest, and main-
tenance on all improvements."

To this list of deductions there should be added the item "a sinking-
fund charge sufficient, when put at interest, to cover the cost of the
building in a given number of years".

How many real estate men include this item for their clients when
presenting cases ?

The author states that "the true value of land is the ground rent
capitalized".

First: True value is spoken of by Judge Charles C. Black, in his
book on "Taxation" in which he reviews many judicial decisions, thus :

"True value, like fraud, is incapable of definition, for the reason
that no definition can have universal application to all the many classes
of property."

He concludes with the statement:

* Jersey City, N. J.



630 DISCUSSION ON VALUATION OF LAND

Mr. "So the 'true value' of property, under the constitution for taxation,

Kelly, comes back in all cases to what such property will exchange for in
the open market, in money. Sometimes cost is a fair criterion ;
earning capacity may be; frequently both should have weight; while,
again, neither will determine its 'true value'; but all these elements
of value should be considered."

Second : If one wishes to calculate the value of land from an income
basis, one must select adequately improved property. Then if one
adds to the present worth of all future anticipated net rentals of a
new building, the present worth of the land value at the date when
the building will need to be replaced, and deduct from the sum the
cost of the building, it should closely approximate the present true
value of the site.*

However, as new buildings exactly adapted to their location are
rarely found, and the difficulties with this method are considerable,
the sales method is to be preferred to the commercial method of finding
the value.

Rarely is there an appraisal of property in which a true capitaliza-
tion method is used.

In the report of the Morris Canal Investigation Committee, ap-
pointed by the joint Legislature of New Jersey, Louis Focht, Assoc.
M. Am. Soc. C. E., Engineer of State Board of Taxation, uses such
a method.

He projects a possible development, assuming 2 050 ft. of bulkhead,
two piers 150 ft. wide, about 2 060 lin. ft. in all. On each pier will
be placed one-story steel sheds 1 175 by 113 ft. and 1 250 by 140 ft.,
respectively ; also a six-story warehouse covering an area of 83 000
sq. ft., together with the necessary tracks, filling back of bulkhead,
dredging of slips, etc.

"The commercial value has been based on the capitalization of the
net surplus after deducting the probable annual fixed charges from
the probable annual income.

"The annual fixed charges are made up of the interest on the invest-
ment, an annuity sufficient to create a sinking fund for the purpose
of extinguishing the debt against the perishable portion of the prop-
erty at the termination of its probable life; taxes on the property,
annual charge for dredging slips to maintain a sufficient depth of water;
insurance on the portion of the property likely to be destroyed by fire;
current annual repairs; and superintendence.

"These elements will now be considered in their order:

"First: In arriving at the value of the probable annual income,
rentals of dock property in the harbor have been considered. They
are lower on the New Jersey than on the New York side, and range
about as follows :

New Jersey side of harbor $0.32 to $0.40 per sq. ft.

New York side of harbor 0.20 to 1.54 per sq. ft.

Average 0.87 per sq. ft.

* King on "Valuation of Urban Property."



DISCUSSION ON VALUATION OF LAND



621



1.48 to $0.57 per sq. ft. Mr.
.30 per sq. ft. of floor ^eiiy.



"Brooklyn rental, private piers, range from
Warehousing rates range from about $0.25 to
surface.

"In estimating the probable income, a rate of $0.50 per sq. ft. has
been assumed for dock property, and $0.25 per sq. ft. of floor surface
for the Warehouse. On this basis, the following result is obtained:

Probable Annual Income.

Docking, 309 000 sq. ft. at $0.50 per sq. ft $154 500

Warehouse floor area, 498 000 sq. ft. at $0.25 per sq. ft. 124 500



"Total annual income $279 000

"Other minor sources of income might be added, but, for the sake
of conservatism, they have not been considered.

"The rate of $0.50 per sq. ft. is higher than the average New Jersey
rentals,_ the development being of a higher character than other leased
properties on the New Jersey side.

"An estimate of the probable cost of the development has been made,
in order to arrive at the fixed charges.

"The estimated cost of the entire development for the 'Small Basin'
is $2 265 000.

"In determining the annuity to be set aside for the sinking fund, an
assumed life had to be given to each depreciable portion of the plant.
These values will vary with the character of the structure. Consider-
ing an interest rate of 3^% on the sinking fund, the annuities in
Table 3 are obtained.

TABLE 3.



Bulkhead

Piers

Sheds on piers.

Warehouse

Paving

Gantry cranes.
Traclis



Totals .



Life.



50 years

40

40

.50

15

15

15



Per

thousand.



S7.63
11.83
11.83
7.63
51.82
51.83
51.82



On:



$153 750
618 000
400 000
755 300
9 750
30 000
37 811



$2 004 611



$1 173
7 311

4 732

5 763
505

1 555
1 959



TABLE 4. — Annual Charges.



Interest on $3 265 000 at 50;,

Annuity for sinking fund on $3 004 611, at 3i4"o (average) '.

Taxes on $1 698 750 at $3.00 per hundred

Annual charge for dredging slips to maintain constant depth of water, 20 660 cu

yd. at SO. 30

Insurance on $\ 800 000 of dock property, at 0.5 of 196

Current annual repairs ' ',',',]

Superintendence :.i,i.,i'. .,i.

Total fixed annual charges



$113 250
22 998
33 975

4 000
9 OCO

15 000

5 000



$203 223



622 DISCUSSION ox \^\luatiox of land

Mr. "In the computation of the annuities in Table 3, it will be noticed

^^"y- that there is no item for grading or other permanent work, which,
when once completed, would last indefinitely.

"On the foregoing basis, therefore, the statement in Table 4 will
represent the entire annual charges.

"With the fixed annual charges shown in Table 4, the net surplus
will be:

Total annual income $279 000

Annual fixed charges 203 223

Balance, or annual net surplus $75 777

"Therefore, if the present worth of this net surplus, namely, $75 777,
is computed on the basis of 5% interest for a term of 60 years, or
the limit of the period when the canal will revert to the State, a value
of $1 434 459 is obtained for the land."

The author (page 585) states as follows : "advantages of location
govern the values entirely". The last word of this statement is open
to question. The "Assessors Manual" quotes Mr. Alfred D. Bernard of
the TJ. S. Fidelity and Guaranty Company, thus :

"We therefore announce four cardinal factors of value in real
estate :

"1 — Location, which includes access;
2 — Utility, which includes capacity to produce;
3— Shape;
4— Size."

These are explained as follows:

"(1) Location. — In any city the most valuable corner lot would
appear to be the lot in that city accessible to the most people.

"N'ow, if that proposition is sound, the most valuable corner lot is
the center of population of any given city.

"In the City of Baltimore, the center of population is in the
colored belt, at a point where land values are around fifty cents a
square foot; so, in fixing the most valuable corner lot we must assume
something else besides accessibility of location; we must assume the
second factor, utility.

"(2) The highest utility which land may assume, generally speak-
ing, is retail business, and the student of values will find that, with
the exception of the banking district of New York City, the highest
valued properties in all the cities may be found in the retail business
districts.

"Now, with Factors 1 and 2 to resolve, we find the most valuable
corner lot in any city is that lot which is so located as to be accessible
to the greatest number of people who buy goods.

"After fixing the point, we must then consider the reason why one
lot is more valuable than another, which calls upon us to invoke the
other principles, of shape and size. The most desirably located corner
may be too small to meet the business demand, and the business be
carried to the next block, or, by reason of angles and irregularities.



DISCUSSION ON VALUATION OF LAND



623



it might not be available for the business of the territory, and thus Mr.
lose in contrast with other regular lots." Keiiy.

From the foregoing it is evident that the greatest number of
people necessarily do not pass through the heart of the city, as Mr.
Jerrard states, but more generally the greatest number of people
pass near some railroad terminal or boat landing.

The retail section moves in the direction of the best residence
section. Bernard sees it as follows:

''To-day the most valuable block in a given city is Main Street
between X and Y Streets. Thomas Tenant's lease is about to expire.
He has made big money in the twenty years he has engaged in the
dry goods business in this block. His landlord wants to share his
business with him and doubles his rent. Tom has made money and
saved it, and feels independent enough to tell his landlord to go
where ice is popular but scarce; but the landlord doesn't melt, and
Tom has to pay double the rent or move. The district broker whom
Tom employs to buy the site is met with 'JSTot for Sale', and tells
Tom about four little shacks he can buy in the second block north
of him and build his own building and laugh at the landlord. He
does it. He builds a fine warehouse, better than the one he was in,
advertises to the trade that he was forced out of his old location,
and thus wins sympathy and trade. He is followed by another unfor-
tunate, and in three years the best block on Main Street is Tom
Tenant's block."

Mr. Jerrard states that the total land value of a city depends
primarily on the population, but is influenced by wealth.
Bernard says :

"While the proposition may be new and startling, the writer's study
of land values in cities warrants him in asserting that land values
bear a relation to the number of and buying power of the inhabitants
of a given community, and that in the average normal city the value
of the retail business property is one cent per foot front per person
and the best residence property 1/10 to 1/12 of a cent per foot per
person."

In answer to the disadvantage of using gross rentals, Bernard
uses such rentals, and gives, as the advantage, the fact that it elimi-
nates the item of poor management, which invariably brings down
the net rental.

If the value of the improvement is 9 times the value of the site,
the gross rental should be 19% of the total investment,
8 times the value of the site. .18%



7








' ..17%


6








' ..16%


5








' . .15%


4








' . .14%


3








' ..13%


2








' . .12%



624 DISCUSSION ON VALUATION OF LAND

Mr. Improvement and site equal (for office building only) 10 to 12

^' per cent.

To Mr. W. A. Somers is attributed the statement that the corner
influence in all property generally extends 100 ft. each way from the
corner. The literature of the Manufacturers Appraisal Company con-
tained this statement, but that company acknowledged this to be an
error. The speaker thinks it is an exceptional case where corner
influence extends more than 25 ft. beyond the corner.

The value of lots of various depths, expressed as percentages of
unit value, or ''rules for long and short lots", as it is termed, requires
the attention of a mathematician.

The speaker believes that Mr. Davies is the only man who gives
a formula with his rule, and states that the curve is a parabola.

Interpolation, to determine intermediate values, is not satisfactory
where many properties are handled. In the Jersey City Tax Office, to
facilitate matters, the engineers in the Map Department have an
equation for the Hoffman rule, which is in the Tax Manual published
by the Department of Revenue and Finance of that city.

It is stated that Mr. Davies examined 10 000 sales. Mr. Bernard,
Mr. Somers, and all the others examined many sales in order to derive
their curves of values.

'•'- There is a question in the speaker's mind whether a man can be
so familiar with every one of 10 000 sales as to be able to squeeze out
all the influences that would pull them away from normal. Probably
the law of averages would counteract errors in so great a number
of sales.

The problem of depth and value presents an example resulting in
an equation the curve of which, when plotted, is that of a conic section.
The Hoffman rule works out as a parabola.

Knowing these results, why is it not as good to assume a condition,
as Hoffman did, and work out the equation; or why not take the least
number of sales or points that will determine a conic curve, and if
the curve suits our judgment, adopt it.

If all the values in a curve do not respond to some formula, the
speaker claims that the curve is theoretically incorrect, as no two
persons are treated according to the same law.

Would it surprise the author to know that Hoffman's opinion, in
1870, agrees with Bernard's careful investigation, in 1913? If Mr.
Jerrard's conversion of the Bernard 150-ft. to 100-ft. rule is correct,
such is the case. Unfortunately, Hoffman's complete figures are
not given in Table 2. In Table 5 is given a comparison of
Hoffman's and Bernard's figures. In no case is there a difference
greater than 1 per cent.

In the author^s comparison of the rules, it will be noticed that,
up to 100 ft., the Newark business is the same as the Somers. The



DISCUSSION ON VALUATION OF LAND



625



Newark residence, up to 100 ft., is practically the same as the Hoffman. Mr.
There is a close resemblance, up to 100 ft., of Milwaukee business and ^ ^"
Somers, and for more than 100 ft. they agree. For more than 100 ft.
Newark business and residence agree.

TABLE 0.



Depth of lot, in feet.


Hoffman.


Bernard.








Percentage.


Percentage.


5




10


10


16


17


15


23.5


24


20


30


31


25


37.5


37


30


44


43


35


50


50


40


56


56


45


61.5


61


50


67


66


55


71.5


72


60


76


76


65


80


81


70


84


84


75


87.5


87


80


91


91


85


93.5


93


90


96


95


95


98


98


100


100


100



Such peculiarities would lead one to suppose that some of the rules
represent no independent investigations.

In Table 6 the speaker examines the Hoffman rule by subtracting
the value of every 10 ft. — ten lower from ten higher — thus 10 ft. = 25% ;
20 ft. = 41%; 41 — 25 = 16, etc. This gives a series of percentages
or first differences.



TABLE 6. — Examination of the Hoffman Eule.



Feet.


Percentage.


First
differences.


Subtract.


Second
differences.


10


16












15


10


5


20


31












13


10


3


30


44












13


10


2


40


55


11


10


1


50


67












9


10


— 1


60


70












S


10


- 2


70


84












7


10


— 3


80


91












5


10


— 5


90


96












4


10


— 6


100


100









626 DISCUSSION ON" VALUATION OF LAND

Mr. If 10 is subtracted from each of these we get a series of second

Kelly, (jiffgrgnces in which it will be noted that 4 is lacking.

The original Hoffman rule does not plot as a smooth curve, but
if 4 is supplied in this last series of numbers the following formula
may be derived.

Assuming that 50 ft. gives 66g%, the formula is:

^ ^ "3 150'

If 50 ft. is assumed to give 67%, the formula is:
y = l.GSo; — O.OOGSa;,

which gives a true parabolic curve.

These formulas were derived by Mr. Walker. This peculiar con-
dition leads to the belief that some real estate men do not understand
these rules thoroughly; for, in important cases, where large tracts of
land are involved, we find them analyzed by real estate men thus :
Zone 1, so many feet deep, parallel with the street, is worth a dollars.
Zone 2, directly behind it, is worth h dollars, etc.

But Zone 1 reflects its value to Zone 2, etc., and immediately the
straight-line valuation begins to bend, and, the smaller the zones are
divided, the greater becomes the reflected increments, until the straight-
line valuation becomes some kind of a curve.

The speaker believes that these rules for short and long lots are
the final result of this line of reasoning, and the foregoing examination
of the Hoffman rule proves it.

The appraisal of lands in different localities and sections requires
individual attention and study, and for these no rules can be laid down
which will fit all cases. Mr. Jerrard's paper gives a firm foundation
on which to build.
Mr. Edward S. Kankin,* M. Am. Soc. C. E. — This discussion refers to

the following statement in the paper:

"The total land value of a city depends primarily on the population,
but is influenced to so great an extent by the city's wealth and other
factors that comparisons between cities of the same population, as to



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