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1st, 1916, at 4.15% 3 746 652

Total carrying charges $3 988 186

Total cost of land and damages, with
carrying charges up to date of first
use of property, January 1st, 1916 $21 300 530

Calculating the percentages corresponding to these figures, it
appears that the expenses of condemnation amounted to 40.1% of
the awards and costs; that the interest on the awards allowed by the
Commissions and included by the Auditor as part of the cost of the


land amounted to 10.85% of the awards and expenses; that the taxes
paid by the city amounted to 1.5% of the cost of the preceding items;
and that the interest on the various payments, from the dates of the
payments until the property is put into use on January 1st, 1916,
will amount to 21.3 per cent.

As a result of all these charges, the cost of the land to the city,
with carrying charges to the date of first use, is 91.3% greater than
the purchase prices and awards. In other words, the overhead charges
on the land are 91.3 per cent.

The expenses of acquiring land as stated by the Auditor, in the
sum of $4 188 795, are given below.

This particular case represents the acquisition of land by a city
under a law which proved in its execution to be unusually burdensome.
It is of value for illustrative purposes, on account of the prominent
character of the work and the detail as to costs.

The total costs aggregated 39.26% of the purchase price, and were:

Per cent.

Advertising $433 946.46 4.16

Commissioners' fees 1 062 498,72 9.96

Expenses of Commissioners 79 898.40 0.75

Stenographers and clerks 62 606.70 0.59

Special counsel fees 358 679.20 3.36

Special counsel expenses 27 493.06 0.26

Obtaining orders 8 375.00 0.08

Closing title 1 370.00 0.01

Counsel fees on appeal 3 275.00 0.03

Costs on appeal 4 499.97 0.04

Searching titles 211 138.64 1.98

Preparing abstracts 125 312.50 1.17

Appraisers' fees 482 512.53 4.52

Appraisers' expenses 5 792.72 0.06

Eent of New York office 26 269.40 0.25

Stenographers' services and printing

testimony 265 684.24 2.49

Counsel fees of parcel owners 384 405.99 3.60

Expenses and disbursement of parcel

owners 261 275.36 2.45

Engineering salaries and expenses 373 760.65 3.50

$4 188 794.54 39.26

Another detailed statement regarding the acquisition of land by a
State commission, under a law which was not burdensome, is afforded
by the experience on the Metropolitan Water- Works of Massachusetts.
In this case the principal acquisition of land was for the Wachusett


Reservoir, the construction of which was not started until several
years after other portions of the work were begun. The policy was
followed, therefore, of acquiring this land as it could be obtained by
negotiation, without resorting to condemnation except in special cases.
Much of the land was acquired in this way, considerably in advance
of the needs of the work, at a much lower price than it would have
been obtained by condemnation, but with an increase in the charges
to taxes and interest during construction. From the accounts of all
real estate purchased, from the initiation of the work in 1895 to
December 1st, 1909, the following summary is obtained :
Total paid directly for real estate, including mill
properties and water rights acquired by

negotiation $3 390 723

Awards for real estate condemned, including

interest to the date of payment 170 446

Total direct payments for real estate $3 561 169

Legal and expert services, including con-
veyancers, experts, appraisers, and
court expenses, in acquiring above
real estate, exclusive of counsel fees. $179 944

Estimated proportion of total adminis-
tration expenses attributable to real
estate 60 000

Engineering expenses are shovsn by the
accounts to amount to $83 582 for
the Wachusett Reservoir alone.
Assuming that other real estate
acquisition would require the same
percentage of engineering expenses,
the total would be 104 700

Estimated expenses for counsel in real
estate cases, charged to the general
expenses of the State, and, there-
fore, not included in the water-works
accounts 20 000

Estimated expenses for financing and
financial officers, attributable to real
estate and charged to the general
expenses of the State and, therefore,
not included in the water-works
accoimts 20 000

Total cost of acquisition $384 644


Brought fonvard $384 644

Total cost of real estate, exclusive of taxes and

interest during constructioni 3 945 813

Taxes during' construction 68 182

Interest during' construction on Wachusett Reser-
voir, real estate alone, on the basis of 5%
compounded annually, would have amounted
to $957 000, or 31% of the expenditures for
this real estate, including incidental ex-^
penses, to the time when the reservoir was
first operated. It is estimated that the inter-
est during construction on other real estate
would have increased this sum to 1 000 000

Total cost of real estate $5 013 995

Calculating the percentages corresponding to the different figures,
it appears that the incidental expenses of acquiring the real estate
amounted to 10.8% of the direct payments for it; that the taxes paid
during the construction of the works amounted to 1.9% of the direct
payments; and that the interest on the various payments, from the
dates of the payments until the property was put in use, on a 5%
basis, would have amounted to 28.1% of the direct payments.

As a result of all these charges, the cost of the real estate, with over-
head and carrying charges to the date of the operation of the property,
is 40.8% greater than the direct payments for it.

The incidental expenses of 10.8% previously given may be sub-
divided as follows:

Amount. Percentage.

Legal and expert expenses, including counsel

fees $199 944 5.62

Administration 60 000 1.68

Engineering 104 700 2.94

Financial expenses 20 000 0.56

Totals $384 644 10.80

The records of the Metropolitan Water- Works show the relation
between the value of the real estate of the Wachusett Reservoir, exclu-
sive of mill property, for general purposes, and the sums which were
paid for it.

Before deciding on the project, an estimate of cost of the required
real estate was made. To obtain a basis for this estimate, local experts
were secured in each town, who went over all the lands, parcel by
parcel, appraising the value of land and buildings separately. Their
instructions were to value the property very liberally, and the results


obtained were much above its value as determined by sales which had
been made about that time. Some of the experts owned property which
would be taken for the reservoir. The assessed valuations in this
district are supposed to be well up toward the full value of the property,
but the value fixed by the experts was one and three-quarter times the
assessed value of the property. As a result of the appraisal by the
experts, the aggregate valuation obtained was, as follows:

Land, 4 772 acres $244 000

Buildings 453 000 $697 000

The cost of acquiring the same property, exclusive of overhead
charges, was $1 182 000, equal to $485 000, or 69% in excess of the
original liberal appraisal of the value.

It is to be noted that this is a case where the appraised general
value of the buildings was nearly twice that of the land. The accounts
do not show a separation between the amounts paid for buildings and
land, but if these amounts could be obtained, they would show that
the sums paid on account of the land, in excess of the appraised value,
would be a large part of the $485 000 excess, for the reason that it is
difficult to sustain a claim for the value of a building much in excess
of its value for general purposes.

The 69% previously stated is, therefore, probably much more than
the excess cost of the buildings, and much less than the excess cost
of the land, over their values for general purposes. It is to be noted,
also, that in the acquisition of this property most of the land was taken
in whole tracts or parcels, so that there were no severance damages in
connection with such portions of the property.

The accounts do not show the sums paid for strips of land taken
for aqueducts or pipe lines in comparison with general land values,
but the original estimate of the cost of these strips was obtained by
multiplying the general value of the land by six, and adding a per-
centage for overhead charges. The actual cost corresponded very nearly
to the estimate.

An illustration which is in marked contrast to the New York
Catskill water supply is that of a railroad line in friendly territory,
and is as follows:

Land Purchases.

Details of Knife River Branch, N. Dak., Northern Pacific Railway.

Mercer County, Dunn County,
N. Dak. ■ N. Dak.

Valuation of naked land per acre, made

by real estate men and bankers, not

by employees $22.07 $22.13

Total $15 709.42 $12 065.12


Mercer County. Dunn Count v,
N. DaU. N. Dak.

Total number of deeds 86 63

Total acres conveyed .... 784.97 615.55

Average acres per transfer 9.12 9.77

Total consideration $24 460. $17 106

Average consideration per acre $35.00 27.80

Total number of considerations 4 Xone

Acres condemned 70.83 ....

Award in condemnation cases $1 966.52 ....

Average per acre, award $27.70 ....

Summary, both Counties :

Total naked land value $27 774.54 62.32%

All other elements of value 16 791.89 37.68%

Total purchase price $44 566.43 100%

Expense of acquisition $9 258.79

Percentage expense of acquisition to

purchase price 20.77

Expense of Acquisition:

Average Average
per fleed. per acre.

Services and expenses, right of way

agents $6 790.75 $46.19 $4.85

Services and expenses of attorneys. 705.69 4.80 0.50
Costs of abstracts and opinions of

title 1 227.80 8.35 0.93

Cost of recording deeds 329.55 2.24 0.23

Automobile hire 205.00 1.40 0.15

$9 258.79 $62.98 $6.66

This case affords an illustration of the extremely favorable cost of
acquisition. The line was desired by the people. There was but little
contest, as two of the condemnation cases were to acquire land owned
by the State of North Dakota, the other two being against land com-
panies. Every individual owner was settled with, yet, in spite of these
facts, the land cost was $27 774.54, while "other elements" plus cost
of acquiring was $26 050.68, or 93.8% of the bare land price.

The conclusion to be drawn from a study of all the figures available
to the Committee is that costs of acquisition, like the element of
damages in the consideration, are variable, that each valuation must
stand by itself, and that, in fixing a figure for land reproduction, the
appraiser must take into account all special local conditions. It is
perfectly clear that no general average percentage which is universally
applicable is to be derived from these figures.


Conclusions. — Cost of Reproducing Land Holdings. — Separate
parcels of land, such as one or two lots, or a tract of not unusual size
not connected with other lands by the utility in a strip or body, and
where freedom of choice in selection may be exercised, should be valued
on the same basis as other lands in the vicinity used for general pur-
poses, plus a reasonable allowance for costs of acquisition and other
proper overhead costs. The normal market value of parcels of like
size, character, and availability, in the immediate vicinity should be
accepted as a basis for reproduction cost determination.

Where large tracts have been acquired, made up of a number of
separate entire parcels, the history of the transaction should be com-
pletely investigated and allowance made in the estimate for costs of
acquisition and costs of vacation of streets or acquisition of other
rights incident to the use of the property as a whole. Such further
allowances should be made, as may seem to be justified by experience,
to cover excess costs over and beyond the normal market values
which existed at the beginning of the project and were due to fluctua-
tions of price or other causes beyond control. Normal market values
of similar and near-by property as of the time of appraisal should be
the basis, with such additions as are warranted by the investigation
in each case.

In the consideration of values of lands, such as rights of way for
a railroad, an electric railroad, an aqueduct, or other like property,
or, such as lands for a water-works or an hydro-electric reservoir, free-
dom of choice is restricted, and where all the land must be acquired,
radically different methods must prevail.

In the valuation of lands of this class, a clear distinction should
be made between :

(a) Lands where the entire tract or parcel is taken and there is

no element of severance damages.
(6) Lands where only a portion of the tract is taken and where

the element of severance damages is present,

and the extent of lands of both classes should be shown.

Historic conditions, where ascertainable, should be given due weight
in fixing the extent and character of the severance. The estimate of
reproduction should include a proper figure for such as was actually
incurred, but should not include allowance to cover speculative or
hypothetical damages on account of changed conditions. All elements
of value to the seller, including recognition of all damages to the por-
tions of his property not taken, which would prevail in the case of con-
demnation of the lands under reproduction, should be considered.

A determination of the relation existing between actual recent
acquisition costs and the normal market value of the lands out of


which the strip or parcel was taken at the time of acquisition is
undoubtedly possible in many cases. It would seem that where such
relation can be determined, its use in connection with the normal
market values of these or similar lands at the time of appraisal should
establish a reasonable cost of reproduction.

There must be kept in mind the fact that no general rule can be
established capable of universal application. Conditions that will apply
in the acquisition of railroad lands in a large city, or in a fully devel-
oped rural community where lands are subdivided into relatively small
tracts and with many improvements upon them, may not be at all
applicable in districts where lands are held in large tracts with few
improvements, such as grazing districts or a heavily timbered district.

The determination of the figure to be used must be based on full
consideration of present normal values of general purpose lands, recent
purchases by the same or other companies of similar lands in the
vicinity or in districts of like characteristics, the extent to which
damages enter into the cost of lands, and the amount and character
of costs of acquisition and overhead charges. All elements of costs-
normal market values of individual parcels, including improvements
thereon, severance and consequential damages, enhanced prices induced
by active demand, expenses of acquisition and overhead costs, and
any other real items of cost which would be included in case of pur-
chase — should be included in reproduction, but no allowance for special
values coming after the acquisition of the property, on account of
its new use or on account of a greater earning power under the new
use, or any other hypothetical "value", should be included.

Estimates should be based on prices and values as of the time of
appraisal, be they higher or lower than those prevailing at the time
of original acquisition. The thing sought in reproduction is the fair
cost of acquiring the property as of the date of valuation.

The treatment of the valuation of land holdings is not yet thor-
oughly crystallized, therefore the valuing engineer will do well to
confer with counsel upon the interpretation of past Court decisions
and the legal principles which are most fairly applicable to the case
under review.

Overhead Charges.

General Nature of Overhead Charges. — There are certain expenses,
inseparable from the construction of any property, which are a neces-
sary and proper part of its cost, but which are not capable of physical
identification after the completion of construction work. These
expenses cannot be covered in the estimate of "Cost of Reproduction"
by the application of specific unit prices; from their nature they attach
to the whole or large parts of the property rather than to any particu-
lar units. These are called "Overhead Charges".


If the reproduction estimate is to be complete, and is to include
allowances for all the labor that was performed, all services that were
rendered, and all expenses that were incurred in the construction of
the property under investigation, it is clear that a proper allowance,
in some form, must be made for these expenditures.

Recognition of Overhead Charges by Courts and Commissions. —
Overhead charges in one form or another have been allowed in all
past valuations. Commissions have recognized their propriety, and
Courts have endorsed their allowance.

One of the most recent cases involving the allowance was the
Des Moines Gas Company case. A part of the decision (238 U. S.,
153) is quoted as supporting the argument of the Committee that these
allowances should be made in amount sufficient to cover all real ele-
ments of overhead costs, and no more.

"What is called in this summary 'the present value of physical
property', the report shows was arrived at by the Master in the manner
following :

"He first found what he thought was the base value of the property,
i. e., 'what it would cost to produce it at the present time new, without
adding thereto any overhead charges'. This figure he fixed at
$1 975 026. To this he added overhead charges, 15 per cent., $296 254.
From this he deducted depreciation, $333 878, leaving as the value
of the property thus ascertained, $1 937 402."

Mr. Justice Day further said:

"These items of expense in development are often called overhead
charges, for which, as we have already seen, the Master allowed 15
per cent, upon the base value (exclusive of real estate), or $296 254,
in addition to his allowance of $6 923 for organization expenses. Of
these charges the Master said :

" 'In reaching the physical value of the plant in question by the
process of reproduction, it is necessary to bear in mind that the present
value thereof represents much more than the machinery therein, the
labor of installing and constructing them, and putting them in place
to perform their various functions, ready for the manufacture and
distribution of gas to its customers. Were the City of Des Moines
without such a plant, and such a one as the Complainant now owns
was proposed, it would be found that much more than the mere cost
of labor and material would be expended. Such expenditures are
termed overhead charges, and are as follows' :

" '1. Time and money expended in the promotion of the enterprise,
in the organization of the company and interesting capital therein,
including, also, legal expenses, obtaining the necessary franchise, as
well as the costs of incorporating the company.'

" '2. Then a competent engineer must be employed to prepare the
plans and specifications for the plant, and make the necessary surveys,
and when the work began, to superintend the construction thereof,
and see that it is done properly and according to plans and specifica-


tions. The successful operation of the plant depends largely upon
its proper construction.'

" '3. Then losses arising from accidents and injuries to workmen
as well as the material during its construction, which is such an
amount as the cost of insuring against such losses, which is between
1 and 2 per cent.'

" '4. Contingencies are such expenditures as arise from the lack
of foresight and care in preparing the plans and specifications. No
matter how carefully the engineer may prepare them, such expenditures
invariably arise. Mr. Alvord testified that his allowance therefor
would depend very much upon his knowledge of the engineer who
prepared them, but that no matter who prepared them, they would
invariably occur, and an allowance should be made therefor. The care-
ful and thorough inventory in this case reduces very greatly the allow-
ance therefor.'

" '5. The cost of administration, which includes the time and
money expended by the parties who are engaged in the enterprise,
purchasing the material, procuring the money for their payment as
needed, and generally superintending the entire enterprise during the
construction of the plant.'

" 'Q. It is estimated that it would take three years to complete the
plant in question, and that at least one-half the time and money
invested therein would give no return, and that a loss of interest
would result therefrom and that such loss would be included in the
overhead charges.'

" '7. Taxes during the construction.'

" 'The latter is regarded by me as very questionable. It is in a
certain sense making taxes an asset rather than a liability, and the
amount is so vague and uncertain that it has been given very little
consideration and weight in fixing the overhead charges. Either the
money or the property should pay taxes.'

" 'It must be borne in mind that these expenditures are all made
during the promotion and construction of the plant, and are neces-
sarily a part of the cost thereof. No overhead charges that do not
inhere in and add to the cost thereof, should be allowed as a part of
its physical value. It is not a question of what was actually expended
therefor in the plant in question, but what would it cost to reproduce
a similar plant at the present time.' "

In the actual construction of any property the expenses properly
includible under "Overhead Charges" are actual physical costs of con-
struction. They are in no sense intangible or non-physical values;
they are not to be confused with development expense, as defined by
the Committee, or going value; and must be set up as part of the
physical property itself.

The late Judge R. W. Taylor, acting as arbitrator in the Cleveland
Street Eailway franchise hearing, said:

"Overhead charges as I have used that term and applied it to this
situation means only those things for which money has been spent
in the necessary work of constructing the property and putting it


into operation * * *. What I want to emphasize is that every
dollar of overhead charge which is allowed for by me is a dollar that
is necessarily spent in the production of the physical property."

What is true in this respect of an actual construction is also true
of a reproduction estimate.

Expenses to he Provided for:

Among the expenditures which must be provided for, and classed
as overhead charges are:

(a) — Cost of promotion;

(6) — Cost of financing and securing the necessary capital with
which to carry out the enterprise;

(c) — Cost of organization, including the incorporation and organi-
zation of the company, securing of franchises, and other like
expenditures ;

{d) — Engineering, including the making of the preliminary inves-
tigations and plans, plans for the construction of the entire
property, the engineering supervision of all construction and
other work involved in the development of a property, except
such direct supervision as may properly be included in the
unit prices of various property units, or as specific charge
against some particular schedule or group of units;

(e) — Administration, including salaries for general officers, agents,
accountants, clerks, and other assistants, not inchided in the
engineering and legal departments, and all administration
expenses ;

(/) — -Legal, including salaries and expenses of law officials and
costs of litigation which, depending on the character of the
property and its location, may be a comparatively minor item
or a very large one;

(.(/) — Interest during the period of construction on money bor-
rowed, or on money invested in the property by its owners ;

{h) — Taxes and insurance during construction;

(-i) — Contingencies representing expenditures which cannot be
foreseen but which from one cause or another are always of
considerable size in the construction or reproduction cost esti-
mate of any great enterprise.

These expenditures, and in some cases others of like character, are

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