Corridor Valuation

Written by M. Robert Goldstein and Michael Rikon.

Recently, Goldstein, Rikon, Rikon & Houghton, P.C. partner Jonathan Houghton won an extraordinary case of first impression on a cross-appeal dealing with the issue of corridor valuation. Corridor valuation, discussed at length below, deals with the proper valuation methodology used by a court when the land which is condemned is part of a railroad corridor.

Many early cases involving eminent domain involved railroads exercising their right of condemnation, such as South Buffalo Ry. v Kirkover, 176 N.Y. 301 (1903), which established the right in a partial condemnation to consequential damages based on the use to which the part condemned is put, and Story v New York Elevated R. Co., 90 N.Y. 122 (1882), which established the rights of abutting owners when there is a taking of an interest in the street on which their property faces which impinges easements such as light, air, or access. However, N.Y. Central Lines, LLC v. State of N.Y., 101 AD3d 966 (2^nd Dept 2012), the case which is the subject of this blog entry, was the first case in New York deciding how just compensation is determined when it is the railroad lands that have been condemned.

Why are there so few cases involving the condemnation of railroad lands? To start with, railroads are subject to federal jurisdiction, namely the Interstate Commerce Commission Termination Act of 1995 (49 USC § 10101, et seq.) which must approve any such interference with a railroad operation. (Matter of Metropolitan Transportation Authority (New York & Atlantic Railway), 32 AD3d 943 [2^nd Dept 2006]). Secondly, railroads have the right of condemnation (N.Y.R.R. Law § 17 [McKinney]) and thus their property cannot be condemned by an entity who jurisdiction is equal to theirs unless it has been specifically granted that power. (Long Island Rail Rd. Co. v Long Island Lighting Co., 103 AD2d 156 [App. Div. 2^nd Dept 1984]).

However, when a railroad is condemned (either all or part of its land), it is akin to condemning part or all of the other corridors of the railroads such as those used for pipelines, electronic transmission lines, or sewer lines. A corridor is exactly what its name connotes: a lateral continuous area connecting two points. What differentiates corridors from one another is their relative importance. For example, imagine the difference between the value of a corridor from Canada to the Texas oil refineries (a plan for which is now in the works), versus the now defunct freight line crossing the Hudson in the vicinity of Poughkeepsie, New York. In other words, a corridor connects two points together -and that connection and the ability to use that corridor- is worth more than just the land itself. The market difference in values of corridors is determined by a number of factors.

Now to the case at hand. In N.Y. Central Lines, the State condemned approximately 280,000 square feet of land in order to reconstruct the Brooklyn-Queens Expressway in the vicinity of Northern Boulevard. The crucial issue in the case was how to value a partial taking of a railroad lands when the railroad itself is not being condemned. It is axiomatic that there are three methodologies for the valuation of condemned property: the comparable sales approach, the income approach, and the cost approach (construct cost new, less depreciation).

The State’s position was that the land should be valued on a before and after basis by calculating reconstruction costs less depreciation (bridges, tracks, ballast, etc.) added to that land value. However in this case, no other claim for damages other than to the land existed, as any improvements that were taken by the State were replaced with new ones. The State took the position that, as existing, the railroad bridges were subject to enough depreciation so that when compared with the cost of building a new bridge, the difference was greater than the value of the land taken. In other words the State contended that the replacement of old structures with new ones was a benefit to be deducted from the value of the land appropriated, with a result that no compensation be paid to the railroad. The value of the land after the taking was greater than before the taking when using this cost approach methodology. This argument ignored the basic rule in New York that the minimum compensation in condemnation cases is the value of the part taken- and that “benefit” cannot reduce that amount. (See e.g. Lerner Pavlick Realty v State of New York, 98 AD3d 567 [App. Div. 2nd Dept 2012]).

Claimants argued that the industry standard for valuing a railroad was the “corridor valuation” approach  which involves determining a value for the land that is based on comparably zoned lands adjacent to the corridor, i.e. those that are across the fence (ATF), to which the corridor factor is added in order to account for the added value created by the use of the corridor. The corridor factor takes into account the value added to the land by the creation of a corridor as revealed by comparable sales. Claimant’s expert gathered various sales of railroad corridors throughout the country and used them to determine the value of the subject by comparing the importance and attributes of these other corridors to the subject. He then developed a multiplier called a “corridor factor” to be applied to the ATF value, which, when applied, resulted in the market value of the corridor (or part taken). Claimant’s expert also opined that the cost approach was a false standard, citing a variety of texts on the subject (since there were no prior New York cases to rely on).

Since this was a partial taking, a “before” and “after” valuation was required. The position of the parties was its lateral area was to be limited, it not being feasible to value 22,000 miles of ownership. The State used the limits of the Fremont Line and the Claimant used the lineal limits of the taking. Since no consequential damages were claimed or valued, that difference was irrelevant.

The lower court held that it was appropriate to use an ATF value multiplied by a “corridor factor”  as the proper method of valuation. However, the court then reasoned that because the use of the railroad was not impaired, the compensation should only be limited to the ATF value. The State appealed and Claimant cross-appealed. The Appellate Division made short shrift of the State’s appeal, finding that the comparable sales method should be used, but reversed on the failure of the Court of Claims to add a corridor factor of the land taken and sent the case back to the Court of Claims to fix the amount of the corridor factor to be applied to the ATF value. The only direct proof relating to a corridor factor in the Court of Claims was produced by the Claimant. The case is now back in the Court of Claims for that purpose.

The Appellate Division’s decision wrote that corridor valuation, was “at its essence a two- step process. First the ‘across the fence’ value (hereinafter the ATF value) of the land is estimated based on, among other things, the location of the corridor and market conditions. The ATF value is then multiplied by a corridor factor.” It agreed with Claimant’s appraiser that the “purpose of the corridor factor is to convert (ATF) value into the value of the corridor into market value. The corridor factor measures the importance of the corridor.” The Court then recognized that when the highest and best use of the land is as a corridor, that property will generally sell for more than the ATF value of the lands, the excess representing the corridor factor.

Since the lower court had not applied a corridor factor the methodology for doing so was not discussed by the Appellate Division. However the corridor factor was discussed by both parties’ experts in the Court of Claims. At its essence, the corridor factor is a comparable sales method. Since time, zoning, and location are taken into account in the ATF value, it finds the relative importance of the two lines, how long or short they are and other factors which enter into sale of a railroad beyond its mere land value. Since time, location, zoning and the like are subsumed in the ATF value, the search for comparable sales can be country wide. The problem lies in gaining sufficient information about the sales to properly analyze them. There is no shortage of those sales. The State’s expert admitted to have 75 such sales in his files, which he eschewed using for a variety of reasons. Claimant’s appraiser used 14 such sales as comparables.

So why this post? If this is the only reported case in New York in over 200 years, it may be another 200 until we have another. But this is not likely. We came close there being a railroad valuation case in Long Island Rail Rd. Co v Long Island Lighting Co., supra. Besides, there are pipelines and electrical transmission lines likely to be impacted by future condemnations. Pipelines are currently being created to carry shale gas. And, after all, New York State finally has a reported case on the methodology for condemning a corridor, albeit a railroad corridor.