cover story

Putting rights-of-way in your domain

BY TODD A. AMSPOKER

The use of eminent domain may change the valuation of telecommunications easement rights within railway or utility corridors

The exploding telecommunications market has caused heightened interest in the purchase and use of railway and utility corridors. The question of how much a telecommunications company must pay for rights to use existing corridors is a difficult one.


Typically, a right-of-way holder will assume that the value of a corridor should be equal to the value of lands adjacent to that corridor. While such appraisals may prove satisfactory in many negotiations, they don't have to be accepted in all of them-particularly in areas of the country where telecommunications companies have the legal status of a public utility with the power of eminent domain.

Across the fence-or not

The proper manner of appraising railway and utility corridors is often perplexing. Such properties are rarely sold on the open market. The shape and size of such properties are almost always unusual. Railway and utility corridors are not normally appropriate for industrial, commercial, or residential development. When such corridors are sold, there is an undeniable monopolistic aspect of the transaction because the seller is typically the exclusive source of such corridors and uses that fact to its advantage in purchase negotiations. Meanwhile, purchasers of such corridors may have already committed to their project and must purchase such interests to complete their work. In such circumstances, purchasers must pay the price requested by the seller with little chance to change the outcome.

It is typical that telecommunications companies need only acquire an easement to use an existing railway or utility corridor (see Figure 1). An easement is simply a legal right to use another person's property for a specific use. The terms of an easement are often defined in a written agreement recorded with the local county or other public body. An easement must therefore be contrasted with outright ownership of property.

Let us suppose that a telecommunications company must lay a new fiber-optic cable and wants to use a corridor owned by a railroad corporation. What happens next? The railroad will often obtain an appraisal of its corridor from an in-house real estate appraiser. If only an easement is being sought, the appraiser will typically assess the easement value at some percentage, often 50%, of the full value of the corridor.
Figure 1. The typical easement would see a carrier leasing the space next to a railroad track with a railway corridor.


Nor surprisingly, our fictional railroad company will seek to maximize the value of its corridor in the negotiations. Very typically, the railroad's appraiser will use some form of the "across the fence" (ATF) appraisal approach to justify such high values. In summary, the ATF approach assumes that the value of a corridor should be equal to the value of lands adjacent to that corridor. For instance, if the corridor is located next to commercial land, the corridor will be valued according to typical commercial land values. The appraiser determines this value by comparing the corridor property to actual sales of nearby commercial properties. These "comparable sales" are reduced to a cost per acre or cost per square foot, and that unit value is applied to the corridor property (see Figure 2).

The ATF method of appraisal may work well in consensual sales where both sides are in agreement as to the proper appraisal approach. However, the transaction need not necessarily be a consensual-or even friendly-arrangement. Many telecommunications companies now operating in the United States have the legal status of a public utility with the power of eminent domain. The power of eminent domain is an inherent power of the federal government and the various states to take private property for use for public projects in return for payment of fair market value to the property owner. The method by which a public agency or utility exercises the power of eminent domain is by filing a court action, commonly known as a "condemnation" action.

Eminent domain

The states may assign the power of eminent domain to local public agencies or other entities such as public utilities. Many states classify telecommunications companies within the broad definition of public utilities. For instance, in California, the Public Utilities Code grants a "telephone corporation" the right of eminent domain to acquire property necessary for the construction and maintenance of its telephone line (California Public Utilities Code SS616). A "telephone line" is defined in Public Utilities Code SS233 to include all property used in connection with or to facilitate communication by telephone, whether such communication is accomplished with or without the use of transmission wires. A "telephone corporation" is defined as any corporation or person "owning, controlling, operating, or managing any telephone line for compensation" within the state (California Public Utilities Code SS234). Many telecommunications companies either fit or have the potential of fitting this definition. Thus, they may have the power of eminent domain.
Figure 2. With the ATF approach, the value of Corridor A is determined by the value of the property on either side of it. Naturally, the holder of the corridor would assert that the corridor was equally as valuable as the surrounding land, even if the corridor could not be developed and the surrounding property could be.


Again using our fictional negotiations, a telecommunications company need not necessarily accept an ATF appraisal approach to value easement rights in a corridor. The legal principles that must be followed in eminent-domain cases do not necessarily support the use of the ATF approach. In short, an owner of a corridor (such as a railroad) may not be assured that the ATF approach will be allowed in an eminent-domain proceeding.

Legal precedent

A search of all United States federal and state court jurisdictions has yielded only two legal cases that specifically discuss the ATF appraisal approach. In Oregon Department of Transportation v. Southern Pacific Transportation Company, the Oregon Department of Transportation (ODOT) filed an eminent-domain proceeding to take full title to an abandoned railroad corridor owned by Southern Pacific (SP).1 SP contended that it should be paid based upon an ATF value. ODOT did not claim otherwise, but merely argued that because SP had abandoned its railway use of the property, only a nominal award should be given. Based on those positions, and due to the fact that the take was total, the court allowed the use of the ATF method. The court reasoned that once SP proved that the property still had use as a railway or utility corridor, the ATF approach was appropriate.

In the recent case of Southern Pacific Transportation Co. v. Santa Fe Pacific Pipelines, Inc., the California Court of Appeal interpreted the meaning of an agreement between a railroad and a pipeline company that allowed the pipeline company to use the railroad's corridor for a prescribed rental figure.2 The agreement provided for future rents to be based on "fair market value." Unable to agree on a value, the parties went to court. The court refused to allow the railroad to use the ATF approach.

Disappointed with the judgment, the railroad appealed. The Court of Appeals decided that the trial court should have considered the parties' original intentions to determine the admissibility of the ATF approach and sent the case back to the trial court for further proceedings. Significantly, the Court of Appeals did not rule that the ATF approach was legal but only determined that the trial court should have considered other criteria in making its decision whether to allow that approach.

Matter of interpretation

The Court of Appeals relied on basic principles of contract interpretation, as opposed to specific rules and requirements of eminent-domain law. In particular, the Court of Appeals focused on the fact that historically, both of the parties had used the ATF approach to value corridor properties. This factor would have little relevance in an eminent-domain proceeding where the condemnor objects to the condemnee's use of the ATF approach based upon the eminent-domain law.

From the above discussion it should be clear that absent a challenge to the ATF appraisal approach, owners of railway or utility corridors may extract substantial payment for the use of their corridor, even though such use may not have any impact on the owner's continued uses. However, it is not necessarily true that the prospective purchaser of corridor rights must accept ATF valuations without objection. Eminent-domain proceedings provide several avenues to attack this standard methodology. Those potential objections are described here.

One of the most basic principles of eminent-domain law is that the search for fair market value depends on what the property owner (Owner) has lost as opposed to what the taking agency (in our example, a telecommunications company) has gained or avoided.3 A reasonable legal argument may be made that if a taking from a corridor has not caused any loss to the Owner, or if the Owner had nothing of value to begin with, ATF is not appropriate.

This principle is often manifested in eminent-domain cases by a judicial finding that only a nominal value is appropriate for a particular taking. For instance, on one occasion, a nominal award was ordered when a taking for roadway purposes was from a location on a parcel that was already burdened with a road easement.4 On another occasion, a $1 nominal award was made when a city took a street crossing over a railway that did not affect railway operations.5 And another railroad operator was not entitled to use an appraisal method similar to ATF when there was no proof that its abandoned railway corridor could ever be put to any profitable use.6

It would appear that the only occasion in which ATF is appropriate is when there is adequate proof of some profitable use of the area taken, combined with the Owner having lost such profitable use as a result of the taking.7 As an example of a taking of a fiber-optic easement that is appropriate for nominal valuation, see Figure 3.

Another possible objection to the ATF approach is by objecting to the ATF comparable sales used by the Owner's real estate appraiser. Typically, such sales will concern neighboring land that is developable in some form. There are two apparent justifications for using such sales to determine the value of a corridor. The first is based on the assumption that the corridor is developable on its own or by being combined with adjacent properties. The second justification is that the corridor is usable for transportation or utility purposes and that such sales give a rough approximation of the value. However, these two theories depend on proof that the corridor is either developable to a higher and better use or has potential profitable use as a transportation or utility corridor.

Figure 3. How much of the corridor would be taken up by the easement will also affect the value. As is obvious, not every easement runs parallel to the tracks, pipelines, or utility lines operated by the right-of-way owner.


As to the development issue, it may be the case that the corridor to be valued may never be developed because of its configuration or size and/or due to the fact that all adjoining properties have already developed and there is no potential buyer of the corridor for development purposes. It is inappropriate to use development sales to determine the value of a property that can never be developed.8 And the general rule also is that current market value must be determined only by uses for which the condemned land is adaptable and available.9

Alternatively, the Owner must show that the corridor is suitable for use as a transportation or utility corridor. In some instances, the corridor may not be available for any transportation or utility use. Other portions of the corridor may have already been sold and developed. The corridor may not go anywhere useful for such purposes. In that situation, sales of other corridors should not be considered.

Additionally, the Owner should not be able to rely upon the taking agency's proposed use of the corridor to justify such a theory. Valuation of a condemned property is usually made on the basis that the public project for which the property is condemned is not to be considered.10 If the agency's proposed use is the only possible use of the corridor, it should be excluded from consideration. As one court has noted, it would be "monstrous" for the benefit arising from the proposed improvement to be taken into consideration as an element of the value of the land.11

Another objection to be made to the consideration of sales of other utility corridors is that such sales are typically made to public agencies or utilities with the power of eminent domain. Evidence of sales transactions in which the purchaser is an entity having the power of eminent domain are normally inadmissible in evidence.12

Actual case study

In a recent matter, a municipality condemned an irrigation district property that was "improved" with an irrigation ditch.13 The municipality condemned fee title to the land, installed an underground concrete pipe to the district's specifications, and reserved a perpetual easement for the district so that it had the legal right to carry on its operations without any interference.

The district's appraiser admitted that (1) the condemned property was not developable, (2) no other public utility use was possible on the property, and (3) the irrigation district's use of the property had not been materially affected. Nevertheless, the district's appraiser still valued the property according to the ATF approach, on the grounds that the property was a public utility and therefore was entitled to be valued on that basis. After motion by the municipality, the trial judge threw out the district's appraisal and awarded judgment according to the municipality's nominal valuation.

In conclusion, there is no substitute for proof that the property rights condemned from a public utility or railway corridor had some open market value for some legitimate use and that such potential use has been eliminated by the taking. Absent such proof, the ATF approach is not legal.

Todd A. Amspoker is an attorney with Price, Postel & Parma LLP in Santa Barbara, CA. He has represented condemning agencies and property owners in eminent-domain trials throughout California for 15 years.

References

  1. (1988) 749 P.2d 1233.
  2. (1999) 74 Cal.App.4th 1232.
  3. United States v. Virginia E. & P. Co. (1961) 365 U.S. 624, 633 [5 L.Ed.2d 838, 847, 81 S.Ct. 784]; People v. Southern Pacific Transportation Co., supra, 84 Cal.App.3d 315, 324.
  4. People v. Schultz (1954) 123 Cal.App.2d 925.
  5. City of Oakland v. Schenck (1925) 197 Cal. 456.
  6. People v. Ocean Shore Railroad (1948) 32 Cal.2d 406.
  7. See Oregon Department of Transportation v. Southern Pacific Transportation Company, supra; People v. Southern Pacific Transportation Co., supra.
  8. County of Los Angeles v. Union Distributing Co. (1968) 260 Cal.App.2d 125.
  9. People v. Arthofer (1966) 245 Cal.App.2d 454, 462-463.
  10. United States v. Miller (1943) 317 U.S. 369, 375, 87 L.Ed. 336, 62 S.Ct. 276.
  11. County of San Diego v. Rancho Vista Del Mar (1993) 16 Cal.App.4th 1046.
  12. For example, see California Evidence Code SS 822(a)(1); Code of Alabama SS18-1A-197(1).
  13. City of Tracy v. The West Side Irrigation District, San Joaquin County (California) Superior Court No. 283677.