If one looks at the early cases involving eminent domain, a significant number of them involved railroads exercising that right, such as in the landmark cases of South Buffalo Ry. v. Kirkover, 176 N.Y. 301 (1903) and Story v. New York Elevated R. Co., 90 N.Y. 122 (1882). The former established the right in a partial condemnation to consequential damages based on the use to which the part condemned is put. The latter established the rights of abutting owners when there is a taking of an interest in the street on which their property faces which impinges on their easements of light, air and access. On the other hand, you cannot find a reported case in New York on how just compensation is determined where railroad lands had been condemned. That is until the recent case of N.Y. Central Lines v. State of N.Y., 2012 NY Slip op. 08704 decided Dec. 19, 2012. The authors’ firm was claimant’s counsel representing the railroad company.

Railroads and Jurisdiction

That there are so few such takings is not an accident. 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 (2d Dept. 2006). Secondly, railroads had the right of condemnation (N.Y.R.R. Law §17 [McKinney]) and thus their property cannot be condemned by an entity whose jurisdiction is equal to theirs unless it had specifically been granted that power. ( Long Island Rail Rd. Co. v. Long Island Lighting Co., 103 AD2d 156 (2d Dept. 1984))

But when you do get to condemn all or part of railroad land, it is akin to condemning parts or all of other corridors such as those for pipelines, electric transmission lines, sewer lines, etc. A corridor is what its name connotes, a lateral continuous area connecting two points. What differentiates the value of corridors is their relative importance in terms of their use and function. A good example is the current plan to lay a pipeline from Canada to the Texas oil refineries, compared to a now defunct freight line crossing the Hudson in the vicinity of Poughkeepsie. A corridor connects two points together and that connection and the ability to use the corridor to run a railroad or a pipeline, or some other lineal use is worth more than just the land itself. The market difference in values of corridors is determined by a number of factors.

‘Central Lines’ Case

In the N.Y. Central Lines case, in order to reconstruct the Brooklyn-Queens Expressway in the vicinity of Northern Boulevard approximately 280,000 square feet of land of the claimant, a subsidiary of CSX Railroad, was appropriated by the State of New York involving a relocation of a part of that line. The railroad itself is an amalgamation of many corridors totaling 22,000 miles of track. Previous to the condemnation, an agreement between the state and CSX had been entered into providing that as part of the project, four railroad bridges crossing city streets would be demolished by the state and replaced by a single longer bridge crossing over the expressway at the state’s expense, in lieu of damages for their taking and the cost to replace them.

The crucial issue in the case was how does one value a partial taking of railroad land, the railroad itself not being condemned. It is basic that there are three methodologies for the valuation of condemned property, the comparable sales approach, the income approach and the cost approach (the present cost to construct, less depreciation). The state’s position was to value the property taken on a before and after basis by reconstruction cost less depreciation (bridges, tracks, ballast, etc.) added to land value. But, in fact, there was no claim for damages to other than land, as any improvements that were taken were replaced by the state with new ones. It took the position that, as existing, the railroad bridges were subject to enough depreciation so that when compared to the cost of building the new bridge, etc. built by it, that the difference was greater than the value of land taken.

As such, it contended, the replacement of old with new was a benefit to be deducted from the value of the land appropriated, with a result that no compensation should be paid to the railroad. In simpler terms, the value after the taking when using the cost approach was greater than before the taking on this valuation methodology. It ignored the basic rule in New York that the minimum compensation in condemnation cases is the value of the part taken and "benefit" cannot reduce that amount. (See, e.g., Lerner Pavlick Realty v. State of New York, 98 AD3d 567 (2d Dept. 2012).)

Claimant’s position was that the industry standard for valuing a railroad was a "corridor valuation" that involved a value for the land based on comparably zoned lands adjacent to the corridor, i.e., across the fence (ATF), to which there had to be added a corridor factor, to account for that added value created by the use of the corridor afforded. That factor takes into account the value added to the land by the creation of a corridor as revealed by comparable sales.

Claimant’s expert then, through the use of sales of railroad corridors throughout the country, analyzed by comparing their importance and attributes to the subject, 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). He also opined the cost approach was a false standard. Since there were no prior cases in New York to rely on, claimant’s expert cited to a variety of texts on the subject.

Challenges of Partial Taking

CSX Railroad has about 22,000 miles of track. Part of that system is the Fremont Line, a freight line, running from the Oak Point Yard in the Bronx over the Hell’s Gate Bridge and ending at the Fresh Pond Junction in Queens. It is the sole line to deliver freight to Long Island unless one wants to barge railroad cars from New Jersey to Brooklyn. It is eight miles long, 3.86 miles of which it had title, with the balance owned by Amtrak. It had originally been part of the Conrail system. The line itself is shared in use by a number of railroads. Shipments arrive in Long Island from all over the country making impossible any ability to say what the income from this 3.86-mile segment is, precluding any income approach to value. In fact, no such analysis had been kept or existed in the railroad records.

Since this was a partial taking, it required a "before" and "after" valuation. 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 claimant the lineal limits of the taking. Since no consequential damages were claimed, or valued, that difference was irrelevant.

The lower court eschewed reproduction cost less depreciation as the proper method of valuation to be used and held it was appropriate to use an ATF value multiplied by a "corridor factor." Then, reasoning the use of the railroad was not impaired, it limited compensation to just the ATF value. The state appealed, and claimant cross-appealed. The Appellate Division found the comparable sales method should be used, but reversed on the failure of the court to add a corridor factor to the value 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 claimant. The case is now back in the Court of Claims for that purpose.

So what is an ATF value, what is a corridor and what is a corridor factor? As the Appellate Division found, the proper methodology was to use a corridor valuation "which is, 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." It recognized that when the highest and best use is as a corridor, that property will generally sell for more than the ATF value of the land, that 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, it was discussed by both sides’ experts in the Court of Claims. It is, at its essence, 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 that 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 is in getting sufficient information about the sales to properly analyze them. There is no shortage of those sales. The state’s expert admitted to having 75 of them in his files, which he eschewed using, for a variety of reasons. Claimant’s appraiser used 14 such sales as comparables.

Conclusion

So why this column? If this is the only reported such case in New York in over 200 years, it may be another 200 until we have another. But, not likely. We came close to there being a 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.

M. Robert Goldstein and Michael Rikon are partners of Goldstein, Rikon, Rikon & Houghton.