What Price an Easement? Setting Market Value in Fiber Optic Corridors
July 1, 2001
By Wayne C. Lusvardi and Charles B. Warren, ASA
How a landmark case on landowner
compensation could make or break the industry.
With
the deregulation of telecommunications technologies and industries
under the Federal Telecommunications Act of 1996, the perplexing issue
of how to set a value on fiber optic cable easements is reaching has reached
a legal, professional, and national critical mass.
And now, on May 30, in a landmark
case in federal district court in Indiana, lawyers have sent out notices
describing what promises to be the largest-ever settlement involving installation
of fiber optic cable on right-of-way land. Another hearing is set for
August 21 to review the fairness of the settlement, to make a final determination
on its approval. (See sidebar, Farmers Get Piece of the Action.)
The Indiana case concerns the
issue of what to pay farmers for easements to bury fiber optic cable under
already existing, or sometimes dormant, railroad rights of way. It is
a massive class action suit involving as many as 50,000 landowners in
some 16 states. That's how many landowners could be eligible to receive
both guaranteed payments and a share of revenue from a fiber optic network
to cover a large region spanning most of the country east of the Mississippi.
The Network would be developed by Thoroughbred Technology and Telecommunications,
Inc., known otherwise as "T-Cubed," the telecom subsidiary of
Norfolk Southern, one of the nation's four largest railroads. (See,
www.nscorp.com, and especially www.t3inc.com, for description and maps
of the project.)
The settlement amount in this
class action case entails a base compensation of $6,000 per linear mile,
plus an unbelievable cut of the cable company's revenues—up to $31,875
per mile. Assuming a 5- to 10-foot surface width for fiber optic cable
right of way easements, by our calculation, the settlement could represent
an equivalent payment of anywhere from $26,295 to $52,590 per acre in
transitional farm land probably worth at best 6,500 per acre1 for
a buried cable that realistically does not damage or interfere with the
existing or future use of the land. In reality, T-Cubed is a wholesale
assembler of corridors that, in turn, sells conduit space to fiber optic
retailers such as Sprint, AT&T, and others. In other words, T-Cubed is
in the real estate business and is not strictly a fiber optics carrier.
It is indeed difficult, if
not impossible, to make sense of the contradictory law, policies, and
market indicators. Consider, also, some additional cases.
First, in Berkeley, California,
a U.S. District Court struck down the city's telecommunications ordinance,
stating that local moratoriums on permits to install telecommunications
equipment in the public streets and the accompanying fees and rent charged
for rights of way were unrelated to public safety, and therefore violated
federal law.2
Second, in Pasadena, California,
the local cable franchise operator levies a 5 percent surcharge on its
customer's bills as a "pass-through", allowed under the Cable
Act of 1984, for "rent" of public street rights of way. This
"rent" is unconnected to real estate value and the cable license
rights effectively serve the same purpose as the fiber easements in the
Indiana case cited above.
Third, the Supreme Court of
the State of Illinois has recently struck down a 2 percent fee charged
by local municipalities imposed on "wireless Internet" companies.
Evidently, the court adopted the rationale that the use of the airspace
should be free because it is considered a public good. Land-line cable
operators will surely file suit under antitrust or nondiscrimination law
for relief from such rents and surcharges on grounds of "unfair competition"
from "wireless Internet" companies. This is reminiscent of how
the railroads once complained about truckers using the public highways
for free while their corridors were taxed.
Fourth, the U.S. Army Corps
of Engineers has been soliciting answers nationwide on the Internet to
the baffling question of what is the market value of a license for an
undersea fiber optic cable running along the ocean bottom in an area designated
as a "marine sanctuary" apparently to keep offshore oil drilling
platforms from ruining the pristine ocean views of wealthy beach front
property owners along the coast of California.3 The Federal government
has been duplicitously charging for the right to lay cable on the ocean
bottom, even though its own land appraisal standards explicitly preclude
any compensation for a taking of property rights in a "navigation
servitude" such as a river, lake, or the ocean.4 Although,
technically, licenses are revocable, such instruments are rarely extinguished.
The extent to which a license can be considered "real property"
is a gray area in the law.
One senses from the cases described
above that the complex issue of valuing a telecommunications easement
within a transportation or utility corridor is, to use technical communications
terminology, prone to scrambled signals, static, interference, and a lot
of noise. Is there a market value for cable easements or leases in transportation
or utility corridors? The answer is that, technically speaking, there
is no singular "market value" in the classically defined sense
of the term, for cable communications easements, leases, or licenses in
public transportation corridors, highways, or public streets. Finding
the market value of a fiber optic cable lease, license, or easement in
special purpose transportation or utility corridors has become like solving
a Rubik's Cube® puzzle. Corridors are multi-faceted properties, and
many values can be assigned to them, depending on the circumstances at
hand (e.g., acquisition, assemblage, liquidation, leasing, etc.). This
paper addresses why this valuation problem seems insoluble and offers
a cubic, or multi-dimensional, valuation framework as a way to ferret
out a reasonable solution.
Found
Money: How Does Fiber Affect Property Value?
Fiber optic installations don't
fit neatly into the legal framework that specifies how to set compensation
for a taking of property. The inconspicuousness and unobtrusiveness of
the fiber optic right of way presents novel valuation problems because
all eminent domain law is based on "what a property owner lost,"
not what they could "gain." By contrast, buried fiber optic
cable does not typically cause any discernible loss in value to larger
properties in which they are located, and in fact may conceivably increase
property value.
Fiber optic communications
is a technology that uses glass (or plastic) threads (fibers) to transmit
electronic data.5 Fiber optic cables have a much greater bandwidth
than metal cables, which means they can carry more data. A single strand
of fiber is capable of transmitting over a million simultaneous telephone
calls, or nearly 80 gigabytes (80 billion pulses) of digital information
per second.
Fiber optic cable can be buried
in conduit below the surface of the ground or strung along electric transmission
lines through the air (i.e., "a sky wrap"). The typical physical
right of way prism or cube for a buried fiber optic cable is as follows:
6
The most important thing to
understand about underground fiber optic cable lines is that they can
be "co-located" within a corridor, right-of-way, or private
property without much, if any, loss or interference with the present special
purpose use or future highest and best use of such properties. Fiber optic
cable line easements are a co-existing use, or "nested use,"
within a larger property. Typically, there is no other economic use of
the strip of land encumbered by the easement, other than for an underground
fiber optic cable. If the property owner refuses to grant an easement
or lease for a fiber optic cable across his property, most likely he will
forever lose the one-time opportunity from the payment for the easement
or rent from a lease. Prices for fiber optic cable easements and rents
might be called "found money." It is often said that "one
man's loss is another's gain." But "one man's absence of loss
may not be sufficient grounds to involuntarily confer a windfall gain
on another."
In reality, the largest challenge
for fiber optic carriers and wholesale fiber optic corridor assemblers
is economic. Telephone and cable television companies can justify the
costs of installing fiber links to remote sites serving a few hundred
customers. However, the cost of the terminal equipment remains too expensive
to justify installing fibers all the way to individual homes, at least
presently. Instead, cable and phone companies run conventional twisted
copper wire pairs or coaxial cable from optical network units to individual
homes. This is called "the last mile problem" in the telecommunications
industry.
Supply and
Demand: A Monopoly Commodity?
Corridors are special use properties.
Some corridors are owned by railroads, some by quasi-public entities,
and some by government agencies. Corridors are defined as "a strip
of land between two designations where traffic, topography, environment,
land uses, and other characteristics are evaluated for transportation
purposes."7 But transport of goods and people are only one
use requiring corridors. Corridors can be distinguished from the term
"right of way", which is defined as "a privilege to pass
over the land of another in some particular path; usually an easement
over the land of another."8 Many corridors are public goods
for which there is no market value because they never transact in the
market place (e.g., public roads, flood control channels, navigation servitudes,
airspace for air plane travel, etc.). Privately owned corridors only sell
infrequently and have a limited market value to a narrow range of buyers.
Corridors are a classic example of why real estate is often termed an
imperfect market in that the properties are unique and illiquid.
What makes corridors "special"
is their use for connectivity between two geographic points, unique linear
shape, and scarce availability. In built-up urban areas, co-location of
utilities in transportation corridors is typically the only practical
solution available. In many cases, local municipalities force cable companies
to co-locate cable in electric transmission line rights of ways or in
rail corridors to avoid tearing up the streets or interrupting business
in a commercial district. Because corridors are scarce, corridor owners
hold a monopoly position over those who desire to use their property for
linear transportation purposes. Monopoly properties typically reflect
highly polarized values: "hold-out" values by owners or nominal
values often sought by public or quasi-public secondary users through
the use of condemnation. The reason that corridors reflect highly polarized
values is that they are "one-buyer/one-seller" properties as
illustrated in the following market value cube chart borrowed from microeconomic
game theory:
One Buyer, One Seller.
Economists refer to this case as a "bilateral" (two-sided) monopoly.9
The problem with valuing a partial interest in a monopoly property is
that the situation does not meet any of the classic tests of legally defined
market value wherein there are willing parties, neither having an undue
advantage over the other. Corridors are monopoly properties and because
of this often command "hold-out" (premium) prices for their
primary or secondary use.
Buyer's Market. With
two or more substitute properties available, but only one buyer, who may
be able to play one seller off against the other, the situation does not
reflect full substitution of buyers (i.e., two or more rival buyers).
Nonetheless, a buyer's market situation is typically considered to reflect
"market value" because there is rivalry and both sellers still
can refuse to sell unless their price is met.
Seller's Market. When
two or more buyers seek to acquire only one property, the seller is likely
to demand a "hold-out price" or premium price because there
are no substitute properties. A seller's market cannot be appraised for
fair market value because legal definitions of market value necessitate
the availability of at least two or more rival properties on the open
market.
Open Market. Only where
there are two or more buyers and two substitute properties available is
there a pure market. This situation is typically considered to reflect
"fair market value" because it generally meets the requisite
tests of no natural advantage to both party, rivalry, and knowledgeable
and prudent parties.
Fiber optic cable line rights
in rail and electric transmission line corridors are typically "one-buyer/one-seller"
transactions. The problem encountered in valuing fiber optic cable easements,
leases, or licenses is that the monopoly market scenario depicted in the
one-buyer/one-seller case must be appraised as if the conditions needed
for an Open and Competitive Market (or the Buyer's Market) have been met,
when in reality, they have not. The process is like putting a square peg
into a round hole. The real estate appraiser assigned to value a fiber
optic cable easement or lease for its "market value" must either
find market evidence that conforms to the legal definition of market value;
or must simulate the conditions of a buyer's market or open and competitive
market even when such conditions may not exist.
The Appraiser's
Toolbox: Too Theoretical?
There are many methods cited
in the professional literature for valuation of corridors: Across-The-Fence
method (ATF), Replacement Cost New method (RCN), Value-For-Corridor Use
(VCU), Liquidation Value (LV), or Value for Non-Corridor Use (NCU, i.e.,
assemblage).10 However, as you read through these definitions and
examples, be aware that these valuation methods that may be prone to producing
a manipulated result. Some real estate appraisers relish corridor valuation
assignments because the many-sided values that can be assigned to corridors
means you can never prove them wrong. Pick a number that will serve your
purposes.
Across the Fence (ATF).
Across-The-Fence Value is defined as "the price or value of land
adjacent to or "across the fence" from a railroad, pipeline,
highway, or other corridor real estate."11 ATF values are
often asserted as the basis of the value for fiber optic cable lines in
corridors on the premise "that the corridor land should be worth
as least as much as the land through which it passes." The ATF appraisal
method uses a replacement theory; i.e. since there are no sales of fiber
optic easements, the valuation of such property rights can be determined
by the cost of hypothetical replacement properties. Cost is often the
only basis of value where there are no markets, or where there are limited
markets, such as for corridors. However, with the recent glut of bandwidth
resulting from the "crash" in the DotCom companies and financial
markets, there may be some fiber optic corridor sales as the DotComs are
sold, acquired, or merged.
There are two fatal flaws that
exist with ATF theory that are mostly not addressed in any of the professional
literature. One is that a corridor often cannot be legally put to the
same use as land across the fence from its boundaries. And secondly, ATF
theory has never addressed the issue of how to value the corridor when
the land adjacent to the corridor is effectively "free," such
as a public street that a cable company can lay conduit within under the
Highways Act without charge. The ATF theory is not well suited for valuation
of secondary use rights, such as fiber optic cable lines within corridors
where the value for corridor use, non-corridor use, or the replacement
cost of the corridor are often irrelevant issues. ATF theory works best
in estimating the just compensation for full fee acquisitions by another
corridor user in those rare situations where the original corridor owner
must find a replacement corridor.
Across-The-Fence value proponents
often contend that a fiber optic easement is another linear use of the
corridor and, thus, should pay an ATF-based price because it is substituting
use of a corridor for having to pay for adjacent or nearby land. But unlike
rail transportation, electric transmission lines, or major gas or water
pipeline easements, fiber optic cable easements have a low profile and
do not discernably affect the primary corridor use or alternate highest
and best uses of the corridor. Moreover, this does not factor the possibility
of a less costly alternate route. Paradoxically, where fiber optic cable
is routed into alternate routes such as public highways and streets without
any charge, because there is no compensation required for the real estate
there is no market data available of alternate route prices.
Corridor owners often point
to market value evidence of ATF sales prices as the basis for easements
or leases acquired in corridors. However, as shown in our market value
grid above, an ATF value reflects a "hold-out" price demanded
by a monopoly corridor owner. Moreover, the corridor owner often unilaterally
sets the percentage discount for an easement or the rate of return for
a lease. Cable line licenses through public-owned corridors typically
violate the "Risk/Return Principle" because they place all the
risk on the user, including the burden of relocation, but demand a full
market return equivalent to land adjacent to the corridor. Thus, because
ATF values are typically one-sided "take-it-or-leave-it" values,
they must be eliminated from consideration as to the "market value"
for a fiber-optic cable line easement; except to the extent that it may
also reflect alternate route cost.
Farmers
Get Piece of the Action
T-Cubed settlement is largest ever of its kind.
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Washington, D.C.,
May 30, 2001—Notices of a class action settlement are being
sent to more than 50,000 landowners in 16 states. The settlement
was reached between attorneys representing the landowners and Thoroughbred
Technology and Telecommunications, Inc. ("T-Cubed"), the
telecom subsidiary of Norfolk Southern Corporation, owner of one
of the nation's four largest railroads.
The settlement is the
largest-ever to involve installation of fiber optic cable on right
of way land, and it is the first ever on active, railroad rights
of way, according to attorneys for the landowners. The settlement
has received preliminary approval from the federal court that is
presiding over the case, and the judge has approved the notice to
class members.
The settlement permits
T-Cubed to install bundles of conduits on railroad corridors that
have been identified between major metropolitan areas in the East,
Northeast, South and Midwest. In return, T-Cubed will pay landowners
along the routes where conduits are installed. Class members are
all owners of land adjacent to or underlying the specified railroad
corridors as of June 5, 2001.
Class members whose land
is used for the fiber optic conduits will receive compensation in
three forms. First, they will receive a guaranteed payment of $6,000
per mile, which will compensate the landowners for the first three
conduits that T-Cubed plans to install. Second, they will receive
7.5 percent or more of the revenue obtained by T-Cubed from selling
additional conduits, beyond the first three. If all of the planned
conduits are leased, the cash compensation to landowners may exceed
$30,000 per mile.
Third, all class members
will have an opportunity to own equity in a company that has been
formed for their benefit as a part of the settlement. The company,
named Class Corridor, LLC, is a limited liability company that has
been formed under the laws of Delaware. This company will own telecom
easements over class members' land on the side of the railroad corridor
that is not being occupied by T-Cubed's conduits. The company will
also have the right to receive strands of dark fibers from T-Cubed
and an option to purchase a conduit from T-Cubed, or in the alternative
to receive a cash payment from T-Cubed. Class Corridor, LLC will
develop its assets for the benefit of the class members. Information
on Class Corridor, LLC can be found on its website: www.classcorridorLLC.com
The class action lawsuit
claims that the landowners own much of the land on which the fiber
optic cables are being installed, and that T-Cubed's railroad affiliates
own only an easement for railroad purposes. The landowners claim
the rights to permit telecom uses on their land. T-Cubed denies
liability, but has agreed to the terms of the settlement. Final
determination on approval of the settlement will be made by the
federal court following a fairness hearing to be held in Indianapolis
on August 21, 2001.
Nels Ackerson, Co-lead
Class Counsel for the plaintiffs, said, "This settlement will
put real value into the hands of the people whose property is being
used to construct the country's fiber optic backbone. Landowners
will get cash and they will also participate for the first time
in future profits from use of their land for fiber optic systems."
He continued, "I
compliment T-Cubed for its sense of fairness and its good business
sense in reaching this settlement. It is a win-win solution. Landowners
will get fair compensation, and T-Cubed will have prime corridors
to develop for fiber optic uses free from title challenges. T-Cubed's
land rights will be unique. We know of no other telecom company
that can claim legal rights on all of the land for an entire fiber
optic system."
Timothy Elzinga, an Indiana
farmer and the settlement class representative, owns land along
a railroad line leading into Chicago. "This is a wonderful
settlement," he said. "I'm glad T-Cubed is doing the right
thing. I was aware of other litigation on railroad right-of-way
land, and when I learned that somebody was about to put fiber optic
cables on my land without my permission, I called my attorney. This
is the kind of result that I had hoped for. We could not have done
it without a class action."
—B.W.R.
Source: The
Ackerson Group, Chartered, attorneys for the plaintiffs, at www.ackersonlaw.com.
See www.FiberOpticFundI.com for more information about the case
.
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Moreover, eminent domain law
specifically excludes valuation of an easement by the gain or avoided
opportunity cost to the user rather than by what the property owner lost12
ATF value reflects the gain from avoiding the higher cost of land over
the fence (i.e., avoided cost). A relevant California case is Redevelopment
Agency vs. Tobriner, 215 Cal. App. 3d 1087 (1989). In that case, the
court ruled in a non-corridor taking that where damages from the imposition
of an easement on a property are minimal, but the transfer value to the
easement user (i.e., dominant estate) are quite high, compensation is
nonetheless minimal. Compare the court's ruling to an analogy from the
oil industry: a property owner may not be able to extract the oil from
under his land, but usually is granted a royalty percentage in the proceeds
from the entire oil field. But in the case of fiber optic cable, the cable
carrier is figuratively bringing the valuable cable resource to the property,
rather than an oil reservoir under the ground surface, as does a petroleum
company.
A dilemma is that there is
an abundance of easement, lease, and license market data predicated on
ATF values, none of which likely reflect the requisite conditions of market
value. Because it is often the only market data available, transactions
based on ATF are often used by default. In valuation disputes, "price
is king." Thus, abundant so-called "comparable" transactions
predicated on ATF are often used as self-validating evidence of the market
price for easements, rents, or license fees in corridors. This is sometimes
called a "hall of mirrors" market. To some extent, the prevalence
of these sort of transactions, whether theoretically elegant or not, gives
the ATF proponents some validity. Bunches of deals, even if suspect, are
still bunches of deals.
Not Any Value (NAV).
In the case of fiber optic cable line easements, leases, or licenses,
there is ample legal support for a nominal valuation of such a property
interest because there is negligible interference with the highest and
best use of the corridor. In the eminent domain context, when a condemnee
is unable to show that a taking of property has caused him any loss, he
is entitled to recover only nominal damages.13 For instance, a
nominal award was made when a city took a street crossing over a railway
that did not affect railway operations.14And another railroad
operation was not entitled to use the reproduction cost method when there
was no proof that its abandoned railway corridor could ever be put to
any profitable use.15 In fact, the only occasion on which corridor
owners have been entitled to use traditional valuation methods for a taking
of their corridors is in the event that there is an entire taking of the
right of way, combined with adequate proof of some profitable use of the
corridor.16
Fiber-Optic
and Real Estate Glossary
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Dark Fiber —
A fiber strand without any light flowing through it. Dark fiber
is sometimes provided to corridor owners in lieu of, or in addition
to, rent.
Demarcation Point
— Where the fiber a carrier or provider owns and leases terminates.
Fiber Backbone — The
geographic network of fiber optic cable.
Fiber Optic Cable
— A cable containing a bundle of fiber strands.
Franchise — An
arrangement through which the franchisee uses the company name of
the franchiser and is provided specified business services in exchange
for a franchise fee, usually an initial purchase requirement and
an ongoing percentage of gross sale of the business (Jack C. Harris
and Jack P. Friedman, Barron's Real Estate Handbook, 1993).
Indefeasible Right
of Use (IRU) Agreement — License agreement between a corridor
owner and a lessee (cable carrier).
License — Permission
subject to revocation at will.
Market Value —
The theoretical highest price a buyer, willing but not compelled
to buy, would pay, and the lowest price a seller, willing but not
compelled to sell, would accept (Jack C. Harris and Jack P. Friedman,
Barron's Real Estate Handbook, 1993).
Single Mode Fiber
— A type of fiber cable capable of transmitting light over longer
distances than multimode fiber.
Splice Points — Locations
on the fiber backbone at which the cable is interconnected. Drop
cables are also connected to the fiber at these locations.
Point-of-Presence
— A larger node on the fiber optic cable route comprised of
an electronic equipment building that accommodates repeater equipment,
a power back-up system, and access point modules for fiber optic
service providers. Between 15,000 to 25,000 sq. ft. site with separate
prefabricated concrete modular structures (30' x 40') (i.e., "a
fiber farm").
—W.C.L.
and C.B.W.
Source: Los
Angeles Department of Water and Power (www.ladwp.com/programs/fiber/glossary.htm)
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Notwithstanding the numerous
case law rulings for nominal easement valuations where no discernible
economic loss is sustained to property, such an approach would not meet
the definition of market value defined above. This is because adjudicated
awards compel a "forced price" on a property owner, even if
there is no demonstrable loss caused to the property by the easement.
Adjudicated nominal values are the opposite of hold-out values, but are
similar in that both are predicated on coercion. As legal scholar Richard
A. Epstein states, "It is impossible to maintain the distinction
between 'causing a harm' (to the owner) on the one hand and 'not conferring
benefit' (to the buyer) on the other."17 No prudent and knowledgeable
property owner would confer a benefit on another property without requiring
some form of compensation.
Nevertheless, an inescapable
problem is that prices paid for easements most often reflect the polarized
values of one-buyer/one-seller transactions indicated in the market value
cube shown above (e.g., either "hold-out" value or "nominal"
value). Where compensation is made for easements outside the court system
or public agencies, it often reflects "hold-out" value and thus
reflects an "unfair" price.
Nominal court awards are "non-evidence"
under most Evidence Codes. Thus, there is little, if any, market evidence
of nominal compensation for easements, leases, or licenses in corridor
properties other than those transacted by public entities. In real estate
appraisal terminology, there are no "nominal comps."
Alternate Route Method (ALT).
Because of the unsatisfactory nature of both ATF and Nominal prices
as an appropriate basis for acquiring partial property rights in corridors
for underground communications cable leases or "relocatable"
pipeline easements, an "Alternate Route Method" (ALT) has been
proposed to solve this dilemma.18 This alternative valuation method
considers the construction cost savings of co-locating in a corridor as
a simulated measure of market value, not the acquisition cost of adjacent
land, or nominal court or public agency awards. For example, the differential
savings in hard construction costs, delay, and avoidance of the "hassle-factor"
of locating underground cable in a corridor as opposed to an adjacent
public street, is believed to reflect the ALT.
The problem with this approach,
despite that it at least tries to simulate fair market value conditions,
is that neither side in a one-buyer/one-seller transaction will use it
when the seller can hold out. There is too much to gain in the "winner
takes all" legal system that pervades our courts. Another obvious
problem is that there is little, if any, market data available of easement,
lease, or license transactions predicated on the economic calculus of
an alternate route. A market predicated on alternate route prices might
emerge if corridor owners facing adjudicated nominal court awards opt
to bargain rather than hold out for an ATF price. In the absence of demonstrable
evidence of alternate route prices for corridors, the winner in any litigation
over the issue of the value of an easement or lease within a corridor
would likely be the client with the respective winning hypotheses. Courts
typically want something less hypothetical. However, maybe courts will
smile on arbitration/mediation awards based on Alternate Route Value resulting
in more corridor valuation disputes being sent out for alternative dispute
resolution.
Going Prices:
A Realistic Alternative?
Real estate appraisers often
say the phrase that the "market is the final arbiter" for most
property rights. The sales comparison approach to real estate appraisal
is also termed the "direct sales comparison" method because
it relies on primary market evidence to discern the market value for partial
property rights within corridors rather than indirect ATF prices.
Nevertheless, the problem with
valuing easements is that there usually are no sales of underground cable
easements, leases, or licenses in corridors outside of one-sided ATF-based
transactions or adjudicated nominal awards.
All the same, however, there
is ample market data of what fiber optic carriers and bandwidth wheelers
are willing to pay for cable easements, and what municipalities charge
for cable leases within public street rights of ways where there are no
impacts of such rights on the special purpose use, highest and best use,
or alternative use of the corridor. We can call these "going prices,"
or Across-the-Board (ATB) prices, the term preferred by real estate appraisers.
Such market evidence could put us on the right track in solving the dilemma
of appraising partial property rights for underground cable in corridor
properties.
Summarized below are the "going
prices" (or ATB prices) for fiber optic cable line easements and
leases excerpted off the Internet for two of the major fiber carriers
and wheelers:19
The difference in the reported
unit prices shown in the chart above may be attributed to whether the
cable is located in private property or is "co-located" with
other utilities, such as in the partnership of Petronet with Buckeye Pipe
Line Company to "piggyback" on their pipelines. The unit values
have been transformed from a price per linear foot basis to a price per
square foot basis so that they could, in turn, be compared with ATF prices.
By using this admittedly highly selected and limited sample, we can get
a tentative indication of whether fiber optic carriers and resellers base
their prices on ATF Value, Alternate Route Value, Nominal Value, or something
else.
Below is an ATF sensitivity
chart where the above unit values have been compared with sample ATF unit
values. For purposes of this comparison, unit values of $0.25, $0.50,
and $1 per square foot have been used as representative of "rural"
land values adjacent to corridors; and unit values of $5, $10, and $15
per square foot representative of "urban" land values abutting
corridors. A comparison of the ratio of easement prices to sample ATF
values paid/charged for fiber optic cable line easements and leases is
shown in the sensitivity analysis table below:
The results shown in Table
5 reflect what is called the "law of one price" in economics,
which says that identical goods will sell for identical prices. Williams
Communications pays a flat $0.05 per sq. ft. for underground cable easements
in rural areas and $0.20 per sq. ft. for urban areas. Similarly, Petronet
pays a flat $0.10 per sq. ft. for cable easements in rural reaches of
its cable alignment, and $1.90 per sq. ft. in highly urbanized areas.
The city of Denver charges on average $1.60 per sq. ft. rent for use of
public street right of ways for underground cable use.
One may draw a number of inferences
from the above table concerning the prices or charges for fiber optic
cable easements or leases:
- ATB or "going-prices"
for underground cable easement prices are not based on ATF values, Alternate
Route Values, or Nominal Values.
- ATB or "going-prices"
for fiber easements reflect "across-the-region" value not
"across-the-fence" values. n ATB or "going-prices"
for cable easements are flat use values probably based on projected
business pro formas.
- Different cable easement
prices for rural or urban areas are predicated on the expected volume
of bandwidth communications business in these areas.
- ATB cable easement prices
come closest to meeting the minimal criteria of "market value"
for a "buyer's market" given earlier for easements or leases
in limited-market corridor properties.
- Uniform cable easement
prices prevent "rent seeking," or the exploitation of profit
opportunities by arbitrageurs where two identical goods are sold at
different prices.
- What makes fiber optic
routes valuable isn't the "in-between land" that it runs through,
but the end points it connects. Fiber optic easements that do not affect
the highest and best use of the corridor are unconnected to the underlying
value of the land. Thus, Across-The-Board prices are appropriate compensation
for fiber optic easements within corridors.
- Fiber optic conduit wholesalers
(or resellers) often pay significantly different consideration for property
rights than actual retail fiber optic carriers or municipalities that
hold a monopoly over "the last mile" connection to residential
and commercial customers.
Overall, we believe that ATB
or "going" prices are appropriate indicators as to what the
market value of a fiber optic cable easement in a corridor is. In the
absence of any demonstrable harm or loss to the highest and best use,
special use, or secondary use of a corridor property from a buried cable
easement, Across-The-Board easement prices come closest to reflecting
the minimum conditions necessary to replicate true competitive market
for partial property rights in limited-market corridor properties.
After all, the world of fiber
optic easements is a world in which probably only a small percentage of
real property transactions conform to the purist legal definition of fair
market value established by our courts. In such a world, we should view
the ATB or going prices paid by fiber optic conduit wholesalers or retailers
as reflective of "fair market value," no matter how one-sided
they may appear to be.
Wayne C. Lusvardi is Senior
Real Estate Representative, Metropolitan Water District of Southern California.
Mr. Lusvardi has published articles on related topics in Right of Way,
Appraisal Journal, and Real Estate Issues. Contact: Telephone (213) 217-7661;
E-Mail: wlusvardi@mwd.dst.ca.us. The opinions expressed herein are those
of the author(s) and do not reflect on any employer, associated consultant,
or affiliated organization.
Charles B. Warren, ASA (Urban-Real
Property), Warren and Warren, San Francisco, California, specializes in
ad valorem appraisal, litigation valuation, cost-benefit studies, computer-assisted
mass valuations, special purpose property valuations, and environmental
and regulatory issues affecting real property valuation. Contact: Telephone
(415) 433-0959; E-Mail: cwarren@batnet.com
1. Craig L. Dobbins, "Indian
Land Values Rise," Purdue Agricultural Economics Report, Sept., 2000:1
(see, www.agecon.purdue.edu/extension/paer.htm).
2. "Quest Communications
Wins Federal Court Ruling to Serve Customers in Berkely," May 25,
2001 (see www.qwest.com/about/media/pressroom).
3. Final Report Fair Market
Value Analysis for a Fiber Optic Cable Permit in National Marine Sanctuaries,
author unknown, submitted to National Ocean Service, National Marine Sanctuaries,
Dec., 2000.
4. Interagency Land Acquisition
Conference, Uniform Appraisal Standards for Federal Land Acquisitions,
1992"The Commerce or Navigation Servitude," 1992A-14.
5. Webopedia (www.pcwebopedia.com).
6. Proponent's Environmental
Assessment, Riverside to Rainbow Canyon Fiber Optic Project, Vesta Telecommunications,
Inc., prepared for California Public Utilities Commission, Nov. 2000.
7. Dictionary of Real Estate
Appraisal, AI, 1993: 314.
8. Id.
9. John Black, A Dictionary
of Economics (Oxford Univ. Press, 1997): 32.
10. See Wayne Lusvardi, Todd
Amspoker, Esq., and John Wright, MAI, "Appraising Linear Subordinate
Easements in Utility Corridors, Appraisal Journal (July 2000): 252.
11. Dictionary of Real Estate
Appraisal, AI, 1993: 5.
12. Lusvardi et al, supra note
10, at 252-253.
13. City of Los Angeles v.
Richards, 10 Cal.3d 385, 290, fn. 4 (1973).
14. City of Oakland v. Schench,
197 Cal. 456 (1925).
15. People v. Ocean Shore Railroad,
32 Dal.2d 406 (1948).
16. Oregon Dept. Of Transp.
v. Southern Pacific Transp. Co., 749 P.2d 1233 (1988); People v. Ocean
Southern Pacific Transp. Co., 84 Cal.App.3d 315 (1978).
17. Richard A. Epstein, Takings:
Property Rights and the Power of Eminent Domain (harvard Univ. Press,
1985).
18. Lusvardi et al, supra note
10, at 250-259.
19. Vicky Uhland, "The
Big Fiber Pull," ZDNet, Oct. 22, 2000 (www.adnet.com/eweek/stories/main).
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