The Valuation of Traction Properties in Chicago.

During 1906 a complete valuation of the property and franchises of the surface roads of Chicago was made under the direction of a Commission consisting of Bion J. Arnold, M. Am. Soc. C. E., and Messrs. Mortimer E. Cooley, and A. B. du Pont. The report of this valuation was published in the form of a pamphlet which is now practically out of print, as all extra copies were long ago exhausted.

The instructions of this Commission from the Chicago City Council were:

"To consider the detailed inventories and estimates of value to be submitted by the Street Railway Companies, to investigate the same and to ascertain whether the values thus listed were reasonable, fair and just."

Detailed inventories and estimates of value were submitted by the roads, and, from time to time during the progress of the work, additions or corrections to these schedules were made.

Reports showing income, operating expense, and traffic statistics were made, and such detailed statements as were called for from time to time were furnished.

The Commission organized its force for valuation work by using the office and field organization of the Arnold Company under the direct 95charge of George Weston, M. Am. Soc. C. E., for the major part of the work, and retained Messrs. Theodore H. Hinchman, Jr., C. V. Conover, and the writer to give special study to certain features of the appraisal. In the determination of franchise values, Professor Henry C. Adams was retained in consultation by the Commission.

In arriving at the value of the physical properties, a complete field examination was made, depreciation determined, cost of reproduction estimated, and in general, the work was carried on along lines quite similar to those of the railway appraisals heretofore described in detail.

Several very interesting and unique problems were presented, some of which were as follows:

"Upon what basis shall the cable properties of the companies be estimated—(a) as operating cable systems, or (b) as obsolete systems having no value except so far as the physical property can be utilized in the conversion of the cable lines into electric?"

In the final conclusions of the Commission, part of the cable lines were treated in one way, and part in the other.

"What allowance, if any, shall be made for the pavements laid by the companies on their right of way?"

The discussion of this topic, together with the opinions of counsel as to the legal status, is of interest. The Commission did not consider the value of paving as constituting any part of the physical property, the value of which must be supported out of earnings. The present value of the pavement was estimated and reported without specific recommendation as to whether an allowance should be made.

The valuation of real estate was left in the hands of real estate experts familiar with values in Chicago, each piece of property being personally examined and valued, and the representatives of the roads given such hearings as they desired.

In computing the value of physical properties, an allowance of 10% was made to cover the following items:

"1.—Legal Expenses—including those incurred in securing right of way and frontage consents.

"2.—Interest or carrying charge for the money expended during the construction period and up to the time the property goes into operation.

"3.—Brokerage—or the expense of securing the necessary moneys.

"4.—Contingencies—to cover incomplete inventories, unforeseen difficulties of construction, and any and all other items of expense which cannot be foreseen."

96The only novel feature in this list is Item 3, which was not included specifically in any of the railroad valuations made by States and heretofore described.

The franchise and intangible property valuation, amounting to some $9,000,000, or about one-fifth of the total, was a very important phase of the work, and the Commission gave up a large part of the report to its discussion.

The difficulties in this part of the work are described as threefold:

"First.—The difficulty of determining what are the exact legal rights of the companies in any given street or part of street, in absence of a direct and final judicial decision as to these rights;

"Second.—The difficulty in estimating the value of a line of street railways, consisting of several parts, where each of these parts is operated under a different tenure due to the character of the ordinances or franchises, respectively; and

"Third.—The difficulties arising from the absence of exact information as to the receipts and expenditures on the several parts of a single line covered by franchises of different length and character."

The Commission, having arrived at such an adjustment of the difficulties as appeared just, determined the value of franchises in the following manner:

It was assumed that the gross earnings on the different parts or routes of each system were in proportion to the car-mileage.

The system was divided into routes, and the car-mileage was determined for each route; then this information was compiled so as to show the car-mileage, and consequently the gross earnings, apportionable to each franchise.

The next step was to determine, in the same manner, the proportion of operating expenses assignable to each franchise, the operating expense being assumed to be uniform with gross earnings. A study of the conditions in Chicago resulted in a determination upon 70% as a fair proportion for operating expenses, taxes, and maintenance.

Next, the amount of capital investment to be supported out of earnings was computed by estimating the cost of reproduction of track and overhead lines under each franchise and apportioning the cost of land, power-houses, barns, cars, tools, and stores in proportion to car-mileage.

In determining earnings for the unexpired years of franchise life, it was assumed that the earnings would increase in accordance with the law laid down by Mr. Arnold in 1902.

97The last step was to find the value of the net earnings of future years, after deducting the sum required to support the invested capital. The rate chosen was 5% compound interest. The sum of the different present values thus found was the value of the franchise sought.

Two other points arising in connection with franchise values were:

"Where, on a street, franchises covering part of the street have expired, and others remain in force, the contention of the city is that the expired franchise is valueless because traffic under it can be stopped; that of the company is that it still has value, as traffic can be routed over other streets where franchises have not expired."

This was set aside on the ground that the value of any particular portion of a street, or of a franchise, remains the same as long as the system is considered as an entirety.

The second point was as to the value of traffic agreements; but this complicated problem was also dismissed on the theory that when two systems are considered as co-operating, the value of individual parts of either system remains the same regardless of their ownership.

The values of their properties, fixed by the companies, included paving. The total figures reached in this valuation were:

Companies' valuation, including paving, $73,555,675

Commission's " " " 50,994,782

Commission's " excluding " 46,652,747

This work affords many interesting problems, and is perhaps the largest valuation for determining a price for the purchase of property that had been made to date.