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Acquiring Rail Corridors:
Chapter 4: Understanding the Railroad
A cardinal rule in any rail-trail negotiation is to understand the railroad's perspective and objectives in corridor disposition. If you have a basic understanding of what the railroad wants, you can develop a position that strikes a fair balance between your needs and the railroad's.
Back From The Brink: Deregulation Saves The Railroads
In the 1990s, railroads have experienced a resurgence and have re-emerged as a vibrant and increasingly efficient part of the nation's infrastructure. Just a few years ago, the situation was much different. In the early 1970s, nearly a quarter of the nation's 275,000 miles of railroad were being operated under bankruptcy, largely because the railroads were unable to respond quickly enough to the changing market. In many cases, they were burdened with unprofitable operations.
Back in the 1950s and 1960s, railroads faced increasing competition from trucking companies. Interstate Commerce Commission (ICC, now the Surface Transportation Board) regulations made it even more difficult for the railroads to compete. Most railroads' corporate cultures left them unprepared to meet the challenge brought by the trucking industry. Railroad companies lost business, and they under-maintained their trackage and equipment as revenues declined.
Faced with the imminent collapse of the nation's rail network, Congress passed the Staggers Act in 1980 to lift much of the railroads' federal regulatory burden in an attempt to make the railroads more competitive. The Staggers Act enabled railroads, for the first time in nearly a century, to set shipping rates based on expenses and traffic demand. Equally important, the Staggers Act redefined the merger and abandonment process, enabling railroad companies to abandon unprofitable lines more quickly and easily than before. In some cases, the new abandonment rules permitted railroads to abandon lines in just 90 days.
The Staggers Act triggered profound change. Railroads cut costs, reduced their debts, and started investing in money-making ventures. During the 16 years since deregulation, the railroads have radically pared down their routes, abandoning almost 70,000 miles of non-productive corridors. This new freedom to compete has led to higher profits, allowing the railroads to improve track maintenance and safety, as well as overall service levels. These improvements have attracted new customers.
As railroad companies continued to streamline throughout the 1980s and early 1990s, they diversified as well. Today railroads not only transport goods by rail; they also operate shipping lines, barges and trucking companies. Railroads manage and develop property and provide financial services as well.
Most railroads now realize that their primary competition is not other railroads but other transportation modes trucks, barges, and cargo planes. Some railroads have even forged agreements with major trucking companies, including Schneider, J.B. Hunt and Roadway, and with shippers such as American President Lines. United Parcel Service is a heavy user of intermodal services to transport its containers and trailers over long distances. In effect, the railroads have become wholesale providers of transportation services.
As railroads develop their new "wholesale" niche in the transportation industry, they are continuing to use mergers and abandonment of unproductive lines to streamline their operations even further. This streamlining guarantees that there will continue to be a significant number of rail corridors available for acquisition by trail groups for the foreseeable future.
Railroad Personnel
Railroad companies are large bureaucracies, with departments responsible for specific functions. Throughout the acquisition process, you will encounter people working in many departments. Since railroads make only about one percent of their income from real estate sales, don't be surprised if your interest in acquiring a corridor is not the top priority for many railroad personnel.
Asset Management (Strategic Planning) Department
What The Department Does: The Asset Management Department, which may also be called Strategic Planning or Plant Rationalization, consists of a railroad's long-term thinkers. This department is responsible for continuously evaluating the profitability of all the rail corridors in a railroad's system and determining which are, and which are not, making a profit. Once the Asset Management Department finds that a line is not making a profit, the railroad determines whether it is in the company's long-term interest to continue operating over that line. If the line is neither unprofitable nor strategically important to the railroad, the Asset Management Department then decides how to dispose of the property.
What the Department Can Do to Help You: As one of the primary decision-making bodies in determining the disposition of rail lines, the Asset Management Department plays a critical role in the rail abandonment process. Asset Management departments publish System Diagram Maps that provide a peek into the future about which lines railroad companies are planning to eliminate from their systems. Make sure you specifically request a System Diagram Map from the Asset Management Department, since railroads also publish "System Maps," which merely indicate the lines a railroad owns and/or operates over.
System Diagram Maps
Under federal law, each railroad is required to produce a map on an annual basis that indicates the status of all rail lines within its system. These system diagram maps must be submitted to the Surface Transportation Board (STB), to the Governors of all states in which a railroad operates, and to the appropriate state agencies that oversee railroad operations. Rail lines listed on system diagram maps are placed in one of five categories:
- Category 1: Line that the railroad anticipates abandoning in the next three years (most likely much sooner than that);
- Category 2: Line that the railroad is studying as a possible abandonment candidate due to operating losses or rehabilitation costs;
- Category 3: Line currently involved in an STB abandonment proceeding or a request to discontinue service;
- Category 4: Line operated under some form of subsidy; and
- Category 5: Line in regular service
Although system diagram maps are important tools, they are not the definitive source for information on upcoming abandonments, since the maps only list corridors likely to be abandoned through the most stringent regulatory process for abandonments. Using the "exempt" rail corridor abandonment process, a railroad can skip many of the regulatory burdens to abandon a line which has been unused for two years or more. Additionally, a line listed in Category 4 or 5 may suddenly become an abandonment candidate due to a sudden change in circumstances. On the other hand, if you are interested in a line listed in Category 1, 2 or 3, you should begin your acquisition efforts in earnest.
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Operating Department
What The Department Does: At a minimum, the Operating Department schedules and operates trains and maintains the rolling stock and track. In addition, some railroad companies give the Operating Department direct responsibility for profit and loss in an assigned area.
What the Department Can Do to Help You: Generally speaking, you will have very little involvement with operating personnel as you work to acquire a rail line. Day-to-day operations are extremely time-consuming, and these individuals are rarely involved in any decisions about the future of a particular rail corridor. However, operating personnel often have a deep, personal connection to the line and the communities it served. Informing these personnel of your interest in a particular line and engaging them in conversation may provide you with a great deal of useful information about the corridor. Since these individuals have first hand experience with the corridor, they can often provide you information concerning the condition of structures, the existence of drainage problems and other maintenance issues.
Taking a First Hand Look
Once you've identified a potential rail-trail corridor, it's only natural to want to take a closer look. Even if it appears that the line is no longer in use, don't assume this to be the case. To avoid misunderstandings, contact the railroad's representative(s) prior to any site visit. If you explain you are interested in acquiring this property, the representative will generally be more than willing to give you permission to tour the property.
While you can approach almost any of the railroad's representatives for permission to tour the property, you may find it most convenient to handle these arrangements with the operating personnel. The Regional Manager may even be able to arrange a supervised tour of the line under the direction of the Track Supervisor or the Roadmaster, and possibly even provide a hi-rail vehicle (a truck that has been modified to run on railroad tracks) for a tour.
If you have the opportunity to hi-rail the line with railroad personnel, use this trip to explore their history and connection to the line. The conversation during the inspection trip will give both sides a good chance to size up each other's intentions, sincerity, and wherewithal.
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Legal Department
What The Department Does: The Legal Department evaluates contracts and issues opinions on matters affecting labor, government, and business relations. In addition, the Legal Department submits the paperwork required by the Surface Transportation Board (STB) as part of the process for obtaining authorization for abandonment.
What the Department Can Do to Help You: The Legal Department can furnish copies of line abandonment applications, notices, and other legal documents. These materials often contain useful information about the condition of the line as well as the railroad's estimate of the value of both the track materials and the real estate. In some railroad companies, Legal Department staff have proven to be the most receptive to rail-trail negotiations, so you may want to consider negotiating the corridor acquisition directly with the Legal Department.
Real Estate Department
What The Department Does: The Real Estate Department manages the railroad's real estate assets and is responsible for maximizing corporate returns on any real estate investments, including selling abandoned rail corridors for the best price possible. Real estate sales may be handled by a railroad's own Real Estate Department or by a corporate subsidiary not actually affiliated with the railroad, or may even be contracted with private real estate agents.
What the Department Can Do to Help You: In many cases, the railroad will expect you to negotiate with their real estate agents to acquire a rail corridor. If you are attempting to acquire a corridor that has already been abandoned, the Real Estate Department will have ultimate authority over how to dispose of the corridor. The Real Estate Department can provide you with documents and information concerning the railroad's ownership, such as valuation maps, as well as with information about easements, crossing agreements, or similar arrangements that may apply to the corridor.
Public Affairs (Government Relations) Department
What The Department Does: The Public Affairs Department, usually staffed by attorneys, monitors state and local politics that may affect the railroad. A public affairs representative may have respon
sibility for more than one state, although larger states and states of greater importance may have a single representative assigned exclusively to them.
What the Department Can Do to Help You: Public Affairs representatives often can break the logjam between different railroad offices. These personnel are typically well-schooled in community affairs and are more than willing to assist with high profile, widely-supported projects. Not only do these people have access to the highest levels of the corporation, they often have the authority to force action from an unwilling department. They understand many of the nuances in the rail-trail acquisition process and can play a constructive role in negotiations with the company. Just remember, your concerns are a small portion of their responsibilities.
Understanding Your Railroad
While it is important to understand the climate of the rail industry, it is even more important to understand the specific railroad with which you are dealing. What issues is the corporation facing? Is it scrambling for cash to reduce its debt? Is it trying to eliminate branch lines in an attempt to focus on mainline service? Is it diversifying and experimenting? Is it expanding its resource base?
To help you answer these questions:
- Read a copy of the railroad's annual report, and take special note of the chairman's message;
- Talk with local transportation planners; and
- Talk with the state Department of Transportation rail representative.
This should give you a sense of the business strategy of the railroad. It may or may not directly affect your negotiations, but it certainly doesn't hurt you to have a better understanding of the railroad's needs.
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The Decision to Abandon a Line
Railroads abandon lines when they are no longer profitable. An unprofitable line has one or more of the following characteristics:
- Carries relatively little traffic;
- Paralleled by a better route;
- High maintenance costs (e.g. the corridor is subject to frequent flooding) or numerous grade crossings; and/or
- Requires considerable (and expensive) upgrading because of poor track conditions or other structural problems.
In addition, sudden changes might render a financially viable line unprofitable. For instance, the closure of a major industry might result in little or no traffic remaining on a branch line. Damage to a major bridge, tunnel, or other structure might be enough to warrant downgrading or abandoning the affected segment. Severe flooding caused by Hurricane Agnes in 1972, for example, forced the abandonment of many Mid-Atlantic rail corridors, several of which are now rail-trails.
Each railroad reviews its transportation network on a regular basis to determine whether a line is profitable and, therefore, worth keeping. Even on profitable lines, railroads must weigh the profits generated from such lines against the value of the assets that can be recouped through liquidation. Depending on the value of the rails, ties and underlying real estate, light-density lines will usually have a liquidation value for the track materials and land of between $50,000 and $100,000 per mile (assuming the railroad owns fee title to the land). These figures represent a sizable capital investment that a railroad may be able to better utilize somewhere else in its system.
In most cases, the ultimate decision about whether to abandon a line rests with the Asset Management Department. Once a line has been identified for abandonment, the railroad's Legal Department files the formal abandonment application with the Surface Transportation Board (STB). Upon receiving abandonment approval, the railroad may assign responsibility for disposition of the track materials to one department (usually the Engineering Department), while another department (usually the Real Estate or Property Management Department) is given responsibility for disposing of the corridor.
If you wait until the Engineering and Real Estate Departments have been assigned the liquidation functions, you may be too late, since these departments may begin dismantling the corridor immediately. You will find the acquisition process easier if you can contact the Asset Management, Strategic Planning, or Legal Departments before the railroad receives abandonment authorization. If railroad personnel learn of your interest early in the abandonment process and they believe you would be a credible negotiating partner they may be willing to put final disposition of the corridor on hold to give you an opportunity to negotiate with them.
The Railroad's Options For Corridor Disposal
Knowing what options a railroad has will allow you to approach your corridor acquisition in an informed fashion. If a car salesman told you, "I've already had five people look at that car today," you would take this fact (if you chose to believe it) into account as you developed your negotiation strategy. Maybe you may make your offer more quickly, or perhaps you would make a higher bid than you might have made otherwise. On the other hand, if you knew the car had been sitting on the lot for the last year, you would use that knowledge and not the salesman's word and offer less for the car.
A railroad's disposal options typically include:
Voluntary Sale to Other Railroads
Lines that a railroad believes may support some form of continued rail use are often marketed to regional or short-line railroads. This is generally the most profitable and easiest disposal option for a railroad, and is called a line sale. Such a line is not a likely candidate for trail use.
Involuntary Sale to Other Railroads: Offers of Financial Assistance (OFA)
When a railroad believes a line is not economically viable, even for a short line operator, the railroad will usually file an abandonment notice with the Surface Transportation Board (STB).
If a railroad files for abandonment, short-lines, shippers or local governmental agencies may still attempt to keep this line in service by submitting an application for an "involuntary" transfer of the corridor to them, called an "Offer of Financial Assistance" (OFA). If the offeror agrees to the terms set by the STB, the railroad must transfer the corridor, since the STB will always favor financially responsible offers that preserve freight operations.
"Piecemeal" Sales to Adjacent Landowners
If there is no reasonable offer made to maintain the corridor as a rail line, the natural interest of the abutting owners (many deeds for railroad property contain reversionary clauses calling for parcels to revert to the neighboring owner(s) when the line is no longer used for railroad purposes) means that railroads will usually first offer the corridor to them. Traditionally, the railroad will subdivide the corridor and sell as many parcels as possible to the adjacent landowners. Typically, a railroad that follows this approach will be able to sell only about 50 percent of the corridor on a piecemeal basis. This is an important point to remember in your negotiations. By selling an entire corridor to your agency for trail use, a railroad can avoid the financial and legal liability associated with long-term ownership of unmarketable corridor parcels. Reminding a railroad of this fact may convince them to accept your offer.
Bulk Sale to Private Interests
Increasingly, adjacent landowners have banded together as "landowner associations" solely to make a bulk purchase offer to a railroad. These private landowner associations usually form to compete with trail groups for the corridor. In addition, land developers are sometimes interested in parcels that are wide enough to support industrial or commercial developments.
St. Ignace to Trout Lake Trail
In 1986, the Soo Line Railroad chose to abandon a 27-mile rail line between St. Ignace and Trout Lake in Michigan's Upper Peninsula. At that time, Rails-to-Trails Conservancy joined with the Michigan Trails Alliance a statewide coalition of recreational and conservation organizations and the Mackinac County Economic Development Corporation to request railbanking negotiations. The Soo Line denied the request, and trail advocates believed the corridor had been lost for trail use.
Upon receiving abandonment authorization, the Soo Line sold the corridor to Michigan Bell Telephone, which was eager to lay a fiber optics line within the corridor. Although Michigan Bell began efforts to lay its fiber optics line within the corridor immediately, the company was aware of the corridor's potential as a trail route. Over the next several years, Michigan Bell attempted to locate local citizen supporters who would take responsibility for developing and managing a trail in the corridor. Finally, Michigan Bell and the United States Forest Service were able to negotiate an arrangement to allow for trail development. Under the terms of the deal, Michigan Bell retained a perpetual easement for its fiber optic line, while donating the corridor to the Forest Service. The property transfer took place in 1992 and the Forest Service developed and opened the St. Ignace to Trout Lake Trail soon after.
In addition to making this trail possible, Michigan Bell also helped to create the Hancock/Calumet Trail and the Mackinaw/Alanson Trail by working with trail supporters at the state and local levels.
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Utility Sales
If a railroad is interested in selling the entire corridor in a single transaction, it may attempt to sell the corridor to one or more utility companies. Electric companies, pipeline companies, local water and sewer authorities, and telecommunications companies may all have an interest in the corridor for power lines, pipelines or fiber optic cables. Utilities can present the railroad with a financially sound offer, but may only need subsurface or air rights. Since your agency may need only surface rights for a trail, you may be able to develop a joint bid for the corridor with a utility.
Developing a Partnership with a Transit Agency
The Pinellas Trail Story
In the early 1980s, the Pinellas County Metropolitan Planning Organization (MPO) and the Pinellas County Commission identified portions of a 35-mile CSX Railroad corridor as a potential mass transit route. With the cooperation of the Florida Department of Transportation, the MPO and the county worked to pass a special state funding bill to acquire this corridor. Between 1983 and 1985, the Department of Transportation (DOT) spent $19 million to acquire the corridor in phases. Although portions of the corridor had not yet been abandoned when the DOT began acquiring it, none of the corridor was railbanked. With the completion in 1985 of most of the acquisition, DOT and the county seemed content to allow the abandoned corridor to sit unused until needed for transit use.
As the corridor sat unused and unmaintained, bicycle activists throughout the county began to realize the corridor would make an excellent bicycle path. When these activists first made a presentation before the MPO, their rail-trail proposal was rejected because the MPO felt it might interfere with future transit use; the 90 at-grade street crossings posed safety and liability concerns; and no one would use the trail.
Despite this initial setback, the activists, many of whom served on the county's Bicycle Advisory Committee, continued to encourage the county to develop the corridor as a trail. In 1988, alarmed by five years of statistics which indicated that Pinellas County's per capita bicycle fatality and injury rates were among the top five in the state, the Bicycle Advisory Committee again approached the MPO about the creation of a trail. This time, the MPO was more receptive to the plan and challenged the Bicycle Advisory Committee to "show that the community is willing to pay for and support a trail project."
Within months, a nonprofit organization, Pinellas Trails, Inc., was formed to promote and assist with the development of the Pinellas Trail. Shortly thereafter, in August 1989, Pinellas Trails, Inc. had generated enough support for the trail to convince the MPO to negotiate a lease agreement with the DOT to allow creation of the Pinellas Trail. Pinellas Trails' efforts paid off. Construction began in July 1990 and the first five miles of the Pinellas Trail opened in December 1990.
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Sales to Other Public Interests
Most public transportation agencies monitor rail corridor abandonments on a regular basis since these agencies may have plans to use the corridor for other public purposes. In some cases, primarily in urban and suburban areas, transit agencies may be interested in acquiring a corridor for conversion to light rail use. State or local departments of transportation may also choose to acquire a corridor for a road construction or improvement project. Although these plans may not be compatible with the creation of a rail-trail, there are numerous examples of cooperative efforts involving road/transit projects and rail-trails.
Tourist Trains
Tourist train operators may also be interested in the entire corridor. Since the railroad will expect to be compensated for the value of the real estate as well as the actual track material (which can cost more than $10,000/mile), tourist trains generally have more difficulty than utilities in putting together an economically feasible offer. However, tourist trains are seen as highly attractive economic development opportunities in certain communities, so don't be surprised if there is discussion of a tourist train along the corridor. Again, your interests may not compete. You may want to consider a "rail-with-trail" project in collaboration with a tourist train operator.
White Mountains Rail-Trail
Until recently, the state of New Hampshire was involved in a long-standing dispute with Guilford Transportation, Inc. over the ownership of several rail corridors throughout New Hampshire. In fact, it took a 1994 court ruling to resolve this dispute. Shortly after the suit was settled in January 1994, the state assumed ownership of 186 miles of inactive rail lines, including a 52-mile line between Conway and Whitefield, New Hampshire.
This line, known as the Mountain Division, crosses some of the most scenic portions of New Hampshire's White Mountains and has long been considered for tourist train operations. In fact, the Conway Scenic Railway, which operates on an adjacent segment of this line, expressed interest in maintaining a significant portion of this track for a tourist train. At the same time, many people pointed out the corridor's long-term potential as a rail-trail. There has been a great deal of speculation as to how the state will respond.
Although no final decision has been made, the state has tentatively indicated it is willing to allow both rail and trail uses to move forward. Although the Conway Scenic Railway is an important business venture in the region, the state knows the Railway will be using certain portions of the corridor on an infrequent basis only. Rather than close off this scenic route to trail users, the state is exploring, with the assistance of all parties, the development of a rail-with-trail which will maximize the corridor's benefits.
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Trail Use
Finally, an increasingly popular option for railroads is to railbank a line and sell it to a group interested in acquiring a corridor with future rail potential for interim use as a trail. If the title to an about-to-be abandoned corridor is questionable, railbanking is the best method for acquiring the entire corridor intact. See Chapter 6 for more information on railbanking.
What a Railroad Expects From a Sale
Remember, corporate decision-makers are fiduciaries, or managers of their shareholders' money and assets. A railroad's representatives cannot act as individuals, but only as functionaries within an organization tasked with improving the corporation's bottom line. Not surprisingly, the railroad's representatives look for disposal options which bring the highest return. The primary factors which are considered in evaluating an offer include:
Highest Value
The railroad's primary expectation is to get the highest value possible for the line. There is value in both the capital investment track, ties, signals, ballast, etc. and in the underlying real estate. The Operating Department will decide whether to salvage the material in-house or to request bids from private salvage companies. For the underlying real estate, a railroad will seek the highest value for the land.
Quick Sale
In addition to receiving fair market value, railroads are interested in a quick transaction. Property sales that drag on can adversely affect the railroad's bottom line. Like all corporations, railroads have quarterly performance objectives. Making a sale may help a representative, or an entire department, meet quarterly objectives.
All things being equal, a railroad will favor the offer that requires the least amount of time to complete the property transfer.
Transfer of Obligation and Liability
An abandoning railroad is usually required to remove bridges over highways and navigable waterways and to restore grade crossings at its own expense. Sometimes railroads must obliterate berms and culverts as well, and restore the corridor to its original contours. Since meeting these requirements can be quite expensive, railroads frequently want to dispose of the corridor in a way that limits their financial obligations. In addition, the railroad retains some risk from the unauthorized use of structures that remain intact. For example, if a trespasser falls off an abandoned bridge, even if the bridge is blocked off, the railroad may still be liable. A railroad wants to be absolved of its associated liability as part of any sale. These are valuable negotiating points for trail advocates.
Retention of Certain Interests
A railroad might want to retain certain property interests as part of a corridor sale. Such present and future rights might include longitudinal easements for pipelines, transmission lines, air rights, or fiber optics, as well as underground mineral rights. The negotiation of these rights is a vital part of any transaction.
Avoidance of Controversy
Finally, and perhaps most importantly for rail-trail advocates, a railroad wants to avoid controversial sales. If neighboring property owners strenuously and vocally object to a trail, a railroad may avoid a sale for trail use. For this reason, you must consider the interests and expectations of adjacent landowners, even if you are negotiating exclusively with the railroad.
Is The Railroad Exploring Other Options?
Have the adjacent landowners already approached the railroad with an offer? Is a developer proposing to acquire the property for a new office park? Has a utility company expressed an interest in locating a cable or pipeline along the corridor?
Visit the local planning office. Has any entity submitted a subdivision permit for the land? Is there any development activity surrounding the corridor? Is the corridor appropriate for utilities or other public improvements? If the answer to any of these questions is yes, the railroad might well be able to sell the property for one of these uses. If not, you may be the railroad's best offer. By analyzing these other options (if they exist), you can develop a negotiation strategy and bid that offer the railroad your best possible package.
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