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Acquiring Rail Corridors:
Chapter 8: Reaching a Preliminary Agreement with the Railroad
No one wants to devote time and energy to acquiring a rail corridor, only to see the corridor sold off to some competing interest. Unfortunately, many rail-trail advocates have failed to act quickly enough to acquire a corridor before it is dismantled or sold. To prevent this from happening, you need to negotiate an initial agreement with the railroad to ensure the corridor's availability for trail use, as well as gain additional time to complete your corridor research. Negotiating a preliminary agreement with a railroad is the best way to accomplish this.
There are three elements to a preliminary agreement:
- Gaining site control;
- Setting a purchase price; and
- Establishing an acquisition process and timeline.
If you develop a preliminary agreement with the railroad which guarantees the corridor's availability until you have completed your due diligence requirements (under whatever terms you may negotiate), you can minimize the risks associated with corridor acquisition.
What Will You Do if There is No Deal?
Consider this basic rule of negotiation: An individual who is unwilling to walk away from a negotiation may be forced into agreeing to whatever terms the other negotiator proposes. This is common sense.
Before you sit down to negotiate with the railroad, ask yourself, "What can we do if we can't reach an agreement with the railroad?" Consider your alternatives. Could you ask someone else to step in and negotiate on your behalf? Could you reach a lease agreement that might allow immediate use of the land while postponing a sale agreement? Is joint use an option? Could you rely on an alternative routing for the trail, such as a public utility right of way? There are obviously advantages and disadvantages associated with each of these options. It is extremely important, however, that you give some thought to which of these options, if any, could serve your purposes.
Another option is to take the property by eminent domain. This is a powerful and coercive strategy, and it is unlikely to lead to a positive relationship with either the railroad or the adjacent landowners. However, it is an option applied routinely in certain areas of public acquisition, such as highway construction. For this approach to succeed, there must be widespread public support for the trail. Consequently, the trail project should be integrated with open space plans, comprehensive development plans, transportation plans and other public planning documents addressing the future form and function of public infrastructure. If your trail is integrated into those plans, the railroad will understand your determination to secure the corridor and will view the possibility of eminent domain as a viable negotiating strategy. This will greatly increase the railroad's willingness to reach a voluntary agreement.
In short, you cannot negotiate effectively unless you have a backup plan. If the railroad knows you have an alternate means to develop your trail, the railroad will tend to be more cooperative in its negotiations with you.
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By this time, you know exactly what you need to create a rail-trail from the corridor that interests you. You should also have a strong sense of how much you will be able to spend to acquire it, as well as where these funds will come from. Using this information, create a list of items that you want to include in the preliminary agreement you reach with the railroad. Consider these issues in developing your list:
- What property rights are needed to create this rail-trail?
- Is it necessary to acquire the entire length of the corridor, or are you only interested in a specific section?
- Who is responsible for salvaging the corridor?
- What happens to the improvements along the corridor? What structures do you need for a successful trail? What structures do you want the railroad to remove?
- How much time do you need to complete your due diligence requirements?
- If the financing is not yet in place, when will it be in place?
- What else needs to happen before you accept ownership of the corridor from the railroad?
Answering these questions will allow you to articulate your needs. You will also get a sense of your thresholds in each area, and you will know which issues are negotiable and which are not. Remember, however, if you're unwilling to negotiate on a particular issue, you will need to convince the railroad that you have sound reasons for your recalcitrance.
Understanding the Basics of Negotiation
In Getting to Yes, one of the most popular books on negotiation, a story is told about two people fighting over an orange. Each had to have the entire orange, and any effort to slice the orange in half was equally unacceptable to both parties. The situation looked impossible, until a third party asked why each wanted the whole orange. One needed the peel for grating; the other needed the pulp for orange juice. Suddenly, the solution became obvious: one person got the entire peel; the other got the entire pulp. By clarifying each party's needs, the impossible became reality.
Developing mutually advantageous outcomes is not as difficult as it seems. The first step is to understand the reasons behind your preferred outcome. Why do you feel that you can only pay $100,000 (or $10,000 or perhaps only $1,000) for the corridor? Is that how much you received from the ISTEA Enhancements program? Are you worried you won't have enough money to develop the corridor if you spend too much purchasing it? Is your agency prohibited from spending more to acquire a property than an official appraisal says it is worth? Or perhaps your agency is only authorized to spend so much money on land acquisitions each year. Make a list of all the reasons which affect your price, timing, and other needs.
Now you need to analyze the railroad's needs. Your initial conversations with the railroad's representatives may offer clues. However, this step is much harder, since the railroad's representatives may not give you any clues as to the railroad's interests until late in your negotiations. Don't use that as an excuse not to consider the railroad's position at the beginning of negotiations. As time passes and you learn more about the railroad's needs, you can always re-analyze the railroad's motivations.
Continuously analyzing both your own and the railroad's positions and brainstorming solutions that might meet both your needs are the keys to successful negotiations.
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As mentioned, gaining site control offers you the security of knowing that the corridor will not be sold or disposed of to any competing interests, except in accordance with the terms specified in your agreement with the railroad. It is important to understand that the terms of a site control agreement also benefit the railroad as a potential seller. Just as your agency needs assurances that the property will be available for purchase upon completion of your due diligence, railroad personnel need assurances that all the work they've invested in arranging a deal with your organization will pay off. By offering some form of payment or consideration in exchange for site control, your agency can convince the railroad's personnel that you are financially capable of completing a project. In addition, railroad personnel can develop terms in these site control arrangements that help them meet their needs whether it is the sale of the property before the end of the fiscal year, or a guarantee that your agency will pay a set amount to acquire the property.
To gain site control, you will need to enter a contractual arrangement with the railroad. Remember, you will need to work with the railroad to tailor this arrangement to meet your timing, research, and financing needs. Gaining site control will only move you closer to your goal if you take the time to address all of the outstanding issues in the initial agreement.
There are three standard contractual tools used to accomplish site control: options, purchase and sale agreements, and donation agreements.
Options: An option is a legal instrument through which a landowner, in this case the railroad, gives a potential buyer the right to acquire the property within a specified period of time. Generally, the landowner granting the option will insist that the potential buyer make some form of payment as part of the option. This payment, which may or may not be applied towards the ultimate purchase price, can range from a modest amount perhaps even as little as $10 to several thousand dollars or more. Clearly, the amount depends on the size of the property and the nature of the deal. The size of the option payment is seen by many potential sellers as an indication of a potential buyer's financial capabilities, as well as the buyer's commitment to completing a deal.
Once an option agreement is in place, the potential buyer then has a specified period of time in which to complete the deal, before the seller markets the property to other buyers. If the potential buyer fails to raise the funds or complete any of the elements specified in the option agreement, the potential buyer would then forfeit the initial payment and the seller would be free to market the property to other buyers.
In drafting an option, be sure that its terms provide enough time to raise the funds necessary to complete the deal and to address any outstanding issues prior to acquiring the property. Make sure the option specifies grounds for termination of the option agreement, at no penalty to you, the potential buyer. These terms are especially important because your agency will be signing the agreement before completing all due diligence requirements.
Purchase and Sale Agreements: Purchase and sale agreements resemble options in many respects, but there is one important difference. In a purchase and sale agreement, the buyer makes an initial payment to gain site control while simultaneously committing to paying the full amount owed within a specified time. If the buyer fails to live up to this commitment, the seller may retain the deposit or, if the contract permits, compel the buyer to complete the transaction. Thus, purchase and sale agreements should only be signed if you are fully committed to acquiring the property.
If the railroad's representatives insist on a purchase and sale agreement, you can negotiate a more flexible agreement. For example, you can ask the railroad to include contingencies that grant you more time for site assessment. You can also negotiate for the ability to cancel the contract should certain conditions not be met.
Donation Agreements: While it is rare for a railroad to agree to donate a corridor for trail use, there are circumstances in which you may be able to convince a railroad to donate a corridor to you. If the railroad signs a donation agreement, you gain the assurance that the railroad will not change its mind about the donation. In addition, a carefully written donation agreement will give you the opportunity to negotiate such critical items as the payment of environmental remediation, closing costs, survey or title research costs, and similar items. As a last resort, you may want to include the option of refusing the corridor if you are unable to reach an acceptable agreement with the railroad about certain issues. Even though a property donation may appear to be the answer to your prayers, you still need to ensure that there are no unforeseen problems with the corridor.
An Alternative to Site Control: Site Influence
If you attempt to gain site control through one of the three contractual arrangements, only to discover that the railroad is either uninterested or unwilling to agree to mutually acceptable terms, you may want to consider requesting a less favorable arrangement - site influence. Site influence differs from site control in that the seller offers no guarantees about the long-term availability of the property. You can gain site influence through:
Right of First Refusal: With this method, the railroad would agree to notify you before it sold the property to any other buyer. You would then have the option of committing to purchase the property, under terms that may or may not have been previously specified, but you would have to act immediately.
Letter of Intent: The railroad may consider signing a letter of intent that documents its interest in exploring the property transfer with you and your agency. The railroad might even commit to transferring the property to you. If the railroad is agreeable to this approach, work with railroad representatives to make the letter's language as specific and formal as possible. While letters of intent are generally non-binding instruments, a formal letter of intent indicates the railroad is committed to successfully completing negotiations with you. Such a letter can be extremely useful in obtaining funding to acquire the property.
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For more information on site control issues, read Doing Deals: A Guide to Buying Land for Conservation, published by The Land Trust Alliance and The Trust for Public Land. This publication includes an excellent discussion of site control issues and is a valuable resource for agencies and organizations involved in land acquisition for conservation purposes.
Setting a Price
As you enter into preliminary negotiations with the railroad, you probably have a preconceived notion of what the final terms should be. Perhaps you've decided the corridor is worth $100,000. Or you may have decided you will only purchase the corridor if the railroad agrees to dismantle both of the adjacent dilapidated depots. "Our terms aren't unreasonable," you may say to yourself. And you may be right. If you're lucky, you may even get what you want.
On the other hand, you may find that the railroad's representatives have their own scenario that is drastically different than yours. "How in the world could that trail group expect us to sell this corridor for less than $150,000. Do we look like a charity?" they may ask themselves.
If you're lucky, you may be able to make your entire offer to the railroad's representatives before one of them interrupts to ask, "How much are you willing to pay for this?" Don't expect to discuss your needs without also discussing the railroad's needs, however. Chief among these, in most cases, is payment.
If you were negotiating to buy a house, you almost certainly wouldn't sit down with the homeowner to negotiate the terms of sale without being prepared to discuss price. Shouldn't you be prepared to do so in this situation as well? The answer is yes and no.
Acquiring a rail corridor has many complicating factors that distinguish it from other land deals:
1. Multiple deeds;
2. Restrictions on the railroad's interest (e.g. it may have only an easement "for railroad purposes");
3. Potential environmental problems from fuel storage, spills, or use of toxics on the right-of-way;
4. Regulatory restrictions on railroad disposal (if the corridor is still under the jurisdiction of the Surface Transportation Board, or if another public agency has a right-of-first-refusal under state railroad law); and
5. Trestles, tunnels and other improvements that may present liability problems for transferees.
Despite all your research, you've only begun to understand how these issues may affect your rail-trail plans. How can you possibly discuss a specific purchase price without the answers to these questions?
Set a price or price range pending the outcome of your due diligence work: With this method, you would develop an internal estimate of the corridor's value based on the research you have completed to date. It is possible, although quite tricky, to develop this estimate without an appraisal, but you should only use this approach if you are very familiar with the corridor and with comparable land values in the area.
Using this method, make a bid to the railroad that is based upon an analysis of local real estate prices. If, for example, the rail corridor runs through farmland, and the average per acre price for farmland in the area is $500, you might offer the railroad $500 for every acre the railroad owns outright. However, you need to include provisions and exceptions in this initial framework as protection against unexpected results during the due diligence process. Perhaps you could include a provision that requires the railroad to quitclaim the entire corridor to you even though you will only pay $500 per acre for those parcels with good title. Likewise, you might include an exception that voids the offer if you discover substantial contamination within the corridor.
A variation on this approach is to commit to paying a figure within a certain price range for the corridor. While the final purchase price would depend on the outcome of the due diligence process, both parties would have assurance that the final price of the corridor would meet both parties' needs.
A potential buyer cannot be too cautious in using this approach. If your agency considers this approach, or if the railroad insists upon it, make sure to spell out every conceivable exception that would affect the price.
Agree to a process for establishing a price: In most cases, a potential buyer will find it far easier, and much less risky, to use the initial negotiations as a time to agree to a process for establishing a purchase price for the property. Both parties should agree to the use of objective standards to establish the corridor's price. A negotiation based on this method should result in an agreement to contract with an outside expert to appraise the corridor in accordance with acceptable instructions. Agree in advance about who will pay for the appraisal.
Although you will still need to exercise caution in establishing the instructions for the appraiser, this process reduces the risk of overpaying for the corridor.
Establishing an Acquisition Process and Timeline
Since your initial agreement is designed to help you gain site control, and to buy enough time to complete your due diligence, it is extremely important that the agreement include enough time for you to complete all of your additional work. It is far easier to ask for more time before the paperwork has been signed than it will be at the end of the time period to which you initially agreed.
In addition, make sure you discuss with the railroad's representative(s) the process for completing the necessary work and finalizing the deal. By spelling out the process in the agreement, you can prevent misunderstandings from arising as you attempt to complete the deal. Make sure this agreement includes a discussion of both parties' responsibilities over the upcoming months. This step is particularly important if you've agreed to a process for jointly establishing the purchase price for the corridor.
Getting Your agreement Signed
Once you have reached a general agreement with the railroad, move to formalize the agreement as quickly as possible, before circumstances change. For example, newly elected officials could change public policies or budgets; new railroad employees may be hired; or a natural disaster could change the priorities of a public agency, the local community or the railroad. Don't be surprised if the written agreement itself becomes yet another topic of negotiation.
As the old saying goes, "the devil is in the details." Drafting contract language is always a delicate process; one misunderstanding can undo months or even years of work. For this reason, handle the issue of who will write the first draft as well as the process for reviewing the draft with great care. If you can convince the railroad to let your attorney(s) take the first shot at drafting the language, you may have the opportunity to detail specific terms in ways that meet your needs. Remember though, the final document must be acceptable to both sides.
Although it may take several attempts to draft a site control agreement that is acceptable to both sides, keep the process moving forward. In case of a misunderstanding or confusion, refer to your written notes of your discussions with the railroad.
This is a delicate time as the attorneys work to translate the lay language of the negotiations into the more precise language of contracts and agreements. Avoid a situation in which those who conducted the negotiations are not involved in preparing the closing terms and documents. Your negotiating team and the railroad's representatives are the most knowledgeable about the land and the people involved because all of you have worked together for months. If a misunderstanding or a new issue arises during the preparation of documents, you and the railroad's negotiators can probably resolve it quickly and smoothly.
If new issues arise that appear difficult to resolve, consider putting them on hold until you've completed your due diligence and both sides are ready to finalize the deal. You've built momentum; don't lose it now.
Your written agreement with the railroad should address the following issues:
Contingencies: Negotiating a preliminary agreement before you complete your due diligence is similar to diving into a pool of water before you know how deep it is. If you plunge right in, you may find yourself in a great deal of trouble. For this reason, your agreement must detail every possible contingency that may arise as a result of your due diligence. Some common contingencies include:
- Securing financing;
- Clean environmental assessment;
- Acceptable title report; and
- Securing an appraisal.
Payment: In most cases, you can expect the railroad to insist on some form of compensation in exchange for agreeing to the terms of the site control agreement. Make sure these financial terms are spelled out in the agreement. Pay particular attention to provisions that allow for a full refund of your money, or its credit against the final purchase price. Make sure the payment is not so large that it poses a financial burden to your agency or a threat to the project. In addition, listen carefully to the railroad's needs in setting this payment figure. If you can afford to cooperate (pending adequate safeguards), do so.
Once you and the railroad's representatives are comfortable with the final terms and language of your preliminary agreement, get it signed by the appropriate officials as quickly as possible. Once signed, you can complete your due diligence and finalize the acquisition.
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