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Acquiring Rail Corridors:
Chapter 9: Due Diligence
Examining the State of Title
Once you've negotiated the basic framework for a deal, you need to supplement your preliminary analysis of the railroad's ownership. This requires contracting with someone a real estate attorney, a title abstract company or a title insurance company who understands the intricacies of land ownership well enough to produce a report on the railroad's ownership, called a title report or title abstract. An expert can quickly determine the extent of the railroad's rights as well as the existence of certain legal risks or limitations that will affect the terms and price of any transaction you might undertake. When the examination is complete, you will have a report that details all restrictions and encumbrances on the property, as well as the extent to which a title company would be willing to insure over those restrictions and limitations.
The most common restrictions or limitations to title are easements, leasehold interests, and restrictive covenants. In many cases the railroad owning the property may have provided an easement to a utility company to run telephone or electric lines or a pipeline under or adjacent to the corridor. In other cases, the railroad may have leased portions of the rail corridor to individuals or companies interested in using the corridor for some non-rail use. Restrictive covenants may allow permanent use of the corridor for a specific purpose, as with crossings, or they may disallow particular uses. Regardless, an experienced real estate professional should review these terms and explain the implications to you. Don't hesitate to ask for this explanation in writing.
A title abstract will also identify other limitations and encumbrances to title, including tax liens, mortgages and mechanic's liens. Liens are claims against the value of a property such as unpaid property or income taxes, unpaid bills for services, and mortgages where the railroad may still owe money on a land purchase. Obviously, you need to know about all such claims so they can be resolved during the course of your negotiations with the railroad.
Some jurisdictional issues the local, state, and federal laws governing the property's use will be identified through a title abstract as well. The nature of the laws governing property use laws covering everything from environmental issues to the types of allowable uses of the corridor may also affect how a proposed transaction can occur. For example, land use laws that protect wetlands may not permit the construction or reconstruction of embankments if this activity would damage wetlands.
Finally, a title report should include a detailed description of the agreements that permit private and public crossings of the railroad line. Public roads traversing the corridor will most likely be based on specific crossing agreements with state agencies. Private crossings for residential driveways, private businesses, or agricultural uses may be less specific and are often not codified in writing. Although a title report can only identify those crossings for which there is a recorded, written agreement, the information contained in the report is an important supplement to your site visit observations.
Surveying the Property
A survey helps to establish the boundaries of the corridor and to document encroachments and other boundary issues. Some states, such as Ohio, may even require the completion of a survey before deeds can be recorded in county records. Although you may decide that the railroad's records, particularly current valuation maps, provide sufficient information about the property's boundaries, you should not take this decision lightly.
Land is typically described through surface measurements resulting in a map or a description (the survey) that shows the precise boundaries of property ownership. Surveys also show the slope, or topography of the property; the location of any improvements, such as railroad track(s); utility or pipeline easements; private and public crossings; encroachments by adjacent landowners; and other physical features of the site.
Surveyors use title research and any available maps or previously-completed surveys held by the railroad, as well as legal research to locate the property's boundaries and prepare a description.
An accurate survey is particularly important should you choose to acquire title insurance. Title insurance, which is offered by title companies, is like more familiar types of insurance car, health, etc. For a nominal one-time fee, usually on the order of $250 - $2,500, a title company will agree to cover the costs associated with any legal challenge to your ownership of the property. Title insurance is by no means comprehensive, since title companies exclude a variety of title defects from the insurance. Unless a survey is completed, many title companies will not insure against encroachments, overlaps, boundary line disputes, and other matters not disclosed in an accurate inspection and certified survey. This does not mean you will be unable to obtain title insurance. Rather, the title insurance you do obtain will be much more limited than it would be if you had completed a survey.
Since surveys are expensive, discuss survey requirements with title companies before you conduct the survey to avoid having to repeat parts of it. You may also choose to forego title insurance to avoid the cost of a survey, although you will not have the additional legal protection title insurance offers.
Appraising the Corridor's Value
Once you know how much of the corridor the railroad actually owns, the next step is to develop an estimate of how much the property is worth. You may be able to estimate the corridor's value on your own, but consider contracting with a professional appraiser unless you have one on your negotiating team as they offer many benefits.
Appraisers make a living following real estate trends and keeping an eye on the market. The best appraisers know who's selling and who's buying property, how much it costs, and what techniques to
use in estimating the value of a property. An appraiser can support an estimate of the property's value with a wide range of statistics and justifications.
Be sure to give your appraiser clear instructions. If your preliminary agreement with the railroad calls for the use of mutually-agreeable standards, make sure you work with the railroad's representative(s) to issue the appropriate instructions. Failing to issue clear, appropriate instructions may result in an inaccurate appraisal, forcing you to spend additional time and money adjusting the appraisal to compensate for these inaccuracies. Finally, instruct your appraiser to review his findings with you (and the railroad if you have jointly issued instructions) before the final report is written. Reviewing the appraiser's findings before he produces a report will give you an opportunity to discuss any concerns you have. For example, the appraiser may produce a report that fails to acknowledge the rail corridor's passage through a wetland area that would limit the range of productive uses for the property.
If possible, your appraiser should meet and tour the property with the appropriate railroad personnel during the appraisal process. In doing so, the appraiser will not only develop a better understanding of the property's limitations, but he can also educate the railroad's personnel about any limitations he identifies.
Keep in mind that a railroad will almost certainly have appraised the corridor as well. If the railroad applied for abandonment authorization through the most strictly regulated process, the railroad should have included an estimate of the corridor's value as part of the documentation it submitted to the Surface Transportation Board (STB). Contact the STB to obtain a copy of this filing. Make sure you know the docket number, as the STB will need it to locate the appropriate documents. Don't be surprised if the railroad's appraisal is significantly higher than yours.
Appraisal Techniques
Appraisers tend to use one of two methods to appraise a rail corridor:
- Across the Fence (ATF); or
- Net Liquidation Value (NLV).
Although railroads occasionally try to use a third appraisal technique called "Going Concern," this only applies when a railroad is selling a line to another railroad.
While you do not need to understand the intricacies of these methods, you should understand their general principles so you can instruct your appraiser to use the appropriate method.
Across the Fence (ATF): This method may be the most straight-forward approach to appraising a rail corridor. The ATF method estimates the corridor's value by comparing it to a similar piece of property the one right "across the fence" from it. To do this, an appraiser reviews tax assessments, existing appraisals, recent property sales, and other public records that indicate the value of land near the corridor. By assuming that the land within the rail corridor is roughly equivalent to the adjacent land that is, it has roughly the same topography and can be used for the same purposes an appraiser can estimate the value of the rail corridor.
If your appraiser stopped there, however, you would probably end up paying too much. Anyone who has ever walked along a rail corridor knows that a corridor is usually not the same as land across the fence. Rail corridors were generally built on the least productive land in an area. Unlike the land across the fence, a rail corridor may run along a river bank subject to frequent flooding, may pass through an industrial area that limits its use, or may just run through the least desirable parts of an area. Furthermore, rail corridors are almost totally landlocked (with the exception of road crossings), while most real estate offers regular access to roads and other public areas. The irregular shape of most rail corridors may make them less suitable for development as well. And in many places you will find that property across the fence has been improved with water, sewer and utility access, while rail corridors are generally unimproved.
Perhaps more significantly, railroads generally are unwilling to guarantee their ownership of a rail corridor. If you have ever bought a house you expected, and probably received, a warranty deed assuring you that the seller owned the house and would defend you against any claims by a third party contesting your ownership. Railroads won't do that. Railroads generally sell property through what is known as a "quitclaim" deed. Rather than reconstructing the entire title history, railroads tend to say, "We'll sell you whatever property we own, but you, the buyer, are responsible for determining exactly what we own." Railroads rely on quitclaim deeds because they are uninterested in, or unable to devote the resources to tracing the property's chain of title.
These factors generally decrease the price of most rail corridors compared to an initial ATF estimate. It is important, therefore, to instruct your appraiser to compensate for this disparity by discounting all factors that make your corridor less valuable than adjacent property. Make sure your appraiser documents how and why these discounts were developed.
Net Liquidation Value (NLV): According to the STB (and its predecessor, the ICC), the minimum constitutional compensation for involuntary transfer of railroad property from one railroad to another is Net Liquidation Value. NLV entitles the railroad to the value it would receive if it had to liquidate the corridor on a parcel-by-parcel basis. This type of liquidation is costly to the railroad because it requires marketing, appraisals, administrative and overhead expenses and real estate commissions if sales are conducted by outside agents. In addition, sales will occur over several years and must be discounted because a return cannot be realized until the date of a sale (a parcel selling five years from now for $1,000 may only be worth $600 now).
The process for determining NLV involves determining what the railroad owns outright; it cannot sell easement property unless it is railbanked. This figure is then discounted for marketing and overhead charges, and the time value of money (the fact that many parcels will not be sold for years). Since there is no absolute formula for determining the corridor's net liquidation value, be prepared for extensive negotiations with the railroad over the "true" value of the corridor.
In most circumstances, you will get the best terms for the transaction by using the ATF method. Make sure you can make a compelling argument for using this method, or whichever method you choose, because the railroad may challenge your assumptions during the actual negotiations.
Assessing the Integrity of Structures Within the Corridor
Once you have inventoried the property, contract with an architect or a structural engineer to examine all major improvements like bridges, tunnels, or buildings for structural weaknesses, unless the railroad has provided the results of a recent structural evaluation. If weaknesses are discovered, ask the architect or engineer to make recommendations for the rehabilitation and renovation of the structures.
If a building needs to be demolished or the supports for a bridge can no longer hold the weight of a maintenance vehicle, the value of the corridor will be affected. This could become an important issue in negotiations. In addition, an architect or an engineer should be able to tell you if the structure has historic value. She can also explain state and federal regulations governing historic designations and guidelines regarding demolition or renovation.
Environmental Assessment
Hidden environmental hazards may exist within the corridor, so you will want to hire an environmental engineer to conduct an environmental assessment of the property. The nature of the assessment will depend on the property and the potential for contamination but should include at a minimum the equivalent of a "Phase I" assessment.
A Phase I environmental assessment combines research into the property's history with a visual inspection. Courthouse records, title abstracts, historic aerial photographs, and newspaper accounts that offer background on the past uses of the site might provide some insight into the property's history. Interviews with local government representatives, adjacent landowners, and state and federal officials may also uncover historical events about which the current railroad knows nothing.
Documents, including environmental impact reports, past audits or assessments, and hydrologic or geologic studies of the corridor, may be requested from the railroad as well. Federal, state, and local agencies may have records of complaints regarding hazardous substances, property use, and waste management. These agencies should also have inspection reports, monitoring data, violation reports, and other correspondence affecting the property on file. In addition, railroads usually have records of any chemicals, fuels or pesticides known to have been stored on the property, particularly where railroad yards or storage buildings are included in the possible purchase.
A physical inspection of the property will usually uncover any evidence of chemical storage or spillage, as well as the possible presence of underground or above ground tanks. Although railroad property is generally free from most forms of environmental contamination, there may be problems. If the corridor was used to store diesel fuel, for example, the tanks may have leaked. PCBs in battery-powered switching boxes can also be a problem. Chemicals used for weed control are rarely a problem, however, because their toxicity is relatively short-lived.
A Phase I assessment of the property may be all that is necessary to determine whether the property poses a contamination threat. If a Phase I assessment of the property indicates that serious contamination may have occurred, do not purchase the property before you arrange for further assessment.
A Phase II assessment involves more thorough testing of water, air, and soil samples, as well as a more thorough investigation of the site. If contamination is found, a Phase III assessment will provide the remediation plan for clean-up.
While the techniques for identifying environmental contamination have become increasingly sophisticated, the cost and responsibility for clean-up and restoration are less clear. Federal law targets past and present owners, operators, transporters and generators of hazardous substances. Assigning responsibility and collecting money for clean-up is complicated by the history of contamination and the likelihood that the original contaminators may no longer be traceable, or if they still exist, do not have the funds to pay for clean-up. Although the railroad has certain responsibilities as the property owner, do not be surprised if the railroad's representative(s) wants to include clean-up costs as a negotiating point.
Overall, an environmental assessment can cost anywhere from a few thousand dollars to more than $20,000 if extensive soil and water samples are taken over a broad area. The assessment and its results can quickly become a critical issue in negotiations to acquire the property. Before you take title to the property, make sure the purchase contract clearly states who will pay for any environmental problems that have been discovered. Seek warranties and representations from the railroad that indicate there is no known contamination, or if that is not the case, that disclose the actual situation and plans for remediation.
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