Citations
- 571 F. Supp. 1269
Full opinion text
PER CURIAM:
I. INTRODUCTION
This opinion, which can be referred to as the CNJ Opinion, begins where our opinion reported at 531 F.Supp. 1191 (1981) ends. Familiarity with that opinion and our other major opinions, notably the Constitutional Minimum Value (CMV) Opinion, 445 F.Supp. 994 (1977), is assumed. While our 1981 opinion is generally characterized by the parties as the Rail Use Opinion and this proceeding as relating to nonrail use, and we shall follow this method of description, it is not entirely accurate. The earlier opinion did deal in the main with the valuation of railroads or segments of railroads which had established earning power and would be continued in rail use on that account. Also, for reasons detailed primarily in Part III of the opinion, 531 F.Supp. at 1210-14, it announced certain conclusions with respect to railroads that would be continued in rail use despite lack of earning power or with earning power but without the prospect of competitive bidding. We deferred the valuation of such railroads to the second phase of the proceeding and referred to “the values that we will determine in the second phase of the proceeding simply as X.” 531 F.Supp. at 1213. We also made a number of observations both in the CMV Opinion and in the Rail Use Opinion which bear upon the determination of X. Broadly speaking, we concluded that for all categories of rail lines, X was the value that could be obtained by sale for the next most valuable use, namely, a break-up of the railroad and a sale of its component parts. We shall call this scrap value, although recognizing that for certain categories of property, e.g., rail, the sale might be for continued use by another carrier in supplying rail service.
When we initiated this phase of the proceeding by our Sixth Pretrial Order of June 12, 1981, it appeared that, despite the earlier settlement by the Penn Central, a number of carriers would be involved. However, as described in the Rail Use Opinion, 531 F.Supp. at 1204, we received, on August 5,1981, an application from the GPs and the Reading Company for approval of a settlement of the claims of the Reading and five other companies for which it was (or expected soon to be) in a position to speak. Settlements were later approved with respect to all of the railroads that had been involved in these proceedings with the exception of the Central Railroad of New Jersey (now, as a result of reorganization, Central Jersey Industries, Inc.) (CNJ), including its interest in the assets of the Raritan River Railroad and the Lehigh & New England Railway (L&NE). We found that despite CNJ’s lack of earning power, “in the absence of the Rail Act, New Jersey would have bought all of CNJ’s conveyed properties”, 531 F.Supp. at 1379. L&NE conceded that the Tamaqua branch would not have been sold for continued rail use, 531 F.Supp. at 1374. With respect to L&NE’s Bethlehem branch, we found that while the Chessie, as an acquirer of the Reading’s class (a) lines and of the Lehigh Valley, might have bid for this, there would have been no competitive bidding and that “the sales price would not have been significantly more than the applicable version of X”, Id
Even with the scope of the proceeding thus reduced, a formidable record has been compiled. The statements of witnesses and appendices for the CNJ and L&NE comprise 5154 pages; those for the GPs 3368; and 17,435 pages of depositions were taken. The GPs’ opening and reply briefs contain 786 pages; the CNJ’s and L&NE’s 741. Oral argument was heard on March 16 and 17, 1983.
The CNJ presented two theories of its case. Its preferred version was what it terms the “perception theory” — perhaps better described as the “constructive offer” theory. Under this theory CNJ endeavors to reconstruct what would have happened in the real world if the Rail Act had not been passed and its validity sustained, first by us in the 180 Day Appeals, 384 F.Supp. 895 (1974) and later by the Supreme Court, Regional Rail Reorganization Act Cases, 419 U.S. 102, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974), the former disagreeing with and the latter reversing Connecticut Gen. Ins. Corp. v. United States Ry. Ass’n, 383 F.Supp. 510 (E.D.Pa.1974). Alternatively it submitted its own scrap value model, avowedly following the same principles as that of the GPs but unsurprisingly producing quite different results. The results of the models (in thousands) were:
CNJ perception theory $72,886
CNJ perception theory as adjusted by GPs $33,169
CNJ scrap value model $82,441
GPs scrap value model $22,932
We shall first analyze, and ultimately reject, CNJ’s perception theory and then take up, category by category, the two scrap value models. While we shall not be able to arrive at an exact figure, we aim to express the governing considerations in sufficient detail that the parties should readily be able to agree on one, or, failing agreement, to submit figures carrying out our decision, with supporting memoranda.
II. CNJ’S PERCEPTION THEORY
The takeoff point for CNJ’s perception theory is the negotiations between Alan Sagner, Commissioner of Transportation for New Jersey’s newly elected Governor, Brendan Byrne, and CNJ’s Trustee and representatives of its security holders, in the spring and early summer of 1974, which are reviewed in the Rail Use Opinion, 531 F.Supp. at 1375-77. CNJ claimed that at a meeting with CNJ bondholder representatives on July 18, 1974, Sagner committed New Jersey to purchasing virtually all of CNJ’s properties at a price equivalent to about $100 million for the conveyed properties, and that just compensation required CNJ to be paid that amount. CNJ’s legal theory was apparently premised on the argument that “the Transferors’ entitlement was to be measured by the indemnity required to compensate for the value of their lost opportunities”,. CNJ Opening Brief With Respect to Sales for Rail Use at 4, and that the frustration of the sale to which New Jersey had allegedly agreed was such a lost opportunity. We had no occasion to explore the legal validity of CNJ’s theory since we concluded that the evidence did not support its contention “that an agreement had nearly been reached”, 531 F.Supp. at 1378. One of the reasons sustaining our factual conclusion that no definite offer was in the immediate offing was Sagner’s statement to a representative of the bondholders on July 30 that he had commissioned a further study by L.E. Peabody & Associates and that any proposals he would make would be based on that study, 531 F.Supp. at 1376.
With its argument based on a July 1974 “near agreement” thus having been rejected on the facts, CNJ here makes a similar argument on the basis that the evidence shows an agreement would have been reached in the fall of 1974. It contends that four studies in the State’s possession, two of which — the Peabody study and the Hyde study — were commissioned by the State as a result of the discussions in July 1974, established a frame of reference that would have resulted, after further negotiations, in a purchase price in the neighborhood of $72,886,000 for the conveyed properties. This is put forward as a form of the “foreclosed option” principle, see 445 F.Supp. at 1012-13, which the GPs have recognized in other contexts. The argument is that but for the Rail Act and the court decisions sustaining it and holding it applicable to CNJ, Commissioner Sagner would have returned to the negotiating table and would have made an offer derived from the four studies, especially the two recent ones he had commissioned. Deprivation of the opportunity to accept such an offer would constitute on this view a taking of property compensable under the Fifth Amendment.
To analyze the argument a bit further, its premise is that if the State of New Jersey had made a firm offer to purchase the conveyed properties and this was rendered ineffectual by enactment of the Rail Act and the decisions upholding its validity and applicability to CNJ, foreclosure of CNJ’s right to accept this offer would be a taking requiring payment of just compensation. The argument then proceeds from this premise to a conclusion that the same consequences should follow if the evidence shows with sufficient certainty that a firm offer of a fixed amount (or falling within an acceptably small range) would have been made but for the intervention of the Rail Act.
As indicated above, we previously found it unnecessary, see 531 F.Supp. at 1378, to consider the legal validity of the premise, namely, that frustration of a firm offer would be compensable, since we concluded that the necessary facts had not been established. The weight of authority is that offers to purchase property under condemnation are not even admissible, much less determinative. However, the reasons expressed for this are singularly inapplicable to the kind of offer posited by CNJ. One is the danger of fabrication; however sound this may be with respect to oral offers, it would have scant applicability to a formal offer bearing the signature of the Governor or other authorized officer of New Jersey. Another argument, that the offer may have been made irresponsibly, without any real intention of consummation, is equally inapplicable to an offer of the sort described. A further objection, lack of knowledge by the offeror, is similarly inapplicable where a state which has been formally studying the question for months makes a firm offer. A final objection, made with respect to persons having the power to condemn, is that the offer may include a premium to avoid the expense of condemnation and the risk of an excessive award. This objection is removed when the court can determine, from the appraisals on which the offeror relied or from other circumstances, that no such element existed. Although it is unnecessary to decide the point, we thus do not readily dismiss the premise of CNJ’s perception theory.
Movement from the case of an actual offer to one where none has been made is a quite different matter. The first issue is one of law. Has a condemnee been deprived of anything for which he is entitled to compensation because of having lost the opportunity to accept an offer which was not but rationally could have been made on the facts available at the time? We find it unnecessary to decide this beyond noting that an affirmative answer would open up possibilities for condemnees that are not to be contemplated lightly. Such considerations suggest that, even if we were to assume arguendo that the question should be answered in the affirmative, the proof that the offer would probably have been made and what it would have been must be clear and convincing. CNJ’s perception theory shatters on this rock.
CNJ’s evidence with respect to the probability and amount of the State’s offer begins with Sagner’s requests on July 26, 1974, for two independent valuations of CNJ which are referred to in the Rail Use Opinion, 531 F.Supp. at 1376, and which we shall now discuss in more detail. The first was by the firm of L.E. Peabody & Associates, which had long advised New Jersey on real estate matters. On July 26, 1974, Lee Peabody and William Whitehurst of that firm met with Commissioner Sagner. Lee Peabody later prepared a memorandum of the meeting. This recited that the Peabody firm was to determine the value of the CNJ on the bases of “book value, reproduction value, net liquidation value, and going concern value” and that in doing so it was to “use the Wyer Dick and DeLeuw Cather reports” described below. The Peabody report was submitted on September 23, 1974. While it reported values on the three other bases specified, it concluded that the value most useful for negotiations with CNJ was net liquidation value. This it found to be $113 million as of December 31,1973, which “should be discounted 20 percent to reflect the elimination of future uncertainties and risks resulting in a value of $90 million.” In arriving at this figure the Peabody firm relied heavily on a study of the net liquidation value (NLV) of all of CNJ’s assets as of June 30,1968, made pursuant to Orders 101 and 137 of the CNJ reorganization court by Wyer, Dick & Co. and completed June 12, 1970. This had relied for real estate values on a report made by the firm of Van Horn & Dolan, which had assisted CNJ in regard to real estate matters for many years.
The second study was by James V. Hyde, Jr., Director of the Right-of-Way Division of the New Jersey Department of Transportation. As reflected in a memorandum dated July 24, 1974, the Division was asked to submit within 60 days reports on the value of the CNJ (excluding rolling stock) as an operating railroad in use and at liquidation or net salvage value. The report, consisting of three volumes, estimated the liquidation value of the CNJ’s land and trackage at $121,005,000, as of October 1974.
The Wyer Dick study had shown a NLV of $79,654,000 as of June 30, 1968. Shortly after its preparation, New Jersey retained DeLeuw, Cather & Co., which was later to make many studies for the GPs in connection with these proceedings, to review the Wyer Dick study and “to express opinions on the methods and procedures used ... and on the accuracy of the values presented therein.” DeLeuw Cather Study, 1 CNJ App. at 80. DeLeuw Cather, with the approval of the State, retained the New Jersey real estate firm of Stack & Stack to review the estimated values of land contained in the Wyer Dick study. Agreeing with some of Wyer Dick’s conclusions, and believing others to be too favorable but more to be too unfavorable to CNJ, it concluded that the net liquidation value of the CNJ as of June 30, 1968, was approximately 15% greater than Wyer Dick’s estimates, or, in other words, $91 million. Particularly DeLeuw Cather regarded Wyer Dick’s real estate values as too low.
At the trial CNJ undertook to distill from the four studies what New Jersey would have thought the NLV of the conveyed properties would be. It did this through two witnesses, John Van Horn, a real estate expert of long experience who, as stated, had been involved in the Wyer Dick study, with respect to real estate, and Jack Storm, who was Director of Engineering for Snavely, King & Associates, Transportation and Economic Consultants, with respect to other assets. The problems faced by these witnesses were formidable. All the appraisals had dealt with the totality of CNJ’s assets. Some of these assets had been disposed of before enactment of the Rail Act and not all of the remainder were designated for conveyance. Other categories had increased in quantity between December 81, 1973 and the conveyance date, April 1,1976. The methodologies of the studies differed with respect to many important matters. Some discounted the assumed proceeds of sale to present value; others did not. The Peabody study simply trended Wyer Dick’s real estate values upward; Hyde made an independent appraisal. The Hyde study made a deduction for title defects; the Peabody study did not. Despite all these problems, Storm felt able to conclude that New Jersey would have perceived the NLV of the conveyed properties in 1974 to be $69,-472.000 on the basis of the Peabody study and $72,886,000 on the basis of the Hyde study. As indicated, CNJ urges the $72,-886.000 figure, primarily on the basis that Hyde made an independent appraisal of the real estate, whereas Peabody had simply trended Wyer Dick’s real estate values which DeLeuw Cather had considered too low. The GPs, while challenging the whole concept of the perception case on both legal and factual grounds, retort that if proper adjustments were made, New Jersey’s 1974 perception would have been only $33,169,-000.
The GPs mount their factual attack on a broad front. They emphasize that neither Storm nor Van Horn purported to testify what New Jersey in fact perceived; their testimony was limited rather to how Peabody and Hyde would have perceived the value of the assets conveyed on April 1, 1976, and, inferentially, how the State should have perceived this on the basis of their appraisals. They emphasize CNJ’s failure to call any New Jersey officials as witnesses. The GPs called Whitehurst to testify that the Peabody study was designed simply to meet Commissioner Sagner’s request for a “rough cut” and to supply a “rank order” of alternatives. CNJ answers that nothing in the letter transmitting the Peabody report suggests that it was a “rough cut” and that the authors of the study knew that negotiations would proceed on the basis of NLV and the other figures were included for cosmetic purposes, such as showing that a purchase at net liquidation value would be a good deal for the State. Whitehurst also pointed out a number of serious defects in his firm’s study, such as the lack of an independent real estate appraisal, failure to consider the timing of the liquidation process, failure to discount proceeds to be received over a term of years to present value, and failure to take account of potential glut. CNJ responds that this poor mouthing of the report ill comports with what the Peabody firm said at the time and also that if there are defects, these can be rectified by resort to the other studies, particularly the Hyde Study. Whitehurst concluded that he “would not have advised the State of New Jersey to proceed to set a purchase price on the basis of [the] figure” set forth in his firm’s report. Whitehurst Testimony, June 2, 1982, at 7. CNJ answers that this is exactly what the report purported to do, indeed, that what Commissioner Sagner wanted was a floor since he expected CNJ’s zealous Trustee, R.D. Timpany, to press for more. CNJ calls attention to a memorandum prepared by New Jersey state officials of a meeting with federal officials in Washington on August 23,1974, in which Sagner stated that he expected the Peabody report to place a net liquidation value of $70 to $80 million on CNJ’s rail properties. The GPs did not call Hyde but relied on an affidavit in which he said that his study was “a preliminary planning study related solely to the transportation activities of the Department of Transportation”, which it manifestly was not, and that it “had nothing to do with the acquisition of land through condemnation.” CNJ objects to this affidavit as inadmissible hearsay, as it well may be. In any event, while the statement that the report “had nothing to do with the acquisition of land through condemnation ” (emphasis supplied) is literally correct,, the letter transmitting the report clearly stated that it was an estimate of the liquidation value and also that “the equitable true market value of the present system lies between the Liquidation Value and the Value-in-Use.” More impressive are the GPs’ attacks on the Hyde study, pointing out the use of all sales in the area rather than sales of comparable properties to value real estate, the admitted failure to allow for title defects, and the wide disparity between Hyde’s estimate of the values of two parcels retained by CNJ under the Final System Plan and what was actually paid for them by the State.
We are left with two conflicting impressions. One is that, on the basis of the appraisals, Sagner would have returned to the bargaining table with an offer which exceeded not only the GPs’ presently asserted scrap value figure but the higher scrap value figure we have found. For one reason or another the minds of all concerned in 1974 were attuned to a higher scale. There is, for example, no evidence that in 1974 New Jersey entertained such ideas as that all of CNJ’s ties and much of its rail was valueless, largely because of glut, although perhaps it ought to have done so. The other impression is that we have no sufficient basis for finding what New Jersey’s offer would have been. For one reason, neither the Peabody report nor the Hyde report gave any satisfactory notion of the liquidation value of CNJ’s real estate, as CNJ’s expert Van Horn conceded. We cannot assume that the State would have entered into serious negotiations when one of its figures with respect to such a major item was more than 150% of the other. Perhaps there might have been a split-the-difference approach, perhaps New Jersey would have commissioned a new appraisal of the real estate, perhaps something else would have occurred — we simply do not know. While it “has been obvious ... from the beginning ... that no amount of effort by counsel and the court will produce a mathematically precise figure of what the estates are constitutionally entitled to receive and the Government is required to pay” and that “the best for which anyone can hope is a fair approximation”, Compensable Unconstitutional Erosion (CUE) Opinion, 439 F.Supp. 1351, 1390 (1977), we cannot properly award judgment on the basis of mere speculation. CNJ has simply not met its burden of showing by clear and convincing evidence that, after the Peabody and Hyde appraisals were available, New Jersey would have made an offer at any ascertainable figure, and we therefore need not discuss what the result should be if CNJ had carried its burden on the facts.
III. REAL ESTATE
A. Base Value
The parties stipulated to real estate base values in all counties except three. With regard to the real estate in Essex, Hudson, and Union Counties, the parties arrived at widely divergent base values. CNJ conveyed approximately 940 acres in those three counties to Conrail. CNJ assigns a base value of $33.4 million to the conveyed real estate in the three counties, while the GPs have adopted a $17.6 million figure.
CNJ and the GPs have used a market data approach to arrive at their estimates. Under this approach, an appraiser attempts to determine the value of the property at issue by inspecting or otherwise determining the characteristics of the parcel of property. The appraiser then examines sales of similar property to come up with the “going rate” for property in the area. CNJ refers to the resulting figure as the “typical property value”; the GPs refer to the result as the “across the fence value”. Although some underlying assumptions differ, the two terms describe the same basic appraisal methodology. See Hannoch/Heaney Deposition, January 11, 1982, at 30-31, 2 CNJ App. at 136-37. By adjusting the comparable sales figures to take into account the peculiar characteristics of the subject property and any change in price levels or other circumstances warranting adjustment between the date of the comparable sale and the valuation date, the appraiser hopes to arrive at an accurate estimate of the property’s value.
As the use of the term “comparable sales” indicates, the market data approach necessarily involves many subjective judgments on the part of the appraisers. The parties spend many pages in their briefs singing the praises of their own appraisers and attacking the credentials and objectivity of the appraisers who worked for the other side. Because we find fundamental flaws in the assumptions underlying the estimates of both CNJ and the GPs, we do not fully accept either party’s estimate of real estate base value.
1. CNJ Appraisal
In conducting their studies, the CNJ appraisers, Franklin Hannoch, Jr., and Michael J. Heaney, employed two assumptions that detract significantly from the reliability of their estimates. The first invalid assumption involves the availability of continued rail service to CNJ’s conveyed parcels. The parties do not dispute that if a piece of industrial real estate has access to a rail line it is worth more to a potential buyer than one not having such access. The parties did not agree, however, on whether particular parcels would continue to be served by a rail line after the conveyance of the property to Conrail. CNJ’s appraisers assumed that all CNJ real estate would continue to be served by a rail line if the purchaser so desired. CNJ contends that this assumption is necessary to vitiate the unfairness that would result if the government forced CNJ to convey property for the formation of a railroad and then valued the property as if the railroad did not exist. Hannoch/Heaney Deposition, March 24, 1982, at 782, 33 GPs Supp.App. at 228.
CNJ’s argument overlooks the fact that, in the conceded absence of proof that the property in question had earning power that would make it valuable for rail use, it is entitled to compensation based on the property’s nonrail use value. See Sixth Pretrial Order, Sp.Ct.Rptr. N-35965, at ¶ 1. By assuming continued rail service to all conveyed parcels, CNJ would have us value its property as if the CNJ would continue as a functioning unit, whereas the assumption underlying the nonrail use approach is precisely the contrary.
Our holding does not suggest, however, that none of the CNJ property would ever be served by a rail line. Many parcels are close enough to other northeastern rail lines for the construction of a spur to service the property that would be both economically feasible and desirable. See Peabody Study, Analysis of CNJ Freight Traffic by Line Segment, September 19, 1974, at 77-107, 1 CNJ App. at 307-37; cf. New Haven Inclusion Cases, 399 U.S. 392, 453-57, 90 S.Ct. 2054, 2090-92, 26 L.Ed.2d 691 (1970).
Unfortunately, we are unable to adjust the CNJ figures to reflect continued rail service to some, but not all, parcels. The CNJ appraisers did not consider the rail service potential of individual parcels. They uniformly assumed that each parcel would have continued rail service. Hannoch/Heaney Deposition, March 24,1982, at 782, 33 GPs Supp.App. at 228. Furthermore, Hannoch and Heaney admitted that the continued rail service assumption had played an important part in their valuations, but they were unable to estimate how much their real estate estimates would decrease in the absence of the continued rail service assumption. See Hannoch/Heaney Deposition, March 24, 1982, at 741-48, 2 CNJ App. at 811-16.
The other faulty assumption on which Hannoch and Heaney relied relates to topography. A substantial portion of the property in question is old CNJ rights of way. Much of this property contains embankments or depressions constructed to maintain even track levels. The embankments mainly consist of ballast and fill materials. The parties assumed for appraisal purposes that the rights of way would have been stripped of rail, ties, and ballast before sale. The CNJ appraisers went one step further and assumed that, with respect to embankments, the land would be returned to its original contours prior to sale. This assumption was based on the premise that fill materials could be sold on site for a price greater than the cost of removal.
Even if we were willing to assume that fill could be sold, we are unwilling to conclude that the presence of embankments should be ignored in estimating the value of the parcels on which the embankments stand. If a market existed for fill, CNJ still should have considered the side effects of removal. For instance, the CNJ appraisers should have taken into account the difficulty of removing fill from remote, narrow rights of way and the ecological impact of heavy earth-moving machinery on adjacent land.
Removal of all embankments also would be an extremely time-consuming endeavor. Fill could be sold only as a need for it arose in the marketplace. Because removal of all embankments would involve disposal of more than 6.4 million cubic yards of fill, we assume that the market would not absorb the supply of fill within a short period of time. As a result, sale of those parcels containing embankments would be delayed pending the sale of the fill. This delay would translate into lower present values for the proceeds from the sale of those parcels.
Furthermore, removal of fill might hinder the sale of parcels not containing embankments. A buyer might be hesitant to purchase a segment of right of way if he anticipated use of his property by CNJ as a means of access to a parcel from which fill was to be removed. Taken as a whole, these factors indicate that the CNJ’s appraisers incorrectly ignored the effect that embankments would have on base values of real estate.
CNJ’s misconceptions with regard to topography and continued rail service signify that its methodology in arriving at real estate values is fundamentally flawed. Hannoch and Heaney admitted that their assumption of continued rail service was an integral factor in their valuation. Hannoch/Heaney Deposition, March 24, 1982, at 772-73, 38 GPs Supp.App. at 200-01. We have stated that we are unable to adjust their figures to take into account any rail service that would have been available. CNJ’s erroneous assumption that all real estate with embankments would be restored to its original contours has an equally unquantifiable effect on the CNJ estimates. In short, Hannoch and Heaney have cast substantial doubt on the accuracy of their appraisals by basing their work, in part, on two incorrect assumptions.
2. GPs Appraisal
Unfortunately, the GPs’ valuations suffer from some severe inadequacies as well. One such inadequacy involves continued rail service. As we pointed out in our discussion of CNJ’s continued rail service assumption, some parcels might have had continued rail service from other nearby rail lines. See Peabody Study, Analysis of CNJ Freight Traffic by Line Segment, September 19, 1974, at 77-107, 1 CNJ App. at 307-37. Nevertheless, the GPs instructed their appraisers to assume that none of the parcels would be serviced by rail. GPs Opening Brief at D-9. Just as the CNJ appraisers were too liberal in assuming rail service to all parcels, the GPs were too conservative in assuming no rail service. The proper approach would have been to determine the accessibility of each parcel from rail lines that would have been proffered for continued service after April 1, 1976, and would have met the tests laid down in our Rail Use Opinion.
Another shortcoming of the GPs’ studies involves the GPs’ choice of comparable sales figures. The GPs instructed their appraisers to consider only sales occurring before April 1,1976 in arriving at their “across the fence” values. In many cases, sales of property similar to that which was being appraised occurred after April 1. In some cases, Conrail sold the very parcels under examination. The CNJ appraisers testified that they considered all comparable sales in arriving at their figures. See Hannoch/Heaney Deposition, January 11, 1982, at 31-32, 2 CNJ App. at 137-38.
The GPs argue that post-April 1 sales should not be considered because they may distort the value assigned to a parcel of real estate. The GPs contend that a purchaser who buys property after the valuation date has at his disposal information not available on or before the valuation date. The price paid for similar property after the valuation date, therefore, does not accurately reflect the economic environment on that date.
We find the GPs’ reasoning unpersuasive. Although a post-April 1 buyer might have more information at his disposal than a hypothetical buyer as of the valuation date, a buyer of comparable property before April 1 would have less information than the hypothetical buyer. Therefore, we see no reason to assume that pre-valuation date sales have any more merit for establishing the market value of the subject property than post-valuation date sales, unless the latter have been influenced by the condemnation of the subject property. We find that the GPs’ appraisers should have considered post-April 1 comparable sales in determining the NLV of CNJ’s conveyed real estate.
Just as we find it impossible to rectify the effect of CNJ’s erroneous assumptions on its estimate of base value, we cannot quantify the effect that the GPs’ misguided instructions had on their real estate valuations. Referring to the issue of continued rail service, counsel for the GPs stated at oral argument, “unquestionably, it has a very significant impact”. Transcript at 153. The GPs’ opening brief states that the assumption of continued rail service is “a major reason why the base values presented by Messrs. Hannoch and Heaney are so much higher than those of the Government Parties”. GPs Opening Brief at D-51.
In a similar vein, the GPs did not indicate how much real estate values would have changed had they considered post-April 1,1976 sales data. The evidence indicates, however, that the CNJ appraisers relied heavily on post-April 1 sales and that the GPs appraisers had available to them many post-April 1 comparable sales with which they could have worked. The net effect of these two errors in the GPs’ appraisal methodology is to undermine the credibility of the GPs’ real estate values. We therefore cannot adopt the GPs’ estimate of $17.6 million as the base value of conveyed real estate in the disputed counties.
3. Van Horn Appraisal
Although we find fundamental flaws in the real estate estimates propounded by both sides, we believe that there is an equitable means of arriving at more accurate real estate base values. The evidence indicates that Hannoch and Heaney relied to a great extent on information provided by the appraisal firm of Van Horn & Dolan. From the 1950’s until 1978 the Van Horn firm, principally under the supervision of John Van Horn, performed a number of appraisals for CNJ. In 1969-70, Van Horn appraised several individual parcels of CNJ real estate and served as project manager for a complete appraisal of all CNJ’s real estate valued as of June 30, 1968. In 1974 and 1975, he supervised another complete appraisal of all CNJ real estate.
Van Horn’s association with CNJ did not end with the conveyance of most of CNJ’s property to Conrail. Since April 1, 1976, Van Horn (and his firm) has acted as consultant and manager of CNJ’s retained real estate, and has performed some services with regard to conveyed real estate. These services have included the preparation of a land inventory and maps of CNJ’s conveyed property in late 1977 and early 1978.
Between August 1978 and the end of the year, in response to a request from CNJ’s counsel, Van Horn updated his previous work to arrive at a nonrail use value for CNJ’s conveyed property as of April 1,1976. CNJ did not use Van Horn’s appraisal as evidence of real estate base values. Instead, it commissioned Hannoch and Heaney in July 1981 to perform new appraisals. Van Horn furnished Hannoch and Heaney with work papers containing sales and other component data and maps accumulated by his firm. CNJ has not given any explanation for its decision to change appraisers.
Three aspects of the 1978 Van Horn appraisal recommend it to us, other than Van Horn’s long-standing familiarity with CNJ property. First, Van Horn made no artificial assumptions, such as the blanket presence or absence of continued rail service, regarding access to the conveyed property. Van Horn did not assume that the real estate would be returned to its original contours. Finally, Van Horn considered some post-April 1, 1976 sales in arriving at his estimates.
CNJ has long maintained that the Van Horn estimates are unreliable indications of the base value of its conveyed real estate. In its attempt to deny the GPs access to most of Van Horn’s study, CNJ referred to Van Horn’s study as a “false start” appraisal. CNJ argued that the Van Horn appraisal was hastily performed as a means of arriving at preliminary estimates of real estate values rather than final figures. CNJ contended that Van Horn designed his 1978 update of previous appraisals only to give CNJ’s counsel a general indication of the value of conveyed real estate. See Objections of Central Jersey Industries, Inc., and Brief in Support Thereof, to Government Parties [sic] Motion of January 19, 1982, to Compel Production of Certain Documents, January 25, 1982, at 5. Although CNJ’s brief does not set forth its objections to the use of Van Horn’s figures, we assume that CNJ still harbors the concerns stated in its January 25, 1982, memorandum.
CNJ’s argument not only ignores the fact that Van Horn’s past experience with CNJ’s property qualified him to perform such an appraisal, but also that Hannoch’s and Heaney’s work relied heavily on Van Horn’s data. Moreover, Van Horn spent five months updating figures he had compiled over a period of several years. By comparison, Hannoch and Heaney conducted their entire appraisal in about four months.
Another factor that recommends the Van Horn figures as accurate reflections of the base values of the CNJ real estate is that the GPs have recognized the Van Horn study as having been based on more acceptable assumptions than the Hannoch and Heaney study. During oral argument, the GPs stated that one way to quantify the effect that the CNJ’s continued rail service and topographical assumptions had on the Hannoch and Heaney figures is to compare them with those of Van Horn because the Van Horn study did not make the same misguided assumptions. Transcript at 255. Furthermore, the GPs imply in their brief that they felt that Van Horn was much more qualified to appraise the CNJ property than Hannoch and Heaney. See GPs Opening Brief at D-41 to 45.
We find that Van Horn’s 1978 estimate of the base value of CNJ’s real estate in the three disputed counties is the most accurate indication of that property’s value. Van Horn was familiar with the property and had appraised the property on several occasions in the past. If he made mistakes with regard to the physical attributes of that property, those mistakes probably infected Hannoch and Heaney’s appraisal as well, because of their reliance on the Van Horn work papers. The assumptions used by Van Horn in conducting his study were superior to those used by both the CNJ and GPs appraisers. Finally, the GPs have implicitly recognized that the Van Horn figures have, at least, some validity. We find the base values in the disputed counties to be:
Essex $3,279,800
Hudson 2,653,700
Union Elizabethport 10,162,700
Other 8.369.000
Total $24,465,200
B. Adjustments to Base Value
1. Title Defects
The GPs contend that the base value of CNJ’s conveyed real estate must be reduced to eliminate the base values of conveyed parcels for which CNJ would not have had marketable title in a nonrail use liquidation of the real estate. The GPs would also deduct the cost, including the cost associated with the delay in receiving proceeds from sales, of bringing quiet title actions for parcels, title to which would be defective but curable. To estimate these adjustments for title defects, the GPs introduced testimony of Paul E. Lacouture, an attorney of considerable experience in real estate titles. He reviewed 102 valuation maps of CNJ conveyed property, representing over 90% of the base value appraised by the GPs, as well as title deeds and other documents in the possession of Conrail.
Lacouture found that CNJ, in assembling its original rights of way more than a century ago, acquired many easements, licenses, and determinable and conditional fees subject to reversion upon cessation of rail use. For all such rights of way, Lacouture concluded that CNJ would have had no title to transfer in a nonrail use liquidation and, thus, this property should be assigned no value. Also CNJ had terminable or limited interests in land in some cases raising title problems which could be cured by quiet title actions. John H. MeDermitt, an attorney with thirty years’ experience in New Jersey title litigation, testified that quiet title actions for curable defects could be successfully completed in an average of twenty-three months at an average cost of $5,258. Combining the elimination of sale proceeds where title defects were insurmountable and the cost of cure and delay in receipt of proceeds for lesser defects, La-couture concluded that CNJ’s real estate base value should be reduced by 7.187%.
CNJ’s principal argument in opposition to a deduction for title defects is that unless reversion of title to any such parcel was imminent as of the valuation date, CNJ as the holder of a defeasible interest in the parcels was entitled to compensation for their full value. The great majority of the title defects uncovered by Lacouture were reversionary interests taking effect on cessation of rail use. CNJ argues that cessation of rail use on the conveyed properties in the absence of the Rail Act was never contemplated and thus that injustice would result if we were to carry our assumption of a nonrail use liquidation to its logical conclusion of divesting CNJ of title to real estate that would in fact never have gone out of rail use. The authorities cited by CNJ support the proposition that where, as a consequence of a condemnation proceeding, a defeasible interest that would otherwise have subsisted indefinitely is extinguished, the holder of the defeasible interest is entitled to compensation as if possessed of an estate in fee simple absolute, Terminal Coal Co. v. United States, 172 F.2d 113, 116 n. 5 (3d Cir.1949); United States v. 635.76 Acres of Land, 319 F.Supp. 763, 767 (W.D.Ark.1970), aff’d., 447 F.2d 1405 (8th Cir.1971) (per curiam); Restatement of the Law of Property § 53, comment b (1936). The authorities, however, are not apposite since the condition of indefinite subsistence apart from the condemnation is not met. The only prospect of continued rail use of CNJ’s lines lay in condemnation by or sale in lieu of condemnation to the federal government or New Jersey. Thus reversion of title was neither remote nor speculative: it was imminent unless there was intervention by some authority with eminent domain power and willingness to carry on a losing operation. Where, but for the action of a condemnor, the condemnee’s determinable or conditional title to real estate would most likely be lost in the near future, no compensation is required. We therefore eliminate the base values of those portions of CNJ’s real estate which would have reverted upon cessation of rail use.
CNJ further argues that the GPs’ deductions, if permissible, are greatly overstated. Its appraisers testified that less than 3% of the conveyed acreage was subject to title defects, but gave no estimate of the value of this real estate. CNJ also introduced a letter from a New Jersey title insurer who reviewed 10 “representative” title deeds and opined that those merely imposing “restrictions” that parcels be used for railroad purposes and those reserving to grantors a right of reentry might under certain conditions be insurable. While we recognize that the successors in interest of the original grantors may well have disappeared in the intervening century, this does not justify an award to CNJ on the basis of marketable title where it has no title or would have to incur the costs and delay incident to a quiet title action prior to any sale — even though the result is that the GPs will be paying no compensation for certain property that Conrail is using. CNJ did point out, and the GPs conceded, an error of $6,240 in Lacouture’s deduction from the GPs’ base values. To reflect this correction we will make an adjusted deduction of 7.162% from base value for title defects.
2. Selling Costs
Apart from its general objections to the deduction of selling costs, which we reject in Section VLB. under the heading “Liquidation Organization and Disposition Costs”, CNJ argues that in the ordinary condemnation proceeding employing the “comparable sales” approach with respect to real estate, no deduction for the costs of selling a parcel of real estate would be made. See, e.g, State v. Brooks, 152 So.2d 687, 641 (La.App.1968). However, the GPs insist that where, as here, the sale is of a large tract which must be broken into parcels, the costs of sale must be deducted. We need not encumber this opinion with citation of the GPs’ many authorities, since the Supreme Court’s opinion in New Haven Inclusion Cases, supra, 399 U.S. at 436-37, 90 S.Ct. at 2081, is ample precedent for the deduction of holding and selling costs when railroad property is to be divided and sold over a long period of time.
The GPs estimate the deduction at $3,002,000 as against a base value of $25,-166,500. CNJ’s figure is only $190,000 as against a base value of $40,093,770. The enormous difference comes from two factors: CNJ contends that the organization it was obliged to retain to sell its non-conveyed properties could have done much of the work incident to the sale of the conveyed properties at no additional expense. It contends also that its own experience in selling its retained real estate indicates that the GPs’ estimated selling costs are much too high. We deal with these contentions under the following categories:
(a) Cost of Sales Force.
(b) In-House Disposition Costs.
(c) Surveys, Transfer Taxes, and Attorneys’ Fees.
(a) Cost of Sales Force. The GPs introduced testimony of Arnold S. Tesh, USRA’s Director of Real Estate. Tesh concluded that the most effective method of disposition of CNJ’s developable properties would be to supplement CNJ’s in-house sales force with a central marketing agent who would develop overall plans and contact and supervise real estate brokers. Tesh thought that the fees of the central marketing agent, including brokers’ commissions, together with the expense of the in-house staff would amount to 10% of the gross sale proceeds. Testimony of Eastdil Realty Inc. supported Tesh’s 10% estimate for developable properties. This figure is in line with estimates of selling costs in the 1968 Wyer Dick study (up to 10%), the 1974 Peabody study (12V2%, including other closing costs), and the 1974 Hyde study (10%). Tesh further testified that sale of abutter properties would have been more difficult, requiring 15% of gross proceeds to compensate independent local brokers and a limited in-house sales force. Sales expenses set any lower than this, Tesh believed, would lead to a slower pace of sale and, with the effect of discounting, would result in a lower figure for net proceeds.
We are not persuaded that a figure higher than 10% is warranted for the sale of abutter properties. Perhaps, as the GPs contend, a broker must be more persistent in his efforts to persuade an abutting owner to buy and would demand higher commissions since the amount of each sale is relatively small. At the same time the broker expends no effort or advertising expense in locating his prospective buyer, and this would work the other way. Furthermore, as Tesh conceded, a larger proportion of sales of abutter properties would be made by CNJ’s in-house staff. We conclude that no sales force expense greater than 10% should be deducted for any of CNJ’s conveyed real estate.
CNJ would have us further reduce the rate of selling expenses in the light of its own experience in selling well over half of its 2000 acres of retained real estate. From April 1, 1976, to the end of 1981, according to testimony of John Van Horn, CNJ received nearly $21 million in proceeds of real estate dispositions of retained properties while incurring no in-house expenses and only $455,000 (or 2.17% of gross proceeds) in fees and commissions paid to the firm of Van Horn & Dolan. However, more than $17 million of these proceeds derived from two condemnations by the State of New Jersey (one still in litigation) and a sale to the Port Authority of New York and New Jersey, transactions which the GPs argue are “not representative”. In sales to private purchasers, Van Horn’s commissions ranged from 6% to 10%, a range that Van Horn testified to be “typical” in sales of vacant land in New Jersey. Lower commissions were incurred with respect to the more expensive properties. While CNJ’s experience in disposing of its retained real estate is impressive, this is another instance where CNJ has failed to provide us with an alternative figure to substitute for that supplied by the GPs. CNJ has not shown what proportion of its conveyed properties would, upon liquidation in the absence of the Rail Act, have been condemned by public authorities at little or no selling expense, or how much or how little litigation expense would have been incurred. Without an informed estimate from CNJ, we apply the figure of 10% as the best available calculation of the expense attributable to brokers’ commissions, marketing agents’ fees, and salaries of in-house sales personnel.
(b) Post-1977 In-House Disposition Costs. The GPs would have us deduct $8.7 million in “additional management costs” that they estimate would be incurred in completing “the disposition of CNJ’s conveyed real estate” in the fourteen years after May 81, 1977, the date by which all facilities and equipment would have been sold. GPs Opening Brief 0-19. Discounted to present value, this deduction would amount to about $2.5 million as of April 1, 1976. Testimony of Russell F. Murphy, a consultant and former USRA Director of Financial Analysis, reveals that this deduction reflects the estimated cost of legal, accounting, finance, and personnel departments attributable to CNJ’s conveyed real estate after May 1977, Murphy Testimony, February 16, 1982, at 24, but does not include expenses of the Trustee and his staff, an item for which the GPs concede no deduction should be made, id. at 46b n. 3. In setting this amount Murphy sought to avoid duplicating Tesh’s calculation of the salaries and expenses of an in-house staff assisting in the sale of real estate included in his deduction of 10% from the proceeds of developable properties and 15% from those of abutter properties. Still, "his result is a top-heavy setup of four management departments, in addition to the Trustee and his staff, lingering on for fourteen years to supervise a limited number of in-house personnel charged with assisting CNJ’s marketing agent and independent brokers in disposing of a dwindling supply of real estate. We conclude in Section III.B.3, infra, that 55% of the real estate would have been sold in the first two years, 85% by the end of the fifth year, and the rest by the end of the eighth year of disposition. We are convinced that ample provision has been made by Tesh for all in-house expenses that would have been incurred by CNJ in disposing of the small balance of its conveyed real estate remaining after the fifth year. The few remaining in-house personnel could surely have reported directly to the Trustee, and their compensation could have been handled by his staff. Murphy’s additional deduction for “management costs” through the fifth year is considered and substantially reduced in the portion of the opinion dealing with liquidation organization and disposition costs. All such costs after the fifth year are disallowed.
(c) Surveys, Transfer Taxes, and Attorneys’ Fees. On behalf of the GPs, Tesh estimated that an additional 2% should be deducted from gross real estate proceeds to account for “the seller’s customary share of closing costs, such as transfer ... taxes and closing attorney’s fees, as well as the costs of performing surveys, as necessary”. Tesh Testimony, February 16, 1982, at 18. CNJ reports that in selling almost $21 million worth of retained real estate it has expended only $140,000 (or about 0.7% of total proceeds) in legal costs, exclusive of a pending condemnation case, nothing for surveys or title searches, and nothing for transfer taxes. CNJ argues that surveys, like title searches, are ordinarily paid for by the buyer in the New Jersey real estate market, and that transfers by a bankruptcy Trustee are exempt from the 0.35% New Jersey transfer tax. Tesh admitted in deposition that he had assumed CNJ was not in bankruptcy and hence was liable to pay the transfer tax. 2 CNJ App. at 1641. It seems more likely that CNJ would have been in reorganization at the relevant time, and thus would qualify for the exemption granted to transfers by “a receiver, trustee in bankruptcy or liquidation, or assignee for the benefit of creditors” in N.J.S.A. 46:15-10(g) (1982). We find therefore that no transfer taxes would have been incurred, that some of the cost of surveys would have been reimbursed by buyers, that closing attorneys’ fees would have been incurred, and that legal fees would have been incurred in connection with condemnation, for a combined deduction of 1% of gross proceeds.
3. Discount to Present Value
We here discuss whether the proceeds of CNJ’s real estate estimated to be realized after April 1, 1976, should be discounted to their value as of that date, and, if so, by how much. We shall do this under three principal subheads:
(a) Should there be such a discount as a matter of principle?
(b) If so, when and in what amounts would the proceeds of the sale of real estate have been realized?
(c) If so, to what extent is the amount otherwise deductible in order to arrive at the present value of future proceeds offset by appreciation from the appraised values as of April 1, 1976?
We shall also deal briefly with related matters such as real estate taxes, other holding costs and interim income during the holding period.
(a) The Need to Discount. Admittedly, the normal method of finding the market value of a parcel of real estate being condemned is to determine its “market value” on the date of taking, usually on the basis of extrapolation from sales of comparable parcels. No discount is taken for the fact that in the real world the owner will often spend some months finding buyers and negotiating the best price even if only one parcel is being sold. The typical appraisal methodology avoids discounting by simply assuming that a willing buyer is available as of the date of the condemnation. The cases do not explain why such an assumption is made. Perhaps the matter is regarded as de minimis, since the prospective condemnee would often have started his hypothetical quest for purchasers and begun negotiations with them before the actual taking and sale could have occurred almost immediately thereafter. Perhaps the thought is that prediction of the actual sale date for a single parcel is beyond the scope of reasonable estimate. Perhaps it is deemed unfair that an often unwilling condemnee should be penalized for the time it would have taken him to find a purchaser. In any event we have been cited to no instances in which a court has considered the application of a discount in cases of this sort.
Here all parties concede that CNJ could not have sold the more than 3000 acres of its conveyed real estate as one parcel except perhaps to a wholesaler who would have broken up the tract into parcels, such as the bulk buyer hypothesized by the I.C.C. in the remand in the New Haven Inclusion Cases, supra, 334 I.C.C. at 60-61; 399 U.S. at 468-73, 90 S.Ct. at 2097-2100. The GPs contend the real estate would have been sold as 364 parcels; CNJ estimates it would have been sold as 962. Both sides agree that the process would have consumed some years, and the GPs argue that the normal implicit assumption of a willing buyer in existence as of the condemnation date is inapplicable. The GPs contend that under such circumstances the proper course is to estimate the amount of sales in each year, add interim income and appreciation if any to the estimated date of sale, deduct taxes, other holding expenses, and selling costs to the same date, and then discount the result to value as of April 1, 1976.
This seems indeed to be the accepted method of appraisal in the case of large tracts of raw land which are proposed to be subdivided and sold. See United States v. Iriarte, 166 F.2d 800, 804 (1st Cir.), cert. denied, 335 U.S. 816, 69 S.Ct. 36, 93 L.Ed. 371 (1948); Drakes Bay Land Co. v. United States, 459 F.2d 504, 510-11 (Ct.Cl.1972); United States v. 100 Acres of Land, 468 F.2d 1261, 1266 (9th Cir.1972), cert. denied, 414 U.S. 822, 94 S.Ct. 119, 38 L.Ed.2d 54 (1973); American Institute of Real Estate Appraisers, The Appraisal of Real Estate 64-65, 148 (7th Ed.1973); College of the Fellows of the American Society of Appraisers, The Applicable Method for Valuation of Undeveloped Land for Which There Is No Current Market Value, 1975 ASA Valuation 88. A good deal of CNJ’s land would have required much time and work to be sold for the projected highest and best uses. As to such land there would seem to be no question that the discounting process proposed by the GPs is required. The deferral in the receipt of payment is as much a cost as expenditures required to place the property in its highest and best use, which clearly must be taken into account, see 4 Nichols, Eminent Domain § 12.3142[1], [2] (Rev. 3d ed. 1981); Norvell, Property, 35 N.Y.U.L.Rev. 1494, 1500 (1960). However, we agree with the GPs that this process should extend not only to the indeterminate amount of land requiring extensive work in preparation for sale but to all CNJ’s real estate.
The eases stress that where the taking is of many parcels, the sale of which would stretch over several years, it is inappropriate to make an award on the basis of summing the market values of each on the date of the taking. See Morton Butler Timber Co. v. United States, 91 F.2d 884, 888 (6th Cir.1937); United States v. Cunningham, 246 F.2d 330, 333 (4th Cir.1957); United States ex rel. TVA v. Phillips, 50 F.Supp. 454, 456 (N.D.Ga.1943); City of Caldwell v. Roark, 92 Idaho 99, 437 P.2d 615, 617-18 (Idaho 1968). CNJ cites no contrary authority. It relies rather on the statement of its witnesses Hannoch and Heaney, 2 CNJ App. at 19, corroborated by that of Professor Stewart C. Myers, 2 CNJ App. at 1166, that “the value of real estate is created by the anticipation of future benefits and the appraisal seeks to reduce those anticipated future benefits to their present value” and that “[t]he comparable sales utilized in the appraisal process provide a measure of the present value of all anticipated future benefits with respect to the given property which was the subject to the sale.” We do not doubt that this is true with respect to what a buyer would pay for any particular parcel; what it ignores is that when condemned property consists of many parcels, the condemnee would not receive the payments until some time after the condemnation date. In other words, the Hannoch-Heaney analysis would be valid only if they had been able to predict that sales prices would have risen sufficiently over their appraisal values to counteract the factor of time lag in receipt of the proceeds. This also is the answer to CNJ’s seemingly pertinent question why a parcel in its hands should have a fair value less than it would if owned by another. CNJ owned not simply one parcel but an immense tract incapable of sale as such, and it is chargeable with the time lag necessary to effect the sales of the many parcels in the tract.
Such precedents as there are with respect to railroads support the GPs. The most important are the New Haven Inclusion Cases, culminating in the Supreme Court’s decision reported in 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970), which, although not condemnation cases, were treated by all concerned as if they were. In these hotly contested proceedings neither the parties, the Interstate Commerce Commission, nor the three reviewing courts, in one of which a member of this court participated, ever questioned that it was necessary to divide the property into parcels, estimate the amounts that would be received over a period of years, and then discount for the time that this would take, 331 I.C.C. 643, 663 (1967). The ICC also followed a practice of discounting in Chicago & North Western Transp. Co. — Abandonment between Ringwood, IL and Geneva, WI, 363 I.C.C. 956, 960-61 (1981), affirmed without discussion of this point in Chicago & North Western Transp. Co. v. United States, 678 F.2d 665 (7th Cir.1982).
The CNJ advances a special contention with respect to the GPs’ applying a discount to the $2,091,220 base value of land in 9 counties where such values were stipulated. The stipulation stated that the figures “represent