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Issues in the valuation of contaminated property.



Valuation of contaminated contaminated,
v 1. made radioactive by the addition of small quantities of radioactive material.
2. made contaminated by adding infective or radiographic materials.
3. an infective surface or object.
 property poses a challenge to scientific and engineering knowledge, to economic analysis and appraisal methods, and to the very definitions of value that underlie our legal system. This article begins with a conceptual framework For the concept in aesthetics and art criticism, see .

A conceptual framework is used in research to outline possible courses of action or to present a preferred approach to a system analysis project.
 to analyze the effect of contamination on property value. This is followed by a general valuation model appropriate to a contaminated, income-producing property. The model clarifies the definition of stigma and shows how the effect of stigma on the value of a property changes over time as contamination is discovered and subsequently remediated. The remainder of the article addresses specific measurement techniques and a number of issues that arise in the definition of value of contaminated property, particularly in the condemnation and ad valorem tax Ad Valorem Tax

A tax based on the assessed value of real estate or personal property. In other words ad valorem taxes can be property tax or even duty on imported items. Property ad valorem taxes are the major source of revenues for state and municipal governments.
 contexts.

HOW CONTAMINATION AFFECTS VALUE

The effect of contamination on property value must be examined within a much broader framework than might at first be thought. Figure 1 presents such a framework and shows that the value of contaminated property ultimately depends on

* The extent of the contamination

* The way in which the contamination is perceived or evaluated

* The remediation and indemnification Indemnification

Used in insurance policy agreements as to compensation for damage or loss. In the context of corporate governance, Director Indemnification uses the bylaws and/or charter to indemnify officers and directors from certain legal expenses and judgements resulting from
 responses to the contamination

* The effect of these responses on utility and marketability

* The appropriate standard of value

In evaluating a contaminated property, the first issue centers on the nature of the problem. Is the property physically contaminated? That is, is it affected by hazardous substances present in, on, or near the subject property in measurable quantities? Perhaps the property is affected by nonphysical contaminants such as noise or visual pollution, which can also influence value. The extent of the contamination (e.g., its toxicity, persistence, flammability flam·ma·ble  
adj.
Easily ignited and capable of burning rapidly; inflammable.



[From Latin flamm
, friability fri·a·ble  
adj.
Readily crumbled; brittle: friable asbestos insulation.



[Latin fri
), must then be documented.

Once the nature of the contamination is clarified, how it is perceived or evaluated by relevant segments of the public must be understood. These segments include, at a minimum, the regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest
regulatory agency

administrative body, administrative unit - a unit with administrative responsibilities
 as well as the participants in the market in which the value of a subject property is determined. Their perceptions are relevant because it is not actual contamination but the perception of the contamination by the market (or regulators) that is of concern.

Three major areas of response must then be considered. To what extent has the contamination affected the financeability of the property? How may the contamination be remediated? For which of the risks associated with the property may indemnification be obtained? In the case of each of these questions, issues of timing, costs, and liability are paramount.

Once financing, remediation, and indemnification questions are answered, it will be possible to determine the utility and marketability of a property. For example, is it leasable in its contaminated condition? If so, at what rates can it be leased? Can it be marketed in its "as is" condition? Considerations of utility and of marketability will in turn allow an assessment of a property's value-in-use and value-in-exchange (i.e., market value).

This framework focuses attention on the following factors that are unique to contaminated properly valuation.

* The high degree of reliance on sophisticated technical/scientific analysis of the problem and of the ways in which it can be remediated

* The importance of the "perceived reality" in determining value

* The enhanced risk and uncertainty, with their attendant impacts on the cost of attracting capital

* The potential for significant divergence divergence

In mathematics, a differential operator applied to a three-dimensional vector-valued function. The result is a function that describes a rate of change. The divergence of a vector v is given by
 of value-in-use from value-in-exchange

A GENERAL VALUATION MODEL

The seminal article by Peter Patchin, "Valuation of Contaminated Property,"(1) outlines the importance of remediation costs, indemnification, and stigma in valuing contaminated property, showing how capitalization and yield rates can be adjusted to account for the effects of contamination on the financeability and marketability of property. In "Contaminated Properties--Stigma Revisited,"(2) Patchin further defines stigma and discusses how it can best be measured. These contributions were followed by two important articles by Bill Mundy Dr. Bill Mundy is widely recognized as one of the leading authorities in real estate appraisal in the United States[1]. Formerly the Land Economist for Weyerhaueser Corporation, in 1976 he founded Mundy Associates, now known as Greenfield Advisors. . In "Stigma and Value,"(3) he focuses on real and perceived risk in determining the stigma attached to a contaminated, or previously contaminated, property. In "The Impact of Hazardous Materials on Property Value,"(4) a generalized theory is presented of how the value of a contaminated property would change over time as uncertainty with respect to its condition changes and as it is, in fact, cleaned up. Additional insight is provided by Richard Neustein in "Estimating Value Diminution Taking away; reduction; lessening; incompleteness.

The term diminution is used in law to signify that a record submitted by an inferior court to a superior court for review is not complete or not fully certified.
 by the Income Approach,"(5) who shows how the income impairment of contaminated property and the risk premium necessary to attract capital to it combine to determine the value discount of a contaminated property relative to an uncontaminated property.

These ideas have been developed in a generally consistent fashion and ultimately express the general proposition that value reflects an anticipated future stream of benefits discounted at a return necessary to attract investors to that opportunity. In the case of contaminated property, both are affected. The future benefit stream is depressed and required returns increase. As emphasized by Mundy,(6) these effects occur over time and the pattern they establish has to be accounted for in establishing the value of, or damages to, the impaired property.

The model outlined in the next section makes an important clarification with respect to the definition of stigma. The analysis offered here argues that the value of contaminated property differs from the value of uncontaminated property for one of two reasons--direct costs or stigma. Direct costs refer to any effect of the contamination on the net cash flow to the owner. These can stem from a variety of causes including lowered effective income flows, remediation costs, and insurance costs. Stigma refers to impacts on value stemming from the increased risk associated with the property and the effect of this on marketability and financeability.

As such, stigma does not refer exclusively to the difference between the value of an uncontaminated property and the value of an otherwise identical, but once contaminated, property that is fully remediated and indemnified. Stigma is a much more general concept and refers to the discount, beyond direct costs, required to compensate investors or lenders for the risks associated with the property. Stigma can exist, therefore, at any time after contamination is discovered--before remediation, during remediation, or after remediation. In fact, Mundy argues that uncertainty, and therefore stigma, are likely to be largest soon after contamination is discovered when little may be known about its extent or the true cost of its remediation.

The model

In general terms, the relationships can be defined as follows:

|Mathematical Expression A group of characters or symbols representing a quantity or an operation. See arithmetic expression.  Omitted~ and |Mathematical Expression Omitted~

where

|V.sub.u~ = Value uncontaminated

|V.sub.c~ = Value contaminated

NOI NOI Net Operating Income
NOI Notice of Intent
NOI Nation of Islam
NOI Notice of Inquiry
NOI Neuro Orthopaedic Institute
NOI New Organizing Institute
NOI Notice of Interest
NOI No Offense Intended
NOI National Olympiad in Informatics
 = Net operating income Operating Income

The profit realized from a business' own operations.

Notes:
This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit.
 of the property uncontaminated in year t

LI = Lost income resulting from contamination in year t

R = Remediation costs resulting from contamination in year t

I = Indemnification costs resulting from contamination in year t

|i.sub.u~ = Market discount rate appropriate to an uncontaminated property

|i.sub.c~ = Risk-adjusted discount rate Risk-adjusted discount rate

The rate established by adding a expected risk premium to the risk-free rate in order to determine the present value of a risky investment.
 appropriate to a contaminated property

The variables necessary to estimate |V.sub.c~ are each discussed briefly as follows:

* Net operating income (NOI)--The starting point Noun 1. starting point - earliest limiting point
terminus a quo

commencement, get-go, offset, outset, showtime, starting time, beginning, start, kickoff, first - the time at which something is supposed to begin; "they got an early start"; "she knew from the
 of the valuation is the anticipated net income stream of the property in its uncontaminated condition.

* Lost income (LI)--In general, lost income can be the result of diminished market demand for the property that shows up in lower rents or lower occupancy. It can also result from physical interference of contamination with use of the property, or from the interference of testing, remediation, or monitoring with use of the property. Reductions in income from these causes can be expected to differ before remediation, during remediation, and after remediation.

* Remediation (R)--A second cost associated with a contaminated property is the cost of remediation. This can include costs related to testing, cleanup, disposal, and subsequent monitoring.

* Indemnification (I)--A property owner usually seeks indemnification with respect to the effectiveness of the remediation process. He or she may also seek indemnification from any costs or liability from previously unidentified contamination of the property. Fortunately, insurance policies are increasingly available in the market which, after appropriate testing, will insure against previously undisclosed contamination. The ERIC Group, Inc., in Englewood, Colorado Englewood is a city in Arapahoe County, Colorado, USA. As of 2005, the city is estimated to have a total population of 32,350.[5] It is part of the Denver-Aurora Metropolitan Area. , for example, specializes in insuring against environmental risk.

* Risk-adjusted discount rate (|i.sub.c~)--The intrinsic value Intrinsic Value

1. The value of a company or an asset based on an underlying perception of the value.

2. For call options, this is the difference between the underlying stock's price and the strike price.
 of any investment can be measured by the cash flows it is expected to generate discounted at a rate of return commensurate with the risk of those cash flows being achieved. The cash flows of contaminated property will often be perceived to be less certain, as a result of concerns that include

* Adequacy of projections of remediation costs and timing

* Changes in technology or regulation that affect the property or its cleanup

* Impact of contamination/remediation on absorption and NOI

* Potential for legal costs and liabilities

As Mundy emphasizes,(7) the uncertainty related to the cash flows of a specific property will vary over time. Typically, uncertainty is highest when a problem is first discovered. As engineering studies are completed and the nature and extent of the contamination is ascertained, uncertainty decreases. This uncertainty continues to decrease as remediation strategies are evaluated and implemented. Finally, when remediation and indemnification are completed, further decreases will occur. The risk-adjusted discount rate (|i.sub.c~) must ultimately reflect the way in which the market evaluates these risks over time.

An example

These relationships can be demonstrated by considering the simple example illustrated in Tables 1, 2, and 3. Assume that a property is contaminated and that it will take three years to prepare the remediation plan. Remediation then takes place over the three-year period from years 4 to 6.

TABULAR tab·u·lar
adj.
1. Having a plane surface; flat.

2. Organized as a table or list.

3. Calculated by means of a table.



tabular

resembling a table.
 DATA OMITTED
Summary of Key Factors
Net Operating Income (NOI)
* Uncontaminated (per
year)                       $200,000
Lost Income (LI)
* Preremediation (per
year, years 1-3)            $ 10,000
* During remediation
(per year, years 4-6)       $ 25,000
* Postremediation (per
year, years 7+)             $  5,000
Remediation (R)
* Planning costs
preremediation, (per
year, years 1-3)            $  5,000
* Remediation costs
(per year, years 4-6)       $100,000
* Postremediation
onitoring (per year,
years 7+)                   $  5,000
Indemnification
* Postremediation (per
year, year 7+)              $  4,000
Discount Rate
* Uncontaminated                  12%
* Contaminated (before
remediation)                      20%
* Contaminated (during
remediation)                      17%
* Contaminated (after
remediation)                      13%
Inflation                          4%
Capitalization rate
(uncontaminated)                   8%
Capitalization rate
(uncontaminated, after
remediation)                       9%


It is further assumed that even after remediation and indemnification, the market requires a permanent risk premium of 1% because of the history of the property. Table 1 shows the relevant cash flows for the property in its contaminated state.

The year 11 net cash flow of $286,338 is then capitalized at 9%, indicating a value of $3,181,533 assumed to occur at the end of year 10. The present value of the cash flows is then determined by discounting them at the variable rate |i.sub.c~ as shown in Table 2.

The value of the property in its contaminated condition is only about $1.5 million based on the lost income, remediation costs, and indemnification costs together with the yield premium necessary to compensate an investor for the uncertainties associated with these projections.

If the value uncontaminated is calculated from Table 2 by capping year 11 NOI at 8% and then discounting the cash flows at 12%, a value of $2.6 million is indicated. This suggests value diminution caused by contamination of about $1.1 million. The following sections disaggregate See disaggregated.  this effect into two components--stigma and direct costs.

Stigma defined

Stigma is defined here as the reduction in value caused by contamination resulting from the increased risk associated with the contaminated property. In the previous analysis, the considerations of risk as a result of uncertainties with respect to the projected cash flows and future liabilities are all summarized by |i.sub.c~. If we define |delta~|i.sub.c~ = |i.sub.c~ - |i.sub.u~ as the yield premium necessary to compensate for the risk of the contaminated property, there will be stigma effects on value as long as |delta~|i.sub.c~ is positive.

Figure 2 shows the pattern of |delta~|i.sub.c~ assumed in the example. Risk is assumed to be highest in the early, preremediation period. Once remediation begins, it can be assumed that the contractor is bonded for performance and that the risk associated with the property diminishes. After remediation is complete, the property has been certified "clean," and the owner is properly indemnified against future liability, the risk falls still further. It is assumed, however, that the market will see some modest, continuing risk associated with the property because of its history.

Illustrating this concept with the previous example, stigma (S) will TABULAR DATA OMITTED be defined formally as:

|Mathematical Expression Omitted~
TABLE 3 Stigma: Change in Value Resulting from Risk
            Cash Flows
Year    NOI - (LI + R + I)   |i.sub.u~   |i.sub.c~
1           $  192,400          12%         20%
2           $  200,096          12%         20%
3           $  208,100          12%         20%
4           $   87,739          12%         17%
5           $   91,249          12%         17%
6           $   94,899          12%         17%
7           $  244,763          12%         13%
8           $  254,554          12%         13%
9           $  264,736          12%         13%
10          $3,456,864          12%         13%
Present value of cash flows
@ |i.sub.u~ = $2,185,097
Present value of cash flows
@ |i.sub.c~ = $1,518,638 (see Table                                     2)
Stigma $666,459


Table 3 shows that the impact of risk, that is, the impact of discounting the cash flows at |i.sub.c~ as opposed to |i.sub.u~, is $666,459. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently
, as the contaminated property is valued at the beginning of year 1, $666,459 of its loss in value is a result of stigma.

This definition of stigma allows the isolation of the other component of value diminution caused by contamination, which is referred to as the direct costs (DC) of contamination.

|Mathematical Expression Omitted~

The first term is the value uncontaminated while the second term is the contamination-affected cash flows discounted at a market rate, not a risk rate. As shown in Table 3:

Present value of NOI - (LI + R + 1) at |i.sub.u~ = $2,185,097, and

Present value of NOI at |i.sub.u~ = $2,600,000

Direct costs of contamination = $414,903

In other words, $414,903 of the value diminution is caused by changed cash flow from the contaminated property and $666,459 is caused by increased risk. It follows that:

|V.sub.u~ = |V.sub.c~ + DC + S or

$2,600,000 = $1,518,638 + $414,903 + $666,459

Changes in value, direct costs, and stigma over time

After a contaminated property at the beginning of year 1 has been valued and the relationship between |V.sub.u~, |V.sub.c~, DC, and S has been shown, it is instructive to observe how these value components change if the property is valued at the beginning of years 2, 3, or 4. Figure 3 shows the three components of value diminution and how they can be expected to change over time. It should be noted that stigma continues to be a residual concept (i.e., the risk-related loss in value after direct costs are accounted for), but that stigma is significantly associated with the highly uncertain, preremediation stages of a property. As remediation is begun, |V.sub.c~ has risen to about $1.9 million from $1.5 million in year 1 and to $2.7 million after remediation.

SPECIFIC MEASUREMENT TECHNIQUES

The previous section outlines an approach to the valuation of contaminated property based on the difference between the value of the property uncontaminated and the various costs necessary to make it equivalent to a property that has never been contaminated. The usefulness of this approach depends on the extent to which it is possible to measure loss of income caused by contamination, the timing and cost of remediation, costs of indemnification, and increased cost of capital as a result of the risks associated with contaminated property. Frequently, each of these costs is defined well enough that contaminated property can be usefully valued.

Important circumstances may occur, however, that make other measurement techniques more appropriate. In general, these involve direct valuation of a property in its as is contaminated state. Two approaches are discussed here. The first is regression analysis In statistics, a mathematical method of modeling the relationships among three or more variables. It is used to predict the value of one variable given the values of the others. For example, a model might estimate sales based on age and gender. , which is effectively a modification of the sales comparison approach The sales comparison approach (SCA) is one of the three major groupings of valuation methods, called the three approaches to value, commonly used in real estate appraisal. . The second is the contingent valuation Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination. While these resources do give people utility, certain aspects of them do not have a market price as they are not  approach.

Regression analysis

One of the first consequences of contamination is impaired marketability. The difficulty of measuring market response is further complicated by the unique circumstances that may accompany each individual property. Conditions relating to relating to relate prepconcernant

relating to relate prepbezüglich +gen, mit Bezug auf +acc 
 underground storage tanks An Underground Storage Tank (UST), in United States environmental law, is a tank and any underground piping connected to the tank that has at least 10 percent of its combined volume underground.  or asbestos may occasionally be sufficiently common that traditional sales comparison techniques can be used to directly value properties in their contaminated state, but even this is rare. More usually, sufficient market information does not exist to allow the use of the sales comparison approach. An important exception exists, however, with respect to the impacts of hazards on residential property.

In an increasingly large number of valuation arenas, it is necessary to understand how an environmental condition has affected residential property value. Such conditions include overhead electric transmission lines, airport noise, freeway noise, air quality, odor, insect swarms, view impairment, waste dumps DUMPS

a lethal inherited disorder of Holstein cattle that causes infertility. The name is an acronym of Deficiency of Uridine MonoPhosphate S
, nuclear waste dumps or transport routes, gas pipelines, accident or spill sites, surface or groundwater contamination, and radon. In these cases, the question is whether there is any evidence of systematic effect of the identified contaminant contaminant /con·tam·i·nant/ (kon-tam´in-int) something that causes contamination.

contaminant

something that causes contamination.
 or hazard on property values.

Because of the relatively large number of residential transactions, this question is frequently amenable to statistical investigation using multiple regression Multiple regression

The estimated relationship between a dependent variable and more than one explanatory variable.
 analysis. This effectively allows the different elements of a conventional sales adjustment matrix to be estimated based on the useful ability of regression analysis to isolate the effects of one variable independent of the effects of other variables. These techniques are the foundation for mass appraisal models as well as for the increasingly large body of statistical analysis carried out by economists and appraisers. Representative applications of this technique include Zeiss and Atwater(8) as well as Smith and Desvouges(9) applied to waste disposal sites; Gamble and Downing(10) applied to nuclear power plants; Nelson(11) applied to airport noise; Kinnard and Geckler(12) applied to radioactive contamination Radioactive contamination is the uncontrolled distribution of radioactive material in a given environment. The amount of radioactive material released in an accident is called the source term. ; and Kirshner and Moore(13) applied to water quality.

In each of these cases, the goal is to first identify those characteristics of properties, of their locations and neighborhoods, of times of sale, and of other important variables that may affect value.

Once these have been determined, it is possible to statistically investigate whether proximity to a hazard, to a point-source emitter One side of a bipolar transistor. See collector.  of pollution, to noise, or to other sources of contamination are systematically associated with value. These techniques are particularly relevant in litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.
 when property value diminution is alleged with respect to residential property. Because property value diminution claims are arising more frequently around Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA CERCLA Comprehensive Environmental Response, Compensation, and Liability Act (aka SuperFund) ) and other high-profile contaminated sites, regression-based attempts to directly measure the consequences of contamination or hazard on market value will become increasingly common.

Contingent valuation methodology

Contingent valuation methodology (CVM) constitutes a second direct approach to valuing property in its as is contaminated state. CVM has become increasingly prominent in the context of natural resource damage claims under CERCLA and has been recognized as an appropriate measure of value when other, more traditional approaches do not work.(14)

As Patchin remarks(15) there may be more relevant information associated with transactions that do not occur than with those that do. Appraisers have long recognized the relevance of careful interviews with market participants The term market participant is used in United States constitutional law to describe a U.S. State which is acting as a producer or supplier of a marketable good or service. When a state is acting in such a role, it may permissibly discriminate against non-residents.  in developing their opinions. In the context of contaminated property, interviews of informed buyers, sellers, brokers, and lenders frequently become critical because of the absence of relevant transaction data. CVM pushes these techniques forward in two important respects. First, it uses formal rather than informal procedures to select interviewees, to determine the number of interviewees, and to set other interview conditions. This allows subsequent statements to be made with respect to the reliability of the statements. Second, much effort has been expended ex·pend  
tr.v. ex·pend·ed, ex·pend·ing, ex·pends
1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend.

2.
 to develop questioning techniques in terms of a hypothetical choice that will have maximum reliability for actual choices. The essence of this work is to make the hypothetical as real and understandable as possible for the respondent. Research in this area is well summarized by Cummings et al.(16)

CVM can be appropriately applied in real property cases that involve contamination. A recent case in point involved a master-planned community centered around a four-acre lake. Expensive lots had been sold around the lake and equally expensive homes built to enjoy the view of snow-capped Snow´-capped`

a. 1. Having the top capped or covered with snow; as, snow-capped mountains s>.

Adj. 1.
 mountains across the open water. Unfortunately, there was little water. The lake leaked and frequently managed to hold only enough water to breed huge swarms of sewer midges midges

see ceratopogonidae and culicoides.
, expose an unattractive lake bed, and generate a noxious noxious adj. harmful to health, often referring to nuisances.  odor. The intensity of the landowners' ire was substantial and the developer continually assured the residents that the problem would be rectified rectified

refined; made straight.
. After five years, and little progress, suit was brought by the landowners.

Some limited market evidence did exist suggesting that damages to the landowners were small or nonexistent non·ex·is·tence  
n.
1. The condition of not existing.

2. Something that does not exist.



non
. It was clear, however, that the apparent ability of the properties to maintain their value was illusory il·lu·so·ry  
adj.
Produced by, based on, or having the nature of an illusion; deceptive: "Secret activities offer presidents the alluring but often illusory promise that they can achieve foreign policy goals without the
. Landowners were resolute res·o·lute  
adj.
Firm or determined; unwavering.



[Middle English, dissolved, dissolute, from Latin resol
 that, despite the fact they were being damaged each year, they would not capitulate ca·pit·u·late  
intr.v. ca·pit·u·lat·ed, ca·pit·u·lat·ing, ca·pit·u·lates
1. To surrender under specified conditions; come to terms.

2. To give up all resistance; acquiesce. See Synonyms at yield.
 and discount their property. They were determined to hold out and find a solution to the problem with the lake. In fact, there were even a few buyers who apparently believed that the situation was temporary and bought at precontamination prices. This, however, in our view could not be considered as evidence of the absence of damages.

To demonstrate this, a survey of knowledgeable recreational property brokers was conducted. They were provided a set of visual materials that clearly illustrated the distinction between the impaired and the unimpaired Adj. 1. unimpaired - not damaged or diminished in any respect; "his speech remained unimpaired"
undamaged - not harmed or spoiled; sound

uninjured - not injured physically or mentally
 condition and were asked their opinion of the discount required to sell the impaired property assuming permanent impairment. They found this an easy hypothetical to deal with, as did the jury. The brokers concluded that a typical impaired property would have to be discounted by $40,000 if it were to be permanently located next to the malfunctioning mal·func·tion  
intr.v. mal·func·tioned, mal·func·tion·ing, mal·func·tions
1. To fail to function.

2. To function improperly.

n.
1. Failure to function.

2.
 lake. If a 10% discount rate is applicable to the future stream of benefits (or disamenities) received from this kind of property, the implied, annualized annualized

Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared.
 damages are $4,243 per year assuming the property has a 30-year life. This estimate can then be applied to the number of years each property owner had been affected, independent of whether the lake might be repaired in the future.

In this instance, the market evidence was ambiguous and counter-intuitive, while the CVM evidence was straightforward, easy to understand, and probably as good a measure as could be obtained of the loss of enjoyment suffered by the landowners.

ISSUES

The preceding sections show that although contamination presents both conceptual and empirical challenges, the valuation profession is making progress on both fronts. Perhaps the most perplexing per·plex  
tr.v. per·plexed, per·plex·ing, per·plex·es
1. To confuse or trouble with uncertainty or doubt. See Synonyms at puzzle.

2. To make confusedly intricate; complicate.
 issue for appraisers is development of a clear definition of the value concept they are trying to estimate. Confusion with respect to a value definition is well illustrated both in the context of condemnation of contaminated property and in the context of the assessment of contaminated property for purposes of ad valorem According to value.

The term ad valorem is derived from the Latin ad valentiam, meaning "to the value." It is commonly applied to a tax imposed on the value of property.
 taxation. In both cases, much of the problem stems from the fact that with contaminated property there can be a large disparity between value-in-use and value-in-exchange.

Condemnation of contaminated property

Condemnation actions condemnation action n. a lawsuit brought by a public agency to acquire private property for public purposes (schools, highways, parks, hospitals, redevelopment, civic buildings, for example), and a determination of the value to be paid.  frequently involve properties adjacent to transportation routes. As a result, condemnation actions involving contaminated property are frequent, particularly within larger metropolitan areas. In a worst-case scenario worst-case scenario nSchlimmstfallszenario nt , assume a landowner owns an improved commercial property of 20,000 square feet on two acres of land. Assume further a zero-inflation environment in which the property generates $100,000 of NOI annually and that similar properties have sold at cap rates of 10%, suggesting a value of $1 million. The owner has just retired and is living off the cash flow from his property. He has no debt on the property and no inclination to sell it.

Unexpectedly, the local mass transit mass transit, public transportation systems designed to move large numbers of passengers. Types and Advantages


Mass transit refers to municipal or regional public shared transportation, such as buses, streetcars, and ferries, open to all on a
 authority routes a new subway line across the property that requires taking the entire property. As part of the acquisition process, test drilling on the property reveals serious soil and groundwater contamination from a previous use of the land unknown to the landowner. The previous user no longer exists. The condemnor receives estimates from its environmental and engineering consultants that remediation will cost $1.2 million. Based on this, they conclude the property has zero market value and proceed to take the property with offered compensation of zero dollars. If this property had to face a true market test, the seriousness of its contamination may well indicate zero market value.

There is more in the bundle of fee simple property rights, however, than the right to sell. There are the right to use and the right to lease. What are those worth? Assume the landowner contacts an environmental attorney, the local regulatory body, and environmental engineers, and they conclude that it is highly unlikely that remediation would be required on the site for a period of 10 years. Further, experts indicate that the remediation can be carried out for $600,000 to a standard sufficient to sell the property. If the next most attractive investment with similar risk characteristics for the landowner yielded 10%, the center can be valued from the condemnee's perspective. Assuming $100,000 NOI annually for 10 years, with $600,000 of remediation in year 10, all discounted at 10%, and then a sale in year 11 with a cap of 10%, with the reversion reversion: see atavism.  discounted at a rate of 10%, the value to the condemnee is about $768,674. The condemnor and the condemnee obviously have different perspectives on value because their remediation programs have different timing and different costs.

Case law and legislative statute create a supposition that favors market value as the measure of just compensation. As Jay Dushoff and Denise Henslee,(17) among others, have argued, however, it is hard to escape the implication of the Fifth Amendment that the landowner be made whole. To make this landowner whole, compensation of $768,674 is sought. This obviously does not leave the condemnor very happy. This $768,674 is for the site as is so $1.2 million still has to be spent to clean it. The result is a total bill of about $2 million for a property everyone thought had a market value of $1 million in an uncontaminated state.

There is no relevant case law to the authors' knowledge on this issue, although several cases are moving forward in the courts. Condemnors are well served to recognize that the condemnee may have a legitimately different perspective on value from their own. In many cases the divergence will not be great and accommodation can be easily reached. When the divergence is great, however, decisions need to be made with full understanding of the differences between the points of view of the two parties.

Valuation of contaminated property for ad valorem taxation

Unlike eminent domain eminent domain, the right of a government to force the owner of private property sell it if it is needed for a public use. The right is based on the doctrine that a sovereign state has dominion over all lands and buildings within its borders, which has its origins in , for which there is little judicial guidance at this time, the tax courts have a broadening (if not enlightening en·light·en  
tr.v. en·light·ened, en·light·en·ing, en·light·ens
1. To give spiritual or intellectual insight to:
) record of valuing contaminated property for the purposes of ad valorem taxation. The record has been well summarized in the writing of Gladstone,(18) Dunmire,(19) and McMurray and Pierce.(20)

The issues here, while they include the value-in-use and value-in-exchange questions discussed previously in the context of eminent domain, go on to add a significant emphasis on "liability or fault" as part of the determination of value. The courts are understandably reluctant to sanction tax reductions for parties that have fouled their own property, but this has put them in a difficult position with respect to owners who clearly have no responsibility for the contamination. Gladstone characterizes the courts as trying mightily might·i·ly  
adv.
1. In a mighty manner; powerfully.

2. To a great degree; greatly.

Adv. 1. mightily - powerfully or vigorously; "he strove mightily to achieve a better position in life"
2.
 to avoid the basic valuation issue while trying to maintain the local property tax base and to avoid rewarding polluters.(21) This is not an unreasonable set of goals but is unlikely to be a tenable ten·a·ble  
adj.
1. Capable of being maintained in argument; rationally defensible: a tenable theory.

2.
 strategy over the long run. He foresees an ad hoc For this purpose. Meaning "to this" in Latin, it refers to dealing with special situations as they occur rather than functions that are repeated on a regular basis. See ad hoc query and ad hoc mode.  evolution of the case law with a gradual move to a discounted cash flow (DCF DCF

See: Discounted Cash Flows
) analysis of the sort discussed earlier in this article.

CONCLUSION

This article argues that valuation of contaminated property is a complex process that requires an understanding of 1) the nature of the problem; 2) how the problem is perceived; 3) the remediation, indemnification, and financing responses that can address the problem; and 4) the ultimate effect of these on the utility and marketability of the property.

Within this general framework, a specific valuation model was proposed in which the consequences of contamination were segregated into direct costs (e.g., loss of income, remediation, indemnification) and stigma. Stigma is defined to represent all of the risk, hazard, and uncertain consequences of contamination, which increase the costs of attracting capital to a contaminated or previously contaminated property.

Although a DCF framework frequently provides the most useful approach to the valuation of contaminated property, multiple regression and contingent valuation techniques increasingly allow appraisers to directly address the value of the contaminated property.

Judicial ambivalence ambivalence (ămbĭv`ələns), coexistence of two opposing drives, desires, feelings, or emotions toward the same person, object, or goal. The ambivalent person may be unaware of either of the opposing wishes.  between notions of value-in-use and market value are the source of considerable confusion in the valuation of contaminated property. This is evident in the determination of just compensation in condemnation proceedings as well as in the valuation of real property for ad valorem taxation. Because of the particularly distorting effect contamination has on market value, value-in-use is likely to become increasingly important in valuing contaminated property.

James A. Chalmers, PhD, is a partner in the financial advisory services advisory services

advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal
 practice of Coopers & Lybrand in Phoenix, Arizona Phoenix /ˈfiːˌnɪks/ (English: Phoenix, Navajo: Hoozdo, lit. "the place is hot", Western Apache: Fiinigis) is the capital and the most populous city of the U.S. . A designated member of the American Society of Real Estate Counselors, Mr. Chalmers received a PhD in economics from the University of Michigan (body, education) University of Michigan - A large cosmopolitan university in the Midwest USA. Over 50000 students are enrolled at the University of Michigan's three campuses. The students come from 50 states and over 100 foreign countries.  and is a candidate in the Appraisal Institute The Appraisal Institute (Institute), headquartered in Chicago, Illinois, is an international association of professional real estate appraisers.[1] It was founded in January 1991 when the American Institute of Real Estate Appraisers (AIREA) and the .

Scott A. Roehr is a managing associate in the financial advisory services practice of Coopers & Lybrand in Phoenix, and is a Certified Public Accountant Certified Public Accountant (CPA)

An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state.
 (CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. ). Mr. Roehr received a BS in business administration from the University of Southern California The U.S. News & World Report ranked USC 27th among all universities in the United States in its 2008 ranking of "America's Best Colleges", also designating it as one of the "most selective universities" for admitting 8,634 of the almost 34,000 who applied for freshman admission  and specializes in the valuation of closely held A phrase used to describe the ownership, management, and operation of a corporation by a small group of people.

In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist.
 businesses, intangible assets Intangible Asset

An asset that is not physical in nature.

Notes:
Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets.
, and real estate.

1. Peter J. Patchin, "Valuation of Contaminated Property," The Appraisal Journal (January 1988): 7-16.

2. Peter J. Patchin, "Contaminated Properties--Stigma Revisited," The Appraisal Journal (April 1992): 167-172.

3. Bill Mundy, "Stigma and Value," The Appraisal Journal (January 1992): 7-13.

4. Bill Mundy, "The Impact of Hazardous Materials on Property Value," The Appraisal Journal (April 1992): 155-162.

5. Richard A. Neustein, "Estimating Value Diminution by the Income Approach," The Appraisal Journal (April 1992): 283-287.

6. Mundy, "The Impact of Hazardous Materials on Property Value."

7. Ibid.

8. Chris Zeiss and James Atwater, "Waste Facility Impacts on Residential Property Values," Journal of Urban Planning urban planning: see city planning.
urban planning

Programs pursued as a means of improving the urban environment and achieving certain social and economic objectives.
 and Development, v. 115 (1989): 123-124.

9. V. Kerry Smith and William H. Desvouges, "The Value of Avoiding a LULU Lulu

keeper of two others on her earnings. [Aust. Opera: Berg, Lulu, Westerman, 484]

See : Prostitution
: Hazardous Waste Hazardous waste

Any solid, liquid, or gaseous waste materials that, if improperly managed or disposed of, may pose substantial hazards to human health and the environment. Every industrial country in the world has had problems with managing hazardous wastes.
 Disposal Sites," The Review of Economics and Statistics, v. 68 (1986): 293-299.

10. Hays B. Gamble and Roger H. Downing, "Effects of Nuclear Power Plants on Residential Property Values," Journal of Regional Science The Journal of Regional Science was the first journal in the field of Regional science. Contributors hold positions in a variety of academic disciplines: economics, geography, agricultural economics, rural sociology, urban and regional planning, and civil engineering. , v. 22, no. 4 (1982): 457-478.

11. Jon P. Nelson, "Airport Noise, Location Rent, and the Market for Residential Amenities," Journal of Environmental Economics and Management, v. 6 (1979): 320-331.

12. William N. Kinnard, Jr., and Mary Beth Geckler, "The Effects on Residential Real Estate Prices from Proximity to Properties Contaminated with Radioactive Materials radioactive material Radiation A substance that contains unstable–radioactive–atoms that give off radiation as they decay. See Radioactive decay. ," Real Estate Issues (1991): 25-36.

13. D. Kirshner and Deboral Moore, "The Effect of San Francisco Bay San Francisco Bay, 50 mi (80 km) long and from 3 to 13 mi (4.8–21 km) wide, W Calif.; entered through the Golden Gate, a strait between two peninsulas.  Water Quality on Adjacent Property Values," Journal of Environmental Management, v. 27 (1989): 263-274.

14. See Ohio v. U.S. Department of the Interior, 800 F.2d 432 (1989). These issues as they apply to natural resource damage assessment are discussed at length in "Department of Interior, 43CFR CFR

See: Cost and Freight
 Part 11, Natural Resource Damage Assessments, Notice of Proposed Rulemaking A notice of proposed rulemaking or NPRM is issued by law when a regulatory agency of the United States Federal Government wishes to add, remove, or change a rule (or regulation) as part of the rulemaking process.

Outside the USA.
," Federal Register, v. 56, no. 82 (April 29, 1991): 19752-19773.

15. Patchin, "Contaminated Properties--Stigma Revisited."

16. Ronald G. Cummings, David S. Brookshire, and William D. Schulze, Valuing Public Goods, The Contingent Value Method (Totowa, N.J.: Rowman & Allanheld Publishers, 1986).

17. Jay Dushoff and Denise Henslee, "When Eminent Domain 'Working Rules' Don't Work," The Appraisal Journal (July 1991): 429-435.

18. Robert A. Gladstone, "Contaminated Property: A Valuation Perspective," Toxics Law Reporter (November 1991): 798-802.

19. Thea D. Dunmire, "Real Estate Tax Valuations: Factoring in Environmental Impacts," Environmental Finance (1992): 461-472.

20. Robert I Robert I, duke of Normandy
Robert I (Robert the Magnificent), d. 1035, duke of Normandy (1027–35); father of William the Conqueror. He is often identified with the legendary Robert the Devil.
. McMurray and David Pierce, "Environmental Remediation Generally, remediation means providing a remedy, so environmental remediation deals with the removal of pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water for the general protection of human health and the environment or from a  and Eminent Domain," ALI-ABA Eminent Domain Seminar (January 1992): 105-146.

21. Gladstone, 798-802.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Chalmers, James A.; Roehr, Scott A.
Publication:Appraisal Journal
Date:Jan 1, 1993
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