Mitigating factors in appraisal & valuation of contaminated real property

Real Estate Issues, Summer 2000 by Gluck, Allan E, Nanney, Donald C, Lusvardi, Wayne C

Cleanup by the government without recovery.

Due to a perceived threat to public health, a governmental agency may clean up a site at the cost of the public even though there may be no viable responsible parties. For example, remediation of the Ralph Gray Trucking Site in Westminster, California, was undertaken by the U.S. Environmental Protection Agency at a cost of millions of dollars with apparently little prospect for significant cost recovery. The site was used for the disposal of petroleum waste, with the parties known to be responsible for the contamination either no longer in existence or with little resources. The site is occupied largely by a residential tract with the residents benefited by the homeowner's exemption. Thus, the cost of remediation should not be a charge against the value of the homes in that area. To the contrary, not only was the Ralph Gray Trucking Site remediated at no cost to the residents, many homes and yards were renovated at taxpayer cost, a probable windfall to the residents enhancing the appeal and value of the neighborhood as a whole.

Environmental liens.

A governmental agency may seek to recover cleanup costs by imposing a lien against the real property. However, such a lien is a regular priority lien under both CERCLA and the California analogue. Thus, the environmental lien may be wiped out through foreclosure by a senior lienholder, with only partial or no net proceeds remaining for junior lienholders. Several other states, including Connecticut, Louisiana, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, and Wisconsin, have adopted various "superlien" laws pursuant to which an environmental lien may be given priority as of a time earlier than its actual recordation, with the potential for "priming" otherwise earlier recorded liens. This may alter the valuation analysis in such a state.

Thus, property may be cleaned up entirely at taxpayers' expense without a viable responsible party or lienable equity in the property. Where governmental cost recovery is frustrated, the value of the cleaned up property could be restored without discount for cleanup cost. In any case, the imposition of an environmental lien would affect the amount of the landowner's equity, not necessarily the value of the cleaned up property itself.

Environmental risk allocation by private agreement.

The potential costs of remediation may be tempered by private agreements, such as through indemnification by the seller or other responsible parties, or by new insurance products as mentioned above. Contaminated properties that may be seemingly unmarketable for sale or lease, or which would otherwise incur a significant discount, can be made viable by such private agreements. Some entrepreneurs have developed alliances with insurance companies and developers to assume environmental risks associated with the acquisition and redevelopment of contaminated property. The value of the property should be restored to the extent that environmental risk has been shifted to such parties, particularly insurers or other creditworthy parties, and away from the property itself.