Mitigating factors in appraisal & valuation of contaminated real property

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

Stigma diminishes over time or may be noncompensable.

As noted above, customary valuation methods "take a picture" of value as of a given time, whereas the impact of contamination on value actually varies over time. Studies have shown that stigma dissipates, and value eventually returns to, or nearly to, unimpaired value.

Post-cleanup stigma claims appear to be based on the fear that there may be some unknown or residual contamination, or that cleanup standards may become more stringent in the future, leading to additional liability even after sign-off by regulators. Some courts have allowed claims for post-cleanup stigma damages, but other courts have denied or limited such claims. Other cases have considered stigma associated with proximity to contaminated sites or fear of toxic impact from nearby operations. Again, some courts have allowed such claims and other courts have rejected them. Accordingly, it remains controversial whether and under what circumstances post-cleanup or proximity stigma damages are recoverable, and, if recoverable, the extent of the residual damage. Thus, the analysis should include consideration of the law in the applicable jurisdiction. If stigma damages have been rejected as a matter of law, or only narrowly permitted, the application of that factor may be eliminated or mitigated at the time of a property appraisal.

A mechanical application of a stigma discount may be inappropriate. It should be considered in each case whether stigma is a proper factor under the circumstances, and if it is, further consideration should be given to mitigating factors and approaches, and the manner in which the risk and profit opportunity posed by the stigma element has been or is being allocated between the transaction parties.

MARKET FACTORS

Highest and best use.

The impact of the presence of contamination may also depend on the current or changing "highest and best use" of the property.

In circumstances where the contamination is located in a building, and there is already limited utility to the building, the costs to mitigate the contamination may exceed the contributory value of the improvements, in which case a sound economic alternative may be to remove the improvements, which may cost less than other forms of remedial action, mitigating net remediation costs.

In cases where the land is contaminated, the regulatory stance and market response may be affected by the long-term outlook for the use of the property, so that if the contamination is commonly associated with the anticipated use, its impact on value may be nominal.

If the market perceives that a property can be reused without exacerbating or exposing the contamination, or the anticipated use is consistent with past uses, then liability or stigma may be largely a moot issue. In contrast, if a change in use is anticipated, a change where there is less tolerance for the presence of the contamination than the tolerance existing for the current use, then the presence of the contamination may trigger a significant impact on the value of the property.