Mitigating factors in appraisal & valuation of contaminated real property

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

Condemnation.

Some courts have not allowed the presence of contamination to be taken into consideration when determining the value of property that is being condemned, but other courts have ruled that remediation costs or stigma are admissible with respect to determining value in condemnation proceedings. This may also be affected by applicable statutes. For instance, California law expressly excludes consideration of the presence of hazardous substances in determining the appraised value of property being taken by a school district under the power of eminent domain. Instead of a price discount, Calif. Code of Civil Procedure 1263.740 contemplates that the property will be cleaned up under the procedure set forth in Section 1263.720, using the full fair market value purchase movies, with any excess costs recoverable under Section 1263.730.

Thus, the extent to which loss of value due to contamination may be considered in condemnation proceedings will depend upon the statutes or case law of the applicable jurisdiction.

Homeowner's exemption.

The U.S. EPA has adopted a policy statement establishing a qualified homeowner's exemption declaring that the average homeowner will not be required to conduct or pay for cleanup when residential property is part of a federal Superfund site. This seemingly discretionary policy is, of course, based on the fact that most homeowners would have the benefit of the third-party defense under CERCLA in any event, and it would be decidedly unpopular were the U.S. EPA to begin pursuing homeowners who happen to reside on top of a contaminated region. Similar homeowners' exemptions have been adopted under the laws of some states.

Defenses to liability.

Current and future owners may have defenses to liability under CERCLA and other environmental laws. Thus, the government may have to pursue other responsible parties, if any, for cost recovery (such as former owners or operators, or those who actually disposed of hazardous waste on someone else's property). Even though contamination may nevertheless have to be dealt with by the owner (e.g., to obtain financing), the availability of defenses to liability will enhance the potential for obtaining recovery from other responsible parties.

Thus, to the extent that defenses are available and remedial costs are not legally recoverable from current or future owners, the potential charge to the real property should be mitigated.

CONCLUSION

It is not enough to deduct mechanically the costs of remediation or regulatory compliance, and any presumed "stigma," in calculating the impact of contamination on the value of real property. The usual valuation model is, at best, simplistic in making short-shrift of relevant mitigating factors (such as those discussed in this manuscript) and may be misleading to the extent that it does not reflect the market devices and legal factors that are frequently present. The valuation of contaminated or formerly contaminated property is a complex undertaking, with a variety of aggravating and mitigating factors. Accurate appraisal requires careful investigation and assessment of such factors, with the assistance of qualified environmental consultants and counsel as to technical and legal aspects. Without a multi-disciplinary team, an appraiser acting alone probably will lack the necessary expertise to render anything but an unimpaired value opinion assuming the absence of contamination. Such an opinion may be of some use, but would not reflect the actual, impaired value of the property, a serious limitation that the appraiser would be obligated to disclose under applicable ethical standards.REI