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How can an appraiser resolve the dilemma between irrational risk response and rational conceptions of market value? This article explores how the market response to real estate environmental risks reflects an irrational vicious circle. For the appraisal industry's consideration, nine propositions are offered, asserting that properties with undesirable environmental conditions do not result in value diminution to surrounding properties as the remediation/stigma concepts of appraisal imply. Rather, environmental regulation contributes to price supports for nearby properties at the expense of the tainted property.

A consensus of recent impartial scientific literature concludes that highly regulated common environmental substances and emissions associated with real estate are what risk analysts call "phantom risks." In other words, those substances that do not present real risk in human health terms.1 Concurrent with these findings recent case law under Daubert v. Merrell Dow Pharmaceuticals2 excludes evidence that does not meet the tests of the scientific method (the Daubert test) from court cases where the reliability of the claim rests on scientific information. Reaffirming the Daubert decision, General Electrio Co. v. Joiner3 excludes testimony in toxic tort cases that amounts to only "subjective belief or unsupported speculation."

The lack of scientific evidence that substances and emissions associated with real estate pose a threat to human health and the growing lack of legal foundation for honoring complaints without such evidence place appraisers in a bind between regulatory law and case law, legal definitions of rational market value and irrational environmental policies, media, and public perception. The following propositions are offered for consideration by the appraisal industry to resolve the dilemma between irrational risk response and rational conceptions of market value.

Proposition 1: Misperception

A consensus of the literature on environmental risk indicates that people tend to overestimate small, but highly regulated environmental risks associated with real estate. Conversely, there is a tendency to underestimate larger risks. Therefore, individual risk perceptions are often irrational and in error. For example, individuals overestimate the infinitesimally small risks posed by asbestos, lead, radon, electromagnetic fields, and waste sites. In contrast, they underestimate risks of much greater magnitude associated with real estate such as home accidents, building fires, or drowning.

Infinitesimally small risks, such as those in the proposition above are overestimated by the public while the most prevalent environmental conditions associated with real estate are underestimated as to risk by the public (see table 1).

This "small risk: overestimation/large risk: underestimation" pattern lends support to the notion that the public is uninformed about environmental risks.4 The following statements summarize the irrational nature of risk perception as reflected in the environmental risk literature:5

1. People simplify their perceptions.

2. Once a person's mind is made up, it is difficult to change it.

3. People remember what they see.

4. People cannot detect omissions in the risk information they receive.

5. People disagree more about what risk is than about its magnitude.

6. People have difficulty in detecting inconsistencies in disputes about risk.

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7. People have difficulty evaluating expertise.

Despite the irrationality of public reaction to environmental risks, the evidence suggests that there is a more accurate perception of risk when it has a direct impact on an individual's financial condition or property value and the regulatory costs cannot be shifted to society at large.6 Research also reveals that people can learn more rational responses to risk when unbiased information is imparted separately from the distorted effects of media, regulations, or biased research.7 In regard to real estate appraisal, one could expect that property owners, managers, buyers, and sellers would have more accurate perceptions of environmental risks on property values than noninvestors in real estate markets.

Proposition 2: Overregulation

Mirroring the "vicious environmental risk circle," government agencies base environmental regulation and remediation on seemingly irrational factors. In other words, government regulation and remediation standards at face value cannot be relied on by real estate appraisers to reflect the true risks of environmental conditions. For example, about 95% of waste-site remediation costs do not result in benefits to human health or the physical environment but are mainly incurred for public perception purposes.

A consensus of the reviewed scientific literature indicates that regulation of toxic substances is based on a flawed zero dose threshold methodology where excessive precaution is the basis of regulation.8 Unknown to much of the public, environmental protection standards do not even adhere to commonly accepted statistical significance tests (95% confidence interval) or relative risk ratios (>1.0) and are not scientifically provable.9 Noted professor of law and economics at Harvard Law School and editor of Journal of Risk and Uncertainty, W. Kip Viscusi has stated:

When confronting government risk statistics, there is a tendency to take this information at face value. Presumably, government officials should be a source of accurate risk information. Unfortunately, the practice of risk assessment in the federal government of the United States is not concerned with providing best estimates of the risk of measures of central tendency. Rather, the policy emphasis is on conservative risk assessments, so that risk management and risk analysis become blurred.10

In dealing with the issue of the impact of toxic substances on real estate, the appraisal industry needs to be guided by the preponderance of the impartial scientific literature-the dosage, not mere exposure or proximity, makes the poison.11 The dosage from such environmental substances and emissions as radon gas, lead-based paint, intact asbestos insulation, weak electromagnetic fields, or carcinogens associated with so-called hazardous waste sites is so negligible and the route of exposure such a remote probability that they represent benign conditions not requiring the excessive regulation of real estate.12 The failure to consider the magnitude of the dosage of environmental substances or emissions and the size of the population exposed is called the "scope effects bias."13

Irrational environmental remediation measures are the mirror image of irrational environmental risk analysis. Strikingly, the first 99.5% of all potentially hazardous substances from toxic waste sites are eliminated by the first 5% of remediation expenditures.-14 Ninety five percent of all cleanup costs are only for public perception purposes and achieve nothing in health reduction. Figure 1 summarizes the research findings relating to irrational environmental protection and site remediation policies for toxic waste sites.

Proposition 3: Exaggerated Publicity

Publicity generated through media sources or liability lawsuits tends to overexaggerate minute environmental risks. Therefore, appraisers cannot rely on media reports of environmental risk events as reflections of true risk because substantial publicity tends to overdramatize the risk and lead to the public overestimation of risk. Take, for example, the Love Canal case, which led to public hysteria.

Peter M. Sandman, professor of environmental and community medicine at Rutgers University, has conducted research that shows how the news media often unrealistically increases public anxiety about an environmental issue even when the intention is unbiased reporting. Sandman has summarized his findings in the following principles:15

1. Surveys suggest that the amount of media coverage accorded environmental risk topics is not related to its seriousness in health terms.

2. Most media coverage is not about real risk or hazard but about blame, fear, anger, and other nontechnical issues.

3. When technical information is provided in news stories, it has little, if any, effect on the audience.

4. Alarming content about risk is more common than reassuring content.

5. The media audience tends to respond to negative information and some may remain unconvinced once the alarm is sounded.

6. Reporters rely most on official sources (EPA) than industry sources on the "safe" side or environmental activists on the "risky" side.

7. Journalistic competition tends to focus on alarm to the advantage of inept journalists and less on reassurance at the expense of skillful journalists.

Hazard perception field studies indicate that prior to media exposure, the public generally fails to recognize many potentially hazardous environments while minimizing potential harm even from significant risks.16 Risk perception generally conforms to what is called the "availability effect."17 People tend to overestimate risks that have been the focus of recent experience. Similarly, the EPA is reported to set more stringent cleanup standards when there is substantial media coverage of the site. The media plays a role in risk perception by dramatically focusing attention on current environmental conditions, many of which are no threat to human health or the environment.

The classic example of the effects of media on environmental issues is the 1978 case of Love Canal near Niagara Falls, New York. Love Canal was a former toxic waste dump that has become synonymous with the term chemical tragedy. However, Love Canal was not even the worst waste dumpsite of which the press was aware at the time. The case prompted evacuations, relocation, mass purchase of more than 100 homes, research, site remediation, and litigation costing about $300 million in response to the presence of toxic substances in the ground, all of which were uncalled for.18 No serious or chronic illness has been attributed to chemicals at Love Canal by peer-supported scientific studies. The cause of the hysteric reaction by the residents of Love Canal was not adverse health effects but the use of science for political and special interests, media exaggeration of risk, and perceived loss of property value as a consequence.

Proposition 4: The Irrational Environmental Risk Spiral

The bad chemistry of exaggerated media coverage, uninformed misperception, and overregulation of environmental risks combine to form a self-fulfilling "vicious circle" of risk. Thus, appraisals of properties with identified environmental conditions tend to mistake the irrational risk spiral for true risk. For example, most of the appraisal literature focuses on exotic, but miniscule risks, not significant environmental risks.

The combined effects of the first three propositions form a circular pattern of what U.S. Supreme Court Justice Stephen Breyer calls the irrational vicious circle of environmental risk policy.19 This cycle typically includes exaggerated media response to an environmental incident that threatens property values, public misperception, public political pressure, lack of public education, overregulation, government institutionalization of overly conservative science, and a feedback loop that starts the cycle all over again (see figure 2).20

Repeated studies show that the expert's evaluation of environmental risks consistently differs from that of the public. Socalled toxic waste sites appear near the bottom of most expert lists and at the top of the public's list of concerns. The gap between public and expert perception of risk has itself been misinterpreted as reflecting that the public views toxic waste sites as a significant health risk. But what remains unexplained is why the public does not move away from such purported hazards, and instead prefers to reside close by. An explanation of this mystery is offered in proposition 6.

Mirroring the irrational environmental risk spiral, the professional appraisal literature is almost silent as to environmental conditions with the greatest magnitude of risk and mainly has focused on miniscule, speculative, and exotic risks (e.g., waste sites, asbestos, electromagnetic fields, crime scenes, and synthetic building materials).

Proposition 5: Rational Market Value

Given the first four propositions, the question is whether real estate appraisers are measuring the rational reactions of informed market participants of undeveloped land or the reactions of nearby owners of residential properties resulting from irrational media and regulation of environmental risks. Appraisers should keep in mind that market reaction to environmental risks that is irrational or reactive to irrational media and regulation does not reflect the rationality tests of legally defined market value. For example, remediation costs do not reflect the market value between willing buyers and sellers, but are compulsory costs imposed by government regulation or courts.

With regard to environmental risks, the role of science is to answer the question, Is it true? The counterpart role of the appraisal profession is to answer the question, Is it market value? The irrational risk cycle does not meet the rationality tests of legally defined market value (i.e., informed parties, prudent behavior, and responsible management with each party cross-checking the other by self-interest).

Most important, law and science have decreed that objective scientific values and verifiable evidence shall trump subjective and speculative evidence in matters relating to determining the market value of real property. Physicist H. W. Lewis in his award-winning science book, Technological Risk, states that the irrational magnification of small and insignificant environmental risks reflects phobia, not stigma.21 Because phobic reactions to environmental risks are irrational, they are inconsistent with the rationality tests contained in the definition of market value.

Environmental remediation costs do not reflect a value derived from a transaction between willing buyers and sellers, but the compulsory costs imposed by government or courts on property owners and/or responsible parties for real or perceived environmental risks. Also, environmental stigma is not derived from knowledgeable parties but often mirrors the irrational environmental risk perception cycle. Moreover, when it is in the public's best interest to accept the risks associated with public projects such as power plants or freeways, an opportunistic individual may be tempted to overstate his or her aversion to smoke or noise. In so doing, he may hope to be bought off by the community at a "holdout price," reflecting the huge collective benefit at stake. If a market does not cross-check the interest of each party, there can only be one-sided valuation of environmental risks.

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Many appraisers claim that what may be irrational risk or phantom risk to one buyer may be perceived as real and contaminationrelated to another.22 This line of argument does not distinguish between a subjective and an irrational reaction to risk. By definition, market value includes subjective perception, but excludes irrationality. The concept of market value presumes a legitimate perceptual bias in favor of faraway investors over fearful neighborhood parents in evaluating environmental risks affecting real estate. Even if there is an absence of information on toxic risk, and the market participant is thus overly protective, the situation reflects buyer motivation based on ignorance and overly risk-aversive market behavior that is not consistent with the legal definition of market value.

The knowledgeable buyer test contained in the definition of market value cuts both ways, however. Where market participants overestimate environmental risk, it is incumbent on real estate appraisers to consider the small magnitude of such risks in their valuations. However, where market participants underestimate risk, it is incumbent on appraisers to consider the larger magnitude of such risks in their valuations. But where a greater magnitude of risk is encountered, appraisers must also consider the typically offsetting mechanisms to mitigate such risks (namely, health and safety ordinances, landuse controls, environmental risk insurance, liability indemnification, hazard abatement districts, and government assistance programs).

Proposition 6: Environmental Regulation as Price Protection

Paradoxically, the irrational risk policy cycle serves to equalize and protect surrounding property values at the expense of environmentally regulated parcels. Contrary to the prevailing appraisal concepts, negative environmental spillovers (externalities) do not necessarily lead to stigma on surrounding property values. Rather, environmental regulation serves to preserve surrounding property values. For example, empirical economic studies conclude that due to government flood protection programs, a general discount for floodplain location does not exist.23

In the "mixed economy" of the United States many economic activities are undertaken by the private sector, while government undertakes others.24 The public looks to the government to provide protection from unexpected or sudden negative social changes such as unemployment, disability, impoverishment, or retirement. Assistance comes in the form of unemployment and disability insurance, family cash assistance programs, and Medicare. The growth of government-assistance programs has extended to both planned and unplanned economic changes such as student loans, agricultural price supports and subsidies, disaster loans, and economic inflation controls (e.g., federal discount rate). Zoning is a form of land-use regulation for health and welfare to prevent the creation of value-diminishing nuisances. Government-assistance programs more recently have extended to fairness and distribution issues purportedly resulting from market failures.25

In the past 30 years, the government has taken an increased role in ensuring the quality of the environment, even the perceived quality of the environment. The cost resulting to the public from the side effects of industry such as pollution, contamination, or the alleged extinction of plant or animal species, is what is called a "negative externality" or spillover.26 The role of government has expanded in recent years to eliminate negative externalities by the use of environmental regulations, fines, mitigation fees, toxic tort lawsuits, subsidization of private remediation measures, and/or by trying to create proxy markets for trading environmental credits (such as pollution credits, transfer development rights, and mitigation credits, etc.).

Prior to the government's protection from negative environmental externalities ("detrimental conditions"), the belief was that the enormous benefits of an industrial society offset the costs of any side effects. As economist Joseph E. Stiglitz has stated:

Consider, for instance, a steel mill that pollutes the neighboring air. Those who live nearby are clearly worse off as a result of the pollution. But if the steel mill existed before they purchased their houses, the price they paid for their house would have reflected the fact that the air was polluted; they paid less for their house than they otherwise would have. The person who suffered was the owner of the house at the time that the steel mill was constructed. In most cases, it would have been impossible to find that individual. Alternatively, suppose that the house was not constructed until after the mill was. In that case, the person who might have been hurt was the owner of the land. But it may be that the gain in value to his land from its proximity to the mill exceeded the loss from pollution. When the value of an asset (like land) increases or decreases to reflect the surrounding amenities (the cleanliness of the air, the proximity to jobs), we say that the value of these amenities is capitalized.27

Under the rational expectations theory in economics, the effect of proximity to real or perceived negative environmental conditions is reflected in natural price differences (i.e., location adjustment). In contrast, under externality theory, it is believed the workings of the market impose an unfair burden on ignorant property owners who live near public or private facilities that contain or emit real or perceived negative environmental conditions. These negative environmental conditions are what are sometimes called "proximity damages" in the field of eminent domain, and are typically noncompensable when property is physically taken for a public purpose. Under externality theory, all price differences due to location are caused by negative externalities and must be reimbursed by excise taxes, fines, court awards, surcharges, and mitigation fees. In other words, it is the function of environmental regulations to offset the natural workings of the private real estate market with respect to environmental location.

Government remedies for negative environmental conditions that pose only small or negligible risks to human health and the physical environment mainly function to support or equalize the value of properties affected by the irrational risk cycle. As economist William A. Fischel states in his book Regulatory Takings, environmental "regulations do transfer wealth from one class of people, owners of undeveloped land, to another class of people, owners of already existing homes."28 Political scientist Stephen Holmes and law professor Cass R. Sunstein state in their book The Cost of Rights that the preservation of property rights and values in the United States is sustained by a "mutually beneficial taxation-for-protection exchange between owners and government."29

Under such a "safety net," residential property rights are considered a government-delivered service and property value a form of entitlement derived therefrom. Small or nonexistent environmental risks are highly regulated to protect affected property owners from the impacts that may result from a negative perception of their property values (e.g., proximity to landfills). The cost of such regulation is passed through to all taxpayers or citizens in the form of taxes or lawsuit awards. Paradoxically, this is why appraisers often cannot find any real value diminution in residential properties near socalled detrimental environmental conditions. This also explains why these "toxic properties" not surrounded by residential districts often do not reflect any diminution in price. However, usually there is no cost/benefit analysis to determine if the amount of "preserved" values of nearby residential properties equals or exceeds the amount of environmental excise taxes imposed and the diminution in value to the regulated parcel.

In a price-support system, the government maintains a higher-than-normal price. Economists cite four options for price supports: (1) regulatory force; (2) economic incentives to reduce supply; (3) subsidizing the sale of good to consumers; and (4) buying up and storing, giving away, and destroying the good .30 Environmental protection policies utilize regulation to compel compliance, require cleanup of sites so they can be reused, and remove (remediate) annoying substances, resulting in a de facto subsidy to surrounding affected property owners.

The missing rational component in the seemingly "irrational environmental risk cycle" is the desire of the public to have government "routinely lay hold of public resources and expend them to salvage, or boost the value of, private (property) rights."31 This includes insulation from sudden and unexpected value shocks resulting from highly visible environmental incidents concerning substances or emissions that pose only negligible risks (the not-in-my-backyard-syndrome, also known as "NIMBY").32 Peter W. Huber, a Supreme Court law clerk and MITtrained engineer, has aptly summed up the NIMBY syndrome origin of the irrational risk response as follows:

By endlessly inflating the individual's right to sue, the courts multiplied opportunities for the exercise of one of the most natural and powerful of human instincts, the NIMBY syndrome. Everybody will concede that some chemical factory, highway system, hydroelectric dam, or waste dump, somewhere or other, is probably necessary. But everyone adds the caveat, "not in my backyard"-or anywhere nearby... In case after case, the courts have promoted the individual's right to sue over the community's right to act. Increasingly, the private suit is directed against the community itself-as represented by the municipality, the state, or the federal government. The community needs jails, AIDS clinics, and waste dumps, of some description, somewhere or other. But the individual enjoys an ever-expanding right not to be exposed in any way to the incidental-perhaps statistically minute but always unavoidable-public hazards. In the end, the shrinkage of all other rights in the face of an ever-expanding right to sue was a simple and unavoidable matter of bookkeeping."33

The NIMBY syndrome, the expansion of the tort-liability system, and environmental regulations are not only at the core of overestimated manmade environmental risks, but influences policies designed to protect property owners from significant natural hazards such as flood losses. Keith Smith, professor emeritus of environmental science at the University of Stirling, and Roy Ward, professor emeritus of geography at the University of Hull, both of the United Kingdom, relate that flood protection policy in the United States reflects the same underestimated risk pattern and irrational regulatory policies of such manmade environmental conditions as fires or home accidents.' Subsidized flood insurance programs are said to follow a "living with floods" policy that rationally protects the view and recreational amenities of private properties proximate to oceans, rivers, and lakes, but irrationally leads to the transfer of national wealth to affected property owners 35 A U.S. Army Corps of Engineers review study of prior flood plain valuations concluded that: "A general discount for floodplain location... does not exist."36 Put bluntly, environmental protection policies are about wealth transfers, not health transfers.

The protection of residential property values, rather than the protection of endangered species, is at the root of plant and animal habitat preservation/mitigation policies as well. The public wants to preserve open space and view amenities near their own properties due to the enhanced value it generates,"but typically wants to shift the cost onto the larger community as a common benefit. This is why the policy of the Environmental Protection Act is to require "on-site / in-kind" mitigation of habitat losses wherever possible. The available data is not consistent with the assertion that there is widespread deforestation or extinction of species requiring such massive preservation." As William Cooper of the Biology Department of Michigan State University has stated, environmental preservation policy ignores tradeoffs or benefit shifts where sport fishing is valued more than commercial fishing, eco-tourism more than off-road motor biking, rural estates protected by agricultural preserves more than urban sprawl, and a view amenity for incumbent housing more than affordable housing for future homeowners.39

A recent example of similar irrational environmental habitat mitigation policy is the one required for the construction of a massive water reservoir project in Riverside County, California. A regional water agency selected a 10,000-acre agricultural valley for the reservoir site because it had the least amount of environmental impacts. Due to the historical agricultural use of the valley, there were only a few, low-quality environmental resources present prior to the public project. Nonetheless, about an equal amount of acreage, but with high-quality and highdensity habitats, was acquired as mitigation land. Ironically, Riverside County had over 75% of its land area already designated as public open space. After construction, the reservoir would create water resources for "urban vegetation and forests" as well as a manmade lake for wildlife. The apparent overwhelming positive tradeoff between the few natural resources destroyed and those created by the reservoir project were not factored into the mitigation equation. Apparently, under the rules for "environmental accounting," the loss of a small natural wildlife habitat is counted and much larger environmental benefits from manmade "urban forests" or lakes are discounted.

Ironically, the "bad chemistry" of NIMBY, government regulation and liability law, combined with the distortions of media, have created the so-called "stigmatized" market conditions from which the public seeks protection. Although externality theory places blame for the irrational environmental risk cycle on "market failure," it is just as plausible that governmental landuse zoning and expanded liability creates such unwanted conditions (legal and regulatory failure, not market failure).

Real estate appraisers who mistakenly dwell on remediation and stigma concepts for the valuation of environmental risks fail to understand that environmental regulation is not necessarily in place to protect public health or the environment, but to protect property rights and even subsidize property values at times. Contributing to the overly protective response of the market to any threat to property values are government policies that give favorable tax treatment to home ownership. Many homeowners view an investment in real estate in a highly protective manner because it often serves as a "forced retirement savings account." The seemingly irrational response to the regulation of small environmental risks becomes more understandable and rational when the threat to the financial nest egg of nearby properties is factored into the risk-cycle equation.

Proposition 7: Disclosure of Noneconomic Analyses

Use of the remediation/stigma concepts that prevail in the appraisal industry reflects a noneconomic analysis of environmental conditions and risks. Professional standards should require appraisers to disclose the type of environmental risk analysis performed: an "economic analysis" or a "noneconomic" analysis. For example, the remediation/stigma concepts employ only single-entry accounting of negative ledger items without taking into consideration environmental offsets (benefits, mitigations, etc.).

Appraisers must currently disclose whether they are rendering an oral, limited, or complete appraisal of property and the accompanying limiting conditions and assumptions on which it is based. Similarly, appraisers should be required to disclose whether they are undertaking an economic or noneco-- nomic analysis of the environmental risks associated with an appraised property.

A cardinal principal of economics is that "people face tradeoffs."40 Significant environmental risks are typically undertaken because of much larger rewards. For example, those who accept the risk of living in a floodplain are often willing to trade it for the amenity of an ocean or riverfront view amenity, or the availability of cheap water for farming, fishing, and other activities. The risk of a flood is often mitigated by government floodplain mapping, subsidized flood insurance, and long cycles between peak flood events. The availability of flood insurance provides a guarantee of reimbursement, enhances affected property values, and removes the risk of catastrophic financial failure. Without addressing both benefits and detriments from environmental conditions, along with any mitigation measures, it is impossible to undertake any economic analysis or an appraisal.

The prevailing single-entry format for accounting environmental risks addresses remediation costs and any accompanying stigma without considering associated benefits or mitigations. This methodology reflects the debit-only bookkeeping system of tort liability law, but is a noneconomic analysis of environmental risks (i.e., no tradeoffs). Appraisers should be guided by the principle of balance in valuing properties with environmental risk issues.

Because the costs that impact real estate from such environmental regulation do not produce significant health benefits to society, and reflect unbalanced accounting methods, it would be more accurate to call such "negative ledger" values for what they really are: deadweight environmental excise taxes, or "the excess of the total harm done by a tax over the actual revenue raised. 1141 These taxes may come in the specific form of fines, mitigation fees, emission charges, hazard abatement district tax levees, remediation costs, or toxic tort lawsuit awards. Likewise, it would be more truthful if appraisers called any analysis that considers only environmental costs as an environmental taxation analysis rather than the current misleading analysis of detrimental conditions, contamination, remediation, and stigma.

The valuation of many environmental conditions is a variation of insurance appraisal. The "cost to cure plus stigma" method violates the following economic valuation formula specified in the insurance codes of most state jurisdictions in the United States, as shown in this typical codified insurance loss valuation formula:

Diminution in value (i.e., value before - value after = diminution) or cost to cure, whichever is the lesser. Therefore, loss = < Vd or < Cc.

Appraisers simplistically using the cost to cure plus stigma (or remediation costs and stigma) method of valuing losses prevalent in tort law must also disclose one of the following indispensable assumptions.

When market value is reported, that:

1. No market study was conducted to determine if a discount for the same loss item is embedded (capitalized) in the market prices of similar properties.

2. Given the limited availability of market data, it is statistically or analytically impossible to isolate the price discount for the loss item in question. Thus, the cost to cure plus stigma method relies on purely subjective judgment and cannot be externally validated from the market one way or another.

When a non-market value is reported, that:

3. No market study was conducted to determine if such discounts are embedded (capitalized) into market prices.

4. The loss reported does not reflect market value, but a liability payment or tax. It is often said that a real estate appraisal is no better than the assumptions on which it is based. Without disclosing the above assumptions, the client may be misled that the loss estimated by the cost plus stigma formula reflects the true price the market is willing to pay to eliminate the environmental condition rather than the cost estimated by an appraiser.

Proposition 8: Truth in Appraising Real estate disclosure laws focus on the presence or absence of environmental substances or emissions associated with risk (subjective risk), not with the magnitude of risk (objective risk). Therefore, appraisers should render informed opinions of real estate value that disclose the magnitude of risk by rational and informed parties. For example, it is common sense that intact asbestos insulation is not likely to present a significant risk to human health, but may reflect a risk of a liability lawsuit, given the government's irrational "zero dose" protection standard.

Real estate appraisers should be held to a higher standard of disclosure than real estate brokers. Brokers must disclose the presence or absence of an environmental substance, emission, or condition. Appraisers, however, should adhere to a "truth in appraising" standard that reports the true magnitude of environmental risks not just the presence or absence of an environmental substance or emission.42

Real estate sales disclosure laws are onesided and do not go far enough to distinguish between real and phantom environmental risks, stigma and phobia, and rational and irrational responses to risk. Uninformed market participants retain real estate appraisers to inform them of the true risks posed by environmental conditions. The "knowledgeability test" contained in the definition of market value presumes that appraisers will value properties without merely reverberating the irrational fears of the public, the exaggerations of media, the excessive precaution in regulations, or the positions of litigants. To do otherwise would result in the loss of professional status for appraisers.

This does not mean that appraisers need to be psychologists, media experts, or scientists. It does mean that they would have to use the same sound reasoning, impartiality, and judgment expected of a properly informed professional. The use of professional judgment about environmental risks includes the ability to take into account the objective magnitude of risk.

Appraisers using common sense, sound judgment, and an undergraduate collegelevel understanding of science, should be able to ascertain large risks from small risks, such as those shown in table 1. Appraisers should also have an understanding of the elementary rule of toxicology: "The dosage makes the poison." This means that everything is a potential poison, depending on its dosage. The fundamental principle of the scientific method that "you can't prove a negative" should be understood by appraisers. For example, science cannot ever categorically prove that a substance cannot cause cancer.43 In addition, appraisers should also have a grasp of the rudiments of epidemiology. Some examples are that correlation is not causation, disease clusters are almost always random, confounding factors often distort health studies, etc.' Appraisers should be sufficiently computer literate to access Internet web sites that provide impartial information on environmental issues, such as the excellent "Toxicology Tutor" site by the National Library of Science.45 Appraisers also should know what type of specialist to consult. For example, toxicologists are the right experts in regard to chemicals. Last but not least, appraisers need to be able to find impartial source materials on environmental risks that resist the rival claims of industry, environmentalists, legal advocates, or the government. (A suggested list of such materials is included in the "References" section.)

More specific examples of simple sound judgment, observation, and common sense should also be exercised. Appraisers should be able to recognize that undisturbed asbestos insulation in buildings does not represent a health hazard although it may be the basis for a liability lawsuit, given the government's irrational "zero dosage" protection standard. Other specific examples involve recognizing that naturally occurring electrical fields in the human body "can be millions of times greater than those resulting from power lines."46 Before the awareness of the "sick building syndrome," radon gas buildup in homes, or occupational asbestos fibers in ambient air, it was well known that you could not enclose people in airtight rooms without making them ill.47 Similar examples abound in the scientific literature on environmental risks that are accessible to the informed layperson.48

According to risk economist W. Kip Viscusi, "information by its very nature tends to be a public good," and everyone within a market and the larger society should have "an incentive to convey information honestly and truthfully."49 To convey information essential to the market accurately, valuation analyses should not emulate an irrational risk perception not consonant with actual market behavior. Failure to do so could resuit in pessimistic valuations of properties surrounding regulated environmental conditions. If the valuations of surrounding properties are too low, more realistic buyers will find bargains and bid up prices to an appropriate level. Poaching on poor appraisals of properties proximate to undesirable, but non-dangerous environmental conditions is a possibility under the remediation/ stigma concepts.

In addition, the use of such technicalsounding terms as remediation, cost to cure, or stigma can mislead the public into thinking that the source of any negative impacts on property values derives from environmental conditions rather than from overreaching regulations. The use of such nomenclature also implies professional competence in making this distinction.50

Proposition 9: Unbalanced Appraisal Methodologies

Environmentally regulated properties present unrecognized and unresolved methodological problems for appraisers. Therefore, appraisers should adhere to the appraisal principle of balance in analyzing risk to both the undesirable parcel or surrounding properties. For example, the cost to cure plus stigma formula of tort law ignores the possibility of embedded (capitalized) discounts in sales prices for an environmental condition and is thus an improper form of double compensation.

Many abandoned waste sites represent a potential monetary liability to those who are considered "principal responsible parties" in the chain of toxic liability. However, any toxic cleanup liability only impacts property values when the underlying real estate is the asset of last resort to cover the remediation costs. If a well-capitalized business or industry is the principal responsible party and is acting responsibly to comply with environmental regulations, there typically is no diminution to the value of the real estate. The author is aware of a large condemnation case of a contaminated property owned by a Fortune 500 company, where reportedly the cleanup costs on the property represented a deficiency that exceeded market value. The condemning agency's appraiser failed to consider whether the owner could indemnify any user or buyer of the property against toxic liability. Moreover, the owner had insured other users and buyers of nearby similar lands (e.g., insurance comparables). The inability of appraisers to identify and analyze any measures that could mitigate environmental risks can lead to unbalanced, misleading, and perhaps incompetent appraisals. The principle of balance assumes an economic tradeoff analysis and holds that "real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium."51 This principle should be incorporated into professional standards for the valuation of environmental conditions affecting real property by requiring analyses of mitigations and benefits as well unless only a "noneconomic" analysis is to be performed and disclosed to the client.

Another methodological problem in appraising properties in urban areas with identified environmental risks such as waste sites is that the surrounding properties represent an economic complement. An economic complement is a tangible good that is used in conjunction with another good (for example, eggs and cereal).52 An economic substitute is a good that can be used in place of another (such as butter or margarine). Real estate appraisal is typically concerned with economic substitution, not complementarity The problem with appraising abandoned waste sites for example, is that they are regulated to protect surrounding property values to the detriment of regulated parcels. The regulation of waste sites creates a de facto economic complement of contaminated land and surrounding protected property values. Whether both sets of complementary properties should be appraised together in a mass appraisal is an unrecognized and unresolved methodological valuation problem. This problem is likely to be encountered more frequently given the recent trend of local governments to permit the establishment of hazard abatement districts (HADs) which comprises both affected and unaffected properties in a given impacted area.53

Another flagrant methodological error in appraising properties with perceived negative environmental conditions is the problem of double compensation. For example, in Southern California, the real estate market already reflects an embedded (capitalized) price discount of $15,000 for a fire-retardant (but not fireproof) wood shake roof in a new hillside single-family residential estate home in a high fire hazard zone. A class action lawsuit is successful against the builder for use of defective building materials, resulting in an award of $10,000 cost to cure plus a $5,000 stigma damage per home. The damage is proven directly from the market by both matched-paired sales data and higher capitalization rates. In so doing, the property owner has received double compensation for imputed loss already proven to be embedded into market prices.54 The purpose of damage appraisals should not be to prove a preexisting market discount for alleged stigma, but that compensation may be indicated where no such prior discount is made by the market (a null valuation hypothesis).

The tort liability system singularly focuses on payment of damages for defects in products, warnings, and performance. Tort law is predicated on the assumption that if compensation for defects is costly, the people responsible will eliminate them. But the hunt for defects by lawyers and appraisers is nonsensical and endless. If payment for defects is extended to the use of anything less than the highest-quality building materials, the outcome is nothing more than another income redistribution program masquerading as damage law. The freedom of choice expressed in markets and the entire legal definition of market value would be negated, and the market appraisal process would be rendered meaningless. Any valuation adjustments made for environmental location or quality of construction would be considered a damage for which a property owner would require compensation. An after-transaction lawsuit and appraisal to recover what the market deprived would follow every property sales transaction. In other words, "if you can't afford a silk purse, but only one made out of a sow's ear, tort law would at least guarantee a silk sow."

SEPARATING MARKET APPRAISAL FROM THE LIABILITY MODEL

By inheriting terms from toxic tort law such as remediation costs and stigma, the appraisal profession has been compelled to accept the irrational risk policy cycle at face value. By tacit adoption of the debit-only bookkeeping system of tort liability law, the appraisal industry has subtly succumbed to noneconomic valuation models. These trends do not solely come from the appraisal industry, but stem from the valuation formats imposed by the tort law system and environmental regulation.

This situation has come about incrementally without much critical professional discussion as to whether any of these concepts and methods are consistent with the rational paradigm of market value, accepted appraisal principles, and professional appraisal standards. The uncritical acceptance of concepts and methods associated with the irrational risk cycle has brought about a frequently encountered situation known as "pluralistic ignorance," in which everyone is wrong, as described by environmental engineer and sociologist Allan Mazur in his book, A Hazardous Inquiry: The Rashomon Effect at Love Canal.55 In response to the one-sided damage calculus of toxic tort law and environmental regulations, the profession is moving incrementally from market appraisal toward a liability model of valuation. This follows a larger societal trend of moving from a market economy to a legal economy. However, mounting scientific evidence, recent changes in federal case law, the glaring inconsistency of environmental valuation concepts and methods with accepted appraisal principles, and a burgeoning property rights movement all add up to a situation to which the appraisal industry can no longer cast a blind eye.

To remedy this dilemma, the appraisal profession needs to create a bright line between a market model and a liability model of appraising. Appraisers can legitimately disagree about opinions of value. However, they must always uphold professional appraisal standards and must not fail or neglect to perform the following: (a) identify the consequential differences between cost-to-cure plus stigma and market value, (b) disclose whether the appraisal methodology employed was economic or noneconomic, (c) ensure that they do not employ methods that result in double compensation, (d) treat economic complements and economic substitutes differently, and (e) omit any slanted assumptions on which an appraisal could be based. This article does not delve into a detailed systematic procedure for properly appraising property with an identified environmental risk or an adjudicated nuisance under tort law. However, an outline is suggested for further professional scrutiny (see figure 3).

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[Footnote]

2. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993).

3. General Electric Co., et al. v. Robert K. Joinder et. ux,, S. Ct., 1997 WL 76-44563 (U.S.).

[Footnote]

6. W. Kip Viscusi, Fatal Tradeoffs: Public and Private Responsibilities for Risk (Oxford, England: Oxford University Press, 1992):106107.

[Footnote]

30. David C. Collander, Microeconomics, 3d ed. (Irwin-McGraw Hill, 1998): 332.

31. Holmes and Sunstein, 14.

32. Charles Piller, The Fail-Safe Society: Community Defiance and the End of American Technological Optimism (Berkeley, California: University of California Press, 1991).

[Footnote]

33. Peter W. Huber, Liability: The Legal Revolution and Its Consequences (New York, New York: Basic Books, 1990): 183-184.

34. Keith Smith and Roy Ward, Floods: Physical Processes and Human Impacts (New York, New York: John Wiley and Sons, 1998): 293-336.

35. J. D. Shilling, C.F. Sirmans, and J. D. Benjamin, "Flood Insurance, Wealth Distribution, and Urban Property Values," Journal of Urban Economics (1989): 26, 43-43.

[Footnote]

38. Julian L. Simon, "Disappearing Species, Deforestation and Data," in Jay H. Lehr, ed., Rational Readings on Environmental Concerns (New York, New York: Van Nostrand-Reinhold, 1992), 741-749. For evidence provided by the Carbon Modeling Consortium (CMC) at Princeton University that a greenhouse gas (carbon dioxide) sponge is soaking up carbon discharged by fossil fuels and stimulating forest growth, see Jocelyn Kaiser, "Possibly Vast Greenhouse Gas Sponge Ignites Controversy," Science (October 16, 1998): 282, 386-387.

[Reference]

Brown, Dennis J. Essential Industry and the NIMBY Phenomenon. New York, New York: Quorum, 1991. Cobin, John M. Building Regulation, Market Alternatives, and Allodial Policy. New York, New York: Avebury Press, 1997.

[Reference]

Landy, Marc K. The Environmental Protection Agency: Asking the Wrong Questions. Oxford, England: Oxford University Press, 1994.

Moulder, John E. Electromagnetic Fields and Human Health, Medical College of Wisconsin web sites as of 1998: